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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)

(972) 733-6200
(Registrant's telephone number, including area code)

Indicate by check mark whether the 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 the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

As of August 12, 1998, American Pad & Paper Company had 27,724,045 shares of
Common Stock outstanding.

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2

AMERICAN PAD & PAPER COMPANY
QUARTERLY PERIOD ENDED JUNE 30, 1998

INDEX

PAGE NO.
--------

PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30,
1998 (unaudited) and December 31, 1997................ 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1997
(unaudited)........................................... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 (unaudited)... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)........................................... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
Item 3 Quantitative and Qualitative Disclosures About
Market Risk............................................ 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................. 19
Item 2 Changes in Securities and Use of Proceeds.......... 19
Item 3 Defaults Upon Senior Securities.................... 19
Item 4 Submission of Matters to a Vote of Security
Holders................................................ 19
Item 5 Other Information.................................. 19
Item 6 Exhibits and Reports on Form 8-K................... 20

2
3

PART 1 -- FINANCIAL INFORMATION

AMERICAN PAD & PAPER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

ASSETS
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------

Current assets:
Cash...................................................... $ 31,419 $ 4,855
Accounts receivable....................................... 37,596 74,203
Inventories............................................... 140,698 154,359
Refundable income taxes................................... 751 4,059
Prepaid expenses and other current assets................. 2,579 1,402
Deferred income taxes..................................... 24,740 11,992
--------- ---------
Total current assets.............................. 237,783 250,870
Property, plant and equipment............................... 153,350 151,390
Intangible assets........................................... 189,545 233,698
Other....................................................... 2,793 2,443
--------- ---------
Total assets...................................... $ 583,471 $ 638,401
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 287,918 $ 1,538
Accounts payable.......................................... 33,414 56,356
Accrued expenses.......................................... 39,796 40,157
Income taxes payable...................................... -- --
--------- ---------
Total current liabilities......................... 361,128 98,051
Long-term debt.............................................. 138,642 398,577
Deferred income taxes....................................... 39,477 39,477
Other....................................................... 1,569 1,630
--------- ---------
Total liabilities................................. 540,816 537,735
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 150 shares authorized, no shares issued
and outstanding, respectively.......................... -- --
Common stock, voting, $.01 par value, 75,000 shares
authorized, 27,724 and 27,436 shares issued and
outstanding, respectively.............................. 277 274
Additional paid-in capital................................ 301,287 301,279
Accumulated deficit....................................... (258,909) (200,887)
--------- ---------
Total stockholders' equity........................ 42,655 100,666
--------- ---------
Total liabilities and stockholders' equity........ $ 583,471 $ 638,401
========= =========

See accompanying notes to condensed
consolidated financial statements.

3
4

AMERICAN PAD & PAPER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- --------- ---------

Net sales............................ $146,724 $167,160 $308,319 $316,994
Cost of sales........................ 143,327 136,433 285,500 257,558
-------- -------- -------- --------
Gross profit....................... 3,397 30,727 22,819 59,436
Operating expenses:
Selling and marketing.............. 5,504 5,241 10,193 9,830
General and administrative......... 9,273 3,440 14,705 8,163
Loss on sales of accounts
receivable...................... 714 631 1,461 1,393
Amortization of intangible
assets.......................... 1,608 1,483 3,195 2,869
Write-down of intangible assets.... 41,000 -- 41,000 --
Management fees and services....... 530 1,837 1,060 3,692
-------- -------- -------- --------
Income (loss) from operations........ (55,232) 18,095 (48,795) 33,489
Other income (expense):
Interest........................... (11,063) (9,584) (21,806) (17,795)
Other income, net.................. (36) 49 15 121
-------- -------- -------- --------
Income (loss) before income taxes.... (66,331) 8,560 (70,586) 15,815
Provision for (benefit from) income
taxes.............................. (10,394) 3,852 (12,564) 7,115
-------- -------- -------- --------
Net income (loss).................... $(55,937) $ 4,708 $(58,022) $ 8,700
======== ======== ======== ========
Earnings (loss) per share (Basic).... $ (2.02) $ 0.17 $ (2.09) $ 0.32
======== ======== ======== ========
Earnings per share (Diluted)......... -- $ 0.16 -- $ 0.30
======== ========
Weighted average number of common
shares (Basic)..................... 27,724 27,436 27,710 27,436
======== ======== ======== ========
Weighted average number of common
shares (Diluted)................... -- 29,316 -- 29,369
======== ========

See accompanying notes to condensed
consolidated financial statements.

4
5

AMERICAN PAD & PAPER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
--------- ---------

Cash flows from operating activities:
Net income (loss)......................................... $(58,022) $ 8,700
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 6,578 6,341
Amortization of goodwill and intangible assets......... 3,195 2,869
Write-down of intangible assets........................ 41,000 --
Amortization of debt issuance costs.................... 1,808 1,265
Loss on sale of assets................................. 141 --
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable.................................. 48,607 11,371
Refundable income taxes.............................. 3,308 --
Inventories.......................................... 13,661 (33,440)
Prepaid expenses and other........................... (1,176) (1,119)
Income tax asset, net................................ (12,748) 5,983
Accounts payable..................................... (22,942) (10,003)
Accrued expenses..................................... (361) (25,628)
Other assets......................................... (806) 2,045
Other liabilities.................................... (62) (861)
-------- --------
Net cash provided by (used in) operating
activities...................................... 22,181 (32,477)
-------- --------
Cash flows from investing activities:
Purchase of business, including acquisition costs......... -- (50,559)
Purchases of property and equipment....................... (8,694) (9,578)
Proceeds from sale of assets.............................. 14 4
-------- --------
Net cash used in investing activities............. (8,680) (60,133)
-------- --------
Cash flows from financing activities:
Net borrowings on credit agreement and long-term debt..... 27,500 110,500
Repayment of long-term debt............................... (1,055) (1,091)
Repayment of accounts receivable financing................ (12,000) (18,000)
Debt issuance costs....................................... (1,393) --
Other..................................................... 11 550
-------- --------
Net cash provided by financing activities......... 13,063 91,959
-------- --------
Net increase (decrease) in cash............................. 26,564 (651)
Cash, beginning of period................................... 4,855 2,290
-------- --------
Cash, end of period......................................... $ 31,419 $ 1,639
======== ========

See accompanying notes to condensed
consolidated financial statements.

5
6

AMERICAN PAD & PAPER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND 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.
("AP&P Delaware") 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 used in connection with an accounts receivable based
credit facility. All significant intercompany balances have been eliminated.
Certain prior year amounts have been reclassified for comparative purposes.

Business

The Company is a leading manufacturer and marketer 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, and other paper-based office products) and Williamhouse (business
envelopes and seasonal greeting cards). 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.

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, 1997.

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, 1998 and the
results of its operations and its cash flows for the three month and six month
periods ended June 30, 1998 and 1997. The results of operations for the interim
periods presented are not necessarily indicative of results to be expected for
the full fiscal year.

American Pad & Paper Company of Delaware, Inc.

The Company's wholly owned subsidiary, AP&P Delaware, is the issuer of 13%
Senior Subordinated Notes ("Notes"). Terms of the Notes require, among other
matters, that AP&P Delaware provide annual audited and quarterly unaudited
financial statements to the holders of the notes. There are no material
differences between the financial statements of the Company and those of AP&P
Delaware. The composition of AP&P Delaware's stockholder's equity at June 30,
1998 consists of one hundred shares of $0.01 par value common stock, paid in
capital of $202,368 and an accumulated deficit of $159,713 and, in total, is
equal to the stockholders' equity of the Company.

6
7
AMERICAN PAD & PAPER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

2. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

JUNE 30, DECEMBER 31,
1998 1997
-------- ------------

Accounts receivable -- trade, excluding $48,000 and $60,000,
respectively, which are sold as part of a $60,000 accounts
receivable financing facility............................. $ 36,161 $ 72,975
Accounts receivable -- other................................ 3,685 4,022
Less allowance for doubtful accounts and reserves for
customers deductions, returns and cash discounts.......... (2,250) (2,794)
-------- --------
$ 37,596 $ 74,203
======== ========

3. INVENTORIES

Inventories consist of the following:

JUNE 30, DECEMBER 31,
1998 1997
-------- ------------

Raw materials and semi-finished goods....................... $ 40,613 $ 54,285
Work in process............................................. 5,937 5,600
Finished goods.............................................. 98,615 100,480
-------- --------
145,165 160,365
LIFO reserve................................................ (4,467) (6,006)
-------- --------
$140,698 $154,359
======== ========

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

JUNE 30, DECEMBER 31,
1998 1997
-------- ------------

Land........................................................ $ 7,058 $ 7,035
Buildings and leasehold improvements........................ 34,306 30,308
Machinery and equipment..................................... 129,187 115,168
Office furniture and fixtures............................... 11,272 9,818
Construction in progress.................................... 4,151 15,322
-------- --------
185,974 177,651
Less accumulated depreciation and amortization.............. 32,624 26,261
-------- --------
$153,350 $151,390
======== ========

7
8
AMERICAN PAD & PAPER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

5. INTANGIBLE ASSETS

Intangible assets consist of the following:

JUNE 30, DECEMBER 31,
1998 1997
-------- ------------

Goodwill.................................................... $149,936 $189,861
Intangible assets, principally tradenames................... 43,667 44,284
Debt issuance costs......................................... 19,761 18,369
-------- --------
213,364 252,514
Less accumulated amortization............................... 23,819 18,816
-------- --------
$189,545 $233,698
======== ========

At June 30, 1998, the Company wrote-down certain long-lived assets,
primarily goodwill and tradenames associated with its forms business
(principally Shade/Allied) by $41,000 to their estimated net realizable value,
as a result of the company's decision to exit this business in its current form.

6. ACCRUED EXPENSES

Accrued expenses consist of the following:

JUNE 30, DECEMBER 31,
1998 1997
-------- ------------

Acquisition integration costs............................... $ 6,863 $ 8,534
Sales volume discounts...................................... 9,601 11,634
Salaries and wages.......................................... 4,260 4,242
Interest.................................................... 6,308 5,927
Other....................................................... 12,764 9,820
------- -------
$39,796 $40,157
======= =======

7. BORROWINGS

In February 1998, the Company and its banking group agreed to an increase
in the size of the revolving credit agreement from $300.0 million to $330.0
million for a period of one year. After such time, the level of debt available
under such credit agreement will be reduced to $300.0 million. In December 1997,
February 1998 and April 1998, certain covenants in the credit agreement were
also modified as of the end of 1997 and for a period ending in February 1999.
Unless approved by the banking group, the Company will be restricted to $15.0
million in net capital expenditures for 1998 and will be restricted from any
acquisitions. The interest rate incurred by the Company will vary each quarter
in 1998 depending on the Company's consolidated debt to EBITDA ratio at the
beginning of each quarter. The Company paid fees and expenses of $1.4 million to
its banking group and lawyers in connection with the amendments to the credit
agreement.

As a result of the second quarter loss, the Company was in default of
certain EBITDA covenants at June 30, 1998. On June 30, 1998 the Company obtained
an amendment to its credit agreement waiving all defaults of its financial
covenants through July 31, 1998. On July 24, 1998, the waiver was extended
through September 30, 1998. The extension also amended the credit agreement to
provide for: changes in the voting procedures necessary to access the additional
$30.0 million available under the credit line and fees of $.3 million to be paid
to those banks approving the extension. The Company's banking group has not
accelerated the debt under the bank credit agreement. However, the Company will
be unable to meet the

8
9
AMERICAN PAD & PAPER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

EBITDA covenants for September 30, 1998 in the current bank credit agreement,
and it is unlikely that the Company will meet such existing EBITDA covenants for
future measurement dates. As a result $286,900 of the Company's long-term debt
has been reclassified as current portion of long-term debt at June 30, 1998 as
required by EITF 86-30. The Company is currently in negotiations with its bank
group to obtain a permanent amendment to its bank credit agreement. Such an
amendment would provide for attainable EBITDA and other covenants and extended
debt maturities. While the Company cannot predict with assurance the outcome of
such negotiations, the Company expects to obtain such a permanent amendment to
its bank credit agreement. Once such a permanent amendment is obtained, the
Company's bank debt will be reclassified to long-term debt on the balance sheet.

8. RELATED PARTY TRANSACTIONS

Effective March 31, 1998, the Company loaned $1.0 million to one of its
Directors on an interest bearing note receivable. This note accrues interest at
5.89%, compounded annually, and is due on March 31, 2001. 546,385 shares of the
Company's common stock owned by this Director and the options not yet exercised
by this Director secure this note.

9
10

AMERICAN PAD & PAPER COMPANY
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company is a leading manufacturer and marketer 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 and other paper-based products. Through its Ampad division, the
Company is among the largest suppliers of pads and other paper-based writing
products, filing supplies 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. Certain
factors, which have affected, and may affect prospectively, the operating
results of the Company are discussed below.

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.

Raw Material. The Company's principal raw material is paper. Certain
commodity grades utilized by the Company have shown considerable price
volatility since 1992. From May 1997 through October 1997, all but one of the
key commodity grades of paper utilized by the Company increased in cost between
6% and 18%. Due to strategic customer considerations and competitive market
conditions, the Company did not begin to recover a significant portion of the
increases in paper costs affecting both its divisions until December 1997. The
Company continued to implement sales price increases during the first half of
1998. Since October 1997, the key commodity grades of paper utilized by the
Company decreased in cost between 6% and 18%. Paper price volatility is expected
to continue to have an effect on net sales and cost of sales and there is no
assurance that the Company will not be materially affected by future
fluctuations in the price of paper. Fluctuations in paper prices can have an
effect on quarterly comparisons of the results of operations and financial
condition of the Company.

RECENT DEVELOPMENTS

Management Changes. The Company appointed James W. Swent, III as Executive
Vice President and Chief Financial Officer and David N. Pilotte as Vice
President and Corporate Controller on June 2 and 10, respectively. Mr. Swent was
previously Chief Executive Officer of Cyrix Corporation, a manufacturer of
microprocessors for the PC industry, until its merger with National
Semiconductor. In addition, he has held operations and financial executive
positions with a number of companies, including Northern Telecom, Rodime PLC and
Memorex. On July 8, 1998 the Company appointed Mr. Swent as Chief Executive
Officer and a member of its Board of Directors ("Board"). Mr. Swent replaced
Charles G. Hanson who retired from his position as Chairman and Chief Executive
Officer and director of the Company. Robert C. Gay, who had been a director of
American Pad & Paper since 1992 and who is a Managing Director of Bain Capital,
Inc., became Chairman of the Board. In addition, Paul B. Edgerly, a Managing
Director of Bain Capital, was added to the Board, increasing the Board size to
nine members. Also, Russel M. Gard stepped down as President and Chief Operating
Officer, but will continue his duties as Vice Chairman and a member of the
Board. Timothy E. Needham, who joined the Company in 1995 following the
acquisition of Williamhouse, was promoted to President and Chief Operating
Officer. On July 20, 1998, the Company appointed William L. Morgan as Executive
Vice President, Operations. Mr. Morgan has 35 years of progressive manufacturing
experience ranging from entrepreneurial start-ups to large scale multi-national
corporations including Northern Telecom, Texas Instruments, Memorex and Fujitsu.

10
11
AMERICAN PAD & PAPER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)

Company Initiatives/Restructuring. Under the leadership of new management,
the Company has begun a review of all operations with the challenge of
rebuilding market share, reducing debt and returning the Company to
profitability. On July 15, 1998, the Board approved the Company's exit from the
forms business in its current form which has produced unfavorable margins. As
part of the review process, the Company retained the management consulting firm
of Bain & Company and the investment banking firm of Goldman, Sachs & Company to
assist the Company in evaluating its current position in the marketplace and in
setting the Company's long term strategic direction. Goldman Sachs will explore
external strategic and financial alternatives to maximize shareholder value.
Bain & Company will work closely with the Company's customers and suppliers to
evaluate core strengths and identify opportunities for improvement. They will
also assist the Company to restructure manufacturing to best serve each of the
Company's markets. Significant restructuring charges are expected for the three
months ending September 30, 1998.

Covenant Violations/Negotiation to Modify Agreement. As a result of the
second quarter loss, the Company was in default of certain covenants based on
EBITDA levels at June 30, 1998. On June 30, 1998 the Company obtained an
amendment to its credit agreement waiving all defaults of its financial
covenants through July 31, 1998. On July 24, 1998, the waiver was extended
through September 30, 1998. The extension also amends the credit agreement to
provide for: changes in the voting procedures necessary to access the additional
$30.0 million available under the credit line and fees of $.3 million to be paid
to those banks approving the extension. The Company's banking group has not
accelerated the debt under the bank credit agreement. However, the Company will
be unable to meet the EBITDA covenants for September 30, 1998 in the current
bank credit agreement, and it is unlikely that the Company will meet such
existing EBITDA covenants for future measurement dates. As a result, $286,900 of
the Company's long-term debt has been reclassified as current portion of
long-term debt at June 30, 1998 as required by EITF 86-30. The Company is
currently in negotiations with its bank group to obtain a permanent amendment to
its bank credit agreement with attainable EBITDA and other covenants. While the
Company cannot predict with assurance the outcome of such negotiations, the
Company expects to obtain such a permanent amendment to its bank credit
agreement. Once such a permanent amendment is obtained, the Company's bank debt
will be reclassified to long-term debt on the balance sheet.

11
12
AMERICAN PAD & PAPER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)

RESULTS OF OPERATIONS

The following table summarizes the Company's historical results of
operations as a percentage of net sales for the three months and six months
ended June 30, 1998 and 1997. The Company's historical results of operations for
each of these periods are significantly affected by the results for
Shade/Allied, which was acquired on February 11, 1997.

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------

Income Statement Data
Net sales......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................... 97.7% 81.6% 92.6% 81.3%
------ ------ ------ ------
Gross profit................... 2.3% 18.4% 7.4% 18.7%
Operating expenses:
Selling and marketing.......... 3.8% 3.1% 3.3% 3.1%
General and administrative..... 6.3% 2.1% 4.8% 2.6%
Loss on sale of accounts
receivable................... 0.5% 0.4% 0.5% 0.4%
Amortization of intangible
assets....................... 1.1% 0.9% 1.0% 0.9%
Write-down of intangible
assets....................... 27.9% 0.0% 13.3% 0.0%
Management fees and services... 0.4% 1.1% 0.3% 1.2%
------ ------ ------ ------
Income (loss) from operations..... (37.7)% 10.8% (15.8)% 10.5%
Other income (expense):
Interest....................... (7.5)% (5.7)% (7.1)% (5.6)%
------ ------ ------ ------
Income (loss) before income
taxes.......................... (45.2)% 5.1% (22.9)% 4.9%
Provision for (benefit from)
income taxes................... (7.1)% 2.3% (4.1)% 2.2%
------ ------ ------ ------
Net income (loss)................. (38.1)% 2.8% (18.8)% 2.7%
====== ====== ====== ======

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

Net Sales for the three months ended June 30, 1998 decreased by $20.5
million, or 12.3%, to $146.7 million from $167.2 million for the three months
ended June 30, 1997. This net sales decrease is comprised of a $11.0 million
reduction in sales spread evenly among continuous forms, envelopes and writing
products and a $9.5 million increase in customer incentives. The lower sales are
due to lower volumes caused by temporarily reduced orders resulting from major
customer inventory reductions, partially offset by higher prices. The increased
customer incentives are due to a changing product mix and additional rebate
programs caused by more competitive pricing.

Gross Profit for the three months ended June 30, 1998 decreased by $27.3
million, or 88.9%, to $3.4 million from $30.7 million for the three months ended
June 30, 1997. Gross profit margin decreased to 2.3% for the three months ended
June 30, 1998 from 18.4% for the three months ended June 30, 1997. The decrease
in gross profit margin is primarily attributable to higher unit production costs
due to underutilized capacity resulting from the Company's efforts to reduce its
inventory, a reduction in selling margins due to competitive pricing pressures,
and a change in product mix, particularly the ongoing sales of continuous forms
at unfavorable margins. In addition, the second quarter of 1998 includes
approximately $7.5 million of charges resulting from reevaluating certain
inventories based on changes in current market conditions and accruals for
workers' compensation and property tax.

12
13
AMERICAN PAD & PAPER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)

Selling and marketing expenses for the three months ended June 30, 1998
increased to $5.5 million, or 3.8% of sales from $5.2 million or 3.1% for the
three months ended June 30, 1997. The increase of $0.3 million was comprised
primarily of severance costs.

General and administrative expenses for the three months ended June 30,
1998 increased to $9.3 million from $3.4 million for the three months ended June
30, 1997, an increase of $5.9 million. This increase is primarily attributable
to the Company's reevaluation of certain assets, which resulted in $1.7 million
of current charges for additional allowance for doubtful accounts stemming from
customer deductions and one time severance costs and litigation costs of $1.3
million. The remainder of the increase is attributable to one time charges
associated with centralizing certain functions in Dallas.

Losses on sales of accounts receivable for the three months ended June 30,
1998 increased to $0.7 million from $0.6 million for the three months ended June
30, 1997 due to a higher average level of accounts receivable sold to the third
party trust in the first half of 1998, partially offset by a slightly lower
average effective interest rate.

Goodwill and intangible asset amortization expense for the three months
ended June 30, 1998 increased to $1.6 million from $1.5 million for the three
months ended June 30, 1997, an increase of $0.1 million.

Write-down of Intangible Assets expense of $41.0 million for the three
months ended June 30, 1998 reflects a write-off of goodwill and a write-down of
intangible assets associated with the Shade/Allied continuous forms business
resulting from the Company's decision to exit the forms business in its current
form.

Management fees and services expense for the three months ended June 30,
1998 amounted to $0.5 million as compared to $1.8 million for the three months
ended June 30, 1997. The change in management fees is due primarily to a one
year non-recurring consulting agreement with the former president of Niagara,
which expired June 30, 1997.

Interest expense for the three months ended June 30, 1998 increased to
$11.1 million from $9.6 million for the three months ended June 30, 1997, an
increase of $1.5 million. Of this increase, $0.7 million is attributable to
increased debt levels, $0.4 million is attributable to increased interest rates
and $0.4 million is attributable to the amortization of fees paid in connection
with amendments to the credit agreement obtained in February 1998 and other
costs.

The income tax provision for the three month period ended June 30, 1998
reflects an effective tax rate of 15.7% versus an effective tax rate of 45.0%
for the three month period ended June 30, 1997. Due to the expected effect of
nondeductible expenses during 1998, primarily goodwill amortization, the Company
lowered its effective income tax rate in the second quarter of 1998 to an annual
effective rate of 17.8%.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

Net Sales for the six months ended June 30, 1998 decreased by $8.7 million,
or 2.7%, to $308.3 million from $317.0 million for the six months ended June 30,
1997. This net sales decrease is comprised of a $4.2 million increase in sales
offset by a $12.6 million increase in customer incentives and a $0.3 million
increase in cash discounts. The net sales increase, is primarily attributable
($3.3 million) to owning Shade/ Allied for the full first half of 1998 versus
only four and a half months in the same period in 1997. The increased customer
incentives are due to a changing product mix and additional rebate programs
caused by more competitive pricing.

Gross Profit for the six months ended June 30, 1998 decreased by $36.6
million, or 61.6%, to $22.8 million from $59.4 million for the six months ended
June 30, 1997. Gross profit margin decreased to 7.4% for the six months ended
June 30, 1998 from 18.7% for the six months ended June 30, 1997. The
13
14
AMERICAN PAD & PAPER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)

decrease in gross profit margin is primarily attributable to higher unit
production costs due to underutilized capacity resulting from the Company's
efforts to reduce its inventory, a reduction in selling margins due to
competitive pricing pressures, and a change in product mix, particularly the
ongoing sales of continuous forms at unfavorable margins. In addition, the
second half of 1998 includes approximately $7.5 million of charges resulting
from reevaluating certain inventories based on changes in current market
conditions and accruals for workers' compensation and property tax.

Selling and marketing expenses for the six months ended June 30, 1998
increased to $10.2 million, or 3.3% of sales, from $9.8 million, or 3.1% of
sales, for the six months ended June 30, 1997. The increase of $0.4 million, or
0.1% of sales was comprised primarily of severance costs.

General and administrative expenses for the six months ended June 30, 1998
increased to $14.7 million from $8.2 million for the six months ended June 30,
1997, an increase of $6.5 million. This increase is primarily attributable to
the Company's reevaluation of certain assets which resulted in $1.7 million of
current charges for additional allowance for doubtful accounts stemming from
customer deductions and one time severance and litigation costs of $1.3 million.
Of the remainder of the increase, $0.1 million is attributable to owning
Shade/Allied for the full first half of 1998 versus only four and a half months
in the same period in 1997 and one time charges associated with centralizing
certain functions in Dallas.

Losses on sales of accounts receivable for the six months ended June 30,
1998 increased to $1.5 million from $1.4 million for the six months ended June
30, 1997 due to a higher average interest rate, partially offset by a lower
average level of accounts receivable sold to the third party trust in the first
half of 1998.

Goodwill and intangible asset amortization expense for the six months ended
June 30, 1998 increased to $3.2 million from $2.9 million for the six months
ended June 30, 1997, an increase of $0.3 million, due primarily to six months
amortization of goodwill associated with the acquisition of Shade/Allied for the
six months ended June 30, 1998 as compared to four and a half months for the six
months ended June 30, 1997.

Write-down of Intangible Assets expense of $41.0 million for the six months
ended June 30, 1998 reflects a write-off of goodwill and a write-down of
intangible assets associated with the Shade/Allied continuous forms business
resulting from the Company's decision to exit the forms business in its current
form.

Management fees and services expense for the six months ended June 30, 1998
amounted to $1.1 million as compared to $3.7 million for the six months ended
June 30, 1997. The change in management fees is due primarily to a one-year
non-recurring consulting agreement with the former president of Niagara, which
expired June 30, 1997.

Interest expense for the six months ended June 30, 1998 increased to $21.8
million from $17.8 million for the six months ended June 30, 1997, an increase
of $4.0 million. Of this increase, $2.6 million is attributable to increased
debt levels, $0.9 million is attributable to increased interest rates and $0.5
million is attributable to amortization of fees paid in connection with
amendments to the credit agreement obtained in February 1998 and other costs.

The income tax provision for the six month period ended June 30, 1998
reflects an effective tax rate of 17.8% versus an effective tax rate of 45.0%
for the six month period ended June 30, 1997. Due to the expected effect of
nondeductible expenses during 1998, primarily goodwill amortization, the Company
lowered its effective income tax rate in 1998.

KNOWN TRENDS AND SEASONALITY

The Company does experience some seasonality in its business operations.
During the Company's third and fourth quarters, net sales tend to be higher than
in the first and second quarters due to higher product sales of back-to-school,
seasonal greeting card and tax filing products.
14
15
AMERICAN PAD & PAPER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)

The Company's Ampad division sells primarily to fast growing customers such
as office products superstores, mass merchants and national contract stationers.
Such customers periodically adjust the levels of inventory in the retail
distribution channels, either in retail stores or in distribution centers. The
Company has determined that lower than expected sales will occur during the
quarters in which such downward adjustments are made. The Company is not able to
predict the future effect of such adjustments; however, it is likely that its
retail customers will continue to adjust inventory levels in future quarters.

The Company's gross profit is directly affected by, among other factors,
the mix of products sold. Based on the Company's current product categories, the
Company's gross profit will be negatively or positively affected as the actual
product sales mix changes.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the six months ended June 30,
1998 was $22.2 million as compared to net cash used by operating activities for
the six months ended June 30, 1997 of $32.5 million. This increase is primarily
the net result of the following: (i) cash used by the net loss of $5.3 million
after adjustment for non-cash expenses, (ii) a decrease in accounts receivable
of $48.6 million as a result of collection of year end receivable balances and
improving days sales outstanding in receivables, (iii) a decrease in inventories
of $13.7 million, (iv) a reduction of accounts payable of $22.9 million, and (v)
a net change in other assets and liabilities of $11.9 million.

Cash used in investing activities for the six months ended June 30, 1998
and 1997 was $8.7 million and $60.1 million, respectively. The first half 1998
use was due to the purchase of equipment, principally production equipment. The
first half of 1997 use was due to the Shade/Allied acquisition of $50.5 million
and purchases of equipment of $9.6 million.

Net cash provided by financing activities during the first six months of
1998 and 1997 was $13.1 million and $92.0 million, respectively. Net cash
provided during the first half of 1998 resulted from the net of the repayment of
$12.0 million in financing outstanding under the accounts receivable credit
facility, payment of fees in connection with amendments to the bank credit
agreement of $1.4 million and borrowings of $27.5 million under the bank credit
agreement. During the first half of 1997, the Company borrowed $110.5 million to
finance (i) repayment of $18.0 million in notes outstanding under its accounts
receivable credit facility, (ii) the acquisition of Shade/Allied, (iii) the
purchases of equipment and (iv) its working capital needs.

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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)

September 30, 1998. The extension also amended the credit agreement to provide
for: changes in the voting procedures necessary to access the additional $30.0
million available under the credit line and fees of $.3 million to be paid to
those banks approving the extension. The Company's banking group has not
accelerated the debt under the bank credit agreement. However, the Company will
be unable to meet the EBITDA covenants for September 30, 1998 in the current
bank credit agreement and it is unlikely that the Company will meet such
existing EBITDA covenants for future measurement dates. As a result, $286,900 of
the Company's long-term debt has been reclassified as current portion of
long-term debt at June 30, 1998 as required by EITF 86-30. The Company is
currently in negotiations with its bank group to obtain a permanent amendment to
its bank credit agreement with attainable EBITDA and other covenants and
extended debt maturities. While the Company cannot predict with assurance the
outcome of such negotiations, the Company expects to obtain such a permanent
amendment to its bank credit agreement. Once such a permanent amendment is
obtained, the Company's bank debt will be reclassified to long-term debt on the
balance sheet.

The ability of the Company to meet its debt service obligations and reduce
its total debt will be dependent upon obtaining the previously described
permanent amendment to its bank credit agreement and the future performance of
the Company and its subsidiaries. In turn, such performance will be subject to
general economic conditions and to financial, business and other factors,
including factors beyond the Company's control. Should the Company not be able
to obtain such an amendment, the Company would explore other financing
alternatives. These alternatives include but are not limited to a refinancing of
its bank debt, raising new private or public debt, raising additional public
equity capital, reducing the level of capital expenditures, reducing operating
costs and selling certain assets. While the Company expects that it will obtain
the previously described amendment to the bank credit agreement and/or that
other financing will be available and that there will be sufficient funds for
1999 operations, there can be no assurance as to the ultimate outcome of the
bank agreement amendment or financing discussions.

Management believes that, based upon cash on hand of $31.4 million at June
30, 1998, estimates of current and future operations, and other available
sources of funds including borrowings under the bank credit agreement and the
accounts receivable facility, its finances will be adequate for 1998 to make
required payments of principal and interest on the Company's indebtedness, to
fund anticipated capital expenditures of approximately $7 million during the
remainder of 1998, and to meet working capital requirements.

INFLATION

The Company believes that inflation has not had a material impact on its
results of operations for the six months ended June 30, 1998 and 1997.

RECENTLY ISSUED ACCOUNTING STANDARDS

The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 98-5, which is effective for fiscal years commencing after
December 15, 1998. SOP 98-5, Reporting on the Costs of Start-up Activities,
prescribes that start-up costs, including organization costs, should be expensed
as incurred. The SOP states that initial application should be reported as a
cumulative effect of a change in accounting principle. The Company will adopt
this SOP for its fiscal year ending December 31, 1999. Assuming an effective tax
rate of 42.5% for the fiscal year ending December 31, 1999, the Company will
report a charge of $.4 million (net of tax benefit of $.3 million) in the first
quarter of 1999.

16
17
AMERICAN PAD & PAPER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)

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.

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 grievances
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 1998 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.

17
18
AMERICAN PAD & PAPER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As part of its Bank Credit Agreement, the Company was required to purchase
an interest rate cap for a nominal portion of the outstanding debt. The premium
paid for the interest rate cap agreement is amortized as interest expense over
the term of the agreement. The amounts concerned are immaterial to both the
financial position and operations of the Company.

18
19

AMERICAN PAD & PAPER COMPANY

PART II OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

Between March 10, 1998 and April 11, 1998, three complaints were filed in
the United States District Court for the Northern District of Texas. The
Company, certain of its officers and directors and certain of the underwriters
and other entities involved in the Company's initial public offering were named
as defendants in the first two complaints. These complaints were filed by
stockholders who claim to represent a purported class of stockholders who
acquired shares of the Company's common stock between July 2, 1996 and December
17, 1997. The complaints seek unspecified damages and other relief under the
federal securities laws based on allegations that the Company made omissions and
misleading disclosures in public reports and press releases and to securities
analysts during 1996 and 1997 concerning the Company's financial condition, its
future business prospects and the impact of various acquisitions. These two
lawsuits were consolidated on July 2, 1998. The Company believes that it has
meritorious defenses to plaintiff's claims and intends to vigorously defend the
action.

The third complaint, which was filed on behalf of a purported class of
stockholders who acquired shares of the Company's common stock between February
18, 1997 and December 17, 1997 and named the Company and certain of its officers
as defendants, was dismissed on June 29, 1998.

ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Shareholders on April 28, 1998. 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 -- Russell M. Gard, Herbert
M. Kohn, and Marc B. Walpow............................ 23,012,364 1,981,633
Ratification of Price Waterhouse LLP as independent
auditors for the Company............................... 24,947,250 46,747

ITEM 5 OTHER INFORMATION

On July 31, 1998, the Company issued a press release announcing that it had
executed an amendment with its banking group which waives all the defaults of
the financial covenants of its loan agreement through September 30, 1998. This
press release is incorporated herein as Exhibit 99.09. This amendment is
incorporated herein as Exhibit 4.20.

19
20
AMERICAN PAD & PAPER COMPANY

PART II OTHER INFORMATION -- (CONTINUED)

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
----------- ----------------------

4.18 -- Fourth Amendment to the Credit Agreement, dated as of
April 6, 1998, among the Company, WR Acquisition, Inc.,
American Pad & Paper Company of Delaware, Inc., various
Lending Institutions, Bank of Tokyo -- Mitsubishi Trust
Company, Bank One, Texas, N.A., The Bank of Nova Scotia
and the First National Bank of Boston, as Co-Agents and
Bankers Trust Company, as Agent.
4.19 -- Fifth Amendment to the Credit Agreement, dated as of June
30, 1998 among the Company, WR Acquisition, Inc., AP & P
Delaware, various Lending Institutions, Bank of
Tokyo -- Mitsubishi Trust Company, Bank One, Texas, N.A.,
The Bank of Nova Scotia and the First National Bank of
Boston, as Co-Agents and Bankers Trust Company, as Agent.
4.20 -- Sixth Amendment to the Credit Agreement, dated as of July
24, 1998 among the Company, WR Acquisition, Inc., AP & P
Delaware, various Lending Institutions, Bank of
Tokyo -- Mitsubishi Trust Company, Bank One, Texas, N.A.,
The Bank of Nova Scotia and the First National Bank of
Boston, as Co-Agents and Bankers Trust Company, as Agent.
10.29 -- Release Agreement with Charles Hanson, III
10.30 -- Severance Agreement with Charles Hanson, III
10.31 -- Release Agreement with Russell Gard
10.32 -- Severance Agreement with Russell Gard
27.02 -- Financial Data Schedule
99.09 -- Press Release Regarding Waiver extension on Bank
Covenants

(b) Reports on Form 8-K.

The following reports on Form 8-K were filed during the second quarter of
1998 and through the date of the filing of this report:

(1) Current Report on Form 8-K filed May 21, 1998 relating to the
Company's May 7, 1998 press release reporting the Company's first quarter
1998 results.

(2) Current Report on Form 8-K filed June 17, 1998 relating to the
Company's June 2, and June 10, 1998 press releases announcing the
appointments of James W. Swent, III as Executive Vice President and Chief
Financial Officer, and David N. Pilotte as Vice President and Controller.

(3) Current Report on Form 8-K filed July 22, 1998, relating to the
Company's July 9, July 16 and July 20, 1998 press releases . A press
release on July 9, 1998 announced the appointment of James W. Swent, III as
Chief Executive Officer and Board member, and the appointment of Robert C.
Gay as Chairman of the Board. A press release on July 9, 1998 announced
that the Company had received a 30 day waiver to its current lending
agreement and that based on preliminary second quarter results, the Company
was in violation of certain financial covenants of the agreement. A press
release on July 16, 1998 reported the Company's second quarter 1998
results. A press release on July 20, 1998 announced the appointment of
William L. Morgan as Executive Vice President, Operations.

20
21
AMERICAN PAD & PAPER COMPANY

PART II OTHER INFORMATION -- (CONTINUED)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
American Pad & Paper Company has duly caused this report to be signed on August
14, 1998 on their behalf by the undersigned thereunto duly authorized.

/s/ JAMES W. SWENT, III /s/ DAVID N. PILOTTE
- ----------------------------------------------------- -----------------------------------------------------
James W. Swent, III David N. Pilotte
Chief Executive Officer and Vice President and Corporate Controller
Chief Financial Officer Principal Accounting Officer
Principal Financial Officer

21
22

INDEX TO EXHIBITS

EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------