_______________________________________________________________________________
_______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Commission file number 1-11803
-------------------
AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 04-3164298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 Preston Road, Suite 700, Dallas, TX 75252-5613
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 733-6200
Commission file number 333-3006
-------------------
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: (214) 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 No X
----- -----
American Pad & Paper Company of Delaware, Inc. Yes No X
----- -----
As of August 10, 1996, American Pad & Paper Company had 27,399,809 shares
of Common Stock outstanding. As of August 10, 1996, American Pad & Paper
Company of Delaware, Inc. had 100 shares of Common Stock outstanding, all of
which are owned by American Pad & Paper Company.
________________________________________________________________________________
________________________________________________________________________________
AMERICAN PAD & PAPER COMPANY
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
QUARTERLY PERIOD ENDED JUNE 30, 1996
INDEX
PAGE NO.
-------
PART I FINANCIAL INFORMATION
Important Explanatory Note.............................. 1
Item 1. Financial Statements.......................... 2
Condensed Consolidated Balance Sheets as
of December 31, 1995 and June 30, 1996........ 2
Condensed Consolidated Statements of
Operations for the three months ended June 30,
1995 and 1996 and for the six months ended
June 30, 1995 and 1996........................ 3
Condensed Consolidated Statements of
Cash Flows for the six months ended June 30,
1995 and 1996................................. 4
Notes to Consolidated Financial Statements.... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security-Holders.............................. 17
Item 6. Exhibits and Reports on Form 8-K.............. 17
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 direct 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.
ITEM I. FINANCIAL STATEMENTS
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
PRO FORMA
EQUITY
DECEMBER 31, JUNE 30, JUNE 30,
ASSETS 1995 1996 1996
------ ------------ --------- ---------
Current assets:
Cash $ 18,341 $ 3,141
Restricted cash 3,619 2,095
Accounts receivable, net 25,943 44,995
Refundable income taxes 3,657 --
Inventories 93,061 111,654
Prepaid expenses and other
current assets 927 2,735
Management services agreement -- 5,000
Assets held for sale 42,578 445
Deferred income taxes 15,009 6,856
--------- ---------
Total current assets 203,135 176,921
Property and equipment, net 106,768 132,478
Intangible assets, net 191,012 202,020
Other 3,441 2,256
--------- ---------
Total $ 504,356 $ 513,676
========= =========
LIABILITIES AND STOCKHOLDERS'
----------------------------
DEFICIT
-------
Current liabilities:
Current portion of long-term debt $ 11,834 $ 14,613
Accounts payable 37,048 36,479
Accrued expenses 44,835 45,874
Income taxes payable 494 181
--------- ---------
Total current liabilities 94,211 97,147
Long-term debt 443,794 447,806
Deferred income taxes 30,070 31,896
Other 2,702 3,726
--------- ---------
Total liabilities 570,777 580,576
--------- ---------
Stockholders' deficit
Preferred stock, 150,000 shares
authorized, 58,449 shares
issued and outstanding 113,887 113,887
Common stock, voting, $.01 par value,
2,000,000 shares authorized, 900,000
shares issued and outstanding on an
actual basis and 75,000,000 shares
authorized and 14,899,809 shares
issued and outstanding on a pro forma
basis 9 9 $ 149
Additional paid-in capital 14,240 14,240 127,987
Accumulated deficit (194,557) (195,036) (195,036)
--------- --------- ---------
Total stockholders' deficit (66,421) (66,900) $ (66,900)
--------- --------- =========
Total liabilities and
stockholders' deficit $ 504,356 $ 513,676
========= =========
See notes to condensed consolidated financial statements.
2
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1995 1996 1995 1996
----------- ----------- ----------- -----------
Net sales $ 44,772 $ 114,099 $ 92,222 $ 234,207
Cost of sales 36,848 89,168 79,001 185,748
----------- ----------- ----------- -----------
Gross profit 7,924 24,931 13,221 48,459
Operating expenses:
Selling and marketing 1,166 3,893 2,329 7,220
General and administrative 1,681 7,832 3,268 15,530
----------- ----------- ----------- -----------
Income from operations 5,077 13,206 7,624 25,709
Other income (expense):
Interest (2,132) (12,491) (3,788) (25,033)
Other income, net 94 500 159 770
----------- ----------- ----------- -----------
Income before income taxes 3,039 1,215 3,995 1,446
Provision for income taxes 1,164 524 1,531 625
----------- ----------- ----------- -----------
Income before extraordinary item 1,875 691 2,464 821
Extraordinary loss from extinguishment
of debt (net of income tax benefit of $989) - (1,300) - (1,300)
----------- ----------- ----------- -----------
Net income (loss) $ 1,875 $ (609) $ 2,464 $ (479)
=========== =========== =========== ===========
Pro forma income (loss) per share:
Income before extraordinary item $ .11 $ .04 $ .14 $ .05
Extraordinary item - (.08) - (.08)
----------- ----------- ----------- -----------
Net income (loss) $ .11 $ (.04) $ .14 $ (.03)
=========== =========== =========== ===========
Pro forma weighted average shares
outstanding 17,106,698 17,106,698 17,106,698 17,106,698
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
3
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30,
1995 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 2,464 $ (479)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation 838 4,138
Amortization of intangible assets 61 2,131
Extraordinary loss on
extinguishment of debt - 1,300
Amortization of debt issuance costs 520 2,520
Gain on sale of assets (132) (49)
Changes in:
Restricted cash (19) 2,394
Accounts receivable (6,458) 11,178
Refundable income taxes 3,657
Inventories (10,001) (5,804)
Prepaid expenses and other
current assets (339) (1,413)
Deferred tax asset, net 1,552 8,249
Accounts payable (3,002) (6,398)
Accrued expenses (2,201) (8,543)
Other assets (103) 1,266
Other liabilities (43) 332
-------- --------
Net cash provided by (used in)
operating activities (16,863) 14,479
-------- --------
Cash flows from investing activities:
Purchase of Niagara, including
acquisition costs and services (52,376)
Purchases of property and equipment (877) (4,822)
Proceeds from sale of Personalizing
Division 47,890
Proceeds from sale of assets 132 913
Net cash used by assets held for sale - (2,515)
-------- --------
Net cash used in investing
activities (745) (10,910)
-------- --------
Cash flows from financing activities:
Repayment of old accounts receivable
facility (45,000)
Proceeds from new accounts receivable
facility 35,000
Repayment of new accounts receivable
facility (10,000)
Net borrowings under line of credit 18,991
Proceeds from long-term debt 33,272
Repayment of long-term debt (1,383) (30,379)
Debt issuance costs - (1,662)
-------- --------
Net cash provided by (used in)
financing activities 17,608 (18,769)
-------- --------
Net decrease in cash - (15,200)
Cash, beginning of period 4 18,341
-------- --------
Cash, end of period $ 4 $ 3,141
======== ========
See notes to condensed consolidated financial statements.
4
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 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
businesses: Ampad (writing pads, file folders and other paper-based office
products) and Williamhouse (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 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 June 30, 1996 and the
results of its operations and its cash flows for the six month periods ended
June 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
consolidated financial statements are as follows:
Earnings per share
Given the changes in the Company's capital structure to be effected in
connection with the initial public offering of the Company's common stock
completed on July 8, 1996, historical earnings per common share amounts are not
presented in the consolidated financial statements as they are not considered to
be meaningful. Pro forma earnings per share is presented and reflects 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.
The pro forma weighted average shares outstanding gives effect to the
8.1192-for-one stock split and has been adjusted to reflect as outstanding,
using the treasury stock method at the initial public offering price, all shares
issuable upon the exercise of stock options granted subsequent to April 25, 1995
(one year prior to the initial public offering filing date pursuant to the
Securities and Exchange Commission's rules).
5
Pro Forma Equity Presentation
Pro forma stockholders' equity as of June 30, 1996 is presented to
reflect, upon the closing of the initial public offering of the Company's common
stock, the effect of the 8.1192-for-one stock split and the conversion of the
preferred stock into common stock at a conversion rate based on an initial
public offering price of $15.00 per share. The pro forma stockholders' equity
does not reflect the net offering proceeds.
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 Regency 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 $10,230, inventories of $12,788, prepaid
and other assets of $1,519, management services agreement of $5,000, property
and equipment of $25,113, deferred income tax liability of $1,992, accounts
payable $5,828, accrued expenses $9,996, 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 $19,265. Accordingly, goodwill was recorded
in accordance with APB No. 16 and is being amortized over 40 years. The
operating results of this acquisition are not included in the accompanying
condensed consolidated financial statements.
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 (the "Bank Credit Agreement") and an off-balance sheet accounts
receivable facility. The aggregate acquisition costs were 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 $40,851; 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 $119,613.
Accordingly, goodwill was recorded in accordance with APB No. 16 and is being
amortized over 40 years. The operating results have been included in the
accompanying condensed consolidated financial statements since the date of
acquisition. The businesses acquired include 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 the date of sale by $3,664. As such, the preliminary purchase price
allocation was adjusted resulting in a $3,664 reduction to goodwill. During the
three month period and the six month period ended June 30, 1996, the
Personalizing Division had operating income of $1,752 and $2,369 respectively,
and interest carrying costs of $942 and $1,884, respectively, which have been
excluded from the statement of operations and included as adjustments to the
carrying amount of the net assets held for sale through the date of sale.
6
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 of $6,911, notes issued to the seller of $10,958 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. The 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 8, 1996, the Company completed an initial public
offering (the "Offering") of 12,500,000 shares of common stock. The net
proceeds to the Company from the Offering were $176.8 million. 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 (the "Notes") from the holders thereof on a pro
rata basis, (iii) pay $7.7 million in redemption premiums on the Notes and (iv)
pay approximately $3.3 million in fees associated with the Offering.
New Bank Credit Agreement
Contemporaneously with the Offering, the Company refinanced and
retired all remaining indebtedness under the Bank Credit Agreement with the
proceeds of the loans under a new bank credit agreement (the "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 Offering.
The following summary presents the results of operations for the six
months ended June 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.
SIX MONTHS ENDED
JUNE 30,
----------------------------
1995 1996
------ ------
(UNAUDITED) (UNAUDITED)
Net sales $ 293,818 $ 288,737
--------- ---------
Income before income taxes and
extraordinary item $ 10,095 $ 16,833
========= =========
Net income before extraordinary item $ 4,662 $ 9,696
========= =========
Net income from continuing operations
after extraordinary item $ 4,662 $ 8,396
========= =========
Net income per share $ .16 $ .28
========= =========
7
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31, June 30,
1995 1996
------------ -----------
(unaudited)
Accounts receivable--trade $ 25,539 $ 39,736
Accounts receivable--other 2,013 7,168
Less allowance for doubtful accounts and
reserves for customer deductions and
cash discounts (1,609) (1,909)
--------- ---------
$ 25,943 $ 44,995
========= =========
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 June 30, 1996, $25 million of
receivables were sold and are excluded from receivables 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 receivables 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
receivables and restrictions on concentrations of receivables.
5. INVENTORIES
Inventories consist of the following:
December 31, June 30,
1995 1996
------------ -----------
(unaudited)
Raw material and semi-finished goods $ 36,129 $ 37,613
Work in process 7,114 9,941
Finished goods 60,266 72,006
--------- ---------
103,509 119,560
LIFO reserve (10,448) (7,906)
--------- ---------
$ 93,061 $ 111,654
========= =========
6. PROPERTY, PLANT AND EQUIPMENT
The cost and accumulated depreciation of property, plant and equipment are
as follows:
December 31, June 30,
1995 1996
------------ -----------
(unaudited)
Property, plant and equipment $ 111,347 $ 141,195
Accumulated depreciation (4,579) (8,717)
--------- ---------
$ 106,768 $ 132,478
========= =========
8
7. INTANGIBLE ASSETS
The cost and accumulated amortization of intangible assets are as follows:
December 31, June 30,
1995 1996
------------ ----------
(unaudited)
Debt issuance costs $ 33,775 $ 33,447
Accumulated amortization (846) (3,366)
--------- ---------
32,929 30,081
--------- ---------
Goodwill 121,176 136,847
Accumulated amortization (793) (2,319)
--------- ---------
120,383 134,528
--------- ---------
Intangible assets 37,900 38,216
Accumulated amortization (200) (805)
--------- ---------
37,700 37,411
--------- ---------
$ 191,012 $ 202,020
========= =========
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 June 30, 1996
and for the three and six months ended June 30, 1996 are presented. The
condensed consolidating financial information of Delaware is as follows:
9
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 (13,490) (154) 39,587 25,943
Intercompany receivable
(payable) 75,423 (72,255) (3,168)
Refundable income 3,657 3,657
taxes
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 $ 1,652 $ 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
======== ======== ======= ============ ========
10
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1996
------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ -----
ASSETS
Current Assets:
Cash $ 2,834 $ 294 $ 13 $ $ 3,141
Restricted cash 1,225 870 2,095
Accounts receivable 24,041 10,181 10,773 44,995
Intercompany receivable
(payable) 17,540 (42,619) 25,079
Inventories 83,514 28,140 111,654
Assets held for sale 445 445
Deferred income taxes 6,166 690 6,856
Management services
agreement 5,000 5,000
Other current assets 2,311 424 - - 2,735
-------- -------- ------- ------------ --------
Total current assets 137,631 2,735 36,555 176,921
Property and equipment, net 70,786 61,692 132,478
Investment in subsidiaries 85,090 12,791 (97,881)
Intangible assets, net 166,242 35,339 439 202,020
Other 2,071 185 - - 2,256
-------- -------- ------- ------------ --------
Total assets $461,821 $112,742 $36,994 $ (97,881) $513,676
======== ======== ======= ============ ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long
term debt $ 13,133 $ 1,480 $ $ $ 14,613
Accounts payable and
accrued expenses 61,564 20,638 151 82,353
Income taxes payable (5,262) 5,139 304 - 181
-------- -------- ------- ------------ --------
Total current liabilities 69,436 27,257 455 97,147
Long term debt 443,026 4,780 447,806
Other liabilities 3,033 693 3,726
Deferred income taxes 13,226 18,670 - - 31,896
-------- -------- ------- ------------ --------
Total liabilities 528,721 51,400 455 580,576
Stockholders' equity (deficit):
Common stock 971 10 (981)
Additional paid-in capital 14,240 51,676 35,399 (87,075) 14,240
Retained earnings (81,140) 8,695 1,130 (9,825) (81,140)
-------- -------- ------- ------------ --------
Total stockholders' equity
(deficit) (66,900) 61,342 36,539 (97,881) (66,900)
-------- -------- ------- ------------ --------
Total liabilities and
stockholders' equity
(deficit) $461,821 $112,742 $36,994 $ (97,881) $513,676
======== ======== ======= ============ ========
11
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996
------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
Net sales $ 88,108 $32,610 $ - $(6,619) $114,099
Cost of sales 72,045 23,742 - (6,619) 89,168
-------- ------- ------- -------- --------
Gross profit 16,063 8,868 24,931
Operating expenses:
Selling and marketing 3,025 868 3,893
General and administrative 7,738 917 (823) - 7,832
-------- ------- ------- -------- --------
Income (loss) from operations 5,300 7,083 823 - 13,206
-------- ------- ------- -------- --------
Other income (expense):
Interest (12,289) (27) (175) (12,491)
Other income, net 2,287 (1,787) - - 500
-------- ------- ------- -------- --------
Income (loss) before income
taxes (4,702) 5,269 648 1,215
Provision (benefit) for income
taxes (311) 531 304 - 524
-------- ------- ------- -------- --------
Income (loss) before equity in
net earnings of subsidiaries
and extraordinary items (4,391) 4,738 344 691
Equity in net earnings of
subsidiaries 5,082 - - (5,082) -
-------- ------- ------- -------- --------
Income (loss) before
extraordinary item 691 4,738 344 (5,082) 691
Extraordinary loss from
extinguishment of debt, net (1,300) - (1,300) 1,300 (1,300)
-------- ------- ------- -------- --------
Net income (loss) $ (609) $ 4,738 $ (956) $(3,782) $ (609)
======== ======= ======= ======== ========
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
Net sales $174,384 $69,599 $ $(9,776) $234,207
Cost of sales 142,745 52,779 - (9,776) 185,748
-------- ------- ------- -------- --------
Gross profit 31,639 16,820 48,459
Operating expenses:
Selling and marketing 5,512 1,708 7,220
General and administrative 15,150 2,047 (1,667) - 15,530
-------- ------- ------- -------- --------
Income (loss) from Operations 10,977 13,065 1,667 - 25,709
Other income (expenses):
Interest (24,677) (83) (273) - (25,033)
Other income, net 2,941 (2,171) - - 770
-------- ------- ------- -------- --------
Income (loss) before income
taxes (10,759) 10,810 1,394 1,446
Provision (benefit) for income
taxes (4,647) 4,670 602 - 625
-------- ------- ------- -------- --------
Income (loss) before equity in
net earnings of subsidiaries
and extraordinary items (6,111) 6,140 792 821
Equity in net earnings of
subsidiaries 6,932 - - (6,932) -
-------- ------- ------- -------- --------
Income (loss) before
extraordinary items 821 6,140 792 (6,932) 821
Extraordinary loss from
extinguishment of debt, net (1,300) - (1,300) 1,300 (1,300)
-------- ------- ------- -------- --------
Net income (loss) $ (479) $ 6,140 $ (508) $(5,632) $ (479)
======== ======= ======= ======== ========
13
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 1996
---------------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
--------------- --------------- ---------------- ---------------- ---------------
Net cash provided by (used in)
operating activities $ 55,890 $(41,825) $ 414 $ - $ 14,479
Investing activities:
Proceeds of sale of assets 864 47,939 48,803
Acquisition of Niagara (52,647) 271 (52,376)
Other (1,776) (5,561) - - (7,337)
-------- -------- ----- ------- --------
Net cash provided by (used in)
investing activities (53,559) 42,649 (10,910)
-------- -------- ----- ------- --------
Financing activities
Proceeds from issuance of debt 33,272 33,272
Repayment of old accounts
receivable facility (45,000) (45,000)
Proceeds from new accounts
receivable facility 35,000 35,000
Repayment of new accounts
receivable facility (10,000) (10,000)
Repayment of long term debt (29,896) (483) (30,379)
Debt issuance costs (1,248) (414) (1,662)
Other - - - - -
-------- -------- ----- ------- --------
Net cash provided by (used in)
financing activities (17,872) (483) (414) - (18,769)
-------- -------- ----- ------- --------
Net increase (decrease) in cash (15,541) 341 0 (15,200)
Cash, beginning of period 18,295 33 13 18,341
-------- -------- ----- ------- ---------
Cash, end of period $ 2,754 $ 374 $ 13 $ - $ 3,141
======== ======== ===== ======= =========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Net sales for the three months ended June 30, 1996 increased by $69.3
million, or 155%, to $114.1 million from $44.8 million for the three months
ended June 30, 1995. Of this net sales increase, $59.5 million is related to
the acquisition of Williamhouse and $12.9 million is related to the acquisition
of the Globe-Weis. Ampad division net sales decreased by $3.1 million in the
second quarter of 1996 compared to the unusually strong second quarter of 1995.
The strong 1995 second quarter was due to certain of the Company's customers
increasing inventory levels in anticipation of supply shortages.
Gross profit for the three months ended June 30, 1996 increased by $17
million, or 215%, to $24.9 million from $7.9 million for the three months ended
June 30, 1995. Approximately $16.3 million of the increase in gross profit is
attributable to the acquisition of Williamhouse. Gross profit margin increased
to 21.8% for the three months ended June 30, 1996 from 17.6% for the three
months ended June 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 June 30, 1996 increased $8.9
million, or 318%, to $11.7 from $2.8 million for the three months ended June 30,
1995. Approximately $7.8 million is attributable to the acquisition of
Williamhouse and $1.1 million to amortization of goodwill and intangibles
related to the acquisitions.
Interest expense for the three months ended June 30, 1996 increased
$10.4 million to $12.5 million from $2.1 million for the three months ended June
30, 1995. The increase is attributable primarily to higher debt related to the
acquisitions.
The income tax provision for the three month period ended June 30,
1996 reflects an effective tax rate of 43.1% versus an effective tax rate of
38.3% for the three month period ended June 30, 1995. The increase is
attributable primarily to the nondeductible goodwill amortization resulting from
the Williamhouse acquisition.
Extraordinary item representing an after tax loss on extinguishment of
debt of $1.3 million ($2.3 million pretax) was recognized as a result of the
write off of unamortized deferred financing costs.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net sales for the six months ended June 30, 1996 increased by $142.0
million, or 154%, to $234.2 million from $92.2 million for the six months ended
June 30, 1995. Of this net sales increase, $122.7 million is related to the
acquisition of Williamhouse and $28.1 million is related to the acquisition of
Globe-Weis. Ampad division net sales decreased by $8.8 million in the first
half of 1996 compared to the unusually strong first half of 1995. The strong
1995 first half was due to certain of the Company's customers increasing
inventory levels in anticipation of supply shortages.
Gross profit for the six months ended June 30, 1996 increased by $35.3
million, or 267%, to $48.5 million from $13.2 million for the six months ended
June 30 1995. Approximately $31.8 million of the increase in gross profit is
attributable to the acquisition of Williamhouse. Gross profit margin increased
to 20.7% for the six months ended June 30, 1996 from 14.3% for the six months
ended June 30, 1995. The increase in gross profit margin is primarily
attributable to higher margins of the Williamhouse division.
SG&A expenses for the six months ended June 30, 1996 increased $17.2
million, or 307%, to $22.8 from $5.6 million for the six months ended June 30,
1995. Approximately $15.1 million is attributable to the acquisition of
Williamhouse and $2.1 million to amortization of goodwill and intangibles
related to the acquisitions.
15
Interest expense for the six months ended June 30, 1996 increased
$21.2 million to $25.0 million from $3.8 million for the six months ended June
30, 1995. The increase is attributable primarily to higher debt related to the
acquisitions.
The income tax provision for the six month period ended June 30, 1996
reflects an effective tax rate of 43.2% versus an effective tax rate of 38.3%
for the six month period ended June 30, 1995. The increase is attributable
primarily to the nondeductible goodwill amortization resulting from the
Acquisition.
Extraordinary item representing an after tax loss on extinguishment of
debt of $1.3 million ($2.3 million pretax) was recognized as a result of the
write off of unamortized deferred financing costs.
The first half 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 six months ended
June 30, 1996 was $14.5 million compared to a use of cash of $16.9 million for
the six months ended June 30, 1995.
Cash used in investing activities for the six months ended June 30,
1996 and 1995 was $10.9 million and $.7 million, respectively. The use of cash
for the six months ended June 30, 1996 was principally due to the Niagara
acquisition ($52.4 million) and purchases of equipment ($4.8 million), offset by
proceeds from the sale of the Personalizing Division ($47.9 million). The use
of cash for the six months ended June 30, 1995 was primarily due to purchases of
equipment.
Cash used in financing activities six months ended June 30, 1996 was
$18.8 million primarily due to refinancing of the $45 million accounts
receivable facility with a new $60 million accounts receivable facility. In
connection with this refinancing the Company received $35 million from the New
Bank Credit Agreement and repaid the $45 million under the existing Bank Credit
Agreement. Additionally, the Company repaid $10 million under the new facility
with proceeds from the sale of the Personalizing Division.
Effective July 8, 1996, the Company completed the Offering of
12,500,000 shares of common stock. The net proceeds to the Company from the
Offering were $176.8 million. The Company used 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 Notes (iii) pay $7.7
million in redemption premiums on the Notes and (iv) pay approximately $3.3
million in fees associated with the Offering.
Contemporaneously with the Offering, the Company refinanced and
retired all remaining indebtedness under the 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 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 million in Term Loans, $5
million in revolver loans and $7.7 million in swingline loans outstanding under
the 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 subject to the following
principal terms: Loans made under the New Bank Credit Agreement bear interest
at a rate per annum equal to, at the Company's option, (i) the Base Rate plus
the Applicable Margin or (ii) the LIBOR Rate plus the 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 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 (as defined) 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 will be
reduced by 189 basis points contemporaneously with the Offering.
16
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 June 30, 1996, $25 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 June 30, 1996 of $3.1million, 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, including the aforementioned restructuring
costs, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Pursuant to Section 228 of the General Corporation Law of the State of
Delaware, on June 22, 1996, the stockholders of the Company, by written consent
without a meeting, adopted resolutions:
1. Approving the Restated Certificate of Incorporation of the Company.
2. Approving the Amended and Restated By-laws of the Company.
3. Approving the adoption of the 1996 Key Employee Stock Incentive Plan.
4. Approving the adoption of the 1996 Non-Employee Director Stock Option
Plan.
5. Approving the adoption of the Management Stock Purchase Plan.
6. Election (i) Gregory M. Benson and Jonathan S. Lavine as Class I
Directors, to serve until the annual meeting of stockholders in 1997;
(ii) Russell M. Gard and Marc B. Wolpow as Class II Directors, to serve
until the annual meeting of stockholders in 1998; and (iii) Charles G.
Hanson III and Robert C. Gay as Class III Directors, to serve until the
annual meeting of stockholders in 1999.
Votes Cast for the above matters: Common Stock - 900,000 and Preferred
Stock - 58,449.
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
- ----------- ----------------------
3.1(i) Restates Certificate of Incorporation of the Company.
3.1(ii) Amended and Restated By-Laws of the Company.
4.1 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. (1)
17
4.2 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. (1)
4.3 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. (1)
4.4 Form of Revolving and Swingline Note of American Pad & Paper Company of
Delaware, Inc.
4.5 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. (1)
10.1 1996 Key Employee Stock Incentive Plan of the Company.
10.2 1996 Non-Employee Director Stock Option Plan of the Company.
10.3 Management Stock Purchase Plan of the Company.
27.1 Financial Data Schedule.
- ------------------------
(1) The Company agrees to furnish supplementally to the Commission a copy of
any omitted schedule or exhibit to such agreement 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: August 13, 1996 American Pad & Paper Company
American Pad & Paper Company
Of Delaware, Inc.
By: /s/ Kevin W. McAleer
-------------------------
Kevin W. McAleer
Chief Financial Officer
19
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
3.1(i) Restated Certificate of Incorporation of the Company.
3.1(ii) Amended and Restated By-Laws of the Company.
4.1 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.(1)
4.2 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.(1)
4.3 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.(1)
4.4 Form of Revolving and Swingline Note of American Pad &
Paper Company of Delaware, Inc.
4.5 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.(1)
10.1 1996 Key Employee Stock Incentive Plan of the Company.
10.2 1996 Non-Employee Director Stock Option Plan of the
Company.
10.3 Management Stock Purchase Plan of the Company.
27.1 Financial Data Schedule.
- -----------------------
(1) The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to such agreement upon request of the
Commission.