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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 MARCH 31, 1997
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 May 12, 1997, American Pad & Paper Company has 27,435,839 shares of
Common Stock outstanding. As of May 12, 1997, 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 MARCH 31, 1997
INDEX
PAGE NO.
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PART I FINANCIAL INFORMATION
Important Explanatory Note ........................................... 2
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 (unaudited) ................ 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 (unaudited) ................ 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (unaudited) ................ 5
Notes to Condensed Consolidated Financial Statements (unaudited) ... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 13
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 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 of Delaware, Inc.
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AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
1997 1996
--------- ------------
ASSETS
------
Current assets:
Cash $ 1,093 $ 2,290
Accounts receivable 53,069 57,054
Inventories 133,172 105,667
Prepaid expense and other current assets 3,940 4,739
Deferred income taxes 7,925 10,754
-------- --------
Total current assets 199,199 180,504
Property, plant and equipment 144,655 133,090
Intangible assets 235,951 192,367
Other 4,719 3,456
-------- --------
Total assets $584,524 $509,417
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,510 $ 2,171
Accounts payable 42,922 44,932
Accrued expenses 44,075 55,041
Income taxes payable 149 503
-------- --------
Total current liabilities 89,656 102,647
Long-term debt 349,206 269,812
Deferred income taxes 34,499 30,981
Other 2,017 1,378
-------- --------
Total liabilities 475,378 404,818
Commitments and contingencies
Stockholders' equity:
Preferred stock, 150 shares authorized,
no shares issued and outstanding - -
Common stock, voting, $0.01 par value, 75,000
shares authorized, 27,436 and 27,400
issued and outstanding, respectively 274 274
Additional paid-in capital 301,280 300,721
Accumulated deficit (192,408) (196,396)
-------- --------
Total stockholders' equity 109,146 104,599
-------- --------
Total liabilities and stockholders' equity $584,524 $509,417
======== ========
See accompanying notes to condensed consolidated financial statements.
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AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended March 31,
----------------------------
1997 1996
---- ----
Net sales $149,834 $120,108
Cost of sales 118,835 96,579
-------- --------
Gross profit 30,999 23,529
Operating expenses:
Selling and marketing 4,752 3,328
General and administrative 9,000 7,191
Management fees and services 1,855 507
------- --------
Income from operations 15,392 12,503
Other income (expense):
Interest (8,214) (12,542)
Other income, net 73 269
------- --------
Income before income taxes 7,251 230
Provision for income taxes 3,263 102
------- --------
Net income $ 3,988 $ 128
======= ========
Earnings per share $ 0.14 $ -
======= ========
Weighted average common shares outstanding 29,400 29,607
See accompanying notes to condensed consolidated financial statements.
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AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three months ended March 31,
----------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 3,988 $ 128
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 3,153 1,984
Amortization of goodwill and intangible assets 1,386 1,036
Amortization of debt issuance costs 626 1,208
Gain on sale of assets - (16)
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable 21,569 396
Refundable income taxes - 3,657
Inventories (21,564) (105)
Prepaid expenses and other (1,498) (1,099)
Deferred income tax asset, net 2,449 106
Accounts payable (8,881) (359)
Accrued expenses (16,749) (1,540)
Other assets 1,955 1,756
Other liabilities (362) 477
------- -------
Net cash provided by (used in) operating activities (13,928) 7,629
------- -------
Cash flows from investing activities:
Purchase of business, including acquisition costs (50,520) -
Purchases of property and equipment (4,036) (2,321)
Proceeds from sale of assets 2 16
Change in value of asset held for sale - (646)
------- -------
Net cash used in investing activities (54,554) (2,951)
------- -------
Cash flows from financing activities:
Borrowings on credit agreement and long-term debt 79,800 25,272
Repayment of long-term debt (66) (27,380)
Repayment of new accounts receivable financing (13,000) -
Debt issuance costs - (803)
Other 551 -
------- -------
Net cash provided by (used in) financing activities 67,285 (2,911)
Net increase (decrease) in cash (1,197) 1,767
Cash, beginning of period 2,290 18,341
------- -------
Cash, end of period $ 1,093 $20,108
======= =======
See accompanying notes to condensed consolidated financial statements.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization and Basis of Presentation
American Pad & Paper Company (the "Company") is a holding company which
conducts its operations through American Pad & Paper Company of Delaware, Inc.
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 in North America. The Company operates in one
business segment, converting paper into office products, and offers a broad
assortment of products through two complementary divisions: Ampad (writing
pads, file folders, retail envelopes, machine papers, and other paper-based
office products) and Williamhouse (business envelopes and machine papers). The
Company's products are distributed through large mass merchant retailers,
office product superstores, warehouse clubs, major contract stationers, office
products wholesalers, paper merchants, and independent dealers. 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, 1996.
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 March 31, 1997, and the
results of its operations and its cash flows for the three month periods ended
March 31, 1997 and 1996. The results of operations for the interim periods
presented are not necessarily indicative of results to be expected for the full
fiscal year.
2. SIGNIFICANT ACQUISITION - SHADE/ALLIED, INC.
Effective February 11, 1997, the Company acquired all of the outstanding
common and preferred stock of Shade/Allied, Inc., ("Shade/Allied") for
approximately $51,300, consisting of $49,500 in cash and $1,800 in direct
acquisition costs, financed by the Company's bank credit agreement. This
acquisition has been recorded following the purchase method of accounting and,
accordingly, the purchase price has been preliminarily allocated to the assets
and liabilities at their fair market values. The excess of the purchase price
over the fair market value of the net assets acquired was allocated to goodwill
and amortized on a straight-line basis over 40 years. The Company
preliminarily allocated the purchase price as follows: trade accounts
receivable of $4,584, inventories of $5,941, other current assets of $929,
property, plant and equipment of $10,685, current liabilities of $13,877,
long-term liabilities of $3,323 and goodwill of $46,361. The results of
operations of Shade/Allied are included in the Company's results of operations
from the date of acquisition through March 31, 1997.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(IN THOUSANDS)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
March 31, December 31,
1997 1996
--------- ------------
Accounts receivable - trade, of which $41,000 and
$54,000, respectively, are sold as part of
a $60,000 accounts receivable financing facility $49,205 $56,431
Accounts receivable - other 4,361 2,839
Less allowance for doubtful accounts and reserves
for customers deductions, returns and cash
discounts (497) (2,216)
-------- --------
$53,069 $57,054
======== ========
4. INVENTORIES
Inventories consisted of the following:
March 31, December 31,
1997 1996
--------- ------------
Raw materials and semi-finished goods $ 48,553 $ 41,505
Work in process 8,046 4,695
Finished goods 73,764 58,607
-------- --------
130,363 104,807
LIFO reserve 2,809 860
-------- --------
$133,172 $105,667
======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31, December 31,
1997 1996
--------- ------------
Land $ 7,056 $ 6,749
Buildings 32,734 30,532
Machinery and equipment 104,696 96,790
Office furniture and fixtures 9,292 8,263
Construction in progress 10,056 5,060
-------- --------
163,834 147,394
Less accumulated depreciation and amortization 19,179 14,304
-------- --------
$144,655 $133,090
======== ========
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(IN THOUSANDS)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, December 31,
1997 1996
--------- ------------
Goodwill $191,589 $146,006
Intangible assets, principally tradenames 38,169 38,169
Debt issuance costs 18,382 18,369
-------- --------
248,140 202,544
Less accumulated amortization 12,189 10,177
-------- --------
$235,951 $192,367
======== ========
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
March 31, December 31,
1997 1996
--------- ------------
Acquisition integration costs $14,134 $12,695
Sales volume discounts 5,856 20,184
Salaries and wages 9,642 8,738
Interest 7,520 4,171
Other 6,923 9,253
------- -------
$44,075 $55,041
======= =======
8. EARNINGS PER SHARE
Effective December 15, 1997, the Company will report basic and diluted
earnings per share following the guidance provided in Statement of Financial
Accounting Standards Number 128, Earnings Per Share. Basic earnings per share
will be computed as the quotient of net income divided by the actual number of
outstanding shares of common stock at the end of a period. Diluted earnings
per share will be computed as the quotient of net income divided by the number
of outstanding shares of common stock as adjusted for common stock options.
The adjustment for common stock options will be calculated by assuming that all
dilutive options are exercised, that the proceeds from such exercise are used
to repurchase shares of the Company's stock at the average price of the common
stock during the period and that the Company will also generate proceeds and
repurchase shares from the tax benefits associated with the assumed exercise of
the common stock options. Early adoption of this new accounting standard is
not permitted nor is the Company permitted to present the earnings per share
information calculated following this guidance on the face of the Company's
income statement.
If the Company had determined its earnings per share under the new
accounting standard, the following information would be presented for the three
month period March 31, 1997 and 1996:
1997 1996
----- -----
Basic earnings per share $0.15 $0.00
Diluted earnings per share $0.14 $0.00
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(IN THOUSANDS)
The Company intends to adopt the new accounting standard effective
December 31, 1997 and will present the basic and diluted earnings per share
information as part of the quarterly financial data in the Company's annual
report to shareholders.
Given the changes in the Company's capital structure effected in
connection with the initial public offering of the Company's common stock,
historical earnings per share for 1996 are not presented in the condensed
consolidated statement of income as it is not considered to be meaningful. Pro
forma weighted average shares outstanding reflect 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 initial public
offering of common stock.
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 estimated 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).
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARY
The 13% senior subordinated notes are guaranteed by Shade/Allied, Inc., a
wholly owned subsidiary of American Pad & Paper Company of Delaware, Inc.
("Delaware"). The subsidiary guaranty is full, unconditional and joint and
several. The Company is not a guarantor of the senior subordinated notes.
Separate financial statements of the guarantor subsidiary are not presented
because management has determined that they would not be material to investors.
However, condensed consolidating financial information as of March 31, 1997
and for the three months ended is presented. Shade/Allied was acquired by
Delaware on February 11, 1997 and, as a result, the three month period ended
March 31, 1997 is the first period in which the Company's historical results
include the results of operations of Shade/Allied and is the first period where
Shade/Allied was a guarantor subsidiary. The condensed consolidating financial
information is as follows:
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(IN THOUSANDS)
Condensed Consolidating Balance Sheet
March 31, 1997
- --------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Eliminations total
--------- ---------- ---------- ------------- ------------
Assets
------
Current Assets:
Cash $ 1,091 $ 2 $ - $ - $ 1,093
Accounts receivable 3,003 6,140 43,926 - 53,069
Intercompany receivable (payable) 9,364 (2,146) (7,218) - -
Inventories 127,267 5,905 - - 133,172
Deferred income taxes 7,235 - 690 - 7,925
Prepaid expenses and other current assets 3,839 101 - - 3,940
--------- ------- ------- -------- ---------
Total current assets 151,799 10,002 37,398 - 199,199
Property, plant and equipment, net 134,177 10,478 - - 144,655
Investment in subsidiaries 88,520 - - (88,520) -
Intangible assets, net 190,071 45,440 440 - 235,951
Other 3,994 725 - - 4,719
--------- ------- ------- -------- ---------
Total assets $ 568,561 $66,645 $37,838 $(88,520) $ 584,524
========= ======= ======= ========= =============
Liabilities and Stockholders' Equity
- -----------------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,510 $ - $ - $ - $ 2,510
Accounts payable and accrued expenses 75,511 11,458 28 - 86,997
Income taxes payable 6 143 - - 149
--------- ------- ------- -------- ---------
Total current liabilities 78,027 11,601 28 - 89,656
Long-term debt 349,206 - - - 349,206
Other liabilities 1,016 1,001 - - 2,017
Deferred income taxes 31,166 3,333 - - 34,499
--------- ------- ------- -------- ---------
Total liabilities 459,415 15,935 28 - 475,378
Stockholders' equity:
Common stock 274 30 10 (40) 274
Additional paid-in capital 301,280 50,491 35,399 (85,890) 301,280
Retained earnings (accumulated deficit) (192,408 189 2,401 (2,590) (192,408)
--------- ------- ------- -------- ---------
Total stockholders' equity 109,146 50,710 37,810 (88,520) 109,146
--------- ------- ------- -------- ---------
Total liabilities and stockholders'
equity $ 568,561 $66,645 $37,838 $(88,520) $ 584,524
========= ======= ======= ======== =========
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(IN THOUSANDS)
Condensed Consolidating Statement of Operations
Three months ended March 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Eliminations total
---------- -------------- ---------------- ------------ -------------
Net sales $139,502 $11,017 $ - $ (685) $149,834
Cost of sales 109,602 9,918 - (685) 118,835
---------- -------------- ---------------- ------------ -------------
Gross profit 29,900 1,099 - - 30,999
Operating expenses:
Selling and marketing 4,347 405 4,752
General and administrative 11,278 477 (900) 10,855
---------- -------------- ---------------- ------------ -------------
Income from operations 14,275 217 900 - 15,392
Other income (expense)
Interest (8,156) (28) (30) (8,214)
Other income, net 73 - - 73
---------- -------------- ---------------- ------------ -------------
Income before income taxes 6,192 189 870 - 7,251
Provision for income taxes 2,786 85 392 3,263
---------- -------------- ---------------- ------------ -------------
Income before equity in
earnings of subsidiaries 3,406 104 478 - 3,988
Equity in earnings of subsidiaries 1,059 - - (1,059) -
---------- -------------- ---------------- ------------ -------------
Net income $ 4,465 $ 104 $ 478 $(1,059) $3,988
========== ============== ================ ============ =============
Condensed Consolidating Statement of Cash Flows
Three months ended March 31, 1997
- --------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Eliminations total
--------- ---------- ------------ ------------ -------------
Net cash provided by (used in)
operating activities $(13,938) $ 2 $ 8 $ - $(13,928)
Investing activities
Purchase of Shade/Allied (50,520) - - - (50,520)
Purchases of property, plant and equipment (4,036) - - - (4,036)
Proceeds from sale of assets 2 - - - 2
-------- --------- --------- ---------- -------
Net cash (used in) investing activities (54,554) - - - (54,554)
-------- --------- --------- ---------- -------
Financing activities
Proceeds from long-term debt 79,800 - - - 79,800
Repayment of new accounts receivable facility (13,000) - - - (13,000)
Repayment of long-term debt (66) - - - (66)
Other 559 - (8) - 551
-------- --------- --------- ---------- -------
Net cash provided
(used in) financing activities 67,293 - (8) - 67,285
-------- --------- --------- ---------- -------
Increase (decrease) in cash (1,199) 2 - - (1,197)
Cash, beginning of period 2,290 - - - 2,290
-------- --------- --------- ---------- -------
Cash, end of period $ 1,091 $ 2 $ $ - $1,093
======== ========= ========= ========== =======
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is one of the largest manufacturers and marketers of
nationally branded and private label paper-based office products (excluding
copy paper) in the $60 billion to $70 billion North American office products
industry. The Company offers a broad assortment of products including writing
pads, file folders, envelopes, machine papers and other paper-based products.
Through its Ampad division, the Company is among the largest and most important
suppliers of pads and other paper-based writing products, filing supplies,
machine papers and retail envelopes to many of the largest and fastest growing
office products distributors. Through its Williamhouse division, the Company is
the leading supplier of mill branded, specialty and commodity business
envelopes to paper merchants and distributors. The Company believes that its
future operating results will not be directly comparable to its historical
operating results because of its strategic acquisitions and the expected cost
savings from integration of its acquisitions. The Company's business has not
generally been seasonal in nature. Certain factors which have affected, and may
affect prospectively, the operating results of the Company are discussed below.
Strategic Acquisition. On February 11, 1997, the Company acquired
Shade/Allied, a national supplier of machine papers, principally continuous
computer forms. The purchase price of $51.2 million was financed with
borrowings under the Company's new bank credit agreement. The Company expects
that Shade/Allied's products will be distributed by both the Ampad and
Williamhouse divisions and that the manufacturing plants will be integrated
into the Ampad division. This acquisition provided the Company with a more
significant position in a fourth product category.
Purchase Accounting Effects. The Company's acquisitions have been
accounted for using the purchase accounting method. The acquisitions have
currently affected, and will prospectively affect, the Company's results of
operations in certain significant respects. The aggregate acquisition costs
(including assumption of debt) are allocated to the net assets acquired based
on the fair market value of such net assets. The allocations of the purchase
price result in an increase in the historical book value of certain assets such
as property, plant and equipment and intangible assets, including goodwill,
which results in incremental annual depreciation and amortization expense each
year.
Paper Prices. Paper represents a majority of the Company's cost of goods
sold. While paper prices have increased by an average of less than 1% annually
since 1989, certain commodity grades have shown considerable price volatility
during that period. Beginning in January 1995, the Company adopted new pricing
policies enabling it to set product prices consistent with the Company's cost
of paper at the time of shipment. The Company believes that it is able to
price its products so as to minimize the impact of price volatility on dollar
margins. Paper price volatility has and is expected to continue to have an
effect on net sales and cost of sales.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the three months ended March 31,
1997, 1996 and 1995. The Company's historical results of operations for each
of these periods are significantly affected by the results for the following
business acquired by the Company: (i) SCM which was acquired on July 5, 1994,
(ii) Globe-Weis which was acquired on August 18, 1995, (iii) Williamhouse which
was acquired on October 31, 1995, (iv) Niagara which was acquired on June 28,
1996 and (v) Shade/Allied which was acquired on February 11, 1997.
Three months ended March 31,
Income Statement Data 1997 1996 1995
--------------------- ---- ---- ----
Net sales 100.0% 100.0% 100.0%
===== ===== =====
Gross Profit 20.7 19.6 11.2
Selling, general and administrative expenses (9.2) (8.8) (5.5)
Management fees and services (1.2) (0.4) (0.3)
----- ----- -----
Income (loss) from operations 10.3 10.4 5.4
Interest expense, net (5.5) (10.4) (3.5)
Other income - 0.2 0.1
----- ----- -----
Income (loss) before income taxes 4.8 0.2 2.0
Provision for (benefit from) income taxes (2.1) (0.1) (0.8)
----- ----- -----
Net income (loss) 2.7% 0.1% 1.2%
===== ===== =====
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AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net Sales for the three months ended March 31, 1997 increased by $29.7
million, or 24.7%, to $149.8 million from $120.1 million for the three months
ended March 31, 1996. Of this net sales increase, $26.5 million is related to
the acquisition of Niagara and $11.0 million is related to the acquisition of
the Shade/Allied. Net sales from existing operations decreased by
approximately $7.8 million primarily due to the deflationary effect of paper
prices from the first quarter of 1996 to the first quarter of 1997 which
negatively affected net sales by approximately 5%.
Gross Profit for the three months ended March 31, 1997 increased by $7.5
million, or 31.9%, to $31.0 million from $23.5 million for the three months
ended March 31, 1996. Approximately $3.6 million of the increase in gross
profit is attributable to the acquisition of Niagara and $1.1 million is
attributable to the Shade/Allied acquisition. Gross profit increased by $2.8
million due to increased sales of higher margin products. Gross profit margin
increased to 20.7% for the three months ended March 31, 1997 from 19.6% for the
three months ended March 31, 1996. The increase in gross profit margin is
primarily attributable to a higher proportion of proprietary product sales
during the first quarter of 1997.
SG&A expenses for the three months ended March 31, 1997 increased $3.3
million, or 31.4%, to $13.8 from $10.5 million for the three months ended March
31, 1996. Approximately $2.3 million is attributable to the acquisitions of
Niagara and Shade/Allied. Management fees and services during the first
quarter increased by approximately $1.3 million due primarily to a one year
non-recurring consulting agreement with the former president of Niagara, an
envelope company acquired in June 1996.
Interest expense for the three months ended March 31, 1997 decreased $4.3
million to $8.2 million from $12.5 million for the three months ended March 31,
1996. The decrease is primarily attributable to repayment of the old credit
agreement indebtedness of $95.8 million and the redemption of $70.0 million
aggregate principal amount of the 13% senior subordinated notes both of which
were funded by the proceeds of the Company's initial public offering of common
stock. This decrease in indebtedness was partially offset by increased
borrowings as a result of the Shade/Allied acquisition.
The income tax provision for the three month period ended March 31, 1997
reflects an effective tax rate of 45.0% versus an effective tax rate of 44.3%
for the three month period ended March 31, 1996. The increase is attributable
primarily to the nondeductible goodwill amortization resulting from the
acquisitions.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Net sales for the three months ended March 31, 1996 increased by $72.6
million, or 152.8%, to $120.1 million from $47.5 million for the three months
ended March 31, 1995. Of this net sales increase, $63.2 million is related to
the Williamhouse acquisition and $15.9 million is related to the Globe-Weis
acquisition. Ampad division net sales, exclusive of Globe-Weis, decreased by
$6.5 million in the first quarter of 1996 compared to the unusually strong
first quarter of 1995. The strong 1995 first quarter was due to certain of the
Company's customers increasing inventory levels in anticipation of price
increases and supply shortages.
Gross profit for the three months ended March 31, 1996 increased by $18.2
million, or 343.4%, to $23.5 million from $5.3 million for the three months
ended March 31, 1995. Approximately $15.5 million of the increase in gross
profit is attributable to the Williamhouse acquisition and $2.0 million is
attributable to the Globe-Weis acquisition. The gross profit from the Ampad
division, exclusive of Globe-Weis, increased by $.7 million, due to a change in
the mix of products sold towards higher margin products. Gross profit margin
increased to 19.6% for the three months ended March 31, 1996 from 11.2% for the
three months ended March 31, 1995. This increase in gross profit margin is
related to unfavorable inventory valuation of $2.6 million in the first quarter
of 1995 due to rising paper prices. In addition, the Company's ability to
maintain its dollar margins in the first quarter of 1996 despite a falling
price environment led to higher margin percentages.
SG&A expenses for the three months ended March 31, 1996 increased $7.9
million, or 288.9%, to $10.5 million from $2.6 million for the three months
ended March 31, 1995. Approximately $7.3 million of the increase is
attributable to the Williamhouse acquisition and includes $1.0 million of
amortization of goodwill and intangibles and $.3 million of costs
13
14
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
related to the off balance sheet financing of receivables. As a percentage of
net sales, SG&A expenses increased to 8.8% for the first three months of 1996
from 5.5% in the comparable period for the prior year as a result of higher SG&A
expenses as a percentage of net sales of the Williamhouse division.
Interest expense for the three months ended March 31, 1996 increased $10.9
million to $12.5 million from $1.6 million for the three months ended March 31,
1995. The increase is attributable primarily to increased borrowings as a
result of the sale of the 13% senior subordinated notes in December 1995, the
Williamhouse acquisition in October 1995 and the Globe-Weis acquisition in
August 1995.
The income tax provision for the three month period ended March 31, 1996
reflects an effective tax rate of 44.4%, versus an effective tax rate of 38.3%
for the three month period ended March 31, 1995. The increase is attributable
primarily to the nondeductible goodwill amortization resulting from the
Williamhouse acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities for the three months ended March 31,
1997 was $13.9 million compared to net cash provided of $7.6 million for the
three months ended March 31, 1996. This decrease in cash provided by operating
activities is due to a combination of the following: (i) a reduction of
accounts receivable of $21.6 million as seasonal and year end accounts
receivable were collected during the quarter, (ii) an increase in inventories
of $21.6 million due to a buildup of inventory levels in anticipation of
seasonal, promotional and new product sales in the second and third quarters,
(iii) a normal reduction of accounts payable by $8.9 million and (iv) a
reduction in accrued expenses of $16.7 million as customer volume rebates and
incentive compensation were paid during the first quarter of 1997.
Cash used in investing activities for the three months ended March 31,
1997 and 1996 was $54.6 million and $3.0 million, respectively. The use of
cash for the three months ended March 31, 1997 was due to the Shade/Allied
Acquisition ($50.5 million) and purchases of equipment ($4.0 million).
Cash provided by financing activities for the three months ended March 31,
1997 was $67.3 million compared to cash used by financing activities for the
three months ended March 31, 1996 of $2.9 million. During the first quarter of
1997, the Company repaid $13.0 million in notes outstanding under its accounts
receivable credit facility and borrowed $79.8 million to finance (i) such
repayment, (ii) the acquisition of Shade/Allied, (iii) the purchases of
equipment and (iv) its working capital needs.
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 bank credit
agreement and available cash on hand at March 31, 1997 of $1.1 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, including anticipated capital expenditures of approximately $13
million during the remainder of 1997, 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.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three months ended March 31, 1997 and 1996.
14
15
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARD
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share, which is effective
December 15, 1997 and which prescribes a new presentation of earnings per share
amounts as either "basic" or "diluted." Basic earnings per share is to be
calculated as net income divided by the number of outstanding shares of common
stock. Diluted earnings per share is to be calculated in a manner similar to
the "primary" earnings per share currently presented by the Company. Diluted
earnings per share is calculated as net income divided the number of
outstanding shares of common stock, as adjusted for common stock options. The
Company intends to implement the new accounting at the end of 1997 and, as part
of its 1997 annual report to shareholders and Form 10-K, will restate its
quarterly earnings per share following the guidelines in the new accounting
standard. If the new standard had been implemented during the first quarter of
1997, earnings per share would have been presented as follows:
Three months ended March 31,
------------------------------
1997 1996
-------------- --------------
Basic earnings per share $0.15 $0.00
Diluted earnings per share $0.14 $0.00
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form
10-Q to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which
are other than statements of historical facts. From time to time, the Company
may publish or otherwise make available forward-looking statements of this
nature. All such subsequent forward-looking statements, whether written or
oral and whether made by or on behalf of the Company, are also expressly
qualified by these cautionary statements. Certain statements contained herein
are forward-looking statements and accordingly involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based, in
turn, upon further assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectation, beliefs or projections will result or be achieved or
accomplished. In addition to the other factors and matters discussed elsewhere
herein, the following are important factors that, in the view of the Company,
could cause actual results to differ materially from those discussed in the
forward-looking statements:
1. Changes in economic conditions, in particular those which affect the
retail and wholesale office product markets.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
3. Changes in senior management or control of the Company.
4. Inability to obtain new customers or retain existing ones.
5. Significant changes in competitive factors including product pricing
conditions affecting the Company.
6. Governmental/regulatory actions and initiatives, including, those
affecting financings.
7. Significant changes from expectations in actual capital expenditures
and operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments.
15
16
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievance were to
occur.
11. Changes in accounting principles and/or the application of such
principles to the Company.
The foregoing factors could affect the Company's actual results and could
cause the Company's actual results during 1997 and beyond to be materially
different from any anticipated results expressed in any forward-looking
statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after date hereof.
16
17
PART II OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 22, 1997.
The following matters were submitted to a vote of shareholders of the Company's
common stock with the results indicated below:
Withheld, Against
Matter Approved or Abstained
------ ---------- -----------------
Election of Class I Directors - Jonathan Lavine
and Greg Benson ........................................ 22,461,798 577,320
Ratification of Price Waterhouse LLP as independent auditors
for the Company ........................................ 23,031,223 3,895
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
The following reports on Form 8-K, all of which pertain to the acquisition
of Shade/Allied, were filed during the first quarter of 1997 and through the
date of the filing of this report..
(1) Current Report on Form 8-K filed January 16, 1997 relating to the
announcement of the proposed acquisition of Shade/Allied.
(2) Current Report on Form 8-K filed February 24, 1997 relating to the
completion of the acquisition of Shade/Allied.
(3) Current Report on Form 8-K/A filed April 24, 1997 relating to the
Company's pro forma financial statements and Shade/Allied's historical financial
statements.
Exhibit 27.1 -- Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
/s/ Kevin W. McAleer
- --------------------------- -----------------
Kevin W. McAleer Date
Chief Financial Officer
Principal Financial Officer
/s/ William W. Solomon, Jr.
- --------------------------- -----------------
Vice President - Controller Date
Principal Accounting Officer
17
18
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
27 Financial Data Schedule