UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission file number 1-11803
AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 04-3164298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 Preston Road, Suite 700, Dallas, TX 75252-5613
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 733-6200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X No
As of November 15, 1999, there were 28,527,983 outstanding shares of
American Pad & Paper Company common stock.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
<S> ...................................................................................................... <C>
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 ................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and 1998 ................................................................ 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 .......................................................... 5
Notes to Consolidated Financial Statements ...................................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................. 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk.................................. 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................................................... 18
Item 2 Changes in Securities and Use of Proceeds................................................... 18
Item 3 Defaults Upon Senior Securities............................................................. 18
Item 4 Submission of Matters to a Vote of Security Holders......................................... 19
Item 5 Other Information........................................................................... 19
Item 6 Exhibits and Reports on Form 8-K............................................................ 19
Signature Page .................................................................................... 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
September 30, December 31,
1999 1998
-------------- --------------
ASSETS
Current assets:
<S> ........................................................ <C> <C>
Cash ..................................................... $ 1,545 $ 1,371
Accounts receivable ...................................... 36,915 60,660
Inventories .............................................. 117,408 112,169
Income taxes receivable .................................. 132 1,700
Prepaid expenses and other current assets ................ 2,206 1,240
Deferred income taxes .................................... 40 40
-------------- --------------
Total current assets ................................... 158,246 177,180
Property, plant and equipment .............................. 148,938 152,198
Goodwill and intangible assets ............................. 179,205 185,805
Other ...................................................... 2,502 2,654
-------------- --------------
Total assets .......................................... $ 488,891 $ 517,837
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ........................ $ 247,610 $ 1,236
Accounts payable ......................................... 48,455 49,598
Accrued expenses ......................................... 49,107 47,078
Income taxes payable ..................................... 300 300
Restructuring reserve .................................... 2,200 5,660
-------------- --------------
Total current liabilities ............................. 347,672 103,872
-------------- --------------
Long-term debt ............................................. 137,871 373,675
Deferred income taxes ...................................... 16,364 16,972
Other ...................................................... 1,102 1,288
-------------- --------------
Total liabilities ....................................... 503,009 495,807
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, 150,000 shares authorized,
no shares issued and outstanding ........................ -- --
Common stock, voting, $.01 par value, 75,000,000
shares authorized, 27,926,405 and 27,724,405
shares issued and outstanding, respectively ............. 279 277
Additional paid-in capital ............................... 301,287 301,287
Accumulated deficit ...................................... (315,684) (279,534)
-------------- --------------
Total stockholders' equity (deficit) ................. (14,118) 22,030
-------------- --------------
Total liabilities and stockholders' equity (deficit) ... $ 488,891 $ 517,837
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> ....................................... <C> <C> <C> <C>
Net sales ................................. $ 144,717 $ 174,160 $ 416,398 $ 482,479
Cost of sales ............................. 131,984 156,462 382,230 441,962
------------ ------------ ------------ ------------
Gross profit ........................... 12,733 17,698 34,168 40,517
Operating expenses:
Selling and marketing .................. 5,590 5,569 15,844 15,762
General and administrative ............. 5,026 9,608 18,269 24,313
Restructuring charges .................. (1,999) 5,741 (1,999) 5,741
Loss on sale of accounts receivable .... 836 858 2,286 2,319
Amortization of intangible assets ...... 1,282 1,327 3,853 4,522
Write-down of intangible assets ........ -- -- -- 41,000
Management fees and services ........... 375 595 1,125 1,655
------------ ------------ ------------ ------------
Income (loss) from operations ............. 1,623 (6,000) (5,210) (54,795)
Other income (expense):
Interest ............................... (10,912) (11,929) (32,632) (33,735)
Other income, net ...................... 88 192 2,418 207
------------ ------------ ------------ ------------
Loss before income taxes .................. (9,201) (17,737) (35,424) (88,323)
Benefit from income taxes ................. -- 4,343 -- 16,907
------------ ------------ ------------ ------------
Loss before cumulative effect of a change
in accounting principal ................ (9,201) (13,394) (35,424) (71,416)
Cumulative effect of a change
in accounting principal ................. -- -- (726) --
------------ ------------ ------------ ------------
Net loss .................................. $ (9,201) $ (13,394) $ (36,150) $ (71,416)
============ ============ ============ ============
Basic loss per share:
Loss before cumulative effect of a change
in accounting principal ................ $ (0.33) $ (0.48) $ (1.27) $ (2.58)
Cumulative effect of a change
in accounting principal .............. -- -- (0.03) --
------------ ------------ ------------ ------------
Net loss ................................ $ (0.33) $ (0.48) $ (1.30) $ (2.58)
============ ============ ============ ============
Weighted average shares outstanding:
Basic ................................... 27,829 27,724 27,760 27,713
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months ended
September 30,
----------- -----------
1999 1998
----------- -----------
Cash flows from operating activities:
<S> .................................................................. <C> <C>
Net loss ........................................................... $ (36,150) $ (71,416)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Deferred income taxes ............................................ (607) (17,148)
Depreciation ..................................................... 10,905 10,241
Amortization of goodwill and intangible assets ................... 3,853 4,522
Write-down of assets - Shade/Allied .............................. -- 41,000
Restructuring charges ............................................ (1,999) 5,741
Cumulative effect of change in accounting principle .............. 726 --
Amortization of debt issuance costs .............................. 2,078 3,589
(Gain) or loss on disposal of assets ............................. (1,929) 143
Changes in assets and liabilities:
Accounts receivable ........................................... 22,745 27,202
Income taxes receivable ....................................... 1,568 3,308
Inventories ................................................... (5,863) 24,752
Prepaid expenses and other .................................... (966) (301)
Accounts payable .............................................. (1,142) (13,682)
Accrued expenses .............................................. 567 13,173
Other assets and liabilities .................................. (34) (805)
------------ ------------
Net cash provided by (used in) operating activities ......... (6,248) 30,319
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ................................ (10,702) (11,195)
Proceeds from sale of assets ....................................... 5,610 21
------------ ------------
Net cash used in investing activities ....................... (5,092) (11,174)
------------ ------------
Cash flows from financing activities:
Net borrowings on credit agreement and long-term debt .............. 11,768 14,400
Repayment of long-term debt ........................................ (1,198) (1,146)
Net repayment of accounts receivable financing facility ............ 1,000 (2,000)
Debt issuance costs ................................................ (57) (2,037)
Options and management stock purchase plan ......................... 1 11
------------ ------------
Net cash provided by financing activities ....................... 11,514 9,228
------------ ------------
Net increase (decrease) in cash ...................................... 174 28,373
Cash, beginning of period ............................................ 1,371 4,855
------------ ------------
Cash, end of period .................................................. $ 1,545 $ 33,228
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1. Organization and Basis of Presentation
Organization and Basis of Presentation
American Pad & Paper Company (the "Company") is a holding company,
that conducts its operations through American Pad & Paper Company of Delaware,
Inc. ("AP&P Delaware") and its wholly owned subsidiaries, AP&P Manufacturing,
Inc., and American Pad & Paper Sales Company, Inc.
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
previous acquisitions AMPAD, the envelope operations of Williamhouse and
Niagara, and the continuous form operations of Shade/Allied. Additionally, the
consolidated financial statements include the accounts of Notepad Funding
Corporation ("Notepad"), a special purpose corporation used in the accounts
receivable financing facility. All significant intercompany balances have been
eliminated.
Business
The Company is a leading manufacturer and marketer of nationally
branded and private label paper-based office products in North America. The
Company operates in one business segment, converting paper into office products,
and offers a broad assortment of products through two complementary divisions:
AMPAD (writing pads, file folders, retail envelopes, and other paper-based
office products) and Williamhouse (business envelopes and seasonal greeting
cards). The Company's products are distributed through large mass merchant
retailers, office product superstores, warehouse clubs, major contract
stationers, office products wholesalers, paper merchants, and independent
dealers.
Interim Financial Information
The accompanying interim financial statements are unaudited. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted, although the Company believes the disclosures included herein are
adequate to make the information presented not misleading. These interim
financial statements should be read in conjunction with the Company's financial
statements for the year ended December 31, 1998.
The accompanying interim financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position at September 30, 1999, and the
results of its operations and its cash flows for the three months and nine
months ended September 30, 1999, and 1998. The results of operations for the
interim periods presented are not necessarily indicative of results to be
expected for the full fiscal year.
American Pad & Paper Company of Delaware, Inc.
AP&P Delaware, is the issuer of 13% Senior Subordinated Notes
("Notes"). Terms of the Notes require, among other matters, that AP&P Delaware
provide annual audited and quarterly unaudited financial statements to the
holders of the notes. There are no material differences between the financial
statements of the Company and those of AP&P Delaware. The composition of AP&P
Delaware's stockholder's equity (deficit) at September 30, 1999, consists of one
hundred shares of $0.01 par value common stock, paid-in capital of $202.4
million and an accumulated deficit of $216.5 million and, in total, is equal to
the stockholders' equity (deficit) of the Company.
<PAGE>
2. Restructuring Reserve
On September 1, 1998, the Company announced a plan to rationalize its
manufacturing operations. The plan includes plant consolidations, equipment
moves, plant/product changes, warehouse consolidations, and the addition of new
distribution centers.
The Company has announced three plant closings as part of the
rationalization plan. The closing of the Kosciusko, Mississippi, plant was
announced on November 10, 1998. The closing of the Dallas, Texas, plant was
announced on January 19, 1999. The closing of the Holland, New York, plant was
announced on May 10, 1999. The final production of the Kosciusko and Dallas
plants occurred on April 14, 1999 and April 22, 1999, respectively. As of
September 30, 1999, 371 employees have been severed and severance and benefit
payments totaling $1.1 million have been charged to the restructuring reserve.
<TABLE>
<CAPTION>
Initial Remaining
Restructuring Amounts Change in Costs to
Charge Used to date Estimate Incur
------------ ------------ ------------ ------------
(in thousands)
<S> ................................... <C> <C> <C> <C>
Severance and benefits ................ $ 1,848 $ (1,064) $ (615) $ 169
Closing costs to exit facilities ...... 2,484 (275) (1,198) 1,011
Lease termination costs ............... 468 (132) -- 336
Property taxes after ceasing operations 941 (71) (186) 684
------------ ------------ ------------ ------------
Total $ 5,741 $ (1,542) $ (1,999) $ 2,200
============ ============ ============ ============
</TABLE>
Restructuring charges recorded in September 1998 of $2.0 million were
reversed during the quarter ended September 30, 1999. The original
rationalization plan included the consolidation of two existing plants. After
attempts to hire additional skilled labor at the receiving plant failed, the
decision to close the first plant was reversed.
The Company recorded one-time implementation costs associated with the
rationalization plan of $8.6 million in cost of sales during the three quarters
ended September 30, 1999. These expenses represent costs to move equipment,
efficiency costs, and recruiting costs. Estimated one-time implementation costs
of $0.2 million that do not qualify for current recognition will be recorded in
the fourth quarter of 1999. Such costs include equipment and inventory transfer
costs, employee retention and relocation, recruiting costs, interim warehouse
costs, and other training and efficiency costs. The major undertakings of the
rationalization plan are expected to be completed in 1999. Upon full
implementation, the plan is expected to have a significant positive effect on
the Company's financial performance, resulting in an estimated annualized cost
saving of $8.0 to $10.0 million.
3. Accounts Receivable
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(in thousands)
<S> ................................................. <C> <C>
Accounts receivable - trade ......................... $ 36,004 $ 59,936
Accounts receivable - other ......................... 3,736 2,972
Less allowance for doubtful accounts and reserves for
customers deductions and cash discounts ............ (2,825) (2,248)
------------ ------------
$ 36,915 $ 60,660
============ ============
</TABLE>
<PAGE>
On May 24, 1996, the Company entered into a $60.0 million accounts
receivable financing facility. At September 30, 1999 and December 31, 1998,
accounts receivable of $57.0 million and $56.0 million, respectively, were sold
under this facility. All accounts are sold with recourse. Therefore, a portion
of the allowance for doubtful accounts covers receivables no longer reflected on
the balance sheet. Under the agreement, the maximum available under the facility
is subject to change based on the level of eligible receivables as defined in
the agreement. The facility matures in October 2001.
4. Inventories
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(in thousands)
<S> ................................................. <C> <C>
Raw materials ....................................... $ 33,981 $ 29,892
Work in process ..................................... 7,092 5,440
Finished goods ...................................... 81,837 77,788
------------ ------------
122,910 113,120
LIFO reserve ........................................ (5,502) (951)
------------ ------------
$ 117,408 $ 112,169
============ ============
</TABLE>
5. Property, Plant, and Equipment
<TABLE>
<CAPTION>
Estimated
Useful lives September 30, December 31,
in years 1999 1998
------------ -------------- --------------
(in thousands)
<S> <C> <C> <C>
Land..................................... $ 4,834 $ 7,002
Buildings................................ 40 33,234 34,585
Machinery and equipment.................. 3-12 135,930 132,721
Office furniture and fixtures............ 3-7 12,987 12,351
Construction in progress................. 11,718 5,109
-------------- --------------
198,703 191,768
Less accumulated depreciation............ (49,765) (39,570)
-------------- -- -----------
$ 148,938 $ 152,198
============== ==============
</TABLE>
6. Goodwill and Intangible Assets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(in thousands)
<S> ................................................. <C> <C>
Goodwill ............................................ $ 148,460 $ 148,460
Intangible assets, primarily tradenames ............. 42,767 43,665
Debt issuance costs ................................. 20,105 20,048
-------------- --------------
211,332 212,173
Less accumulated amortization ....................... (32,127) (26,368)
-------------- --------------
$ 179,205 $ 185,805
============== ==============
</TABLE>
<PAGE>
The Accounting Standards Executive Committee (AcSEC) issued Statement
of Position (SOP) 98-5, which is effective for fiscal years commencing after
December 15, 1998. SOP 98-5, "Reporting on the Costs of Start-up Activities",
prescribes that start-up costs should be expensed as incurred. The SOP states
that its adoption should be reported as a cumulative effect of a change in
accounting principle. The Company adopted SOP 98-5 effective January 1, 1999,
recorded a charge of $0.7 million in January 1999 reflecting the write off of
previously recorded start-up costs.
7. Accrued Expenses
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- --------------
(in thousands)
<S> ................................................. <C> <C>
Acquisition integration costs ....................... $ 5,043 $ 6,190
Sales volume discounts .............................. 21,704 18,572
Salaries, wages and benefits ........................ 2,903 4,922
Interest ............................................ 7,433 3,808
Insurance reserves .................................. 4,682 5,550
Other ............................................... 7,342 8,036
-------------- --------------
$ 49,107 $ 47,078
============== ==============
</TABLE>
8. Long-Term Debt
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(in thousands)
<S> ................................................. <C> <C>
Revolving credit facility ........................... $ 246,000 $ 235,150
13% Senior Subordinated Notes due 2005 .............. 130,000 130,000
Industrial revenue bonds ............................ 6,815 7,165
Notes payable ....................................... 932 584
Capitalized lease obligations ....................... 1,734 2,012
-------------- --------------
385,481 374,911
Less current portion ................................ 247,610 1,236
-------------- --------------
$ 137,871 $ 373,675
============== ==============
</TABLE>
On Friday November 12, 1999, the Company was notified by its banking
group of a default of its revolving credit facility. The default stems from the
formation of new subsidiaries in December 1997 related to a reorganization of
the Company's corporate structure without proper notification to the banks. The
reorganization was implemented primarily for state tax purposes and included the
transfer of assets between existing entities and transfers to the new
subsidiaries. Certain of these subsidiaries own assets for which the banks'
security interest may not have been perfected, resulting in a default under the
revolving credit facility. The banks' default notice prevents the Company from
making the scheduled November 15, 1999 interest payment to its subordinated
debt holders. The subordinated debt indenture provides a 30-day grace period
during which to cure this interest payment default. The Company has been in
discussions with its bank group and intends to continue to work with them to
attempt to resolve the credit facility default during this grace period.
The Company has engaged Lazard Freres to analyze its strategic and
financial alternatives, including the possible sale of the Williamhouse
division. The main reason for considering this option is that at the proper
valuation, the proceeds from the sale of the Williamhouse division would make
significant progress toward reducing debt. Lazard will also look at other
actions that would also allow the Company to address its debt structure.
<PAGE>
Due to the availability of a 30-day grace period provided in the bond
indenture, the liability for the 13% Senior Subordinated Notes will continue to
be classified as long term in the balance sheet. The revolving credit facility
does not provide for a grace period relative to the default. Therefore, the
entire revolving credit debt will be classified as a current liability.
9. Related Party Transactions
The Company had an outstanding note receivable of $284,000 at September
30, 1999, from its former President and Chief Operating Officer. In 1998, the
note was extended to July 2000, and bears interest at a rate of six percent. The
amounts due under the note are with full recourse and are secured by a pledge of
all such shares of Common Stock purchased by the former executive.
On March 31, 1998, the Company loaned its acting Chief Financial
Officer, who is also a director, $1.0 million related to the exercise of stock
options. The current loan balance is $1.1 million. The loan is due in March 2001
and bears interest at a rate of 5.89%. The loan is secured by shares of common
stock.
<PAGE>
AMERICAN PAD & PAPER COMPANY
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is one of the largest manufacturers and marketers of
nationally branded and private label paper-based office products (excluding copy
paper) in the $60 to $70 billion North American office products industry.
Through its AMPAD division, the Company is among the largest manufacturers of
writing pads and notebooks, filing supplies, retail envelopes and machine papers
to many of the largest office products retailers and distributors. Through its
Williamhouse division, the Company is the leading supplier of mill branded,
specialty and commodity business envelopes to paper merchants and distributors.
Certain factors that have affected, and may affect prospectively, the operating
results of the Company are discussed below.
Purchase Accounting Effects. The Company's acquisitions have been
accounted for using the purchase accounting method. The 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 assets acquired based on the
fair market value of such assets on the date of acquisition. 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.
Historically, certain commodity grades utilized by the Company have shown
considerable price volatility. To the extent that the Company is not able to
pass such price changes on to its customers due to strategic customer
considerations or competitive market conditions, this price volatility has and
is expected to continue to have an effect on net sales and cost of sales. There
is no assurance that the Company will not be materially affected by future
fluctuations in the price of paper.
Recent Developments
On Friday November 12, 1999, the Company was notified by its banking
group of a default of its revolving credit facility. The default stems from the
formation of new subsidiaries in December 1997 related to a reorganization of
the Company's corporate structure without proper notification to the banks. The
reorganization was implemented primarily for state tax purposes and included the
transfer of assets between existing entities and transfers to the new
subsidiaries. Certain of these subsidiaries own assets for which the banks'
security interest may not have been perfected, resulting in a default under the
revolving credit facility. The banks' default notice prevents the Company from
making the scheduled November 15, 1999 interest payment to its subordinated
debt holders. The subordinated debt indenture provides a 30-day grace period
during which to cure this interest payment default. The Company has been in
discussions with its bank group and intends to continue to work with them to
attempt to resolve the credit facility default during this grace period.
The Company has engaged Lazard Freres to analyze its strategic and
financial alternatives, including the possible sale of the Williamhouse
division. The main reason for considering this option is that at the proper
valuation, the proceeds from the sale of the Williamhouse division would make
significant progress toward reducing debt. Lazard will also look at other
actions that would also allow the Company to address its debt structure.
Due to the availability of a 30-day grace period provided in the bond
indenture, the liability for the 13% Senior Subordinated Notes will continue to
be classified as long term in the balance sheet. The revolving credit facility
does not provide for a grace period relative to the default. Therefore, the
entire revolving credit debt will be classified as a current liability.
<PAGE>
Results of Operations
The following table summarizes the Company's historical results of operations as
a percentage of net sales for the three and nine months ended September 30, 1999
and 1998.
<TABLE>
<CAPTION>
Income Statement Data
Three months ended September 30, Nine months ended September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> ..................................... <C> <C> <C> <C>
Net sales ............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................... 91.2% 89.8% 91.8% 91.6%
------------ ------------ ------------ ------------
Gross profit ......................... 8.8% 10.2% 8.2% 8.4%
Operating expenses:
Selling and marketing ................ 3.9% 3.2% 3.8% 3.3%
General and administrative ........... 3.5% 5.5% 4.4% 5.0%
Restructuring charges................. -1.4% 3.3% -0.5% 1.2%
Loss on sale of accounts receivable .. 0.6% 0.5% 0.5% 0.5%
Amortization of intangible assets .... 0.9% 0.8% 0.9% 0.9%
Write-down of assets ................. 0.0% 0.0% 0.0% 8.5%
Management fees and services ......... 0.3% 0.3% 0.3% 0.3%
------------ ------------ ------------ ------------
Income (loss) from operations ........... 1.0% -3.4% -1.2% -11.3%
Other income (expense):
Interest ............................. -7.5% -6.8% -7.8% -7.0%
Other income, net .................... 0.1% 0.0% 0.6% 0.0%
------------ ------------ ------------ ------------
Loss before income taxes ................ -6.4% -10.2% -8.4% -18.3%
Benefit from income taxes................ 0.0% -2.5% 0.0% -3.5%
------------ ------------ ------------ ------------
Loss before cumulative effect of
a change in accounting principle ...... -6.4% -7.7% -8.4% -14.8%
Cumulative effect of a change in
accounting principle net of tax ....... 0.0% 0.0% -0.2% 0.0%
------------ ------------ ------------ ------------
Net loss ................................ -6.4% -7.7% -8.6% -14.8%
============ ============ ============ ============
</TABLE>
Three months ended September 30, 1999, compared to three months ended September
30, 1998
Net sales decreased to $144.7 million in 1999 from $174.2 million in
1998, a decrease of $29.4 million or 16.9%. The decrease is comprised of a $30.3
million decrease in sales partially offset by a $0.9 million decrease in
customer incentives. The net sales decrease is primarily attributable to the
loss of a major superstore customer, the Company's efforts to eliminate
unprofitable business in its forms sales, the continued effort by the Company's
superstore customers to reduce inventory, and slower than expected business in
the paper merchant channel. The decrease was partially offset by increases in
the remaining superstore customers and the end of some customer incentive
programs.
Gross profit decreased to $12.7 million or 8.8% of net sales in 1999
from $17.7 million or 10.2% of net sales in 1998. This $5.0 million decrease in
gross profit margin is primarily attributable to lower than expected volume as
well as a less favorable product mix (more commodity and less proprietary
products). This was somewhat offset by lower standard costs and higher rebates
collected from vendors. In addition, 1999 cost of sales included $3.8 million of
one-time costs associated with the plant rationalization plan. These expenses
represent costs to move equipment, efficiency costs, and recruiting costs.
Selling and marketing expenses of $5.6 million incurred in 1999 were in
line with expenses recorded in 1998.
General and administrative expenses decreased to $5.0 million in 1999
from $9.6 million in 1998. This decrease is primarily attributable to the 1998
expenses of $2.2 million for severance and consulting costs paid to certain
former executives of the company and $1.4 million of consulting fees related to
work on the Company's restructuring.
Restructuring charges recorded in September 1998 of $2.0 million were
reversed during the three months ended September 30, 1999. The original
rationalization plan included the consolidation of two existing plants. After
attempts to hire additional skilled labor at the receiving plant failed, the
decision to close the first plant was reversed. Restructuring charges for the
three months ended September 30, 1998, of $5.7 million represents part of the
previously announced major rationalization plan of the Company's manufacturing
operations.
Losses on sales of accounts receivable of $0.8 million in 1999 were in
line with expenses recorded in 1998. The losses on sales of accounts receivable
represent the Company's cost of using a third party trust to provide off balance
sheet financing of trade accounts receivable.
Goodwill and intangible asset amortization expense of $1.3 million in
1999 were in line with recorded expenses in 1998.
Management fees and services decreased to $0.4 million in 1999 from
$0.6 million for 1998. The change in management fees is due to the renegotiation
of the Company's Advisory Agreement to reduce the fee from $2.0 million to $1.5
million annually.
Interest expense decreased to $10.9 million in 1999 from $11.9 million
in 1998, representing a decrease of $1.0 million. The decline is due to lower
average outstanding debt levels during the third quarter of 1999 compared to the
third quarter of 1998, partially offset by higher rates.
The income tax provision for the quarter ended September 30, 1999,
reflects an effective income tax benefit rate of 0% as compared with the
effective income tax provision rate of 24.5% for the quarter ended September 30,
1998. In the third quarter of 1999, the Company did not record any tax benefit
associated with its loss. Instead, the Company increased its net deferred tax
valuation allowance by an amount equal to the tax benefit that would have been
provided by the loss. The Company will continue this practice until the
realization of its recorded net operating loss is reasonably assured.
Nine months ended September 30, 1999, compared to nine months ended September
30, 1998
Net sales decreased to $416.4 million in 1999 from $482.5 million in
1998, a decrease of $66.1 million or 13.7%. The decrease is comprised of a $69.2
million decrease in sales partially offset by a $3.1 million decrease in
customer incentives. The net sales decrease is primarily attributable to the
loss of a major superstore customer, the Company's efforts to eliminate
unprofitable business in its forms sales, and the continued effort by the
Company's superstore customers to reduce inventory. The decrease was partially
offset by increases in the remaining superstore customers and the end of some
customer incentive programs.
Gross profit decreased to $34.2 million or 8.2% of net sales in 1999
from $40.5 million or 8.4% of net sales in 1998. This $6.3 million decrease in
gross profit margin is primarily attributable to lower sales and LIFO charges
that exceeded 1998 charges by $6.7 million. These variances were partially
offset by lower standard costs and operating variances as well as higher rebates
collected from vendors. In addition, 1999 cost of sales included $8.6 million of
one-time costs associated with the plant rationalization plan. These expenses
represent costs to move equipment, efficiency costs, and recruiting costs.
<PAGE>
Selling and marketing expenses of $15.8 million incurred in 1999 were
in line with expenses recorded in 1998.
General and administrative expenses decreased to $18.3 million in 1999
from $24.3 million in 1998, or $6.0 million. This decrease is primarily
attributable to 1998 one time severance and consulting costs paid to certain
former executives of the Company of $3.4 million, $1.4 million of consulting
fees related to work on the Company's restructuring, and $0.7 million in
litigation costs.
Restructuring charges recorded in September 1998 of $2.0 million were
reversed during the nine months ended September 30, 1999. The original
rationalization plan included the consolidation of two existing plants. After
attempts to hire additional skilled labor at the receiving plant failed, the
decision to close the first plant was reversed. Restructuring charges for the
nine months ended September 30, 1998, of $5.7 million represents part of the
previously announced major rationalization plan of the Company's manufacturing
operations.
Losses on sales of accounts receivable of $2.3 million in 1999 were in
line with expenses recorded in 1998. The losses on sales of accounts receivable
represent the Company's cost of using a third party trust to provide off balance
sheet financing of trade accounts receivable.
Goodwill and intangible asset amortization expense decreased to $3.9
million in 1999 from $4.5 million in 1998. The decrease of $0.6 million is due
primarily to the amortization associated with the $41.0 million write down of
intangible assets in the second quarter of 1998.
Write-down of intangible assets expense of $41.0 million for the nine
months ended September 30, 1998, reflects a write-off of goodwill and a
write-down of intangible assets associated with the Shade/Allied continuous
forms business.
Management fees and services decreased to $1.1 million in 1999 from
$1.7 million for 1998, representing a decrease of $0.6 million. The change in
management fees is due to the renegotiation of the Company's Advisory Agreement
to reduce the fee from $2.0 million to $1.5 million annually.
Interest expense decreased to $32.6 million in 1999 from $33.7 million
in 1998, representing a decrease of $1.1 million. The decline is due to lower
average outstanding debt levels during the year-to-date period ended September
30, 1999 compared to the year-to-date period ended September 30, 1998, partially
offset by higher rates.
The income tax provision for the nine months ended September 30, 1999,
reflects an effective income tax benefit rate of 0% as compared with the
effective income tax provision rate of 19.1% for the nine months ended September
30, 1998. In the first nine months of 1999, the Company did not record any tax
benefit associated with its loss. Instead, the Company increased its net
deferred tax valuation allowance by an amount equal to the tax benefit that
would have been provided by the loss. The Company will continue this practice
until the realization of its recorded net operating loss is reasonably assured.
In the first nine months of 1998, the Company lowered its effective tax rate due
to the expected effect of nondeductible expenses during 1998.
Cumulative effect of a change in accounting principle for the nine
months ended September 30, 1999, reflects a charge of $0.7 million, net of tax,
for the write off of previously recorded start-up costs. The Accounting
Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-5,
which is effective for fiscal years commencing after December 15, 1998. SOP
98-5, "Reporting on the Costs of Start-up Activities", prescribes that start-up
costs should be expensed as incurred. The SOP states that its adoption should be
reported as a cumulative effect of a change in accounting principle.
<PAGE>
Known Trends and Seasonality
The Company experiences some seasonality in its business operations.
During the Company's third and fourth quarters, net sales tend to be higher than
in the first and second quarters due to sales of back-to-school, seasonal
greeting card and tax filing products.
The Company's AMPAD division sells primarily to fast growing customers
such as office products superstores, mass merchants and national contract
stationers. Such customers periodically adjust the levels of inventory in the
retail distribution channels, either in retail stores or in distribution
centers. The Company has determined that lower than expected sales will occur
during the quarters in which such downward adjustments are made. The Company is
not able to predict the future effect of such adjustments; however, it is likely
that its retail customers will continue to adjust inventory levels in future
quarters.
The Company's gross profit is directly affected by, among other
factors, the mix of products sold and the mix of customers. Based on the
Company's current product categories and customer mix, the Company's gross
profit will be negatively or positively affected as the actual product and
customer sales mix changes.
Liquidity and Capital Resources
Net cash used by operating activities for the nine months ended
September 30, 1999, was $6.2 million as compared to net cash provided by
operating activities for the nine months ended September 30, 1998, of $30.3
million. This decrease is primarily the result of lower sales.
Cash used in investing activities for the nine months ended September
30, 1999 and 1998, was $5.1 million and $11.2 million, respectively, due to the
purchase of equipment, principally production equipment, offset by the sale of
assets.
On Friday November 12, 1999, the Company was notified by its banking
group of a default of its revolving credit facility. The default stems from the
formation of new subsidiaries in December 1997 related to a reorganization of
the Company's corporate structure without proper notification to the banks. The
reorganization was implemented primarily for state tax purposes and included the
transfer of assets between existing entities and transfers to the new
subsidiaries. Certain of these subsidiaries own assets for which the banks'
security interest may not have been perfected, resulting in a default under the
revolving credit facility. The banks' default notice prevents the Company from
making the scheduled November 15, 1999 interest payment to its subordinated debt
holders. The subordinated debt indenture provides a 30-day grace period during
which to cure this interest payment default. The Company has been in discussions
with its bank group and intends to continue to work with them to attempt to
resolve the credit facility default during this grace period.
The Company has engaged Lazard Freres to analyze its strategic and
financial alternatives, including the possible sale of the Williamhouse
division. The main reason for considering this option is that at the proper
valuation, the proceeds from the sale of the Williamhouse division would make
significant progress toward reducing debt. Lazard will also look at other
actions that would also allow the Company to address its debt structure.
Due to the availability of a 30-day grace period provided in the bond
indenture, the liability for the 13% Senior Subordinated Notes will continue to
be classified as long term in the balance sheet. The revolving credit facility
does not provide for a grace period relative to the default. Therefore, the
entire revolving credit debt will be classified as a current liability.
The declaration of the default has restricted the Company's liquidity
to it current cash on hand and the cash generated by its near-term operations.
As a result, the ability of the Company to meet its continuing obligations is
dependent upon its continued sales and collection of outstanding receivables and
the careful management of cash until availability under the revolving credit
facility can be restored or other financing can be arranged. Cash on hand at
November 15, 1999, was $10.4 million.
<PAGE>
Year 2000 Issue
The Company recognizes the need to ensure that its operations and
relationships with vendors, customers and other parties will not be adversely
impacted by software or other processing errors arising from calculations using
the year 2000 and beyond. Failure by the Company to timely resolve Year 2000
issues could result, in the worst case, in an inability of the Company to
manufacture and distribute its product to customers and process its daily
business for some period of time. However, based on the progress made to date in
its Year 2000 remediation plan, the Company believes the worst case scenario is
unlikely. Failure to address Year 2000 issues by one or more third party service
providers on whom the Company relies could also result, in a worst case
scenario, in some business interruption. The amount of lost revenues, if any,
resulting from a worst case scenario such as those examples described above
would depend on the period of time over which the failure goes uncorrected and
the breadth of its impact.
The Company has purchased a new certified Year 2000 compliant version
of its existing software to upgrade critical manufacturing, distribution, and
financial applications. While the primary purpose of the software upgrade is to
modernize and improve the Company's operations, it is also expected to resolve
any Year 2000 issues in these critical computer systems. Through September 30,
1999, capital expenditures to purchase software and related hardware total $2.3
million and non-capital expenditures for Year 2000 readiness are approximately
$0.7 million. At this time, other than the cost of implementing its new
information system, the Company does not believe that the costs of addressing
the Year 2000 issue will be material. The Company has increased its overall
information systems budget to accommodate the implementation of the upgraded
software and Year 2000 compliance projects and has not delayed other critical
information systems work due to its Year 2000 efforts. The implementation of the
new software was completed and put in production on October 15, 1999.
In addition to the software upgrade, a Company-wide committee of senior
executives representing all functional areas has been established to identify,
evaluate and initiate corrective actions in order to achieve Year 2000
readiness. The committee has completed the process of taking the relevant
inventory, assessing risk and assigning priorities to various tasks and
performing limited internal tests relative to the Company's critical functions.
The committee determined that the Company's primary hardware and operating
systems and the program supporting the Company's electronic data interchange are
Year 2000 compliant. With regard to the Company's manufacturing and other non-IT
readiness for Year 2000, the Committee has not identified any issues that would
have a material, adverse impact on the Company's operations' processes. The
committee has developed contingency plans for the Company's critical information
systems that primarily consist of making its existing systems Year 2000
compliant in the event that the software upgrade was not completed by the
scheduled date. In addition, contingency plans have included the development of
manual intervention processes for critical functions. Remedial tasks relative to
the Company's critical functions have been completed. In addition, the committee
has requested and received documentation from all key customers, suppliers and
other business partners that their organizations will be ready for the year
2000. While the Company cannot warrant that all the systems of its business
partners will be Year 2000 compliant, based on currently available information,
the Company expects no significant business interruptions due to non-compliance
by any particular entity.
There can be no assurance that the Company will be able to complete all
of the remedial tasks in the required time frame, that unanticipated events will
not occur, that the Company will be able to identify all Year 2000 issues before
the problems manifest themselves, that third party systems will be Year 2000
compliant and that Company's estimate of Year 2000 costs will not require
revision if unanticipated adverse developments occur. However, management
believes the Company is taking adequate action to address Year 2000 issues.
Based on a current assessment of risks relating to its Year 2000 readiness, the
Company does not believe Year 2000 issues will materially affect future
financial results or operating performance.
<PAGE>
Forward-Looking Statements
The Company is including the following cautionary statement in this
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained herein are
forward-looking statements and, accordingly, involve risks and uncertainties
that could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based, in
turn, upon further assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectation, beliefs or projections will result or be achieved or
accomplished. In addition to the other factors and matters discussed elsewhere
herein, the following are important factors that, in the view of the Company,
could cause actual results to differ materially from those discussed in the
forward-looking statements:
1. Changes in economic conditions, in particular those which affect the
retail and wholesale office product markets.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
3. Changes in senior management or control of the Company.
4. Inability to obtain new customers or retain existing ones.
5. Significant changes in competitive factors, including product pricing
conditions affecting the Company.
6. Governmental/regulatory actions and initiatives, including those
affecting financings.
7. Significant changes from expectations in actual capital expenditures and
operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments.
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievances were
to occur.
11. Changes in accounting principles and/or the application of such
principles to the Company.
12. Timely resolution of Year 2000 issues by the Company and its
customers and suppliers.
13. Completion of the Company's restructuring plan.
14. Changes in customer inventory levels.
15. Changes in relationships with lenders and other sources of capital.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after the date hereof.
<PAGE>
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
The Company has market risk exposure arising from changes in interest
rates. The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its revolving credit facility that bear
interest based on floating rates. The Company has entered into an interest rate
cap to reduce the impact from a significant rise in interest rates on its
floating rate debt and may do so in the future. However, there were no amounts
received under the agreement as of September 30, 1999 and 1998.
At September 30, 1999, the Company had approximately $246.0 million of
variable rate debt obligations outstanding with a weighted average interest rate
of 9.04%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at September 30, 1999, would have changed
interest expense by approximately $1.7 million for year-to-date September 30,
1999.
AMERICAN PAD & PAPER COMPANY
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
As previously reported, between March 10, 1998 and April 11, 1998,
three complaints were filed in the United States District Court for the Northern
District of Texas naming as defendants the Company, certain of its officers and
directors and certain of the underwriters and other related entities involved in
the Company's initial public offering. The plaintiffs in the first two
complaints purport to represent a class of stockholders who acquired shares of
the Company's common stock between July 2, 1996 and December 17, 1997. The
complaints seek unspecified damages and other relief under the federal
securities laws based on allegations that the Company made omissions and
misleading disclosures in public reports and press releases and to securities
analysts during 1996 and 1997 concerning the Company's financial condition, its
future business prospects and the impact of various acquisitions. These two
lawsuits were consolidated on July 2, 1998. The third complaint was dismissed
without prejudice by the plaintiffs on September 29, 1998. Motions to dismiss
have been filed in the consolidated cases and all briefing is complete. Pending
a ruling on the motions to dismiss, all proceedings in the consolidated action
have been stayed. To the extent that the motions to dismiss are denied in whole
or in part, the Company believes that it has meritorious defenses to plaintiff's
claims and intends to vigorously defend the action.
ITEM 2 Changes in Securities and Use of Proceeds
None
ITEM 3 Defaults Upon Senior Securities
On Friday November 12, 1999, the Company was notified by its banking
group of a default of its revolving credit facility. The default stems from the
formation of new subsidiaries in December 1997 related to a reorganization of
the Company's corporate structure without proper notification to the banks. The
reorganization was implemented primarily for state tax purposes and included the
transfer of assets between existing entities and transfers to the new
subsidiaries. Certain of these subsidiaries own assets for which the banks'
security interest may not have been perfected, resulting in a default under the
revolving credit facility. The banks' default notice prevents the Company from
making the scheduled November 15, 1999 interest payment to its subordinated debt
holders. The subordinated debt indenture provides a 30-day grace period during
which to cure this interest payment default. The Company has been in discussions
with its bank group and intends to continue to work with them to attempt to
resolve the credit facility default during this grace period.
The Company has engaged Lazard Freres to analyze its strategic and
financial alternatives, including the possible sale of the Williamhouse
division. The main reason for considering this option is that at the proper
valuation, the proceeds from the sale of the Williamhouse division would make
significant progress toward reducing debt. Lazard will also look at other
actions that would also allow the Company to address its debt structure.
<PAGE>
Due to the availability of a 30-day grace period provided in the bond
indenture, the liability for the 13% Senior Subordinated Notes will continue to
be classified as long term in the balance sheet. The revolving credit facility
does not provide for a grace period relative to the default. Therefore, the
entire revolving credit debt will be classified as a current liability.
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part hereof:
Exhibit No. Description of Exhibit
27.05 Financial Data Schedule
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the third quarter
of 1999 and through the date of the filing of this report:
(1) Current Report on Form 8-K filed August 26, 1999, relating to
the Company's August 18, 1999, press releases. A press release
on August 18, 1999, announcing the appointment of Raj Tanna as
Vice President of E*Commerce.
(2) Current Report on Form 8-K filed September 20, 1999, relating
to the Company's September 13, 1999, press releases. A press
release on September 13, 1999, announcing the appointment of
Barry L. Silberman as Vice President of Marketing for the
AMPAD Division.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Pad & Paper Company has duly caused this report to be signed on November 15,
1999, on its behalf by the undersigned thereunto duly authorized.
/s/ James W. Swent, III /s/ David N. Pilotte
- ----------------------- ------------------------------------
James W. Swent, III David N. Pilotte
Chief Executive Officer and Vice President and Corporate Controller
Chief Financial Officer (Principal Accounting Officer)
(Principal Executive Officer and
Principal Financial Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
historical financial statements of American Pad & Paper Company's September 30,
1999, 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
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<NAME> AMERICAN PAD & PAPER COMPANY
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