Document/Exhibit Description Pages Size
1: 10-K Annual Report 63 401K
2: EX-4.22 Instrument Defining the Rights of Security Holders 9 18K
3: EX-10.33 Material Contract 10 44K
4: EX-10.34 Material Contract 2 11K
5: EX-10.35 Material Contract 5 29K
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, 1998
Commission file number 1-11803
AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
[Download Table]
DELAWARE 04-3164298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 PRESTON ROAD, SUITE 700, DALLAS, 75252-5613
TX (Zip Code)
(Address of principal executive
offices)
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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 9, 1999, there were 27,724,045 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
$24.8 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
listed Parts and Items of Form 10-K: Proxy Statement for April 27, 1999 Annual
Meeting of Stockholders: Part III, Items 10, 11, 12 and 13.
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9
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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ITEM PAGE
--------- -----
PART I
1. Business............................................................................................ 11
Recent Developments................................................................................. 12
2. Properties.......................................................................................... 20
3. Legal Proceedings................................................................................... 21
4. Submission of Matters to a Vote of Security Holders................................................. 22
PART II
5. Market of Registrant's Common Equity and Related Stockholder Matters................................ 23
6. Selected Financial Data............................................................................. 24
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 26
7A. Quantitative and Qualitative Disclosures About Market Risk.......................................... 36
8. Financial Statements and Supplementary Data......................................................... 36
9. Changes in and Disagreements on Accounting and Financial Disclosure................................. 37
PART III
10. Directors and Executive Officers of the Registrant.................................................. 37*
11. Executive Compensation.............................................................................. 37*
12. Security Ownership of Certain Beneficial Owners and Management...................................... 37*
13. Certain Relationships and Related Transactions...................................................... 37*
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.................................... 37
Signatures .................................................................................................... 68
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* Included in Form 10-K by incorporation by reference to the Registrant's
Proxy Statement for the April 27, 1999, Annual Meeting of Stockholders.
10
American Pad & Paper Company (the "Company") is a holding company with no
separate operations. At March 9, 1999, the Company had 27,724,045 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"). Although additional wholly owned subsidiaries of AP&P
Delaware are maintained, AP&P Delaware is the primary operating company 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 products 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 products 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, management has enhanced the Company's scale, broadened its
product line, expanded upon its national presence and strengthened its
distribution capabilities through acquisition and innovation while
simultaneously delivering higher customer service levels.
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.
11
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.
Although the Company regularly engages in discussions with companies
regarding potential acquisitions, it currently does not have any agreements or
understandings relating to any future acquisitions. The terms of the Company's
revolving credit facility currently restrict the Company from any acquisitions
of businesses without the formal approval of the Company's banking group.
RECENT DEVELOPMENTS
MANAGEMENT CHANGES. On June 2, 1998, the Company appointed James W. Swent
III as Executive Vice President and Chief Financial Officer. Mr. Swent was
previously Chief Executive Officer of Cyrix Corporation, a manufacturer of
microprocessors for the PC industry, until its merger with National
Semiconductor. In addition, he has held operations and financial executive
positions with other companies, including Northern Telecom, Rodime PLC and
Memorex.
On July 7, 1998, the Company appointed Mr. Swent as Chief Executive Officer
and a member of its Board of Directors ("Board"). As Chief Executive Officer,
Mr. Swent replaced Charles G. Hanson III who resigned from his position as
Chairman and Chief Executive Officer and director of the Company. Robert C. Gay,
who had been a director of the Company since 1992 and who is Managing Director
of Bain Capital became Chairman of the Board. Also, Russell M. Gard stepped down
as President and Chief Operating Officer, but continues his duties as Vice
Chairman and a member of the Board.
On July 20, 1998, the Company appointed William L. Morgan as Executive Vice
President, Operations. Mr. Morgan has 35 years of manufacturing experience
ranging from entrepreneurial start-ups to large-scale multi-national
corporations including Northern Telecom, Texas Instruments, Memorex and Fujitsu.
On September 3, 1998, John H. Rodgers was appointed to the position of
Senior Vice President, General Counsel and Secretary. Before joining the
Company, Mr. Rodgers was with The Southland Corporation where he held several
key executive positions including Executive Vice President, Chief Administrative
Officer, and General Counsel over a twenty year career. Timothy Needham,
President and Chief Operating Officer, resigned from the Company effective
October 31, 1998.
On December 1, 1998, the Company named James V. Heim as President of its
AMPAD division. Mr. Heim joined the Company from American Safety Razor where he
was Senior Vice President, responsible for all aspects of marketing, sales and
manufacturing. Prior to American Safety Razor, Mr. Heim held the position of
Senior Vice President of Sales and General Manager positions with
Maybelline/Cosmair, and senior marketing and sales positions with both Polaroid
and Procter & Gamble.
12
On March 17, 1999, the Company appointed James W. Swent III as Co-Chairman
of the Board with Mr. Gay. Also, John H. Rodgers and Jeffery K. Hewson were
appointed to the Board of Directors replacing Jonathan S. Lavine and filling a
newly created vacant position. Mr. Hewson has held executive positions including
President of the Beckley Cardy Group, Chief Executive Officer of United
Stationers, Inc., President of ACCO World Corporation--U.S. Division and Canada,
and is a director of ISA International, a publicly held company in Great
Britain.
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.
On September 1, 1998, the Company announced a plan to rationalize its
manufacturing operations. The plan includes plant consolidations, equipment
moves, plant/product changes, warehouse consolidations, and the addition of new
distribution centers. The rationalization is expected to result in an
approximate 14-18% reduction in manufacturing space and a net 7% reduction
(approximately 250 employees, primarily in manufacturing) in the workforce. The
third quarter restructuring charge of $5.7 million represents part of the
Company's rationalization plan and includes employee termination costs,
including severance and benefits totaling $1.8 million, costs to exit facilities
of $2.5 million, lease termination costs of $500,000 and property taxes after
ceasing operations of $900,000. In addition, in 1998, the Company recorded $0.9
million of one-time implementation costs associated with the rationalization
plan in cost of sales. These expenses represent professional consulting fees,
costs to move equipment and efficiency costs. Estimated capital expenditures of
$2.8 million and one-time implementation costs of $6.6 million that do not
qualify for current recognition will be recorded primarily in 1999. Such costs
include equipment and inventory transfer costs, employee retention and
relocation, recruiting costs, interim warehouse costs, and other training and
efficiency costs. The major undertakings of the rationalization plan are
expected to be completed in 1999. Upon full implementation, the plan is expected
to have a significant positive effect on the Company's financial performance,
resulting in an estimated annualized cost savings of approximately $10.0
million.
COVENANT VIOLATIONS/AMENDMENTS TO REVOLVING CREDIT FACILITY. As a result of
the second quarter 1998 loss, the Company was in default of certain covenants
based on EBITDA (earnings before interest, taxes, depreciation, amortization,
and certain noncash charges, as defined in the agreement) levels at June 30,
1998. On September 30, 1998, the Company amended its revolving credit facility
to eliminate all prior defaults and reinstate the original $300.0 million
available under the credit facility. The amended credit facility provided for
permanent reductions in availability of $25.0 million in December 1998 and 1999
and $50.0 million in July 2000. Fees of $1.0 million were paid in conjunction
with this amendment and will be amortized over the remaining life of the debt.
This amendment also provided that the interest rate incurred by the Company will
vary each quarter through July 2001, depending on the Company's consolidated
debt to EBITDA ratio at the beginning of each quarter, and requires the Company
to meet certain financial tests including minimum EBITDA levels, minimum
interest coverage ratios and maximum leverage ratios. The Company exceeded
EBITDA performance targets for the third and fourth quarters of 1998 and through
February 1999, as measured by the agreement. The amendment also limits capital
expenditures to $15.0 million per year in 1999 and 2000 and $7.5 million through
July 2001. The revolving credit facility matures in July 2001.
On March 5, 1999, the Company again amended its revolving credit facility.
The amendment rescheduled the $25 million line reduction from December 31, 1999,
to March 31, 2000. Other changes provided for an add-back for purposes of
calculating cumulative EBITDA of $6.3 million in certain charges absorbed in the
fourth quarter of 1998, and a more favorable manner in which proceeds from the
sale of assets are applied to scheduled line reductions. As amended, 50% of the
proceeds from the sale of assets are credited against the scheduled line
reduction of March 2000 and 50% to the scheduled reduction of July 2000.
13
COMPETITIVE STRENGTHS
The combination of the Company's products and customers distinguishes it as
a leading manufacturer and marketer of paper-based office products (excluding
copy paper) in North America. The Company attributes this position to the
following competitive strengths:
- MARKET LEADER. The Company believes it is a market leader in core products
sold to customers in the largest office products 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 believes it has
substantial opportunities for growth within several distribution channels
of the office products industry. 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 16 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.
- LOW-COST MANUFACTURER. The Company believes completion of its
rationalization plan will make 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
The Company's strategy includes the following:
- RETURN TO PROFITABILITY. The Company plans to return to profitability by
being among the lowest cost producers after completion of its
rationalization plan; improving asset management, particularly inventory,
equipment and receivables; enhanced information systems, including those
that increase productivity and provide efficiency; and 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.
14
- 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.
- PURSUE COMPLEMENTARY PRODUCT LINES AND STRATEGIC ACQUISITIONS. The office
products industry is highly fragmented despite continuing consolidation
among its manufacturers. The Company has been leading consolidation among
manufacturers of writing products, filing supplies, envelopes and machine
papers and believes, in subsequent years, the Company will have
opportunities to acquire companies in both its existing and complementary
product lines.
- 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. As an important part of its growth
strategy, for example, the Company has successfully introduced the
commodity envelope product lines acquired in the Williamhouse and Niagara
acquisitions to the AMPAD division's distribution channels under the
AMPAD-Registered Trademark- and private label names.
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 more than 700 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 more than 500 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 manufacturer of envelopes
serving the paper merchant/distributor and office products superstore channels.
In 1998, the Company produced over 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 30 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 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.
15
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:
[Enlarge/Download Table]
AMPAD WILLIAMHOUSE CREATIVE CARD
----------------------------------- ----------------------------------- ----------------------------
PRODUCTS
-Pads and Notebooks -Business Envelopes -Invitations
-Filing 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-
-Embassy-Registered Trademark- -Huxley-TM-
-Evidence-Registered Trademark- -Karolton-Registered Trademark-
-Globe-Weis-Registered Trademark- -Kent-Registered Trademark-
-Gold-Fibre-TM- -Kentwove-Registered Trademark-
-SCM-TM- -Peel & 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, Staples, Inc., accounted for 15%, 12% and 11% of the
Company's net sales in 1998, 1997, and 1996, 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.
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.
16
Current key customers of the Company include:
KEY CUSTOMERS
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OFFICE PRODUCTS SUPERSTORES MASS MERCHANDISERS PAPER MERCHANTS/DISTRIBUTORS
------------------------------------ ------------------------------------ ------------------------------------
Office Max Wal-Mart Nationwide
Staples xpedx
Unisource
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CONTRACT STATIONERS OFFICE PRODUCTS WHOLESALERS WAREHOUSE CLUBS
------------------------------------ ------------------------------------ ------------------------------------
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 but one of the key commodity grades of paper used
by the Company increased in cost between 6% and 18% in 1997. 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 1997 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 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.
17
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's principal competitor in this channel is
New York/National Envelope Group of National Envelope Corporation, a private
company. Another competitor in this channel is Murray Envelope Corp., a division
of American Mail-Well. In the direct channel, manufacturers sell customized
envelopes directly to high volume corporate users and mass mailers. Mail-Well
and Westvaco are the leading companies in this channel. In the office products
channel, manufacturers including Westvaco and Quality Park produce commodity
mailing envelopes for retail sale.
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, 1999, the Company had approximately 4,000 full-time
employees. All the Company's operations are non-union except for the operations
located in Scottdale, Pennsylvania; Appleton, Wisconsin; and Holland, New York
which have, in total, about 950 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
674 employees; the Holland contract expires December 7, 2000 and covers 135
employees; and the Appleton contract expires March 31, 2000 and covers 144
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. During 1998, the Company successfully
negotiated a five-year contract with the union representing the Scottdale union
employees. 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 plan announced in September 1998, an
announcement was made on November 9, 1998, that the Kosciusko, Mississippi plant
would be closing. The Kosciusko plant employed approximately 107 people at
December 31, 1998. A second announcement was made on January 19, 1999, that the
Dallas, Texas plant would be consolidating into the Corsicana, Texas facility,
which is less than 50 miles away. The Dallas plant employs approximately 150
people. Both plants are expected to continue operations at reduced levels
through the end of May 1999. All affected employees will be provided a severance
package as well as career transition assistance.
18
These decisions were based on several key factors designed to return the
Company to sustained profitability, to better balance manufacturing capacity
while enhancing service to customers, and to move the Company toward being the
lowest cost producer.
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.
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.
The Company's AMPAD division sells primarily to customers such as office
products superstores, mass merchants and national contract stationers. Such
customers periodically adjust the levels of inventory in the retail distribution
channels, either in retail stores or in distribution centers. The Company 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 future quarters.
The Company's gross profit is directly affected by, among other factors, the
mix of products sold. Based on the Company's current product categories, the
Company's gross profit will be negatively or positively affected as the actual
product sales mix changes.
19
ITEM 2 PROPERTIES
PROPERTIES AND FACILITIES
As of December 31, 1998, the Company operated manufacturing, distribution,
office and warehouse space in the United States with a total area of
approximately 4.7 million square feet. Of this area, approximately 1.7 million
square feet are leased and approximately 3.0 million square feet are owned by
the Company. All of the Company's owned facilities are pledged as collateral
under the Company's revolving credit facility.
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 20 facilities. The Company believes that
substantially all of its property and equipment is in good condition and that it
has sufficient capacity to 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, 1998:
[Enlarge/Download Table]
BUSINESS OWNED OR EXPIRATION OF SQUARE
LOCATION DIVISION(1) LEASED LEASE(2) FEET
------------------------------------------------------------ ---------- --------- ----------------- ---------
CALIFORNIA City of Industry........................... W Owned -- 85,000
City of Industry........................... W Leased 2008 105,000
COLORADO Denver..................................... W Leased 2001 55,000
GEORGIA Gainesville................................ W Owned -- 70,000
ILLINOIS Mattoon.................................... A Leased month-to-month 29,200
Mattoon.................................... A Owned -- 261,800
Mattoon.................................... A Leased 3 month renewable 40,000
term
Mattoon.................................... A Leased 1999 64,351
Chicago.................................... W Leased 2000 107,000
Chicago.................................... W Owned -- 227,000
Chicago.................................... W Owned -- 128,716
MASSACHUSETTS Westfield.................................. A Owned -- 165,785
Holyoke.................................... A Owned -- 536,000
MISSISSIPPI Kosciusko.................................. A Leased 2000 303,085
NEW JERSEY Bloomfield................................. W Leased 2003 94,000
NEW YORK New York City.............................. W Leased 1999 5,000
New York City.............................. W Leased (b) 50,000
Buffalo.................................... W Leased (b) 10,000
Holland.................................... W Owned -- 168,000
PENNSYLVANIA Scottdale.................................. W Owned -- 400,000
Mt. Pleasant............................... W Leased 1999 226,000
Lancaster.................................. A Leased 2001 105,000
TENNESSEE Morristown................................. W Owned -- 255,000
TEXAS Dallas..................................... Corporate Leased 2002 49,119
Office
Dallas..................................... W Owned -- 105,000
Dallas..................................... W Leased -- 12,500
Corsicana.................................. W Owned -- 250,000
UTAH Salt Lake City............................. A Leased 2016 385,106
WASHINGTON Kent....................................... W Leased 1999 38,400
WISCONSIN DePere..................................... A Owned (a) 95,853
Appleton................................... W Owned (a) 313,000
------------------------------
(1) "A" indicates operations associated with the Company's AMPAD division and
"W" indicates operations associated with the Company's Williamhouse
division.
(2) (a) Two or more properties owned at this location.
(b) Lease/subleased to third parties.
20
ITEM 3 LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
Between March 10, 1998 and April 11, 1998, three complaints were filed in
the United States District Court for the Northern District of Texas naming as
defendants the Company, certain of its officers and directors and certain of the
underwriters and other related entities involved in the Company's initial public
offering. The plaintiffs in the first two complaints purport to represent a
class of stockholders who acquired shares of the Company's common stock between
July 2, 1996, and December 17, 1997. The complaints seek unspecified damages and
other relief under the federal securities laws based on allegations that the
Company made omissions and misleading disclosures in public reports and press
releases and to securities analysts during 1996 and 1997 concerning the
Company's financial condition, its future business prospects and the impact of
various acquisitions. These two lawsuits were consolidated on July 2, 1998. The
third complaint was dismissed without prejudice by the plaintiffs on June 29,
1998. Motions to dismiss have been filed in the consolidated cases and all
briefing is complete. Pending a ruling on the motions to dismiss, all
proceedings in the consolidated action have been stayed. To the extent that the
motions to dismiss are denied in whole or in part, the Company believes that it
has meritorious defenses to plaintiff's claims and intends to vigorously defend
the action.
The Company is a party to various other litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
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.
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 $880,000, $839,000 and $100,000 in
1998, 1997, and 1996, 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 $0.8 million to $1.4
million in each of 1999 and 2000. 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.
21
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.
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, 1998.
22
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 1998 and 1997 were:
[Download Table]
QUARTER ENDED LOW PRICE HIGH PRICE
-------------------------------------------------- ----------- -----------
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
1997:
March 31, 1997.................................... $ 15.000 $ 26.000
June 30, 1997..................................... $ 13.125 $ 19.250
September 30, 1997................................ $ 11.625 $ 24.813
December 31, 1997................................. $ 7.813 $ 14.625
As of December 31, 1998, there were approximately 6,250 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 and support its growth strategy. 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
subsidiary, AP&P Delaware. The payment of dividends by AP&P Delaware 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.
23
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, 1998, 1997 and 1996 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, 1995 and
1994 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]
THE COMPANY
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
INCOME STATEMENT DATA (1,9)
Net sales..................................................... $ 662,031 $ 687,335 $ 583,859 $ 257,160 $ 127,744
Cost of sales(2).............................................. 597,456 598,416 466,385 209,633 120,695
--------- --------- --------- --------- ---------
Gross profit.................................................. 64,575 88,919 117,474 47,527 7,049
Selling and marketing expenses................................ 21,261 22,246 16,964 6,254 5,059
General and administrative expenses........................... 31,840 19,133 16,438 10,447 4,867
Amortization of goodwill and intangible assets................ 5,939 6,110 4,488 879 114
Restructuring charges(3)...................................... 5,741 -- -- -- --
Loss on sales of accounts receivable.......................... 3,226 2,954 1,823 423 --
Management fees and services(4)............................... 2,030 4,871 3,880 542 575
Write down of assets--Shade/Allied(5)......................... 41,000 -- -- -- --
Nonrecurring compensation charge(6)........................... -- -- -- 27,632 --
--------- --------- --------- --------- ---------
Income (loss) from operations................................. (46,462) 33,605 73,881 1,350 (3,566)
Interest expense.............................................. 44,970 37,843 42,968 13,657 4,560
Other income.................................................. (1,411) (389) (1,153) (735) (90)
--------- --------- --------- --------- ---------
Income (loss) before income taxes............................. (90,021) (3,849) 32,066 (11,572) (8,036)
Provision (benefit) for income taxes.......................... (11,374) 642 13,852 (6,538) (488)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item....................... (78,647) (4,491) 18,214 (5,034) (7,548)
Extraordinary loss from extinguishment of debt, net of income
tax benefit................................................. -- -- (19,995) (9,652) --
--------- --------- --------- --------- ---------
Net loss...................................................... $ (78,647) $ (4,491) $ (1,781) $ (14,686) $ (7,548)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share(7):
Basic earnings per share:
Before extraordinary item................................... $ (2.84) $ (0.16) $ 1.05 $ (0.69) $ (1.03)
Extraordinary item.......................................... -- -- (1.15) (1.32) --
--------- --------- --------- --------- ---------
Net loss.................................................... $ (2.84) $ (0.16) $ (.10) $ (2.01) $ (1.03)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share:
Before extraordinary item................................... $ (2.84) $ (0.16) $ 0.99 $ (0.69) $ (1.03)
Extraordinary item.......................................... -- -- (1.09) (1.32) --
--------- --------- --------- --------- ---------
Net loss.................................................... $ (2.84) $ (0.16) $ (0.10) $ (2.01) $ (1.03)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares and common share
equivalents outstanding(7):
Basic....................................................... 27,718 27,431 17,408 7,307 7,307
Diluted..................................................... 27,718 27,431 18,426 7,307 7,307
OTHER DATA:
Depreciation and amortization................................. $ 19,769 $ 18,639 $ 14,253 $ 4,248 $ 942
Capital expenditures.......................................... $ 15,000 $ 23,095 $ 15,109 $ 5,640 $ 942
[Enlarge/Download Table]
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital............................................... $ 73,308 $ 152,819 $ 77,857 $ 108,845 $ 1,170
Total assets.................................................. $ 517,837 $ 638,401 $ 509,417 $ 504,356 $ 68,233
Long-term debt, less current maturities....................... $ 373,675 $ 398,577 $ 269,812 $ 443,794 $ 19,889
Stockholders' equity (deficit)(8)............................. $ 22,030 $ 100,666 $ 104,599 $ (66,421) $ (2,733)
24
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 July 5, 1994, the Company acquired the assets and assumed
certain liabilities of SCM.
- 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) Inventory cost is determined using the LIFO method of valuation.
(3) 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.
(4) 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.
(5) In the second quarter of 1998, the Company wroteoff $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) 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.
(8) 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.
(9) Certain amounts in the 1997 and 1996 consolidated financial statements have
been reclassified in order to conform to the presentation in the 1998
consolidated financial statements.
25
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 products retailers and distributors. Through its
Williamhouse division, the Company is the leading supplier of mill branded,
specialty and commodity business envelopes to paper merchants and distributors.
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. Machine
papers products are distributed by both the AMPAD and Williamhouse divisions.
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 but one of the key commodity grades of paper
utilized by the Company increased in cost between 6% and 18% in 1997. 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 1997 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
MANAGEMENT CHANGES. On June 2, 1998, the Company appointed James W. Swent
III as Executive Vice President and Chief Financial Officer. Mr. Swent was
previously Chief Executive Officer of Cyrix Corporation, a manufacturer of
microprocessors for the PC industry, until its merger with National
Semiconductor. In addition, he has held operations and financial executive
positions with other companies, including Northern Telecom, Rodime PLC and
Memorex.
On July 7, 1998, the Company appointed Mr. Swent as Chief Executive Officer
and a member of its Board of Directors ("Board"). As Chief Executive Officer,
Mr. Swent replaced Charles G. Hanson III who resigned from his position as
Chairman and Chief Executive Officer and director of the Company.
26
Robert C. Gay, who had been a director of the Company since 1992 and who is
Managing Director of Bain Capital became Chairman of the Board. Also, Russell M.
Gard stepped down as President and Chief Operating Officer, but continues his
duties as Vice Chairman and a member of the Board.
On July 20, 1998, the Company appointed William L. Morgan as Executive Vice
President, Operations. Mr. Morgan has 35 years of manufacturing experience
ranging from entrepreneurial start-ups to large-scale multi-national
corporations including Northern Telecom, Texas Instruments, Memorex and Fujitsu.
On September 3, 1998, John H. Rodgers was appointed to the position of
Senior Vice President, General Counsel and Secretary. Before joining the
Company, Mr. Rodgers was with The Southland Corporation where he held several
key executive positions including Executive Vice President, Chief Administrative
Officer, and General Counsel over a twenty year career. Timothy Needham,
President and Chief Operating Officer, resigned from the Company effective
October 31, 1998.
On December 1, 1998, the Company named James V. Heim as President of its
AMPAD division. Mr. Heim joined the Company from American Safety Razor where he
was Senior Vice President, responsible for all aspects of marketing, sales and
manufacturing. Prior to American Safety Razor, Mr. Heim held the position of
Senior Vice President of Sales and General Manager positions with
Maybelline/Cosmair, and senior marketing and sales positions with both Polaroid
and Procter & Gamble.
On March 17, 1999, the Company appointed James W. Swent III as Co-Chairman
of the Board with Mr. Gay. Also, John H. Rodgers and Jeffery K. Hewson were
appointed to the Board of Directors replacing Jonathan S. Lavine and filling a
newly created vacant position. Mr. Hewson has held executive positions including
President of the Beckley Cardy Group, Chief Executive Officer of United
Stationers, Inc., President of ACCO World Corporation--U.S. Division and Canada,
and is a director of ISA International, a publicly held company in Great
Britain.
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.
On September 1, 1998, the Company announced a plan to rationalize its
manufacturing operations. The plan includes plant consolidations, equipment
moves, plant/product changes, warehouse consolidations, and the addition of new
distribution centers. The rationalization is expected to result in an
approximate 14-18% reduction in manufacturing space and a net 7% reduction
(approximately 250 employees, primarily in manufacturing) in the workforce. The
third quarter restructuring charge of $5.7 million represents part of the
Company's rationalization plan and includes employee termination costs,
including severance and benefits totaling $1.8 million, costs to exit facilities
of $2.5 million, lease termination costs of $500,000 and property taxes after
ceasing operations of $900,000. In addition, in 1998, the Company recorded $0.9
million of one-time implementation costs associated with the rationalization
plan in cost of sales. These expenses represent professional consulting fees,
costs to move equipment and efficiency costs. Estimated capital expenditures of
$2.8 million and one-time implementation costs of $6.6 million that do not
qualify for current recognition will be recorded primarily in 1999. Such costs
include equipment and inventory transfer costs, employee retention and
relocation, recruiting costs, interim warehouse costs, and other training and
efficiency costs. The major undertakings of the rationalization plan are
expected to be completed in 1999. Upon full implementation, the plan is expected
to have a significant positive effect on the Company's financial performance,
resulting in an estimated annualized cost savings of approximately $10.0
million.
COVENANT VIOLATIONS/AMENDMENTS TO REVOLVING CREDIT FACILITY. As a result of
the second quarter 1998 loss, the Company was in default of certain covenants
based on EBITDA (earnings before interest, taxes, depreciation, amortization,
and certain noncash charges, as defined in the agreement) levels at June 30,
1998. On September 30, 1998, the Company amended its revolving credit facility
to eliminate all prior defaults and reinstate the original $300.0 million
available under the credit facility. The amended credit facility provided for
permanent reductions in availability of $25.0 million in December 1998 and 1999
and $50.0 million in July 2000. Fees of $1.0 million were paid in conjunction
with this amendment and will be
27
amortized over the remaining life of the debt. This amendment also provided that
the interest rate incurred by the Company will vary each quarter through July
2001, depending on the Company's consolidated debt to EBITDA ratio at the
beginning of each quarter, and requires the Company to meet certain financial
tests including minimum EBITDA levels, minimum interest coverage ratios and
maximum leverage ratios. The Company exceeded EBITDA performance targets for the
third and fourth quarters of 1998 and through February 1999, as measured by the
agreement. The amendment also limits capital expenditures to $15.0 million per
year in 1999 and 2000 and $7.5 million through July 2001. The revolving credit
facility matures in July 2001.
On March 5, 1999, the Company again amended its revolving credit facility.
The amendment rescheduled the $25 million line reduction from December 31, 1999,
to March 31, 2000. Other changes provided for an add-back for purposes of
calculating cumulative EBITDA of $6.3 million in certain charges absorbed in the
fourth quarter of 1998, and a more favorable manner in which proceeds from the
sale of assets are applied to scheduled line reductions. As amended, 50% of the
proceeds from the sale of assets are credited against the scheduled line
reduction of March 2000 and 50% to the scheduled reduction of July 2000.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the years 1998, 1997 and 1996. The
Company's historical results of operations for each of these periods are
significantly affected by the results for the following businesses acquired by
the Company: (i) Shade/Allied, acquired in February 1997, and (ii) Niagara,
acquired in June 1996.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(PERCENTAGE OF NET SALES)
INCOME STATEMENT DATA:
Net sales.............................................................................. 100.0 100.0 100.0
--------- --------- ---------
--------- --------- ---------
Gross profit........................................................................... 9.8 12.9 20.1
Selling and marketing expenses......................................................... 3.2 3.2 2.9
General and administrative expenses.................................................... 4.8 2.8 2.8
Restructuring charges.................................................................. 0.9 0.0 0.0
Goodwill amortization.................................................................. 0.9 0.9 0.8
Losses on sales of accounts receivable................................................. 0.5 0.4 0.3
Management fees and services........................................................... 0.3 0.7 0.7
Write down of intangible assets........................................................ 6.2 -- --
--------- --------- ---------
Income (loss) from operations.......................................................... (7.0) 4.9 12.6
Interest expense, net.................................................................. (6.8) (5.6) (7.4)
Other income, net...................................................................... 0.2 0.1 0.2
--------- --------- ---------
Income (loss) before taxes............................................................. (13.6) (0.6) 5.4
Provision (benefit) for income taxes................................................... (1.7) 0.1 2.4
--------- --------- ---------
Income (loss) before extraordinary item................................................ (11.9) (0.7) 3.0
Extraordinary loss from extinguishment of debt, net of income tax benefit.............. -- -- (3.4)
--------- --------- ---------
Net loss............................................................................... (11.9) (0.7) (0.4)
--------- --------- ---------
--------- --------- ---------
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
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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 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
29
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 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 $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 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.
YEAR 1997 COMPARED TO 1996
NET SALES increased to $687.3 million in 1997 from $583.9 million in 1996,
an increase of $103.4 million or 17.7%. Of this sales increase, $67.4 million is
due to the acquisition of Shade/Allied and $50.1 million is due to the inclusion
of a full year of sales from the acquisition of Niagara. Excluding sales
generated by the Shade/Allied and Niagara acquisitions, sales from the AMPAD
division increased $14.6 million and sales from the Williamhouse division
declined $28.5 million. The increase in sales from the AMPAD division is due
primarily to increased sales volume with the office products superstores and
mass market retail customers. The sales decline for the Williamhouse division is
due primarily to lower average selling prices in 1997 due to competitive market
conditions during the year and somewhat lower volumes of envelopes sold.
GROSS PROFIT decreased to $88.9 million, or 12.9% of net sales, in 1997 from
$117.5 million, or 20.1% of net sales, in 1996. This $28.6 million decrease is
primarily due to increased paper, material and labor costs which the Company did
not recover. During 1997, the Company's gross profit in the AMPAD division was
30
negatively affected by sales price incentives provided to the office superstores
and mass merchants. Additionally, the Company's gross profit in the Williamhouse
division was negatively affected by competitive market sales pricing conditions.
These factors combined with higher material and labor costs led to significantly
lower gross profit in 1997 than in 1996. During 1997, the Company incurred
approximately $2.8 million in one-time costs relating to training personnel on
new equipment, the training time needed to expand to 24 hour 7 day shifts and
the move to the new Salt Lake facility. Additionally, the Company incurred $1.2
million in one-time fixed costs in 1997 for former Shade/Allied and Williamhouse
plants which were closed during 1997.
During the fourth quarter of 1997, the Company announced it would incur
additional charges due to revisions to the LIFO and cost of sales estimates,
primarily for the Williamhouse division. These charges resulted in $13.4 million
of additional operating costs. Such estimate revisions for the Williamhouse
division reflected the effects of higher paper costs.
SELLING AND MARKETING expenses increased to $22.2 million in 1997 from $16.9
million in 1996, or $5.3 million. Of this increase, $1.1 million is attributable
to the acquisition of Shade/Allied and the retention of a portion of their sales
force and customer service personnel, and $3.1 million is primarily attributable
to the Niagara acquisition and the integration of its sales force and customer
service personnel into the Williamhouse division. The remainder of the increase
is attributable to the AMPAD division, primarily to increased sales commissions
associated with higher sales.
GENERAL AND ADMINISTRATIVE expenses increased to $19.1 million in 1997 from
$16.4 million in 1996, or $2.7 million. Of the increase, $800,000 is
attributable to the acquisition of Shade/Allied, and the remainder is
attributable to increases in corporate expenses associated with the
centralization of certain functions in Dallas.
LOSSES ON SALES OF ACCOUNTS RECEIVABLE increased to $3.0 million in 1997
from $1.8 million in 1996 due to a higher average level of accounts receivable
sold to the third party trust during 1997. Following the acquisition of Niagara
in June 1996, the maximum amount of accounts receivable which the Company could
sell to the third party trust at any point in time was raised from $45.0 million
to $60.0 million. 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 increased to $6.1 million
in 1997 from $4.5 million in 1996, an increase of $1.6 million, due primarily to
a full year of amortization of goodwill associated with the acquisition of
Niagara and ten and one-half months of amortization of goodwill associated with
the acquisition of Shade/Allied.
MANAGEMENT FEES AND SERVICES expense increased to $4.9 million in 1997 from
$3.9 million in 1996. The change in management fees is due primarily to the
capitalization of $800,000 in fees in 1996 related to the acquisition of
Shade/Allied.
INTEREST EXPENSE decreased to $37.8 million in 1997 from $43.0 million in
1996, representing a decrease of $5.2 million. Such decrease was due primarily
to the refinancing of the Company's revolving credit facility in July 1996,
which resulted in lower effective interest rates generating an interest savings
of $5.1 million, and the repayment of $70.0 million in senior subordinated notes
in August 1996, which led to an interest expense reduction of approximately $5.5
million. These savings were offset by $3.4 million additional interest expense
due to increases in long-term debt associated with the acquisition of
Shade/Allied and approximately $2.5 million additional interest expense as a
result of the Company's investment in working capital and net increase in
capital expenditures.
THE INCOME TAX PROVISION for the year ended December 31, 1997 reflects an
effective income tax provision rate of 16.7% as compared with the effective
income tax rate of 43.2% for the year ended December 31, 1996. In 1997, the
Company's loss before income taxes was relatively low, $3.8 million, in
comparison to the amount of expenses which are 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
31
employees. As a result, the Company has taxable income for tax reporting
purposes versus a loss for financial reporting purposes and, therefore, the
Company has incurred a tax provision for 1997. The Company paid $4.5 million in
income taxes during 1997 and received an income tax refund of $3.3 million in
January 1998.
EXTRAORDINARY ITEM in 1996 represents an after tax loss on extinguishment of
debt of $20.0 million ($33.0 million pretax) recognized as a result of the
redemption of $70.0 million of senior subordinated notes with a portion of the
net proceeds from the initial public offering and the write off of a portion of
the unamortized deferred financing costs related to the Notes and all of the
deferred financing costs associated with the former revolving credit facility
and the former accounts receivable financing facility.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended 1998 was $42.3
million compared to net cash used by operating activities for the year ended
1997 of $62.4 million. This improved cash flow from operations in 1998 is
primarily the net result of the following: (i) cash used by the net loss of
$20.4 million after adjustment for non-cash expenses, (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 $9.8 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, of
$21.9 million, (ii) cash used to fund increases in accounts receivable of $17.3
million relating to higher sales in 1997 than in 1996, (iii) cash used to fund
increases in inventories of $44.2 million manufactured in anticipation of higher
sales (iv) an increase in accounts payable of $4.6 million and (v) a decrease in
accrued expenses of $22.0 million due primarily to changes in acquisition
integration cost reserves ($8.2 million), reduced incentive compensation due to
payment of bonuses earned in 1996 and no bonus compensation for 1997 ($4.6
million) and reductions in customer incentive liabilities due to the timing of
the payments to customers ($8.5 million). Cash provided by operating activities
for 1996 was $23.2 million primarily due to higher net sales and earnings of the
Company in 1996.
Cash used in investing activities for the year ended 1998 and 1997 was $13.2
million and $69.7 million, respectively. The year 1998 use was due to the
purchase of equipment, principally production equipment. The year 1997 use was
due to the Shade/Allied acquisition of $50.7 million and purchases of equipment
of $23.1 million. The $16.2 million use of cash 1996 was principally due to the
Niagara acquisition ($53.0 million, net of cash received) and purchases of
equipment ($14.6 million), offset by proceeds from the sale of the Regency
Division and other assets held for sale ($49.3 million).
Net cash used by financing activities during 1998 was $32.6 million compared
to net cash provided by financing activities in 1997 of $134.7 million. 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. During 1996, the Company used $23.0 million of cash in
financing activities to (i) complete its initial public offering of 12.5 million
shares of common stock for $172.8 million in net proceeds after deducting
offering fees and expenses, (ii) refinance its accounts receivable facility with
a new $60.0 million facility, (iii) refinance its bank credit agreement, (iv)
redeem $70.0 million of senior subordinated notes, (v) repay $95.8 million of
debt incurred under the old bank credit agreement, (vi) pay $7.7 million in
redemption premiums on the Notes, (vii) repay $10 million under the new accounts
receivable facility with proceeds from the sale of the Regency Division, (viii)
borrow $54 million under the new accounts receivable facility and (ix) repay WR
seller notes for $25 million.
32
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 1998, 1997, and
1996.
In February 1998, the Company and its banking group agreed to an increase in
the size of the revolving credit facility from $300.0 million to $330.0 million
for a period of one year. After such time, the level of debt available under the
revolving credit facility was to be reduced to $300.0 million. In December 1997,
February 1998 and April 1998, certain covenants in the revolving credit facility
were also modified as of the end of 1997 and for a period to end in February
1999. The Company paid fees and expenses of $1.7 million in connection with the
amendments to the revolving credit facility.
As a result of the second quarter 1998 loss, the Company was in default of
certain covenants based on EBITDA (earnings before interest, taxes,
depreciation, amortization, and certain noncash charges, as defined in the
agreement) levels at June 30, 1998. On September 30, 1998, the Company amended
its revolving credit facility to eliminate all prior defaults and reinstate the
original $300.0 million available under the credit facility. The amended credit
facility provided for permanent reductions in availability of $25.0 million in
December 1998 and 1999 and $50.0 million in July 2000. Fees of $1.0 million were
paid in conjunction with this amendment and will be amortized over the remaining
life of the debt. This amendment also provided that the interest rate incurred
by the Company will vary each quarter through July 2001, depending on the
Company's consolidated debt to EBITDA ratio at the beginning of each quarter,
and requires the Company to meet certain financial tests including minimum
EBITDA levels, minimum interest coverage ratios and maximum leverage ratios. The
Company exceeded EBITDA performance targets for the third and fourth quarters of
1998 and through February 1999, as measured by the agreement. The amendment also
limits capital expenditures to $15.0 million per year in 1999 and 2000 and $7.5
million through July 2001. The revolving credit facility matures in July 2001.
On March 5, 1999, the Company again amended its revolving credit facility.
The amendment rescheduled the $25 million line reduction from December 31, 1999,
to March 31, 2000. Other changes provided for an add-back for purposes of
calculating cumulative EBITDA of $6.3 million in certain charges absorbed in the
fourth quarter of 1998, and a more favorable manner in which proceeds from the
sale of assets are applied to scheduled line reductions. As amended, 50% of the
proceeds from the sale of assets are credited against the scheduled line
reduction of March 2000 and 50% to the scheduled reduction of July 2000.
The ability of the Company to meet its debt service and other obligations
and reduce its total debt will be dependent upon the future performance of the
Company and its subsidiaries. In turn, such performance will be subject to
general economic conditions and to financial, business and other factors,
including factors beyond the Company's control.
Although there can be no assurance, management believes that, based upon
cash on hand at December 31, 1998, estimates of current and future operations,
and other available sources of funds including availability under the revolving
credit facility and the accounts receivable financing facility at December 31,
1998, of $29.2 million, its finances will be adequate for 1999 to make required
payments of principal and interest on the Company's debt, to fund anticipated
capital expenditures, and to meet working capital needs.
The amount of debt available under the Company's current credit agreement
decreases by $25.0 million in March 2000 and by an additional $50.0 million in
July 2000. Based on the Company's current level of operating results and the
expected operating results in 1999 and 2000, the Company expects that the
scheduled reduction in July 2000 may require the Company to pursue other
financing alternatives, including but not limited to refinance of its bank debt,
raise new private or public debt, raise additional public equity, reduce capital
expenditures, reduce operating costs or sell assets. However, no assurance can
33
be given that the Company will be able to complete the financing alternatives
just described, or that the other measures will be sufficient to provide
adequate liquidity to meet the Company's obligations.
INFLATION
The Company believes that inflation has not had a material impact on its
financial position or its results of operations for 1998, 1997, and 1996.
NEWLY ISSUED ACCOUNTING STANDARDS
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 98-5, which is effective for fiscal years commencing after
December 15, 1998. SOP 98-5, "Reporting on the Costs of Start-up Activities",
prescribes that start-up costs should be expensed as incurred. The SOP states
that its adoption should be reported as a cumulative effect of a change in
accounting principle. The Company adopted SOP 98-5 effective January 1, 1999,
and took a pre-tax charge of approximately $725,000 in January 1999 reflecting
the write off of previously recorded start-up costs.
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", in March 1998. The SOP requires capitalization of
qualifying costs, as defined, relating to the developing or obtaining internal
use software and the expensing of internal costs for maintenance. The SOP is
effective for the year ending December 31, 1999, and is not expected to have a
material effect on the Company's results of operations.
YEAR 2000 ISSUE
The Year 2000 issue is the result of date-sensitive devices, systems and
computer programs which were deployed using only two digits, rather than four,
to represent the applicable year. Any such technologies may recognize a year
containing "00" as the year 1900 rather than the year 2000. If not corrected,
many computer applications could fail or create erroneous results.
The Company recognizes the need to ensure that its operations and
relationships with vendors, customers and other parties will not be adversely
impacted by software or other processing errors arising from calculations using
the year 2000 and beyond. Like many companies, a significant number of the
Company's computer applications and systems require modification in order to
render these systems Year 2000 compliant. Failure by the Company to timely
resolve Year 2000 issues could result, in the worst case, in an inability of the
Company to manufacture and distribute its product to customers and process its
daily business for some period of time. However, based on the progress made to
date in its Year 2000 remediation plan, the Company believes the worst case
scenario is unlikely. Failure to address Year 2000 issues by one or more third
party service providers on whom the Company relies could also result, in a worst
case scenario, in some business interruption. The amount of lost revenues, if
any, resulting from a worst case scenario such as those examples described above
would depend on the period of time over which the failure goes uncorrected and
the breadth of its impact.
The Company has recently purchased a new certified Year 2000 compliant
version of its existing software to upgrade critical manufacturing,
distribution, and financial applications. The upgrade is scheduled for
completion and full installation by December 31, 1999. While the primary purpose
of the software upgrade is to modernize and improve the Company's operations, it
is also expected to resolve any Year 2000 issues in these critical computer
systems. Costs to acquire the software and related hardware are being
capitalized in accordance with SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Costs to implement the upgrade
and other costs relating to Year 2000 readiness are being expensed as incurred
as required by generally accepted accounting principles. Through December 31,
1998, capital expenditures to purchase software and related hardware total $2.0
million and non-capital expenditures for Year 2000 readiness are approximately
$200,000. To complete Year 2000
34
readiness, $500,000 of capital expenditures will be incurred to complete the
purchase of related hardware and approximately $1.0 to $1.5 million is expected
to be spent through 1999 for implementation of the upgraded software, consultant
costs and other Year 2000 readiness costs. The Company will fund these
expenditures through its operating cash flow. At this time, other than the cost
of implementing its new information system, the Company does not believe that
the costs of addressing the Year 2000 issue will be material. The Company has
increased its overall information systems budget to accommodate the
implementation of the upgraded software and Year 2000 compliance projects and
has not delayed other critical information systems work due to its Year 2000
efforts.
In addition to the software upgrade, a Company-wide committee of senior
executives representing all functional areas has been established to identify,
evaluate and initiate corrective actions in order to achieve Year 2000
readiness. The committee has completed the process of taking the relevant
inventory, assessing risk and assigning priorities to various tasks and
performing limited internal tests relative to the Company's critical functions.
The committee determined that the Company's primary hardware and operating
systems, which were installed in 1997, and the program supporting the Company's
electronic data interchange are already Year 2000 compliant. With regard to the
Company's manufacturing and other non-IT readiness for Year 2000, the Committee
has not identified any issues that would have a material, adverse impact on the
Company's operations' processes. The committee has developed contingency plans
for the Company's critical information system which primarily consist of making
its existing information system Year 2000 compliant in the event that the
software upgrade is not completed by the scheduled date. In addition,
contingency plans have included the development of manual intervention processes
for critical functions. The committee's expectation is that the remedial tasks
relative to the Company's critical functions will be completed by June 30, 1999,
and that full integrated testing will be completed by October 31, 1999. In
addition, the committee has requested and received documentation from all key
customers, suppliers and other business partners that their organizations will
be ready for the year 2000. While the Company cannot warrant that all the
systems of its business partners will be Year 2000 compliant, based on currently
available information, the Company expects no significant business interruptions
due to non-compliance by any particular entity.
There can be no assurance that the Company will be able to complete the
installation of the upgraded software and all of the remedial tasks in the
required time frame, that unanticipated events will not occur, that the Company
will be able to identify all Year 2000 issues before the problems manifest
themselves, that third party systems will be Year 2000 compliant and that
Company's estimate of Year 2000 costs will not require revision if unanticipated
adverse developments occur. However, management believes the Company is taking
adequate action to address Year 2000 issues. Based on a current assessment of
risks relating to its Year 2000 readiness, the Company does not believe Year
2000 issues will materially affect future financial results or operating
performance.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form
10-K to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and uncertainties,
which could cause actual results, or outcomes to differ materially from those
expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based, in
turn, upon further assumptions. The Company's expectations, beliefs and
projections
35
are expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that management's
expectation, beliefs or projections will result or be achieved or accomplished.
In addition to the other factors and matters discussed elsewhere herein, the
following are important factors that, in the view of the Company, could cause
actual results to differ materially from those discussed in the forward-looking
statements:
1. Changes in economic conditions, in particular those which affect the retail
and wholesale office product markets.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
3. Changes in senior management or control of the Company.
4. Inability to obtain new customers or retain existing ones.
5. Significant changes in competitive factors, including product pricing
conditions affecting the Company.
6. Governmental/regulatory actions and initiatives, including those affecting
financings.
7. Significant changes from expectations in actual capital expenditures and
operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from operations,
debt or equity to finance needed capital expenditures and other investments.
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its employees and
the potential adverse effects if labor disputes or grievances were to
occur.
11. Changes in accounting principles and/or the application of such principles
to the Company.
12. Timely resolution of Year 2000 issues by the Company and its customers and
suppliers.
13. Completion of the Company's restructuring plan.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after date hereof.
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 1998, 1997, and 1996.
At December 31, 1998, the Company had approximately $235.1 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, 1998, would change interest
expense by approximately $2.0 million.
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.
36
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this Item is incorporated herein by
reference from the Registrant's Proxy Statement for April 27, 1999 Annual
Meeting of Stockholders.
ITEM 11 EXECUTIVE COMPENSATION
The information required in response to this Item is incorporated herein by
reference from the Registrant's Proxy Statement for April 27, 1999 Annual
Meeting of Stockholders.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated herein by
reference from the Registrant's Proxy Statement for April 27, 1999 Annual
Meeting of Stockholders.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is incorporated herein by
reference from the Registrant's Proxy Statement for April 27, 1999 Annual
Meeting of Stockholders.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(A)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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PAGE
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AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES
Responsibility for the Consolidated Financial Reports...................................................... 41
Report of Independent Accountants.......................................................................... 42
Consolidated Balance Sheets at December 31, 1998 and 1997.................................................. 43
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996................. 44
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. 45
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1998,
1997, and 1996........................................................................................... 46
Notes to Consolidated Financial Statements................................................................. 47
37
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, 1998, 1997, AND 1996
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BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ----------- ------------- ----------- -------------
Allowance for doubtful accounts and (a) (b)
sales returns.......................
1998 $ 2,794 $ 4,204 $ -- $ 4,750 $ 2,248
1997 2,216 3,279 225 2,926 2,794
1996 2,512 1,079 154 1,529 2,216
Inventory obsolescence reserve........ (a) (b)
1998 $ 1,647 $ 2,332 $ -- $ 462 $ 3,517
1997 2,135 32 300 820 1,647
1996 275 1,038 1,799 977 2,135
------------------------
(a) APB 16 purchase accounting
(b) Accounts written off and customer returns
ITEM 14(B) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K during 1998 and
through March 15, 1999:
(1) Current Report on Form 8-K filed May 21, 1998, relating to the Company's
May 7, 1998, press release reporting the Company's first quarter 1998
results.
(2) Current Report on Form 8-K filed June 17, 1998, relating to the
Company's June 2, and June 10, 1998, press releases announcing the
appointments of James W. Swent III as Executive Vice President and Chief
Financial Officer, and David N. Pilotte as Vice President and
Controller.
(3) Current Report on Form 8-K filed July 22, 1998, relating to the
Company's July 9, July 16 and July 20, 1998, press releases. A press
release on July 9, 1998, announcing the appointment of James W. Swent
III as Chief Executive Officer and Board member, and the appointment of
Robert C. Gay as Chairman of the Board. A press release on July 9, 1998,
announcing that the Company had received a 30 day waiver to its current
lending agreement and that based on preliminary second quarter results,
the Company was in violation of certain financial covenants of the
agreement. A press release on July 16, 1998, reporting the Company's
second quarter 1998 results. A press release on July 20, 1998,
announcing the appointment of William L. Morgan as Executive Vice
President, Operations.
(4) Current Report on Form 10Q filed August 14, 1998, relating to the
Company's July 31, 1998, press release. A press release on July 31,
1998, announcing the waiver extension on bank covenants until September
30, 1998.
(5) Current Report on Form 8-K filed September 1, 1998, relating to the
Company's August 17 and August 18, 1998, press releases. A press release
on August 17, 1998, announcing the Company's first step in its
restructuring plan. A press release on August 18, 1998, announcing the
Company's appointment of John Hill to the position of Vice President of
the AMPAD Division.
38
(6) Current Report on Form 8-K filed October 15, 1998, relating to the
Company's September 30, October 7, and October 14, 1998, press releases.
A press release on September 30, 1998, announcing that the Company's
lending group amended the original lending agreement. A press release on
October 7, 1998, announcing an update of the Company's restructuring
plans. A press release on October 14, 1998, announcing the resignation
of Timothy Needham, President and Chief Operating Officer.
(7) Current Report on Form 8-K filed October 26, 1998, relating to the
Company's October 15 and October 16, 1998, press releases. A press
release on October 15, 1998, announcing the Company's third quarter and
year-to-date results. A press release on October 16, 1998, announcing
the Company's appointments of John H. Rodgers to Senior Vice President,
General Counsel and Secretary, Mark S. Lipscomb to Vice President
Corporate Communications, Patrick D. "Dan" Lane to Treasurer, Robert D.
Dunn to Vice President, Corporate Development and Planning, and Deborah
A. Garrett to Vice President, Human Resources.
(8) Current Report on Form 10-Q filed November 11, 1998, relating to the
Company's November 10, 1998, press release. A press release on November
10, 1998, announcing the closing of the Company's plant in Kosciusko,
Mississippi.
(9) Current Report on Form 8-K filed December 17, 1998, relating to the
Company's December 2, 1998, press release. A press release on December
2, 1998, announcing the Company's appointment of James V. Heim as
President of its AMPAD division.
(10) 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.
(11) 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.
(12) 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.
ITEM 14(B) EXHIBITS
See Exhibit Index which follows on pages 69 to 71.
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN PAD & PAPER COMPANY
AND SUBSIDIARIES
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PAGE NO.
-----------
Responsibility for the Consolidated Financial Reports................................................... 41
Report of Independent Accountants....................................................................... 42
Consolidated Balance Sheets at December 31, 1998 and 1997............................................... 43
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.............. 44
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............. 45
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997
and 1996.............................................................................................. 46
Notes to Consolidated Financial Statements.............................................................. 47
40
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 42.
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
Chief Executive Officer and Vice President and Corporate Controller
Chief Financial Officer (Principal Accounting Officer)
(Principal Executive Officer and
Principal Financial Officer)
41
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 pages 37 and 38 present fairly, in all
material respects, the financial position of American Pad & Paper Company and
its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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
generally accepted auditing standards 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.
PricewaterhouseCoopers LLP
Dallas, Texas
March 15, 1999
42
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
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DECEMBER 31,
------------------------
1998 1997
----------- -----------
ASSETS
Current assets:
Cash.................................................................................. $ 1,371 $ 4,855
Accounts receivable................................................................... 60,660 74,203
Inventories........................................................................... 112,169 154,359
Income taxes receivable............................................................... 1,700 4,059
Prepaid expenses and other current assets............................................. 1,240 1,402
Deferred income taxes................................................................. 40 11,992
----------- -----------
Total current assets................................................................ 177,180 250,870
Property and equipment................................................................ 152,198 151,390
Intangible assets..................................................................... 185,805 233,698
Other................................................................................. 2,654 2,443
----------- -----------
Total assets........................................................................ $ 517,837 $ 638,401
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................................................... $ 1,236 $ 1,538
Accounts payable...................................................................... 49,598 56,356
Accrued expenses...................................................................... 47,078 40,157
Income taxes payable.................................................................. 300 --
Restructuring charges................................................................. 5,660 --
----------- -----------
Total current liabilities........................................................... 103,872 98,051
Long-term debt.......................................................................... 373,675 398,577
Deferred income taxes................................................................... 16,972 39,477
Other................................................................................... 1,288 1,630
----------- -----------
Total liabilities................................................................... 495,807 537,735
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 150,000 shares authorized, no shares issued and
outstanding......................................................................... -- --
Common stock, voting, $.01 par value, 75,000,000 shares authorized, 27,724,045 and
27,435,839 shares issued and outstanding, respectively.............................. 277 274
Additional paid-in capital............................................................ 301,287 301,279
Accumulated deficit................................................................... (279,534) (200,887)
----------- -----------
Total stockholders' equity.......................................................... 22,030 100,666
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 517,837 $ 638,401
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
43
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
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YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Net sales.................................................................... $ 662,031 $ 687,335 $ 583,859
Cost of sales................................................................ 597,456 598,416 466,385
---------- ---------- ----------
Gross profit............................................................... 64,575 88,919 117,474
---------- ---------- ----------
Operating expenses:
Selling and marketing...................................................... 21,261 22,246 16,964
General and administrative................................................. 31,840 19,133 16,438
Restructuring charges...................................................... 5,741 -- --
Losses on sales of accounts receivable..................................... 3,226 2,954 1,823
Amortization of goodwill and intangible assets............................. 5,939 6,110 4,488
Management fees and services............................................... 2,030 4,871 3,880
Write down of assets--Shade/Allied......................................... 41,000 -- --
---------- ---------- ----------
111,037 55,314 43,593
---------- ---------- ----------
Income (loss) from operations................................................ (46,462) 33,605 73,881
Other income (expense):
Interest................................................................... (44,970) (37,843) (42,968)
Other income, net.......................................................... 1,411 389 1,153
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item..................... (90,021) (3,849) 32,066
Provision (benefit) for income taxes......................................... (11,374) 642 13,852
---------- ---------- ----------
Income (loss) before extraordinary item...................................... (78,647) (4,491) 18,214
Extraordinary loss from extinguishment of debt (net of income tax benefits of
$13,009)................................................................... -- -- (19,995)
---------- ---------- ----------
Net loss..................................................................... $ (78,647) $ (4,491) $ (1,781)
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share:
Income (loss) before extraordinary item.................................... $ (2.84) $ (0.16) $ 1.05
Extraordinary item......................................................... -- -- (1.15)
---------- ---------- ----------
Net loss................................................................... $ (2.84) $ (0.16) $ (0.10)
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share:
Income before extraordinary item........................................... $ (2.84) $ (0.16) $ 0.99
Extraordinary item......................................................... -- -- (1.09)
---------- ---------- ----------
Net loss................................................................... $ (2.84) $ (0.16) $ (0.10)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding:
Basic...................................................................... 27,718 27,431 17,408
Diluted.................................................................... 27,718 27,431 18,426
The accompanying notes are an integral part of these consolidated financial
statements.
44
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
--------------------------------------------------------------------------------
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YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net loss..................................................................... $ (78,647) $ (4,491) $ (1,781)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Deferred income taxes...................................................... (11,674) 642 13,361
Depreciation............................................................... 13,830 12,529 9,765
Amortization of goodwill and intangible assets............................. 5,939 6,110 4,488
Write down of assets--Shade/Allied......................................... 41,000 -- --
Restructuring charges...................................................... 5,741 -- --
Extraordinary loss on extinguishment of debt............................... -- -- 19,995
Amortization of debt issuance costs........................................ 4,277 2,529 3,790
(Gain) loss on sale of assets.............................................. (859) 86 (94)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable...................................................... 17,543 (17,300) (25,625)
Income tax receivable.................................................... 3,479 (4,059) 3,657
Inventories.............................................................. 42,190 (44,186) (2,030)
Prepaid expenses and other............................................... 163 598 1,721
Income tax payable....................................................... 300 -- --
Accounts payable......................................................... (6,758) 4,553 1,819
Accrued expenses......................................................... 6,841 (22,049) (4,294)
Other assets and liabilities............................................. (1,096) 2,629 (1,556)
--------- --------- ---------
Net cash provided by (used in) operating activities........................ 42,269 (62,409) 23,216
--------- --------- ---------
Cash flows from investing activities:
Purchase of stock and net assets of businesses, including acquisition costs.. -- (50,677) (52,964)
Purchases of property and equipment.......................................... (14,379) (23,095) (14,609)
Proceeds from sale of assets................................................. 1,221 4,056 2,056
Net cash generated from assets held for sale................................. -- -- 49,277
--------- --------- ---------
Net cash used in investing activities...................................... (13,158) (69,716) (16,240)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings on credit agreement and long-term debt........................ -- 130,400 192,773
Repayment of long-term debt.................................................. (25,826) (2,268) (380,317)
Redemption premiums and penalties included in extraordinary loss............. -- -- (7,700)
Debt issuance costs.......................................................... (2,780) -- (9,584)
Repayment of old accounts receivable financing facility...................... -- -- (45,000)
Net proceeds from new accounts receivable financing facility................. (4,000) 6,000 54,000
Options and management stock purchase plan................................... 11 558 --
Proceeds from initial public offering, net................................... -- -- 172,801
--------- --------- ---------
Net cash provided by (used in) financing activities........................ (32,595) 134,690 (23,027)
--------- --------- ---------
Net increase (decrease) in cash................................................ (3,484) 2,565 (16,051)
Cash, beginning of year........................................................ 4,855 2,290 18,341
--------- --------- ---------
Cash, end of year.............................................................. $ 1,371 $ 4,855 $ 2,290
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................................... $ 42,807 $ 34,292 $ 38,785
--------- --------- ---------
--------- --------- ---------
Income taxes............................................................... $ 367 $ 4,519 $ 470
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of noncash investing activity:
Notes payable issued to purchase equipment................................... $ 621 $ -- $ 500
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
45
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
--------------------------------------------------------------------------------
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PREFERRED STOCK COMMON STOCK
---------------------- ------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- ----------- ----------- --------- ------------ ---------
Balance at December 31, 1995............ 58 $ 113,887 7,307 $ 73 $ 14,234 $ (194,615) $ (66,421)
Conversion of preferred stock to common
stock................................. (58) (113,887) 7,593 76 113,811 -- --
Proceeds from initial public offering of
common stock.......................... -- -- 12,500 125 172,676 -- 172,801
Net loss................................ -- -- -- -- -- (1,781) (1,781)
--- --------- ----------- ----- --------- ------------ ---------
Balance at December 31, 1996............ -- -- 27,400 274 300,721 (196,396) 104,599
Common stock sold under the management
stock purchase plan................... -- -- 36 -- 558 -- 558
Net loss................................ -- -- -- -- -- (4,491) (4,491)
--- --------- ----------- ----- --------- ------------ ---------
Balance at December 31, 1997............ -- -- 27,436 274 301,279 (200,887) 100,666
Exercise of stock options............... -- -- 288 3 8 -- 11
Net loss................................ -- -- -- -- -- (78,647) (78,647)
--- --------- ----------- ----- --------- ------------ ---------
Balance at December 31, 1998............ -- $ -- 27,724 $ 277 $ 301,287 $ (279,534) $ 22,030
--- --------- ----------- ----- --------- ------------ ---------
--- --------- ----------- ----- --------- ------------ ---------
The accompanying notes are an integral part of these consolidated financial
statements.
46
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 now 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 and AP&P Delaware. Included in the historical accounts
and operations of AP&P Delaware are the accounts and operations of AMPAD, the
envelope operations of Williamhouse and Niagara, and the continuous form
operations of Shade/Allied since their respective dates of acquisition.
Additionally, the consolidated financial statements include the accounts of
Notepad Funding Corporation ("Notepad"), a special purpose corporation used in
the accounts receivable financing facility. All significant intercompany
balances have been eliminated.
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, 1998, consists of one hundred
shares of $0.01 par value common stock, paid in capital of $202.4 million and an
accumulated deficit of $180.3 million and, in total, is equal to the
stockholders' equity 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.
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
47
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS (CONTINUED)
through large mass merchant retailers, office product superstores, warehouse
clubs, major contract stationers, office products wholesalers, paper merchants,
and independent dealers.
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.
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 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.
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
48
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 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 foontote 5
"Impairment of Shade/Allied Long-Lived Assets.") Amortization expense was $5.9
million in 1998, $6.1 million in 1997 and $4.5 million in 1996.
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, 1998.
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
49
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. In 1998, the Company recorded a deferred tax
valuation allowance of $6.3 million.
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 1998,
1997, or 1996.
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, 1998, the carrying value
of the Notes of $130.0 million compares to the Notes' fair value of $87.1
million based on quoted market trades.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements have
been reclassified in order to conform to the presentation in the 1998
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 98-5, which is effective for fiscal years commencing after
December 15, 1998. SOP 98-5, "Reporting on the Costs of Start-up Activities",
prescribes that start-up costs should be expensed as incurred. The SOP states
that its adoption should be reported as a cumulative effect of a change in
accounting principle. The Company adopted SOP 98-5 effective January 1, 1999,
and took a pre-tax charge of approximately $725,000 in January 1999 reflecting
the write off of previously recorded start-up costs.
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", in March 1998. The SOP requires capitalization of
qualifying costs, as defined, relating to the developing or obtaining internal
use software and the expensing of internal costs for maintenance. The SOP is
effective for the year ending December 31, 1999, and is not expected to have a
material effect on the Company's 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
50
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
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.
NIAGARA ENVELOPE COMPANY, INC.
Effective June 28, 1996, the Company acquired the stock of Niagara Envelope
Company, Inc. ("Niagara"). 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 $48.2 million and consisted of cash of $45.2
million and direct acquisition costs of $3.0 million. Additionally, the Company
paid $5.0 million at closing under a one-year consulting service agreement. The
Company financed the acquisition primarily through proceeds from the sale of the
Personalizing division described below. The aggregate acquisition costs have
been allocated to the assets acquired and liabilities assumed as follows: cash
of $238,000; accounts receivable of $11.0 million; inventories of $11.9 million;
prepaid and other assets of $1.6 million; management services agreement of $5.0
million; property and equipment of $26.8 million; deferred income tax liability
of $2.2 million; accounts payable of $6.1 million; accrued expenses of $10.5
million; other noncurrent liabilities of $381,000; and assumed debt of $3.9
million. The aggregate acquisition costs exceeded fair market value of the net
assets acquired by $19.8 million. Accordingly, goodwill was recorded and is
being amortized over 40 years. The operating results of this acquisition have
been included in the accompanying consolidated financial statements since the
date of acquisition. In both 1997 and 1996, the Company recorded $2.5 million as
management fees and services for the amortization of the consulting service
agreement.
WR ACQUISITION, INC./WILLIAMHOUSE-REGENCY
The Company acquired WR Acquisition, Inc. and its wholly owned subsidiary
Williamhouse-Regency of Delaware, Inc. through a merger transaction effective
October 31, 1995. The Personalizing stationery and invitations division acquired
in the acquisition was identified by management at the date of acquisition as a
nonstrategic asset held for sale. The purchase price allocated to the net assets
acquired included the expected proceeds from sale plus the net cash flows
expected to be generated from the Personalizing division from the date of
acquisition through the expected date of sale (the holding period), offset by
interest expense incurred during the holding period on debt incurred to finance
the purchase of the Personalizing division. On June 27, 1996, the Personalizing
division was sold for net proceeds of $47.9 million. The net proceeds from the
sale exceeded the carrying amount of the asset held for sale by $1.6 million. As
such, the preliminary purchase price allocation was adjusted resulting in a
$959,000 addition to goodwill. During the six month period ended June 30, 1996,
the Personalizing division had
51
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
operating income of $2.4 million and interest carrying costs of $1.9 million,
which have been excluded from the consolidated statement of operations and
included as adjustments to the carrying amount of the net assets held for sale
through the date of sale.
PRO FORMA RESULTS OF OPERATIONS
The following summary for the year ended December 31, 1996, presents the
results of operations on a pro forma basis, as if the Niagara and Shade/Allied
acquisitions had occurred as of January 1, 1996, (with appropriate adjustments
for amortization of intangible assets, interest expense, elimination of
duplicate selling and administrative expenses and the related income tax
effects). As Shade/Allied was acquired effective February 11, 1997, the pro
forma results for the year ended December 31, 1997, are not materially different
from the actual results and therefore are not reported here. The pro forma
operating results are for illustrative purposes only and do not purport to be
indicative of the actual results which would have occurred had the transaction
been consummated as of those earlier dates, nor are they indicative of results
of operations which may occur in the future.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
1996
---------------------------
(in thousands except per share amount)
Net sales........................................................ $ 730,801
--------
--------
Income before income taxes....................................... $ 41,257
--------
--------
Net income....................................................... $ 23,434
--------
--------
Diluted earnings per share....................................... $ 1.27
--------
--------
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 Williamhouse, Niagara and
Shade/Allied. 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 $6.2 million of the acquisition
integration costs is intended to cover the remaining costs of integrating
plants, administrative, sales and corporate functions which is expected to be
substantially completed during the next year.
4. RESTRUCTURING CHARGES
On September 1, 1998, the Company announced a plan to rationalize its
manufacturing operations. The plan includes plant consolidations, equipment
moves, plant/product changes, warehouse consolidations, and the addition of new
distribution centers. The rationalization is expected to result in an
approximate 14-18% reduction in manufacturing space and a net 7% reduction
(approximately 250 employees, primarily in manufacturing) in the workforce. The
third quarter restructuring charge of $5.7 million represents part of the
Company's rationalization plan and includes employee termination costs,
including severance and benefits totaling $1.8 million, costs to exit facilities
of $2.5 million, lease termination costs of $500,000 and property taxes after
ceasing operations of $900,000.
The Company has announced two plant closings as part of the rationalization
plan. The closing of the Kosciusko, Mississippi plant was announced on November
10, 1998. The closing of the Dallas, Texas plant
52
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING CHARGES (CONTINUED)
was announced on January 19, 1999. As of December 31, 1998, 67 employees have
been severed and severance payments totaling $81,000 have been charged to the
restructuring reserve.
Restructuring Reserve Activity 1998
(in thousands)
[Enlarge/Download Table]
EXPENDITURES DEC. 31, 1998
1998 CHARGE TO-DATE ENDING BALANCE
----------- --------------- ---------------
Severance and benefits....................................... $ 1,848 $ (81) $ 1,767
Closing costs to exit facilities............................. 2,484 -- 2,484
Lease termination costs...................................... 468 -- 468
Property taxes after ceasing operations...................... 941 -- 941
----------- ----- ------
Total........................................................ $ 5,741 $ (81) $ 5,660
----------- ----- ------
----------- ----- ------
Also in 1998, the Company recorded $0.9 million of one-time implementation
costs associated with the rationalization plan in cost of sales. These expenses
represent professional consulting fees, costs to move equipment and efficiency
costs. Estimated capital expenditures of $2.8 million and one-time
implementation costs of $6.6 million that do not qualify for current recognition
will be recorded primarily in 1999. Such costs include equipment and inventory
transfer costs, employee retention and relocation, recruiting costs, interim
warehouse costs, and other training and efficiency costs. The major undertakings
of the rationalization plan are expected to be completed in 1999. Upon full
implementation, the plan is expected to have a significant positive effect on
the Company's financial performance, resulting in an estimated annualized cost
savings of approximately $10.0 million.
5. IMPAIRMENT OF SHADE/ALLIED LONG-LIVED ASSETS
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 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.
53
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. IMPAIRMENT OF SHADE/ALLIED LONG-LIVED ASSETS (CONTINUED)
This $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 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.
6. ACCOUNTS RECEIVABLE
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DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
Accounts receivable--trade.............................................. $ 59,936 $ 72,975
Accounts receivable--other.............................................. 2,972 4,022
Less allowance for doubtful accounts and reserves for customer
deductions, returns and cash discounts................................ (2,248) (2,794)
--------- ---------
$ 60,660 $ 74,203
--------- ---------
--------- ---------
On May 24, 1996, the Company entered into a $60.0 million accounts
receivable financing facility. At December 31, 1998 and 1997, accounts
receivable of $56.0 million and $60.0 million respectively were sold under this
facility. All accounts are sold with recourse. Therefore, a portion of the
allowance for doubtful accounts covers receivables no longer reflected on the
balance sheet. Under the agreement, the maximum available under the facility is
subject to change based on the level of eligible receivables as defined in the
agreement. The facility matures in October 2001.
Bad debt expense for 1998 was $2.5 million. Bad debt expense in 1997 and
1996 was not material.
7. INVENTORIES
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DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Raw material.......................................................... $ 29,892 $ 54,285
Work in process....................................................... 5,440 5,600
Finished goods........................................................ 77,788 100,480
---------- ----------
113,120 160,365
LIFO reserve.......................................................... (951) (6,006)
---------- ----------
$ 112,169 $ 154,359
---------- ----------
---------- ----------
54
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 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 1998, the liquidation of LIFO layers increased cost of goods sold by $1.7
million. There was no liquidation of LIFO layers in 1997, and the liquidation of
LIFO layers in 1996 was not material.
8. PROPERTY AND EQUIPMENT
[Enlarge/Download Table]
ESTIMATED DECEMBER 31,
USEFUL LIVES IN ----------------------
YEARS 1998 1997
--------------- ---------- ----------
(IN THOUSANDS)
Land....................................................... $ 7,002 $ 7,035
Buildings.................................................. 40 34,585 30,308
Machinery and equipment.................................... 3-12 132,721 115,168
Office furniture and fixtures.............................. 3-7 12,351 9,818
Construction in progress................................... 5,109 15,322
---------- ----------
191,768 177,651
Less accumulated depreciation.............................. (39,570) (26,261)
---------- ----------
$ 152,198 $ 151,390
---------- ----------
---------- ----------
In connection with the Shade/Allied acquisition, acquired property, plant
and equipment was valued at $6.7 million in excess of its historical book value.
The land was written down $34,000; buildings were written down $3.1 million; and
machinery and equipment were written up $9.8 million. The Company capitalized
interest expense of $443,000 and $483,000 for 1998 and 1997, respectively.
9. GOODWILL AND INTANGIBLE ASSETS
[Enlarge/Download Table]
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Goodwill.............................................................. $ 148,460 $ 189,861
Intangible assets, primarily tradenames............................... 43,665 44,284
Debt issuance costs................................................... 20,048 18,369
---------- ----------
212,173 252,514
Less accumulated amortization......................................... (26,368) (18,816)
---------- ----------
$ 185,805 $ 233,698
---------- ----------
---------- ----------
The Company wrote-down goodwill and tradenames associated with its
Shade/Allied forms business by $41.0 million. See note 5.
55
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ACCRUED EXPENSES
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DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
Acquisition integration costs........................................... $ 6,190 $ 8,534
Sales volume discounts.................................................. 18,572 11,634
Salaries, wages and benefits............................................ 4,922 4,242
Interest................................................................ 3,808 5,927
Insurance reserves...................................................... 5,550 3,959
Other................................................................... 8,036 5,861
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$ 47,078 $ 40,157
--------- ---------
--------- ---------
11. LONG-TERM DEBT
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DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Revolving credit facility............................................. $ 235,150 $ 259,400
13% Senior Subordinated Notes due 2005................................ 130,000 130,000
Industrial revenue bonds.............................................. 7,165 8,340
Notes payable......................................................... 584 --
Capitalized lease obligations......................................... 2,012 2,375
---------- ----------
374,911 400,115
Less current portion.................................................. 1,236 1,538
---------- ----------
$ 373,675 $ 398,577
---------- ----------
---------- ----------
Future maturities of long-term debt at December 31, 1998, are $1.2 million
in 1999, $36.4 million in 2000, $201.1 million in 2001, $987,000 in 2002,
$967,000 in 2003, and $134.2 million thereafter.
REVOLVING CREDIT FACILITY
The Company has a revolving credit facility. In February 1998, the Company
and its banking group agreed to an increase in the size of the revolving credit
facility from $300.0 million to $330.0 million for a period of one year. After
such time, the level of debt available under the revolving credit facility was
to be reduced to $300.0 million. In December 1997, February 1998 and April 1998,
certain covenants in the revolving credit facility were also modified as of the
end of 1997 and for a period to end in February 1999. In 1998, the Company paid
fees and expenses of $1.7 million in connection with these amendments to the
credit facility.
As a result of the second quarter 1998 loss, the Company was in default of
certain covenants based on EBITDA (earnings before interest, taxes,
depreciation, amortization, and certain noncash charges, as defined in the
agreement) levels at June 30, 1998. On September 30, 1998, the Company amended
its revolving credit facility to eliminate all prior defaults and reinstate the
original $300.0 million available under the credit facility. The amended credit
facility provided for permanent reductions in availability of $25.0 million in
December 1998 and 1999 and $50.0 million in July 2000. Fees of $1.0 million were
paid in conjunction with this amendment and will be amortized over the remaining
life of the debt. This
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AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LONG-TERM DEBT (CONTINUED)
amendment also provided that the interest rate incurred by the Company will vary
each quarter through July 2001, depending on the Company's consolidated debt to
EBITDA ratio at the beginning of each quarter, and requires the Company to meet
certain financial tests including minimum EBITDA levels, minimum interest
coverage ratios and maximum leverage ratios. The Company exceeded EBITDA
performance targets for the third and fourth quarters of 1998 and through
February 1999, as measured by the agreement. The amendment also limits capital
expenditures to $15.0 million per year in 1999 and 2000 and $7.5 million through
July 2001. The revolving credit facility matures in July 2001.
On March 5, 1999, the Company again amended its revolving credit facility.
The amendment rescheduled the $25 million line reduction from December 31, 1999,
to March 31, 2000. Other changes provided for an add-back for purposes of
calculating cumulative EBITDA of $6.3 million in certain charges absorbed in the
fourth quarter of 1998, and a more favorable manner in which proceeds from the
sale of assets are applied to scheduled line reductions. As amended, 50% of the
proceeds from the sale of assets are credited against the scheduled line
reduction of March 2000 and 50% to the scheduled reduction of July 2000.
Based on the Company's current level of operating results and expected
operating results in 1999 and 2000, the Company expects that the scheduled $50
million reduction in July 2000 may require the Company to pursue other financing
alternatives, including but not limited to refinance of its bank debt, raise new
private or public debt, raise additional public equity, or to reduce capital
expenditures, reduce operating costs, or sell assets. However, no assurance can
be given that the Company will be able to complete the financing alternatives
just described, or that the other measures will be sufficient to provide
adequate liquidity to meet the Company's obligations.
The revolving credit facility also contains covenants, which, among other
things, limit the incurrence of additional indebtedness, transactions with
affiliates, asset sales, acquisitions, mergers, and other matters customarily
restricted in such agreements. In addition no dividends may be paid prior to
March 31, 1999, and future acquisitions require the written consent of the
banks. The new revolving credit facility contains customary events of default,
including payment defaults, breach of representations and warranties, covenant
defaults, cross-defaults to certain other indebtedness, certain events of
bankruptcy and insolvency, ERISA, judgment defaults, failure of any guaranty or
security agreement supporting the revolving credit facility to be in full force
and effect, and change of control.
Credit extended under the new revolving credit facility bears interest at a
rate per annum equal to, at the Company's option, a base rate, plus an
applicable margin, or a Eurodollar rate plus an applicable margin as such terms
are defined in the agreement and amendments. The applicable margin for base rate
loans varies from .5% to 3.0% and the applicable margin for Eurodollar rate
loans varies from 1.5% to 4.0%, each based on the Company's current leverage
ratio. The revolving credit facility includes an unused commitment fee which
varies from .3% to .5% depending on the Company's leverage ratio.
At December 31, 1998 and 1997, letters of credit outstanding totaled $12.3
million and $13.0 million, respectively. Letters of credit reduce availability
under the revolving credit facility. Availability is further reduced to the
extent of the net proceeds from the sales of assets, the net proceeds from the
issuance of debt, or 50% of the net proceeds from the issuance of equity.
SENIOR SUBORDINATED NOTES
AP&P Delaware issued $200.0 million of 13% Senior Subordinated Notes through
a private placement in December 1995. Proceeds from the issue were used to
repurchase $100.0 million of publicly-traded
57
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LONG-TERM DEBT (CONTINUED)
notes issued by Williamhouse-Regency and assumed by the Company in its
acquisition of WR and to redeem preferred stock, preferred stock equivalents,
and Class P common stock in the aggregate amount of $75.0 million.
In June 1996, AP&P Delaware completed an exchange of the privately held
notes for publicly traded notes ("Notes") with substantially identical terms.
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. Subsequent to the Company's initial public
offering of common stock in July 1996, AP&P Delaware repaid $70.0 million of the
Notes.
The Notes are fully and unconditionally guaranteed by all subsidiaries of
AP&P Delaware, except Notepad, on a joint, several and senior subordinated
basis. The Company 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.
OTHER
At December 31, 1998, the Company had outstanding various industrial revenue
bonds in the aggregate amount of $7.2 million. The bonds bear interest at 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, the Company entered into six notes payable contracts
totaling $621,000 for the purchase of equipment in 1998.
The Company incurred fees related to financing transactions of approximately
$8.6 million in 1996 which have been deferred and are being amortized using the
effective interest method over the respective lives of the agreements.
An extraordinary after-tax loss on extinguishment of debt of $20.0 million
($33.0 million pre-tax) is reflected in the consolidated statement of operations
for the year ended December 31, 1996. This was a result of $7.7 million of
prepayment penalties associated with the repayment of $70.0 million of Notes,
the write off of $25.3 million of unamortized deferred financing costs in
connection with such Notes and with the Company's old revolving credit facility.
12. 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.
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
58
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
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 1998 and 1997.
STOCK OPTIONS
1992 OPTION PLAN. On July 31, 1992, the Board of Directors of the Company
adopted the AMPAD HOLDING CORPORATION 1992 KEY EMPLOYEES STOCK OPTION PLAN
("1992 Option 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 Option 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 Option Plan.
1996 OPTION PLAN. On June 22, 1996, the Company adopted the 1996 KEY
EMPLOYEES STOCK OPTION INCENTIVE PLAN ("1996 Option Plan"). The 1996 Option 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 Option Plan. The 1996 Option 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 Option 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 Option Plan must be approved by the
stockholders of the Company. Stock options granted during 1996 under the Option
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 Option 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 option shares and the vesting
period was restarted.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. On June 22, 1996, the Company
adopted the NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. Pursuant to the
Non-Employee Director Stock Option Plan, each
59
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
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 Stock Option Plan will be at fair market
value as of the date of grant. Options granted under the Non-Employee Director
Stock Option 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 Stock Option 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.
MANAGEMENT STOCK PURCHASE PLAN. On June 22, 1996, the Company adopted the
MANAGEMENT STOCK PURCHASE PLAN. The Management Stock Purchase 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
Purchase 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 Purchase 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.
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 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, 1998, stock option activity is as
follows:
[Enlarge/Download Table]
WEIGHTED
AVERAGE
SHARES SUBJECT EXERCISE
TO OPTION PRICE
--------------- -------------
(SHARES IN THOUSANDS)
Balance, December 31, 1995......................................................... 2,227 $ 0.160
Stock options granted.............................................................. 867 $ 15.343
-----
Balance, December 31, 1996......................................................... 3,094 $ 4.413
Stock options forfeited............................................................ (80) $ 15.000
-----
Balance, December 31, 1997......................................................... 3,014 $ 4.132
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
-----
-----
60
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
In 1998, 622,000 options were granted above fair market value on the date of
grant, 1,374,000 options were granted at fair market value on the date of the
grant, and 50,000 options were granted below fair market value the date of the
grant. Stock based compensation expense relative to the options granted below
fair market value for 1998 was not material.
As of December 31, 1998, the following information is presented for stock
options outstanding.
(shares in thousands)
[Enlarge/Download Table]
WEIGHTED AVERAGE WEIGHTED
NUMBER REMAINING WEIGHTED NUMBER AVERAGE
RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL LIFE IN AVERAGE EXERCISABLE AT EXERCISE
PRICES 12/31/98 YEARS EXERCISE PRICE 12/31/98 PRICE
---------------------- --------------- ------------------- --------------- --------------- ---------
$ 0.007 701 0.8 $ 0.007 701 $ 0.007
0.028 1,007 1.7 0.028 1,007 0.028
0.440 103 0.8 0.440 103 0.440
0.131-$ 1.940 416 6.4 1.574 178 1.671
2.000- 2.440 1,372 9.7 2.027 -- --
3.125- 4.500 418 9.8 4.484 164 4.500
4.750- 6.938 75 9.4 6.208 -- --
15.000- 21.375 125 7.7 17.375 83 17.375
----- -----
4,217 2,236
----- -----
----- -----
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 1998 was $1.460 per share. There were no options
granted in 1997. The average fair value at the date of the grant of common stock
options granted in 1996 was $8.835 per share.
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
1998, 1997 and 1996 for the stock options granted in accordance with the
accounting provisions of SFAS No. 123, the pro forma net income (loss) before
extraordinary item would have been $(80.6 million), $(5.8 million) and $17.8
million, respectively; the basic pro forma net income (loss) per share before
extraordinary item would have been $(2.91), $(0.21) and $1.02, respectively; and
the diluted pro forma net income(loss) per share before extraordinary item for
1998, 1997, and 1996 would have been $(2.91), $(0.21), and $.97. There was no
dilution in 1998 and 1997 due to the loss.
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 10 years, an expected volatility of 22.7% and
no expected dividend payments.
The significant assumptions used to estimate the fair value of the stock
options granted in 1996 include risk free rates of return ranging from 6.26% to
6.94%, an expected option life of 10 years, an expected volatility of 27% and no
expected dividend payments.
61
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. PENSION PLAN AND 401(K) PLAN
At December 31, 1998, 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 its 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 the Board of Directors.
Contributions to the plans were approximately $2.3 million, $1.2 million, and
$1.2 million for the years 1998, 1997 and 1996, respectively.
14. INCOME TAXES
[Enlarge/Download Table]
PROVISION (BENEFIT) FOR INCOME
TAXES FOR THE YEAR ENDED DECEMBER
31,
---------------------------------
1998 1997 1996
---------- --------- ----------
(IN THOUSANDS)
Current
Federal..................................................... $ -- $ -- $ --
State....................................................... 300 -- 491
---------- --------- ----------
300 -- 491
Deferred provision (benefit).................................. (11,674) 642 13,361
---------- --------- ----------
Provision (benefit) for income taxes before extraordinary
item........................................................ (11,374) 642 13,852
Deferred benefit relating to extraordinary item............... -- -- (13,009)
---------- --------- ----------
Provision (benefit) for income taxes.......................... $ (11,374) $ 642 $ 843
---------- --------- ----------
---------- --------- ----------
Reconciliation between the statutory U.S. federal income tax (benefit) rate
and the Company's effective income tax rate is as follows:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
Federal income tax (benefit) rate.................................... (35.0)% (35.0)% 35.0%
Valuation allowance.................................................. 7.0 -- --
Goodwill and intangible amortization................................. 17.6 45.2 3.3
State taxes, net..................................................... (2.4) 2.1 4.9
Other, net........................................................... 0.2 4.4 --
--------- --------- ---------
Effective tax rate*.................................................. (12.6)% 16.7% 43.2%
--------- --------- ---------
--------- --------- ---------
------------------------
* Before effect of extraordinary item in 1996.
For the year ended December 31, 1996, the Company's statutory income tax
rate of 35.0% differed from the Company's effective income tax (benefit) rate,
including extraordinary item, of (89.8)% due to
62
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
the following reasons: goodwill and intangible asset amortization accounted for
113.6%; other nondeductible expenses accounted for 11.8%; state income taxes
accounted for (5.0)% and other items accounted for 4.4%.
Temporary tax differences by Balance Sheet line item are as follows:
[Enlarge/Download Table]
DEFERRED TAX ASSETS
(LIABILITIES)
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Current deferred tax assets (liabilities):
Accrued expenses.......................................................... $ 5,331 $ 4,896
Accounts receivable and allowances........................................ 1,219 6
Inventory valuation....................................................... (6,510) (6,687)
Net operating losses and tax credits...................................... -- 13,777
---------- ----------
Current deferred tax asset, net........................................... $ 40 $ 11,992
---------- ----------
---------- ----------
Noncurrent deferred tax assets (liabilities):
Tradenames and intangibles................................................ $ (15,614) $ (16,347)
Net operating losses and tax credits...................................... 26,728 --
Property and equipment, net............................................... (29,153) (30,780)
Other accrued liabilities................................................. 7,400 7,650
---------- ----------
Noncurrent deferred tax liability......................................... (10,639) (39,477)
Valuation allowance....................................................... (6,333) --
---------- ----------
Noncurrent deferred tax liability, net.................................... $ (16,972) $ (39,477)
---------- ----------
---------- ----------
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 1998 income tax benefit was reduced by a
provision of $6.3 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.
At December 31, 1998, the Company had net operating losses available to
reduce future taxable income of approximately $65.5 million which expire in the
years 2007 through 2018. In the event certain changes in ownership of the
Company occur as defined by the 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 resulted
in a change in control of WR. Consequently the utilization of these credits in
future periods are subject to limitation.
63
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)
1999............................................................. $ 6,284
2000............................................................. 5,506
2001............................................................. 4,371
2002............................................................. 4,012
2003............................................................. 3,027
Thereafter....................................................... 29,595
-------------
Total............................................................ $ 52,795
-------------
-------------
Total rent expense was approximately $7.9 million, $6.6 million, $3.6
million for 1998, 1997 and 1996 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 June 29,
1998. Motions to dismiss have been filed in the consolidated cases and all
briefing is complete. Pending a ruling on the motions to dismiss, all
proceedings in the consolidated action have been stayed. To the extent that the
motions to dismiss are denied in whole or in part, the Company believes that it
has meritorious defenses to plaintiff's claims and intends to vigorously defend
the action.
There are various other outstanding claims against the Company arising in
the normal course of business. The Company believes that the claims are without
merit and that any losses which might ultimately be sustained by the Company
would not be material to the financial position, results of operations, or cash
flows of the Company.
ENVIRONMENTAL MATTERS
The Company is 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.
64
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company had been named a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, at five waste disposal sites. The Company settled its liability at four
of these sites as a de minimis party. The Company expects to be eligible for a
de minimis settlement at the remaining site.
16. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1998, 1997 and 1996, the Company expensed
$2.2 million $2.4 million and $1.4 million, respectively, for management and
directors' fees and out of pocket expenses payable to the principal stockholder.
Unpaid fees of $885,000 and $553,000 are included in accrued expenses in the
consolidated balance sheets at December 31, 1998 and 1997 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 June 1996, the Company amended its Advisory
Agreement with its principal stockholder, pursuant to which, for four years, the
Company will pay the stockholder an aggregate annual fee of $2.0 million plus a
fee of 1% for completed acquisition transactions. In September 1998, the Company
renegotiated its Advisory Agreement to reduce the fee from $2.0 million to $1.5
million annually.
In 1996, the Company paid its principal stockholder $3.0 million in fees in
connection with obtaining the new revolving credit facility (which were included
in debt issuance costs paid); $550,000 and $750,000, respectively, in fees in
connection with the acquisitions of Niagara and Shade/Allied (which were
included as part of the purchase price); and $2.1 million in connection with the
Company's initial public offering of common stock.
The Company had an outstanding note receivable of $273,000 and $289,000 at
December 31, 1998 and 1997, respectively, from its former President and Chief
Operating Officer. In 1998, the note was extended to July 2000, and bears
interest at 6.00%. 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 March 31, 1998, the Company's loaned it's acting 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% and has
accrued interest of $44,538 at December 31, 1998. The loan is secured by shares
of common stock.
Mr. Herbert M. Kohn, a 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 $424,400, $444,000 and $42,800 in 1998, 1997 and 1996,
respectively.
17. OTHER INFORMATION
Substantially all of the Company's operations are conducted within the
United States.
One customer accounted for 15%, 12%, and 11% of the Company's net sales in
1998, 1997, and 1996, respectively.
65
AMERICAN PAD & PAPER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. EARNINGS PER SHARE
The difference between basic and diluted weighted average shares in 1996 is
due to 1,018,000 dilutive common stock options granted. Options to purchase 50
shares of common stock at a weighted average exercise price of $20.94 per share
were outstanding during the second half of 1996 but were not included in the
computation of diluted earnings per share because the exercise price of these
options was greater than the average market price of the common stock. Dilutive
earnings per share and weighted average shares outstanding are not presented in
1997 and 1998 due to the losses incurred and the anti-dilutive effect of the
common stock options.
In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 98, the weighted average number of outstanding common shares and
common stock options is calculated based on the historical timing of the common
stock transactions. The historical numbers do not reflect retroactive treatment
of the Company's initial public offering of common stock or the conversion of
preferred stock and preferred stock options; however, the Company's 8.1192--
for--one stock split in 1996 has been retroactively reflected in the Company's
financial statements.
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, 1998 and 1997 and
for the years then ended is presented. The summarized financial information is
as follows:
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
AP&P DELAWARE
& GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------------- ------------- ------------ ------------
(IN THOUSANDS)
Current assets........................................ $ 137,853 $ 39,327 $ -- $ 177,180
Non-current assets.................................... 379,797 230 (39,370) 340,657
--------------- ------------- ------------ ------------
Total assets.......................................... $ 517,650 $ 39,557 $ (39,370) $ 517,837
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Current liabilities................................... $ 103,685 $ 187 $ -- $ 103,872
Non-current liabilities............................... 391,935 -- -- 391,935
Equity................................................ 22,030 39,370 (39,370) 22,030
--------------- ------------- ------------ ------------
Total liabilities and equity.......................... $ 517,650 $ 39,557 $ (39,370) $ 517,837
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
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)
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
66
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, 1997
----------------------------------------------------------
AP&P DELAWARE &
GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------------- ------------- ------------ ------------
(IN THOUSANDS)
Current assets........................................ $ 212,480 $ 38,390 $ -- $ 250,870
Non-current assets.................................... 425,487 350 (38,306) 387,531
--------------- ------------- ------------ ------------
Total assets.......................................... $ 637,967 $ 38,740 $ (38,306) $ 638,401
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Current liabilities................................... $ 97,617 $ 434 $ -- $ 98,051
Non-current liabilities............................... 439,684 -- -- 439,684
Equity................................................ 100,666 38,306 (38,306) 100,666
--------------- ------------- ------------ ------------
Total liabilities and equity.......................... $ 637,967 $ 38,740 $ (38,306) $ 638,401
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Net sales............................................. $ 687,335 $ -- $ -- $ 687,335
Gross profit.......................................... 88,919 -- -- 88,919
Income(loss) from continuing operations............... 32,581 2,382 (1,358) 33,605
Net income(loss)...................................... $ (4,491) $ 1,358 $ (1,358) $ (4,491)
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
[Enlarge/Download Table]
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 income (loss)............................................ (2,085) (55,937) (13,394) (7,231)
Basic EPS--net income (loss) per share....................... $ (0.08) $ (2.02) $ (0.48) $ (0.26)
Diluted EPS--net income (loss) per share..................... $ (0.08) $ (2.02) $ (0.48) $ (0.26)
[Enlarge/Download Table]
1997--QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30(1) DECEMBER 31
---------- ---------- --------------- ------------
(IN THOUSANDS)
Net sales................................................. $ 149,834 $ 167,160 $ 176,462 $ 193,879
Gross profit.............................................. 28,708 30,727 26,258 3,226
Net income (loss)......................................... 3,988 4,708 951 (14,138)
Basic EPS--net income (loss) per share.................... $ 0.15 $ 0.17 $ 0.03 $ (0.52)
Diluted EPS--net income (loss) per share.................. $ 0.14 $ 0.16 $ 0.03 $ (0.52)
------------------------
(1) Quarterly data reflects restatement from data previously filed on Form 10-Q
for the quarter ended September 30, 1997. The Company previously reported
earnings per share of $0.06 per share for the quarter ended September 30,
1997. The results presented above for the same quarter reflects certain
adjustments which should have been reported in the earnings for that
quarter.
67
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 report to be signed
on its behalf by the undersigned, thereunto duly authorized, as of March 15,
1999.
AMERICAN PAD & PAPER COMPANY
as Registrant
[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)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below as of March 15, 1999, by the following persons
on behalf of the registrant and in the capacities indicated.
[Enlarge/Download Table]
/s/ Robert C. Gay /s/ Russell M. Gard
------------------------------------------ ------------------------------------------
Robert C. Gay Russell M. Gard
Co-Chairman and Director Vice Chairman and Director
/s/ Gregory M. Benson /s/ Paul B. Edgerley
------------------------------------------ ------------------------------------------
Gregory M. Benson Paul B. Edgerley
Director Director
/s/ Jeffery K. Hewson /s/ Herbert M. Kohn
------------------------------------------ ------------------------------------------
Jeffery K. Hewson Herbert M. Kohn
Director Director
/s/ John H. Rodgers /s/ Scott R. Watterson
------------------------------------------ ------------------------------------------
John H. Rodgers Scott R. Watterson
Director Director
/s/ Marc B. Wolpow
------------------------------------------
Marc B. Wolpow
Director
68
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.
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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).
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)
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)
70
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EXHIBIT
NO. DESCRIPTION
--------- -----------------------------------------------------------------------------------------------------
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)
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.
(A) These agreements constitute management compensation contracts for the
individuals named.
71
Dates Referenced Herein and Documents Incorporated by Reference
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