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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission file number 1-11803
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AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 04-3164298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 Preston Road, Suite 700, Dallas, TX 75252-5613
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 733-6200
Commission file number 333-3006
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AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1512956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 Preston Road, Suite 700, Dallas, TX 75252-5613
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 733-6200
Indicate by check mark whether 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.
American Pad & Paper Company Yes X No
--- ---
American Pad & Paper Company of Delaware, Inc. Yes X No
--- ---
As of November 4, 1996, American Pad & Paper Company has 27,399,809
shares of Common Stock outstanding. As of November 4, 1996, American Pad &
Paper Company of Delaware, Inc. had 100 shares of Common Stock outstanding, all
of which are indirectly owned by American Pad & Paper Company.
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AMERICAN PAD & PAPER COMPANY
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Important Explanatory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as
of December 31, 1995 and September 30, 1996 . . . . . . . . . . . 3
Condensed Consolidated Statements of
Operations for the three months ended
September 30, 1995 and 1996 and for the nine
months ended September 30, 1995 and 1996 . . . . . . . . . . . . 4
Condensed Consolidated Statements of
Cash Flows for the nine months
ended September 30, 1995 and 1996 . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 18
PART I. FINANCIAL INFORMATION
Important Explanatory Note.
This integrated Form 10-Q is filed pursuant to the Securities Exchange
Act of 1934, as amended, for each of American Pad & Paper Company, a Delaware
corporation, and its wholly owned subsidiary, American Pad & Paper Company of
Delaware, Inc., a Delaware corporation. Unless the context requires otherwise,
references herein to the "Company" refer to both American Pad & Paper Company
and American Pad & Paper Company of Delaware, Inc. American Pad & Paper Company
is a holding company with no operations separate from its operating subsidiary,
American Pad & Paper Company of Delaware, Inc. No separate financial information
for American Pad & Paper Company of Delaware, Inc. has been provided herein
because management of the Company believes such information would not be
meaningful because (i) American Pad & Paper Company of Delaware, Inc. is the
only operating subsidiary of American Pad & Paper Company, which has no
operations other than those of American Pad & Paper Company of Delaware, Inc.
and its subsidiaries and (ii) all assets and liabilities of American Pad & Paper
Company are recorded on the books of American Pad & Paper Company of Delaware,
Inc. There is no material difference between American Pad & Paper Company and
American Pad & Paper Company of Delaware, Inc. for the disclosure required by
the instructions to Form 10-Q and therefore, unless otherwise indicated, the
responses set forth herein apply to each of American Pad & Paper Company and
American Pad & Paper Company of Delaware, Inc.
2
ITEM 1. FINANCIAL STATEMENTS
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
December 31, September 30,
ASSETS 1995 1996
------ ------- -----
Current assets:
Cash $ 18,341 $ 13,200
Restricted cash 3,619 2,410
Accounts receivable, net 25,943 60,287
Refundable income taxes 3,657 -
Inventories 93,061 97,212
Prepaid expenses and other current assets 927 7,601
Assets held for sale 42,578 356
Deferred income taxes 15,009 14,070
-------- --------
Total current assets 203,135 195,136
Property and equipment, net 106,768 132,541
Intangible assets, net 191,012 190,946
Other 3,441 1,790
-------- --------
Total assets $504,356 $520,413
======== ========
LIABILITIES AND STOCKHOLDERS'
-----------------------------
EQUITY (DEFICIT)
----------------
Current liabilities:
Current portion of long-term debt $ 11,834 $ 2,168
Accounts payable 37,048 37,420
Accrued expenses 44,835 51,565
Income taxes payable 494 --
--------- ---------
Total current liabilities 94,211 91,153
Long-term debt 443,794 298,920
Deferred income taxes 30,070 31,821
Other 2,702 4,070
--------- ---------
Total liabilities 570,777 425,964
--------- ---------
Stockholders' equity (deficit):
Preferred stock, 150 shares authorized, 58
shares and no shares issued and outstanding,
respectively 113,887 --
Common stock, voting, $.01 par value, 75,000
shares authorized, 900 shares and 27,400
shares issued, respectively 9 274
Additional paid-in capital 14,240 300,980
Accumulated deficit (194,557) (206,805)
--------- ---------
Total stockholders' equity (deficit) (66,421) 94,449
--------- ---------
Total liabilities and stockholders' (deficit) $ 504,356 $ 520,413
========= =========
See notes to condensed consolidated financial statements.
3
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30,
1995 1996 1995 1996
---- ---- ---- ----
Net sales $ 53,787 $ 173,606 $ 146,009 $ 407,813
Cost of sales 43,529 137,569 122,530 323,317
-------- --------- --------- ---------
Gross profit 10,258 36,037 23,479 84,496
Operating expenses:
Selling and marketing 1,269 4,945 3,598 12,165
General and administrative 1,733 7,581 4,714 22,051
Management fees and services 185 1,786 472 2,846
-------- --------- --------- ---------
Income from operations 7,071 21,725 14,695 47,434
Other income (expense):
Interest (2,050) (9,940) (5,837) (34,972)
Other income, net (29) 408 130 1,179
-------- --------- --------- ---------
Income before income taxes 4,992 12,193 8,988 13,641
Provision for income taxes 142 5,268 1,674 5,893
-------- --------- --------- ---------
Income before extraordinary item 4,850 6,925 7,314 7,748
Extraordinary loss from extinguishment of
debt (net of income tax benefit of
$12,018 and $13,009, respectively) -- (18,695) -- (19,995)
-------- --------- --------- ---------
Net income (loss) $ 4,850 $ (11,770) $ 7,314 $ (12,247)
======== ========= ========= =========
Income (loss) per share:
Income before extraordinary item $ .16 $ .24 $ .25 $ .26
Extraordinary item -- (.64) -- (.67)
-------- --------- --------- ---------
Net income (loss) $ .16 $ (.40) $ .25 $ (.41)
======== ========= ========= =========
Weighted average common shares
outstanding 29,607 29,351 29,607 29,607
======== ========= ========= =========
See notes to condensed consolidated financial statements.
4
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------
Nine Months
Ended September 30,
1995 1996
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 7,314 $ (12,247)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation 1,291 6,796
Amortization of goodwill and intangible assets 93 3,340
Extraordinary loss on extinguishment of debt -- 19,995
Amortization of debt issuance costs 637 3,167
Non cash interest expense and accretion of discount 116 --
Gain on sale of assets (119) (49)
Changes in:
Restricted cash -- 2,079
Accounts receivable (14,681) (14,114)
Refundable income taxes -- 3,657
Inventories (748) 8,638
Prepaid expenses and other current assets (537) (1,279)
Deferred tax asset, net 916 12,795
Accounts payable (134) (5,457)
Accrued expenses (162) (2,852)
Other assets -- 1,646
Other liabilities 390 677
--------- ---------
Net cash provided by (used in)
operating activities (5,624) 26,792
--------- ---------
Cash flows from investing activities:
Purchase of Niagara and other businesses, including
acquisition costs and services (6,665) (52,894)
Purchases of property and equipment, net (1,975) (7,630)
Proceeds from sale of Personalizing Division -- 47,890
Proceeds from sale of assets 119 913
Net cash used by assets held for sale -- (7,618)
--------- ---------
Net cash used in investing activities (8,521) (19,339)
--------- ---------
Cash flows from financing activities:
Repayment of old accounts receivable facility -- (45,000)
Proceeds from new accounts receivable facility -- 45,000
Repayment of new accounts receivable facility -- (10,000)
Net borrowings under line of credit 6,455 --
Proceeds from long-term debt 10,209 192,773
Repayment of long-term debt (2,499) (351,213)
Redemption premiums included in extraordinary loss -- (7,700)
Debt issuance costs -- (9,572)
Net proceeds from initial public offering -- 173,118
--------- ---------
Net cash provided by (used in) financing activities 14,165 (12,594)
--------- ---------
Net increase (decrease) in cash 20 (5,141)
Cash, beginning of period 64 18,341
--------- ---------
Cash, end of period $ 84 $ 13,200
========= =========
See notes to condensed consolidated financial statements.
5
AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
1. Organization, Basis of Presentation and Business
Organization and Basis of Presentation
American Pad & Paper Company (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. All of the Company's operations are conducted through American Pad &
Paper Company of Delaware, Inc. and its wholly owned subsidiaries.
The financial statements of the Company present the accounts and
operations of the Company and its wholly owned subsidiaries. Additionally, the
consolidated financial statements include the accounts of Notepad Funding
Corporation, a special purpose corporation utilized in the accounts receivable
facility. All significant intercompany balances have been eliminated. Certain
prior and current year amounts have been reclassified for comparative purposes.
Business
The Company operates in one segment, paper converting, and is one of
the largest manufacturers and marketers of paper-based office products
(excluding computer forms and copy paper) in North America. It 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). The Company's products are distributed
through large mass merchant retailers, office product superstores, warehouse
clubs, major contract stationers, office products wholesalers, independent
dealers and merchants. Substantially all sales are to customers within the
United States.
Interim Financial Information
The accompanying interim financial statements and pro forma information
are unaudited. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes the
disclosures included herein are adequate to make the information presented not
misleading. These interim financial statements should be read in conjunction
with the Company's financial statements for the year ended December 31, 1995.
The accompanying interim financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position at September 30, 1996 and the
results of its operations and its cash flows for the three and nine month
periods ended September 30, 1996 and 1995. The results of operations for the
interim periods presented are not necessarily indicative of results of the full
fiscal year.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of the
condensed consolidated financial statements are as follows:
Earnings per share
Given the changes in the Company's capital structure effected in
connection with the initial public offering of the Company's common stock on
July 2, 1996, historical earnings per common share amounts are not presented in
the consolidated financial statements, except for the three month period ended
September 30, 1996, as they are not considered to be meaningful. Pro forma
earnings per share is presented for all other periods and reflects the sale of
common shares in the initial public offering, the conversion of the preferred
stock into common stock for the same periods outstanding as the underlying
common stock on which the preferred stock was issued, and the 8.1192-for-one
stock split.
6
3. Significant transactions
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
in accordance with Accounting Principles Board Opinion (APB) No. 16. The
aggregate acquisition costs totaled $47,647 and consisted of cash of $44,620 and
direct acquisition costs of $3,027. Additionally, the Company paid $5,000 at
closing under a one-year consulting services agreement. The Company principally
financed the acquisition through proceeds from the sale of the Personalizing
division described below. The aggregate acquisition cost has been preliminary
allocated to the assets acquired and liabilities assumed as follows: cash and
restricted cash of $1,141, accounts receivable of $10,223, inventories of
$12,787, prepaid and other assets of $1,519, management services agreement of
$5,000, property and equipment of $24,940, deferred income tax liability of
$1,992, accounts payable of $6,106, accrued expenses of $9,710, other noncurrent
liabilities of $693 and assumed debt of $3,900. The aggregate acquisition costs
exceeded fair market value of the net assets acquired by $19,438. Accordingly,
goodwill was recorded in accordance with APB No. 16 and is being amortized over
40 years. The operating results of this acquisition have been included in the
accompanying condensed consolidated financial statements since the date of
acquisition.
WR Acquisition, Inc./Williamhouse-Regency
The Company acquired WR Acquisition, Inc. ("WR") and its wholly owned
subsidiary Williamhouse-Regency of Delaware, Inc. ("Williamhouse") (later
renamed American Pad & Paper Company of Delaware, Inc.) through a merger
transaction effective October 31, 1995. The transaction 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 market value of such
net assets in accordance with APB No. 16. The aggregate acquisition cost totaled
$147,853 and consisted of cash of $140,000 and direct acquisition costs of
$7,853. The acquisition was entirely financed through the Company's bank credit
agreement and an off-balance sheet accounts receivable facility. The aggregate
acquisition costs have been preliminarily allocated to the assets acquired and
liabilities assumed as follows: accounts receivable of $39,174; inventories of
$49,496; prepaid expenses and other assets of $8,699; net assets held for sale
of $40,094; property and equipment of $88,688; identifiable intangible assets of
$37,900; deferred income tax liability of $27,644; accounts payable of $17,518;
accrued expenses of $36,482; noncurrent liabilities of $2,019 and assumed debt
of $152,905. The aggregate acquisition costs exceeded fair market value of the
net assets acquired by $120,370. Accordingly, goodwill was recorded in
accordance with APB No. 16 and is being amortized over 40 years. The operating
results of this acquisition have been included in the accompanying condensed
consolidated financial statements since the date of acquisition. The
Williamhouse company consisted of the Williamhouse division, a manufacturer of a
wide range of mill branded, specialty and commodity envelopes; and the Regency
division, which provides custom imprinting services.
The Regency personalized stationery and invitations division (the
"Personalizing Division") acquired in the acquisition was identified by the
Company's 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 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 $51,807, subject to certain post-closing purchase price adjustments. The net
proceeds from the sale exceeded the carrying amount of the asset held for sale
at September 30, 1996 by $2,907. As such, the preliminary purchase price
allocation was adjusted resulting in a $2,907 reduction to goodwill. During the
six month period ended June 30, 1996, the Personalizing Division had operating
income of $2,369, and interest carrying costs of $1,884, which have been
excluded from the condensed consolidated statement of operations and included as
adjustments to the carrying amount of the net assets held for sale through the
date of sale.
7
Globe-Weis
Effective August 16, 1995, the Company acquired the inventories and
certain equipment of the file folder and hanging file folder product lines of
Globe-Weis's ("Globe") office products division from Globe's parent. For
financial reporting purposes, 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
in accordance with APB No. 16. The aggregate acquisition costs totaled $19,958
and consisted of cash and seller issued notes of $17,869 and direct acquisition
and financing costs of $2,089. The Company principally financed the acquisition
through its financing arrangement with a commercial lender and notes issued to
the seller, which notes were repaid in October 1995. The preliminary allocation
of the aggregate acquisition costs was as follows: inventories of $12,848,
equipment of $5,445, and debt issuance costs of $1,665. The operating results of
this acquisition have been included in the accompanying consolidated financial
statements since the date of acquisition.
Initial Public Offering
Effective July 2, 1996, the Company sold 12,500,000 shares of common
stock in an initial public offering. The net proceeds to the Company from the
offering, which were received on July 8, 1996, amounted to $173.1 million, after
deducting underwriting discounts, legal and accounting fees and printing,
registration and travel expenses. The Company used such proceeds to (i) repay
$95.8 million on the indebtedness incurred under the Bank Credit Agreement, (ii)
redeem $70 million aggregate principal amount of the 13% senior subordinated
notes from the holders thereof on a pro rata basis, and (iii) pay $7.7 million
in redemption premiums on such notes.
New Bank Credit Agreement
Contemporaneously with the initial public offering, the Company
refinanced and retired all remaining indebtedness under the old bank credit
agreement with the proceeds of the loans under a new bank credit agreement. As a
result of the refinancing, effective July 8, 1996, the Company borrowed $162
million in revolving loans and $6.5 million in swingline loans. The proceeds of
these loans was used to (i) pay off the remaining $145 million in term loans, $5
million in revolver loans and $7.7 million in swingline loans outstanding under
the existing bank credit agreement and (ii) pay approximately $8.6 million in
fees associated with the new bank credit agreement. The new bank credit
agreement provides a revolving credit facility of $300 million. As a result of
the new bank credit agreement, the Company's effective interest rate under its
senior credit facility was reduced by approximately 189 basis points
contemporaneously with the initial public offering.
Pro Forma Results of Operations
The following summary presents the results of operations for the nine
months ended September 30, 1995 and 1996, on an unaudited pro forma basis, as if
the Niagara, Williamhouse and Globe acquisitions and the initial public offering
and the new bank credit agreement had occurred as of January 1, 1995 (with
appropriate adjustments for amortization of intangible assets, interest expense,
elimination of duplicate selling and administrative expenses and the related
income tax effects). 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 transactions been consummated as of those earlier
dates, nor are they indicative of results of operations which may occur in the
future.
Nine months ended
September 30,
1995 1996
---------- --------
Net sales $ 449.7 $ 462.3
========== ========
Income before income taxes and extraordinary item $ 21.6 $ 32.2
========== ========
Net income before extraordinary item $ 13.8 $ 18.6
========== ========
Net income (loss) $ 13.8 $ (3.1)
========== ========
Net income (loss) per share $ .47 $ (.10)
========== ========
8
4. Accounts Receivable
Accounts receivable consist of the following:
December 31, September 30,
1995 1996
------------ -------------
Accounts receivable--trade $ 25,539 $ 58,561
Accounts receivable--other 2,013 3,554
Less allowance for doubtful accounts and
reserves for customer deductions and cash
discounts (1,609) (1,828)
-------- --------
$ 25,943 $ 60,287
======== ========
On May 29, 1996, the Company entered into a new $60 million accounts
receivable facility to sell, on a revolving basis, an undivided interest in a
designated pool of trade accounts receivable. At September 30, 1996, $35 million
of accounts receivable were sold and are excluded from accounts receivable in
the accompanying balance sheets. The full amount of the allowance for doubtful
accounts has been retained because the Company has retained substantially the
same risk of credit loss as if the accounts receivable had not been sold through
the recourse provision of the receivable sale agreement. Under the agreement,
the maximum amount of the purchaser's investment is subject to change based on
the level of eligible accounts receivable and restrictions on concentrations of
accounts receivable.
5. Inventories
Inventories consist of the following:
December 31, September 30,
1995 1996
------------ -------------
Raw material and semi-finished goods $ 36,129 $ 36,300
Work in process 7,114 7,462
Finished goods 60,266 60,644
--------- ---------
103,509 104,406
LIFO reserve (10,448) (7,194)
--------- ---------
$ 93,061 $ 97,212
========= =========
6. Property, Plant and Equipment
The cost and accumulated depreciation of property, plant and equipment are as
follows:
December 31, September 30,
1995 1996
------------ -------------
Property, plant and equipment $ 111,347 $ 143,916
Accumulated depreciation (4,579) (11,375)
----------- ----------
$ 106,768 $ 132,541
========== ==========
9
7. Intangible Assets
The cost and accumulated amortization of intangible assets are as follows:
December 31, September 30,
1995 1996
------------ -------------
Debt issuance costs $ 33,775 $ 18,344
Accumulated amortization (846) (4,013)
------------ -----------
32,929 14,331
------------ -----------
Goodwill 121,176 142,732
Accumulated amortization (793) (3,226)
------------ -----------
120,383 139,506
------------ -----------
Intangible assets 37,900 38,216
Accumulated amortization (200) (1,107)
------------ -----------
37,700 37,109
------------ -----------
$ 191,012 $ 190,946
============ ===========
8. Condensed Consolidating Financial Information of Guarantor Subsidiaries
The 13% senior subordinated notes are guaranteed by substantially all
of the subsidiaries of American Pad & Paper Company of Delaware, Inc.
("Delaware"), a wholly owned subsidiary of the Company and formerly known as
Williamhouse-Regency of Delaware, Inc. The subsidiary guarantees are full,
unconditional and joint and several. Each of the guarantor subsidiaries are
wholly owned. The Company is not a guarantor of the Notes. Separate financial
statements of the guarantor subsidiaries are not presented because management
has determined that they would not be material to investors. However, condensed
consolidating financial information as of December 31, 1995 and September 30,
1996 and for the three and nine months ended September 30, 1996 are presented.
The condensed consolidating financial information of Delaware is as follows:
10
Condensed Consolidating Balance Sheet
December 31, 1995
-------------------------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Delaware Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ -----
Assets
Current assets:
Cash $ 18,295 $ 33 $ 13 $ $ 18,341
Restricted cash 3,619 -- -- -- 3,619
Accounts receivable, net (13,490) (154) 39,587 -- 25,943
Intercompany receivable
(payable) 75,423 (72,255) (3,168) -- --
Refundable income
taxes 3,657 -- -- -- 3,657
Inventories 74,112 18,949 -- -- 93,061
Assets held for sale 864 41,714 -- -- 42,578
Deferred income taxes 17,395 (2,386) -- -- 15,009
Other current assets 879 48 -- -- 927
--------- -------- --------- --------- --------
Total current assets 180,754 (14,051) 36,432 -- 203,135
--------- -------- --------- --------- --------
Property and equipment, net 69,659 37,109 -- -- 106,768
Investment in subsidiaries 41,575 -- -- (41,575) --
Intangible assets, net 171,432 16,993 2,587 -- 191,012
Other 3,311 130 -- -- 3,441
--------- -------- --------- --------- --------
Total Assets $ 466,731 $ 40,181 $ 39,019 $ (41,575) $504,356
========= ======== ========= ========= ========
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities:
Current portion of long-
term debt $ 10,652 $ 1,182 $ -- $ -- $ 11,834
Accounts payable and
accrued expenses 62,869 19,014 -- -- 81,883
Income taxes payable 494 -- -- -- 494
--------- -------- --------- --------- --------
Total current liabilities 74,015 20,196 -- -- 94,211
--------- -------- --------- --------- --------
Long-term debt 442,134 1,660 -- -- 443,794
Other liabilities 2,702 -- -- -- 2,702
Deferred income taxes 14,301 15,769 -- -- 30,070
--------- -------- --------- --------- --------
Total liabilities 533,152 37,625 -- -- 570,777
--------- -------- --------- --------- --------
Stockholders' equity
(deficit):
Common stock -- 1 10 (11) --
Additional paid-in capital 28,998 -- 37,370 (37,370) 28,998
Retained earnings (95,419) 2,555 1,639 (4,194) (95,419)
--------- -------- --------- --------- --------
Total stockholders' equity
(deficit) (66,421) 2,556 39,019 (41,575) (66,421)
--------- -------- --------- --------- --------
Total liabilities and
stockholders' equity
(deficit) $ 466,731 $ 40,181 $ 39,019 $ (41,575) $504,356
========= ======== ========= ========= ========
11
Condensed Consolidating Balance Sheet
September 30, 1996
------------------------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Delaware Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ -----
Assets
Current Assets:
Cash $ 12,980 $ 220 $ -- $ -- $ 13,200
Restricted cash 1,791 619 -- -- 2,410
Accounts receivable 8,259 11,605 40,423 -- 60,287
Intercompany receivable
(payable) 40,951 (36,693) (4,258) -- --
Inventories 71,495 25,717 -- -- 97,212
Assets held for sale -- 356 -- -- 356
Deferred income taxes 13,199 181 690 -- 14,070
Management services
agreement -- 3,750 -- -- 3,750
Other current assets 3,702 149 -- -- 3,851
--------- --------- -------- --------- ---------
Total current assets 152,377 5,904 36,855 -- 195,136
--------- --------- -------- --------- ---------
Property and equipment, net 71,174 61,367 -- -- 132,541
Investment in subsidiaries 86,960 16,942 -- (103,902) --
Intangible assets, net 155,174 35,298 474 -- 190,946
Other 1,198 592 -- -- 1,790
--------- --------- -------- --------- ---------
Total assets $ 466,883 $ 120,103 $ 37,329 $(103,902) $ 520,413
========= ========= ======== ========= =========
Liabilities and
stockholders' equity (deficit)
Current liabilities:
Current portion of long-
term debt $ 688 $ 1,480 $ -- $ -- $ 2,168
Accounts payable and
accrued expenses 70,140 18,692 153 -- 88,985
Income taxes payable (9,063) 8,609 454
--------- --------- -------- --------- ---------
Total current liabilities 61,765 28,781 607 -- 91,153
--------- --------- -------- --------- ---------
Long-term debt 294,140 4,780 -- -- 298,920
Other liabilities 3,377 693 -- -- 4,070
Deferred income taxes 13,152 18,669 -- -- 31,821
--------- --------- -------- --------- ---------
Total liabilities 372,434 52,923 607 -- 425,964
Stockholders' equity (deficit):
Common stock -- 109 10 (119) --
Additional paid-in capital 300,980 53,055 35,399 (88,454) 300,980
Retained earnings (206,531) 14,016 1,313 (15,329) (206,531
--------- --------- -------- --------- ---------
Total stockholders' equity
(deficit) 94,449 67,180 36,722 (103,902) 94,449
--------- --------- -------- --------- ---------
Total liabilities and
stockholders' equity
(deficit) $ 466,883 $ 120,103 $ 37,329 $(103,902) $ 520,413
========= ========= ======== ========= =========
12
Condensed Consolidating Statement of Operations
For the three months ended September 30, 1996
------------------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Delaware Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ -----
Net sales $ 129,782 $ 60,795 $ - $ (16,971) $ 173,606
Cost of sales 107,117 47,423 - (16,971) 137,569
--------- -------- -------- --------- ---------
Gross profit 22,665 13,372 - - 36,037
Operating expenses:
Selling and marketing 3,460 1,485 - - 4,945
General and administrative 5,561 4,165 (359) - 9,367
--------- -------- -------- --------- ---------
Income from operations 13,644 7,722 359 - 21,725
Other income (expense):
Interest (9,775) (139) (26) - (9,940)
Other income, net (751) 1,159 - - 408
--------- -------- -------- --------- ---------
Income before income
taxes 3,118 8,742 333 - 12,193
Provision for income
taxes 1,341 3,777 150 - 5,268
--------- -------- -------- --------- ---------
Income before equity in
net earnings of subsidiaries
and extraordinary items 1,777 4,965 183 - 6,925
Equity in net earnings of
subsidiaries 5,148 - - (5,148) -
--------- -------- -------- --------- ---------
Income (loss) before
extraordinary item 6,925 4,965 183 (5,148) 6,925
Extraordinary loss from
extinguishment of debt, net (18,695) - - - (18,695)
--------- -------- -------- --------- ---------
Net income (loss) $ (11,770) $ 4,965 $ 183 $ (5,148) $ (11,770)
========= ======== ======== ========= =========
13
Condensed Consolidating Statement of Operations
For the three months ended September 30, 1996
------------------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Delaware Subsidiaries Subsidiary Eliminations Total
-------- ------------ ----------- ------------ -----
Net sales $ 304,167 $ 130,394 $ - $ (26,748) $ 407,813
Cost of sales 249,863 100,202 - (26,748) 323,317
---------- --------- ---------- --------- ---------
Gross profit 54,304 30,192 - - 84,496
Operating expenses:
Selling and marketing 8,972 3,193 - - 12,165
General and administrative 20,712 6,211 (2,026) - 24,897
----------- ---------- ---------- --------- ---------
Income from operations 24,620 20,788 2,026 - 47,434
Other income (expenses):
Interest (34,449) (223) (300) - (34,972)
Other income, net 2,191 (1,012) - - 1,179
----------- ---------- ---------- --------- ---------
Income (loss) before income
taxes (7,638) 19,553 1,726 - 13,641
Provision (benefit) for income
taxes (3,306) 8,447 752 - 5,893
----------- ---------- ---------- --------- ---------
Income (loss) before equity in
net earnings of subsidiaries
and extraordinary items (4,332) 11,106 974 - 7,748
Equity in net earnings of
subsidiaries 12,080 - - (12,080) -
----------- ---------- ---------- --------- ---------
Income (loss) before
extraordinary items 7,748 11,106 974 (12,080) 7,748
Extraordinary loss from
extinguishment of debt, net (19,995) - (1,300) 1,300 (19,995)
----------- ---------- ---------- ---------- ---------
Net income (loss) $ (12,247) $ 11,106 $ (326) $ (10,780) $ (12,247)
========== ========== ============ =========== ==========
14
Condensed Consolidating Cash Flow Information
For the three months ended September 30, 1996
------------------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Delaware Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ -----
Net cash provided by (used in)
operating activities $67,512 $(40,864) $ 144 $ - $ 26,792
Investing activities:
Proceeds from sale of assets 864 47,939 - - 48,803
Purchase of Niagara (52,894) - - - (52,894)
Other (9,140) (6,108) - - (15,248)
-------- -------- ------- --------- ---------
Net cash provided by (used in)
investing activities (61,170) 41,831 - - (19,339)
-------- -------- ------- --------- ---------
Financing activities
Repayment of old accounts
receivable facility (45,000) - - - (45,000)
Proceeds from new accounts
receivable facility 45,000 - - - 45,000
Repayment of new accounts
receivable facility (10,000) - - - (10,000)
Proceeds from long-term debt 192,773 - - - 192,773
Repayment of long term debt (350,433) (780) - - (351,213)
Debt issuance costs and
redemption premium (19,086) - 1,814 - (17,272)
Proceeds from initial public
offering, net 173,118 - - - 173,118
Other 1,971 - (1,971) - -
------- -------- -------- --------- ---------
Net cash provided by (used in)
financing activities (11,657) (780) (157) - (12,594)
------- -------- -------- --------- ---------
Net increase (decrease) in cash (5,315) 187 (13) - (5,141)
Cash, beginning of period 18,295 33 13 - 18,341
------- -------- -------- --------- ---------
Cash, end of period $12,980 $ 220 $ - $ - $ 13,200
======= ======== ========= ========= =========
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Net sales for the three months ended September 30, 1996 increased by
$119.8 million, or 223%, to $173.6 million from $53.8 million for the three
months ended September 30, 1995. Of this net sales increase, $99.3 million is
related to the acquisition of the Williamhouse division and $8.8 million is
related to the acquisition of the Globe-Weis. Ampad division net sales increased
by $11.7 million in the third quarter of 1996 compared to the third quarter of
1995 due to higher sales to fast growing customer channels such as superstores,
mass merchants stores and contract stationers.
Gross profit for the three months ended September 30, 1996 increased by
$25.8 million, or 251%, to $36.0 million from $10.3 million for the three months
ended September 30, 1995. Approximately $24.6 million of the increase in gross
profit is attributable to the acquisition of Williamhouse and Niagara. Gross
profit margin increased to 21% for the three months ended September 30, 1996
from 19% for the three months ended September 30, 1995. The increase in gross
profit margin is primarily attributable to higher margins of the Williamhouse
division.
SG&A expenses for the three months ended September 30, 1996 increased
$11.1 million, or 347%, to $14.3 million from $3.2 million for the three months
ended September 30, 1995. Approximately $7.6 million is attributable to the
acquisitions of Williamhouse and Niagara, $1.6 million is attributable to
management fees payable to a significant shareholder and to a former owner of an
acquired envelope company, and $1.2 million to amortization of goodwill and
intangible assets related to the acquisitions. The remainder of the increase in
selling, general and administrative expenses is primarily attributable to
increases in selling and administrative personnel at the Ampad division and at
the Company's corporate office to support the sales growth of the Company.
Interest expense for the three months ended September 30, 1996
increased $7.8 million to $9.9 million from $2.1 million for the three months
ended September 30, 1995. The increase is attributable primarily to increased
borrowings as a result of the acquisitions.
The income tax provision for the three month period ended September 30,
1996 reflects an effective tax rate of 43.2% versus an effective tax rate of
2.9% for the three month period ended September 30, 1995. The effective tax rate
for the three months ended September 30, 1996 is consistent with the effective
tax rate for the first six months of 1996 and also represents the expected
effective tax rate for all of 1996. The tax rate for the three months ended
September 30, 1995 is unusually low due to the release of a tax valuation
allowance in 1995 as the Company recognized the tax benefit of its carryforward
tax losses.
Extraordinary item representing an after tax loss on extinguishment of
debt of $18.7 million ($30.7 million pretax) was recognized as a result of the
premium paid to redeem 35% of the senior subordinated notes using a portion of
the net proceeds from the Company's initial public offering and the write off of
unamortized deferred financing costs associated with the senior subordinated
notes and with the old bank credit agreement.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Net sales for the nine months ended September 30, 1996 increased by
$261.8 million, or 179%, to $407.8 million from $146.0 million for the nine
months ended September 30, 1995. Of this net sales increase, $222.0 million is
related to the acquisition of the Williamhouse division and $36.9 million is
related to the acquisition of Globe-Weis. Ampad division net sales increased by
$2.9 million in the first nine months of 1996 compared to 1995 due to higher
sales to the fast growing customer channels such as superstores, mass merchant
stores and contract stationers. During the unusually strong first nine months of
1995, certain of the Company's customers increased inventory levels in
anticipation of supply shortages. Such customer actions were not repeated in the
first nine months of 1996.
Gross profit for the nine months ended September 30, 1996 increased by
$61.0 million, or 260%, to $84.5 million from $23.5 million for the nine months
ended September 30 1995. Approximately $56.4 million of the increase in gross
profit is attributable to the acquisition of Williamhouse and Niagara. Gross
profit margin
16
increased to 21% for the nine months ended September 30, 1996 from 16% for the
nine months ended September 30, 1995. The increase in gross profit margin is
primarily attributable to higher margins of the Williamhouse division.
SG&A expenses for the nine months ended September 30, 1996 increased
$28.3 million, or 322%, to $37.1 million from $8.8 million for the nine months
ended September 30, 1995. Approximately $21.9 million is attributable to the
acquisition of Williamhouse and Niagara, $2.4 million is attributable to
management fees payable to a significant shareholder and to a former owner of an
acquired envelope company and $3.2 million to amortization of goodwill and
intangibles related to the acquisitions. The remainder of the increase is due
primarily to increased personnel which helped support the increase in the sales
of the Ampad division and the overall growth of the Company.
Interest expense for the nine months ended September 30, 1996 increased
$29.1 million to $35.0 million from $5.9 million for the nine months ended
September 30, 1995. The increase is attributable primarily to increased
borrowing as a result of the acquisitions.
The income tax provision for the nine month period ended September 30,
1996 reflects an effective tax rate of 43.2% versus an effective tax rate of
18.6% for the nine month period ended September 30, 1995. The effective tax rate
for 1996 reflects a 40% statutory federal and state income tax rate adjusted for
nondeductible expenses, primarily goodwill amortization. The effective tax rate
for the nine months ended September 30, 1995 is lower than the statutory rate
due to the release of a tax valuation allowance related to the recognition of
carryforward tax losses.
Extraordinary item representing an after tax loss on extinguishment of
debt of $20.0 million ($33.0 million pretax) was 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 unamortized
deferred financing costs related to the senior subordinated notes, the old bank
credit agreement and the old accounts receivable facility.
The results of operations for the first nine months of 1996 may not be
indicative of future anticipated operating results due to the Company's
significant acquisition activity. See Note 3 in Item 1.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended
September 30, 1996 was $26.8 million compared to a use of cash of $5.6 million
for the nine months ended September 30, 1995. The increase in net cash provided
by operating activities is primarily due to higher net sales and earnings of the
Company in 1996.
Cash used in investing activities for the nine months ended September
30, 1996 and 1995 was $19.4 million and $8.5 million, respectively. The use of
cash for the nine months ended September 30, 1996 was principally due to the
Niagara acquisition ($52.9 million) and purchases of equipment ($7.6 million),
offset by proceeds from the sale of the Personalizing Division ($47.9 million).
The use of cash for the nine months ended September 30, 1995 was primarily due
to purchases of equipment and due to the acquisition of Globe-Weis.
Cash used in financing activities for the nine months ended September
30, 1996 was $12.6 million as compared to a provision of cash from financing
activities of $14.2 million for the nine months ended September 30, 1995. During
the nine months ended September 30, 1996, the Company (i) completed its initial
public offering of 12.5 million shares of common stock for $173.1 million in net
proceeds after deducting offering fees and expenses, (ii) refinanced its
accounts receivable facility with a new $60.0 million facility, (iii) refinanced
its bank credit agreement, (iv) redeemed $70.0 million of senior subordinated
notes, (v) repaid $95.8 million of debt incurred under the old bank credit
agreement, (vi) paid $7.7 million in redemption premiums on the senior
subordinated notes, and (vii) repaid $10 million under the new accounts
receivable facility with proceeds from the sale of the Personalizing Division.
Contemporaneously with the initial public offering, the Company
refinanced and retired all remaining indebtedness under the old bank credit
agreement with the proceeds of the loans under the new bank credit agreement. As
a result of the refinancing, effective July 8, 1996, the Company borrowed $162.0
million in revolving loans and $6.5 million in swingline loans. The proceeds of
these loans were used to (i) pay off the remaining $145.0 million in term loans,
$5.0 million in revolver loans and $7.7 million in swingline loans outstanding
under the old bank credit agreement and (ii) pay approximately $8.1 million in
fees associated with the new bank credit agreement. The new bank credit
agreement provides a revolving credit facility of $300 million subject to the
following principal terms. Loans made under the new bank credit agreement bear
interest at a rate
17
per annum equal to, at the Company's option, (i) a base rate plus an applicable
margin or (ii) the LIBOR rate plus an applicable margin (as each term is defined
in the new bank credit agreement). The applicable margin varies from 0% to
1.75%, based on the Company's level of debt as compared to earnings ("leverage
ratio"). The Company's margin is currently 1.50%. Availability under the new
bank credit agreement is subject to an unused commitment fee which, like the
applicable margin, varies from .3% to .5% based on the Company's leverage ratio.
The Company's current rate is .45%. Availability under the new bank credit
agreement will be reduced to the extent of the net proceeds of a sale of assets
by the Company, the net proceeds of an issuance of debt by the Company or 50% of
the net proceeds of an issuance of equity by the Company. Availability will also
be reduced by $50 million in 1999 and $50 million in 2000. The new bank credit
agreement will terminate in 2001. The Company will be permitted to make
acquisitions under the new bank credit agreement up to an aggregate of $25
million without consent of the agent bank and up to $50 million if, on a pro
forma basis giving effect to such acquisition, the Company's leverage ratio is
less than 3.0:1.0. As a result of the new bank credit agreement, the Company's
effective interest rate under its senior credit facility was reduced by 189
basis points contemporaneously with the initial public offering.
On May 29, 1996, the Company refinanced its $45 million accounts
receivable facility with a new $60 million accounts receivable facility. Under
the new facility the Company may sell, on a revolving basis, an undivided
interest in a designated pool of trade accounts receivable. At September 30,
1996, $35.0 million of accounts receivable were sold under the program. The
agreement expires in 2000.
Management believes that based on current levels of operations and
anticipated internal growth, cash flow from operations, together with other
available sources of funds including borrowings under the new bank credit
agreement and available cash on hand at September 30, 1996 of $13.2 million,
will be adequate for the foreseeable future to make required payments of
principal and interest on the Company's indebtedness, to fund anticipated
capital expenditures and working capital requirements and to enable the Company
and its subsidiaries to comply with the terms of their debt agreements. However,
actual capital requirements may change, particularly as a result of any
acquisitions which the Company may make. The ability of the Company to meet its
debt service obligations and reduce its total debt will be dependent, however,
upon the future performance of the Company and its subsidiaries which, in turn,
will be subject to general economic conditions and to financial, business and
other factors, including factors beyond the Company's control. 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
protection agreement to minimize the impact from a rise in interest rates.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
Exhibit No. Description of Exhibit
- ---------- ----------------------
10.1 Amended and Restated Advisory Agreement, dated July 8, 1996,
between Bain Capital, Inc. and American Pad & Paper Company of
Delaware, Inc.
27.1 Financial Data Schedule.
(1) The Company agrees to furnish supplementally to the Commission
a copy of any omitted schedule or exhibit upon request by the
Commission.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the period presented.
18
Pursuant to the requirements of the Securities Exchange Act of 1934,
each Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 4, 1996 American Pad & Paper Company
American Pad & Paper Company
Of Delaware, Inc.
By: /s/ Kevin W. McAleer
-------------------------
Kevin W. McAleer
Chief Financial Officer
19