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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 JUNE 30, 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 August 12, 1997, American Pad & Paper Company has 27,435,839 shares
of Common Stock outstanding. As of August 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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2
AMERICAN PAD & PAPER COMPANY
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Important Explanatory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 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)
June 30, December 31,
1997 1996
--------- ---------
ASSETS
------
Current assets:
Cash $ 1,639 $ 2,290
Accounts receivable 68,268 57,054
Inventories 144,867 105,667
Prepaid expense and other current assets 3,487 4,739
Deferred income taxes 11,188 10,754
--------- ---------
Total current assets 229,449 180,504
Property, plant and equipment 146,768 133,090
Intangible assets 239,493 192,367
Other 4,625 3,456
--------- ---------
Total assets $ 620,335 $ 509,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,690 $ 2,171
Accounts payable 41,801 44,932
Accrued expenses 36,284 55,041
Income taxes payable 6,998 503
--------- ---------
Total current liabilities 86,773 102,647
Long-term debt 379,703 269,812
Deferred income taxes 38,433 30,981
Other 1,568 1,378
--------- ---------
Total liabilities 506,477 404,818
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 (187,696) (196,396)
--------- ---------
Total stockholders' equity 113,858 104,599
--------- ---------
Total liabilities and stockholders' equity $ 620,335 $ 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 Six months ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Net sales $ 167,160 $ 114,099 $ 316,994 $ 234,207
Cost of sales 134,339 89,168 253,173 185,748
--------- --------- --------- ---------
Gross profit 32,821 24,931 63,821 48,459
Operating expenses:
Selling and marketing 5,147 3,893 9,898 7,220
General and administrative 7,742 7,280 16,742 14,471
Management fees and services 1,837 552 3,692 1,059
--------- --------- --------- ---------
Income from operations 18,095 13,206 33,489 25,709
Other income (expense):
Interest (9,584) (12,491) (17,795) (25,033)
Other income, net 49 500 121 770
--------- --------- --------- ---------
Income before income taxes and 8,560 1,215 15,815 1,446
extraordinary item
Provision for income taxes 3,852 524 7,115 625
--------- --------- --------- ---------
Income before extraordinary item 4,708 691 8,700 821
Extraordinary loss from extinguishment of
debt (net of income tax benefit of $989) -- (1,300) -- (1,300)
--------- --------- --------- ---------
Net income (loss) $ 4,708 $ (609) $ 8,700 $ (479)
========= ========= ========= =========
Earnings per share:
Income before extraordinary item $ 0.16 $ 0.02 $ 0.30 $ 0.03
Extraordinary item -- (0.04) -- (0.04)
--------- --------- --------- ---------
Net income (loss) $ 0.16 $ (0.02) $ 0.30 $ (0.01)
========= ========= ========= =========
Weighted average common shares outstanding 29,316 29,607 29,369 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)
Six months ended June 30,
------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 8,700 $ (479)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 6,341 4,138
Amortization of goodwill and intangible assets 2,858 2,131
Extraordinary loss on extinguishment of debt -- 1,300
Amortization of debt issuance costs 1,265 2,520
Gain on sale of assets -- (49)
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable 11,371 11,178
Refundable income taxes -- 3,657
Inventories (33,440) (5,804)
Prepaid expenses and other (1,119) (1,413)
Deferred income tax asset, net 5,983 8,249
Accounts payable (10,003) (6,398)
Accrued expenses (25,628) (8,543)
Other assets 2,056 3,660
Other liabilities (861) 332
--------- --------
Net cash provided by (used in) operating activities (32,477) 14,479
--------- --------
Cash flows from investing activities:
Purchase of business, including acquisition costs (50,559) (52,376)
Purchases of property and equipment (9,578) (4,822)
Proceeds from sale of assets 4 913
Net cash generated from assets held for sale -- 45,375
--------- --------
Net cash used in investing activities (60,133) (10,910)
--------- --------
Cash flows from financing activities:
Borrowings on credit agreement and long-term debt 110,500 33,272
Repayment of long-term debt (1,091) (30,379)
Repayment of old accounts receivable financing -- (45,000)
Proceeds from new accounts receivable financing -- 35,000
Repayment of new accounts receivable financing (18,000) (10,000)
Debt issuance costs -- (1,662)
Other 550 --
--------- --------
Net cash provided by (used in) financing activities 91,959 (18,769)
--------- --------
Net decrease in cash (651) (15,200)
Cash, beginning of period 2,290 18,341
--------- --------
Cash, end of period $ 1,639 $ 3,141
========= ========
See accompanying notes to condensed consolidated financial statements.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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 June 30, 1997, and the
results of its operations and its cash flows for the six and three month
periods ended June 30, 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 $50,668, consisting of $49,477 in cash and $1,191 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 $4,585,
inventories of $5,760, other current assets of $856, property, plant and
equipment of $14,825, identifiable intangible assets of $5,610, deferred income
tax liability of $7,316, current liabilities of $13,957, noncurrent liabilities
of $1,051 and goodwill of $41,356. The operating results of Shade/Allied have
been included in the accompanying condensed consolidated financial statements
since the date of acquisition.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
June 30, December 31,
1997 1996
-------- --------
Accounts receivable - trade, excluding $36,000
and $54,000, respectively, which are sold as part
of a $60,000 accounts receivable financing
facility $ 64,399 $ 56,431
Accounts receivable - other 4,309 2,839
Less allowance for doubtful accounts and reserves for
customers deductions, returns and cash discounts (440) (2,216)
-------- --------
$ 68,268 $ 57,054
======== ========
4. INVENTORIES
Inventories consisted of the following:
June 30, December 31,
1997 1996
-------- --------
Raw materials and semi-finished goods $ 53,551 $ 41,505
Work in process 6,921 4,695
Finished goods 81,036 58,607
-------- --------
141,508 104,807
LIFO reserve 3,359 860
-------- --------
$144,867 $105,667
======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30, December 31,
1997 1996
-------- --------
Land $ 7,138 $ 6,749
Buildings 30,886 30,532
Machinery and equipment 108,760 96,790
Office furniture and fixtures 9,391 8,263
Construction in progress 11,185 5,060
-------- --------
167,360 147,394
Less accumulated depreciation and amortization 20,592 14,304
-------- --------
$146,768 $133,090
======== ========
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
June 30, December 31,
1997 1996
-------- --------
Goodwill $191,632 $146,006
Intangible assets, principally tradenames 43,779 38,169
Debt issuance costs 18,382 18,369
-------- --------
253,793 202,544
Less accumulated amortization 14,300 10,177
-------- --------
$239,493 $192,367
======== ========
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, December 31,
1997 1996
-------- --------
Acquisition integration costs $ 12,514 $ 12,695
Sales volume discounts 2,164 20,184
Salaries and wages 10,738 8,738
Interest 5,759 4,171
Other 5,109 9,253
-------- --------
$ 36,284 $ 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.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
If the Company had determined its earnings per share under the new
accounting standard, the following earnings per share information would be
presented:
Three months Six months
ended June 30, ended June 30,
----------------- -----------------
1997 1996 1997 1996
----- ------ ----- ------
Basic earnings per share $0.17 $(0.02) $0.32 $(0.02)
Diluted earnings per share $0.16 $(0.02) $0.30 $(0.02)
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 June 30, 1997 and
for the three and six months then ended is presented. Shade/Allied was acquired
by Delaware on February 11, 1997 and, as a result, the six month period ended
June 30, 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
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Condensed Consolidating Balance Sheet
June 30, 1997
- --------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Elimination total
--------- --------- --------- --------- ---------
Assets
------
Current Assets:
Cash $ 1,636 $ 3 $ -- $ -- $ 1,639
Accounts receivable 8,068 5,623 54,577 -- 68,268
Intercompany receivable (payable) 20,006 (3,723) (16,283) -- --
Inventories 136,933 7,934 -- -- 144,867
Prepaid expenses and other current
assets 3,442 3 42 -- 3,487
Deferred income taxes 11,188 -- -- -- 11,188
--------- --------- --------- --------- ---------
Total current assets 181,273 9,840 38,336 -- 229,449
Property, plant and equipment, net 132,641 14,127 -- -- 146,768
Investment in subsidiaries 90,753 -- -- (90,753) --
Intangible assets, net 192,600 46,483 410 -- 239,493
Other 4,625 -- -- -- 4,625
--------- --------- --------- --------- ---------
Total assets $ 601,892 $ 70,450 $ 38,746 (90,753) $ 620,335
========= ========= ========= ========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,690 $ -- $ -- $ -- $ 1,690
Accounts payable 34,334 7,467 -- -- 41,801
Accrued expenses 33,803 2,419 62 -- 36,284
Income taxes payable 6,870 128 -- -- 6,998
--------- --------- --------- --------- ---------
Total current liabilities 76,697 10,014 62 -- 86,773
Long-term debt 379,703 -- -- -- 379,703
Deferred income taxes 31,117 7,316 -- -- 38,433
Other liabilities 517 1,051 -- -- 1,568
--------- --------- --------- --------- ---------
Total liabilities 488,034 18,381 62 -- 506,477
Stockholders' equity:
Common stock 274 30 10 (40) 274
Additional paid-in capital 301,280 50,531 35,399 (85,930) 301,280
Retained earnings (accumulated deficit) (187,696) 1,508 3,275 (4,783) (187,696)
--------- --------- --------- --------- ---------
Total stockholders' equity 113,858 52,069 38,684 (90,753) 113,858
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity $ 601,892 $ 70,450 $ 38,746 $ (90,753) $ 620,335
========= ========= ========= ========= =========
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Condensed Consolidating Statement of Operations
Three months ended June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company Subsidiary subsidiary Eliminations total
--------- ---------- ------------ ------------ ------------
Net sales $ 149,191 $ 17,284 $ -- $ 685 $ 167,160
Cost of sales 118,635 15,019 -- 685 134,339
--------- --------- --------- --------- ---------
Gross profit 30,556 2,265 -- -- 32,821
Operating expenses:
Selling and marketing 4,447 700 -- -- 5,147
General and administrative 8,372 275 (905) -- 7,742
Management fees and services 1,837 -- -- -- 1,837
--------- --------- --------- --------- ---------
Income from operations 15,900 1,290 905 -- 18,095
Other income (expense)
Interest (9,582) 28 (30) -- (9,584)
Other income, net 49 -- -- -- 49
--------- --------- --------- --------- ---------
Income before income taxes 6,367 1,318 875 -- 8,560
Provision for income taxes 2,866 593 393 -- 3,852
--------- --------- --------- --------- ---------
Income before equity in
earnings of subsidiaries 3,501 725 482 -- 4,708
Equity in earnings of subsidiaries 1,207 -- -- $ (1,207) --
--------- --------- --------- --------- ---------
Net income $ 4,708 $ 725 $ 482 $ (1,207) $ 4,708
========= ========= ========= ========= =========
Six months ended June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company Subsidiary subsidiary Eliminations total
--------- ---------- ------------ ------------ ------------
Net sales $ 288,693 $ 28,301 $ -- $ -- $ 316,994
Cost of sales 228,236 24,937 -- -- 253,173
--------- --------- --------- --------- ---------
Gross profit 60,457 3,364 -- -- 63,821
Operating expenses:
Selling and marketing 8,793 1,105 -- -- 9,898
General and administrative 17,795 752 (1,805) -- 16,742
Management fees and services 3,692 -- -- -- 3,692
--------- --------- --------- --------- ---------
Income from operations 30,177 1,507 1,805 -- 33,489
Other income (expense)
Interest (17,735) -- (60) -- (17,795)
Other income, net 121 -- -- -- 121
--------- --------- --------- --------- ---------
Income before income taxes 12,563 1,507 1,745 -- 15,815
Provision for income taxes 5,652 678 785 -- 7,115
--------- --------- --------- --------- ---------
Income before equity in
earnings of subsidiaries 6,911 829 960 -- 8,700
Equity in earnings of subsidiaries 1,789 -- -- (1,789) --
--------- --------- --------- --------- ---------
Net income $ 8,700 $ 829 $ 960 $ (1,789) $ 8,700
========= ========= ========= ========= =========
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Condensed Consolidating Statement of Cash Flows
Six months ended June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company Subsidiary subsidiary Eliminations total
--------- ---------- ------------ ------------ ------------
Net cash provided by (used in)
operating activities $ (32,505) $ 20 $ 8 $ -- $ (32,477)
Investing activities
Purchase of business, including
acquisition costs (50,559) -- -- -- (50,559)
Purchases of property, plant and equipment (9,559) (19) -- -- (9,578)
Proceeds from sale of assets 4 -- -- -- 4
--------- ------- ------- ------- ---------
Net cash used in investing activities (60,114) (19) -- -- (60,133)
========= ======= ======= ======= =========
Financing activities
Proceeds from long-term debt 110,500 -- -- -- 110,500
Repayment of long-term debt (1,091) -- -- -- (1,091)
Repayment of new accounts receivable
facility (18,000) -- -- -- (18,000)
Other 558 -- (8) -- 550
--------- ------- ------- ------- ---------
Net cash provided by
(used in) financing activities 91,967 -- (8) -- 91,959
--------- ------- ------- ------- ---------
Increase (decrease) in cash (652) 1 -- -- (651)
Cash, beginning of period 2,288 2 -- -- 2,290
--------- ------- ------- ------- ---------
Cash, end of period $ 1,636 $ 3 $ -- $ -- $ 1,639
========= ======= ======= ======= =========
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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 $50.7 million was financed with
borrowings under the Company's bank credit agreement. Shade/Allied's products
are distributed by both the Ampad and Williamhouse divisions and the
manufacturing plants are 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 and six months ended June
30, 1997 and 1996. 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) Niagara which was acquired on June 28,
1996 and (ii) Shade/Allied which was acquired on February 11, 1997.
Three months ended June 30, Six months ended June 30,
Income Statement Data 1997 1996 1997 1996
--------------------- ----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Gross profit 19.6 21.9 20.1 20.7
Selling, general and administrative
expenses (7.7) (9.8) (8.4) (9.3)
Management fees and services (1.1) (0.5) (1.1) (0.4)
----- ----- ----- -----
Income from operations 10.8 11.6 10.6 11.0
Interest expense, net (5.7) (10.9) (5.6) (10.7)
Other income -- 0.4 -- 0.3
----- ----- ----- -----
Income before income taxes and
extraordinary item 5.1 1.1 5.0 0.6
Provision for income taxes (2.3) (0.5) (2.3) (0.3)
----- ----- ----- -----
Income before extraordinary item 2.8 0.6 2.7 0.3
Extraordinary loss from extinguishment
of debt -- (1.1) -- (0.5)
----- ----- ----- -----
Net income (loss) 2.8% (0.5)% 2.7% (0.2)%
===== ===== ===== =====
13
14
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net Sales for the three months ended June 30, 1997 increased by $53.1
million, or 46.5%, to $167.2 million from $114.1 million for the three months
ended June 30, 1996. Of this net sales increase, $26.2 million is related to
the acquisition of Niagara and $17.3 million is related to the acquisition of
Shade/Allied. Net sales from existing operations increased by approximately
$9.6 million primarily as the result of strong sales in the superstores and
contract stationers customer channels.
Gross Profit for the three months ended June 30, 1997 increased by $7.9
million, or 31.6%, to $32.8 million from $24.9 million for the three months
ended June 30, 1996. Approximately $4.0 million of the increase in gross
profit is attributable to the acquisition of Niagara and $2.3 million is
attributable to the Shade/Allied acquisition. The remaining increase in gross
profit of approximately $1.6 million is attributable to the increased sales
from existing operations. Gross profit margin decreased to 19.6% for the three
months ended June 30, 1997 from 21.9% for the three months ended June 30, 1996.
The decrease in gross profit margin is primarily attributable to increases in
sales of relatively lower margin products, including those of Shade/Allied, in
the second quarter of 1997.
SG&A expenses for the three months ended June 30, 1997 increased $1.7
million, or 15.2%, to $12.9 million from $11.2 million for the three months
ended June 30, 1996. The acquisitions of Niagara and Shade/Allied resulted in
additional expense for the three months ended June 30, 1997 of approximately
$2.0 million which was partially offset by increased efficiencies. Management
fees and services expense for the second quarter of 1997 increased by
approximately $1.3 million as compared to the same quarter of 1996 due
primarily to a one year non-recurring consulting agreement with the former
president of Niagara.
Interest expense for the three months ended June 30, 1997 decreased $2.9
million to $9.6 million from $12.5 million for the three months ended June 30,
1996. The decrease is primarily attributable to the reduction in long-term
debt which resulted from the Company's initial public offering of common stock
in the third quarter of 1996. This decrease in indebtedness was partially
offset by increased borrowings required for the Shade/Allied acquisition and
for the increase in working capital.
The income tax provision for the three month period ended June 30, 1997
reflects an effective tax rate of 45.0% versus an effective tax rate of 43.1%
for the three month period ended June 30, 1996. The increase is attributable
primarily to the nondeductible goodwill amortization resulting from the Niagara
and Shade/Allied acquisitions.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net Sales for the six months ended June 30, 1997 increased by $82.8
million, or 35.3%, to $317.0 million from $234.2 million for the six months
ended June 30, 1996. Of this net sales increase, $52.7 million is related to
the acquisition of Niagara and $28.3 million is related to the acquisition of
Shade/Allied. The remaining increase of approximately $1.8 million is
attributable to existing operations.
Gross Profit for the six months ended June 30, 1997 increased by $15.3
million, or 31.6%, to $63.8 million from $48.5 million for the six months ended
June 30, 1996. Approximately $7.5 million of the increase in gross profit is
attributable to the acquisition of Niagara and $3.4 million is attributable to
the Shade/Allied acquisition. The remaining increase in gross profit of
approximately $4.5 million is primarily attributable to increased sales of
higher margin proprietary products from existing operations, particularly in
the first quarter of 1997. Gross profit margin decreased to 20.1% for the six
months ended June 30, 1997 from 20.7% for the six months ended June 30, 1996.
The decrease in gross profit margin is primarily attributable to the addition
of sales of the relatively lower margin Shade/Allied products during the first
half of 1997.
14
15
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
SG&A expenses for the six months ended June 30, 1997 increased $4.9
million, or 22.6%, to $26.6 million from $21.7 million for the six months ended
June 30, 1996. The acquisitions of Niagara and Shade/Allied resulted in
additional expense for the six months ended June 30, 1997 of approximately $4.3
million. Management fees and services expense for the first half of 1997
increased by approximately $2.6 million as compared to the first half of 1996
due primarily to a one year non-recurring consulting agreement with the former
president of Niagara.
Interest expense for the six months ended June 30, 1997 decreased $7.2
million to $17.8 million from $25.0 million for the six months ended June 30,
1996. The decrease is primarily attributable to the reduction in long-term
debt which resulted from the Company's initial public offering of common stock
in the third quarter of 1996. This decrease in indebtedness was partially
offset by increased borrowings required for the Shade/Allied acquisition and
for the increase in working capital.
The income tax provision for the six month period ended June 30, 1997
reflects an effective tax rate of 45.0% versus an effective tax rate of 43.2%
for the six month period ended June 30, 1996. The increase is attributable
primarily to the nondeductible goodwill amortization resulting from the Niagara
and Shade/Allied acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities for the six months ended June 30,
1997 of $32.5 million was primarily the net result of the following: (i) a
reduction of accounts receivable of $11.4 million as seasonal accounts
receivable were collected during the first part of the year, (ii) an increase
in inventories of $33.4 million due to a buildup in anticipation of seasonal,
promotional and new product sales in the second half of the year and (iii) a
reduction in accrued expenses of $25.6 million as annual customer volume
rebates and incentive compensation were paid during the first half of 1997.
Cash used in investing activities for the six months ended June 30, 1997 of
$60.1 million was due to the acquisition of Shade/Allied and purchases of
equipment.
Net cash provided by financing activities during the first half of 1997 was
$92.0 million and primarily resulted from repayment of $18.0 million in
financing outstanding under the accounts receivable credit facility and
borrowings of $110.5 million under the bank credit agreement to finance: (i)
such repayment, (ii) the acquisition of Shade/Allied, (iii) the purchases of
equipment and (iv) growth in working capital.
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 the accounts receivable facility and available cash on hand at June 30,
1997 of $1.6 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 $8 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.
15
16
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three and six months ended June 30, 1997 and
1996.
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 second quarter
of 1997, earnings per share would have been presented as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
Basic earnings per share $0.17 $(0.02) $0.32 $(0.02)
Diluted earnings per share $0.16 $(0.02) $0.30 $(0.02)
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.
16
17
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.
===============================================================================
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 Gregory M. 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
(a) Exhibits. The following Exhibits are filed herewith and made a
part hereof:
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Change of Control Agreement by and between the Company
and Kevin W. McAleer
10.2 Indemnification Agreement by and between the Company and
its officers and directors
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The following report on Form 8-K, which pertains to the acquisition of
Shade/Allied, was filed during the second quarter of 1997:
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.
17
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Pad & Paper Company and American Pad & Paper Company of Delaware, Inc. have
duly caused this report to be signed on August 14, 1997 on their behalf by the
undersigned thereunto duly authorized.
/s/ Kevin W. McAleer /s/ William W. Solomon, Jr.
- ---------------------------- -------------------------------
Kevin W. McAleer William W. Solomon, Jr.
Chief Financial Officer Vice President - Controller
Principal Financial Officer Principal Accounting Officer
18
19
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Change of Control Agreement by and between the Company
and Kevin W. McAleer
10.2 Indemnification Agreement by and between the Company and
its officers and directors
27.1 Financial Data Schedule