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 JUNE 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 August 2, 1999, there were 27,724,045 outstanding shares of
American Pad & Paper Company common stock.
================================================================================
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<CAPTION>
AMERICAN PAD & PAPER COMPANY
QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
<S> <C>
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998......................................................... 3
Consolidated Statements of Operations for the three and six months ended
June 30, 1999 and 1998...................................................................... 4
Consolidated Statements of Cash Flows for the six months
ended June 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........................................................................... 19
Item 2 Changes in Securities and Use of Proceeds................................................... 19
Item 3 Defaults Upon Senior Securities............................................................. 19
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 .................................................................................... 20
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<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
June 30, December 31,
1999 1998
-------------- --------------
ASSETS
Current assets:
<S> <C> <C>
Cash .................................................. $ 347 $ 1,371
Accounts receivable ................................... 36,757 60,660
Inventories ........................................... 119,670 112,169
Income taxes receivable ............................... 1,700 1,700
Prepaid expenses and other current assets ............. 2,515 1,240
Deferred income taxes ................................. 40 40
-------------- --------------
Total current assets ................................ 161,029 177,180
Property, plant and equipment ........................... 150,008 152,198
Goodwill and intangible assets .......................... 181,179 185,805
Other ................................................... 2,533 2,654
-------------- --------------
Total assets .......................................... $ 494,749 $ 517,837
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Current portion of long-term debt ..................... $ 2,592 $ 1,236
Accounts payable ...................................... 40,494 49,598
Accrued expenses ...................................... 45,923 47,078
Income taxes payable .................................. 300 300
Restructuring reserve ................................. 4,678 5,660
-------------- --------------
Total current liabilities ........................... 93,987 103,872
-------------- --------------
Long-term debt .......................................... 388,033 373,675
Deferred income taxes ................................... 16,547 16,972
Other ................................................... 1,101 1,288
-------------- --------------
Total liabilities .................................... 499,668 495,807
-------------- --------------
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, 27,724,045 and 27,724,045
shares issued and outstanding, respectively ......... 277 277
Additional paid-in capital .............................. 301,287 301,287
Accumulated deficit ..................................... (306,483) (279,534)
-------------- --------------
Total stockholders' equity(deficit).................. (4,919) 22,030
-------------- --------------
Total liabilities and stockholders' equity(deficit).. $ 494,749 $ 517,837
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three months ended Six Months ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................... $ 134,051 $ 146,724 $ 271,681 $ 308,319
Cost of sales ........................... 125,475 143,327 250,246 285,500
------------ ------------ ------------ ------------
Gross profit .......................... 8,576 3,397 21,435 22,819
Operating expenses:
Selling and marketing ................. 5,375 5,504 10,255 10,193
General and administrative ............ 6,113 9,273 13,243 14,705
Loss on sales of accounts receivable .. 710 714 1,449 1,461
Amortization of intangible assets ..... 1,286 1,608 2,571 3,195
Write-down of intangible assets ....... -- 41,000 -- 41,000
Management fees and services .......... 375 530 750 1,060
------------ ------------ ------------ ------------
Income (loss) from operations ........... (5,283) (55,232) (6,833) (48,795)
Other income (expense):
Interest .............................. (10,923) (11,063) (21,719) (21,806)
Other income, net ..................... 2,023 (36) 2,329 15
------------ ------------ ------------ ------------
Loss before income taxes ................ (14,183) (66,331) (26,223) (70,586)
Benefit from income taxes ............... -- (10,394) -- (12,564)
------------ ------------ ------------ ------------
Loss before cumulative effect of a change
in accounting principle .............. (14,183) (55,937) (26,223) (58,022)
Cumulative effect of a change in
accounting principle .................. -- -- 726 --
------------ ------------ ------------ ------------
Net loss ................................ $ (14,183) $ (55,937) $ (26,949) $ (58,022)
============ ============ ============ ============
Basic loss per share
Loss before cumulative effect of a change
in accounting principle ............... $ (0.51) $ (2.02) $ (0.94) $ (2.09)
Cumulative effect of a change in
accounting principle .................. -- -- (0.03) --
------------ ------------ ------------ ------------
Net loss ................................ $ (0.51) $ (2.02) $ (0.97) $ (2.09)
============ ============ ============ ============
Weighted average shares outstanding:
Basic ................................... 27,724 27,724 27,724 27,710
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
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<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
-------------- ----------------
1999 1998
-------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net loss .......................................................... $ (26,949) $ (58,022)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Deferred income taxes ........................................... (425) --
Depreciation .................................................... 7,212 6,578
Amortization of goodwill and intangible assets .................. 2,572 3,195
Write-down of assets - Shade/Allied ............................. -- 41,000
Cumulative effect of change in accounting principle ............. 726 --
Amortization of debt issuance costs ............................. 1,386 1,808
(Gain) or loss on disposal of assets ............................ (1,880) 141
Changes in assets and liabilities:
Accounts receivable .......................................... 26,903 48,607
Income taxes receivable ...................................... -- 3,308
Inventories .................................................. (7,501) 13,661
Prepaid expenses and other ................................... (1,276) (1,176)
Income taxes payable ......................................... -- (12,748)
Accounts payable ............................................. (9,104) (22,942)
Accrued expenses ............................................. (2,138) (361)
Other assets and liabilities ................................. (67) (868)
-------------- --------------
Net cash provided by (used in) operating activities ........ (10,541) 22,181
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment ............................... (8,672) (8,694)
Proceeds from sale of assets ...................................... 5,531 14
-------------- --------------
Net cash used in investing activities ...................... (3,141) (8,680)
-------------- --------------
Cash flows from financing activities:
Net borrowings on credit agreement and long-term debt ............. 16,542 27,500
Repayment of long-term debt ....................................... (827) (1,055)
Net repayment of accounts receivable financing facility ........... (3,000) (12,000)
Debt issuance costs ............................................... (57) (1,393)
Options and management stock purchase plan ........................ -- 11
-------------- --------------
Net cash provided by financing activities ...................... 12,658 13,063
-------------- --------------
Net increase (decrease) in cash ..................................... (1,024) 26,564
Cash, beginning of period ........................................... 1,371 4,855
-------------- --------------
Cash, end of period ................................................. $ 347 $ 31,419
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 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 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 June 30, 1999, and the
results of its operations and its cash flows for the three months and six months
ended June 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.
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(deficit) at
June 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 $207.3 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 rationalization is expected to result in an
approximate 14-18% reduction in manufacturing space and a net 7% reduction in
the workforce (approximately 250 employees, primarily in manufacturing).
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 June
30, 1999, 122 employees have been severed and severance and benefit payments
totaling $749,000 have been charged to the restructuring reserve.
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<CAPTION>
Initial Remaining
Restructuring Amounts Costs to
Charge Used to date Incur
--------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Severance and benefits ...................... $ 1,848 $ (749) $ 1,099
Closing costs to exit facilities ............ 2,484 (213) 2,271
Lease termination costs ..................... 468 (66) 402
Property taxes after ceasing operations ..... 941 (35) 906
-------------- -------------- --------------
Total ...................................... $ 5,741 $ (1,063) $ 4,678
============== ============== ==============
</TABLE>
The Company recorded one-time implementation costs associated with the
rationalization plan of $4.7 million in cost of sales during the two quarters
ended June 30, 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 $2.0 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
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<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Accounts receivable - trade ......................... $ 32,700 $ 59,936
Accounts receivable - other ......................... 5,908 2,972
Less allowance for doubtful accounts and reserves for
customers deductions and cash discounts ............ (1,851) (2,248)
-------------- --------------
$ 36,757 $ 60,660
============== ==============
</TABLE>
<PAGE>
On May 24, 1996, the Company entered into a $60.0 million accounts
receivable financing facility. At June 30, 1999 and December 31, 1998, accounts
receivable of $53.0 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.
<TABLE>
<CAPTION>
3. Inventories
June 30, December 31,
1999 1998
-------------- ---------------
(in thousands)
<S> <C> <C>
Raw materials ....................................... $ 32,820 $ 29,892
Work in process ..................................... 5,604 5,440
Finished goods ...................................... 86,111 77,788
-------------- --------------
124,535 113,120
LIFO reserve ........................................ (4,865) (951)
-------------- --------------
$ 119,670 $ 112,169
============== ==============
</TABLE>
4. Property, Plant, and Equipment
<TABLE>
<CAPTION>
Estimated
Useful lives June 30, December 31,
in years 1999 1998
-------------- --------------
(in thousands)
<S> <C> <C> <C>
Land..................................... $ 4,834 $ 7,002
Buildings................................ 40 32,912 34,585
Machinery and equipment.................. 3-12 133,660 132,721
Office furniture and fixtures............ 3-7 12,341 12,351
Construction in progress................. 12,383 5,109
-------------- --------------
196,130 191,768
Less accumulated depreciation............ (46,122) (39,570)
-------------- -- -----------
$ 150,008 $ 152,198
============== ==============
</TABLE>
5. Goodwill and Intangible Assets
<TABLE>
<CAPTION>
June 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 ....................... (30,153) (26,368)
-------------- --------------
$ 181,179 $ 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.
6. Accrued Expenses
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- --------------
(in thousands)
<S> ................................................. <C> <C>
Acquisition integration costs ....................... $ 5,270 $ 6,190
Sales volume discounts .............................. 19,525 18,572
Salaries, wages and benefits ........................ 4,498 4,922
Interest ............................................ 3,366 3,808
Insurance reserves .................................. 5,908 5,550
Other ............................................... 7,356 8,036
-------------- --------------
$ 45,923 $ 47,078
============== ==============
</TABLE>
7. Long-Term Debt
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(in thousands)
<S> ................................................. <C> <C>
Revolving credit facility ........................... $ 250,855 $ 235,150
13% Senior Subordinated Notes due 2005 .............. 130,000 130,000
Industrial revenue bonds ............................ 6,815 7,165
Notes payable ....................................... 1,128 584
Capitalized lease obligations ....................... 1,827 2,012
-------------- --------------
390,625 374,911
Less current portion ................................ 2,592 1,236
-------------- --------------
$ 388,033 $ 373,675
============== ==============
</TABLE>
On March 5, 1999, the Company amended its revolving credit facility. The
amendment rescheduled a $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 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 and second
quarters of 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 $279,000 at June 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 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. Robert C. 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 as Chief
Operating Officer (COO). Mr. Morgan, 59, joined American Pad & Paper in July
1998 as Executive Vice President, Operations. In his new position as COO, Mr.
Morgan will focus on the day-to-day business operations for manufacturing,
marketing, sales, purchasing, logistics, information systems, new product
development and operational finance/accounting functions.
On May 10, 1999, the Company announced that its plant in Holland, New
York, will be closed and consolidated as part of the Company's previously
announced rationalization plan. The Holland plant is a Williamhouse Division
operation and will be transferring its production capability into an existing
plant in Scottdale, Pennsylvania. The Holland plant employs approximately 185
people and will continue operations at reduced levels through the end of
September 1999.
On June 1, 1999, the Company named Lee E. Meyer as President of its
Creative Card Division. Mr. Meyer, 46, will be responsible for all operations of
the Creative Card Division. Mr. Meyer has over 20 years of industry experience.
His most recent position was President, of Current Inc. and PaperDirect Inc., a
$225+ million manufacturer and marketer of greeting cards and papers. Prior to
that he held both executive and operational positions with Deluxe Corporation
and Procter and Gamble.
<PAGE>
Amendments to Revolving Credit Facility. On March 5, 1999, the Company
amended its revolving credit facility. The amendment rescheduled a $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 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 the first and second quarters of 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
The following table summarizes the Company's historical results of operations as
a percentage of net sales for the three and six months ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
Income Statement Data
Three months ended June 30, Six months ended June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> ..................................... <C> <C> <C> <C>
Net sales ............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................... 93.6% 97.7% 92.1% 92.6%
------------ ------------ ------------ ------------
Gross profit ......................... 6.4% 2.3% 7.9% 7.4%
Operating expenses:
Selling and marketing ................ 4.0% 3.8% 3.8% 3.3%
General and administrative ........... 4.6% 6.3% 4.9% 4.8%
Loss on sale of accounts receivable .. 0.5% 0.5% 0.5% 0.5%
Amortization of intangible assets .... 1.0% 1.1% 0.9% 1.0%
Write-down of assets - Shade/Allied .. 0.0% 27.9% 0.0% 13.3%
Management fees and services ......... 0.3% 0.4% 0.3% 0.3%
------------ ------------ ------------ ------------
Income (loss) from operations ........... -4.0% -37.7% -2.5% -15.8%
Other income (expense):
Interest ............................. -8.1% -7.5% -8.0% -7.1%
Other income, net .................... 1.5% 0.0% 0.9% 0.0%
------------ ------------ ------------ ------------
Loss before income taxes ................ -10.6% -45.2% -9.6% -22.9%
Provision for (benefit from) income taxes 0.0% -7.1% 0.0% -4.1%
------------ ------------ ------------ ------------
Loss before cumulative effect of
a change in accounting principle ...... -10.6% -38.1% -9.6% -18.8%
Cumulative effect of a change in
Accounting principle net of tax ....... 0.0% 0.0% 0.3% 0.0%
------------ ------------ ------------ ------------
Net loss ................................ -10.6% -38.1% -9.9% -18.8%
============ ============ ============ ============
</TABLE>
Three months ended June 30, 1999, compared to three months ended June 30, 1998
Net sales decreased to $134.1 million in 1999 from $146.7 million in 1998,
a decrease of $12.6 million or 8.6%. The decrease is comprised of a $17.0
million decrease in sales partially offset by a $4.4 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 focused effort by the
Company's superstore customer 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 increased to $8.6 million or 6.4% of net sales in 1999 from
$3.4 million or 2.3% of net sales in 1998. This $5.2 million increase in gross
profit margin is primarily attributable to lower costs and operating variances
as well as increased FIFO. These operating efficiencies were partially
offset by LIFO charges that exceed 1998 charges by $3.6 million. In addition,
1999 cost of sales included $3.4 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 $5.4 million incurred in 1999
decreased $0.1 million from $5.5 million recorded in 1998.
General and administrative expenses decreased to $6.1 million in 1999 from
$9.3 million in 1998. This decrease is primarily attributable to the Company's
1998 reevaluation of certain assets, which resulted in $1.7 million of charges
for the allowance for doubtful accounts and one time severance and litigation
charges of $1.3 million in the second quarter of 1998.
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.
Write-down of intangible assets expense of $41.0 million for the three
months ended June 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 $0.4 million in 1999 from
$0.5 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 $11.1 million
in 1998, representing a decrease of $0.2 million. The decline is due to lower
average outstanding debt levels during the second quarter of 1999 compared to
the second quarter of 1998, partially offset by higher rates.
The income tax provision for the quarter ended June 30, 1999, reflects an
effective income tax benefit rate of 0% as compared with the effective income
tax provision rate of 15.7% for the quarter ended June 30, 1998. In the second
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 which 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 second quarter of 1998, the
Company lowered its effective tax rate due to the expected effect of
nondeductible expenses during 1998.
Six months ended June 30, 1999, compared to six months ended June 30, 1998
Net sales decreased to $271.7 million in 1999 from $308.3 million in
1998, a decrease of $36.6 million or 11.9%. The decrease is comprised of a $38.9
million decrease in sales partially offset by a $2.3 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 focused 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 $21.4 million or 7.9% of net sales in 1999
from $22.8 million or 7.4% of net sales in 1998. This $1.4 million decrease in
gross profit margin is primarily attributable to lower sales and LIFO charges
that exceeded 1998 charges by $3.6 million. In addition, 1999 cost of sales
included $4.7 million of one-time costs associated with the plant
rationalization plan. These expenses represent costs to move equipment,
efficiency costs, and recruiting costs. These variances were partially offset by
lower standard costs and operating variances as well as increased FIFO.
<PAGE>
Selling and marketing expenses of $10.3 million incurred in 1999
increased $0.1 million from $10.2 million recorded in 1998. This increase was
primarily due to increased marketing research and new product development.
General and administrative expenses decreased to $13.2 million in 1999
from $14.7 million in 1998, or $1.5 million. This decrease is primarily
attributable to one time severance and litigation costs of $1.3 million in 1998.
Losses on sales of accounts receivable decreased to $1.4 million in
1999 from $1.5 million in 1998 due primarily to a lower average level of
accounts receivable sold to the third party trust in 1999. The decrease was
caused by lower eligible receivables partially offset by higher rates. 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 $2.6
million in 1999 from $3.2 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 six
months ended June 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 $0.8 million in 1999 from
$1.1 million for 1998, representing a decrease of $0.4 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 $21.7 million in 1999 from $21.8 million
in 1998, representing an decrease of $0.1 million. The decline is due to lower
average outstanding debt levels during the year-to-date period ended June 30,
1999 compared to the year-to-date period ended June 30, 1998. This was partially
offset by higher rates.
The income tax provision for the six months ended June 30, 1999, reflects
an effective income tax benefit rate of 0% as compared with the effective income
tax provision rate of 17.8% for the six months ended June 30, 1998. In the first
half 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 which would have been provided by the loss.
The Company will continue this practice until the realization of it recorded net
operating loss is reasonably assured. In the first half 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 six
months ended June 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.
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.
<PAGE>
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 six months ended June 30,
1999, was $10.5 million as compared to net cash provided by operating activities
for the six months ended June 30, 1998, of $22.2 million. This decrease is
primarily the result of lower sales.
Cash used in investing activities for the six months ended June 30,
1999 and 1998, was $3.1 million and $8.7 million, respectively, due to the
purchase of equipment, principally production equipment, offset by the sale of
assets.
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 June 30, 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 June 30, 1999,
of $14.3 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 million in March 2000 and by an additional $50 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, refinancing of its bank debt,
raising new private or public debt, raising additional public equity, reducing
capital expenditures, reducing operating costs, selling assets, or a combination
of these efforts. 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
ongoing obligations.
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.
<PAGE>
The Company has 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.
Through June 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. To complete Year 2000 readiness, $0.2 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 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 systems which primarily consist of making its existing
systems 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.
Remedial tasks relative to the Company's critical functions have been completed.
The committee's expectation is 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.
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-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
<PAGE>
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.
14. Changes in customer inventory levels.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after the date hereof.
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 June 30, 1999 and 1998.
At June 30, 1999, the Company had approximately $250.9 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 June 30, 1999, would have changed interest
expense by approximately $1.1 million for year-to-date June 30, 1999.
<PAGE>
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 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 SUBMMISSION 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
27.03 Financial Data Schedule
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the second quarter
of 1999 and through the date of the filing of this report:
(1) 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.
(2) 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, announced that its plant in Holland, New York will
be closed and consolidated.
(3) Current Report on Form 8-K filed June 3, 1999, relating to the
Company's June 1, 1999, press release. A press release on
June 1, 1999, announcing the appointment of Lee E. Meyer as
President of its Creative Card Division.
(4) Current Report on Form 8-K filed July 26, 1999, relating to
the Company's July 19, 1999, press release. A press release
on July 19, 1999, announcing reported financial results for
the second quarter ended June 30, 1999.
<PAGE>
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 August 4, 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 June 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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