Document/Exhibit Description Pages Size
1: 10-K Annual Report 75 463K
2: EX-4.23 Instrument Defining the Rights of Security Holders 195 529K
3: EX-4.24 Instrument Defining the Rights of Security Holders 9 21K
4: EX-4.25 Instrument Defining the Rights of Security Holders 33 56K
5: EX-10.36 Material Contract 5 23K
6: EX-23.1 Consent of Experts or Counsel 1 6K
7: EX-27.1 Financial Data Schedule (Pre-XBRL) 2 8K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-11803
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AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
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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)
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Registrant's telephone number, including area code: (972) 733-6200
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
------------------------
Indicate by check mark whether each Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that each
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 30, 2000, there were 28,527,983 outstanding shares of American
Pad & Paper Company common stock and the aggregate market value of the common
stock of American Pad & Paper Company held by non-affiliates was approximately
$4.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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ITEM PAGE
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PART 1
1. Business.................................................... 3
Recent Developments......................................... 4
2. Properties.................................................. 11
3. Legal Proceedings........................................... 13
4. Submission of Matters to a Vote of Security Holders......... 14
PART II
5. Market of Registrant's Common Equity and Related Stockholder
Matters................................................... 15
6. Selected Financial Data..................................... 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 27
8. Financial Statements and Supplementary Data................. 27
9. Changes in and Disagreements on Accounting and Financial
Disclosure................................................ 27
PART III
10. Directors and Executive Officers of the Registrant.......... 28
11. Executive Compensation...................................... 30
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 37
13. Certain Relationships and Related Transactions.............. 38
PART IV
14. Exhibits, Financial Statements Schedules and Reports on
Form 8-K.................................................. 40
Signatures.................................................. 70
2
American Pad & Paper Company (the "Company") is a holding company with no
separate operations. At March 30, 2000, the Company had 28,527,983 shares of
outstanding common stock traded on the National Association of Security Dealers
Over-the-Counter Bulletin Board System. The Company owns 100% of the outstanding
common shares of WR Acquisition, Inc. ("WR Acquisition"). WR Acquisition is also
a holding company with no separate operations. WR Acquisitions owns 100% of the
outstanding common shares of American Pad & Paper Company of Delaware, Inc.
("AP&P Delaware"), and AP&P Delaware owns 100% of the outstanding common shares
of AP&P Manufacturing, Inc. ("Manufacturing"). AP&P Delaware and Manufacturing
are the primary operating companies in which all significant operations of the
Company take place. AP&P Delaware has $130 million of 13% Senior Subordinated
Notes ("Notes") outstanding. The Company has followed full push-down accounting
for the financial statements of AP&P Delaware such that the only differences
between the Company and AP&P Delaware relate to the capital structure just
described.
ITEM 1 BUSINESS
GENERAL
The Company is one of the largest manufacturers and marketers of nationally
branded and private label paper-based office products (excluding copy paper) in
the $60 billion to $70 billion North American office products industry. 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 product retailers and distributors. Established in 1888,
the Company's Ampad division has been a leading supplier of pads and other
paper-based writing products throughout its history. Acquired in October 1995,
the Company's Williamhouse division is the leading supplier of mill branded
specialty and commodity business envelopes and machine papers to paper
merchants/distributors and jobbers. The Company maintains several nationally
recognized brand names such as AMPAD-REGISTERED TRADEMARK-, CENTURY-TM-,
EMBASSY-REGISTERED TRADEMARK-, EVIDENCE-REGISTERED TRADEMARK-, GOLD-FIBRE-TM-,
HUXLEY-TM-, KAROLTON-REGISTERED TRADEMARK-, KENT-REGISTERED TRADEMARK-, PEEL &
SEEL-REGISTERED TRADEMARK-, SCM-TM-, WILLIAMHOUSE-TM- and WORLD FIBRE-TM-.
Since the mid-1980s, the office products industry has experienced
significant changes in the channels through which office products are
distributed. Such changes include the emergence of new channels including
national office product superstores, national contract stationers and mass
merchandisers, and consolidation within these and other channels. The channels
through which office products are distributed from the manufacturer to the
end-user include retail channels such as national office products superstores,
mass merchandisers and warehouse clubs; commercial channels such as national
contract stationers; paper merchants/distributors and jobbers; and other
channels such as regional distributors, school campuses and direct mail.
HISTORY
From 1986 to 1992, Ampad operated as a subsidiary of Mead Corporation
("Mead"). In July 1992, the Company acquired Ampad from Mead in an acquisition
led by Bain Capital, Inc. ("Bain Capital") and former senior management. Since
the acquisition, of Ampad, the Company has made additional acquisitions in order
to enhance the Company's scale, broaden its product line, expand upon its
national presence and strengthen its distribution capabilities.
In July 1994, the Company acquired the assets and assumed certain
liabilities of SCM, one of the industry leaders in hanging files and writing
products. In August 1995, the Company acquired certain file folder and file
product lines of American Trading and Production Corporation's ("Atapco")
Globe-Weis-Registered Trademark- office products division. Prior to the
acquisition, Atapco was one of the leading providers of file folders and hanging
files to office product superstores. The acquisitions of the SCM-TM- and
Globe-Weis-Registered Trademark- product lines further strengthened the
Company's position in the filing supplies and writing products categories.
3
In October 1995, the Company acquired WR Acquisition and its wholly owned
subsidiary, Williamhouse-Regency of Delaware, Inc. (collectively referred to as
"Williamhouse"). Williamhouse is a leading supplier to many of the largest
national, regional, and independent paper merchants/distributors and jobbers.
Williamhouse also includes the Creative Card operations. Creative Card is an
industry leader in design and publishing of boxed holiday greeting cards, all
occasion greeting cards, social and business announcements, wedding invitations
and pre-printed papers for desktop publishing. The Company's management
identified the Regency Division of Williamhouse as a nonstrategic asset
following the Williamhouse acquisition and, in June 1996, completed the sale of
the Regency Division.
In June 1996, the Company acquired Niagara Envelope Company, Inc.
("Niagara"). Niagara supplies mill branded, specialty and commodity envelopes to
paper merchants/distributors through four manufacturing facilities located near
Buffalo, Chicago, Dallas and Denver.
In February 1997, the Company acquired Shade/Allied, Inc. ("Shade/Allied").
Shade/Allied supplied continuous forms to paper merchants/distributors and
retail customers through four manufacturing facilities located near Green Bay,
Seattle, Atlanta and Philadelphia. In July 1997, the Atlanta facility was
closed, and in September 1997, the Seattle facility's lease was terminated. In
November 1998, the remaining operations of Shade/Allied were combined with
similar manufacturing operations of Ampad.
In November 1999, the Company announced it had 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. In March 2000, the Company announced it had signed a letter of intent to
sell its Creative Card division to Taylor Corporation. Such sale is subject to
the approval of the bankruptcy court. Efforts by Lazard Freres to sell the
Williamhouse division and other business assets are continuing.
RECENT DEVELOPMENTS
Since the Company's last acquisition in 1997 revenues have declined, margins
have eroded, competitive pressures in the marketplace kept the Company from
fully recouping increasing paper prices, and inventory levels were, for a period
of time, built to an excessive level. Through the rationalization plan initiated
in late 1998, three manufacturing plants were closed, inventory levels were
reduced and production was better coordinated with sales. Although competitive
pressures continued, price increases were initiated which, while not fully
recouping prices movements in raw materials, caused amounts absorbed by the
Company to be reduced. Despite the progress on operational and pricing issues,
the Company's capital structure and high level of debt have limited its abiity
to return to profitability.
DEBT DEFAULT AND PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. On
November 12, 1999, the Company was notified by its banking group of a default of
its revolving credit facility. The default stemmed from the formation of new
subsidiaries in December 1997 related to a reorganization of the Company's
corporate structure without proper notification to the banks. The reorganization
was implemented primarily for state tax purposes and included the transfer of
assets between existing entities and transfers to the new subsidiaries. The
default on the revolving credit facility prevented the Company from paying
interest on its publicly traded Notes due November 15, 1999, thereby causing a
default on the Notes as well.
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) 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
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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.
On March 8, 2000, the Company announced that it had signed a letter of
intent with Taylor Corporation for the purchase of the Company's Creative Card
division located in Chicago. Negotiations are continuing with Taylor Corporation
and the Company expects the sale to be finalized in the second quarter of 2000.
Such sale, subject to the approval of the bankruptcy court, is expected to
result in a loss of $5 to $10 million.
On March 21, 2000, the Company was notified by one of its major customers of
the Ampad division that it intends to move its business to other suppliers. In
1999, that customer accounted for approximately $42 million or 6.4% of the
Company's sales.
Although Chapter 11 bankruptcy raises substantial doubt about the Company's
ability to continue as a going concern, the accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles applicable to a company on a going-concern basis which contemplates
the continuity of operations, realization of assets and the liquidation of
liabilities in the ordinary course of business. As a result of the Chapter 11
filing, realization of assets and liquidation of liabilities are subject to
significant uncertainties. Specifically, the financial statements do not present
the amount that will be paid to settle liabilities and contingencies that may be
allowed in 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 STATEMENT OF
POSITION 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE
BANKRUPTCY CODE (SOP 90-7) 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. The filing of a plan of
reorganization could materially affect the carrying value of the assets and
liabilities currently disclosed in the consolidated financial statements.
MANAGEMENT CHANGES. On March 31, 2000, William L. Morgan retired as
Executive Vice President and Chief Operating Officer of the Company.
Additionally, on March 31, 2000, the Company appointed William J. Mays as Chief
Operations Officer. Mr. Mays joined the Company in December 1998 as Vice
President, Operations Controller.
COMPANY INITIATIVES/RESTRUCTURING. During 1999, the Company closed its
Holland, New York; Dallas, Texas and Kosciusko, Mississippi facilities and
consolidated the equipment at those facilities into its Scottdale, Pennsylvania;
Corsicana, Texas; Mattoon, Illinois and Holyoke, Massachusetts facilities to
eliminate excess space, reduce fixed overhead expenses and operating costs and
improve customer service. Additionally, the Company consolidated six stand-alone
distribution facilities into two, and relocated the Scottdale finished goods
warehouse to a new state-of-the-art distribution facility in nearby New Stanton,
Pennsylvania.
5
COMPETITIVE STRENGTHS
Although the recent bankruptcy could limit the Company's ability to further
capitalize or build on its competitive strengths, the Company still enjoys the
following advantages:
MARKET LEADER. The Company believes it is a market leader in core products
sold to customers in the largest office product channels by offering one of
the broadest assortments of high quality products in the industry.
Furthermore, the Company enjoys national brand awareness in many of its
product lines, including AMPAD-REGISTERED TRADEMARK-, CENTURY-TM-,
EMBASSY-REGISTERED TRADEMARK-, EVIDENCE-REGISTERED TRADEMARK-,
GOLD-FIBRE-TM-, HUXLEY-TM-, KAROLTON-REGISTERED TRADEMARK-,
KENT-REGISTERED TRADEMARK-, PEEL & SEEL-REGISTERED TRADEMARK-, SCM-TM-,
WILLIAMHOUSE-TM- and WORLD FIBRE-TM-.
WELL-POSITIONED AND DIVERSIFIED CUSTOMER BASE. The Company maintains strong
relationships with a combination of national, regional and independent paper
merchants throughout the country. The Company also maintains strong customer
relationships across all of the office products distribution channels,
including superstores, contract stationers, mass merchandisers, warehouse
clubs, office products wholesalers and independent dealers.
NATIONAL SCALE AND SERVICE CAPABILITY. The Company's extensive product
line, multiple brands and broad price point coverage provide significant
advantages and economies of scale in selling to and servicing its customers.
The Company is an important strategic partner to its customers as they seek
higher value-added products, simplify their purchasing organizations and
consolidate their relationships among selected national suppliers. The
Company's national presence and network of 13 strategically located
manufacturing and distribution facilities have enabled it to maintain rapid
and efficient order fulfillment standards. In addition, the Company's
advanced Electronic Data Interchange ("EDI") capabilities enable it to meet
its customers' EDI requirements, executing automated transactions rapidly,
efficiently and accurately.
INNOVATION/NEW PRODUCTS. During the third and fourth quarters of 1999, the
company introduced several value-added innovative products including: a new
poly filing line, expandable filing products, REGAL
MILLS-REGISTERED TRADEMARK- (papers), GEL MATES-TM- (papers), envelopes (new
sizes, colors, features, etc.) and TWIN PERF-TM- writing pads. The Company
is focused on developing a constant flow of new products. By developing new
products and continuing the branding initiatives, the Company intends to
increase its mix of value-added products. The Company believes these new
products, combined with a new branding strategy, will improve inventory turn
rates and return on inventory investment.
LOW-COST MANUFACTURER. The Company believes completion of its plant
rationalization plan has made it among the lowest-cost manufacturers of
paper-based office products in the industry.
PURCHASING ADVANTAGES. The Company has strong relationships with most of
the country's largest paper mills, many of which have been conducting
business with the Company for more than 30 years. The Company is one of the
largest purchasers of the principal paper grades used in its manufacturing
operations. In addition, the Company has the largest number of designated
mill relationships which involve some of the largest and most recognized
paper mill brands such as Hammermill, Fox River, Gilbert, Neenah and
Strathmore.
GROWTH STRATEGY
Although the recent bankruptcy will impact the Company's strategy, its
recent initiatives have laid the foundation for the future growth of its various
divisions.
E-COMMERCE INITIATIVE. Recognizing the growth in online commerce, the
Company believes it can expand the Ampad division's presence in the SOHO
(small office, home office) marketplace by working directly with both
E-Tailers who offer the Company's products via the Internet and
Commercial/Wholesale distributors who provide fulfillment for Internet sales
of the Company's products. The
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Company began its efforts in the E-Commerce channel in mid-1999 and the
Ampad division currently has products available on approximately 30 Internet
sites with an average of 175 items per site.
ENHANCING PROFITABILITY. The plant rationalization plan completed in 1999
has produced the intended cost savings and has enabled the Company to be
included among the lowest cost producers within its product category.
Additional efforts are continuing that improve asset management,
particularly inventory, equipment and receivables; enhance information
systems, including those that increase productivity and provide efficiency;
and provide better communication and coordination both internally and with
its customers and vendors.
FOCUS ON MARKET GROWTH AND INCREASING MARKET SHARE. The Company serves many
of the largest and best positioned customers in the office products market
segment including national office products superstores, mass merchandisers
and warehouse clubs, national contract stationers and national and regional
paper merchants/distributors and jobbers. The Company expects that its
national scope and broad product line will be increasingly important in
meeting the needs of its customers. The Company will continue to target
those customers who are on the forefront of their markets.
CONTINUE TO INTRODUCE NEW PRODUCTS. New, higher value-added products give
the Company a greater selection to offer its customers and improve product
line profitability for both the Company and its customers. The Company plans
to differentiate itself from other suppliers and improve profitability
through product innovation, differentiation and line extensions.
BROADEN PRODUCT DISTRIBUTION. The Company's market presence and
distribution strengths position it to sell new or acquired product lines
across its distribution channels, including paper merchants, national office
products superstores, national contract stationers, office product
wholesalers and mass merchandisers.
PRODUCTS AND SERVICES
PADS AND OTHER PAPER-BASED WRITING PRODUCTS. The Company is one of the
largest manufacturers and marketers of paper-based writing products (excluding
copy paper) in North America, offering approximately 725 SKUs of writing pads,
notebooks and specialty papers. Many of the Company's writing products are
available in multiple sizes, grades of paper (including recycled), and colors
and with glued, perforated tops or wire binding. All writing products are
offered under the AMPAD-REGISTERED TRADEMARK- brand name or a retailer's private
label. The Company has created innovative packaging especially for sale through
warehouse clubs (bulk and crate packaging), superstores and mass merchandisers.
FILING SUPPLIES. The Company is one of the three largest manufacturers of
filing supplies in North America. The product line includes approximately 465
SKUs of filing supplies including file folders, hanging files, index cards and
expandable folders under the SCM-TM- and Globe-Weis-Registered Trademark- brand
names. The Company is attempting to grow its market share in filing supplies by
focusing its sales efforts on large retail customers and contract stationers and
by expanding into other areas of the mass market channel.
ENVELOPES. The Company is among the largest manufacturers of envelopes
serving the paper merchant/distributor and office product superstore channels.
In 1999, the Company produced approximately 20 billion envelopes. The Company's
broad envelope product line includes products manufactured from mill branded
paper, which is paper unique in color and texture to a particular mill,
typically with an identifying watermark. The Company is the largest designated
envelope manufacturer, producing envelopes for 33 mill brands. These mills
include the Hammermill, Strathmore and Beckett divisions of International Paper
Company, the Neenah division of Kimberly-Clark Corporation, the Gilbert division
of Mead and the Fox River Paper Company.
The Company also produces a wide variety of standard size and specialty
envelopes made from commodity paper and Tyvek-Registered Trademark- (a high
density polyurethane based product made by Du Pont), including
7
booklet and catalog mailing envelopes, envelopes closable by metal clasp or
button-and-string, PEEL & SEEL-REGISTERED TRADEMARK- (pressure sensitive
adhesion) envelopes, and jumbo, X-ray and remittance envelopes. The Company
offers in excess of 27,000 SKUs of envelopes (which the Company believes is more
than any of its competitors), providing its customers with a wide choice of
paper grades, colors and sizes.
MACHINE PAPERS. The Company manufactures machine papers, a product category
defined by the Company which includes inkjet papers, printed formats, fine
papers such as cotton content and laid papers, as well as continuous forms.
INVITATIONS AND ANNOUNCEMENTS. The Company manufactures invitations and
announcements, Christmas and holiday cards, and presentation folders. These
products are sold principally to paper merchants/ distributors, personalizing
businesses (including the former Regency Division), and other wholesale outlets
throughout the United States. The Company offers a wide variety of such
products, primarily made from the same mill branded grades of paper used in
manufacturing envelopes.
Principal products, customers and selected brands of the Company include:
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AMPAD WILLIAMHOUSE CREATIVE CARD
------------------------------ ------------------------------ ----------------------------
PRODUCTS
- Pads and Notebooks - Business Envelopes - Invitations
- Filings Supplies - Invitations - Announcements
- Retail envelopes - Announcements - Christmas Cards
- Machine Papers - Christmas and Holiday Cards - Holiday Cards
- Christmas and Holiday Cards - Machine Papers - PC/Desktop Stationary
- Invitations
- Announcements
DISTRIBUTION CHANNELS
- Office Products Superstores - Paper Merchants/Distributors - Superstores
- Mass Merchants - Jobbers - Mass Merchandisers
- Contract Stationers - Personalizing Businesses - Card Distributors
- Wholesalers - Imprinters
- Buying Groups - Card Outlets
SELECTED BRANDS
- AMPAD-Registered Trademark- - Century-TM- - Century-TM-
- - Huxley-TM-
Embassy-Registered Trademark- -
- Karolton-Registered Trademark-
Evidence-Registered Trademark- - Kent-Registered Trademark-
- Globe -
Weis-Registered Trademark- Kentwove-Registered Trademark-
- Gold-Fibre-TM- - Peel &
- SCM-TM- Seel-Registered Trademark-
- World Fibre-TM- - Williamhouse-TM-
SALES, DISTRIBUTION AND MARKETING
The Company markets its broad range of products to a wide variety of
customers. One customer accounted for 21%, 15% and 12% of the Company's net
sales in 1999, 1998 and 1997, respectively.
The Company markets its writing products, filing supplies, retail envelopes
and machine papers through virtually every channel of distribution for
paper-based office products including the largest mass merchant retailers,
office product superstores, warehouse clubs, major contract stationers, paper
merchants/distributors and other traditional outlets for office supplies such as
office product wholesalers, independent dealers, buying groups and mail order
firms.
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The Company sells its business envelopes and machine papers principally to
paper merchants/ distributors and other wholesale outlets throughout the United
States, primarily through an in-house sales force. In addition, mill branded
products are sold directly to personalizing businesses (including the former
Regency Division). The Company currently employs sales representatives
throughout the United States and sells products to over 1,700 paper
merchant/distributor locations in the United States and Canada. The Williamhouse
acquisition provided the Company with the ability to manufacture and distribute
retail envelopes to the Ampad division customers under the
AMPAD-Registered Trademark- and private label names.
Current key customers of the Company include:
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OFFICE PRODUCT SUPERSTORES MASS MERCHANTS PAPER MERCHANTS/DISTRIBUTORS
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Office Max Wal-Mart Nationwide
Staples xpedx
Unisource
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CONTRACT STATIONERS OFFICE PRODUCT WHOLESALERS WAREHOUSE CLUBS
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Boise Cascade Office Products S. P. Richards Sam's Warehouse Club
BT Office Products United Stationers
Staples*
U.S. Office Products
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* Contract Stationers division.
RAW MATERIAL
The Company's principal raw material is paper. Historically, certain
commodity grades utilized by the Company have shown considerable price
volatility. For example, all the key commodity grades of paper used by the
Company increased in cost between 9% and 28% in 1999. 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. The Company's gross margin was adversely affected in 1999 due to
these paper price increases. There is no assurance that the Company will not be
materially affected by future fluctuations in the price of paper.
The Company has strong relationships with most of the country's largest
paper mills, many of which have been doing business with the Company for more
than 30 years. The Company is one of the largest purchasers of the principal
paper grades used in its manufacturing operations. In addition, the Company has
the largest number of designated mill relationships, which involve some of the
largest and most recognized paper mill brands such as Hammermill, Fox River,
Gilbert, Neenah and Strathmore. The Company believes that these relationships
afford it certain paper purchasing advantages, including stable supply and
favorable pricing arrangements. While these relationships are stable, all but
one of the designated manufacturer arrangements are oral and terminable at will
at the option of either party. There can be no assurance that any of the
supplier or designated manufacturer relationships will not be terminated in the
future. While the Company has been able to obtain sufficient paper supplies
during paper shortages and otherwise, the Company is subject to the risk that it
will be unable to purchase sufficient quantities of paper to meet its production
requirements during times of tight supply.
COMPETITION
The markets for the Company's products are highly competitive. Competition
is based largely on a company's ability to offer a broad range of products on a
regional or national scale at competitive prices and to deliver these products
on a timely basis. The Company has many local and regional competitors. The
markets in which the Company operates have become increasingly characterized by
a limited number
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of large companies selling under recognized trade names. These larger companies,
including the Company, have the economies of scale, national presence,
management information systems and breadth of product line required by the major
customers. In addition to branded product lines, manufacturers also produce
private label products, especially in the context of broader supply
relationships with office product superstores and contract stationers.
In the writing products segment, the Company's key domestic competitors
include Mead, Pen-Tab Industries, and the Tops division of Wallace Computer
Services. In the filing supplies segment, the Company's key domestic competitors
include Esselte AB and Smead Manufacturing. In the machine papers segment, the
Company's key domestic competitors are CST/Star and Willamette Industries.
Envelope manufacturers compete in three distinct channels. In the paper
merchant/distributor channel, where the Company competes, manufacturers sell a
wide variety of mill branded, specialty and commodity envelope products to paper
merchants/distributors. The Company believes that envelope competitors in one
channel have the ability to compete in other channels, as competitive conditions
change.
INTELLECTUAL PROPERTY
The Company registers some of its material trademarks, tradenames and
copyrights and has acquired patent protection for some of its proprietary
processes. In the opinion of management, the Company has current trademark
rights to conduct its business as now constituted. The Company has the right to
use the Globe-Weis-Registered Trademark- name on a non-exclusive basis through
August 15, 2000, pursuant to the extension of a royalty agreement it obtained
when it purchased certain file folder and hanging file assets from Atapco.
Thereafter, it shall continue in force for successive 12-month periods unless
terminated by either party. Under the terms of the agreement, the Company pays a
royalty of 0.3% of the net selling price of licensed products to Atapco.
EMPLOYEES
As of January 1, 2000, the Company had 3,834 full-time employees. All the
Company's operations are non-union except for the operations located in
Scottdale, Pennsylvania and Appleton, Wisconsin which have, in total, 917
employees participating in collective bargaining agreements. The collective
bargaining contracts covering the Company's employees will expire as follows:
the Scottdale contract expires April 30, 2003 and covers 777 employees; and the
Appleton contract expires March 31, 2001 and covers 140 employees. With the
exception of a strike at the Company's Marion, Indiana plant, as described
below, there have been no work stoppages at any Company facility during the last
five years. The Company believes that its relations with its employees and
unions are satisfactory.
In July 1994, the Company acquired the writing products and filing supplies
assets of SCM. Work rules and associated costs at SCM's plant in Marion, Indiana
were less favorable to the Company than those at other plants. As a result of
management's effort to bring the labor agreement at the plant more in line with
its other plants, a labor strike occurred on September 1, 1994. Consequently,
the Company closed the Marion, Indiana plant on February 15, 1995, and moved the
equipment to other facilities.
As part of the rationalization substantially completed in 1999, a total of
436 employees were severed in connection with the closures of Kosciusko,
Mississippi; Dallas, Texas and Holland, New York.
BACKLOG
The Company does not consider backlog to be a significant factor is its
business. Customer orders are generally received anywhere from same day to three
months in advance of shipment dates and are satisfied with on-hand finished
goods inventory or completed manufacturing within the customers delivery
deadlines.
10
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 items, seasonal
greeting card and tax filing products. With the sale of the Company's Creative
Card division, fourth quarter sales will likely be lower than they ordinarily
would have been.
The Company's Ampad division sells primarily to customers such as office
product 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 will
experience lower sales during periods when 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 the future.
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.
ITEM 2 PROPERTIES
PROPERTIES AND FACILITIES
As of December 31, 1999, the Company operated manufacturing, distribution,
office and warehouse space in the United States with a total area of
approximately 5.4 million square feet. Of this area, approximately 2.5 million
square feet are leased and the Company owns approximately 2.9 million square
feet. Three closed facilities totaling approximately 343,000 square feet in
Gainesville, Georgia; Dallas, Texas and Holland, New York were held for sale at
December 31, 1999. All of the Company's owned facilities are pledged as
collateral under the Company's financing agreements.
To provide a cost efficient supply of products to its customers, the Company
maintains centralized management of nationwide manufacturing and distribution
facilities. Since 1992, the Company has consolidated 32 manufacturing and
distribution facilities into 23 facilities. The Company believes that
substantially all of its property and equipment is in good condition and that it
has sufficient capacity to
11
meet its current and projected manufacturing and distribution needs in the
foreseeable future. The following table describes the principal properties of
the Company as of December 31, 1999:
[Enlarge/Download Table]
BUSINESS OWNED OR EXPIRATION OF SQUARE
LOCATION DIVISION(1) LEASED LEASE(2) FEET
----------------------------------------- ----------- -------- --------------- --------
ARKANSAS Bentonville A Leased 2000
CALIFORNIA City of Industry W Owned -- 85,000
City of Industry W Leased 2008 105,000
COLORADO Aurora W Leased 2001 55,000
GEORGIA Gainesville(c) A Owned (c) 70,000
ILLINOIS Bedford Park C Leased 2000 107,000
Bedford Park C Leased (d) 183,000
Chicago C Owned -- 40,000
Chicago C Leased 2000 227,000
Columbia A Leased month-to-month 29,200
Elk Grove Village W Owned -- 128,716
Mattoon A Leased 2009 172,000
Mattoon A Owned -- 261,800
Mattoon A Leased month-to-month 43,115
INDIANA Marion A Leased 2000 279
MASSACHUSETTS Holyoke A Owned -- 536,000
Holyoke A Owned -- 30,000
Springfield A Leased 2000 132,600
Westfield A Owned -- 165,785
MISSISSIPPI Kosciusko A Leased 2000 303,085
NEW JERSEY Bloomfiled W Leased 2003 70,000
NEW YORK Holland(c) W Owned (c) 168,000
New York City W Leased 2000 4,000
New York City W Leased 2009(b) 50,000
PENNSYLVANIA Lancaster F Leased 2001 105,000
Mt. Pleasant W Leased 2001 226,000
New Stanton W Leased 2009 176,000
Scottdale W Owned -- 400,000
TENNESSEE Morristown A Owned -- 255,000
Morristown A Leased 2000 52,500
TEXAS Corsicana W Owned -- 250,000
Dallas Corporate Leased 2002 49,119
Dallas(c) W Owned (c) 105,000
Dallas A Leased 2002 5,000
UTAH Salt Lake City A Leased 2016 385,106
WASHINGTON Kent W Leased month-to-month 38,400
WISCONSIN DePere F Owned (a) 95,853
Appleton W Owned (a) 313,000
------------------------
(1) "A" indicates operations associated with the Company's Ampad division, "W"
indicates operations associated with the Company's Williamhouse division,
"F" indicates operations associated with the Company's Forms division, and
"C" indicates operations associated with the Company's Creative Card
division.
(2) (a) Two or more properties owned at this location.
(b) Subleased to third parties
(c) Closed facility held for sale
(d) Lease was rejected as part of the bankruptcy proceedings.
12
ITEM 3 LEGAL PROCEEDINGS
CHAPTER 11 PROCEEDINGS
On January 10, 2000, certain holders of the Company's 13% Senior
Subordinated Notes due November 15, 2003 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) 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. With
Court approval, the Company has obtained debtor in possession financing in the
amount of $65 million from a subset of its prepetition secured bank group. No
plan of reorganization has yet been proposed by the Company.
OTHER LEGAL PROCEEDINGS
As previously reported, between March 10, 1998 and April 11, 1998, three
complaints were filed in the United States District Court for the Northern
District of Texas naming as defendants the Company, certain of its officers and
directors and certain of the underwriters and other related entities involved in
the Company's initial public offering. The plaintiffs in the first two
complaints purport to represent a class of stockholders who acquired shares of
the Company's common stock between July 2, 1996 and December 17, 1997. The
complaints seek unspecified damages and other relief under the federal
securities laws based on allegations that the Company made omissions and
misleading disclosures in public reports and press releases and to securities
analysts during 1996 and 1997 concerning the Company's financial condition, its
future business prospects and the impact of various acquisitions. These two
lawsuits were consolidated on July 2, 1998. The third complaint was dismissed
without prejudice by the plaintiffs on September 29, 1998. Motions to dismiss
have been filed in the consolidated cases and all briefing is complete. Pending
a ruling on the motions to dismiss, all proceedings in the consolidated action
have been stayed. To the extent that the motions to dismiss are denied in whole
or in part, the Company believes that it has meritorious defenses to plaintiff's
claims and, subject to actions relating to the lawsuit under the company's
bankruptcy proceedings, intends to vigorously defend the action.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The operations of the Company are subject to federal, state and local laws
and regulations relating to the environment. Certain of the more significant
federal laws are described below. The implementation of these laws by the United
States Environmental Protection Agency ("EPA") and the states will continue to
affect the Company's operations by imposing increased operating and maintenance
costs and capital expenditures required for compliance.
The Resource Conservation and Recovery Act ("RCRA") of 1976, as amended,
affects the Company through its reporting, recordkeeping and waste management
requirements, thereby increasing the cost of all types of waste disposal.
Regulations under RCRA prohibit certain types of waste disposal, further
increasing Company costs for waste management. The Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended ("CERCLA") creates
the potential for substantial liability for the costs of study and cleanup of
waste disposal sites and requires the reporting of certain releases into the
environment. Court interpretation of this Act may result in joint and several
liability even for parties not primarily responsible for hazardous waste
disposal sites. Additional laws and the regulations promulgated thereunder also
have resulted in additional reporting duties.
13
Violations of any federal environmental statutes or regulations or orders
issues thereunder, as well as relevant state and local laws and regulations,
could result in civil or criminal actions.
While there can be no assurance that the Company is at all times in complete
compliance with all such laws and regulations, the Company has made and will
continue to make capital and other expenditures to comply with such
requirements. The Company spent approximately $1.2 million, $880,000 and
$839,000 in 1999, 1998 and 1997, respectively, on environmental capital
projects, primarily for the acquisition of waste paper baling and vacuum systems
to improve the collection of paper waste at its plants. The Company estimates
that its environmental capital expenditures will be approximately $0.3 million
in each of 2000 and 2001. As is the case with manufacturers in general, if a
release of hazardous substances occurs on or from the Company's properties or
any associated offsite disposal location, or if contamination from prior
activities is discovered at any of the Company's properties, the Company may be
held liable and the amount of such liability could be material.
The Company is aware that three of its facilities have been the subject of
certain soil and groundwater investigations. The prior owner of the facilities
has indemnified the Company for certain environmental liabilities associated
with historical use of the properties. The Company currently believes that any
environmental liabilities associated with such facilities would not be material
or have been adequately covered by agreements with the former owners. Soil and
groundwater contamination relating to underground storage tanks has been
identified at an additional facility not covered by an indemnification agreement
with the prior owner. The Company is cooperating with state and local
environmental officials to finalize remediation plans for the site. Current
cleanup costs are not expected to exceed $150,000.
The Company has been named a potentially responsible party ("PRP") under
CERCLA at five waste disposal sites. The Company settled its liability at four
of these sites as a de minimis party. At the Spectron site in Elkton, Maryland,
the Company paid approximately $1,300 in 1989 as a de minimis settlement for an
initial removal action at the site. In 1995, the Company received a notice of a
remedial action at the site, and based upon its allocation in 1989, expects to
be eligible for a de minimis or de micromis settlement. The Company is aware
that Niagara has been named a PRP at the Envirotek II site in Tonawanda, New
York with respect to which Niagara expects to be eligible for a de minimis
settlement.
GENERAL
The potential effect of the Company's chapter 11 bankruptcy proceedings will
be considered by the Company with regard to any decisions or actions relating to
the foregoing Legal Proceedings. The resolution in any reporting period of one
or more of the foregoing matters in a manner adverse to the Company could have a
material adverse effect on the Company's financial condition or results of
operations. The Company is also a party to various other litigation matters
incidental to the conduct of its business. Although the outcome of these matters
cannot be predicted with certainty, management does not expect the outcome of
any of the matters in which it is currently involved to have a material adverse
effect on the Company's financial position.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the Company
during the quarter ended December 31, 1999.
14
PART II
ITEM 5 MARKET FOR THE REGISTRANTS' COMMON STOCK
Until January 25, 1999, the common stock of the Company was traded on the
New York Stock Exchange (NYSE) under the symbol "AGP". On January 26, 1999, the
NYSE suspended trading of the Company's common stock and the NYSE applied to the
Securities and Exchange Commission in Washington, D.C. for removal of the common
stock of the Company from listing and registration on the NYSE. On January 26,
1999, the Company's common stock began trading on the NASD Over-the-Counter
Bulletin Board System under the symbol "AMPP." The quarterly high and low prices
for the common stock during 1999 and 1998 were:
[Download Table]
QUARTER ENDED LOW PRICE HIGH PRICE
------------- --------- ----------
1999:
March 31, 1999.......................................... $0.500 $1.750
June 30, 1999........................................... $1.125 $2.750
September 30, 1999...................................... $0.469 $2.500
December 31, 1999....................................... $0.203 $0.625
1998:
March 31, 1998.......................................... $6.875 $9.500
June 30, 1998........................................... $4.500 $7.500
September 30, 1998...................................... $1.063 $5.125
December 31, 1998....................................... $1.188 $3.438
As of December 31, 1999, there were approximately 6,000 stockholders of the
Company's common stock. The Company has not sold any unregistered securities
during the last fiscal year.
DIVIDEND POLICY
Subsequent to its initial public offering, the Company has not declared or
paid any cash or other dividends on its common stock and does not expect to pay
dividends for the foreseeable future. Instead, the Company currently intends to
retain earnings to reduce debt. As a holding company, the ability of the Company
to pay dividends in the future is dependent upon the receipt of dividends or
other payments from its principal operating subsidiaries, AP&P Delaware and
Manufacturing. The payment of dividends by AP&P Delaware and Manufacturing to
the Company for purposes of paying dividends to holders of common stock is
prohibited by the revolving credit facility and restricted by the indenture
related to the Notes. Any future determination to pay dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
factors, the Company's results of operations, financial condition, capital
requirements and contractual restrictions.
15
ITEM 6 SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data set forth below for the
years ended December 31, 1999, 1998 and 1997 have been derived from, and are
qualified by reference to, the audited consolidated financial statements of the
Company included elsewhere in this Form 10-K. The selected historical
consolidated financial data set forth for the years ended December 31, 1996 and
1995 have been derived from the Company's audited financial statements not
included in this Form 10-K. The selected historical consolidated financial data
set forth below should be read in conjunction with, and is qualified by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the audited consolidated financial statements and
accompanying notes thereto included elsewhere in this Form 10-K.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCOME STATEMENT DATA(1,2) 1999 1998 1997 1996 1995
-------------------------- --------- -------- -------- -------- --------
(IN THOUSANDS)
Net sales................................................... $ 572,616 $662,031 $687,335 $583,859 $257,160
Cost of sales(3)............................................ 531,085 597,456 598,416 466,385 209,633
--------- -------- -------- -------- --------
Gross profit............................................ 41,531 64,575 88,919 117,474 47,527
--------- -------- -------- -------- --------
Operating expenses:
Selling and marketing..................................... 22,204 21,261 22,246 16,964 6,254
General and administrative................................ 26,780 31,840 19,133 16,438 10,447
Rationalization charges(4)................................ (2,773) 5,741 -- -- --
Losses on sales of accounts receivable.................... 3,295 3,226 2,954 1,823 423
Amortization of goodwill and intangible assets............ 5,133 5,939 6,110 4,488 879
Write down of assets--Shade/Allied(5)..................... -- 41,000 -- --
Nonrecurring compensation charge(6)....................... -- -- -- -- 27,632
Management fees and services(7)........................... 1,500 2,030 4,871 3,880 542
--------- -------- -------- -------- --------
56,139 111,037 55,314 43,593 46,177
--------- -------- -------- -------- --------
Income (loss) from operations............................... (14,608) (46,462) 33,605 73,881 1,350
Other income (expense):
Interest.................................................. (44,865) (44,970) (37,843) (42,968) (13,657)
Other income, net......................................... 2,005 1,411 389 1,153 735
--------- -------- -------- -------- --------
Income (loss) before income taxes........................... (57,468) (90,021) (3,849) 32,066 (11,572)
Provision (benefit) for income taxes........................ 23,270 (11,374) 642 13,852 (6,538)
--------- -------- -------- -------- --------
Income (loss) before extraordinary item and cumulative
effect of a change in accounting principle................ (80,738) (78,647) (4,491) 18,214 (5,034)
Extraordinary loss from extinguishment of debt, net of
income tax................................................ -- -- -- (19,995) (9,652)
Loss before cumulative effect of a change in accounting
principal................................................. (80,738) (78,647) (4,491) (1,781) (14,686)
Cumulative effect of a change in accounting principle(11)... (726) -- -- -- --
--------- -------- -------- -------- --------
Net loss.................................................... $ (81,464) $(78,647) $ (4,491) $ (1,781) $(14,686)
========= ======== ======== ======== ========
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item and cumulative
effect of a change in accounting principle.............. $ (2.89) $ (2.84) $ (0.16) $ 1.05 $ (0.69)
Extraordinary loss from extinguishment of debt, net of
income tax.............................................. -- -- -- (1.15) (1.32)
Cumulative effect of a change in accounting principle..... (0.03) -- -- -- --
--------- -------- -------- -------- --------
Net loss.................................................. $ (2.92) $ (2.84) $ (0.16) $ (0.10) $ (2.01)
========= ======== ======== ======== ========
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item and cumulative
effect of a change in accounting principle.............. $ (2.89) $ (2.84) $ (0.16) $ 0.99 $ (0.69)
Extraordinary loss from extinguishment of debt, net of
income tax.............................................. -- -- -- (1.09) (1.32)
Cumulative effect of a change in accounting principle..... (0.03) -- -- -- --
--------- -------- -------- -------- --------
Net loss.................................................. $ (2.92) $ (2.84) $ (0.16) $ (0.10) $ (2.01)
========= ======== ======== ======== ========
Weighted average shares outstanding:(8)
Basic..................................................... 27,944 27,718 27,431 17,408 7,307
Diluted................................................... 27,944 27,718 27,431 18,426 7,307
Other Data:
Depreciation and amortization............................. $ 20,156 $ 19,769 $ 18,639 $ 14,253 $ 4,248
Capital expenditures...................................... $ 11,876 $ 15,000 $ 23,095 $ 15,109 $ 5,640
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[Enlarge/Download Table]
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
Balance Sheet Data:
Working capital........................................... $(343,178) $ 73,308 $152,819 $ 77,857 $108,845
Total assets.............................................. $ 472,228 $516,480 $638,401 $509,417 $504,356
Long-term debt, less current maturities(9)................ $ -- $373,675 $398,577 $269,812 $443,794
Stockholders' equity (deficit)(10)........................ $ (60,779) $ 20,713 $100,666 $104,599 $(66,421)
The Company has completed the following acquisitions during the periods
presented. All such acquisitions have been accounted for using the purchase
method of accounting. The results of operations for each of the businesses
acquired are included in the Company's results of operations from the date of
acquisition through the end of the year in which the acquisition occurred and in
each subsequent year presented.
(1) - Effective August 16, 1995, the Company acquired the inventory and certain
equipment of the file folder and hanging file product lines of the
Globe-Weis office products division of Atapco.
- Effective October 31, 1995, the Company acquired Williamhouse. The
Personalizing Division of Williamhouse was identified as a non-strategic
asset at the date of the acquisition and was reflected as an asset held
for sale in the consolidated balance sheet through June 27, 1996, when it
was sold. As such, the operating results of the Personalizing Division are
excluded from the results of operations from the date of the Williamhouse
acquisition.
- Effective June 28, 1996, the Company acquired Niagara.
- Effective February 11, 1997, the Company acquired Shade/Allied.
(2) Certain amounts in the 1998, 1997 and 1996 consolidated financial
statements have been reclassified in order to conform to the presentation
in the 1999 consolidated financial statements.
(3) Inventory cost is determined using the LIFO method of valuation.
(4) In the third quarter of 1998, the Company recorded a $5.7 million charge
for part of the plan to rationalize the Company's manufacturing operations.
In the fourth quarter of 1999, the Company reversed $2.8 million of the
restructuring charges for a facility not closed as planned.
(5) In the second quarter of 1998, the Company wrote off $41.0 million of
goodwill and intangible assets associated with the Shade/ Allied continuous
forms business. See Note 5, "Impairment of Shade/Allied Long-Lived Assets,"
in Part IV, Item 14(a)(1).
(6) Includes non-cash stock option compensation charges of $24.3 million
directly related to the Williamhouse acquisition as well as other
non-recurring cash and non-cash charges aggregating $3.3 million.
(7) Includes $2.5 million in 1997 and 1996 related to a one-year consulting
agreement with the former president and major shareholder of Niagara, which
ended in 1997.
(8) In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE,
and the provisions of Securities and Exchange Commission Staff Accounting
Bulletin No. 98. Basic earnings per share are computed using the actual
weighted average number of outstanding common shares for each period after
giving effect to the Company's 8.1192-for-one stock split prior to the
Company's initial public offering. However, changes in the Company's
capital structure at the time of the initial public offering relative to
preferred stock and preferred stock option conversions to common stock and
common stock options are not presented retroactively. Diluted earnings per
share are based on the weighted average number of outstanding common shares
and give effect to the exercise of common stock options. Diluted earnings
per share are not presented for years in which the Company incurred losses,
as the earnings per share information would be anti-dilutive.
(9) All indebtedness of the Company, in the aggregate amount of $392 million,
is in default at December 31, 1999, and has been classified as a current
liability in its balance sheet.
(10) For 1995, includes $4.5 million to pay the liquidation preference,
including the return of original cost, of the Company's Class P common
stock and $70.6 million to redeem a portion of its preferred stock.
(11) For 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.
17
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is one of the largest manufacturers and marketers of nationally
branded and private label paper-based office products (excluding copy paper) in
the $60 billion to $70 billion North American office products industry. 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 product 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.
The Company believes that certain aspects of its future operating results, such
as year to year revenue growth, will not be directly comparable to its
historical operating results because of the effect of its strategic
acquisitions. Certain factors, which have affected, and may affect
prospectively, the operating results of the Company are discussed below.
STRATEGIC ACQUISITIONS. In October 1995, the Company acquired Williamhouse,
a leading supplier of envelopes to many of the largest distributors, for an
aggregate purchase price (including assumption of debt) of approximately
$300.7 million plus reimbursement of certain expenses to the sellers. In
June 1996, the Company acquired Niagara, a national supplier of envelopes to
distributors, for an aggregate purchase price of approximately $53.2 million,
including costs of the acquisition and a $5.0 million one-year consulting
agreement with Niagara's former president. With these acquisitions, the Company
became the largest supplier of envelopes to the national paper merchants. The
Williamhouse acquisition was financed through the Company's revolving credit
facility and the assumption of senior subordinated notes. The Niagara
acquisition was financed with proceeds from the sale of the Personalizing
Division of Williamhouse. In February 1997, the Company acquired Shade/Allied, a
national supplier of machine papers, principally continuous computer forms. The
purchase price of $50.7 million was financed through the Company's revolving
credit facility. Both the Ampad and Williamhouse divisions distribute machine
papers products.
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. For example, all the key commodity grades of paper utilized by the
Company increased in cost between 9% and 28% in 1999. 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. The Company's gross margin was adversely affected in 1999 due to
these paper price increases. There is no assurance that the Company will not be
materially affected by future fluctuations in the price of paper.
RECENT DEVELOPMENTS
Since the Company's last acquisition in 1997 revenues have declined, margins
have eroded, competitive pressures in the marketplace kept the Company from
fully recouping increasing paper prices, and inventory levels were, for a period
of time, built to an excessive level. Through the rationalization plan initiated
in late 1998, three manufacturing plants were closed, inventory levels were
reduced and production was better coordinated with sales. Although competitive
pressures continued, price increases were initiated which, while not fully
recouping prices movements in raw materials, caused amounts absorbed by
18
the Company to be reduced. Despite the progress on operational and pricing
issues, the Company's capital structure and high level of debt have limited its
ability to return to profitability.
DEBT DEFAULT AND PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. On
November 12, 1999, the Company was notified by its banking group of a default of
its revolving credit facility. The default stemmed from the formation of new
subsidiaries in December 1997 related to a reorganization of the Company's
corporate structure without proper notification to the banks. The reorganization
was implemented primarily for state tax purposes and included the transfer of
assets between existing entities and transfers to the new subsidiaries. The
default on the revolving credit facility prevented the Company from paying
interest on its publicly traded Notes due November 15, 1999, thereby causing a
default on the Notes as well.
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) 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.
Although Chapter 11 bankruptcy raises substantial doubt about the Company's
ability to continue as a going concern, the accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles applicable to a company on a going-concern basis which contemplates
the continuity of operations, realization of assets and the liquidation of
liabilities in the ordinary course of business. As a result of the Chapter 11
filing, realization of assets and liquidation of liabilities are subject to
significant uncertainties. Specifically, the financial statements do not present
the amount that will be paid to settle liabilities and contingencies that may be
allowed in 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, STATEMENT OF POSITION
90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY
CODE (SOP 90-7) 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. The filing of a plan of reorganization could
materially affect the carrying value of the assets and liabilities currently
disclosed in the consolidated financial statements.
MANAGEMENT CHANGES. On March 30, 2000, William L. Morgan retired as
Executive Vice President and Chief Operating Officer of the Company.
Additionally, on March 30, 2000, the Company appointed William J. Mays as Chief
Operations Officer. Mr. Mays joined the Company in December 1998 as Vice
President, Operations Controller.
19
COMPANY INITIATIVES/RESTRUCTURING. Under the leadership of new management,
the Company performed a review of all operations with the goals of rebuilding
market share, reducing debt and returning the Company to profitability.
As previously reported in 1998, the Company announced a plan to rationalize
its manufacturing operations, and recorded a $5.7 million dollar restructuring
charge to include employee termination costs, costs to exit facilities, lease
termination costs, and property taxes after ceasing operations. The plan
included plant consolidations, equipment moves, plant/product changes, warehouse
consolidations and the addition of new distribution centers.
In 1999, the Company closed three plants as part of the rationalization
plan. The closing of the Kosciusko, Mississippi plant was announced on
November 10, 1998, and final production occurred on April 14, 1999. The closing
of the Dallas, Texas, plant was announced on January 19, 1999, and final
production occurred on April 22, 1999. The closing of the Holland, New York,
plant was announced on May 10, 1999, and final production occurred on
November 30, 1999. As of December 31, 1999, 436 employees have been severed and
severance and benefit payments totaling $1.3 million have been charged to the
restructuring reserve.
The original rationalization plan included the consolidation of two existing
plants. After attempts to hire additional skilled labor at the receiving plant
failed, the decision to close the first plant was reversed; as such,
$2.8 million of the originally recorded restructuring charges were reversed in
the third and fourth quarters of 1999.
The Company additionally recorded one-time implementation costs associated
with the rationalization plan of $9.4 million in cost of sales during 1999.
These expenses represent costs to move equipment and inventory, interim
warehouse costs, employee retention and relocation, recruiting costs, and other
training and efficiency costs. The Company also recorded one-time capital
expenditure costs of $2.0 million in 1999 associated with the rationalization
plan. The major undertakings of the rationalization plan have been completed as
of December 31, 1999.
OTHER. On March 8, 2000, the Company announced that it had signed a letter
of intent with Taylor Corporation for the purchase of the Company's Creative
Card division located in Chicago. Negotiations are continuing with Taylor
Corporation and the Company expects the sale to be finalized in the second
quarter of 2000. Such sale, subject to the approval of the bankruptcy court, is
expected to result in a loss of $5 to $10 million.
On March 21, 2000, the Company was notified by one of its major customers of
the Ampad division that it intends to move its business to other suppliers. In
1999, that customer accounted for approximately $42 million or 6.4% of the
Company's sales.
20
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the years 1999, 1998, and 1997. The
Company's historical results of operations for each of these periods are
significantly affected by the results of the February 1997 acquisition by the
Company of Shade/Allied.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Net sales................................................... 100.0% 100.0% 100.0%
Gross profit............................................ 7.3% 9.8% 12.9%
Operating expenses:
Selling and marketing..................................... 3.9% 3.2% 3.2%
General and administrative................................ 4.7% 4.8% 2.8%
Rationalization charges................................... (0.5)% 0.9% 0.0%
Losses on sales of accounts receivable.................... 0.6% 0.5% 0.4%
Amortization of goodwill and intangible assets............ 0.9% 0.9% 0.9%
Write down of assets--Shade/Allied........................ 0.0% 6.2% 0.0%
Management fees and services.............................. 0.3% 0.3% 0.7%
------ ------ ------
9.9% 16.8% 8.0%
------ ------ ------
Income (loss) from operations............................... (2.6)% (7.0)% 4.9%
Other income (expense):
Interest.................................................. (7.8)% (6.8)% (5.6)%
Other income, net......................................... 0.4% 0.2% 0.1%
------ ------ ------
Loss before income taxes.................................... (10.0)% (13.6)% (0.6)%
Provision (benefit) for income taxes........................ 4.1% (1.7)% 0.1%
------ ------ ------
Loss before cumulative effect of a change in accounting
principle................................................. (14.1)% (11.9)% (0.7)%
Cumulative effect of a change in accounting principle....... (0.1)% 0.0% 0.0%
------ ------ ------
Net loss.................................................... (14.2)% (11.9)% (0.7)%
====== ====== ======
YEAR 1999 COMPARED TO 1998
NET SALES decreased to $572.6 million in 1999 from $662.0 million in 1998, a
decrease of $89.4 million or 13.5%. The decrease is comprised of a
$84.4 million decrease in sales and a $5.0 million increase in customer
incentives. The net sales decrease is primarily attributable to the loss of a
superstore customer in 1998, the Company's efforts to eliminate unprofitable
business, and the continued effort by the Company's superstore customers to
reduce inventory. The decrease was partially offset by increases in sales to the
remaining superstore customers.
GROSS PROFIT decreased to $41.5 million, or 7.3% of net sales, in 1999 from
$64.6 million, or 9.8% of net sales, in 1998. This $23.1 million decrease in
gross profit margin is primarily attributable to lower sales and LIFO charges
that exceeded 1998 charges by $9.5 million. These variances were partially
offset by lower standard costs and operating variances. In addition, 1999 cost
of sales included $9.4 million of one-time costs associated with the plant
rationalization plan. These expenses represent costs to move equipment,
efficiency costs and recruiting costs.
SELLING AND MARKETING expenses increased to $22.2 million in 1999 from
$21.3 million in 1998, or $0.9 million, due to increased advertising costs
associated with an effort to re-align branding and revise merchandising within
the Company's Ampad division.
GENERAL AND ADMINISTRATIVE expenses decreased to $26.8 million in 1999 from
$31.8 million in 1998, or $5 million. This decrease is primarily attributable to
1998 one-time severance and consulting costs paid to certain former executives
of the Company of $3.0 million, $2.1 million of consulting fees paid in 1998
related to work on the Company's restructuring, and $1.4 million in management
bonus and sales incentives in 1998; partially offset by $3.0 million in 1999 in
fees paid to professionals to assist in negotiations with the banks regarding
potential debt restructuring.
21
RATIONALIZATION CHARGES recorded in September 1998 of $2.8 million were
reversed during 1999. The original rationalization plan included the
consolidation of two existing plants. After attempts to hire additional skilled
labor at the receiving plant failed, the decision to close the first plant was
reversed. Restructuring charges for 1998 were $5.7 million.
LOSSES ON SALES OF ACCOUNTS RECEIVABLE increased to $3.3 million in 1999
from $3.2 million in 1998 due primarily to a higher average level of accounts
receivable sold to the third party trust in 1999, partially offset by slightly
lower average interest 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
$5.1 million in 1999 from $5.9 million in 1998. The decrease of $0.8 million is
due primarily to the amortization associated with the $41.0 million writedown of
intangible assets in the second quarter of 1998. (SEE WRITE DOWN OF INTANGIBLE
ASSETS BELOW.)
WRITE DOWN OF INTANGIBLE ASSETS expense of $41.0 million for the year ended
1998 reflects a write-off of goodwill and a writedown of intangible assets
associated with the Shade/Allied continuous forms business.
MANAGEMENT FEES AND SERVICES decreased to $1.5 million in 1999 from
$2.0 million for 1998, representing a decrease of $0.5 million. The change in
management fees is due to the renegotiation of the Company's Advisory Agreement
with Bain Capital to reduce the fee from $2.0 million to $1.5 million annually.
INTEREST EXPENSE decreased from $45 million in 1998 to $44.9 million in
1999, representing a decrease of $0.1 million. This $0.1 million variance was
due primarily to the conversion from base rate denominated debt in 1998, to
Euro-dollar denominated debt in 1999, following the November default.
THE INCOME TAX PROVISION for the year ended December 31, 1999, reflects an
effective income tax rate of 39.9% as compared with the effective income tax
benefit rate of 12.6% for the year ended December 31, 1998. In 1999, the Company
recorded a deferred tax asset valuation allowance of $43.3 million based on
management's uncertainty surrounding the realizability of certain deferred tax
assets. Therefore, the 1999 income tax benefit was reduced by a provision of
$43.3 million related to the valuation allowance. In future periods, the
Company's provision for income taxes may be impacted by adjustments to the
valuation allowance. In 1998, the Company's loss before income taxes included
non-deductible expenses of $45.0 million. These expenses were primarily the
write off of goodwill and other intangibles, goodwill amortization, and travel
and entertainment costs. In 1998, the Company recorded a net deferred tax
valuation allowance of $6.3 million to reduce the deferred tax asset to an
amount which the Company believed, based on the Company's estimates of near-term
taxable earnings, was realizable.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE for the year ended
December 31, 1999, reflects a charge of $0.7 million, net of tax, for the write
off of previously recorded start-up costs. The Accounting Standards Executive
Committee (AcSEC) issued Statement of Position (SOP) 98-5, which is effective
for fiscal years commencing after December 15, 1998. SOP 98-5, "Reporting on the
Costs of Start-up Activities", prescribes that start-up costs should be expensed
as incurred. The SOP states that its adoption should be reported as a cumulative
effect of a change in accounting principle.
YEAR 1998 COMPARED TO 1997
NET SALES decreased to $662.0 million in 1998 from $687.3 million in 1997, a
decrease of $25.3 million or (3.7%). This net sales decrease is comprised
primarily of a $12.4 million decrease in sales and a $12.5 million increase in
customer incentives. The net sales decrease is primarily attributable to
unfavorable volume variances and the loss of a major customer, partially offset
by favorable mix and price variances, and owning Shade/Allied ($3.3 million) for
twelve months of 1998 versus only ten and one-half months in the same period in
1997. The sales decrease occurred primarily in the merchant channel due to the
consolidation and restructuring experienced in that channel. The increased
customer incentives are due to additional rebate programs caused by more
competitive pricing, changing product mix, higher volumes
22
resulting in certain customers reaching the next incentive tier level and a
write off related to the loss of a major customer.
GROSS PROFIT decreased to $64.6 million, or 9.8% of net sales, in 1998 from
$88.9 million, or 12.9% of net sales, in 1997. This $24.3 million decrease in
gross profit margin is primarily attributable to increased customer incentives
discussed above, higher unit production costs due to underutilized capacity
resulting from the Company's efforts to reduce its inventory, the lower sales,
and increased manufacturing costs. In addition, 1998 included approximately
$7.5 million of charges resulting from reevaluating certain inventories based on
changes in current market conditions and accruals for workers' compensation and
property tax; approximately $1.9 million of net charges for additional
obsolescence reserves; $0.9 million of one-time costs associated with the plant
rationalization plan.
SELLING AND MARKETING expenses decreased to $21.3 million in 1998 from
$22.2 million in 1997, or $0.9 million due to efforts to control costs.
GENERAL AND ADMINISTRATIVE expenses increased to $31.8 million in 1998 from
$19.1 million in 1997, or $12.7 million. This increase is primarily attributable
to $3.0 million of severance and consulting costs paid to certain former
executives of the Company, $2.1 million of consulting fees related to work on
the Company's rationalization plan, and $1.4 million of management bonus and
sales incentives. In addition, the Company's second quarter reevaluation of
certain assets resulted in $1.7 million of current charges for additional
allowance for doubtful accounts and other severance and litigation costs of
$1.3 million. The remainder of the increase is attributable to owning
Shade/Allied for the full year in 1998 versus only ten and one-half months in
the same period in 1997 and one time charges associated with centralizing
certain functions in Dallas.
RESTRUCTURING CHARGES for the year ended 1998 of $5.7 million represents
part of the rationalization plan of the Company's manufacturing operations.
LOSSES ON SALES OF ACCOUNTS RECEIVABLE increased to $3.2 million in 1998
from $3.0 million in 1997 due primarily to a higher average level of accounts
receivable sold to the third party trust in 1998, partially offset by slightly
lower average interest 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
$5.9 million in 1998 from $6.1 million in 1997. The decrease of $200,000 is due
primarily to the amortization associated with the $41.0 million writedown of
intangible assets in the second quarter of 1998. (SEE WRITE DOWN OF INTANGIBLE
ASSETS BELOW.)
WRITE DOWN OF INTANGIBLE ASSETS expense of $41.0 million for the year ended
1998 reflects a writeoff of goodwill and a writedown of intangible assets
associated with the Shade/Allied continuous forms business.
In June 1998, the Company's management reviewed all operations of the
Company and determined that the acquired Shade/Allied continuous forms business
was underperforming as a result of several factors. Principally among these
factors were (i) the greater use of personal computers and desk printers
resulting in lesser reliance on large mainframe printers, and (ii) the
disappearance of tractor-fed personal printers from the marketplace. These two
factors seemed to be driving a permanent decline of 6-8% per year in continuous
forms usage. Increased competition and aggressive pricing in response to the
overall decline in usage had contributed to the Company's year-over-year decline
in sales and margins. Finally, certain marketing and pricing strategies and cost
saving synergies assumed at the time of acquisition did not occur.
As part of its review, management considered various alternatives for its
continuous forms business including measures to improve operations, potential
strategic alliances, and the possible exit of the business. At June 30, 1998,
based upon management's intention to explore exiting the business, a write down
of goodwill and other intangibles totaling $41 million was recorded to reduce
the carrying value of
23
the long-lived assets to their net realizable value. The Company has discussed
the sale of the acquired Shade/Allied business with potential purchasers but has
not reached agreement on any potential sale.
This $41 million charge recorded at June 30, 1998, consisted of a
$39.9 million write down of goodwill and a $1.1 million write down of trade
names. The recorded values of the property, plant and equipment and trade names
at December 31, 1998, are $10.7 million and $4.3 million respectively.
In November 1998, the continuous forms business was consolidated from six
separate manufacturing facilities where forms comprised only a portion of the
plant's manufacturing operations into two dedicated continuous forms plants
located in DePere, Wisconsin and Lancaster, Pennsylvania. Although manufacturing
efficiencies and margins have improved, management continues to consider the
sale of the business as well as various other alternatives.
At December 31, 1998, an analysis based upon the discounted expected future
cash flows of the acquired continuous forms business indicated that no further
write down of the carrying value of the long-lived assets was required.
MANAGEMENT FEES AND SERVICES decreased to $2.0 million in 1998 from
$4.9 million for 1997, representing a decrease of $2.9 million. The change in
management fees is due primarily to a one-year non-recurring consulting
agreement with the former president of Niagara, which expired June 30, 1997.
INTEREST EXPENSE increased to $45.0 million in 1998 from $37.8 million in
1997, representing an increase of $7.2 million. Of this increase, approximately
$2.5 million is attributable to increased debt levels, approximately
$3.0 million is attributable to increased interest rates and approximately
$1.7 million is attributable to amortization of fees paid in connection with
amendments to the revolving credit facility.
THE INCOME TAX PROVISION for the year ended December 31, 1998, reflects an
effective income tax benefit rate of 12.6% as compared with the effective income
tax provision rate of 16.7% for the year ended December 31, 1997. In 1998, the
Company's loss before income taxes included non-deductible expenses of
$45.0 million. These expenses were primarily the write off of goodwill and other
intangibles, goodwill amortization, and travel and entertainment costs. In 1998,
the Company recorded a net deferred tax valuation allowance of $6.3 million to
reduce the deferred tax asset to an amount which the Company believes, based on
the Company's estimates of near-term taxable earnings, is realizable. In 1997,
the Company's loss before income taxes was relatively low, $3.8 million, in
comparison to the amount of expenses which were not deductible, $5.4 million.
Such expenses primarily consist of goodwill amortization, certain travel and
entertainment costs and life insurance for certain current and former employees.
As a result, the Company had taxable income for tax reporting purposes versus a
loss for financial reporting purposes and, therefore, the Company recorded a tax
provision for 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended 1999 was
$4.2 million compared to the year ended 1998 of $43.3 million. The decreased
cash flow from operations in 1999 is primarily the net result of the following:
(i) cash used by the net loss of $40.1 million after adjustment for non-cash
expenses, (ii) a decrease in accounts receivable of $21.3 million due to lower
sales in 1999, (iii) a decrease in inventories of $18.5 million, (iv) a
reduction of accounts payable of $9.7 million, and (v) a net change in all other
assets and liabilities of $14.2 million. Cash provided by operating activities
in 1998 was $43.3 million and consisted of (i) $20.4 million of cash generated
from the net loss, after adding back non-cash charges, (ii) a decrease in
accounts receivable of $17.5 million as a result of improving days sales
outstanding in receivables, (iii) a decrease in inventories of $42.2 million,
(iv) a reduction of accounts payable of $6.8 million, and v) a net change in all
other assets and liabilities of $10.7 million. Cash used by operating activities
in 1997 amounted to $62.4 million and consisted of (i) $17.4 million of cash
generated from the net loss, after adding back non-cash charges, (ii) cash used
to fund increases in accounts receivable of $17.3 million, (iii) cash used to
fund increases in inventories of $44.2 million (iv) an increase in accounts
payable of $4.6 million and (v) a decrease in all other assets and liabilities
of $22.9 million.
24
Cash used in investing activities for the year ended 1999 and 1998 was
$6.2 million and $13.2 million, respectively. The year 1999 use was due to the
purchase of production equipment and computer software and related hardware in
the amount of $11.8 million, offset by proceeds from the sale of assets of
$5.6 million. The year 1998 use was due to the purchase of equipment,
principally production equipment. The year 1997 use of $69.7 million was due to
the Shade/Allied acquisition of $50.7 million and purchases of equipment of
$23.1 million.
Net cash provided by financing activities during 1999 was $20.6 million
compared to net cash used by financing activities in 1998 of $32.6 million. Net
cash provided in 1999 included $18.3 million net borrowings on the revolving
credit facility, $1.7 million repayment of long-term debt, an increase of
$4 million in the financing outstanding under the accounts receivable financing
facility, a reduction of $.1 million for accrued interest on stockholders'
notes, and $.1 million paid-in-capital received from the exercising of stock
options. Net cash used during 1998 included $25.8 million repayment of long-term
debt, the payment of fees in connection with amendments to the revolving credit
facility of $2.8 million, and a reduction of $4.0 million in financing
outstanding under the accounts receivable financing facility. During 1997, the
Company borrowed $130.4 million to finance the acquisition of Shade/Allied of
$50.7 million and the purchases of equipment of $23.1 million and to fund the
increase in working capital of $56.6 million.
A portion of the consolidated debt of the Company bears interest at floating
rates; therefore, its financial condition is and will continue to be affected by
changes in prevailing interest rates. The Company has entered into an interest
rate cap to reduce the impact from a significant rise in interest rates.
However, there were no amounts received under the agreement in 1999, 1998 and
1997.
On November 12, 1999, the Company was notified by its banking group of a
default of its revolving credit facility. The default stemmed from the formation
of new subsidiaries in December 1997 related to a reorganization of the
Company's corporate structure without proper notification to the banks. The
reorganization was implemented primarily for state tax purposes and included the
transfer of assets between existing entities and transfers to the new
subsidiaries. The default on the revolving credit facility prevented the Company
from paying interest on its publicly traded Notes due November 15, 1999, thereby
causing a default on the Notes as well.
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) 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.
25
INFLATION
The Company believes that inflation has not had a material impact on its
financial position or its results of operations for 1999, 1998, and 1997.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. FAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. FAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated at
part of a hedge transaction and the type of hedge transaction. The ineffective
portion of all hedges will be recognized in earnings. Adoption of the Statement
is not expected to have a material impact on the Division's financial position
and results of operations.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 compliant. In late 1999, the Company completed its Year 2000
project. As a result of the Company's efforts, the Company experienced no
significant disruptions related to Year 2000. The Company is not aware of any
material problems resulting from Year 2000 issues either with its products, its
internal systems, or with vendors, customers and other third parties.
The total estimated cost of the Year 2000 project, including system
upgrades, was approximately $3.5 million. As of December 31, 1999, all costs had
been incurred. Of the total cost of the project, approximately $2.5 million was
attributable to new software and related hardware, which was capitalized. The
remaining costs were expensed as incurred.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Form 10-K to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and uncertainties,
which could cause actual results, or outcomes to differ materially from those
expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based, in
turn, upon further assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectation, beliefs or projections will result or be achieved or
accomplished. In addition to the other factors and matters discussed elsewhere
herein, the following are important factors that, in the view of the Company,
could cause actual results to differ materially from those discussed in the
forward-looking statements:
1. Changes in economic conditions, in particular those, which affect the
retail and wholesale office product markets.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
26
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. Completion of the Company's restructuring plan.
13. Emergence from Chapter 11 filing.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after date hereof.
ITEM 7A 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 in 1999, 1998, and 1997.
At December 31, 1999, the Company had approximately $252.7 million of
variable rate debt obligations outstanding with a weighted average interest rate
of 8.48%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at December 31, 1999, would change interest
expense by approximately $2.0 million.
As a result of the Chapter 11 filing, principal or interest payments may not
be made on any pre-petition debt until a plan of reorganization defining the
repayment terms has been approved by the Bankruptcy Court.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a)(1) of the Exhibit Index for a listing of the Company's
financial statements included with this Form 10-K.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive officers
and directors of the Company as of March 1, 2000:
[Enlarge/Download Table]
NAME AGE POSITION
---- -------- ------------------------------------------------------------
James W. Swent III............. 49 Co-Chairman of the Board & Chief Executive Officer, and
Director
Robert C. Gay.................. 48 Co-Chairman of the Board and Director
John H. Rodgers................ 56 Senior Vice President & General Counsel, Secretary and
Director
Scott R. Watterson............. 44 Director
Gregory M. Benson.............. 44 Director
Paul B. Edgerley............... 44 Director
Jeffrey K. Hewson.............. 56 Director
William L. Morgan*............. 60 Executive Vice President, and Chief Operating Officer
John J. Grymes................. 42 President, Williamhouse division
------------------------
* Mr. Morgan retired from the Company on March 31, 2000.
JAMES W. SWENT III. Co-Chairman of the Board since March 17, 1999; Director
and Chief Executive Officer since July 1998; Chief Financial Officer since
June 1998; Executive Vice President from June 1998 to July 1998. Chief Executive
Officer, Cyrix Corporation, from December 1996 to December 1997; Senior Vice
President Finance and Administration from July 1996 to December 1996. Vice
President, Business Development, Northern Telecom, from September 1993 to
July 1996.
ROBERT C. GAY. Co-Chairman of the Board since March 17, 1999; Director
since 1992; Chairman of the Board from July 1998 to March 1999. Managing
Director, Bain Capital, Inc. ("Bain Capital") since 1993. A General Partner of
Bain Venture Capital since 1989; Principal from 1988 through 1989. Vice Chairman
of the Board of Directors, IHF Capital, Inc., the parent of ICON Health &
Fitness Inc. Director, Cambridge Industries, Inc., GS Industries, Inc. and its
subsidiary GS Technologies Operating Co., Inc. and Nutraceutical International
Corporation.
JOHN H. RODGERS. Director of the Company since March 17, 1999; Senior Vice
President and General Counsel, Secretary since September 1998. President,
Clairemead Corporation, operator of small retail and service businesses, since
1996. Executive Vice President, The Southland Corporation, from 1992 to 1995;
Chief Administrative Officer from 1991 to 1995; General Counsel from 1979 to
1992; other management positions, including Senior Vice President, Vice
President and Secretary, from 1973 to 1995.
SCOTT R. WATTERSON. Director of the Company since December 1996. Chairman
of the Board and Chief Executive Officer, IHF Capital, Inc., the parent of ICON
Health & Fitness Inc., since November 1994. President and Chief Executive
Officer, Weslo, Inc., since 1977. President and Chief Executive Officer, ProForm
Fitness Products, Inc., since 1988.
GREGORY M. BENSON. Director of the Company since 1992. Executive Vice
President, Bain Capital since November 1996. Acting Chief Financial Officer of
the Company from December 1997 to June 1998; Executive Vice President and
Director of Strategic Planning and Acquisitions from May 1996 through
November 1996; Chief Financial Officer and Secretary from 1992 to August 1996.
Chief Financial Officer, Chief Administrative Officer and Director of Ampad
Corporation (the principal operating subsidiary of the Company during that
period) from 1992 to 1995.
28
PAUL B. EDGERLEY. Director of the Company since July 1998. Managing
Director, Bain Capital since 1993. General Partner, Bain Venture Capital, since
1990 and a Principal, Bain Venture Capital, from 1988 to 1990. Director, GS
Technologies Corporation, AMF Group Inc., Anthony Crane Rental and Sealy
Corporation.
JEFFERY K. HEWSON. Director of the Company since March 17, 1999. President,
The Beckley Cardy Group from 1996 to 1997. Chief Executive Officer, United
Stationers, Inc., from 1995 to 1996; President and Chief Operating Officer from
1991 to 1995. Formerly, President, ACCO World Corporation, US Division.
President, ACCO World Corporation, Canada; Director, ISA International, a
publicly held company in Great Britain.
JOHN J. GRYMES. President, Williamhouse division since May 1996. National
Sales Manager, Williamhouse-Regency of Delaware, Inc. from 1991 to 1996 prior to
and after its acquisition by the Company in October 1995; Employee of
Williamhouse since 1987.
WILLIAM L. MORGAN. Executive Vice President since July 1998 and Chief
Operating Officer since May 10, 1999. Retired from 1994 until July 1998.
Corporate Vice President and President, Transmission, Connection & Broadband
Systems, Northern Telecom, LTD., from 1991 to 1994. Mr. Morgan retired from the
Company on March 31, 2000.
DIRECTOR COMPENSATION
At present, no separate compensation or fees are payable to employee
Directors of the Company. The Company pays non-employee Directors an annual
retainer of $20,000. In addition, the Company reimburses Directors for
reasonable travel expenses incurred in attending Board of Directors' meetings.
Pursuant to the Company's Non-Employee Director Stock Option Plan (the "Non
Employee Director Plan"), non-employee Directors are granted options to purchase
25,000 shares of Common Stock upon their initial election or appointment to the
Board (or upon the adoption of the Non Employee Director Plan for those
Directors in office on the date of such adoption) and will be granted options to
purchase an additional 2,000 shares of Common Stock on an annual basis beginning
on the later of the fourth anniversary of the adoption of the Non Employee
Director Plan (July 8, 2000) or a Director's fourth anniversary of being elected
to the Board. The Directors do not receive any additional compensation for
committee participation.
29
ITEM 11 EXECUTIVE COMPENSATION
The table below sets forth the compensation paid by the Company to its Chief
Executive Officer and each of its four other current executive officer for 1999
and 1998; and for the last three fiscal years for one former executive officer
who received compensation in 1999. The amounts shown include compensation for
services in all capacities that were provided to the Company.
[Enlarge/Download Table]
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(5) COMPENSATION(6) OPTIONS COMPENSATION(7)
--------------------------- -------- -------- -------- --------------- ------------ ---------------
James W. Swent III ............... 1999 $490,735 $200,000 -- 300,000 5,000
Chief Executive Officer(1) 1998 184,423 89,682 600,000 0
William L. Morgan ................ 1999 $305,481 $ 82,500 -- 100,000 0
Executive Vice President & 1998 134,238 100,000 200,000 0
Chief Operating Officer(2)
John J. Grymes ................... 1999 $234,545 $ 68,500 -- 75,000 3,793
President, Williamhouse division 1998 225,000 0 150,000 4,615
John H. Rodgers .................. 1999 $243,637 $ 37,500 -- 65,000 2,712
Senior Vice President & 1998 76,881 37,500 100,000 0
General Counsel; Secretary(3)
James V. Heim .................... 1999 $246,925 $ 20,000 -- 62,500 73,289
President, Ampad division(4)
--------------------------
(1) Mr. Swent was employed by the Company on June 1, 1998. Mr. Swent entered
into an employment agreement with the Company effective as of September 3,
1998. The 1998 annual salary for Mr. Swent was determined based upon a
survey of compensation paid to similar officers at comparably sized
companies and a recognition of their importance to the Company. See
"Employment Agreements."
(2) Mr. Morgan was employed by the Company on July 20, 1998 and retired as an
executive officer on March 31, 2000.
(3) The Company employed Mr. Rodgers on August 26, 1998.
(4) Mr. Heim was employed by the Company on December 1, 1998 and resigned as an
executive officer of the Company on January 18, 2000.
(5) Bonus levels for Messrs. Swent, Grymes, Morgan, Rodgers and Heim in 1999
were established by the Board to recognize attainment of certain objectives,
including plant rationalization, which was substantially completed in
December, 1999. 1998 bonus payments to Messrs. Swent, Morgan and Rodgers
were paid as inducements for employment.
(6) The aggregate amount of perquisites and other personal benefits given to
each of the Named Executive Officers, valued on the basis of the aggregate
incremental cost to the Company, was less than either $50,000 or 10% of the
total of annual salary and bonus for that Named Executive Officer during
each of the periods presented. Such benefits included automobile allowances.
(7) The amounts shown for "All Other Compensation" in 1999 for Messrs. Swent,
Grymes and Rodgers include $5,000, $3,793 and $2,712, respectively, which
represents a matching contribution made by the Company on behalf of each
executive officer to the Company's 401 (k) plan. Additionally, the amount
shown for "All Other Compensation" in 1998 for Mr. Grymes includes $4,615,
which represents a matching contribution made by the Company on behalf of
Mr. Grymes to the Company's 401 (k) plan. In addition, the amounts shown for
Mr. Heim in 1999, include $73,289, which represents a matching contribution
made by the Company on behalf of Mr. Heim to the Company's 401 (k) plan, and
reflect relocation expenses paid by the Company ($65,294), and the gross up
of taxes on the imputed income from such payment ($7,430).
30
STOCK OPTION GRANTS
The following table provides information relating to the stock options
awarded to the Named Executive Officers during the Company's last fiscal year.
[Enlarge/Download Table]
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE VALUE AT
------------------------ ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL MARKET STOCK PRICE APPRECIATION
SECURITIES OPTIONS EXERCISE PRICE ON FOR OPTION TERM(2)
UNDERLYING GRANTED TO OR BASE DATE OF --------------------------------
OPTIONS EMPLOYEES PRICE GRANT EXPIRATION
NAME GRANTED (#) IN FY ($/SHARE) ($/SHARE) DATE 5% ($) 10% ($)
---- ----------- ---------- --------- --------- ---------- -------- --------
James W. Swent III..... 300,000 18.14% 1.8125 1.8125 05/03/2009 341,961 866,597
William L. Morgan...... 100,000 6.05% 1.8125 1.8125 05/03/2009 113,987 288,866
John J. Grymes......... 75,000 4.53% 1.8125 1.8125 05/03/2009 85,490 216,649
John H. Rodgers........ 65,000 3.93% 1.8125 1.8125 05/03/2009 74,092 187,763
James V. Heim.......... 62,500 3.78% 1.8125 1.8125 05/03/2009 71,242 180,541
------------------------
(1) Options vest in three equal installments on each anniversary of the date of
grant. Unless otherwise determined by the Compensation Committee of the
Board, options expire upon the termination of the executive's employment
with the exception of options which are then exercisable in the following
circumstances: (i) 180 days following the executive's death or disability;
(ii) 90 days following the executive's retirement; and (iii) 30 days
following the termination of the executive's employment by the Company other
than by cause.
(2) Amounts reflect certain assumed rates of appreciation set forth in the SEC's
compensation disclosure rules. Actual gains, if any, on stock options
exercises depend on future performance of the Common Stock and overall
market conditions.
STOCK OPTION HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning stock options outstanding as of December 31, 1999.
There were no options exercised by the Named Executive Officers in 1999 for
securities of the Company.
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FY-END
AT FY-END (#) ($)(1)
-------------------- --------------------
SHARES AQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ------------------ -------------------- --------------------
James W. Swent III.......... -- -- 200,000/700,000 --/--
William L. Morgan........... -- -- 66,667/233,333 --/--
John J. Grymes.............. -- -- 50,000/175,000 --/--
John H. Rodgers............. -- -- 33,333/131,667 --/--
James V. Heim............... -- -- 41,667/145,833 --/--
------------------------
(1) The closing sale price of the Common Stock on December 31, 1999, was $.2344
per share, as reported by the National Association of Security Dealers
Over-the-Counter Bulletin Board System. The value of such options at fiscal
year end is calculated on the basis of the difference between the option
exercise price and $1.5625 multiplied by the number of shares of Common
Stock underlying the option. As of December 31, 1999, no Named Executive
Officer held any in-the-money options, exercisable or unexercisable.
31
EMPLOYMENT AGREEMENTS.
Effective September 3, 1998, the Company and Mr. Swent entered into an
employment agreement (the "Swent Agreement"), pursuant to which Mr. Swent agreed
to serve as the Chief Executive Officer of the Company. Under the Swent
Agreement, the Company agreed to pay to Mr. Swent: (i) an annual base salary
equal to at least $425,000; (ii) an annual bonus in 1998 of $200,000 and
thereafter an annual bonus not to exceed 120% of his annual base salary (based
upon the Company achieving certain operating targets); and (iii) certain fringe
and severance benefits. In February 2000, the severance benefits payable to
Mr. Swent under the Swent Agreement were amended and superceded by a one-time
stay-on bonus payable to Mr. Swent upon the occurrence of specific events under
the Retention Plan [See Below]. Mr. Swent has agreed not to compete with the
Company for a period of twelve months following his termination of employment
with the Company and not to disclose any confidential information at any time
without the prior written consent of the Company.
RETENTION PLAN.
On November 30, 1999, the Board of Directors approved a retention and
incentive plan (the "Retention Plan") for key employees who have been identified
by management as critical to continue the operations of the Company throughout
the bankruptcy and reorganization process. Under the Retention Plan, a maximum
of $6,470,000 has been approved to be paid to 85 designated employees as special
incentives for continued employment though established transition periods and,
for certain managers, as a special award for the successful sale of specified
business units of the Company. The Retention Plan includes a special severance
program totaling $2,686,158 to be paid in lieu of regular severance pay to key
employees in the event that their employment with the Company is involuntarily
terminated without cause. The amount of the incentives was determined as a
percentage of base pay by level of job and responsibility within the Company. An
order approving the Retention Plan was entered by the Bankruptcy Court on
February 7, 2000.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee was established by the Board of Directors in
June 1996 in connection with the Company's IPO. At such time, Messrs. Robert C.
Gay and Marc B. Wolpow, Managing Directors of Bain Capital, were appointed to
the Committee. The Bain Capital Funds collectively own approximately 34.9% of
the outstanding Common Stock. The Board selected Messrs. Gay and Wolpow to help
ensure that the compensation policies of the Company serve to align the
interests of the Company's management with those of its stockholders.
In 1999, Mr. Wolpow resigned from the Compensation Committee, and
Messrs. Jeffrey K. Hewson and Scott R. Watterson were named to the Compensation
Committee.
The Compensation Committee is responsible for (i) determining the
compensation of the Company's executive officers; (ii) reviewing the
recommendations of the Company's Chief Executive Officer on compensation levels
of all other officers of the Company; and (iii) adopting and changing
compensation policies and practices of the Company and reporting its
recommendations to the full Board of Directors. In making its recommendations to
the Board concerning adjustments to compensation levels, the Compensation
Committee considers the financial condition and operational performance of the
Company during the prior year. The Company's executive compensation program
consists of three principal components (i) base salary; (ii) annual bonus; and
(iii) long-term equity incentives.
BASE SALARY. The base salary for each of the Company's executive officers
was determined in 1999 pursuant to the terms of his respective employment
agreement or arrangement with the Company. The executive officers' base salaries
are based on their respective expected levels of responsibility and competitive
market conditions. Messrs. Swent's, Grymes', Morgan's, Rodgers' and Heim's base
salaries
32
were increased in December 1999. Mr. Swent entered into an employment agreement
with the Company effective September 3, 1998. See "Compensation of Executive
Officers--Employment Agreements."
ANNUAL BONUS. Each of the executive officers and senior management of the
Company is eligible, under the terms of his or her employment with the Company,
to participate annually in a Key Manager Bonus Program based upon individual
bonus targets and the Company achieving certain operating targets. In general,
such operating targets relate to the attainment by the Company of certain
minimum levels of EBITDA, which are recommended by management and established by
the Board of Directors. In 1999, the Company did not implement the Key Manager
Bonus Program and, as a result, no annual bonuses were paid under the program to
executive officers. In January and February 2000 bonus payments were made to
selected named executives of the Company to recognize their continuing
performance and support of the Company's strategic objectives. During that
period, the Company paid a total of $382,000 to named executive officers and
senior management.
LONG-TERM EQUITY INCENTIVES. Long-term incentive awards are intended to
develop and retain strong management through stock ownership that recognizes
future performance. The Board believes that a significant portion of senior
executives' compensation should depend on value created for the stockholders. In
order to more closely align the interests of the Company's senior management
with those of its stockholders, and to link the value of management's holdings
directly to the market value of the Common Stock, the Company has adopted the
1999 Key Employees Stock Incentive Plan (the "1999 Option Plan") and the 1996
Key Employee Stock Incentive Plan (the "1996 Option Plan") and the Management
Stock Purchase Plan.
On February 16, 1999, the Board of Directors adopted the American Pad &
Paper Company 1999 Key Employees Stock Incentive Plan (the "1999 Option Plan")
which provides that the Compensation Committee (the "Committee") of the Board,
on behalf of the Company, may enter into any type of arrangement with an
employee that is consistent with the provisions of the 1999 Option Plan and that
by its terms involves the issuance or potential issuance of (i) shares of Common
Stock or (ii) a Derivative Security (as such term is defined in Rule 16a-1
promulgated under the Exchange Act as such Rule may be amended from time to
time) with an exercise or conversion right at a price related to the Common
Stock or with a value derived from the value of the shares of Common Stock. The
entering into of any such arrangement is referred to under the 1999 Option Plan
as the grant of an "Award."
The maximum number of shares of Common Stock available for issuance upon
exercise of Awards granted to employees under the 1999 Option Plan is 1,500,000,
subject to adjustment in the event of a stock dividend, stock split or similar
change in outstanding shares of Common Stock. Common Stock purchased under the
1999 Option Plan will be purchased from the Company; therefore the Company will
receive the purchase price paid for the Common Stock, if any. The Compensation
Committee granted a total of 1,204,250 new options under the 1999 Option Plan in
1999, of which 602,500 were granted to executive officers. As of December 31,
1999, a total of 1,122,750 options were outstanding under the 1999 Option Plan.
The following description of certain features of the 1999 Option Plan is
qualified in its entirety by reference to the 1999 Option Plan, a copy of which
is attached hereto as Appendix A and incorporated herein by reference. Terms
with their initial letter capitalized that are used in this description and not
specifically defined herein shall have the same meaning given such terms in the
1999 Option Plan.
PURPOSE AND ADOPTION. The purpose of the 1999 Option Plan is to enable the
Company and its subsidiaries to attract, retain and motivate their employees by
providing for or increasing the proprietary interests of such employees in the
corporation. The 1999 Option Plan was originally adopted by the Board of
Directors on February 16, 1999, approved by the stockholders of the Company on
April 27, 1999, and became effective on April 27, 1999.
33
AWARDS. Awards are not restricted to any specified form or structure and
may include, without limitation, sales or bonuses of stock, restricted stock,
stock options, reload stock options, stock purchase warrants, other rights to
acquire stock, securities convertible into or redeemable for stock, stock
appreciation rights, limited stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares, and an Award may consist
of one or more such security or benefit. The Company anticipates that under the
1999 Option Plan it will only issue nonqualified stock options ("NQOs") that are
not intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code ("ISOs").
ADMINISTRATION. The Committee administers the 1999 Option Plan. The
Committee currently consists of two Directors, and, subject to certain
limitations in the 1999 Option Plan, the Committee (or its Authorized Delegate)
is authorized and empowered to do all things necessary or desirable in
connection with the administration of the 1999 Option Plan, including the
following:
(i) adopt, amend and rescind rules and regulations relating to the 1999
Option Plan;
(ii) determine which persons meet the requirements for eligibility under
the 1999 Option Plan and to which of such eligible persons, if any,
Awards shall be granted;
(iii) determine whether, and the extents to which adjustments are required
under the 1999 Option Plan;
(iv) interpret and construe the 1999 Option Plan and the terms and
conditions of any Award granted under the 1999 Option Plan; and
(v) correct any defect or supply any omission or reconcile any
inconsistency in the 1999 Option Plan or in any Award in the manner and
to the extent the Committee deems necessary or desirable to carry it
into effect.
Any decision of the Committee (or any Authorized Delegate) in the interpretation
and administration of the 1999 Option Plan lies within its sole and absolute
discretion and is final, conclusive and binding on all parties concerned.
TRANSFERABILITY. Except as may be set forth in an Award or otherwise
approved by the Committee, an employee's rights and interest under the 1999
Option Plan may not be assigned or transferred, hypothecated or encumbered in
whole or in part either directly or by operation of law or otherwise (except in
the event of an employee's death) including, but not by way of limitation,
execution, levy, garnishment, attachment, pledge, bankruptcy or in any other
manner.
ELIGIBILITY. Any person employed by the Company or any of its subsidiaries
including any Director who is so employed is eligible to be considered for the
grant of Awards under the 1999 Option Plan.
AMENDMENT, TERMINATION AND ADJUSTMENT. The Board may amend or terminate the
1999 Option Plan at any time and in any manner; PROVIDED, HOWEVER, that no such
amendment or termination may deprive the recipient of an Award previously
granted under the 1999 Option Plan of any of his or her rights thereunder
without the consent of such recipient; and; PROVIDED FURTHER, that no amendment
shall become effective without stockholder approval if such stockholder approval
is required by law. No Awards may be granted under the 1999 Option Plan after
April 27, 2009. Shares of Common Stock may be issued after April 27, 2009
pursuant to Awards granted prior to such date; however, no shares of Common
Stock may be issued under the 1999 Option Plan after April 27, 2019.
ADJUSTMENTS. If the outstanding securities of the class then subject to the
1999 Option Plan are increased, decreased or exchanged for or converted into
cash, property or a different number or kind of securities, or if cash, property
or securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
34
stock split or the like, or if substantially all of the property and assets of
the Company are sold, then, unless the terms of such transaction provide
otherwise, the Committee must make appropriate and proportionate adjustments in
(a) the number and type of shares or other securities or cash or other property
that may be acquired pursuant to Awards theretofore granted under the 1999
Option Plan, (b) the maximum number and type of shares or other securities that
may be issued pursuant to Awards thereafter granted under the 1999 Option Plan
and (c) to the extent permitted under the 1999 Option Plan, the maximum number
of shares of Common Stock with respect to which Awards may be granted to any
employee during any calendar year; PROVIDED, HOWEVER, that no adjustment may be
made to the number of shares of Common Stock that may be acquired pursuant to
outstanding ISOs or the maximum number of shares of Common Stock with respect to
which ISOs may be granted under the 1999 Option Plan to the extent such
adjustment would result in such options being treated as other than ISOs;
PROVIDED FURTHER, that no such adjustment may be made to the extent the
Committee determines that such adjustment would result in the disallowance of a
federal income tax deduction for compensation attributable to Awards hereunder
by causing such compensation to be other than performance-based compensation.
CONSIDERATION. Common Stock may be issued pursuant to an Award for any
lawful consideration as determined by the Committee, including without
limitation, services rendered by the recipient of such Award.
Under the 1996 Option Plan, the Compensation Committee was granted broad
authority to award equity-based compensation arrangements to any eligible
employee of the Company. An aggregate of 1,500,000 shares of Common Stock was
reserved for issuance upon the exercise of awards granted to eligible
participants under the 1996 Option Plan. Under the Management Stock Purchase
Plan, eligible management employees of the Company are entitled to purchase
shares of Common Stock at a purchase price equal to 75% of its fair market value
using up to 25% of their annual incentive bonuses. The Management Stock Purchase
Plan is designed to encourage management employees of the Company to acquire an
ownership interest in the Company and thereby permit such employees to share in
the growth in value of the Company. No annual bonuses were paid for 1998 and
consequently no shares of Common Stock were purchased under the Management Stock
Purchase Plan in 1998. In September 1998, the Board approved a proposal to
re-price currently outstanding options under the 1996 Option Plan. Under the
proposal, on a voluntary basis, the Company offered to exchange at an exchange
rate of .8 to 1, all currently outstanding stock options granted under the 1996
Option Plan prior to July 1, 1998, and to re-price such outstanding options to a
market valuation of $4.50 per share with a vesting period of three years
commencing on October 1, 1998. The proposal further offered to the holders of
such outstanding options a three year retention bonus equal to $2.50 for each
new option share granted to be paid in three equal payments on the same vesting
terms and schedule as the new option grants. A total of 413,200 options were
granted in exchange for 516,500 outstanding options pursuant to the re-pricing
program. After taking into account options exchanged under the re-pricing
program, the Compensation Committee granted a net of 1,117,800 new options under
the 1996 Option Plan in 1998 of which 350,000 were granted to executive
officers, and granted 60,000 new options under the 1996 Option Plan in 1999. A
total of 1,214,600 options were outstanding under the 1996 Option Plan as of
December 31, 1999.
In September 1998, the Board, with the prior approval of the New York Stock
Exchange, reserved a total of 1,210,000 option shares to be available for option
grants outside of the 1996 Option Plan and as conditions of employment to
certain newly hired executives in individual amounts and at option prices to be
approved by the Compensation Committee. The Compensation Committee granted
800,000 options to executive officers outside of the 1996 Option Plan in 1998.
POLICY WITH RESPECT TO QUALIFYING COMPENSATION FOR DEDUCTIBILITY AND OTHER
MATTERS. Section 162(m) of the Internal Revenue Code generally limits to
$1 million the annual tax-deductible compensation paid to a covered officer.
However, the limitation does not apply to performance-based compensation,
provided certain conditions are satisfied. Although the Compensation Committee
recognizes that, under certain circumstances, compensation paid pursuant to the
options granted outside the 1996 Option Plan could
35
exceed the limitations of Section 162(m) of the Internal Revenue Code, it does
not believe that any executives will earn in excess of deductible limits.
The Company's policy is generally to preserve the federal income tax
deductibility of compensation paid. Accordingly, the Company has taken, to the
extent it believes feasible, appropriate actions to preserve the deductibility
of annual incentive, long-term performance, and stock option awards. However,
notwithstanding the Company's general policy, the Committee retains the
authority to authorize payments that may not be deductible if it believes that
is in the best interests of the Company and its stockholders.
The Compensation Committee will continue to review the compensation package
provided for the Chief Executive Officer and all other officers, and to monitor
its competitiveness within the industry and the community, as well as its
relationship to stockholders' returns. The Compensation Committee will recommend
adjustments that are deemed appropriate, both in compensation policies and
practices, compensation structure and the actual compensation paid.
PERFORMANCE GRAPH. The Performance Graph below compares the value at
year-end 1996, 1997, 1998 and 1999 of an investment in the Common Stock of $100
on July 2, 1996, the date the Common Stock became publicly traded at an initial
offering price of $15.00 per share. Also shown are the values, assuming $100
invested in the Russell 2000 Stock Index and a peer group index selected by the
Company consisting of manufacturers, distributors or retailers of office
products, also beginning on July 2, 1996, and at year-end 1996, 1997 and 1998.
The companies selected to form the Company's peer group index are Avery Dennison
Corporation, Day Runner, Inc., Mail-Well, Inc., Mead Corporation, Moore
Corporation LTD, New England Business Services, Wallace Computer Services,
Westvaco Corporation and Willamette Industries. The Company may decide, in
future years, to change the composition of the peer group if the Company
believes that comparative data is available. Total returns are based on market
capitalization.
COMPARE CUMULATIVE TOTAL RETURN
AMONG AMERICAN PAD & PAPER,
RUSSELL 2000 INDEX AND PEER GROUP INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Enlarge/Download Table]
AMERICAN PAD & PAPER COMPANY RUSSELL 2000 STOCK INDEX PEER GROUP INDEX
July 2, 1996 $100 $100 $100
1996 $151 $106 $114
1997 $64 $129 $125
1998 $10 $126 $118
1999 $2 $150 $155
ASSUMES $100 INVESTED ON JULY 2, 1996
ASSUMES DIVIDENDS REINVESTED
[Enlarge/Download Table]
FISCAL YEAR ENDING DECEMBER 31ST
--------------------------------------------------
JULY 2, 1996 1996 1997 1998 1999
------------ -------- -------- -------- --------
American Pad & Paper Company......................... $100 $151 $ 64 $ 10 $ 2
Russell 2000 Stock Index............................. $100 $106 $129 $126 $150
Peer Group Index..................................... $100 $114 $125 $118 $155
36
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as otherwise noted, the following table sets forth certain
information as of March 1, 2000, as to the security ownership of equity
securities of the Company by (i) each of the executive officers named in the
Summary Compensation Table; (ii) each of the Directors and Director nominees of
the Company; (iii) all Directors and executive officers as a group; and
(iv) those persons owning of record or known to the Company to be the beneficial
owner of more than five percent of the voting securities of the Company. All
information with respect to beneficial ownership has been furnished by the
respective Director, Director nominee, executive officer or five percent
beneficial owner, as the case may be. Unless otherwise indicated, the persons
named below have sole voting and investment power with respect to the number of
shares set forth opposite their names. Beneficial ownership of the Common Stock
has been determined for this purpose in accordance with the applicable rules and
regulations promulgated under the Exchange Act.
[Download Table]
COMMON STOCK
---------------------
EXECUTIVE OFFICERS, NUMBER PERCENT
DIRECTORS AND 5% STOCKHOLDERS OF SHARES OF CLASS
----------------------------- ---------- --------
Executive Officers and Directors:
Robert C. Gay(1)........................................ 9,967,141 34.9%
James W. Swent III(2)................................... 250,000 *
Gregory M. Benson(3).................................... 845,842 3.0%
Paul B. Edgerley(4)..................................... 9,956,641 34.9%
John J. Grymes(5)....................................... 92,943 *
Jeffrey K. Hewson....................................... 0 *
William L. Morgan(6).................................... 66,667 *
John H. Rodgers(7)...................................... 39,908 *
Scott R. Watterson(8)................................... 25,000 *
James V. Heim(9)........................................ 41,667 *
All Directors and Executive Officers as a 11,343,668 39.8%
group (10 persons)(10)................................
5% Stockholders:
Bain Capital Funds(11) ................................. 9,942,141 34.9%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
------------------------
* Less than one percent.
(1) Includes (i) 25,000 shares of Common Stock that can be acquired through
currently exercisable options and (ii) 9,942,141 shares held collectively
by Bain Capital partnerships as described herein. Mr. Gay is a general
partner of Bain Venture Capital, a California limited partnership ("BVC"),
which is the general partner of the Tyler Capital Fund, L.P. ("TCF"), Tyler
Massachusetts L.P. ("TM") and Tyler International L.P.-II ("TI").
Accordingly, Mr. Gay may be deemed to beneficially own shares held by such
investment funds. In addition, Mr. Gay is a general partner of BCIP Trust
Associates L.P. ("BCIP Trust") and BCIP Associates ("BCIP") and, as a
result, may be deemed to beneficially own shares held by such partnerships.
Mr. Gay disclaims beneficial ownership of such shares in which he does not
have a pecuniary interest. The address of Mr. Gay is c/o Bain
Capital, Inc., Two Copley Place, Boston, Massachusetts 02116.
37
(2) Includes 200,000 shares of Common Stock that can be acquired through
currently exercisable options.
(3) Includes 299,457 shares of Common Stock that can be acquired through
currently exercisable options.
(4) Includes (i) 12,500 shares of Common Stock that can be acquired through
currently exercisable options and (ii) 9,942,141 shares held collectively
by Bain Capital partnerships as described herein. Mr. Edgerley is a general
partner of BVC, which is the general partner of TCF, TM and TI.
Accordingly, Mr. Edgerley may be deemed to beneficially own shares held by
such investment funds. In addition, Mr. Edgerley is a general partner of
BCIP Trust and BCIP and, as a result, may be deemed to beneficially own
shares held by such partnerships. Mr. Edgerley disclaims beneficial
ownership of such shares in which he does not have a pecuniary interest.
(5) Includes 50,000 shares of Common Stock that can be acquired through
currently exercisable options.
(6) Includes 66,667 shares of Common Stock that can be acquired through
currently exercisable options.
(7) Includes 33,333 shares of Common Stock that can be acquired through
currently exercisable options.
(8) Includes 25,000 shares of Common Stock that can be acquired through
currently exercisable options.
(9) Includes 41,667 shares of Common Stock that can be acquired through
currently exercisable options.
(10) Includes shares, which may be deemed to be beneficially owned by
Messrs. Gay and Edgerley as a result of their relationship with the Bain
Capital Funds and shares that the Directors and executive officers can
acquire through currently exercisable options.
(11) Includes (i) 7,270,836 shares held by TCF; (ii) 1,489,744 shares held by
TM; (iii) 435,915 shares held by TI; (iv) 620,562 shares held by BCIP; and
(v) 125,084 shares held by BCIP Trust (BCIP Trust, TCF, TM, TI and BCIP
are collectively referred to herein as the "Bain Capital Funds"). BVC, as
the sole general partner of TCF, TM and TI, may be deemed to be the
beneficial owner of the shares of Common Stock held by such investment
funds. In addition to Mr. Gay, the other general partners of BVC include:
Joshua Bekenstein, Paul B. Edgerley, Adam W. Kirsch, Geoffrey S. Rehnert,
W. Mitt Romney and Robert F. White. All such persons disclaim beneficial
ownership of all such shares in which they do not have a pecuniary
interest.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of the Exchange
Act requires the Company's officers, Directors and persons who beneficially own
more than ten percent of the Company's Common Stock to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission ("SEC"). Officers, Directors and greater than ten percent
beneficial owners also are required by rules promulgated by the SEC to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the
Company, or written representations that no Form 5 filings were required, the
Company believes that during the period from January 1, 1999, through
December 31, 1999, all Section 16(a) filing requirements applicable to its
officers, Directors and greater than ten percent beneficial owners were complied
with.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ADVISORY AGREEMENT. In October 1995, the Company entered into a ten-year
Management Advisory Agreement (the "Advisory Agreement") with Bain Capital to
replace Bain Capital's prior agreement with the Company. In connection with the
Company's IPO, the Company and Bain Capital amended and restated the Advisory
Agreement to provide for an initial term of four years, subject to automatic
one-year extensions beyond the initial term (not to exceed an aggregate of eight
years) on each anniversary of the effective date of such agreement so long as
Bain Capital continues to own at least 5% of the outstanding
38
Common Stock. Under the amended Advisory Agreement, the Company agreed to pay
Bain Capital an annual cash advisory fee of $2.0 million, payable by the Company
on a quarterly basis in arrears, and a transaction fee in connection with the
consummation of each acquisition, divestiture or financing by the Company or its
subsidiaries in an amount equal to 1% of the aggregate value of such transaction
(the "Bain Fees"), plus reasonable out-of-pocket expenses. In September 1998,
the Company and Bain Capital mutually agreed to reduce the advisory fee to
$1.5 million annually. Amendments to the Company's revolving credit agreement,
approved on September 30, 1998, prohibit future payments of the Bain Fees, with
a right to accrue them, until satisfaction of all obligations under the
revolving credit agreement or unless otherwise permitted by the Company's
banking group. For the year ended December 31, 1999, the Company accrued Bain
Fees of $1.5 million, plus expenses of approximately $46,000. The Company
believes that the fees received for the professional services rendered are at
least as favorable to the Company as those which could be negotiated with an
independent third party.
REGISTRATION AGREEMENT. The Company and certain of its executive officers
and other existing stockholders, including investment funds controlled by Bain
Capital (the "Bain Capital Funds"), are parties to a registration agreement (the
"Registration Agreement"). Under the Registration Agreement, the holders of a
majority of the registrable securities owned by the Bain Capital Funds and
related investors have the right, at any time and subject to certain conditions,
to require the Company to register any or all of their shares of Common Stock
under the Securities Act on Form S-1 on three occasions at the Company's expense
and on Form S-2 or Form S-3 on an unlimited number of occasions at the Company's
expense. In addition, all holders of registrable securities are entitled to
request the inclusion of any shares of Common Stock subject to the Registration
Agreement in any registration statement at the Company's expense whenever the
Company proposes to register any of its securities under the Securities Act,
subject to certain conditions. As of December 31, 1999, the holders of an
aggregate of 9,979,641 shares of Common Stock (including 37,500 shares that
could be acquired through exercisable options) had demand registration rights
pursuant to the Registration Agreement.
INDEBTEDNESS OF MANAGEMENT. On July 2, 1996, the Company lent Mr. Needham,
a former executive officer of the Company, an aggregate of $324,537 in order to
permit him to purchase shares of Common Stock in the Company's IPO. The loan had
an interest rate of 8% per annum, was due on July 2, 1998, and requires
Mr. Needham to prepay the loan with 40% of any bonus received by him during the
first four years of his employment agreement with the Company or with any
proceeds he receives from the sale of any of his shares of Common Stock. The
amounts due under the loan are with full recourse and are secured by a pledge of
all such shares of Common Stock purchased by Mr. Needham. On February 6, 1998,
the Company extended the due date of the loan to July 2, 2000, and, effective
July 7, 1998, in conjunction with the amendment of Mr. Needham's employment
agreement, reduced the interest rate under the loan to the lesser of (i) 6% per
annum or (ii) the highest rate permitted by applicable law. On December 31,
1999, approximately $289,000 in aggregate principal and interest remained
outstanding under the loan.
On March 31, 1998, the Company lent Mr. Benson, a director and former
executive officer of the Company, an aggregate of $1.0 million in order to
permit him to purchase shares of Common Stock. The loan has an interest rate of
5.89% per annum, is due on March 31, 2001, and requires Mr. Benson to prepay the
loan with any proceeds he receives from the sale of any of his shares of Common
Stock. The amounts due under the loan are with full recourse and are secured by
a pledge of 546,385 shares of Common Stock owned by Mr. Benson and certain stock
options granted to Mr. Benson, together with certain stock issuable to
Mr. Benson, under certain of the Company's stock option agreements. On
December 31, 1999, approximately $1.1 million in aggregate principal and
interest remained outstanding under the loan.
39
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(A)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
PAGE
--------
AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES
Responsibility for the Consolidated Financial Reports....... 44
Report of Independent Accountants........................... 45
Consolidated Balance Sheets at December 31, 1999 and 1998... 46
Consolidated Statements of Operations for the years ended
December 31 1999, 1998, and 1997.......................... 47
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1999, 1998, and
1997...................................................... 48
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997......................... 49
ITEM 14(A)(2) FINANCIAL STATEMENT SCHEDULES
Other than the schedule listed below, the information required by this item
is included in the consolidated financial statements or is omitted because the
schedules are not applicable to the Company.
VALUATION AND QUALIFYING ACCOUNTS SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
[Enlarge/Download Table]
BALANCE AT CHARGED TO
BEGINNING COSTS AND CHARGED TO BALANCE AT
OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
---------- ---------- -------------- ---------- -------------
Allowance for doubtful accounts
and sales returns (a) (b)
1999 $2,248 $6,823 $ -- $4,994 $4,077
1998 2,794 4,204 -- 4,750 2,248
1997 2,216 3,279 225 2,926 2,794
Inventory obsolescence reserve (a) (b)
1999 $3,517 $ 724 $ -- $2,354 $1,887
1998 1,647 2,332 -- 462 3,517
1997 2,135 32 300 820 1,647
------------------------
(a) APB 16 purchase accounting
(b) Accounts written off and customer returns
40
ITEM 14(B) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K during 1999 and
through March 15, 2000:
(1) Current Report on Form 8-K filed January 22, 1999, relating to the
Company's January 8, 1999, press release. A press release on January 8,
1999, announcing that the NYSE is delisting the Company's common stock.
(2) Current Report on Form 8-K filed February 4, 1999, relating to the
Company's January 19, 1999, January 26, 1999, and February 1, 1999,
press releases. A press release on January 19, 1999, announcing that the
Company's plant in Dallas, Texas will be closed and consolidated as part
of a previously announced restructuring plan. A press release on
January 26, 1999, announcing that the Company will begin trading on the
NASD OTC Bulletin Board System under the symbol AMPP effective
January 26, 1999. A press release on February 1, 1999, announcing that
the Williamhouse division of the Company will increase the price of
White Wove Commodity Envelopes to its customers by approximately 7%
effective February 15, 1999.
(3) Current Report on Form 8-K filed February 24, 1999, relating to the
Company's February 9, 1999, and February 17, 1999, press releases. A
press release on February 9, 1999, announcing the appointments of
William J. Mays as Vice President of Operations and Leon W. Hall as Vice
President of Sales for Ampad. A press release on February 17, 1999,
announcing financial results for the fourth quarter and year ended
December 31, 1998.
(4) Current Report on Form 8-K filed April 1, 1999, relating to the
Company's March 22, 1999, press release. A press release on March 22,
1999, announcing that the Board of Directors elected two new directors,
Jeffery K. Hewson and John H. Rodgers, and has named James W. Swent III
as Co-Chairman of the Board, effective March 17, 1999.
(5) Current Report on Form 8-K filed April 28, 1999, relating to the
Company's April 19, 1999, press release. A press release on April 19,
1999, announcing reported financial results for the first quarter ended
March 31, 1999.
(6) Current Report on Form 8-K filed May 14, 1999, relating to the Company's
May 10, 1999, press release. A press release on May 10, 1999, announcing
the appointment of William L. Morgan as Chief Operating Officer (COO).
(7) Current Report on Form 8-K filed May 14, 1999, relating to the Company's
May 10, 1999, press release. A press release on May 10, 1999, announcing
the closing and consolidation of the Holland, New York plant.
(8) 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.
(9) 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 of the second quarter ended
June 30, 1999.
(10) Current Report on Form 8-K filed August 26, 1999, relating to the
Company's August 18, 1999, press release. A press release on August 18,
1999, announcing the appointment of Raj Tanna as Vice President of
E*Commerce.
(11) Current Report on Form 8-K filed September 20, 1999, relating to the
Company's September 13, 1999, press release. A press release on
September 13, 1999, announcing the appointment of Barry L. Silberman as
Vice President of Marketing for Ampad division.
41
(12) Current Report on Form 8-K filed November 16, 1999, relating to the
Company's November 15, 1999, press release. A press release on
November 15, 1999, announcing reported financial results of the third
quarter ended September 30, 1999. A press release on November 15, 1999,
announcing that a default of the Company's bank credit agreement will
preclude payment of its November 15, 1999 interest payment to its
subordinated debt holders; and that the Company has engaged Lazard
Freres & Co. LLC to investigate and pursue various strategic and
financial alternatives, including the possible sale of the Williamhouse
division.
(13) Current Report on Form 8-K filed December 17, 1999, relating to the
Company's December 16, 1999, press release. A press release on
December 16, 1999, announcing that the Company is in continuing
negotiations with its bank group and a committee of bondholders, that
the Company believes represents holders of over 70% of the principal
amount of its subordinated debt.
(14) Current Report on Form 8-K filed January 11, 2000, relating to the
Company's January 11, 2000, press release. A press release on
January 11, 2000, announcing that a group of its bondholders filed a
petition on January 10, 2000 with the United States Bankruptcy Court in
Delaware asking the court to place the Company in an involuntary Chapter
11. The Company has 20 days to respond to this petition and is not
currently operating in Chapter 11.
(15) Current Report on Form 8-K filed January 18, 2000, relating to the
Company's January 14 press release, and to the January 18, 2000
resignation of James V. Heim as President of the Ampad division. A press
release on January 14, 2000, announcing that the Company has filed a
petition in the United States Bankruptcy Court in Delaware to convert
the involuntary Chapter 11 petition filed by its bondholders on
January 10, 2000 to a voluntary Chapter 11 proceeding under the Federal
Bankruptcy Code; and that it had received a commitment for $65 million
of debtor-in-possession (DIP) financing from a group of its current bank
lenders.
(16) Current Report on Form 8-K filed January 20, 2000, relating to the
Company's January 19, 2000, press release. A press release on
January 19, 2000, announcing that it has received Bankruptcy Court
approval to, among other things, pay employee wages, salaries and
benefits during its voluntary reorganization under Chapter 11; and that
the Court has approved interim debtor-in-possession (DIP) financing for
immediate use by the Company for its day-to-day operational needs.
ITEM 14(B) EXHIBITS
See Exhibit Index that follows on pages 69 to 71.
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES
[Download Table]
PAGE
--------
Responsibility for the Consolidated Financial Reports....... 44
Report of Independent Accountants........................... 45
Consolidated Balance Sheets at December 31, 1999 and 1998... 46
Consolidated Statements of Operations for the years ended
December 31 1999, 1998, and 1997.......................... 47
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1999, 1998, and
1997...................................................... 48
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997......................... 49
Notes to Consolidated Financial Statements.................. 50
43
RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL REPORTS
Company management is responsible for the preparation, accuracy and
integrity of the consolidated financial statements and other financial
information included in this Annual Report. This responsibility includes
preparing the statements in accordance with generally accepted accounting
principles and necessarily includes estimates that are based on management's
best judgments.
To help ensure the accuracy and integrity of the Company's financial data,
management maintains a system of internal controls which are designed to provide
reasonable assurance that transactions are executed as authorized, that they are
accurately recorded and that assets are properly safeguarded. Internal financial
and operations management monitors these controls. It is essential for all
Company employees to conduct their business affairs in keeping with the highest
ethical standards as outlined in our code of conduct policy. Careful selection
of employees and appropriate divisions of responsibility also help us to achieve
our control objectives.
The financial statements have been audited by the Company's independent
accountants, PricewaterhouseCoopers LLP. Their report is shown on page 45.
The Board of Directors, acting through its Audit Committee composed entirely
of outside directors, oversees the adequacy of the Company's control
environment. The Audit Committee meets periodically with representatives of
PricewaterhouseCoopers LLP and internal financial management to review
accounting, control, auditing and financial reporting matters. The independent
accountants also have full and free access to meet privately with the Audit
Committee.
[Enlarge/Download Table]
/s/ JAMES W. SWENT III /s/ DAVID N. PILOTTE
--------------------------------------------- ---------------------------------------------
James W. Swent III David N. Pilotte
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND VICE PRESIDENT, CORPORATE CONTROLLER
DIRECTOR AND CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER)
(PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
AMERICAN PAD & PAPER COMPANY:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 40 present fairly, in all material
respects, the financial position of American Pad & Paper Company and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 11 to the
consolidated financial statements, the Company is currently in bankruptcy and is
in default under substantially all of its debt agreements. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters involve the potential sale of
assets as described in Note 1. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
April 13, 2000
Dallas, Texas
45
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
[Download Table]
DECEMBER 31,
---------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash...................................................... $ 19,976 $ 1,371
Accounts receivable....................................... 35,385 60,660
Inventories............................................... 93,083 112,169
Income taxes receivable................................... -- 1,700
Prepaid expenses and other current assets................. 3,521 1,240
--------- ---------
Total current assets.................................... 151,965 177,140
Property, plant, and equipment............................ 145,982 152,198
Goodwill and intangible assets............................ 173,210 185,805
Other..................................................... 1,071 1,337
--------- ---------
Total assets............................................ $ 472,228 $ 516,480
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 391,567 $ 1,236
Accounts payable.......................................... 39,892 49,598
Accrued expenses.......................................... 60,020 47,078
Deferred income taxes..................................... 2,300 (40)
Income taxes payable...................................... 300 300
Restructuring reserve..................................... 1,064 5,660
--------- ---------
Total current liabilities............................... 495,143 103,832
Long-term debt.............................................. -- 373,675
Deferred income taxes....................................... 37,067 16,972
Other....................................................... 797 1,288
--------- ---------
Total liabilities....................................... 533,007 495,767
--------- ---------
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, 28,527,983 and 27,724,045 shares issued and
outstanding, respectively............................... 285 277
Additional paid-in-capital................................ 301,329 301,287
Stockholder notes......................................... (1,395) (1,317)
Accumulated deficit....................................... (360,998) (279,534)
--------- ---------
Total stockholders equity (deficit)..................... (60,779) 20,713
--------- ---------
Total liabilities and stockholders' equity (deficit).... $ 472,228 $ 516,480
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
46
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net sales................................................... $572,616 $662,031 $687,335
Cost of sales............................................... 531,085 597,456 598,416
-------- -------- --------
Gross profit............................................ 41,531 64,575 88,919
-------- -------- --------
Operating expenses:
Selling and marketing..................................... 22,204 21,261 22,246
General and administrative................................ 26,780 31,840 19,133
Restructuring charges/(credits)........................... (2,773) 5,741 --
Losses on sales of accounts receivable.................... 3,295 3,226 2,954
Amortization of goodwill and intangible assets............ 5,133 5,939 6,110
Write down of assets--Shade/Allied........................ -- 41,000
Management fees and services.............................. 1,500 2,030 4,871
-------- -------- --------
56,139 111,037 55,314
-------- -------- --------
Income (loss) from operations............................... (14,608) (46,462) 33,605
Other income (expense):
Interest.................................................. (44,865) (44,970) (37,843)
Other income, net......................................... 2,005 1,411 389
-------- -------- --------
Loss before income taxes.................................... (57,468) (90,021) (3,849)
Provision (benefit) for income taxes........................ 23,270 (11,374) 642
-------- -------- --------
Loss before cumulative effect of a change in accounting
principal................................................. (80,738) (78,647) (4,491)
Cumulative effect of a change in accounting principal....... (726) -- --
-------- -------- --------
Net loss.................................................... $(81,464) $(78,647) $ (4,491)
======== ======== ========
Basic and diluted loss per share:
Loss before cumulative effect of a change in accounting
principal............................................... $ (2.89) $ (2.84) $ (0.16)
Cumulative effect of a change in accounting principal..... (0.03) -- --
-------- -------- --------
Net loss.................................................. $ (2.92) $ (2.84) $ (0.16)
======== ======== ========
Weighted average shares outstanding:
Basic and diluted......................................... 27,944 27,718 27,431
The accompanying notes are an integral part of these consolidated financial
statements.
47
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
[Enlarge/Download Table]
PREFERRED STOCK COMMON STOCK
------------------- ------------------- PAID IN STOCKHOLDER ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL NOTES DEFICIT TOTAL
-------- -------- -------- -------- -------- ----------- ----------- --------
Balance at December 31,
1996..................... -- $ -- 27,400 $274 $300,721 $ (338) $(196,396) $104,261
Common stock sold under
the Management stock
purchase plan.......... -- -- 36 -- 558 -- -- 558
Reduction in stockholder
notes.................. -- -- 49 -- 49
Net loss................. -- -- -- -- -- -- (4,491) (4,491)
---- ---- ------ ---- -------- ------- --------- --------
Balance at December 31,
1997..................... -- -- 27,436 274 301,279 (289) (200,887) 100,377
Exercise of stock
options................ -- -- 288 3 8 -- -- 11
Stockholder notes-new.... -- -- -- (1,045) -- (1,045)
Reduction in stockholder
notes.................. -- -- -- -- -- 17 -- 17
Net loss................. -- -- -- -- -- -- (78,647) (78,647)
---- ---- ------ ---- -------- ------- --------- --------
Balance at December 31,
1998..................... -- -- 27,724 277 301,287 (1,317) (279,534) 20,713
Exercise of stock
options................ -- -- 804 8 42 -- -- 50
Addition to stockholder
notes.................. -- -- -- -- -- (78) -- (78)
Net loss................. -- -- -- -- -- -- (81,464) (81,464)
---- ---- ------ ---- -------- ------- --------- --------
Balance at December 31,
1999..................... -- $ -- 28,528 $285 $301,329 $(1,395) $(360,998) $(60,779)
==== ==== ====== ==== ======== ======= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
48
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(81,464) $(78,647) $ (4,491)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Deferred income taxes................................... 22,436 (11,674) 642
Depreciation............................................ 15,023 13,830 12,529
Amortization of goodwill and intangible assets.......... 5,133 5,939 6,110
Write-down of assets--Shade/Allied...................... -- 41,000 --
Cumulative effect of change in accounting principle..... 726 -- --
Restructuring charges/(credits)......................... (2,773) 5,741 --
Amortization of debt issuance costs..................... 2,771 4,277 2,529
(Gain) loss on sale of assets........................... (1,941) (859) 86
Changes in assets and liabilities, net of effects of
acquistions:
Accounts receivable................................... 21,275 17,543 (17,300)
Income tax receivable................................. 1,700 3,479 (4,059)
Inventories........................................... 18,463 42,190 (44,186)
Prepaid expenses and other............................ (2,281) 163 598
Income tax payable.................................... -- 300 --
Accounts payable...................................... (9,706) (6,758) 4,553
Accrued expenses...................................... 15,084 6,841 (22,049)
Other assets and liabilities.......................... (226) (68) 2,580
-------- -------- --------
Net cash provided by (used in) operating
activities........................................ 4,220 43,297 (62,458)
-------- -------- --------
Cash flows from investing activities:
Purchase of stock and net assets of businesses, including
acquisition costs....................................... -- -- (50,677)
Purchases of property and equipment....................... (11,877) (14,379) (23,095)
Proceeds from sale of assets.............................. 5,634 1,221 4,056
-------- -------- --------
Net cash used in investing activities............... (6,243) (13,158) (69,716)
-------- -------- --------
Cash flows from financing activities:
Net borrowings on credit agreement........................ 18,343 -- 130,400
Repayment of long-term debt............................... (1,687) (25,826) (2,268)
Debt issuance costs....................................... -- (2,780) --
Net proceeds from new accounts receivable financing
facility................................................ 4,000 (4,000) 6,000
Stockholder notes......................................... (78) (1,028) 49
Options and management stock purchase plan................ 50 11 558
-------- -------- --------
Net cash provided by (used in) financing
activities........................................ 20,628 (33,623) 134,739
-------- -------- --------
Net increase (decrease) in cash............................. 18,605 (3,484) 2,565
-------- -------- --------
Cash, beginning of year..................................... 1,371 4,855 2,290
-------- -------- --------
Cash, end of year........................................... $ 19,976 $ 1,371 $ 4,855
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 32,474 $ 42,807 $ 34,292
Income taxes............................................ $ 489 $ 367 $ 4,519
======== ======== ========
Supplemental disclosure of noncash investing activity:
Notes payable issued to purchase equipment................ $ -- $ 621 $ --
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
49
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
ORGANIZATION AND BASIS OF PRESENTATION
American Pad & Paper Company (formerly Ampad Holding Corporation and
referred to hereafter as the "Company") was incorporated on June 2, 1992, as a
holding company to acquire all of the outstanding stock of Ampad Corporation
("Ampad"), the surviving entity from the merger between Ampad Acquisition
Corporation and Ampad. The Company had no operations through July 31, 1992.
On October 3, 1995, the Company agreed to acquire in a merger transaction
all of the outstanding stock of WR Acquisition, Inc. ("WR"). In a series of
transactions, the Company exchanged 100% of the stock of its wholly owned
subsidiary, Ampad, for newly issued shares of WR. WR then contributed Ampad to
its wholly owned subsidiary, Williamhouse-Regency of Delaware, Inc., renamed
American Pad & Paper Company of Delaware, Inc. (referred to hereafter on a
pre-October 31, 1995 basis as "Williamhouse-Regency" and on a post-October 31,
1995 basis as "AP&P Delaware"), in exchange for a right to receive
$140.0 million of merger consideration. The Company, principally using bank
borrowings by AP&P Delaware aggregating $245.0 million, funded WR's right to
receive the merger consideration. WR in turn repurchased 100% of the WR shares
not owned by the Company. The Company accounted for the transaction as a
purchase of the stock of WR. As a result of the transactions, the Company owns
100% of WR, which in turn owns 100% of AP&P Delaware.
The financial statements of the Company include the historical accounts and
operations of the Company, AP&P Delaware and Manufacturing. Included in the
historical accounts and operations of AP&P Delaware are the accounts and
operations of Ampad, the envelope operations of Williamhouse and Niagara, and
the continuous form operations of Shade/Allied since their respective dates of
acquisition. Additionally, the consolidated financial statements include the
accounts of Notepad Funding Corporation ("Notepad"), a special purpose
corporation used in the accounts receivable financing facility. All significant
intercompany balances have been eliminated.
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. The Company is providing the
holders of the Notes with its quarterly and annual consolidated financial
statements as well as its periodic reports as filed with the Securities and
Exchange Commission. 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 stockholders' equity at December 31, 1999, consists of one hundred
shares of $0.01 par value common stock, paid in capital of $252.4 million and an
accumulated deficit of $217.6 million and, in total, is equal to the
stockholders' equity (deficit) of the Company. The Company believes that
providing such consolidated financial statements satisfies the financial
information and debt compliance reporting needs of the holders of the Notes.
DEBT DEFAULT AND CHAPTER 11 FILING
On November 12, 1999, the Company was notified by its banking group of a
default of its revolving credit facility. The default stemmed from the formation
of new subsidiaries in December 1997 related to a reorganization of the
Company's corporate structure without proper notification to the banks. The
reorganization was implemented primarily for state tax purposes and included the
transfer of assets between existing entities and transfers to the new
subsidiaries. The default on the revolving credit facility
50
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS (CONTINUED)
prevented the Company from paying interest on its publicly traded Notes due
November 15, 1999, thereby causing a default on the Notes as well.
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) 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.
In November 1999, the Company announced that it had 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. In March 2000, the Company announced it had signed a letter of intent to
sell its Creative Card division to Taylor Corporation. Negotiations with Taylor
Corporation are continuing and the Company expects the sale to be final in the
second quarter of 2000. Such sale, subject to the approval of the bankruptcy
court, is expected to result in a loss of $5 to $10 million. Efforts by Lazard
Freres to sell the Williamhouse division and other business assets are
continuing.
Although Chapter 11 bankruptcy raises substantial doubt about the Company's
ability to continue as a going concern, the accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles applicable to a company on a going-concern basis which contemplates
the continuity of operations, realization of assets and the liquidation of
liabilities in the ordinary course of business. As a result of the Chapter 11
filing, realization of assets and liquidation of liabilities are subject to
significant uncertainties. Specifically, the financial statements do not present
the amount that will be paid to settle liabilities and contingencies that may be
allowed in 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 STATEMENT OF POSITION
90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY
CODE (SOP 90-7) 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, if approved, contemplates the disposal of all or
portions of its assets and operations. The filing of a plan of reorganization
could materially affect the carrying value of the assets and liabilities
currently disclosed in the consolidated financial statements.
51
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS (CONTINUED)
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.
Since the Company's last acquisition in 1997 revenues have declined, margins
have eroded, competitive pressures in the marketplace kept the Company from
fully recouping increasing paper prices, and inventory levels were, for a period
of time built to an excessive level. Through the rationalization plan initiated
in late 1998, three manufacturing plants were closed, inventory levels were
reduced and production was better coordinated with sales. Although competitive
pressures continued, price increases were initiated which, while not fully
recouping prices movements in raw materials, caused amounts absorbed by the
Company to be reduced. Despite the progress on operational and pricing issues,
the Company's capital structure and high level of debt have limited its abiity
to return to profitability.
PRO FORMA INFORMATION
The pro forma information included in these financial statements and notes
is unaudited.
QUARTERLY FINANCIAL INFORMATION
The quarterly financial information included in these financial statements
is unaudited and includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position, its results of operations and its cash flows. Operating results for
any particular quarter are not necessarily indicative of results for the full
fiscal year.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 98-5, which is effective for fiscal years commencing after
December 15, 1998. The statement of operations reflects a charge of
$0.7 million, net of tax in 1999, for the write off of previously recorded
start-up costs. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
52
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid, interest-bearing instruments with
an original maturity of three months or less to be cash equivalents. Cash
overdrafts of $12.8 million and $28.5 million at December 31, 1999 and 1998,
respectively were reclassed to accounts payable.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the product. All risks and
rewards of ownership pass to the customer upon shipment. Damaged or defective
products may be returned to the Company for replacement or credit. The Company
also offers sales volume rebates or contractual allowance payments to customers
based on their level of sales activity or period of time customers agree to sell
the Company's products, which period does not exceed three years. The effects of
returns, discounts and other incentives are estimated and recorded at the time
of shipment. Volume rebates are estimated and recorded based on sales activity
or amount of time customers agree to sell the Company's products.
CONCENTRATION OF CREDIT RISK
The Company sells its products into various wholesale and retail channels,
primarily for the commercial office products marketplace. Management believes
its credit policies are prudent and reflect normal industry terms and business
risks. The Company performs periodic credit evaluations of its customers and
does not require collateral. Historically, the Company has not experienced
significant losses related to individual customers or groups of customers in any
particular industry or geographic area. An allowance is maintained at a level
that management believes is sufficient to cover potential credit losses
including potential losses on receivables sold with recourse.
INVENTORIES
Inventories, which consist primarily of paper and converted paper products,
are stated at the lower of cost or market. Cost is determined by the last-in,
first-out (LIFO) method. Costs include material, labor and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the individual
assets. Significant repairs or improvements, which extend the useful life of an
asset, are capitalized and depreciated over the asset's remaining useful life.
Interest costs associated with capital projects during the time that
expenditures have been made until the asset is placed in service are capitalized
as part of the historical cost of the asset.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method over periods ranging from 20
53
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to 40 years. Intangible assets represent trade names acquired in the WR and
Shade/Allied acquisitions and are amortized using the straight-line method.
Trade names in the aggregate gross amount of $31.7 million and $6.2 million for
WR are amortized over 40 and 15 years, respectively, and originally, trade names
totaling $5.6 million for Shade/Allied were amortized over 40 years. In the
fourth quarter of 1999, the Company reduced goodwill by $2.7 million and trade
names by $1.2 million by reversing certain transition reserves established with
the Williamhouse, Niagara, and Shade/Allied acquisitions. In the second quarter
of 1998, the Company wrote off $39.9 million of goodwill and $1.1 million of
trade names associated with the Shade/Allied continuous forms business. (See
footnote 5 "Impairment of Shade/Allied Long-Lived Assets.") Amortization expense
was $5.1 million in 1999, $5.9 million in 1998 and $6.1 million in 1997.
LONG-LIVED ASSETS
The Company periodically reviews the net realizable value of its long-lived
assets, including goodwill and intangible assets, through an assessment of the
estimated future cash flows related to such assets. In the event that assets are
found to be carried at amounts which are in excess of estimated gross future
cash flows, the carrying value of the asset is reduced to a level commensurate
with a discounted cash flow analysis. Based upon its most recent analysis, the
Company does not believe an impairment of long-lived assets exists at
December 31, 1999.
DEBT ISSUANCE COSTS
Costs associated with debt issuance are capitalized and amortized to
interest expense using the effective interest method of accounting over the
terms of the related debt agreement.
INCOME TAXES
The Company accounts for income taxes following the liability method, which
prescribes an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and tax operating loss and credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances. The Company periodically reviews the realizability
of its deferred tax assets and, as needed, records valuation allowances when
realizability of the deferred tax asset is not reasonably assured. The Company
recorded a deferred tax valuation allowance of $43.3 million and $6.3 million in
1999 and 1998, respectively.
DERIVATIVES
In January 1996, the Company entered into a four-year interest rate cap that
entitles the Company to receive, on a quarterly basis from the counterparty, the
amount, if any, by which LIBOR exceeds 6.5% for the first two years of the
agreement and 7.5% for the last two years on a notional principal amount of
$100.0 million. The counterparty to this agreement is a large financial
institution. Premiums are amortized as interest expense over the term of the
agreement. Amounts receivable under the agreement are recorded as a reduction of
interest expense. There were no amounts received under this agreement in 1999,
1998 or 1997.
54
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values of cash, accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short-term maturities of these assets
and liabilities. The carrying value of senior bank debt bearing interest at
floating rates approximates fair value. At December 31, 1999 and 1998, the
carrying value of the Notes of $130.0 million compares to the Notes' fair value
of $14.3 million and $87.1 million, respectively, based on quoted market trades.
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 consolidated financial statements have
been reclassified in order to conform to the presentation in the 1999
consolidated financial statements. Specifically, stockholder notes totalling
$1.4 million were reclassified from other assets to stockholders' deficit at
December 31, 1999.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. FAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. FAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated at
part of a hedge transaction and the type of hedge transaction. The ineffective
portion of all hedges will be recognized in earnings. Adoption of the Statement
is not expected to have a material impact on the Division's financial position
and results of operations.
3. ACQUISITIONS
SHADE/ALLIED, INC.
Effective February 11, 1997, the Company acquired all of the outstanding
common and preferred stock of Shade/Allied, Inc., ("Shade/Allied"). This
acquisition was accounted for under the purchase method of accounting.
Accordingly, the aggregate acquisition cost was allocated to the net assets
acquired based on the fair value of such net assets. The aggregate acquisition
costs totaled $50.7 million, consisting of cash of $49.5 million and direct
acquisition costs of $1.2 million. The Company financed this acquisition with
proceeds from its revolving credit facility. The aggregate acquisition costs
were allocated to the assets acquired and liabilities assumed as follows:
accounts receivable of $4.6 million; inventory of $5.8 million; prepaid and
other assets of $129,000; property and equipment of $14.5 million; identifiable
intangible assets of $5.6 million; other long-term assets of $725,000; accounts
payable of $6.9 million; accrued liabilities of $7.2 million; income taxes
payable of $215,000; deferred income tax payable of $6.7 million; and pension
liability of $1.0 million. The aggregate acquisition costs exceeded the fair
market value of net assets acquired by $41.4 million. Accordingly, goodwill was
recorded and was amortized on the basis of a 40 year life until it was written
off as of June 30, 1998. (SEE FOOTNOTE 5, "IMPAIRMENT OF SHADE/ALLIED LONG-
LIVED ASSETS.") The operating results of the acquisition have been included in
the accompanying consolidated financial statements since the date of
acquisition.
55
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
ACQUISITION INTEGRATION COSTS
At acquisition, certain costs were expected to be incurred in connection
with the Company's plans to integrate and consolidate certain plant,
administrative, sales and corporate functions of the acquired division
businesses. Such costs, estimated to total $27.5 million, included lease
termination expenses, severance and contractual change of control benefits, and
the liabilities for such costs were included in the purchase price allocation
within accrued expenses. The remaining $0.9 million of the acquisition
integration costs at December 31, 1999, is intended to cover the remaining costs
of integrating plants, administrative, sales and corporate functions.
4. RESTRUCTURING CHARGES
On September 1, 1998, the Company announced a plan to rationalize its
manufacturing operations. The plan included plant consolidations, equipment
moves, plant/product changes, warehouse consolidations and the addition of new
distribution centers. The previously reported third quarter 1998 restructuring
charge of $5.7 million shown in the accompanying statement of operations
represents the Company's rationalization plan.
The Company has closed three plants as part of the rationalization plan. The
closing of the Kosciusko, Mississippi plant was announced on November 10, 1998,
and final production occurred on April 14, 1999. The closing of the Dallas,
Texas plant was announced on January 19, 1999, and final production occurred on
April 22, 1999. The closing of the Holland, New York plant was announced on
May 10, 1999, and final production occurred on November 30, 1999. As of
December 31, 1999, 371 employees have been severed and severance and benefit
payments totaling $1.3 million have been charged to the restructuring reserve.
[Enlarge/Download Table]
1998 1998 1999 CHANGE IN DEC. 31, 1999
CHARGE EXPENDITURES EXPENDITURES ESTIMATE BALANCE
-------- ------------ ------------ --------- -------------
(IN THOUSANDS)
Severance and benefits....... $1,848 $(81) $(1,181) $ (584) $ 2
Closing costs to exit
facilities................. 2,484 -- (273) (1,440) 771
Lease termination costs...... 468 -- (264) -- 204
Property taxes after ceasing
operations................. 941 -- (105) (749) 87
------ ---- ------- ------- ------
Total........................ $5,741 $(81) $(1,823) $(2,773) $1,064
====== ==== ======= ======= ======
Restructuring charges recorded in September 1998 of approximately
$2.8 million were reversed during the third and fourth quarters of 1999. The
original rationalization plan included the consolidation of two existing plants.
After attempts to hire additional skilled labor at the receiving plant failed,
the decision to close the first plant was reversed.
The Company recorded one-time implementation costs associated with the
rationalization plan of $9.4 million in cost of sales during 1999. These
expenses represent costs to move equipment and inventory, interim warehouse
costs, employee retention and relocation, recruiting costs, and other training
and efficiency costs. The Company also recorded one-time capital expenditure
costs of $2.0 million in 1999 associated with the rationalization plan. The
major undertakings of the rationalization plan were completed in 1999.
56
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. IMPAIRMENT OF SHADE/ALLIED LONG-LIVED ASSETS
The $41 million charge recorded at June 30, 1998 consisted of $39.9 million
write down of goodwill and a $1.1 million write down of trade names. The
recorded values of property, plant and equipment and trade names at
December 31, 1999, are $9.1 million and $3.3 million, respectively.
In November 1998, the continuous forms business was consolidated from six
separate manufacturing facilities where forms comprised only a portion of the
plant's manufacturing operations into two dedicated continuous forms plants.
Although manufacturing efficiencies and margins have improved, in 1999, the
Company announced its intentions to sell the Division.
At December 31, 1999, an analysis based upon the discounted expected future
cash flows of the acquired continuous forms business indicated that no further
write down of the carrying value of the long-lived assets was required.
6. RECEIVABLES
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Accounts receivable--trade................................ $36,870 $59,936
Accounts receivable--other................................ 2,592 2,972
Less allowance for doutful accounts and reserves for
customer deductions, returns and cash discounts......... (4,077) (2,248)
------- -------
$35,385 $60,660
======= =======
On May 24, 1996, the Company entered into a $60.0 million accounts
receivable facility. Accounts receivable are sold under the Company's accounts
receivable financing facility without legal recourse. However, under the terms
of the facility, receivables that become past due beyond a predetermined limit
are deemed "ineligible receivables" and the Company assumes the credit risk for
the collection of such accounts. As such, a portion of the allowance for
doubtful accounts covers receivables no longer reflected on the balance sheet.
In the event of a termination of the facility, as in the case of the Company's
chapter 11 filing, the lenders to the facility bear the risk of uncollectible
accounts.
Bad debt expense for 1999 and 1998 was $2.1 million and $2.5 million,
respectively.
7. INVENTORIES
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Raw material............................................. $28,633 $ 29,892
Work-in-process.......................................... 4,586 5,440
Finished goods........................................... 66,406 77,788
------- --------
99,625 113,120
LIFO reserve............................................. (6,542) (951)
------- --------
$93,083 $112,169
======= ========
57
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVENTORIES (CONTINUED)
In connection with the acquisitions of WR, Niagara and Shade/Allied, total
inventories for financial accounting purposes were written up by $15.8 million
to fair market value at the dates of acquisition including the reversal of
$7.3 million related to historical LIFO reserves. Using the LIFO method of
accounting, such write up formed the historical base year cost for the
inventories acquired.
In 1999, the liquidation of LIFO layers decreased cost of goods sold by
$1.0 million and in 1998, increased cost of goods sold by $1.7 million.
8. PROPERTY AND EQUIPMENT
[Download Table]
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------
IN YEARS 1999 1998
------------ -------- --------
(IN THOUSANDS)
Land......................................... $ 4,837 $ 7,002
Buildings.................................... 40 34,796 34,585
Machinery and equipment...................... 3-12 139,640 132,721
Office furniture and fixtures................ 3-7 16,324 12,351
Construction-in-progress..................... 4,477 5,109
-------- --------
200,074 191,768
Less accumulated depreciation................ 54,092 39,570
-------- --------
$145,982 $152,198
======== ========
In connection with the Shade/Allied acquisition, acquired property, plant,
and equipment was valued at $6.7 million in excess of it historical book value.
The land was written down by $34,000; buildings were written down $3.1 million;
and machinery and equipment were written up by $9.8 million. The Company
capitalized interest expense of $462,000 and $443,000 for 1999 and 1998,
respectively.
Included in property and equipment is real estate held for sale at closed
plants in Dallas, Texas; Gainesville, Georgia and Holland, New York with a
combined net book value of $5.7 million at December 31, 1999. No additional loss
is expected upon the ultimate disposition of these assets.
9. GOODWILL AND INTANGIBLE ASSETS
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Goodwill................................................ $145,716 $148,460
Intangible assets, primarily tradenames................. 41,545 43,665
Debt issuance costs..................................... 20,048 20,048
-------- --------
207,309 212,173
Less accumulated amortization........................... 34,099 26,368
-------- --------
$173,210 $185,805
======== ========
In 1999, the Company reversed transition reserves associated with the
Williamhouse and Niagara acquisitions to reduce goodwill and tradenames by
$3.9 million. In 1998, the Company wrote-down goodwill and tradenames associated
with its Shade/Allied business by $41.0 million. See note 5.
58
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ACCRUED EXPENSES
[Download Table]
DECEMBER 31,
1999 1998
-------- --------
(IN THOUSANDS)
Acquisition integration costs............................. $ 900 $ 6,190
Sales volume discounts.................................... 28,022 18,572
Salaries, wages and benefits.............................. 3,756 4,922
Interest.................................................. 16,557 3,808
Insurance reserves........................................ 3,624 5,550
Other..................................................... 7,161 8,036
------- -------
$60,020 $47,078
======= =======
11. LONG-TERM DEBT
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Revolving credit facility............................... $252,650 $235,150
13% Senior Subordinated Notes due 2005.................. 130,000 130,000
Industrial revenue bonds................................ 6,515 7,165
Notes payable........................................... 763 584
Capitalized lease obligations........................... 1,639 2,012
-------- --------
391,567 374,911
Less current portion.................................... 391,567 1,236
-------- --------
$ -- $373,675
======== ========
As of December 31, 1999, all indebtedness of the Company is in default and
has been classified as a current liability in its balance sheet.
REVOLVING CREDIT FACILITY
Prior to the Chapter 11 filing, the Company maintained a $275 million
revolving credit facility, which was used, in part, to finance the Company's
operations. The revolving credit facility required that substantially all of the
Company's assets were pledged as collateral. On November 12, 1999, the Company
was notified by its banking group of a default of its revolving credit facility.
The default stemmed from the formation of new subsidiaries in December 1997
related to a reorganization of the Company's corporate structure without proper
notification to the banks. The reorganization was implemented primarily for
state tax purposes and included the transfer of assets between existing entities
and transfers to the new subsidiaries.
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.
59
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LONG-TERM DEBT (CONTINUED)
At December 31, 1999 and 1998, the Company had letters of credit outstanding
totaling $11.8 million and $12.3 million, respectively.
SENIOR SUBORDINATED NOTES
In June 1996, AP&P Delaware issued $200 million of publically traded notes
("Notes") of which $130 million remains outstanding. The Notes are unsecured and
subordinated to all senior bank debt. Interest is payable semi-annually on
May 15 and November 15. The Notes are redeemable on and after November 15, 2000,
at AP&P Delaware's option, at redemption prices ranging from 106.5% of the face
value of the notes in 2000 to 100% of the face value of the notes in 2003 or
thereafter.
The Notes are fully and unconditionally guaranteed by all subsidiaries of
AP&P Delaware, except Notepad, on a joint, several and senior subordinated basis
(AP&P is not a guarantor of the Notes). The Notes contain restrictive covenants
which, among other things, limit dividends, repurchase of capital stock and
investments, incurrence of additional indebtedness, transactions with affiliates
and other matters customarily restricted in such agreements. The default
described above on the revolving credit facility prevented AP&P from paying
interest on the Notes due November 15, 1999, thereby causing a default on the
Notes as well.
OTHER
At December 31, 1999, the Company had outstanding various industrial revenue
bonds in the aggregate of $6.5 million. The bonds bear interest rates ranging
from 3.2% to 4.8%. Aggregate annual principal payments ranging from $650,000 to
$1.2 million are due through 2010. The payment of principal and interest on the
bonds is secured by letters of credit and guarantees by the Company. In
addition, at December 31, 1999, the Company had outstanding notes payable
contracts totaling $763,000 for the purchase of equipment.
12. PENSION PLAN AND 401(k) PLAN
At December 31, 1999, the Company was a sponsor of three qualified defined
benefit pension plans and a post retirement plan, all of which were assumed as
part of acquisitions. During 1998, two of the qualified defined benefit pension
plans were merged. The Company's liabilities under such plans are included in
other liabilities in the consolidated balance sheets.
The Company maintains retirement plans (401(k) plan) for the benefit of all
employees who meet minimum age and service requirements. Company contributions
to the plans may be made at the discretion of its Board of Directors.
Contributions to the plans were approximately $1.4 million, $2.3 million and
$1.2 million for the years ended December 31, 1999, 1998 and 1997, respectively.
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
In July 1996, the Company sold 12,500,000 shares of common stock in an
initial public offering. The net proceeds amounted to $172.8 million after
deducting underwriting discounts, legal and accounting fees, registration fees
and travel expenses. The Company used the proceeds and working capital
to:(i) repay $95.8 million on the indebtedness incurred under the old bank
credit agreement, (ii) redeem $70.0 million principal amount of the 13% Notes
from the holders thereof on a pro rata basis, and (iii) pay $7.7 million in
redemption premium on such Notes.
60
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Prior to the completion of the initial public offering, the Company's
shareholders approved an 8.1192-for-one stock split for all of the then
outstanding common stock shares and common stock options. Concurrently with the
stock split, all of the outstanding preferred stock and preferred stock options
were converted into shares of common stock and common stock options,
respectively, using a conversion price determined by dividing the preferred
stock liquidation value of $1,948.50 per share by the initial public offering
price per share of $15. All common stock share amounts have been restated to
reflect the stock split; however, the common stock share amounts have not been
restated to reflect the conversion of preferred stock and preferred stock
options.
The preferred stock has no dividend rights and, except as required by law,
is non-voting. There was no preferred stock outstanding during 1999, 1998 and
1997.
STOCK OPTIONS
1992 STOCK PLAN. On July 31, 1992, the Board of Directors of the Company
adopted the AMPAD HOLDING CORPORATION 1992 KEY EMPLOYEES STOCK OPTION PLAN
("1992 Stock Plan"), which authorized grants of stock options and the sale of
common stock to current or future employees, directors, consultants or advisers
of the Company or its subsidiaries. During 1992, 1994 and 1995, the Company
granted options to purchase 2,839,000 shares of common stock to three of its
officers, who were also stockholders, at weighted average purchase prices
ranging from $.007 to $1.65 per share. Currently, all options granted pursuant
to the 1992 Stock Plan are exercisable and originally expired 15 months after
the termination of the option holder's employment with the Company or any of its
subsidiaries. The expiration period for certain options granted under this plan
were extended in 1998 upon termination of employment of the option holders. The
extension of the option terms did not result in compensation expense in excess
of that previously recorded upon granting of options. On June 22, 1996, the
Board of Directors terminated the 1992 Stock Plan.
1996 STOCK PLAN. On June 22, 1996, the Company adopted the 1996 KEY
EMPLOYEES STOCK INCENTIVE PLAN ("1996 Stock Plan"). The 1996 Stock Plan provides
for the granting to employees and other key individuals who perform services for
the Company the following types of incentive awards: options to purchase common
stock, stock appreciation rights with respect to the common stock, restricted
shares of common stock, performance grants and other types of awards that the
Compensation Committee deems to be consistent with the purposes of the 1996
Stock Plan. The 1996 Stock Plan affords the Company flexibility in tailoring
incentive compensation to support corporate and business objectives, and to
anticipate and respond to changing business environments and competitive
compensation practices.
An aggregate of 1,500,000 shares of common stock of the Company has been
reserved for issuance under the 1996 Stock Plan. Except for any other
adjustments made by the Board of Directors relating to a stock split or certain
other changes in the number of shares of common stock, or to reflect
extraordinary corporate transactions, further increases in the number of shares
authorized for issuance under the 1996 Stock Plan must be approved by the
stockholders of the Company. Stock options granted during 1996 under the Stock
Plan have a maximum term of ten years and vest equally over three years. During
1996, the Company granted options to purchase 742,000 shares of common stock at
a weighted average purchase price of $15.00 per share. During 1998, the Company
granted options to purchase 1,221,000 shares of common stock at a weighted
averaged purchase price of $3.32 per share. Effective October 1, 1998, all
options outstanding under the 1996 Stock Plan were repriced at $4.50 per share.
As part of the repricing, options outstanding were reduced using a conversion
ratio of .8 repriced option share for each former
61
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
option shares and the vesting period was restarted. In 1999, the Company granted
option to purchase 60,000 shares of common stock at a price of $4.50 per share.
NON-EMPLOYEE DIRECTOR PLAN. On June 22, 1996, the Company adopted the
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN ("Non-Employee Director Plan"). Pursuant
to the Non-Employee Director Plan, each non-employee director will receive a
one-time option grant to purchase 25,000 shares of common stock upon election or
appointment to the Board. In addition, each director will receive an annual
grant of options to purchase 2,000 shares of common stock beginning on the
latter of the date of such director's fourth anniversary of being elected to the
Board, or four years from the initial public offering date. The initial one-time
grants will vest over three years with 50% vesting in the first year and 25% in
the subsequent two years. The annual grants will vest in three equal
installments. The exercise price for all options granted under the Non-Employee
Director Plan will be at fair market value as of the date of grant. Options
granted under the Non-Employee Director Plan terminate ten years after the date
such options become exercisable. An aggregate of 350,000 shares of common stock
has been reserved for issuance under the Non-Employee Director Plan. During
1996, the Company granted options to purchase 125,000 shares of common stock to
the Company's non-employee directors at a weighted average purchase price of
$17.38 per share. In 1998, the Company granted options to purchase 25,000 shares
of common stock to a new director at $4.75 per share. In 1999, the Company
granted options to purchase 25,000 shares of common stock to a director at $1.50
per share.
MANAGEMENT STOCK PLAN. On June 22, 1996, the Company adopted the MANAGEMENT
STOCK PURCHASE PLAN ("Management Stock Plan"). The Management Stock Plan is
designed to provide equity incentives to selected members of the Company's
management, including employee Directors and executive officers. The
Compensation Committee of the Board of Directors, upon the recommendation of the
Company's Chief Executive Officer, will select eligible participants. Under the
Management Stock Plan, eligible participants will be able to elect to purchase
shares of common stock in lieu of up to 25% of their annual incentive bonuses.
The common stock will be sold under the Management Stock Plan at a 25% discount
from the fair market value on the date of purchase. An aggregate of 250,000
shares of common stock has been reserved under the plan and 36,000 shares were
sold in 1997.
KEY EMPLOYEES STOCK INCENTIVE PLAN. On April 27, 1999, the Company adopted
the 1999 KEY EMPLOYEES STOCK INCENTIVE PLAN ("Key Employee Plan"). The Key
Employee Plan is designed to enable the Company to attract, retain and motivate
its employees by providing for or increasing the proprietary interests of such
employees in the Company. A committee of the Board of Directors of the Company,
in its sole and absolute discretion, will select eligible participants. Awards
under the plan may include, without limitation, sales or bonuses of stock,
restricted stock, restricted stock unit, stock options, reload stock options,
stock purchase warrants, other rights to acquire stocks, securities convertible
into or redeemable for stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares, and an Award may consist
of one or more such security or benefit. 1,500,000 shares, subject to
adjustments, have been reserved under the plan, and no one employee shall be
granted more than 100,000 shares in any one calendar year. Stock options granted
during 1999 under the Key Employee Plan have a maximum term of ten years and
vest equally over three years. In 1999, the Company granted options to purchase
1,204,250 shares to various employees at a weighted average purchase price of
$1.595 per share.
OTHER OPTIONS. During 1998, the Company granted options to purchase
800,000 shares of common stock at $2.00 in connection with the recruiting of
executive officers. These options were approved by the
62
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Board of Directors and issued without stockholder approval pursuant to rules of
the New York Stock Exchange. These options were not issued under any of the
previously mentioned plans.
For the three years ended December 31, 1999, stock option activity is as
follows:
[Download Table]
WEIGHTED
SHARES SUBJECT AVERAGE
TO OPTION EXERCISE PRICE
-------------- --------------
(SHARES IN THOUSANDS)
Balance, December 31, 1996......................... 3,094 $ 4.413
Stock options forfeited............................ (80) $15.000
-----
Balance December 31, 1997.......................... 3,014 $ 4.130
Stock options granted.............................. 2,046 $ 2.826
Stock options exercised............................ (288) $ 0.038
Stock options cancelled due to reprice............. (517) $10.497
Stock options granted due to reprice............... 413 $ 4.500
Stock options forfeited............................ (451) $14.582
-----
Balance December 31, 1998.......................... 4,217 $ 1.919
Stock options granted.............................. 1,289 $ 1.728
Stock options exercised............................ (804) $ 0.062
Stock options forfeited............................ (330) $ 5.991
----- -------
Balance, December 31, 1999......................... 4,372 $ 1.854
===== =======
In 1999 all options were granted at fair market value on the date of the
grant.
As of December 31, 1999, the following information is presented for stock
options outstanding.
[Enlarge/Download Table]
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL SHARES SUBJECT EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/99 LIFE IN YEARS TO OPTION AT 12/31/99 PRICE
------------------------------------ ----------- ------------- -------------- ----------- --------
$ 0.028 1,007 0.7 $ 0.028 1,007 $ 0.028
$ 0.131 $ 1.750 603 8.6 $ 1.442 340 $ 1.681
$ 1.760 $ 1.874 948 9.7 $ 1.870 -- $ --
$ 1.875 $ 2.440 1,299 8.6 $ 2.023 678 $ 2.031
$ 3.125 $ 4.500 380 7.4 $ 4.500 373 $ 4.483
$ 4.750 $ 6.938 85 8.9 $ 4.574 19 $ 4.750
$15.000 $21.375 50 6.7 $18.188 50 $18.188
----- ------
4,372 2,467
----- ------
The average life is the average remaining contractual life of the
outstanding options in years. The average fair value at the date of the grant of
common stock options granted in 1999 was $1.728 per share. The average fair
value at the date of the grant of common stock options granted in 1998 was
$1.460 per share. There were no options granted in 1997.
63
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
In 1996, the Company adopted the disclosure-only option under Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
("SFAS No. 123").
On a pro forma basis, if the Company had recorded compensation expense in
1999, 1998 and 1997 for the stock options granted in accordance with the
accounting provisions of SFAS No. 123, the pro forma net loss before
extraordinary item would have been $83.5 million, $80.6 million and
$5.8 million, respectively; the basic pro forma net loss per share before
extraordinary item would have been $2.99, $2.91 and $0.21, respectively; and the
diluted pro forma net loss per share before extraordinary item for 1999, 1998
and 1997 would have been $2.99, $2.91 and $0.21. There was no dilution in 1999,
1998 and 1997 due to the loss.
The significant assumptions used to estimate the fair value of the stock
options granted in 1999 include risk free rates of return ranging from 4.91% to
6.32%, an expected option life of 5 years, an expected volatility of 76% and no
expected dividend payments.
The significant assumptions used to estimate the fair value of the stock
options granted in 1998 include risk free rates of return ranging from 4.44% to
5.80%, an expected option life of 5 years, an expected volatility of 22.7% and
no expected dividend payments.
14. INCOME TAXES
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Current
Federal.......................................... $ -- $ -- $ --
State............................................ 834 300 --
------- -------- ----
834 300 --
Deferred provision (benefit)....................... 22,436 (11,674) 642
------- -------- ----
Provision (benefit) for income taxes............... $23,270 $(11,374) $642
======= ======== ====
Reconciliation between the statutory U.S. federal income tax rate and the
Company's effective income tax rate is as follows:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Federal income tax rate......................... -(35.0)% -(35.0)% -(35.0)%
Valuation allowance............................. 74.0 % 7.0 % 0.0 %
Goodwill and intangible amortization............ 2.2 % 17.6 % 45.2 %
State taxes, net................................ -(2.0)% -(2.4)% 2.1 %
Other, net...................................... 0.7 % 0.2 % 4.4 %
------ ------ ------
Effective tax rate.............................. 39.9 % -(12.6)% 16.7 %
====== ====== ======
64
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
Temporary tax differences by balance sheet line item are as follows:
[Download Table]
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Current deferred tax assets (liabilities):
Accrued expenses............................. $ 92 $ 5,331 $ 4,896
Accounts receivable and allowances........... 505 1,219 6
Inventory valuation.......................... (2,897) (6,510) (6,687)
Net operating losses and tax credits......... -- -- 13,777
-------- -------- --------
Current deferred tax asset/(liability),
net........................................ $ (2,300) $ 40 $ 11,992
======== ======== ========
Noncurrent deferred tax assets (liabilities):
Trade names and intangibles.................. $(15,187) $(15,614) $(16,347)
Net operating losses and tax credits......... 49,509 26,728 --
Property and equipment, net.................. (29,206) (29,153) (30,780)
Accrued expenses............................. 7,326 7,400 7,650
-------- -------- --------
Noncurrent deferred tax asset/(liability).... 12,442 (10,639) (39,477)
Valuation allowance.......................... (49,509) (6,333) --
-------- -------- --------
Noncurrent deferred tax liability, net....... $(37,067) $(16,972) $(39,477)
======== ======== ========
A deferred tax asset valuation allowance of $43.3 million was recorded in
1999 and a deferred tax asset valuation allowance of $6.3 million was recorded
in 1998. This valuation allowance reduced the deferred tax asset to an amount
which the Company believes, based on the Company's estimates of its future
taxable earnings, is realizable. Therefore, the effect on the income tax
provision related to the valuation allowance was an expense of $43.3 million for
the year ended December 31, 1999, and $6.3 million for the year ended
December 31, 1998. In future periods, the Company's provision for income taxes
may be impacted by adjustments to the valuation allowance.
At December 31, 1999, the Company had net operating loses available to
reduce future taxable income of approximately $124.5 million which will expire
in the years 2007 through 2019. In the event certain changes in ownership occur
as defined by Internal Revenue Code Section 382 there would be an annual
limitation on the amount of net operating loss carryforwards that could be
utilized. In addition, the Company has approximately $1.4 million of alternative
minimum tax credit carried forward. The acquisition of WR (Note 1) resulted in a
change of control of WR. Consequently, the utilization of these credits in
future periods may be subject to limitation.
65
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company is obligated under noncancelable operating leases for office
space and machinery and equipment, which expire at various times through 2016.
Annual minimum lease commitments under these leases amount to the following:
[Download Table]
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
2000........................................................ $ 6,502
2001........................................................ 5,005
2002........................................................ 4,634
2003........................................................ 3,634
2004........................................................ 3,436
Thereafter.................................................. 29,264
-------
Total....................................................... $52,475
=======
Total rent expense was approximately $7.5 million, $7.9 million,
$6.6 million for 1999, 1998 and 1997, respectively.
LITIGATION
Between March 10, 1998 and April 11, 1998, three complaints were filed in
the United States District Court for the Northern District of Texas naming as
defendants the Company, certain of its officers and directors and certain of the
underwriters and other related entities involved in the Company's initial public
offering. The plaintiffs in the first two complaints purport to represent a
class of stockholders who acquired shares of the Company's common stock between
July 2, 1996 and December 17, 1997. The complaints seek unspecified damages and
other relief under the federal securities laws based on allegations that the
Company made omissions and misleading disclosures in public reports and press
releases and to securities analysts during 1996 and 1997 concerning the
Company's financial condition, its future business prospects and the impact of
various acquisitions. These two lawsuits were consolidated on July 2, 1998. The
third complaint was dismissed without prejudice by the plaintiffs on
September 29, 1998. Motions to dismiss have been filed in the consolidated cases
and all briefing is complete. Pending a ruling on the motions to dismiss, all
proceedings in the consolidated action have been stayed. To the extent that the
motions to dismiss are denied in whole or in part, the Company believes that it
has meritorious defenses to plaintiff's claims and, subject to actions relating
to the lawsuit under the company's bankruptcy proceedings, intends to vigorously
defend the action.
ENVIRONMENTAL MATTERS
The operations of the Company are subject to federal, state and local laws
and regulations relating to the environment. Such laws and regulations impose
limitations on the discharge of pollutants and establish standards for
management of waste. While there can be no assurance that the Company is at all
times in complete compliance with all such requirements, the Company has made
and will continue to make capital and other expenditures to comply with such
requirements.
The Company has been named a potentially responsible party ("PRP") under
CERCLA at five waste disposal sites. The Company settled its liability at four
of these sites as a de minimis party. At the Spectron
66
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
site in Elkton, Maryland, the Company paid approximately $1,300 in 1989 as a de
minimis settlement for an initial removal action at the site. In 1995, the
Company received a notice of a remedial action at the site, and based upon its
allocation in 1989, expects to be eligible for a de minimis or de micromis
settlement. The Company is aware that Niagara has been named a PRP at the
Envirotek II site in Tonawanda, New York with respect to which Niagara expects
to be eligible for a de minimis settlement.
GENERAL
The potential effect of the Company's chapter 11 bankruptcy proceedings will
be considered by the Company with regard to any decisions or actions relating to
the foregoing Legal Proceedings. The resolution in any reporting period of one
or more of the foregoing matters in a manner adverse to the Company could have a
material adverse effect on the Company's financial condition or results of
operations. The Company is also a party to various other litigation matters
incidental to the conduct of its business. Although the outcome of these matters
cannot be predicted with certainty, management does not expect the outcome of
any of the matters in which it is currently involved to have a material adverse
effect on the Company's financial position.
16. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1999, 1998 and 1997, the Company expensed
$1.7 million, $2.2 million and $2.4 million, respectively, for management and
directors' fees and out of pocket expenses payable to the principal stockholder.
Unpaid fees of $2.7 million and $.9 million are included in accounts payable and
accrued expenses in the consolidated balance sheets at December 31, 1999 and
1998, respectively. The Company's revolving credit facility, as amended through
September 30, 1998, prohibits the future payment of management fees pursuant to
the Company's Advisory Agreement with its principal stockholder. The principal
stockholder has agreed to waive any default arising from such non-payment of
fees through December 31, 1999, or until such earlier time as the Company is
allowed to pay such fees by its banking group. In September 1998, the Company
renegotiated its Advisory Agreement to reduce the fee from $2.0 million to
$1.5 million annually.
The Company had an outstanding note receivable of approximately $289,000,
and $273,000 at December 31, 1999 and 1998, respectively, from its former
President and Chief Operating Officer. In 1998, the note was extended to
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 loan is due in March 2001 and bears interest at a rate of 5.89%. The Company
had an outstanding note receivable of approximately $1.1 million and
$1.0 million at December 31, 1999 and 1998, respectively. The loan is secured by
shares of common stock.
Mr. Herbert M. Kohn, a former Director of the Company, is also a partner in
the law firm of Bryan Cave LLP. The firm provided legal services to the Company
valued at approximately $173,400, $424,400 and $444,000 in 1999, 1998 and 1997,
respectively.
The notes are reflected as adjustments to stockholders' deficit at
December 31, 1999 and 1998.
17. OTHER INFORMATION
Substantially all of the Company's operations are conducted within the
United States.
67
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. OTHER INFORMATION (CONTINUED)
One customer accounted for 21%, 15% and 12% of the Company's net sales in
1999, 1998 and 1997, respectively.
18. SUBSEQUENT EVENTS
On March 8, 2000, the Company announced that it has signed a letter of
intent with Taylor Corporation for the purchase of the Company's Creative Card
division located in Chicago. The Company expects the sale to be finalized in the
second quarter of 2000. Such sale subject to the approval of the bankruptcy
court, is not expected to result in a gain.
On March 21, 2000, the Company was notified by one of its major customers of
the Ampad division that it intends to move its business to other suppliers. In
1999, that customer accounted for approximately $42 million or 6.4% of the
Company's sales.
19. SUMMARIZED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
The 13% Senior Subordinated Notes are guaranteed by all wholly owned
subsidiaries of American Pad & Paper Company of Delaware, Inc. except for
Notepad. The subsidiary guaranties are full, unconditional and joint and
several. The Company is not a guarantor of the Senior Subordinated Notes.
Separate financial statements of the guarantor subsidiary are not presented
because management has determined that they would not be material to investors.
However, summarized financial information as of December 31, 1999 and 1998 and
for the years then ended is presented. The summarized financial information is
as follows:
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------
AP&P DELAWARE
& GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
(IN THOUSANDS)
Current assets............................. $109,871 $42,094 $ -- $151,965
Non-current assets......................... 362,133 110 (41,980) 320,263
-------- ------- -------- --------
Total assets............................... $472,004 $42,204 $(41,980) $472,228
======== ======= ======== ========
Current liabilities........................ $494,919 $ 224 $ -- $495,143
Non-current liabilities.................... 37,864 -- -- 37,864
Equity (deficit)........................... (60,779) 41,980 (41,980) (60,779)
-------- ------- -------- --------
Total liabilities and equity (deficit)..... $472,004 $42,204 $(41,980) $472,228
======== ======= ======== ========
Net sales.................................. $572,616 $ -- $ -- $572,616
Gross profit............................... 41,531 -- -- 41,531
Income(loss) from continuing operations.... (16,348) 4,350 (2,610) (14,608)
Net income(loss)........................... $(81,464) $ 2,610 $ (2,610) $(81,464)
68
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUMMARIZED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES (CONTINUED)
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
AP&P DELAWARE
& GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
(IN THOUSANDS)
Current assets............................. $137,813 $39,327 $ -- $177,140
Non-current assets......................... 378,480 230 (39,370) 339,340
-------- ------- -------- --------
Total assets............................... $516,293 $39,557 $(39,370) $516,480
======== ======= ======== ========
Current liabilities........................ $103,645 $ 187 $ -- $103,832
Non-current liabilities.................... 391,935 -- -- 391,935
Equity (deficit)........................... 20,713 39,370 (39,370) 20,713
-------- ------- -------- --------
Total liabilities and equity (deficit)..... $516,293 $39,557 $(39,370) $516,480
======== ======= ======== ========
Net sales.................................. $662,031 $ -- $ -- $662,031
Gross profit............................... 64,575 -- -- 64,575
Income(loss) from continuing operations.... (47,172) 1,774 (1,064) (46,462)
Net income(loss)........................... $(78,647) $ 1,064 $ (1,064) $(78,647)
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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1999--QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
Net sales........................................ $137,631 $134,051 $144,717 $156,217
Gross profit..................................... 12,860 8,576 12,733 7,362
Net loss......................................... (12,767) (14,183) (9,201) (45,313)
Basic/diluted loss per share
Loss before cumulative effect of change in
accounting principle......................... $ (0.43) $ (0.51) $ (0.33) $ (1.59)
Cumulative effect of a change in accounting
principle.................................... (0.03) 0.00 0.00 (0.00)
-------- -------- -------- --------
Net loss....................................... $ (0.46) $ (0.51) $ (0.33) $ (1.59)
1998--QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
Net sales........................................ $161,595 $146,724 $174,160 $179,552
Gross profit..................................... 19,422 3,397 17,698 24,058
Net loss......................................... (2,085) (55,937) (13,394) (7,231)
Basic/diluted EPS--net loss per share............ $ (0.08) $ (2.02) $ (0.48) $ (0.26)
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant have duly caused this reportto signed on
its behalf by the undersigned, thereunto duly authorized, as of March 30, 2000.
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AMERICAN PAD & PAPER COMPANY
as Registrant
/s/ JAMES W. SWENT III /s/ DAVID N. PILOTTE
------------------------------------------- -------------------------------------------
James W. Swent III David N. Pilotte
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND VICE PRESIDENT, CORPORATE CONTROLLER
DIRECTOR AND CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER)
(PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below as of March 30, 2000, by the following persons
on behalf of the registrant and in the capacities indicated.
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/s/ ROBERT C. GAY /s/ JOHN H. RODGERS
------------------------------------------- -------------------------------------------
Robert C. Gay John H. Rodgers
CO-CHAIRMAN AND DIRECTOR DIRECTOR
/s/ SCOTT R. WATTERSON /s/ GREGORY M. BENSON
------------------------------------------- -------------------------------------------
Scott R. Watterson Gregory M. Benson
DIRECTOR DIRECTOR
/s/ PAUL B. EDGERLEY /s/ JEFFREY K. HEWSON
------------------------------------------- -------------------------------------------
Paul B. Edgerley Jeffrey K. Hewson
DIRECTOR DIRECTOR
70
EXHIBIT INDEX
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EXHIBIT
NO. DESCRIPTION
--------------------- -----------
2.1 Stock Purchase Agreement, dated May 29, 1996, by and among
American Pad & Paper Company of Delaware, Inc., Niagara
Envelope Company, Inc. and the person named therein.(1)
3.1(i) Restated Certificate of Incorporation of the Company(3)
3.1(ii) Amended and Restricted By-laws of the Company.(3)
4.1 Indenture, dated as of December 1, 1995, among American
Pad & Paper Company of Delaware, Inc., the Subsidiary
Guarantors and the Trustee (including Form of Note).(2)
4.2 Purchase Agreement, dated as of November 17, 1994, among
American Pad & Paper Company of Delaware, Inc., the
Subsidiary Guarantors and the Initial Purchasers.(1)
4.3 Registration Rights Agreement dated as of December 1, 1995,
among American Pad & Paper Company of Delaware, Inc., the
Subsidiary Guarantors and the Initial Purchasers named
therein.(1)
4.7 Notepad Funding Receivables Master Trust Pooling and
Servicing Agreement, dated October 31, 1995, among APPC,
Notepad Funding Corporation and Manufacturers and Traders
Trust Company (the "Pooling and Service Agreement").(1)
4.8 Series 1995-1 Supplement to the Pooling and Service
Agreement, dated October 31, 1995.(1)
4.9 Revolving Certificate Purchase Agreement, dated October 31,
1995 among APPC, Notepad Funding Corporation, Bankers
Trust Company and the Purchasers described therein.(1)
4.10 Receivables Purchase Agreement, dated October 31, 1995,
among APP., Notepad Funding Corporation and certain
subsidiaries.(1)
4.11 Credit Agreement, dated as of July 8, 1996, among the
Company, WR Acquisition, Inc., American Pad & Paper
Company of Delaware, Inc., various Lending Institutions,
Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas,
N.A., The Bank of Nova Scotia and the First National Bank
of Boston, as Co-Agents and Bankers Trust Company, as
Agent(3)
4.12 Security Agreement, dated as of July 8, 1996, among the
Company, WR Acquisition, Inc., American Pad & Paper
Company of Delaware, Inc., certain other subsidiaries of
American Pad & Paper Company, and Bankers Trust Company,
as Collateral Agent.(3)
4.13 Pledge Agreement, dated as of July 8, 1996, among the
Company, WR Acquisition, Inc., American Pad & Paper
Company of Delaware, Inc., the Lenders from time to time
party thereto, and Bankers Trust Company, as Agent.(3)
4.14 Form of Revolving and Swingline Note of American Pad & Paper
Company of Delaware, Inc.(3)
4.15 Subsidiary Guaranty, dated as of July 8, 1996, among each of
the Company's subsidiaries named therein and Bankers Trust
Company, as Agent for the Bank.(3)
4.16 Second Amendment to the Credit Agreement, dated as of
December 18, 1997, among the Company, WR
Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., various Lending Institutions, Bank of
Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The
Bank of Nova Scotia and the First National Bank of Boston,
as Co-Agents and Bankers Trust Company, as Agent.
71
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EXHIBIT
NO. DESCRIPTION
--------------------- -----------
4.17 Third Amendment to the Credit Agreement, dated as of
February 11, 1998, among the Company, WR
Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., various Lending Institutions, Bank of
Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The
Bank of Nova Scotia and the First National Bank of Boston,
as Co-Agents and Bankers Trust Company, as Agent.
4.18 Fourth Amendment to the Credit Agreement, dated as of April
6, 1998, among the Company, WR Acquisition, Inc., American
Pad & Paper Company of Delaware, Inc., various Lending
Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank
One, Texas, N.A., The Bank of Nova Scotia and the First
National Bank of Boston, as Co-Agents and Bankers Trust
Company, as Agent(9).
4.19 Fifth Amendment to the Credit Agreement, dated as of June
30, 1998, among the Company, WR Acquisition, Inc.,
American Pad & Paper Company of Delaware, Inc., various
Lending Institutions, Bank of Tokyo-Mitsubishi Trust
Company, Bank One, Texas, N.A., The Bank of Nova Scotia
and the First National Bank of Boston, as Co-Agents and
Bankers Trust Company, as Agent(10).
4.20 Sixth Amendment to the Credit Agreement, dated as of July
24, 1998, among the Company, WR Acquisition, Inc.,
American Pad & Paper Company of Delaware, Inc., various
Lending Institutions, Bank of Tokyo-Mitsubishi Trust
Company, Bank One, Texas, N.A., The Bank of Nova Scotia
and the First National Bank of Boston, as Co-Agents and
Bankers Trust Company, as Agent(10).
4.21 Seventh Amendment to the Credit Agreement, dated as of
September 30, 1998, among the Company, WR
Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., various Lending Institutions, Bank of
Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The
Bank of Nova Scotia and the First National Bank of Boston,
as Co-Agents and Bankers Trust Company, as Agent(11).
4.22 Eighth Amendment to the Credit Agreement, dated as of March
5, 1999, among the Company, WR Acquisition, Inc., American
Pad & Paper Company of Delaware, Inc., various Lending
Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank
One, Texas, N.A., The Bank of Nova Scotia and the First
National Bank of Boston, as Co-Agents and Bankers Trust
Company, as Agent(12).
4.23 Debtor-In-Possession Financing, dated as of January 18,
2000, among American Pad & Paper Company of
Delaware, Inc., et al and various Lending Institutions,
Bankers Trust, as Agent, First Union National Bank, as
Syndication Agent, and Deutsche Bank Securities Inc., as
Arranger.(13).
4.24 First Amendment to the Debtor-In-Possession Financing, dated
as of January 28, 2000, among American Pad & Paper Company
of Delaware, Inc., et al and various Lending Institutions,
Bankers Trust, as Agent, First Union National Bank, as
Syndication Agent, and Deutsche Bank Securities Inc., as
Arranger.(13).
4.25 Second Amendment to the Debtor-In-Possession Financing,
dated as of February 9, 2000, among American Pad & Paper
Company of Delaware, Inc., et al and various Lending
Institutions, Bankers Trust, as Agent, First Union
National Bank, as Syndication Agent, and Deutsche Bank
Securities Inc., as Arranger.(13).
10.1 Agreement and Plan of Merger, dated as of October 3, 1995,
among the Company, WHR Acquisition, Inc. and WR
Acquisition, Inc.(1)
10.2 Amendment No. 1 to WHR Merger Agreement, dated as of
October 31, 1995, among the Company, WHR
Acquisition, Inc. and WR Acquisition, Inc.(1)
72
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EXHIBIT
NO. DESCRIPTION
--------------------- -----------
10.3 Stock Purchase Agreement, dated as of October 30, 1995,
among WR Acquisition, Inc. and the Company(1)
10.4 Tax Sharing Agreement, dated as of October 30, 1995, among
American Pad & Paper Company of Delaware, Inc. and the
Subsidiary Guarantors.(1)
10.5 Agreement and Plan of Merger, dated as of October 31, 1995,
among Williamhouse Regency of Delaware, Inc. and Ampad
Corporation.(1)
10.6 Amended and Restricted Advisory Agreement, dated as of
October 31, 1995, among American Pad & Paper Company of
Delaware, Inc. and Bain Capital, Inc.(4)
10.7 Ampad Holding Corporation 1992 Key Employees Stock Option
Plan.(1)
10.12 Asset Purchase Agreement, dated as of June 29, 1994, by and
between Huxley Envelope corp., The Kent Paper Co., Inc.
and Williamhouse of California, Inc.(2)
10.13 Lease Agreement for City of Industry, California.(1)
10.14 Lease Agreement for Dubuque, Iowa(1)
10.15 Lease Agreement for Miamisburg, Ohio.(1)
10.16 Lease Agreement for North Salt Lake City, Utah.(1)
10.17 Lease Agreement for Tacoma, Washington.(1)
10.18 Change of Control Agreement between WR Acquisition, Inc. and
certain officers of American Pad & Paper Company of
Delaware, Inc.(1)
10.19 Registration Rights Agreement, dated as of July 31, 1992,
between the Company and the stockholders named therein.(2)
10.20 1996 Key Employee Stock Incentive Plan(3)
10.21 1996 Non-Employee Director Stock Option Plan.(3)
10.22 Employment Agreement between the Company and Charles Hanson
III.(2)(A)
10.23 Employment Agreement between the Company and Russell
Gard.(2)(A)
10.24 Amended and Restated Advisory Agreement between American
Pad & Paper Company and Bain Capital, Inc.(2)
10.25 Management Stock Purchase Plan.(3)
10.26 Employment Agreement between the Company and Timothy
Needham.(2)(A)
10.27 Agreement and Plan of Merger by and between
Shade/Allied, Inc. and American Pad & Paper Company of
Delaware, Inc.(6)
10.28 Indemnification Agreement by and between the Company and its
officers and directors(8).
10.29 Release Agreement with Charles Hanson III(10)
10.30 Severance Agreement with Charles Hanson III(10)
10.31 Release Agreement with Russell Gard(10)
10.32 Severance Agreement with Russell Gard(10)
10.33 Employment Agreement between the Company and James W. Swent
III(12)(A)
10.34 Release Agreement with Timothy Needham(12)
10.35 Severance Agreement with Timothy Needham(12)
10.36 1999 Key Employees Stock Incentive Plan(13)
73
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EXHIBIT
NO. DESCRIPTION
--------------------- -----------
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
The exhibits listed above are filed with the Securities and Exchange Commission
in this Form 10-K or are incorporated by reference as follows:
(1) Same-numbered exhibit to the Registration Statement on Form S-1 of American
Pad & Paper of Delaware, Inc. (File No. 333-3006); (2) Same-numbered exhibit to
the Registration Statement on Form S-1 of American Pad & Paper Company (File
No. 333-4000); (3) Exhibits to the Quarterly Report on Form 10-Q of the
registrants for the quarter ended June 30, 1996; (4) Exhibits to the Quarterly
Report on Form 10-Q of the registrants for the quarter ended September 30, 1996;
(5) Exhibits to the Annual Report on Form 10-K of the registrants for the year
ended December 31, 1996; (6) Exhibits to the Quarterly Report on Form 10-Q of
the registrants for the quarter ended March 31, 1997; (7) Exhibits to the
Quarterly Report on Form 10-Q of the registrants for the quarter ended June 30,
1997 and (8) Exhibits to the Quarterly Report on Form 10-Q of the registrants
for the quarter ended September 30, 1997.(9) Exhibits to the Quarterly Report on
Form 10-Q of the registrants for the quarter ended March 31, 1998,
(10) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the
quarter ended June 30, 1998, (11) Exhibits to the Quarterly Report on Form 10-Q
of the registrants for the quarter ended September 30, 1998, (12) Exhibits to
the Annual Report on Form 10-K of the registrant for the year ended
December 31, 1998, (13) Exhibits to the Annual Report on Form 10-K of the
registrant for the year ended December 31, 1999.
(A) These agreements constitute management compensation contracts for the
individuals named.
74
HELPFUL INVESTOR INFORMATION
INVESTOR INQUIRIES AND CORRESPONDENCE
Investors with questions about AP&P should contact:
Mark Lipscomb, Vice President
Investor and Corporate Communications
American Pad & Paper Company
17304 Preston Road, Suite 700
Dallas, TX 75252
Telephone: (972) 733-5415
Fax: (972) 733-6298
Email: mark.lipscomb@americanpad.com
COMPANY WEB SITE
American Pad & Paper makes information available on the
World Wide Web, our internet address is:
www.americanpad.com
COMPANY FINANCIAL INFORMATION
Several publications including the annual report and forms
10-K and 10-Q filed with the Securities and Exchange
Commission are available without charge by contacting:
American Pad & Paper Company
17304 Preston Road, Suite 700
Dallas, TX 75252
Telephone: (972) 733-5471
ADMINISTRATIVE INQUIRIES
The transfer agent for American Pad & Paper Company is
Boston EquiServe. Administrative inquiries relating to stock-
Holder records, stock transfer or change of ownership or
Address should be directed to:
Boston Bank c/o EquiServe
PO Box 8040
Boston, MA 02266-8040
Telephone: (781) 575-3120
Web site: www.equiserve.com
ANNUAL MEETING
Stockholders will be invited to attend the 2000 American Pad
& Paper Annual Meeting once the date is set. Formal notice
of the meeting will be included with the proxy statement.
COMMON STOCK INFORMATION
The Company's common stock trades on the OTC Bulletin
Board (OTCBB) under the symbol: AMPP
At December 31, 1999, there were about 28.5 million shares
outstanding and approximately 6,000 total stockholders.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Dallas, Texas
All other brand names are trademarks or registered trademarks of their
respective holders.
75
Dates Referenced Herein and Documents Incorporated by Reference
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