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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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. Yes _X No
As of April 30, 1999, there were 27,727,045 outstanding shares of
American Pad & Paper Company common stock.
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<PAGE>
AMERICAN PAD & PAPER COMPANY
QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
<S> <C>
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998............................................................ 3
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998......................................................................... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 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............................... 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................................................ 17
Item 2 Changes in Securities and Use of Proceeds................................................ 17
Item 3 Defaults Upon Senior Securities.......................................................... 17
Item 4 Submission of Matters to a Vote of Security Holders...................................... 17
Item 5 Other Information........................................................................ 17
Item 6 Exhibits and Reports on Form 8-K......................................................... 17
Signature Page ................................................................................. 18
</TABLE>
<PAGE>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
ASSETS
Current assets:
<S> ..................................................... <C> <C>
Cash .................................................. $ 1,270 $ 1,371
Accounts receivable ................................... 38,651 60,660
Inventories ........................................... 120,047 112,169
Income taxes receivable ............................... 1,700 1,700
Prepaid expenses and other current assets ............. 1,726 1,240
Deferred income taxes ................................. 40 40
-------------- --------------
Total current assets ................................ 163,434 177,180
Property, plant and equipment ........................... 150,747 152,198
Intangible assets ....................................... 183,158 185,805
Other ................................................... 2,580 2,654
-------------- --------------
Total assets .......................................... $ 499,919 $ 517,837
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................... $ 1,242 $ 1,236
Accounts payable ...................................... 38,385 49,598
Accrued expenses ...................................... 45,022 47,078
Income taxes payable .................................. 300 300
Restructuring charges ................................. 5,522 5,660
-------------- --------------
Total current liabilities ........................... 90,471 103,872
-------------- --------------
Long-term debt .......................................... 382,383 373,675
Deferred income taxes ................................... 16,701 16,972
Other ................................................... 1,101 1,288
-------------- --------------
Total liabilities .................................... 490,656 495,807
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 150,000 shares authorized,
no shares issued and outstanding ..................... -- --
Common stock, voting, $.01 par value, 75,000,000
shares authorized, 27,724,045 and 27,724,045
shares issues and outstanding, respectively ......... 277 277
Additional paid-in capital .............................. 301,287 301,287
Accumulated deficit ..................................... (292,301) (279,534)
-------------- --------------
Total stockholders' equity .......................... 9,263 22,030
-------------- --------------
Total liabilities and stockholders' equity .......... $ 499,919 $ 517,837
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Net sales ......................................................... $ 137,631 $ 161,595
Cost of sales ..................................................... 124,771 142,173
-------------- --------------
Gross profit .................................................... 12,860 19,422
Operating expenses:
Selling and marketing ........................................... 4,880 4,689
General and administrative ...................................... 7,130 5,432
Loss on sale of accounts receivable ............................. 740 747
Amortization of intangible assets ............................... 1,286 1,587
Management fees and services .................................... 375 530
-------------- --------------
Income (loss) from operations ..................................... (1,551) 6,437
Other income (expense):
Interest ........................................................ (10,796) (10,743)
Other income, net ............................................... 306 51
-------------- --------------
Loss before income taxes .......................................... (12,041) (4,255)
Benefit for income taxes .......................................... -- (2,170)
-------------- --------------
Loss before cumulative effect of a change in accounting principle . (12,041) (2,085)
Cumulative effect of a change in accounting principle ............. 726 --
-------------- --------------
Net loss .......................................................... $ (12,767) $ (2,085)
============== ==============
Basic loss per share
Loss before cumulative effect of a change in accounting principle $ (0.43) $ (0.08)
Cumulative effect of a change in accounting principle ........... (0.03) --
-------------- --------------
Net loss ........................................................ $ (0.46) $ (0.08)
============== ==============
Weighted average shares outstanding:
Basic ........................................................... 27,724 27,695
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------- --------------
1999 1998
------------- --------------
Cash flows (uses) from operating activities:
<S> ....................................................... <C> <C>
Net loss ................................................ $ (12,767) $ (2,085)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Deferred income tax ................................... (271) --
Depreciation .......................................... 3,627 3,293
Amortization of goodwill and intangible assets ........ 1,286 1,587
Cumulative effect of change in accounting principle ... 726 --
Amortization of debt issuance costs ................... 693 849
Gain on disposal of assets ............................ (67) --
Changes in assets and liabilities
Accounts receivable ................................ 28,009 32,997
Income taxes receivable ............................ -- 3,301
Inventories ........................................ (7,877) (2,757)
Prepaid expenses and other ......................... (486) (383)
Income tax payable ................................. -- (2,280)
Accounts payable ................................... (11,213) (10,864)
Accrued expenses ................................... (2,195) (5,252)
Other assets and liabilities ....................... (115) (2,072)
-------------- --------------
Net cash provided (used) by operating activities . (650) 16,334
-------------- --------------
Cash uses from investing activities:
Purchases of property and equipment ..................... (2,149) (5,980)
Proceeds from sale of assets ............................ 40 19
-------------- --------------
Net cash used in investing activities ............ (2,109) (5,961)
-------------- --------------
Cash flows from financing activities:
Net borrowings on credit agreement and long-term debt ... 9,000 27,600
Repayment of long-term debt ............................. (285) (90)
Net repayment from accounts receivable financing facility (6,000) (23,000)
Debt issuance costs ..................................... (57) (1,393)
Options and management stock purchase plan .............. -- 11
-------------- --------------
Net cash provided by financing activities ............ 2,658 3,128
-------------- --------------
Net increase (decrease) in cash ........................... (101) 13,501
Cash, beginning of period ................................. 1,371 4,855
-------------- --------------
Cash, end of period ....................................... $ 1,270 $ 18,356
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. Organization and Basis of Presentation
Organization and Basis of Presentation
American Pad & Paper Company (the "Company") is a holding company,
which conducts its operations through American Pad & Paper Company of Delaware,
Inc. ("AP&P Delaware") and its wholly owned subsidiaries.
The financial statements of the Company 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 continuous
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 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 three complementary divisions:
AMPAD (writing pads, file folders, retail envelopes, and other paper-based
office products), Williamhouse (business envelopes and forms), and Creative Card
(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 March 31, 1999, and the
results of its operations and its cash flows for the three months ended March
31, 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.
The Company's wholly owned subsidiary, AP&P Delaware, is the issuer of
13% Senior Subordinated Notes ("Notes"). Terms of the Notes require, among other
matters, that AP&P Delaware provide annual audited and quarterly unaudited
financial statements to the holders of the notes. There are no material
differences between the financial statements of the Company and those of AP&P
Delaware. The composition of AP&P Delaware's stockholder's equity at March 31,
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 $193.1 million and, in
total, is equal to the stockholders' equity 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 rationalization is expected to result in an
approximate 14-18% reduction in manufacturing space and a net 7% reduction
(approximately 250 employees, primarily in manufacturing) in the workforce.
The Company has announced two 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, and the closing of the Holland, New York plant was announced May 10, 1999.
The final production of the Kosciusko and Dallas plants occurred on April 14,
1999, and April 22, 1999, respectively. As of March 31, 1999, 122 employees have
been severed and severance and benefit payments totaling $219,000 have been
charged to the restructuring reserve.
<TABLE>
<CAPTION>
Accrued
Amounts Restructuring
Charge Utilized Costs
----------- ------------ -----------
(in thousands)
<S> .........................................<C> <C> <C>
Severance and benefits ...................... $ 1,848 $ (219) $ 1,629
Closing costs to exit facilities ............ 2,484 -- 2,484
Lease termination costs ..................... 468 -- 468
Property taxes after ceasing operations ..... 941 -- 941
------------ ------------ ------------
Total ....................................... $ 5,741 $ (219) $ 5,522
============ ============ ============
</TABLE>
The Company recorded one-time implementation costs associated with the
rationalization plan of $1.3 million in cost of sales during the quarter ended
March 31, 1999. These expenses represent costs to move equipment, efficiency
costs, and recruiting costs. Estimated capital expenditures of $2.8 million and
one-time implementation costs of $5.2 million that do not qualify for current
recognition will be recorded primarily in 1999. Such costs include equipment and
inventory transfer costs, employee retention and relocation, recruiting costs,
interim warehouse costs, and other training and efficiency costs. The major
undertakings of the rationalization plan are expected to be completed in 1999.
Upon full implementation, the plan is expected to have a significant positive
effect on the Company's financial performance, resulting in an estimated
annualized cost savings of approximately $10.0 million.
3. Accounts Receivable
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(in thousands)
<S> ........................................................<C> <C>
Accounts receivable - trade ................................ $ 36,951 $ 59,936
Accounts receivable - other ................................ 3,834 2,972
Less allowance for doubtful accounts and reserves for
customers deductions and cash discounts ................... (2,134) (2,248)
------------ ------------
$ 38,651 $ 60,660
============ ============
</TABLE>
<PAGE>
On May 24, 1996, the Company entered into a $60.0 million accounts
receivable financing facility. At March 31, 1999 and December 31, 1998, accounts
receivable of $50.0 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.
3. Inventories
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(in thousands)
<S> ........................................................<C> <C>
Raw materials .............................................. $ 32,849 $ 29,892
Work in process ............................................ 5,786 5,440
Finished goods ............................................. 82,587 77,788
------------ ------------
121,222 113,120
LIFO reserve ............................................... (1,175) (951)
------------ ------------
$ 120,047 $ 112,169
============ ============
</TABLE>
4. Property, Plant, and Equipment
<TABLE>
<CAPTION>
Estimated
Useful lives March 31, December 31,
in years 1999 1998
------------ ------------
(in thousands)
<S> .......................................... <S> <C> <C>
Land ......................................... $ 7,002 $ 7,002
Buildings .................................... 40 34,604 34,585
Machinery and equipment ...................... 3-12 133,492 132,721
Office furniture and fixtures ................ 3-7 12,345 12,351
Construction in progress ..................... 6,429 5,109
------------ ------------
193,872 191,768
Less accumulated depreciation ................ (43,125) (39,570)
------------ ------------
$ 150,747 $ 152,198
============ ============
</TABLE>
5. Goodwill and Intangible Assets
<TABLE>
<CAPTION>
March 31, 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 .............................. (28,174) (26,368)
------------ ------------
$ 183,158 $ 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,
and recorded a charge of $0.7 million (net of tax) in January 1999 reflecting
the write off of previously recorded start-up costs.
6. Accrued Expenses
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(in thousands)
<S> .......................................................<C> <C>
Acquisition integration costs ............................. $ 5,699 $ 6,190
Sales volume discounts .................................... 13,039 18,572
Salaries, wages and benefits .............................. 5,204 4,922
Interest .................................................. 7,992 3,808
Insurance reserves ........................................ 5,600 5,550
Other ..................................................... 7,488 8,036
------------ ------------
$ 45,022 $ 47,078
============ ============
</TABLE>
7. Long-Term Debt
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Revolving credit facility ................................. $ 244,000 $ 235,150
13% Senior Subordinated Notes due 2005 .................... 130,000 130,000
Industrial revenue bonds .................................. 7,165 7,165
Notes payable ............................................. 540 584
Capitalized lease obligations ............................. 1,920 2,012
------------ ------------
383,625 374,911
Less current portion ...................................... 1,242 1,236
------------ ------------
$ 382,383 $ 373,675
============ ============
</TABLE>
On March 5, 1999, the Company amended its revolving credit facility.
The amendment rescheduled the $25 million line reduction from December 31, 1999,
to March 31, 2000. Other changes provided for an add-back for purposes of
calculating cumulative EBITDA of $6.3 million in certain charges absorbed in the
fourth quarter of 1998 and a more favorable manner in which proceeds from the
sale of assets are applied to scheduled line reductions. As amended, 50% of the
proceeds from the sale of assets are credited against the scheduled line
reduction of March 2000 and 50% to the scheduled reduction of July 2000. The
amended credit facility also provides for a permanent reduction in availability
of $50.0 million in July 2000. This amended revolving credit facility also
provided that the interest rate incurred by the Company will vary each quarter
through July 2001, depending on the Company's consolidated debt to EBITDA ratio
at the beginning of each quarter, and requires the Company to meet certain
financial tests including minimum EBITDA levels, minimum interest coverage
ratios and maximum leverage ratios. The Company exceeded EBITDA performance
targets for the third and fourth quarters of 1998 as well as first quarter 1999,
as measured by the agreement. The amendment also limits capital expenditures to
$15.0 million per year in 1999 and 2000 and $7.5 million through July 2001. The
revolving credit facility matures in July 2001.
<PAGE>
8. Related Party Transactions
The Company had an outstanding note receivable of $277,000 at March 31,
1999, from its former President and Chief Operating Officer. The note is due in
July 2000, and bears interest at 6.00%. 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 individual.
On March 31, 1998, the Company's loaned its acting Chief Financial Officer,
who is also a director, $1.0 million related to the exercise of stock options.
The current balance, including capitalized interest, 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 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 three complementary divisions:
AMPAD (writing pads, file folders, retail envelopes, and other paper-based
office products), Williamhouse (business envelopes and forms), and Creative Card
(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. Certain factors which 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
Management Changes. On March 17, 1999, the Company appointed James W. Swent
III as Co-Chairman of the Board with Mr. Gay. Also, John H. Rodgers, Senior Vice
President, General Counsel and Secretary, and Jeffery K. Hewson were appointed
to the Board of Directors replacing Jonathan S. Lavine and filling a newly
created vacant position. Mr. Hewson has held executive positions including
President of the Beckley Cardy Group, Chief Executive Officer of United
Stationers, Inc., President of ACCO World Corporation - U.S. Division and
Canada, and is a director of ISA International, a publicly held company in Great
Britain.
On May 10, 1999, the Company appointed William L. Morgan, Executive Vice
President of Operations, as Chief Operating Officer.
Amendments to Revolving Credit Facility. On March 5, 1999, the Company
amended its revolving credit facility. The amendment rescheduled the $25 million
line reduction from December 31, 1999, to March 31, 2000. Other changes provided
for an add-back for purposes of calculating cumulative EBITDA of $6.3 million in
certain charges absorbed in the fourth quarter of 1998 and a more favorable
manner in which proceeds from the sale of assets are applied to scheduled line
reductions. As amended, 50% of the proceeds from the sale of assets are credited
against the scheduled line reduction of March 2000 and 50% to the scheduled
reduction of July 2000. The amended credit facility also provides for a
permanent reduction in availability of $50.0 million in July 2000. This amended
revolving credit facility also provided that the interest rate incurred by the
Company will vary each quarter through July 2001, depending on the Company's
consolidated debt to EBITDA ratio at the beginning of each quarter, and requires
the Company to meet certain financial tests including minimum EBITDA levels,
minimum interest coverage ratios and maximum leverage ratios. The Company
exceeded EBITDA performance targets for the third and fourth quarters of 1998 as
well as first quarter 1999, as measured by the agreement. The amendment also
limits capital expenditures to $15.0 million per year in 1999 and 2000 and $7.5
million through July 2001. The revolving credit facility matures in July 2001.
<PAGE>
Results of Operations
Three months ended March 31, 1999, compared to three months ended March 31, 1998
Net sales decreased to $137.6 million in 1999 from $161.6 million in 1998,
a decrease of $24.0 million or 14.9%. The decrease is comprised of a $22.0
million decrease in sales and a $2.0 million increase in customer incentives.
The net sales decrease is primarily attributable to the loss of a major
superstore customer and a contract stationer both in 1998 and the Company's
efforts to eliminate unprofitable business in its forms sales. The decrease was
partially offset by increases in the remaining superstore customers. Unfavorable
variances in envelopes also contributed to the sales decrease. The increased
customer incentives are due to increased volume of two large customers and
additional rebates caused by changing product mix.
Gross profit decreased to $12.9 million or 9.3% of net sales in 1999
from $19.4 million or 12.0% of net sales in 1998. This $6.6 million decrease in
gross profit margin is primarily attributable to lower sales and increased
customer incentives discussed above. In addition, 1999 cost of sales included
$1.3 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 $4.9 million incurred in 1999
increased $0.2 million from $4.7 million recorded in 1998. This increase was
primarily due to increased marketing research and new product development.
General and administrative expenses increased to $7.1 million in 1999 from
$5.4 million in 1998, or $1.7 million. This increase is primarily attributable
to increased bad debt expense.
Losses on sales of accounts receivable decreased to $0.7 million in
1999 from $0.8 million in 1998 due primarily to a lower average level of
accounts receivable sold to the third party trust in 1999. 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 $1.3
million in 1999 from $1.6 million in 1998. The decrease of $0.3 million is due
primarily to the amortization associated with the $41.0 million write down of
intangible assets in the second quarter of 1998.
Management fees and services decreased to $0.4 million in 1999 from $0.5
million for 1998, representing a decrease of $0.1 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 increased to $10.8 million in 1999 from $10.7 million
in 1998, representing an increase of $0.1 million. The increase was caused by an
increase in the LIBOR spread on the revolving credit facility offset by a
general decline in interest rates. Average outstanding debt levels during the
first quarter of 1999 were unchanged from the first quarter of 1998.
The income tax provision for the quarter ended March 31, 1999, reflects
an effective income tax benefit rate of 0% as compared with the effective income
tax provision rate of 51% for the quarter ended March 31, 1998. In the first
quarter of 1999, the Company did not record the tax benefit associated with its
loss. The Company increased its net deferred tax valuation allowance by the
amount of tax benefit provided by the net loss of $3.3 million. The Company will
continue this practice until near-term taxable earnings are realized. In the
first quarter of 1998, the Company raised its effective tax rate due to the
expected effect of nondeductible expenses during 1998.
Cumulative effect of a change in accounting principle for the quarter
ended March 31, 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. Based on the Company's current product
categories, the Company's gross profit will be negatively or positively affected
as the actual product sales mix changes.
Liquidity and Capital Resources
Net cash used by operating activities for the three months ended March 31,
1999 was $0.7 million as compared to net cash provided by operating activities
for the three months ended March 31, 1998 of $16.3 million. This decrease is
primarily the result of lower sales and an inventory build up to support normal
seasonality and the rationalization plan.
Cash used in investing activities for the three months ended March 31, 1999
and 1998 was $2.1 million and $6.0 million, respectively, due to the purchase of
equipment, principally production equipment.
The ability of the Company to meet its debt service and other
obligations and reduce its total debt will be dependent upon the future
performance of the Company and its subsidiaries. In turn, such performance will
be subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control.
Although there can be no assurance, management believes that, based
upon cash on hand at March 31, 1999, estimates of current and future operations,
and other available sources of funds including availability under the revolving
credit facility and the accounts receivable financing facility at March 31,
1999, of $21.3 million, its finances will be adequate for 1999 to make required
payments of principal and interest on the Company's debt, to fund anticipated
capital expenditures, and to meet working capital needs.
The amount of debt available under the Company's current credit
agreement decreases by $25.0 million in March 2000 and by an additional $50.0
million in July 2000. Based on the Company's current level of operating results
and the expected operating results in 1999 and 2000, the Company expects that
the scheduled reduction in July 2000 may require the Company to pursue other
financing alternatives, including but not limited to refinance of its bank debt,
raise new private or public debt, raise additional public equity, or to reduce
capital expenditures, reduce operating costs or sell assets. However, no
assurance can be given that the Company will be able to complete the financing
alternatives just described, or that the other measures will be sufficient to
provide adequate liquidity to meet the Company's obligations.
<PAGE>
Year 2000 Issue
The Year 2000 issue is the result of date-sensitive devices, systems and
computer programs which were deployed using only two digits, rather than four,
to represent the applicable year. Any such technologies may recognize a year
containing "00" as the year 1900 rather than the year 2000. If not corrected,
many computer applications could fail or create erroneous results.
The Company recognizes the need to ensure that its operations and
relationships with vendors, customers and other parties will not be adversely
impacted by software or other processing errors arising from calculations using
the year 2000 and beyond. Like many companies, a significant number of the
Company's computer applications and systems require modification in order to
render these systems Year 2000 compliant. Failure by the Company to timely
resolve Year 2000 issues could result, in the worst case, in an inability of the
Company to manufacture and distribute its product to customers and process its
daily business for some period of time. However, based on the progress made to
date in its Year 2000 remediation plan, the Company believes the worst case
scenario is unlikely. Failure to address Year 2000 issues by one or more third
party service providers on whom the Company relies could also result, in a worst
case scenario, in some business interruption. The amount of lost revenues, if
any, resulting from a worst case scenario such as those examples described above
would depend on the period of time over which the failure goes uncorrected and
the breadth of its impact.
The Company has recently purchased a new certified Year 2000 compliant
version of its existing software to upgrade critical manufacturing,
distribution, and financial applications. The upgrade is scheduled for
completion and full installation by December 31, 1999. While the primary purpose
of the software upgrade is to modernize and improve the Company's operations, it
is also expected to resolve any Year 2000 issues in these critical computer
systems. Costs to acquire the software and related hardware are being
capitalized in accordance with SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Costs to implement the upgrade
and other costs relating to Year 2000 readiness are being expensed as incurred
as required by generally accepted accounting principles. Through March 31, 1999,
capital expenditures to purchase software and related hardware total $2.0
million and non-capital expenditures for Year 2000 readiness are approximately
$0.2 million. To complete Year 2000 readiness, $0.5 million of capital
expenditures will be incurred to complete the purchase of related hardware and
approximately $1.0 to $1.5 million is expected to be spent through 1999 for
implementation of the upgraded software, consultant costs and other Year 2000
readiness costs. The Company will fund these expenditures through its operating
cash flow. At this time, other than the cost of implementing its new information
system, the Company does not believe that the costs of addressing the Year 2000
issue will be material. The Company has increased its overall information
systems budget to accommodate the implementation of the upgraded software and
Year 2000 compliance projects and has not delayed other critical information
systems work due to its Year 2000 efforts.
In addition to the software upgrade, a Company-wide committee of senior
executives representing all functional areas has been established to identify,
evaluate and initiate corrective actions in order to achieve Year 2000
readiness. The committee has completed the process of taking the relevant
inventory, assessing risk and assigning priorities to various tasks and
performing limited internal tests relative to the Company's critical functions.
The committee determined that the Company's primary hardware and operating
systems, which were installed in 1997, and the program supporting the Company's
electronic data interchange are already Year 2000 compliant. With regard to the
Company's manufacturing and other non-IT readiness for Year 2000, the Committee
has not identified any issues that would have a material, adverse impact on the
Company's operations' processes. The committee has developed contingency plans
for the Company's critical information system which primarily consist of making
its existing information system Year 2000 compliant in the event that the
software upgrade is not completed by the scheduled date. In addition,
contingency plans have included the development of manual intervention processes
for critical functions. The committee's expectation is that the remedial tasks
relative to the Company's critical functions will be completed by June 30, 1999,
and that full integrated testing will be completed by October 31, 1999. In
addition, the committee has requested and received documentation from all key
customers, suppliers and other business partners that their organizations will
be ready for the year 2000. While the Company cannot warrant that all the
systems of 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.
<PAGE>
There can be no assurance that the Company will be able to complete the
installation of the upgraded software and all of the remedial tasks in the
required time frame, that unanticipated events will not occur, that the Company
will be able to identify all Year 2000 issues before the problems manifest
themselves, that third party systems will be Year 2000 compliant and that
Company's estimate of Year 2000 costs will not require revision if unanticipated
adverse developments occur. However, management believes the Company is taking
adequate action to address Year 2000 issues. Based on a current assessment of
risks relating to its Year 2000 readiness, the Company does not believe Year
2000 issues will materially affect future financial results or operating
performance.
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 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.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after 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 which 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 March 31, 1999 and 1998.
At March 31, 1999, the Company had approximately $250.6 million of
variable rate debt obligations outstanding with a weighted average interest rate
of 8.92%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at March 31, 1999, would have changed interest
expense by approximately $0.6 million for the quarter ended March 31, 1999.
<PAGE>
AMERICAN PAD & PAPER COMPANY
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
As reported in the Company's Form 10-K for the year ended December 31,
1998, between March 10, 1998 and April 11, 1998, three complaints were filed in
the United States District Court for the Northern District of Texas naming as
defendants the Company, certain of its officers and directors and certain of the
underwriters and other related entities involved in the Company's initial public
offering. The plaintiffs in the first two complaints purport to represent a
class of stockholders who acquired shares of the Company's common stock between
July 2, 1996 and December 17, 1997. The complaints seek unspecified damages and
other relief under the federal securities laws based on allegations that the
Company made omissions and misleading disclosures in public reports and press
releases and to securities analysts during 1996 and 1997 concerning the
Company's financial condition, its future business prospects and the impact of
various acquisitions. These two lawsuits were consolidated on July 2, 1998. The
third complaint was dismissed without prejudice by the plaintiffs on June 29,
1998. Motions to dismiss have been filed in the consolidated cases 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
None
ITEM 4 Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April
27, 1999. The following matters were submitted to a vote of
shareholders of the Company's common stock with the results
indicated below:
<TABLE>
<CAPTION>
Withheld, Against
Matter Approved or Abstained
Election of Class III Directors -
<S> <C> <C>
James W. Swent III........................................... 23,299,589 4,427,456
Robert C. Gay................................................ 23,290,812 4,436,233
and Scott R. Watterson....................................... 23,301,237 4,425,808
Ratification of PricewaterhouseCoopers LLP as independent
Accountants for the Company.................................. 23,443,580 4,283,465
Approval of the 1999 Key Employees Stock Incentive Plan for
the Company................................................. 14,022,124 13,704,921
</TABLE>
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
27.03 Financial Data Schedule
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the first quarter of
1999 and through the date of the filing of this report:
(1) Current Report on Form 8-K filed April 1, 1999, relating to
the Company's March 22, 1999, press release. A press release
on March 22, 1999, announcing that the Board of Directors
elected two new directors, Jeffery K. Hewson and John H.
Rodgers, and has named James W. Swent III as Co-Chairman of
the Board, effective March 17, 1999.
(2) Current Report on Form 8-K filed April 28, 1999, relating to
the Company's April 19, 1999, press release. A press release
on April 19, 1999, announcing reported financial results for
the first quarter ended March 31, 1999.
(3) Current Report on Form 8-K filed May 14, 1999, relating to the
Company's May 10, 1999, press releases. A press release on
May 10, 1999, announcing the appointment of William L. Morgan
as Chief Operating Officer (COO). An additional press release
on May 10, 1999, announcing the closing of the Holland,
New York plant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
American Pad & Paper Company has duly caused this report to be signed on May 14,
1999, on their 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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
historical financial statements of American Pad & Paper Company's March 31, 1999
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000005588
<NAME> American Pad & Paper Company
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