<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 2000
COMMISSION FILE NUMBER 1-11803
---------------------
AMERICAN PAD & PAPER COMPANY
(Debtor-In-Possession as of January 14, 2000)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3164298
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
17304 PRESTON ROAD, SUITE 700, DALLAS, TX 75252-5613
(Address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (972) 733-6200
------------------------
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 $0.01 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 28, 2000, there were 28,527,983 outstanding shares of American
Pad & Paper Company common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN PAD & PAPER COMPANY
QUARTERLY PERIOD ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999......................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999............................. 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999............................. 5
Notes to Consolidated Financial Statements.................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
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>
2
<PAGE>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS
(DEBTOR-IN-POSSESSION)
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 5,806 $ 19,976
Accounts receivable....................................... 73,403 35,385
Inventories............................................... 99,952 93,083
Prepaid expenses and other current assets................. 3,361 3,521
--------- ---------
Total current assets.................................... 182,522 151,965
Property, plant and equipment............................. 142,109 145,982
Goodwill and intangible assets............................ 172,577 173,210
Other..................................................... 387 1,071
--------- ---------
Total assets............................................ $ 497,595 $ 472,228
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities:
Current portion of long-term debt......................... $ 261,536 $ 391,567
DIP financing facility.................................... 44,000 --
Accounts payable.......................................... 7,157 39,892
Accrued expenses.......................................... 33,712 60,020
Deferred income taxes..................................... 2,300 2,300
Income taxes payable...................................... 388 300
Restructuring reserve..................................... 836 1,064
--------- ---------
Total current liabilities............................... 349,929 495,143
Long-term liabilities:
Deferred income taxes..................................... 37,067 37,067
Other..................................................... -- 797
--------- ---------
Total long-term liabilities............................. 37,067 37,864
LIABILITIES SUBJECT TO COMPROMISE (NOTE 2).................. 199,701 --
--------- ---------
Total liabilities....................................... 586,697 533,007
Commitments and contingencies
Stockholders' deficit:
Preferred stock, 150,000 shares authorized, no shares
issued and outstanding.................................. -- --
Common Stock, voting $.01 par value, 75,000,000 shares
authorized, 28,527,983 shares issued and outstanding at
March 31, 2000 and December 31, 1999.................... 285 285
Additional paid-in-capital................................ 301,329 301,329
Stockholder notes......................................... (1,415) (1,395)
Accumulated deficit....................................... (389,301) (360,998)
--------- ---------
Total stockholders' deficit............................. (89,102) (60,779)
--------- ---------
Total liabilities and stockholders' deficit............. $ 497,595 $ 472,228
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DEBTOR-IN-POSSESSION)
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales................................................... $135,691 $137,631
Cost of sales............................................... 131,549 124,771
-------- --------
Gross profit............................................ 4,142 12,860
-------- --------
Operating expenses:
Selling and marketing..................................... 5,053 4,880
General and administrative................................ 9,384 7,130
Losses on sales of accounts receivable.................... 429 740
Amortization of goodwill and intangible assets............ 1,247 1,286
Management fees and services.............................. 375 375
-------- --------
16,488 14,411
Bankruptcy items (Note 3)................................... 4,400 --
-------- --------
Income (loss) from operations............................... (16,746) (1,551)
Other income (expense):
Interest (contractual amount $14.6 million in 2000)....... (11,012) (10,796)
Other income (expense), net............................... (425) 306
-------- --------
Loss before income taxes.................................... (28,183) (12,041)
Provision for income taxes.................................. 120 --
-------- --------
Loss before cumulative effect of a change in accounting
principle................................................. (28,303) (12,041)
Cumulative effect of a change in accounting principle....... -- (726)
-------- --------
Net loss.................................................... $(28,303) $(12,767)
======== ========
Basic and diluted loss per share:
Loss before cumulative effect of a change in accounting
principle............................................... $ (0.99) $ (0.43)
Cumulative effect of a change in accounting principle..... -- (0.03)
-------- --------
Net loss.................................................. $ (0.99) $ (0.46)
======== ========
Weighted average shares outstanding:
Basic and diluted......................................... 28,528 27,724
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DEBTOR-IN-POSSESSION)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(28,303) $(12,767)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Deferred income taxes................................... -- (271)
Depreciation............................................ 3,796 3,627
Amortization of goodwill and intangible assets.......... 1,252 1,286
Cumulative effect of change in accounting principle..... -- 726
Restructuring charges (credits)......................... (228) --
Amortization of debt issuance costs..................... 1,406 693
(Gain) loss on sale of assets........................... 353 (67)
Bankruptcy items........................................ 4,400 --
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................... 11,982 28,009
Inventories........................................... (6,869) (7,877)
Prepaid expenses and other............................ 159 (486)
Income tax payable.................................... 88 --
Accounts payable...................................... 4,199 (11,213)
Accrued expenses...................................... (779) (2,195)
Other assets and liabilities.......................... 681 (96)
-------- --------
Net cash provided by (used in) operating
activities.......................................... (7,863) (631)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (529) (2,149)
Proceeds from sale of assets.............................. 253 40
-------- --------
Net cash provided by (used in) investing
activities.......................................... (276) (2,109)
-------- --------
Cash flows from financing activities:
Net borrowings on credit agreement........................ 47,732 9,000
Repayment of long-term debt............................... (3,257) (285)
Proceeds from long-term debt.............................. 1,539 --
Debt issuance costs....................................... -- (57)
Repayment of A/R facility................................. (50,000) (6,000)
Shareholder notes......................................... (20) (19)
Debt issuance costs, DIP--bankruptcy...................... (2,025) --
-------- --------
Net cash provided by (used in) financing
activities.......................................... (6,031) 2,639
-------- --------
Net decrease in cash........................................ (14,170) (101)
-------- --------
Cash, beginning of period................................... 19,976 1,371
-------- --------
Cash, end of period......................................... $ 5,806 $ 1,270
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
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
until January 10, 2000, in an 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.
As previously reported in the Company's 10-K for the year ended December 31,
1999, the Company has engaged Lazard Freres & Co. LLC ("Lazard Freres") to
investigate the possible sale of its Williamhouse division, as well as other
business assets of the Company, in order to reduce debt. On May 9, 2000, the
Company sold its Creative Card division to Taylor Corporation. Efforts by Lazard
Freres to sell the Williamhouse division and other business assets are
continuing.
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, included in its 10-K, for the year ended December 31, 1999.
The accompanying interim financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's interim financial information. The results of
operations for the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year.
6
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2000
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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. AP&P Delaware's stockholder's equity at March 31, 2000, consisted of
one hundred shares of $0.01 par value common stock, paid-in capital of $202.4
million and an accumulated deficit of $291.5 million which, in total, was equal
to the stockholders' deficit of the Company.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On January 10, 2000, certain holders of the Company's 13% Senior
Subordinated Notes due November 15, 2005, filed an involuntary Chapter 11
petition against the Company and all of its subsidiaries except Notepad Funding
Corporation (the "Debtors") in the United States Bankruptcy Court for the
District of Delaware. On January 14, 2000, each of the Debtors consented to the
entry of an Order for Relief and filed voluntary petitions under Chapter 11 of
title 11 of the United States Code (the "Bankruptcy Code"). The Bankruptcy Case
Numbers 00-00066 (RRM) through 00-00072 (RRM) (the "Chapter 11 Cases") are being
jointly administered under Case Number 00-00066 (RRM). Each of the Debtors is
continuing to operate its business and manage its property as a
debtor-in-possession pursuant to sections 1107 (a) and 1108 of the Bankruptcy
Code. On January 28, 2000, an Official Committee of Unsecured Creditors was
appointed in these cases.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and in accordance with AICPA Statement of
Position 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE
BANKRUPTCY CODE (SOP 90-7). The accompanying consolidated financial statements
do not reflect any adjustments that might result if the Company is unable to
continue as a going concern. The Company's recent losses and negative cash flows
from operations and the Chapter 11 Cases raise substantial doubt about the
Company's ability to continue as a going concern. The Company intends to submit
a plan of reorganization to the Bankruptcy Court. The ability of the Company to
continue as a going concern and the appropriateness of using the going concern
basis are dependant upon, among other things, (i) the Company's ability to
comply with debtor-in-possession (DIP) financing agreements, (ii) confirmation
of a plan of reorganization under the Bankruptcy Code, (iii) the Company's
ability to achieve profitable operations after such confirmation and (iv) the
Company's ability to generate sufficient cash from operations to meet its
obligations.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness are
stayed and other contractual obligations of the Debtors may not be enforced. In
addition, under the Bankruptcy Code, the Debtors may assume or reject executory
contracts including lease obligations. Parties affected by these rejections may
file claims with the Bankruptcy Court in accordance with the reorganization
process. Substantially all pre-petition liabilities are subject to settlement
under a plan of reorganization to be voted upon by the creditors and equity
holders and approved by the Bankruptcy Court. Although the Debtors expect to
file a reorganization plan or plans that provide for emergence from bankruptcy,
there can be no assurance that a reorganization plan or plans will be proposed
by the Debtors or confirmed by the Bankruptcy Court, or that any such plan(s)
will be consummated. As provided by the Bankruptcy Code, the Debtors initially
have the exclusive right to submit a plan of reorganization for 120 days. On
May 11, 2000,
7
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2000
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
the Bankruptcy Court approved the Company's motion to extend the exclusivity
period from May 13, 2000 to July 31, 2000. If the Debtors fail to file a plan of
reorganization during such period or if the plan is not accepted by the required
number of creditors and equity holders, any party in interest may subsequently
file its own plan of reorganization for the Debtors. The Bankruptcy Court may
confirm a plan of reorganization notwithstanding the non-acceptance of the plan
by an impaired class of creditors or equity security holders if certain
requirements of the Bankruptcy Code are met.
A plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. Specifically, the financial
statements do not present the amounts that will be paid to settle liabilities
and contingencies that may be allowed in a Chapter 11 reorganization. Also, the
consolidated financial statements do not reflect (i) adjustments to assets and
liabilities which may occur in accordance with generally accepted accounting
principles following the confirmation of a plan of reorganization or (ii) the
realizable value of assets which would be required to be recorded if the Company
presents a plan which contemplates the disposal of all or portions of its assets
and operations.
BORROWINGS
On January 18, 2000, the Company entered into $65 million DIP financing in
the form of a revolving credit facility provided by the Company's existing bank
group. Availability under the facility is contingent upon a borrowing base of
accounts receivable and inventory, and bears interest at a rate of prime plus
2.5% (11.5% at March 31, 2000). The revolving credit facility matures July 17,
2000, and may be extended upon satisfaction of certain conditions. The
Bankruptcy Court approved the DIP financing facility on an interim basis on
January 18, 2000, and granted final approval on February 9, 2000.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net earnings
(losses) by the weighted-average number of common shares outstanding during the
reported period. Diluted net earnings (loss) per share is computed by dividing
net earnings (loss) by the weighted-average number of common shares outstanding
during the period plus incremental shares that would have been outstanding upon
the assumed exercise of dilutive stock options. As of March 31, 2000, all
outstanding stock options (4.3 million shares) are anti-dilutive.
2. LIABILITIES SUBJECT TO COMPROMISE
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases. The liabilities consist primarily of
amounts outstanding under long-term debt, but excluding all long-term debt
deemed to be secured debt, and also include accounts payable, accrued interest
and other accrued expenses. The amounts represent the Company's estimate of
known or potential claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments based on negotiations,
actions of the Bankruptcy Court, potential disputed claims, future rejection of
executory contracts or unexpired leases and determination as to the value of any
collateral securing claims or other events. Payment terms for these amounts,
which are considered long-term liabilities at this time, will be established in
connection with the Chapter 11 Cases.
8
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2000
2. LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
The Company received approval from the Bankruptcy Court to pay certain
pre-petition employee wages, salaries, other compensation, employee benefits,
reimbursable employee expenses and to pay pre-petition claims of critical trade
vendors, as well as to honor certain pre-petition customer obligations such as
volume discounts and rebates. The Company also received approval to pay all
employees and employee-related expenses, vendors and other providers in the
ordinary course for goods and services received from January 14, 2000.
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below.
<TABLE>
<CAPTION>
MARCH 31,
2000
--------------
(IN THOUSANDS)
<S> <C>
Notes payable............................................... $ 2,047
13% senior subordinated notes............................... 130,000
Accounts payable............................................ 36,934
Accrued expenses............................................ 30,720
--------
Total..................................................... $199,701
========
</TABLE>
Contractual interest expense not recorded on certain pre-petition debt
totaled $3.6 million for the three months ended March 31, 2000.
3. BANKRUPTCY ITEMS
Expenses and income directly incurred or realized as a result of the Chapter
11 Cases have been segregated from the normal operations and are disclosed
separately. As of March 31, 2000, the only component reported as a bankruptcy
item is $4.4 million of professional fees and administrative items.
4. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw material.......................................... $ 31,467 $28,633
Work-in-process....................................... 4,916 4,586
Finished goods........................................ 72,381 66,406
-------- -------
108,764 99,625
LIFO reserve.......................................... (8,812) (6,542)
-------- -------
$ 99,952 $93,083
======== =======
</TABLE>
9
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2000
5. RESTRUCTURING RESERVES
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1ST QUARTER, 2000 CHANGE IN MARCH 31, 2000
BALANCE EXPENDITURES ESTIMATE BALANCE
----------------- ----------------- --------- --------------
<S> <C> <C> <C> <C>
Severance and benefits................. $ 2 $(114) $ 200 $ 88
Closing costs to exit facilities....... 771 (102) (200) 469
Lease termination costs................ 204 -- -- 204
Property taxes after ceasing
operations........................... 87 (12) -- 75
------ ----- ----- ----
Total.................................. $1,064 $(228) $ -- $836
====== ===== ===== ====
</TABLE>
6. RELATED PARTY TRANSACTIONS
For the three months ended March 31, 2000, the Company accrued $0.4 million
for management and directors' fees and out of pocket expenses payable to the
principal stockholder. At March 31, 2000, unpaid fees of $0.4 million are
included in accrued liabilities not subject to compromise and unpaid fees of
$2.7 million are included in accounts payable and accrued expenses, subject to
compromise. Unpaid fees of $2.7 million are included in accounts payable and
accrued expenses in the consolidated balance sheets at December 31, 1999.
The Company has an outstanding note receivable of $0.3 million at March 31,
2000, from its former President and Chief Operating Officer. The note is due in
July 2000, and bears interest at 6.00%.
On March 31, 1998, the Company's loaned its former 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.
The notes are reflected as deductions from stockholders' equity at March 31,
2000 and December 31, 1999.
7. SUBSEQUENT EVENT
On April 28, 2000, the Company signed a definitive agreement to sell its
Creative Card division located in Chicago to Taylor Corporation. Final approval
for the sale was received on May 9, 2000, from the Bankruptcy Court, and the
sale was finalized on May 9, 2000. The transaction included the sale of the
division's inventory, property and equipment, intellectual property and certain
prepaid expenses. The anticipated loss of $10 to $13 million will be recorded as
a bankruptcy item in the second quarter, 2000.
8. CONDENSED FINANCIAL INFORMATION OF ENTITIES IN PROCEEDING UNDER CHAPTER 11
On January 10, 2000, certain holders of the Company's 13% Senior
Subordinated Notes due November 15, 2005, filed an involuntary Chapter 11
petition against the Company and all of its subsidiaries except Notepad Funding
Corporation (the "Debtors") in the United States Bankruptcy Court for the
District of Delaware. On January 14, 2000, each of the Debtors consented to the
entry of an Order for Relief and filed voluntary petitions under Chapter 11 of
title 11 of the United States Code (the
10
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2000
8. CONDENSED FINANCIAL INFORMATION OF ENTITIES IN PROCEEDING UNDER CHAPTER 11
(CONTINUED)
"Bankruptcy Code"). Following is the condensed financial statement for the
entities in bankruptcy proceedings:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 2000
----------------------------------------------------
ENTITIES IN NOTEPAD
CHAPTER 11 FUNDING ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current................................................ $178,577 $ 3,945 $ -- $182,522
Non-current assets..................................... 356,158 80 (41,165) 315,073
-------- -------- -------- --------
Total assets........................................... $534,735 4,025 $(41,165) $497,595
======== ======== ======== ========
Current liabilities.................................... $349,890 $ 39 $ -- $349,929
Intercompany payable................................... 37,179 (37,179) -- --
Non-current liabilities................................ 37,067 37,067
Liabilities subject to compromise...................... 199,701 -- -- 199,701
Deficit................................................ (89,102) 41,165 (41,165) (89,102)
-------- -------- -------- --------
Total liabilities and deficit.......................... $534,735 $ 4,025 $(41,165) $497,595
======== ======== ======== ========
Net sales.............................................. $135,691 $ -- $ -- $135,691
Gross profit........................................... 4,142 -- -- 4,142
Net loss............................................... $(28,303) $ (815) $ 815 $(28,303)
</TABLE>
11
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form
10-Q to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and uncertainties,
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. Inability of the Company to operate pursuant to the terms of the DIP
financing facility.
2. Inability of the Company to operate successfully under a Chapter 11
proceeding.
3. Failure of the Bankruptcy Court to approve orders requested by the Company
and/or reorganization plans.
4. Inability of the Company to create and have approved a reorganization plan
in the Chapter 11 Cases.
5. Inability of the Company to sell certain business assets to reduce debt.
6. Changes in economic conditions, in particular those that affect the retail
and wholesale office product markets.
7. 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.
8. Changes in senior management or control of the Company.
9. Inability to obtain new customers or retain existing ones.
10. Significant changes in competitive factors, including product pricing
conditions affecting the Company.
11. Governmental/regulatory actions and initiatives, including those affecting
financings.
12. Significant changes from expectations in actual capital expenditures and
operating expenses.
13. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and other
investments.
14. Significant changes in rates of interest, inflation or taxes.
15. Significant changes in the Company's relationship with its employees and
the potential adverse effects if labor disputes or grievances were to
occur.
16. Changes in accounting principles and/or the application of such principles
to the Company.
12
<PAGE>
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after date hereof.
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 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 had 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
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. On January 10, 2000,
certain holders of the Company's 13% Senior Subordinated Notes due November 15,
2005, filed an involuntary Chapter 11 petition against the Company and all of
its subsidiaries except Notepad Funding Corporation (the "Debtors") in the
United States Bankruptcy Court for the District of Delaware. On January 14,
2000, each of the Debtors consented to the entry of an Order for Relief and
filed voluntary petitions under Chapter 11 of title 11 of the United States Code
(the "Bankruptcy Code"). The Bankruptcy Case Numbers 00-00066 (RRM) through
00-00072 (RRM) (the "Chapter 11 Cases") are being jointly administered under
Case Number 00-00066 (RRM). Each of the Debtors is continuing to operate its
business and manage its property as a debtor-in-possession pursuant to sections
1107 (a) and 1108 of the Bankruptcy Code. On January 28, 2000, an Official
Committee of Unsecured Creditors was appointed in these cases. No plan of
reorganization has yet been proposed by the Company.
On January 10, 2000, as a result of the Chapter 11 filings, the Company's
$60.0 million accounts receivable financing facility terminated and no further
sales of receivables occurred. Although no post-termination receivables were
sold under this facility, the Company continues to act as servicer under the
facility and to collect and remit remaining outstanding receivables as provided
in the facility.
On February 9, 2000, the Bankruptcy Court entered a final order approving
$65 million DIP financing in the form of a revolving credit facility provided by
the Company's existing bank group. Availability under the facility is contingent
upon a borrowing base of accounts receivable and inventory, and bears interest
at a rate of prime plus 2.5%. The revolving credit facility matures July 17,
2000, and may be extended upon satisfaction of certain conditions.
13
<PAGE>
On March 21, 2000, the Company was notified by one of the major customers of
the Ampad division that it intends to move its business to other suppliers. For
the full year 1999, that customer accounted for approximately $42 million or
6.4% of the Company's sales.
On May 9, 2000, the Company sold its Creative Card division located in
Chicago to Taylor Corporation. The sale will result in a recorded loss for the
second quarter, 2000, of approximately $10 to $13 million.
MANAGEMENT CHANGES. On March 31, 2000, William L. Morgan, 60, retired as
Executive Vice President and Chief Operating Officer of the Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES decreased to $135.7 million in 2000 from $137.6 million in 1999, a
decrease of $1.9 million or 1.4%. The decrease is comprised of a $1.3 million
decrease in sales and a $0.6 million increase in customer incentives. The
decrease in sales resulted from some customers' efforts to secure alternate
sources of commodity product after the Chapter 11 filings. 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 $4.1 million or 3.1% of net sales in 2000 from
$12.9 million or 9.3% of net sales in 1999. This $8.8 million decrease in gross
profit margin includes (i) $1.2 million attributable to lower sales,
(ii) $0.6 million in increased customer incentives discussed above, (iii)
$2.7 million LIFO adjustment, (iv) $0.8 million inventory write-down due to the
pending loss of a major Ampad customer, (v) $0.4 million write-off of obsolete
inventory and (vi) $3.1 in other operating variances.
SELLING AND MARKETING expenses of $5.1 million incurred in 2000 increased
$0.2 million from $4.9 million recorded in 1999. This increase was primarily due
to higher costs for advertising and sales commissions.
GENERAL AND ADMINISTRATIVE expenses increased to $9.4 million in 2000 from
$7.1 million in 1999, or $2.3 million. This increase is primarily attributable
to the employee retention plan approved in 2000, of which $3.2 million was
expensed in the first quarter of 2000, offset by a decline in bad debt expenses
of $0.9 million.
LOSSES ON SALES OF ACCOUNTS RECEIVABLE decreased to $0.4 million in 2000
from $0.7 million in 1999 due primarily to the termination of the accounts
receivable financing facility on January 10, 2000, as discussed above, see Item
2 "Proceedings Under Chapter 11 of the Bankruptcy Code". 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 $1.2 million
in 2000 from $1.3 million in 1999, representing a decrease of $0.1 million. The
decrease is due to the amortization associated with the reversal of transition
reserves related to the Williamhouse and Niagara acquisitions to reduce goodwill
and tradenames by $3.9 million in 1999.
MANAGEMENT FEES AND SERVICES remained constant at $0.4 million in 2000 and
1999.
BANKRUPTCY ITEMS of $4.4 million recorded in the first quarter, 2000,
represent professional fees and administrative items associated with the Chapter
11 Cases filed on January 14, 2000. No bankruptcy items were incurred in 1999.
See Note 3, Notes to Consolidated Financial Statements, "Bankruptcy Items".
INTEREST EXPENSE increased to $11.0 million in 2000 from $10.8 million in
1999, representing an increase of $0.2 million. The increase was due to interest
incurred on the additional $65 million DIP financing entered into as a result of
the Chapter 11 filings, partially offset by contractual interest expense not
recorded on pre-petition unsecured debt totaling $3.6 million.
14
<PAGE>
THE INCOME TAX PROVISION for the quarter ended March 31, 2000, reflects an
effective income tax provision rate of (0.4)%, and for the quarter ended March
31, 1999, reflects an effective tax provision rate of 0%. In 2000, the income
tax provision recorded represents only the estimated state tax liability. In
both the first quarter of 2000 and 1999, the Company did not recognize the
federal income tax benefit associated with its loss. The Company has recorded a
full valuation allowance on net deferred tax assets relating to net operating
losses and tax credits due to uncertainty surrounding the future realization of
these assets.
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 variance between quarters will decrease slightly in
2000 due to the sale of the Creative Card division.
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
On January 14, 2000, the Debtors filed the Chapter 11 Cases, which will
affect the Company's liquidity and capital resources in 2000. See Note 1 of
Notes to Consolidated Financial Statements (Unaudited) "Proceedings Under
Chapter 11 of the Bankruptcy Code".
Net cash used by operating activities for the three months ended March 31,
2000, was $7.9 million as compared to net cash used by operating activities for
the three months ended March 31, 1999, of $0.6 million. The decreased cash flow
from operations in 2000 is primarily the net result of the following: (i) cash
used by the net loss of $17.3 million after adjustment for non-cash expenses,
(ii) a decrease in accounts receivable of $12.0 million due to lower sales in
2000 and the termination of the accounts receivable financing facility,
described below, (iii) an increase in inventories of $6.9 million, (iv) an
increase in accounts payable of $4.2 million due to the Chapter 11 filings which
stayed most pre-petition trade payables and (v) a net change in all other assets
and liabilities of $0.1 million.
Cash used in investing activities for the three months ended March 31, 2000
and 1999 was $0.3 million and $2.1 million, respectively. In 2000, the Company
purchased production equipment in the amount of $0.5 million, and recorded net
proceeds on the sale of equipment of $0.2 million. The use in 1999 was primarily
due to the purchase of equipment, principally production equipment.
On January 10, 2000, as a result of the Chapter 11 filings, the Company's
$60.0 million accounts receivable financing facility terminated and no further
sales of receivables occurred. Although no post-termination receivables were
sold under this facility, the Company continues to act as servicer under the
facility and to collect and remit remaining outstanding receivables as provided
in the facility.
On January 18, 2000, the Company entered into $65 million DIP financing in
the form of a revolving credit facility provided by the Company's existing bank
group. Availability under the facility is contingent upon a borrowing base of
accounts receivable and inventory, and bears interest at a rate of prime plus
15
<PAGE>
2.5% (11.5% at March 31, 2000). The revolving credit facility matures July 17,
2000, and may be extended upon satisfaction of certain conditions.
On February 9, 2000, the Bankruptcy Court gave final approval to the DIP
facility. The Company believes the DIP facility should provide it with adequate
liquidity to conduct its operations while it prepares a reorganization plan.
The Company's Consolidated Financial Statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The filing of the involuntary and voluntary petitions, referred to in
Note 1 of the Notes to the Consolidated Financial Statements (Unaudited),
"Proceedings Under Chapter 11 of the Bankruptcy Code", the related circumstances
and the losses from operations raise substantial doubt about the Company's
ability to continue as a going concern. The appropriateness of using the going
concern basis is dependant upon, among other things, confirmation of a plan or
plans of reorganization, future profitable operations and the ability to
generate cash from operations and financing sources sufficient to meet
obligations. As a result of the filing of the Chapter 11 Cases and related
circumstances, realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under protection of Chapter 11, the Debtors
may sell or otherwise dispose of assets, and liquidate or settle liabilities,
for amounts other than those reflected in the consolidated financial statements.
Further, a plan or plans of reorganization could materially change the amounts
reported in the accompanying consolidated financial statements. The consolidated
financial statements do not include any adjustments relating to the
recoverability of the values of recorded asset amounts or the amounts and
classification of liabilities that might be necessary as a consequence of a plan
of reorganization.
At this time, it is not possible to predict the outcome of the Chapter 11
Cases or their effect on the Company's business. The Company believes the DIP
facility should provide the Company with adequate liquidity to conduct its
business while it prepares a reorganization plan. However, the Company's
liquidity, capital resources, results of operations and ability to continue as a
going concern are subject to known and unknown risks and uncertainties,
including those set forth above under "Forward-Looking Statements."
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure arising from changes in interest rates is
minimal as less than 1% of the total debt outstanding at March 31, 2000,
represented variable rate obligations.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
As reported in the Company's Form 10-K for the year ended December 31, 1999,
on January 10, 2000, certain holders of the Company's 13% Senior Subordinated
Notes due November 15, 2005, filed an involuntary Chapter 11 petition against
the Company and all of its subsidiaries except Notepad Funding Corporation (the
"Debtors") in the United States Bankruptcy Court for the District of Delaware.
On January 14, 2000, each of the Debtors consented to the entry of an Order for
Relief and filed voluntary petitions under Chapter 11 of title 11 of the United
States Code (the "Bankruptcy Code"). The Bankruptcy Case Numbers 00-00066 (RRM)
through 00-00072 (RRM) (the "Chapter 11 Cases") are being jointly administered
under Case Number 00-00066 (RRM). Each of the Debtors is continuing to operate
its business and manage its property as a debtor-in-possession pursuant to
sections 1107 (a) and 1108 of the Bankruptcy Code. On January 28, 2000, an
Official Committee of Unsecured Creditors was appointed in these cases.
The potential effect of the Company's Chapter 11 bankruptcy proceedings will
be considered by the Company with respect to any decisions or actions relating
to legal proceedings.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
The Company commenced the Chapter 11 Cases on January 14, 2000. As a result
of the filing of the Chapter 11 Cases, no principal and interest payments will
be made on certain indebtedness incurred by the Company prior to January 14,
2000, including the 13% Senior Subordinated Notes, until a plan of
reorganization defining the payment terms has been approved by the Bankruptcy
Court.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None.
17
<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 May 15,
2000, on their behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C>
/s/ JAMES W. SWENT, III
------------------------------------------- /s/ DAVID N. PILOTTE
James W. Swent, III ---------------------------------------------
CHIEF EXECUTIVE OFFICER AND David N. Pilotte
CHIEF FINANCIAL OFFICER VICE PRESIDENT AND CORPORATE CONTROLLER
(PRINCIPAL EXECUTIVE OFFICER AND (PRINCIPAL ACCOUNTING OFFICER)
PRINCIPAL FINANCIAL OFFICER)
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HISTORICAL FINANCIAL STATEMENTS OF AMERICAN PAD & PAPER COMPANY AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,806
<SECURITIES> 0
<RECEIVABLES> 73,403
<ALLOWANCES> 0
<INVENTORY> 99,952
<CURRENT-ASSETS> 3,361
<PP&E> 142,109
<DEPRECIATION> 0
<TOTAL-ASSETS> 497,595
<CURRENT-LIABILITIES> 349,929
<BONDS> 0
0
0
<COMMON> 285
<OTHER-SE> (89,387)
<TOTAL-LIABILITY-AND-EQUITY> 497,595
<SALES> 0
<TOTAL-REVENUES> 135,691
<CGS> (131,549)
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (20,888)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,012)
<INCOME-PRETAX> (28,183)
<INCOME-TAX> (120)
<INCOME-CONTINUING> (28,303)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,303)
<EPS-BASIC> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
