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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission file number 1-11803
AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 04-3164298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 Preston Road, Suite 700, Dallas, TX 75252-5613
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 733-6200
Commission file number 333-3006
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1512956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 Preston Road, Suite 700, Dallas, TX 75252-5613
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 733-6200
Indicate by check mark whether each Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
each Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
American Pad & Paper Company Yes X No
--- ---
American Pad & Paper Company of Delaware, Inc. Yes X No
--- ---
As of November 10, 1997, American Pad & Paper Company has 27,435,839
shares of Common Stock outstanding. As of November 10, 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 SEPTEMBER 30, 1997
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Important Explanatory Note........................................................................... 2
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 (unaudited) and December 31, 1996........................................ 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 1997 and 1996 (unaudited)..................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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 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)
September 30, December 31,
1997 1996
--------- ---------
ASSETS
Current assets:
Cash $ 674 $ 2,290
Accounts receivable 77,625 57,054
Inventories 157,882 105,667
Prepaid expense and other current assets 2,798 4,739
Deferred income taxes 11,188 10,754
--------- ---------
Total current assets 250,167 180,504
Property, plant and equipment 148,810 133,090
Intangible assets 237,581 192,367
Other 4,543 3,456
--------- ---------
Total assets $ 641,101 $ 509,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,657 $ 2,171
Accounts payable 67,440 44,932
Accrued expenses 40,309 55,041
Income taxes payable 7,950 503
--------- ---------
Total current liabilities 117,356 102,647
Long-term debt 368,547 269,812
Deferred income taxes 38,433 30,981
Other 1,260 1,378
--------- ---------
Total liabilities 525,596 404,818
--------- ---------
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 (186,049) (196,396)
--------- ---------
Total stockholders' equity 115,505 104,599
--------- ---------
Total liabilities and stockholders' equity $ 641,101 $ 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 Nine months ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Net sales $ 176,462 $ 173,606 $ 493,456 $ 407,813
Cost of sales 148,246 137,569 401,419 323,317
--------- --------- --------- ---------
Gross profit 28,216 36,037 92,037 84,496
Operating expenses:
Selling and marketing 5,425 4,945 15,323 12,165
General and administrative 9,463 7,581 26,205 22,051
Management fees and services 592 1,786 4,284 2,846
--------- --------- --------- ---------
Income from operations 12,736 21,725 46,225 47,434
Other income (expense):
Interest (9,851) (9,940) (27,646) (34,972)
Other income, net 112 408 233 1,179
--------- --------- --------- ---------
Income before income taxes and
extraordinary item 2,997 12,193 18,812 13,641
Provision for income taxes 1,350 5,268 8,465 5,893
--------- --------- --------- ---------
Income before extraordinary item 1,647 6,925 10,347 7,748
Extraordinary loss from extinguishment of
debt (net of income tax benefit of
$12,018 and $13,009, respectively) -- (18,695) -- (19,995)
--------- --------- --------- ---------
Net income (loss) $ 1,647 $ (11,770) $ 10,347 $ (12,247)
========= ========= ========= =========
Earnings per share:
Income before extraordinary item $ 0.06 $ 0.24 $ 0.35 $ 0.26
Extraordinary item -- (0.64) -- (0.67)
--------- --------- --------- ---------
Net income (loss) $ 0.06 $ (0.40) $ 0.35 $ (0.41)
========= ========= ========= =========
Weighted average common shares outstanding 29,389 29,351 29,382 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)
Nine months ended September 30,
-------------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 10,347 $ (12,247)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation 9,167 6,796
Amortization of goodwill and intangible assets 4,528 3,340
Extraordinary loss on extinguishment of debt -- 19,995
Amortization of debt issuance costs 1,900 3,167
Gain on sale of assets -- (49)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (9,649) (12,035)
Refundable income taxes -- 3,657
Inventories (47,703) 8,638
Prepaid expenses and other (798) (1,279)
Deferred income tax asset, net 6,935 12,795
Accounts payable 15,637 (5,457)
Accrued expenses (21,603) (2,852)
Other assets 2,139 1,646
Other liabilities (1,216) 677
--------- ---------
Net cash provided by (used in) operating activities (30,316) 26,792
--------- ---------
Cash flows from investing activities:
Purchase of business, including acquisition costs (50,666) (52,894)
Purchases of property and equipment (15,448) (7,630)
Proceeds from sale of assets 3,286 913
Net cash generated from assets held for sale -- 40,272
--------- ---------
Net cash used in investing activities (62,828) (19,339)
--------- ---------
Cash flows from financing activities:
Borrowings on credit agreement and long-term debt 99,400 192,773
Repayment of long-term debt (1,179) (351,213)
Repayment of old accounts receivable financing -- (45,000)
Proceeds from new accounts receivable financing 39,000 45,000
Repayment of new accounts receivable financing (46,000) (10,000)
Redemption premiums included in extraordinary loss -- (7,700)
Debt issuance costs -- (9,572)
Net proceeds from initial public offering -- 173,118
Other 307 --
--------- ---------
Net cash provided by (used in) financing activities 91,528 (12,594)
--------- ---------
Net decrease in cash (1,616) (5,141)
Cash, beginning of period 2,290 18,341
--------- ---------
Cash, end of period $ 674 $ 13,200
========= =========
See accompanying notes to condensed consolidated financial statements.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1997, and the
results of its operations and its cash flows for the nine and three month
periods ended September 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 $1,145 and goodwill of $41,450. 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
SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
September 30, December 31,
1997 1996
-------- --------
Accounts receivable - trade, excluding $47,000 and $54,000,
respectively, which are sold as part of a $60,000
accounts receivable financing facility $ 74,188 $ 56,431
Accounts receivable - other 4,424 2,839
Less allowance for doubtful accounts and reserves for
customers deductions, returns and cash discounts (987) (2,216)
-------- --------
$ 77,625 $ 57,054
======== ========
4. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1997 1996
-------- --------
Raw materials and semi-finished goods $ 53,787 $ 41,505
Work in process 5,077 4,695
Finished goods 97,260 58,607
-------- --------
156,124 104,807
LIFO reserve 1,758 860
-------- --------
$157,882 $105,667
======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, December 31,
1997 1996
-------- --------
Land $ 7,138 $ 6,749
Buildings 30,544 30,532
Machinery and equipment 108,880 96,790
Office furniture and fixtures 9,467 8,263
Construction in progress 15,889 5,060
-------- --------
171,918 147,394
Less accumulated depreciation and amortization 23,108 14,304
-------- --------
$148,810 $133,090
======== ========
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30, December 31,
1997 1996
-------- --------
Goodwill $191,786 $146,006
Intangible assets, principally tradenames 44,023 38,169
Debt issuance costs 18,377 18,369
-------- --------
254,186 202,544
Less accumulated amortization 16,605 10,177
-------- --------
$237,581 $192,367
======== ========
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
September 30, December 31,
1997 1996
------- -------
Acquisition integration costs $10,167 $12,695
Sales volume discounts 5,726 20,184
Salaries and wages 9,553 8,738
Interest 9,474 4,171
Other 5,389 9,253
------- -------
$40,309 $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
statement of operations.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 ended Nine months ended
September 30, September 30,
------------------- --------------------
1997 1996 1997 1996
------ ------ ------ ------
Basic earnings per share $0.06 $(0.43) $0.38 $(0.45)
Diluted earnings per share $0.06 $(0.40) $0.35 $(0.41)
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).
9. 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 September 30, 1997
and for the three and nine months then ended is presented. Shade/Allied was
acquired by Delaware on February 11, 1997 and, as a result, the nine month
period ended September 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
SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Condensed Consolidating Balance Sheet
September 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Eliminations total
--------- ---------- ---------- ------------ ---------
Assets
Current assets:
Cash $ 671 $ 3 $ -- $ -- $ 674
Accounts receivable 3,892 2,108 71,625 -- 77,625
Intercompany receivable (payable) 45,568 (12,496) (33,072) -- --
Inventories 150,978 6,904 -- -- 157,882
Prepaid expenses and other current
assets 2,732 36 30 -- 2,798
Deferred income taxes 11,188 -- -- -- 11,188
--------- --------- --------- --------- ---------
Total current assets 215,029 (3,445) 38,583 -- 250,167
Property, plant and equipment 134,592 14,218 -- -- 148,810
Investment in subsidiaries 90,969 -- -- (90,969) --
Intangible assets 191,056 46,145 380 -- 237,581
Other 4,543 -- -- -- 4,543
--------- --------- --------- --------- ---------
Total assets $ 636,189 $ 56,918 $ 38,963 $ (90,969) $ 641,101
========= ========= ========= ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,657 $ -- $ -- $ -- $ 1,657
Accounts payable 64,261 3,179 -- -- 67,440
Accrued expenses 38,576 1,613 120 -- 40,309
Income taxes payable 7,950 -- -- -- 7,950
--------- --------- --------- --------- ---------
Total current liabilities 112,444 4,792 120 -- 117,356
Long-term debt 368,547 -- -- -- 368,547
Deferred income taxes 38,433 -- -- -- 38,433
Other liabilities 1,260 -- -- -- 1,260
--------- --------- --------- --------- ---------
Total liabilities 520,684 4,792 120 -- 525,596
--------- --------- --------- --------- ---------
Stockholders' equity:
Common stock 274 30 10 (40) 274
Additional paid-in capital 301,280 50,588 35,399 (85,987) 301,280
Retained earnings (accumulated deficit) (186,049) 1,508 3,434 (4,942) (186,049)
--------- --------- --------- --------- ---------
Total stockholders' equity 115,505 52,126 38,843 (90,969) 115,505
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity $ 636,189 $ 56,918 $ 38,963 $ (90,969) $ 641,101
========= ========= ========= ========= =========
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Condensed Consolidating Statement of Operations
Three months ended September 30, 1997
- ------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Eliminations total
--------- ---------- ---------- --------- ---------
Net sales $ 176,462 $ 15,858 $ -- $ (15,858) $ 176,462
Cost of sales 148,246 15,858 -- (15,858) 148,246
--------- --------- --------- --------- ---------
Gross profit 28,216 -- -- -- 28,216
Operating expenses:
Selling and marketing 5,425 -- -- -- 5,425
General and administrative 9,782 -- (319) -- 9,463
Management fees and services 592 -- -- -- 592
--------- --------- --------- --------- ---------
Income from operations 12,417 -- 319 -- 12,736
Other income (expense)
Interest (9,821) -- (30) -- (9,851)
Other income, net 112 -- -- -- 112
--------- --------- --------- --------- ---------
Income before income taxes 2,708 -- 289 -- 2,997
Provision for income taxes 1,220 -- 130 -- 1,350
--------- --------- --------- --------- ---------
Income before equity in
earnings of subsidiaries 1,488 -- 159 -- 1,647
Equity in earnings of subsidiaries 159 -- -- (159) --
--------- --------- --------- --------- ---------
Net income $ 1,647 $ -- $ 159 $ (159) $ 1,647
========= ========= ========= ========= =========
Nine months ended September 30, 1997
- ------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Eliminations total
--------- ---------- ---------- --------- ---------
Net sales $ 465,155 $ 44,159 $ -- $ (15,858) $ 493,456
Cost of sales 376,482 40,795 -- (15,858) 401,419
--------- --------- --------- --------- ---------
Gross profit 88,673 3,364 -- -- 92,037
Operating expenses:
Selling and marketing 14,218 1,105 -- -- 15,323
General and administrative 27,577 752 (2,124) -- 26,205
Management fees and services 4,284 -- -- -- 4,284
--------- --------- --------- --------- ---------
Income from operations 42,594 1,507 2,124 -- 46,225
Other income (expense)
Interest (27,556) -- (90) -- (27,646)
Other income, net 233 -- -- -- 233
--------- --------- --------- --------- ---------
Income before income taxes 15,271 1,507 2,034 -- 18,812
Provision for income taxes 6,872 678 915 -- 8,465
--------- --------- --------- --------- ---------
Income before equity in
earnings of subsidiaries 8,399 829 1,119 -- 10,347
Equity in earnings of subsidiaries
1,948 -- -- (1,948) --
--------- --------- --------- --------- ---------
Net income $ 10,347 $ 829 $ 1,119 $ (1,948) $ 10,347
========= ========= ========= ========= =========
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 1997
---------------------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Eliminations total
-------- -------- -------- ------ --------
Net cash provided by (used in)
operating activities $(30,375) $ 51 $ 8 $ -- $(30,316)
Investing activities:
Purchase of business, including
acquisition costs (50,666) -- -- -- (50,666)
Purchases of property, plant and equipment (15,398) (50) -- -- (15,448)
Proceeds from sale of assets 3,286 -- -- -- 3,286
-------- -------- -------- ------ --------
Net cash used in investing activities (62,778) (50) -- -- (62,828)
-------- -------- -------- ------ --------
Financing activities:
Proceeds from long-term debt 99,400 -- -- -- 99,400
Repayment of long-term debt (1,179) -- -- -- (1,179)
Repayment of new accounts receivable
facility (7,000) -- -- -- (7,000)
Other 315 -- (8) -- 307
-------- -------- -------- ------ --------
Net cash provided by
(used in) financing activities 91,536 -- (8) -- 91,528
-------- -------- -------- ------ --------
Increase (decrease) in cash (1,617) 1 -- -- (1,616)
Cash, beginning of period 2,288 2 -- -- 2,290
-------- -------- -------- ------ --------
Cash, end of period $ 671 $ 3 $ -- $ -- $ 674
======== ======== ======== ====== ========
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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 nine months ended
September 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 September 30, Nine months ended September 30,
Income Statement Data 1997 1996 1997 1996
--------------------- ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Gross profit 16.0 20.8 18.7 20.7
Selling, general and administrative expenses (8.4) (7.2) (8.4) (8.4)
Management fees and services (0.4) (1.1) (0.9) (0.7)
------ ------ ------ ------
Income from operations 7.2 12.5 9.4 11.6
Interest expense, net (5.6) (5.7) (5.6) (8.6)
Other income 0.1 0.2 -- 0.3
------ ------ ------ ------
Income before income taxes and
extraordinary item 1.7 7.0 3.8 3.3
Provision for income taxes (0.8) (3.0) (1.7) (1.4)
------ ------ ------ ------
Income before extraordinary item 0.9 4.0 2.1 1.9
Extraordinary loss from extinguishment of debt -- (10.8) -- (4.9)
------ ------ ------ ------
Net income (loss) 0.9% (6.8)% 2.1% (3.0)%
====== ====== ====== ======
13
14
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net Sales for the three months ended September 30, 1997 increased by
$2.9 million, or 1.7%, to $176.5 million from $173.6 million for the three
months ended September 30, 1996. Of this net sales increase, $18.2 million is
related to the acquisition of Shade/Allied offset by a decrease in net sales
from existing operations of approximately $15.3 million primarily as the result
of reduced sales in the mass merchant and superstores customer channels.
Gross Profit for the three months ended September 30, 1997 decreased by $7.8
million, or 21.7%, to $28.2 million from $36.0 million for the three months
ended September 30, 1996. The acquisition of Shade/Allied resulted in an
increase in gross profit of approximately $2.4 million. The remaining decrease
in gross profit of approximately $10.2 million is attributable to the reduced
sales from existing operations. Gross profit margin decreased to 16.0% for the
three months ended September 30, 1997 from 20.8% for the three months ended
September 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, as well as a highly competitive pricing market
in the third quarter of 1997.
SG&A expenses for the three months ended September 30, 1997 increased
$2.4 million, or 18.9%, to $14.9 million from $12.5 million for the three
months ended September 30, 1996. This increase in SG&A expenses is primarily
attributable to the acquisition of Shade/Allied. Management fees and services
expense for the third quarter of 1997 decreased by approximately $1.2 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 September 30, 1997 of $9.9
million was approximately equal to interest expense for the three months ended
September 30, 1996.
The income tax provision for the three month period ended September
30, 1997 reflects an effective tax rate of 45.0% versus an effective tax rate
of 43.2% for the three month period ended September 30, 1996. The increase is
attributable primarily to the nondeductible goodwill amortization resulting
from the Shade/Allied acquisition.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Net Sales for the nine months ended September 30, 1997 increased by
$85.7 million, or 21.0%, to $493.5 million from $407.8 million for the nine
months ended September 30, 1996. Of this net sales increase, $52.7 million is
related to the acquisition of Niagara and $46.5 million is related to the
acquisition of Shade/Allied. The remaining decrease of approximately $13.5
million is attributable to existing operations and primarily is the result of
reduced sales in the mass merchant and superstores customer channels.
Gross Profit for the nine months ended September 30, 1997 increased by
$7.5 million, or 8.9%, to $92.0 million from $84.5 million for the nine months
ended September 30, 1996. Approximately $7.5 million of the increase in gross
profit is attributable to the acquisition of Niagara and $5.8 million is
attributable to the Shade/Allied acquisition. The remaining decrease in gross
profit of approximately $5.8 million is primarily attributable to reduced sales
from existing operations and competitive pricing pressures. Gross profit margin
decreased to 18.7% for the nine months ended September 30, 1997 from 20.7% for
the nine months ended September 30, 1996. The decrease in gross profit margin
is primarily attributable to the addition of sales of the relatively lower
margin Shade/Allied products and the highly competitive pricing environment
experienced in 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 nine months ended September 30, 1997 increased
$7.3 million, or 21.4%, to $41.5 million from $34.2 million for the nine months
ended September 30, 1996. The acquisitions of Niagara and Shade/Allied resulted
in additional expense for the nine months ended September 30, 1997 of
approximately $6.3 million. Management fees and services expense for the first
nine months of 1997 increased by approximately $1.4 million as compared to the
comparable period of 1996 due primarily to a one year non-recurring consulting
agreement with the former president of Niagara which commenced in the third
quarter of 1996.
Interest expense for the nine months ended September 30, 1997
decreased $7.3 million to $27.7 million from $35.0 million for the nine months
ended September 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 nine month period ended September 30,
1997 reflects an effective tax rate of 45.0% versus an effective tax rate of
43.2% for the nine month period ended September 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 nine months ended
September 30, 1997 of $30.3 million was primarily the net result of the
following: (i) cash provided from net income of $25.9 million after adjustment
for non-cash expenses, (ii) an increase in accounts receivable of $9.6 million
as a result of the increased sales volumes, (iii) an increase in inventories
net of increased accounts payable of $32.1 million due to a buildup in
anticipation of seasonal, promotional and new product sales and (iv) a
reduction in accrued expenses of $21.6 million as annual customer volume
rebates and incentive compensation were paid early in 1997.
Cash used in investing activities for the nine months ended September
30, 1997 of $62.8 million was due to the acquisition of Shade/Allied and
purchases of equipment.
Net cash provided by financing activities during the first nine months
of 1997 was $91.5 million and primarily resulted from repayment of $7.0 million
in financing outstanding under the accounts receivable credit facility and
borrowings of $99.4 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 September
30, 1997 of $.7 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 $2 million during the remainder of 1997, and
to meet working capital requirements.
As part of the Company's expected growth in the near term and in
connection with certain potential acquisitions which may be completed in the
next year, the Company has commenced discussions with its lenders to increase
the amount of borrowing capacity available under the revolving credit agreement
and to modify certain debt covenants. The Company has been given preliminary
oral indications the results of such discussions will be favorable. To the
extent that the Company does not obtain these changes to its existing revolving
credit agreement, the Company may not be in compliance with the required
minimum ratio of consolidated debt to EDITDA (earnings before interest, taxes,
depreciation and amortization) at the end of the fourth quarter of 1997. The
Company expects that its banking group will either waive such covenant or amend
the required ratio to an acceptable level for 1998. In the unlikely event that
neither a waiver or amendment is obtained, it may be necessary for the Company
to reduce its capital spending in 1998, alter its capital asset financing
programs in 1998 or lower its operating costs during 1998 in order to meet the
required ratio of consolidated debt to EDITDA.
Additionally, the ability of the Company to meet its debt service
obligations and reduce its total debt will be dependent 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 nine months ended September 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 by the number of outstanding
shares of common stock, as adjusted for common stock options. The
Company intends to implement the new accounting standard 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 third quarter of 1997, earnings per share would
have been presented as follows:
Three months ended September 30, Nine months ended September 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
Basic earnings per share $ 0.06 $ (0.43) $ 0.38 $ (0.45)
Diluted earnings per share $ 0.06 $ (0.40) $ 0.35 $ (0.41)
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 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
---------- ----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the third quarter
of 1997 and through the date of the filing of this report:
(1) Current Report on Form 8-K filed September 25, 1997 relating
to the Company's September 15, 1997 press release stating that
it expects to report significantly lower than expected
revenues and earnings for the third and fourth quarters of
1997.
(2) Current Report on Form 8-K filed November 12, 1997 relating
to the Company's November 3, 1997 press release announcing
the resignation of Kevin McAleer, Chief Financial Officer.
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 November 14, 1997 on their behalf by
the undersigned thereunto duly authorized.
/s/ William W. Solomon, Jr.
- ------------------------------------------
William W. Solomon, Jr.
Vice President - Controller
Principal Financial and Accounting Officer
17
18
Index to Exhibits
Exhibit No. Description of Exhibit
---------- ----------------------
27.1 Financial Data Schedule