-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IvRgJ1QwFxOQs9vt0TLpe+UVap/vPauQk/1c2XmU4/rQnOG6Mgef5FrpyX8jOm1g EOVXtkiWooF1Z8DtPJC1lw== 0000950130-96-002127.txt : 19960607 0000950130-96-002127.hdr.sgml : 19960607 ACCESSION NUMBER: 0000950130-96-002127 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960606 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PAD & PAPER CO CENTRAL INDEX KEY: 0000005588 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 043164298 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04000 FILM NUMBER: 96577362 BUSINESS ADDRESS: STREET 1: 17304 PRESTON D STREET 2: STE 700 CITY: DALLAS STATE: TX ZIP: 75252 BUSINESS PHONE: 2147336200 MAIL ADDRESS: STREET 1: 17304 PRESTON ROAD STREET 2: SUITE 700 CITY: DALLAS STATE: TX ZIP: 75252 S-1/A 1 AMENDMENT NO. 1 TO S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1996 REGISTRATION NO. 333-4000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- AMERICAN PAD & PAPER COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 2678 04-3164298 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) 17304 PRESTON ROAD, SUITE 700 DALLAS, TX 75252-5613 (214) 733-6200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- CHARLES G. HANSON III CHIEF EXECUTIVE OFFICER AMERICAN PAD & PAPER COMPANY 17304 PRESTON ROAD, SUITE 700 DALLAS, TX 75252-5613 (214) 733-6200 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES OF ALL COMMUNICATIONS, INCLUDING COMMUNICATIONS SENT TO AGENT FOR SERVICE, SHOULD BE SENT TO: LANCE C. BALK FRANCIS J. MORISON KIRKLAND & ELLIS DAVIS POLK & WARDWELL 153 E. 53RD STREET 450 LEXINGTON AVENUE NEW YORK, NY 10022 NEW YORK, NY 10017 (212) 446-4800 (212) 450-4000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list of the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AMERICAN PAD & PAPER COMPANY CROSS REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF PART I OF FORM S-1.
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS ----------------------- --------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus..... Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Page of Prospectus..... Inside Front Cover Page of Prospectus; Outside Back Cover Page of Prospectus; Additional Information 3. Summary Information and Risk Factors...................... Prospectus Summary; Risk Factors 4. Use of Proceeds............... Prospectus Summary; Use of Proceeds; Management's Discussion and Analysis of Financial Condition and Results of Operations 5. Determination of Offering Price........................ Outside Front Cover Page of Prospectus; Underwriters 6. Dilution...................... Dilution 7. Selling Security Holders...... Principal and Selling Stockholders 8. Plan of Distribution.......... Outside Front Cover Page of Prospectus; Underwriters 9. Description of Securities to Be Registered................ Prospectus Summary; Dividend Policy; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel...................... Legal Matters 11. Information with Respect to the Registrant............... Outside Front Cover Page of Prospectus; Prospectus Summary; Risk Factors; The Company; Use of Proceeds; Dividend Policy; The Recapitalization; Capitalization; Dilution; Selected Historical Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Industry; Business; Management; Principal and Selling Stockholders; Certain Relationships and Related Transactions; Description of Capital Stock; Legal Matters; Experts; Index to Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................. Not Applicable
EXPLANATORY NOTE This Registration Statement contains two forms of prospectus; one to be used in connection with a United States offering (the "U.S. Prospectus") and one to be used in a concurrent international offering (the "International Prospectus"). The two prospectuses will be identical in all respects except for the front cover pages. The form of the U.S. Prospectus is included herein and the form of the front cover page of the International Prospectus follows the front cover page of the U.S. Prospectus. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued June 5, 1996 15,625,000 Shares American Pad & Paper Company COMMON STOCK ---------- OF THE 15,625,000 SHARES OF COMMON STOCK OFFERED HEREBY, 12,500,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 3,125,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." OF THE 15,625,000 SHARES OF COMMON STOCK OFFERED HEREBY, 12,500,000 SHARES ARE BEING SOLD BY THE COMPANY AND 3,125,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $15 AND $17. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. ---------- THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE, SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, UNDER THE SYMBOL "AGP." ---------- SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------- PRICE $ A SHARE ----------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS -------- -------------- ----------- ------------ Per Share........................................... $ $ $ $ Total(3)............................................ $ $ $ $
- ----- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (2) Before deducting expenses payable by the Company estimated at $1,300,000. (3) The Selling Stockholders have granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 2,343,750 additional shares at the price to public less underwriting discounts and commissions for the purpose of covering over- allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriters." ---------- The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to the approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1996 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ---------- MORGAN STANLEY & CO. INCORPORATED ALEX. BROWN & SONS INCORPORATED BT SECURITIES CORPORATION CS FIRST BOSTON GOLDMAN, SACHS & CO. SALOMON BROTHERS INC WASSERSTEIN PERELLA SECURITIES, INC. , 1996 [PICTURES TO COME] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE ("NYSE"), IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THE OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. 2 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ---------------- No action has been or will be taken in any jurisdiction by the Company, any Selling Stockholder or any Underwriter that would permit a public offering of the Common Stock or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons into whose possession this Prospectus comes are required by the Company and the Underwriters to inform themselves about, and to observe any restrictions as to, the offering of the Common Stock and the distribution of this Prospectus. ---------------- Ampad(R), Century(TM), Embassy(R), Evidence(R), Gold Fibre(R), Huxley(TM), Karolton(R), Kent(TM), Peel & Seel(R), SCM(TM), World Fibre(TM) and Williamhouse(TM) are trademarks of the Company. ---------------- Until , 1996 (25 days after commencement of the Offering), all dealers effecting transactions in the Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligations of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 4 Risk Factors........................ 11 The Company......................... 15 Use of Proceeds..................... 15 Dividend Policy..................... 16 The Recapitalization................ 17 Capitalization...................... 18 Dilution............................ 19 Selected Historical Consolidated Financial Data..................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22 Industry............................ 30 Business............................ 32 Management.......................... 42
PAGE ---- Principal and Selling Stockholders...................... 51 Certain Relationships and Related Transactions...................... 53 Description of Certain Indebtedness...................... 54 Description of Capital Stock....... 57 Shares Eligible for Future Sale.... 60 Certain Material Federal Income Tax Consequences for Non-United States Holders.................... 62 Underwriters....................... 65 Experts............................ 68 Legal Matters...................... 69 Additional Information............. 69 Unaudited Pro Forma Financial Data.............................. 70 Index to Financial Statements...... F-1
3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by more detailed information and financial statements and notes thereto included elsewhere in this Prospectus. Unless otherwise stated, the information contained in this Prospectus (i) assumes no exercise of the U.S. Underwriters' over-allotment option, (ii) reflects a 8.1192-for-one stock split of the existing Common Stock and Common Stock equivalents and (iii) reflects the conversion of all shares of preferred stock and preferred stock equivalents into shares of Common Stock and Common Stock equivalents, respectively. See "The Recapitalization." Unless otherwise stated in this Prospectus, references to (a) the "Company" shall mean American Pad & Paper Company, its consolidated subsidiaries and their respective predecessors; (b) "Williamhouse" shall mean the operations of Williamhouse--Regency of Delaware, Inc. prior to its acquisition by the Company on October 31, 1995 (the "Acquisition"); and (c) "Ampad" shall mean Ampad Corporation, the former operating subsidiary of the Company, prior to Ampad's merger with and into Williamhouse immediately prior to the Acquisition. On May 29, 1996, the Company executed a definitive agreement to purchase the Niagara Envelope Company, Inc. ("Niagara"). Financial data presented herein on a pro forma basis for the year ended December 31, 1995 gives effect to the Acquisition, the other transactions related thereto, the acquisition of Niagara and the Offering as if such transactions occurred on January 1, 1995. See "Unaudited Pro Forma Financial Data." THE COMPANY The Company is one of the largest manufacturers and marketers of paper-based office products (excluding computer forms and copy paper) in the $60 billion to $70 billion North American office products industry. The Company offers a broad product line including nationally branded and private label writing pads, file folders, envelopes and other office 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 and envelopes to many of the largest and fastest growing office products distributors. Acquired in October 1995, the Company's Williamhouse division is the leading supplier of mill branded, specialty and commodity envelopes to paper merchants/distributors. The Company's strategy is to grow by focusing on the largest and fastest growing office product distribution channels, making acquisitions, introducing new product lines, broadening product distribution across its channels and maintaining its position among the lowest-cost manufacturers in the industry. As a result of this strategy, the Company's sales have grown at a compound annual rate of approximately 34% from 1992 to 1995. For the year ended December 31, 1995, the Company had net sales of $617.2 million and income from operations of $57.3 million on the pro forma basis described herein. See "Unaudited Pro Forma Financial Data." Since the mid-1980s, the office products industry has experienced significant changes in the channels through which office products are distributed such as the emergence of new channels, including national office products superstores, national contract stationers and mass merchandisers, and consolidation within these and other channels. As a result of these changes, approximately 6,800 office product distributors existed in 1994 compared with approximately 13,300 in 1987. The channels through which office products are distributed from the manufacturer to the end-user include retail channels such as national office products superstores, mass merchandisers and warehouse clubs; commercial channels such as national contract stationers; paper merchants/distributors; and other channels such as regional distributors, school campuses and direct mail. The Company believes that sales of office products through retail channels are approximately $20 billion to $25 billion. The three dominant national superstores (Office Depot, OfficeMax and Staples) have experienced significant growth over the past three years and currently account for approximately 17% of retail office products sales and approximately 6% of total office products sales. The Company believes that sales of office products through commercial channels are approximately $25 billion to $30 billion. Principally through the acquisition of smaller, regional contract stationers, national contract stationers (including Boise Cascade Office Products, BT Office Products, Corporate Express, U.S. Office Products and the contract stationer divisions of Office Depot and Staples) have grown more rapidly than other commercial channels. These national contract stationers now account for approximately 25% of commercial office products sales and approximately 11% of total office products sales. Certain office products, particularly envelopes, are sold predominantly through paper 4 merchants/distributors or directly to end users. Paper merchants/distributors currently account for approximately 30% of the envelope market. The three largest paper merchants (ResourceNet, Unisource and Zellerbach) have experienced significant growth primarily through consolidation. The Company has targeted and will continue to target those customers driving consolidation in the retail, commercial and paper merchant distribution channels and believes that it is uniquely positioned to meet the special requirements of these customers. These customers seek suppliers, such as the Company, who are able to offer broad product lines, higher value-added innovative products, national distribution capabilities, low costs and reliable service. Furthermore, as these customers continue to grow and as they consolidate their supplier bases, the Company's ability to meet their special requirements becomes an increasingly important competitive advantage. Recognizing Ampad's potential for growth through the changing distribution channels, Bain Capital, Inc. ("Bain Capital") and management formed the Company and purchased Ampad from Mead Corporation ("Mead") in 1992. Since that time, management has enhanced the Company's scale, broadened its product line, expanded upon its national presence and strengthened its distribution capabilities through acquisition and innovation while simultaneously delivering higher customer service levels. As a result, the Company's net sales through the most rapidly growing retail and commercial channels increased from $8.8 million in 1992 to $134.8 million ($164.5 million on a pro forma basis) in 1995. COMPETITIVE STRENGTHS The combination of the Company's products, customers and national scale distinguishes it as a leading manufacturer and marketer of paper-based office products (excluding computer forms and copy paper) in North America. The Company attributes this position and its continued opportunities for growth and profitability to the following competitive strengths: . Market Leader. The Company has achieved market leadership in core products sold to customers in the largest and fastest growing office products channels by offering one of the broadest assortments of high quality products in the industry. Furthermore, the Company enjoys national brand awareness in many of its product lines, including Ampad, Century, Embassy, Evidence, Gold Fibre, Huxley, Karolton, Kent, Peel & Seel, SCM, Williamhouse and World Fibre. . Well-Positioned and Diversified Customer Base. The Company has substantial opportunities for growth within several distribution channels of the office products industry. The Company has focused on the largest and fastest growing office products channels. Several of the Company's largest customers, such as Boise Cascade Office Products, BT Office Products, Corporate Express, Office Depot, OfficeMax and Staples, are expected by industry analysts to experience annual revenue growth of 15% to 35% over the next five years. The Company's Williamhouse division maintains particularly strong relationships with the largest and fastest growing paper merchants/distributors in the market, including ResourceNet, Unisource and Zellerbach. The Company also maintains strong customer relationships across all of the other office products distribution channels, including mass merchandisers, warehouse clubs, office products wholesalers and independent dealers. . National Scale and Service Capability. The Company's extensive product line, multiple brands and broad price point coverage provide significant advantages and economies of scale in selling to and servicing its customers. The Company has become an increasingly important strategic partner to its customers as they seek higher value-added products, simplify their purchasing organizations and consolidate their relationships among selected national suppliers. The Company's national presence and network of 22 strategically located facilities have enabled it to maintain rapid and efficient order fulfillment standards. In addition, the Company's advanced electronic data interchange ("EDI") capabilities enable it to meet its customers' EDI requirements, executing automated transactions rapidly, efficiently and accurately. . Innovation/New Products. The Company has introduced several innovative products as part of its marketing strategy to differentiate itself from other suppliers and enhance profitability. Recent examples include Gold Fibre classic and designer notebooks, Papers with a Purpose, World Fibre ground- wood writing pads and Peel 5 & Seel envelopes. Products introduced since 1992 accounted for over $70 million of the Company's 1995 net sales. The Company's brand recognition and presence with its national customers allows it to more easily introduce new or acquired product lines to those customers. . Low-Cost Manufacturer. The Company believes it is among the lowest-cost manufacturers of paper-based office products in the industry. The Company ensures its low-cost manufacturing position through its paper purchasing and distribution advantages as well as its maintenance of modern and efficient manufacturing technology and a high quality workforce. The Company has been successful in reducing costs with each of its acquisitions in the last three years by continually streamlining its manufacturing processes and overhead structure. From 1992 to 1995, the Company reduced its fixed manufacturing costs from 7.4% to 5.2% of net sales and its selling, general and administrative expenses from 10.5% to 7.2% of net sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview." . Purchasing Advantages. The Company has strong relationships with most of the country's largest paper mills, many of which have been conducting business with the Company for more than 30 years. The Company is one of the largest purchasers of the principal paper grades used in its manufacturing operations. In addition, the Company has the largest number of designated mill relationships which involve some of the largest and most recognized paper mill brands such as Hammermill, Hopper, Neenah and Strathmore. These relationships afford the Company certain paper purchasing advantages, including stable supply and favorable pricing arrangements. . Proven Management Team With Successful Track Record. The Company's senior operating management team averages over 25 years each in the paper products industry. Management has succeeded in increasing sales and operating profitability by recognizing and acting on the transition to the fastest growing distribution channels, introducing higher value-added products, acquiring complementary product lines (Karolton in December 1993, SCM Office Supplies, Inc. ("SCM") in July 1994 and certain product lines of Huxley and Globe-Weis in July 1994 and August 1995, respectively), improving manufacturing processes and reducing overhead and administrative costs. Upon completion of the Offering, the Company's senior management team (Messrs. Hanson, Gard and Benson) will collectively own 865,516 shares of Common Stock (438,427 shares if the U.S. Underwriters' over-allotment option is exercised in full) and hold currently exercisable options to purchase an additional 2,156,000 shares of Common Stock. Assuming an initial public offering price of $16.00 per share, these holdings represent on a fully-diluted basis approximately 10.3% of the outstanding Common Stock (8.9% if the U.S. Underwriters' over-allotment option is exercised in full). See "Principal and Selling Stockholders." GROWTH STRATEGY The Company's strategy is to maintain and strengthen its leadership position by focusing on the following: . Focus on Rapidly Growing Customers. The Company serves many of the largest and best positioned customers in the office products market segment including national office products superstores, mass merchandisers and warehouse clubs, national contract stationers and national paper merchants/distributors. For 1995 on a pro forma basis, approximately 15.3% of the Company's net sales were to national office product superstores, 7.8% to mass merchandisers and warehouse clubs, 9.1% to national contract stationers and 19.7% to the three largest national paper merchants/distributors. Anticipating further consolidation in the office products industry, the Company expects that its national scope and broad product line will be increasingly important in meeting the needs of its customers. The Company will continue to target those customers driving consolidation in the office products industry. . Continue to Introduce New Products. New, higher value-added products give the Company a greater selection to offer its customers and improve product line profitability for both the Company and its customers. The Company plans to differentiate itself from other suppliers and improve profitability through product innovation, differentiation and line extensions. . Pursue Complementary Product Line and Strategic Acquisitions. The office products industry is highly fragmented despite continuing consolidation among its manufacturers. The Company is leading consolidation 6 among manufacturers of writing products, filing supplies and envelopes. The SCM and Williamhouse acquisitions broadened the Company's product line to include filing products and envelopes and enhanced its presence in the growing distribution channels. The Globe-Weis acquisition and the Company's agreement to acquire Niagara demonstrate its commitment to strengthening its competitive and strategic position within its markets. The Company believes that there are significant opportunities to acquire companies in both its existing and complementary product lines. In addition, the Company intends to enter new office products markets through acquisitions of established companies in those markets. . Broaden Product Distribution. The Company's market presence and distribution strengths uniquely position it to sell new or acquired product lines across its distribution channels, including national office products superstores, national contract stationers, office product wholesalers and mass merchandisers. As an important part of its growth strategy, for example, the Company has successfully introduced the envelope product lines acquired in the Acquisition, previously distributed primarily through paper merchants/distributors, to the Ampad division's distribution channels under the Ampad and private label names. The Company estimates that this market opportunity is approximately $350 million in annual net sales. . Continue to Reduce Costs. The Company has identified and is in the process of implementing cost reductions in connection with the Acquisition that are expected to result in approximately $7.4 million of annualized cost savings. In addition, management plans to implement further identified cost reductions beyond 1996. RECENT TRANSACTIONS On May 29, 1996, the Company executed a definitive agreement to acquire Niagara for an aggregate purchase price of approximately $50 million, plus $5.0 million to be paid under a one-year consulting services agreement (the "Niagara Acquisition"). Niagara supplies mill branded, specialty and commodity envelopes to paper merchants/distributors through four manufacturing facilities located near Buffalo, Chicago, Dallas and Denver. Niagara had 1995 net sales of approximately $106 million and operating income of approximately $8.5 million. The Company expects the Niagara Acquisition to be completed by the middle of July 1996. The Company believes that the Niagara Acquisition will strengthen the Company's distribution capabilities in the Midwest, provide additional manufacturing capacity and provide opportunities to achieve operating improvements through the consolidation of Niagara's operations with those of the Company. The completion of the Niagara Acquisition is subject to certain conditions. In October 1995, the Company acquired Williamhouse for an aggregate purchase price (including assumption of debt of approximately $152.9 million) of approximately $300 million, plus reimbursement of certain expenses. In connection with the Acquisition, the Company (i) refinanced an aggregate of approximately $119.1 million of combined indebtedness of the Company and Williamhouse, (ii) purchased for $109.0 million in cash all of the outstanding 11 1/2% Senior Subordinated Debentures due 2005 of Williamhouse (the "Old Debentures"), together with accrued interest thereon of $5.3 million, (iii) declared a stock dividend of $200 million in aggregate liquidation value of preferred stock and preferred stock equivalents (collectively, the "Preferred Stock") and subsequently redeemed approximately $70.6 million of such Preferred Stock and declared a $4.5 million cash dividend on its Class P Common Stock, (iv) paid approximately $34.2 million in related fees and expenses and (v) used approximately $3.4 million for working capital purposes. To finance the Acquisition and these related transactions, the Company's principal operating subsidiary (i) incurred borrowings under a credit agreement (the "Bank Credit Agreement") of approximately $245 million, (ii) issued $200 million in aggregate principal amount of senior subordinated notes due 2005 (the "Notes"), and (iii) received approximately $45 million from the establishment of a new non-recourse, off-balance sheet accounts receivable securitization program (the "Accounts Receivable Facility"). The Acquisition, the other transactions entered into in connection therewith, and the financing thereof are collectively referred to herein as the "Transactions." The Company's management identified the personalizing business division of Williamhouse (the "Personalizing Division") as a nonstrategic asset following the Acquisition and has decided to pursue a sale of 7 the Personalizing Division. As a result, the financial statements of the Company included elsewhere in this Prospectus reflect the Personalizing Division as "Assets held for Sale" as of December 31, 1995 and March 31, 1996. On April 17, 1996, the Company signed a letter of intent with a potential buyer to sell the Personalizing Division. Under the terms of such letter, the Company will receive approximately $60 million in gross proceeds (subject to certain working capital adjustments) from the sale of the Personalizing Division, which it expects to complete by the end of June 1996. To date, the Company has not executed any definitive agreements with respect to such sale and, as a result, no assurance can be given that the proposed sale will be completed or, if completed, will be on the terms outlined herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." Although the Company regularly engages in discussions with companies regarding potential acquisitions, it currently does not have any agreements or understandings relating to acquisitions other than the Niagara Acquisition. THE OFFERING(1) Common Stock offered by The Company........... 12,500,000 shares The Selling Stockholders......... 3,125,000 shares Total............... 15,625,000 shares Common Stock offered U. S. Offering........ 12,500,000 shares International Offering............. 3,125,000 shares Total............... 15,625,000 shares Common Stock to be outstanding after the Offering............... 26,925,272 shares(2) Use of proceeds......... The net proceeds to be received by the Company from the Offering will be used to repay certain outstanding bank indebtedness and to redeem a portion of the Notes issued by the Company's principal operating subsidiary and to pay certain fees. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. See "Use of Proceeds." Proposed NYSE symbol.... AGP
- -------- (1) Does not include the Underwriters' over-allotment option granted by the Selling Stockholders for an aggregate of 2,343,750 shares of Common Stock. (2) Does not include 2,156,000 shares of Common Stock reserved for issuance upon the exercise of options outstanding as of June 5, 1996 and granted to members of management pursuant to the Company's 1992 Key Employees Stock Option Plan (the "1992 Stock Plan") or 2,100,000 shares of Common Stock reserved for issuance under the Company's 1996 Key Employees Stock Incentive Plan (the "1996 Stock Plan"), the Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan") and the Management Stock Purchase Plan. See "Management--Stock Options." 8 SUMMARY FINANCIAL DATA The summary historical consolidated financial data set forth below for the years ended December 31, 1993, 1994 and 1995 have been derived from, and are qualified by reference to, the audited consolidated financial statements of the Company included elsewhere in this Prospectus. The summary historical consolidated financial data set forth below for the three months ended March 31, 1995 and 1996 have been derived from the unaudited consolidated financial statements of the Company, which, in the opinion of the Company, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation. Results for the three months ended March 31, 1996 are not necessarily indicative of results for the full year. The summary historical consolidated and unaudited pro forma financial data set forth below should be read in conjunction with, and are qualified by reference to, "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Financial Data" and the audited consolidated financial statements and accompanying notes thereto included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ----------------------------------------- ----------------------------------- HISTORICAL HISTORICAL ------------------------------ ----------------- PRO FORMA PRO FORMA 1993 1994 1995 1995(1) 1995 1996 1996(2) -------- -------- -------- --------- ------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) INCOME STATEMENT DATA(3)(4)(5): Net sales............... $104,277 $120,443 $259,341 $617,167 $47,691 $121,418 $149,735 Cost of sales(6)........ 88,491 113,394 211,814 481,804 42,394 97,889 121,245 -------- -------- -------- -------- ------- -------- -------- Gross profit............ 15,786 7,049(6) 47,527 135,363 5,297 23,529 28,490 Selling, general and administrative expenses............... 10,765 10,615 18,545 74,678(7) 2,749 11,026 14,493(7) Non-recurring compensation charge(8).............. -- -- 27,632 3,367 -- -- -------- -------- -------- -------- ------- -------- -------- Income (loss) from operations............. 5,021 (3,566) 1,350 57,318 2,548 12,503 13,997 Interest expense........ 3,320 4,560 13,657 30,953 1,656 12,542 7,738 Other (income) expense.. (167) (90) (735) (642) (65) (269) (265) -------- -------- -------- -------- ------- -------- -------- Income (loss) before income taxes........... 1,868 (8,036) (11,572) 27,007 957 230 6,524 Provision for (benefit from) income taxes..... 64 (488) (6,538) 9,814 366 102 2,596 -------- -------- -------- -------- ------- -------- -------- Income (loss) before extraordinary item..... 1,804 (7,548) (5,034) 17,193 591 128 3,928 Extraordinary loss from extinguishment of debt, net of income tax benefit................ -- -- (9,652) -- -- -- -- -------- -------- -------- -------- ------- -------- -------- Net income (loss)....... $ 1,804 $ (7,548) $(14,686) $ 17,193 $ 591 $ 128 $ 3,928 ======== ======== ======== ======== ======= ======== ======== Pro forma earnings (loss) per share(9).... $ (.95) $ .59 $ .01 $ .14 ======== ======== ======== ======== Pro forma weighted average number of common shares and common share equivalents outstanding(9)......... 15,540 29,063 16,562 29,063 ======== ======== ======== ======== OTHER DATA: Depreciation and amortization........... $ 159 $ 942 $ 4,248 $ 17,982 $ 528 $ 3,020 $ 3,803 Capital expenditures.... 1,656 942 5,640 13,688 2,530 2,321 3,087
MARCH 31, 1996 ------------------------- PRO FORMA ACTUAL AS ADJUSTED(10) -------- --------------- BALANCE SHEET DATA: Working capital...................................... $109,238 $114,799 Total assets......................................... 500,794 541,933 Long-term debt, less current maturities(11).......... 440,453 319,295 Stockholders' equity (deficit)(12)................... (66,293) 100,650
(footnotes on next page) 9 (1) The summary unaudited pro forma income statement and other data for the year ended December 31, 1995 give pro forma effect, in the manner described under "Unaudited Pro Forma Financial Data" and the notes thereto, to: (i) the Transactions, (ii) the Globe-Weis Acquisition (as defined), (iii) the pending disposal of the Personalizing Division, (iv) the transactions described under "The Recapitalization," (v) refinancing of the Bank Credit Agreement, (vi) the Niagara Acquisition and (vii) the Offering (assuming an initial public offering price of $16.00 per share) and the application of the net proceeds therefrom as described under "Use of Proceeds," as if each had occurred on January 1, 1995. The summary pro forma income statement data and other data do not (i) purport to represent what the Company's results of operations actually would have been if the foregoing transactions had actually occurred as of such date or what such results will be for any future periods or (ii) give effect to certain non- recurring charges expected to result from items (i), (v) and (vii) above, including certain non-cash compensation charges directly related to the Acquisition and an extraordinary charge for the write-off of deferred financing fees and direct expenses to retire and refinance existing Company debt. The final allocation of purchase price and the resulting amortization expense in the income statement data may differ somewhat from the preliminary estimates for the reasons described in more detail in "Unaudited Pro Forma Financial Data" and in Note 3 of the Notes to Consolidated Financial Statements of the Company. (2) The summary unaudited pro forma income statement and other data for the three months ended March 31, 1996 give pro forma effect, in the manner described under "Unaudited Pro Forma Financial Data" and the notes thereto, to: (i) the pending disposal of the Personalizing Division, (ii) the transactions described under "The Recapitalization," (iii) refinancing of the Bank Credit Agreement, (iv) the Niagara Acquisition and (v) the Offering (assuming an initial public offering price of $16.00 per share) and the application of the net proceeds therefrom as described under "Use of Proceeds," as if each had occurred on January 1, 1996. (3) Effective July 5, 1994, the Company acquired the assets and assumed certain liabilities of SCM Office Supplies, Inc. (the "SCM Acquisition"). The acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results have been included with the Company's results since the date of acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of the Notes to Consolidated Financial Statements of the Company included herein. (4) Effective August 16, 1995, the Company acquired the inventories and certain equipment of the file folder and hanging file product lines of the Globe-Weis office products division ("Globe-Weis") of Atapco (as defined) (the "Globe-Weis Acquisition"). The acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results have been included in the Company's results since the date of acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," Note 3 of the Notes to Consolidated Financial Statements of the Company and the audited statements of Net Sales and Cost of Sales of Globe-Weis included herein. (5) Effective October 31, 1995, the Company acquired Williamhouse in the Acquisition. The Acquisition has been accounted for under the purchase method of accounting and accordingly, the operating results of Williamhouse, except for the Personalizing Division, for the two-month period ended December 31, 1995 have been included in the Company's results for the year ended December 31, 1995. The Personalizing Division was held for sale at December 31, 1995 and March 31, 1996. As such, the operating results of the Personalizing Division are excluded from the results of operations for the two-month period ended December 31, 1995 (period subsequent to the Acquisition) and the three months ended March 31, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," Note 3 of the Notes of Consolidated Financial Statements of the Company and the audited financial statements of Williamhouse included herein. (6) Inventory cost is determined using the last-in, first-out ("LIFO") method of valuation. Gross profit in the fourth quarter of 1994 was adversely impacted by a significant increase in paper prices, resulting in a $5.4 million charge for LIFO in advance of the Company's raising selling prices in the first quarter of 1995. 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 now able to price its products so as to minimize the impact of price volatility on dollar margins. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." (7) Includes charges under a one-year consulting services agreement to be entered into in connection with the Niagara Acquisition of $5.0 million and $1.25 million for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. (8) Includes non-cash stock option compensation charges of $24.3 million directly related to the Acquisition as well as other non-recurring cash and non-cash charges aggregating $3.3 million. See Note 9 of Notes to Consolidated Financial Statements of the Company included herein. (9) Pro forma earnings (loss) per common share and pro forma weighted average number of shares and share equivalents outstanding have been adjusted to give effect to (i) a 8.1192-for-one stock split of all existing Common Stock and Common Stock equivalents and (ii) the conversion of all shares of Preferred Stock and Preferred Stock equivalents into shares of Common Stock and Common Stock equivalents at the assumed offering price per share to the public. Common Stock equivalents were determined using the treasury stock method. (10) The unaudited "Pro Forma As Adjusted" balance sheet data at March 31, 1996 gives pro forma effect to (i) the transactions described under "The Recapitalization," (ii) the refinancing of the Bank Credit Agreement, (iii) the Niagara Acquisition and (iv) the sale by the Company of 12,500,000 shares of Common Stock pursuant to the Offering, assuming an initial public offering price of $16.00 per share and the application of the estimated net proceeds to the Company therefrom as described under "Use of Proceeds," as if each had occurred on such date. See "Unaudited Pro Forma Financial Data." (11) Does not reflect the expected repayment of debt from the estimated proceeds from the sale of the Personalizing Division. (12) Includes $4.5 million to pay the liquidation preference, including the return of original cost, of the Company's Class P Common Stock and $70.6 million to redeem a portion of its Preferred Stock. See "Dividend Policy." 10 RISK FACTORS Prospective investors should consider carefully the following factors, in addition to the other information contained in this Prospectus, in evaluating an investment in the shares of Common Stock offered hereby. RISKS ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS Following the Offering, the Company will continue to have substantial indebtedness. Subject to the restrictions in the Bank Credit Agreement and the indenture under which the Notes were issued (the "Indenture"), the Company may incur additional indebtedness from time to time to finance acquisitions or capital expenditures or for other purposes. The level of the Company's indebtedness could have important consequences, given that (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes, (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions may be limited and (iii) the Company's level of indebtedness could limit its flexibility in reacting to changes in the industry and conditions generally. Certain of the Company's competitors currently operate on a less leveraged basis and have significantly greater operating and financing flexibility than the Company. The Company's ability to service its indebtedness will be dependent on its future performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control. The Company believes that, based upon current levels of operations, it should be able to meet its debt service obligations when due. If, however, the Company were unable to service its indebtedness, it would be forced to pursue one or more alternative strategies such as selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital (which may substantially dilute the ownership interest of holders of Common Stock). There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Bank Credit Agreement and the terms of the Indenture impose certain operating and financial restrictions on the Company's ability to (i) incur additional debt, (ii) pay dividends, (iii) transact business with its affiliates, (iv) sell assets, merge or consolidate, (v) prepay other indebtedness, (vi) create liens and encumbrances and (vii) other restrictions customarily found in such agreements. Contemporaneously with the Offering, the Company intends to refinance its existing indebtedness under the Bank Credit Agreement with a new senior credit facility (the "New Bank Credit Agreement"). The Company anticipates that the New Bank Credit Agreement will impose operating and financial restrictions on the Company similar to those contained in the Bank Credit Agreement. A failure to comply with the obligations in the Bank Credit Agreement, the New Bank Credit Agreement or the Indenture, as the case may be, could result in an event of default under such agreements, which, if not cured or waived, could permit acceleration of the indebtedness thereunder and acceleration of indebtedness under other instruments that may contain cross-acceleration or cross-default provisions which could have a material adverse effect on the Company. See "Description of Certain Indebtedness." RISKS RELATING TO ACQUISITION STRATEGY The Company expects to continue its strategy of identifying and acquiring companies or assets that would enable the Company to offer complementary product lines and that management considers likely to enhance the Company's operations and profitability. In furtherance of this strategy, the Company executed a definitive agreement to acquire Niagara on May 29, 1996. The completion of the Niagara Acquisition is subject to certain conditions. While the Company expects the Niagara Acquisition will be completed, no assurance can be given that such conditions will be satisfied. In addition, there can be no assurance that the Company will continue to acquire businesses or assets on satisfactory terms or that any business or assets acquired by the Company will be integrated successfully into the Company's operations or be able to operate profitably. 11 RISKS ASSOCIATED WITH FLUCTUATIONS IN PAPER COSTS The Company's principal raw material is paper. 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. This volatility negatively impacted the Company's earnings in 1994, particularly in the fourth quarter, as a result of the Company's inability to implement price changes in many of its product lines without giving its customers advance notification. 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. To date, such policies have been accepted by customers; however, no assurance can be given that the Company will continue to be successful in maintaining such pricing policies or that future price fluctuations in the price of paper will not have a material adverse effect on the Company. Fluctuation in paper prices can have an effect on quarterly comparisons of the results of operations and financial condition of the Company. See "Management's Discussion and Analysis of Financial Condition and Result of Operations--Overview." SUPPLIER RELATIONSHIPS The Company has strong relationships with most of the country's largest paper mills, many of which have been doing business with the Company for more than 30 years. The Company is one of the largest purchasers of the principal paper grades used in its manufacturing operations. In addition, the Company has the largest number of designated mill relationships which involve some of the largest and most recognized paper mill brands such as Hammermill, Hopper, Neenah and Strathmore. These relationships afford the Company certain paper purchasing advantages, including stable supply and favorable pricing arrangements. While these relationships are stable, all but one of the designated manufacturer arrangements are oral and terminable at will at the option of either party. There can be no assurance that any of the supplier or designated manufacturer relationships will not be terminated in the future. While the Company has been able to obtain sufficient paper supplies during recent paper shortages and otherwise, the Company is subject to the risk that it will be unable to purchase sufficient quantities of paper to meet its production requirements during times of tight supply. An interruption in the Company's supply of paper could have a material adverse effect on the Company's business. See "Business--Products and Services" and "Industry-- Distribution." DEPENDENCE UPON SIGNIFICANT CUSTOMERS The Company's aggregate net sales to Sam's Warehouse Club/Wal-Mart and Office Depot accounted for approximately 14.8% and 12.7% of the Company's net sales for 1995, respectively. The Company's top five customers accounted for approximately 50.3% of its net sales in 1995 (32.0% on a pro forma basis). A significant decrease or interruption in business from Sam's Warehouse Club/Wal-Mart or Office Depot or from any other of the Company's significant customers could have a material adverse effect on the Company. See "Business-- Sales, Distribution and Marketing." INFLUENCE OF CERTAIN STOCKHOLDERS Upon completion of the Offering (assuming an initial public offering price of $16.00 per share), certain members of senior management and Bain Capital and its related investors will beneficially own approximately 41.1% of the outstanding Common Stock (approximately 32.6% if the U.S. Underwriters' over- allotment option is exercised in full). By virtue of such stock ownership, these stockholders will continue to have significant influence over all matters submitted to a vote of the holders of Common Stock, including the election of directors, amendments to the Company's Restated Certificate of Incorporation and By-laws and approval of significant corporate transactions, following the Offering. See "Description of Capital Stock." Such concentration of ownership could also have the effect of delaying, deterring or preventing a change in control of the Company that might otherwise be beneficial to stockholders. See "Principal and Selling Stockholders." COMPETITION The paper-based office products market is highly competitive. The Company competes with other national and local manufacturers in many product segments. Certain of the Company's principal competitors are less 12 highly-leveraged than the Company and may be better able to withstand volatile market conditions within the paper industry. There can be no assurance that the Company will not encounter increased competition in the future, which could have a material adverse effect on the Company's business. See "Business--Competition." DEPENDENCE ON KEY EXECUTIVES The Company is dependent to a large degree on the services of its senior management team and there can be no assurance that such individuals will remain with the Company. The loss of any of these individuals could have a material adverse effect on the Company. The Company has recently entered into employment agreements with its Chief Executive Officer and Chief Operating Officer. Upon completion of the Offering (assuming an initial public offering price of $16.00 per share), the Company's senior management team will collectively own 865,516 shares of Common Stock (438,427 shares if the U.S. Underwriters' over-allotment is exercised in full) and hold currently exercisable options to purchase 2,156,000 shares of Common Stock, representing on a fully-diluted basis approximately 10.3% of the outstanding Common Stock (8.9% if the U.S. Underwriters' over-allotment is exercised in full). See "Management." IMPACT OF ENVIRONMENTAL REGULATION The Company is subject to the requirements of federal, state, and local environmental and occupational health and safety laws and regulations. There can be no assurance that the Company is at all times in complete compliance with all such requirements. The Company has made and will continue to make capital and other expenditures to comply with environmental requirements. As is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. The Company's Ampad division has been named a potentially responsible party for cleanup costs under the federal Comprehensive Environmental Response, Compensation and Liability Act at five waste disposal sites and is aware that Niagara has been named as a potentially responsible party at one site. See "Business-- Environmental, Health and Safety Matters." DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company currently intends to retain earnings to support its growth strategy and reduce indebtedness and does not anticipate paying dividends in the foreseeable future. As a holding company, the ability of the Company to pay dividends in the future is dependent upon the receipt of dividends or other payments from its principal operating subsidiary, American Pad & Paper Company of Delaware, Inc. ("APPC"). The payment of dividends by APPC to the Company for the purpose of paying dividends to holders of Common Stock is prohibited by the Bank Credit Agreement and is restricted under the Indenture. The Company expects that the New Bank Credit Agreement will likewise restrict the payment of dividends by APPC to the Company for such purpose. See "Dividend Policy." ABSENCE OF PRIOR PUBLIC MARKET; SUBSTANTIAL DILUTION Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiations among the Company, the Selling Stockholders and the Representatives and may not be indicative of the market price for shares of the Common Stock after the Offering. For a description of factors considered in determining the initial public offering price, see "Underwriters." There can be no assurance that an active trading market for the Common Stock will develop or if developed, that such market will be sustained. The market price for shares of the Common Stock may be significantly affected by such factors as quarter-to-quarter variations in the Company's results of operations, news announcements or changes in general market conditions. In addition, broad market fluctuations and general economic and political conditions may adversely affect the market price of the Common Stock, regardless of the Company's actual performance. Purchasers of the Common Stock in the Offering will be subject to immediate and substantial dilution. See "Dilution." 13 POTENTIAL ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering (assuming an initial public offering price of $16.00 per share), the Company expects to have 26,925,272 shares of Common Stock outstanding. Of these shares, the 15,625,000 shares of Common Stock (17,968,750 shares if the U.S. Underwriters' over-allotment option is exercised in full) sold in the Offering will be freely tradeable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), except any such shares which may be acquired by an "affiliate" of the Company. Subject to certain 180-day "lock up" agreements described herein, approximately 11,300,272 shares of Common Stock will be eligible for sale in the public market, subject to compliance with the resale volume limitations and other restrictions of Rule 144 under the Securities Act, beginning 90 days after the date of this Prospectus. Beginning 180 days after the completion of the Offering, the holders of an aggregate of approximately 11,078,256 shares of Common Stock will have certain rights to register their shares of Common Stock under the Securities Act at the Company's expense. Future sales of the shares of Common Stock held by existing stockholders could have an adverse effect on the price of the Common Stock. See "Shares Eligible for Future Sale." CERTAIN ANTI-TAKEOVER EFFECTS Certain provisions of the Company's Restated Certificate of Incorporation and By-laws may inhibit changes in control of the Company not approved by the Company's Board of Directors. These provisions include (i) a classified Board of Directors, (ii) a prohibition on stockholder action through written consents, (iii) a requirement that special meetings of stockholders be called only by the Board, (iv) advance notice requirements for stockholder proposals and nominations, (v) limitations on the ability of stockholders to amend, alter or repeal the Company's By-laws and (vi) the authority of the Board to issue without stockholder approval preferred stock with such terms as the Board may determine. The Company will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects. See "Description of Capital Stock." In addition, the Indenture provides that upon a "change of control," each Note holder will have the right to require the Company to purchase all or a portion of such holder's Notes at a purchase price of 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of such redemption. Such obligation, if it arose, could have a material adverse effect on the Company. Such provision could delay, deter or prevent a takeover attempt. See "Description of Certain Indebtedness--Notes." 14 THE COMPANY Established in 1888, the Company's Ampad division has been a leading supplier of pads and other paper-based writing products throughout its history. The Company is one of the largest manufacturers and marketers of all paper-based office products (excluding computer forms and copy paper) in the $60 billion to $70 billion North American office products industry. The Company offers a broad product line including writing pads, file folders, envelopes and other office 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 and envelopes to many of the largest and fastest growing office products distributors. Acquired in October 1995, the Company's Williamhouse division is the leading supplier of mill branded, specialty and commodity envelopes to paper merchants/distributors. The Company maintains several nationally-recognized brand names such as Ampad, Century, Embassy, Evidence, Gold Fibre, Huxley, Karolton, Kent, Peel & Seel, SCM, Williamhouse and World Fibre. The Company's strategy is to grow by focusing on the largest and fastest growing office product distribution channels, acquiring and introducing new product lines, broadening product distribution across its channels and maintaining its position among the lowest-cost manufacturers in the industry. From 1986 to 1992, Ampad operated as a subsidiary of Mead. On July 31, 1992, the Company acquired Ampad from Mead in an acquisition led by Bain Capital and senior management. Since the acquisition, new management has enhanced the Company's scale, broadened its product line, expanded upon its national presence and strengthened its distribution capabilities through acquisition and innovation while simultaneously delivering higher customer service levels. In July 1994, the Company acquired the assets and assumed certain liabilities of SCM, one of the industry leaders in hanging files and writing products. In August 1995, the Company acquired the file folder and file product lines of American Trading and Production Corporation's ("Atapco") Globe-Weis office products division. Prior to the acquisition, Atapco was one of the leading providers of file folders and hanging files to office product superstores. The acquisitions of the SCM and Globe-Weis product lines further strengthened the Company's position in the filing supplies and writing products categories. In October 1995, the Company acquired Williamhouse for an aggregate purchase price (including assumption of debt of approximately $152.9 million) of approximately $300.0 million, plus reimbursement of certain expenses. In connection with the Acquisition, the Company (i) refinanced an aggregate of approximately $119.1 million of combined indebtedness of the Company and Williamhouse, (ii) purchased for $109.0 million in cash all of the Old Debentures, together with accrued interest thereon of $5.3 million, (iii) declared a stock dividend of $200 million in aggregate liquidation value of Preferred Stock and subsequently redeemed approximately $70.6 million of such Preferred Stock and declared a $4.5 million cash dividend on its Class P Common Stock, (iv) paid approximately $34.2 million in related fees and expenses and (v) used approximately $3.4 million for working capital purposes. To finance the Acquisition and these related transactions, the Company's principal operating subsidiary (i) incurred borrowings under the Bank Credit Agreement of approximately $245.0 million, (ii) issued Notes in the aggregate principal amount of $200.0 million and (iii) received approximately $45.0 million from the establishment of the Accounts Receivable Facility. On May 29, 1996, the Company executed a definitive agreement to acquire Niagara for an aggregate purchase price of approximately $50 million, plus $5.0 million to be paid under a one-year consulting services agreement. See "Business--Recent Acquisitions." The Company's principal executive offices are located at 17304 Preston Road, Suite 700, Dallas, Texas 75252 and its telephone number is (214) 733-6200. USE OF PROCEEDS The net proceeds to the Company from the Offering (after deducting applicable underwriting discounts and estimated expenses payable by the Company) are estimated to be approximately $187 million (assuming an initial public offering price of $16.00 per share). The Company intends to use such net proceeds to (i) repay 15 approximately $107 million of the indebtedness incurred under the Bank Credit Agreement, (ii) allow APPC to redeem approximately $70 million aggregate principal amount of Notes outstanding, (iii) allow APPC to pay approximately $8 million in redemption premiums on the Notes and (iv) pay Bain Capital a fee of approximately $2 million in connection with the Offering. See "Certain Relationships and Related Transactions--Management Advisory Agreement." The Company expects that the reduction in indebtedness from the application of such net proceeds will enhance its ability to make future acquisitions. The indebtedness to be repaid under the Bank Credit Agreement consists of multi-tranche term loans (the "Term Loans") with principal payments scheduled in varying amounts from 1996 through 2004. Such Term Loans bear interest at varying rates based, at the Company's option, on either the Eurodollar Rate (as defined in the Bank Credit Agreement) plus 275 to 400 basis points or the bank base rate (as defined in the Bank Credit Agreement) plus 175 to 300 basis points. The applicable basis points vary per tranche. The overall effective interest rate for such indebtedness at March 31, 1996 was 9.0%. See "Description of Certain Indebtedness--Bank Credit Agreement." The Notes are scheduled to mature on November 15, 2005 and bear interest at 13.0% per annum, payable semi-annually in cash on May 15 and November 15 of each year. The Company used borrowings under the Bank Credit Agreement to pay the cash portion of the purchase price of Williamhouse and the net proceeds from the sale of the Notes to (i) repurchase the Old Debentures of Williamhouse, (ii) to redeem a portion of the Preferred Stock, (iii) to pay a cash dividend on the Class P Common Stock, (iv) to pay related fees and expenses and (v) to provide for working capital. See "Description of Certain Indebtedness--Description of Notes." In connection with the Offering, the Company expects to refinance its remaining indebtedness under the Bank Credit Agreement after the application of the net proceeds of the Offering as described above. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" and "Description of Certain Indebtedness--New Bank Credit Agreement." The Company will not receive any of the proceeds from the sale of 3,125,000 shares of Common Stock by the Selling Stockholders. DIVIDEND POLICY Except as described below, the Company has not declared or paid any cash or other dividends on its Common Stock and does not expect to pay dividends for the foreseeable future. Instead, the Company currently intends to retain earnings to support its growth strategy and reduce indebtedness. As a holding company, the ability of the Company to pay dividends in the future is dependent upon the receipt of dividends or other payments from its principal operating subsidiary, APPC. The payment of dividends by APPC to the Company for purposes of paying dividends to holders of Common Stock is prohibited by the Bank Credit Agreement and restricted by the Indenture. The Company anticipates that the New Bank Credit Agreement will likewise prohibit the payment of dividends by APPC to the Company for such purpose. Any future determination to pay dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other factors, the Company's results of operations, financial condition, capital requirements and contractual restrictions. See "Risk Factors--Dividend Policy; Restrictions on Payment of Dividends" and "Description of Certain Indebtedness." In October 1995, the Company declared a stock dividend on its outstanding capital stock of one share of Preferred Stock for each ten shares of Class P Common Stock and Common Stock (the "Preferred Stock Dividend"). In December 1995, the Company paid a cash dividend on its then outstanding Class P Common Stock equal to approximately $8.10 per share (after giving effect to the Recapitalization). Immediately thereafter, all outstanding shares of Class P Common Stock were converted on a share-for-share basis into shares of existing Common Stock. Prior to such conversion, the Class P Common Stock was entitled to a preferential payment upon any distribution by the Company to its holders of capital stock (whether by dividend, liquidating distribution or otherwise) equal to the original cost of such shares plus an amount which accrued on a daily basis at a rate of 15.0% per annum on such cost and the amount so accrued in prior quarters (the "Preference Amount"). The cash dividend returned such Preference Amount to the holders of the Class P Common Stock. 16 THE RECAPITALIZATION Prior to the Offering, the Company had two classes of issued and outstanding stock, the Preferred Stock and the Common Stock. See "Description of Capital Stock." The Preferred Stock has a liquidation value of $1,948.50 per share and was issued by the Company in October 1995 in the form of a dividend to the then-existing stockholders of the Company. Prior to the completion of the Offering, an 8.1192-for-one stock split will be effected as to all of the then outstanding shares of Common Stock and Common Stock equivalents and all of the outstanding Preferred Stock and Preferred Stock equivalents will be converted into shares of Common Stock (collectively, the "Recapitalization"). Each share of Preferred Stock will be converted into a number of shares of Common Stock determined by dividing the per share liquidation value of the Preferred Stock by the initial public offering price of the Common Stock in the Offering. Based on an assumed initial public offering price of $16.00 per share, an aggregate of 7,118,002 shares of Common Stock will be issued as a result of the as a result of the conversion of the Preferred Stock in the Recapitalization. After giving effect to the Recapitalization, the Company will have an aggregate of 14,425,272 shares of outstanding Common Stock prior to the Offering. In addition, all outstanding options for Preferred Stock and Common Stock held by members of senior management will be converted into options for Common Stock based upon the initial public offering price and the exercise price thereof will be adjusted so as to maintain such holder's economic value. See "Management--Stock Options." Fractional shares otherwise issuable as a result of the Recapitalization will be rounded to the nearest whole number. No consideration will be paid for in lieu of fractions that are rounded down. 17 CAPITALIZATION The following table sets forth at March 31, 1996, (i) the actual capitalization of the Company and (ii) the pro forma capitalization of the Company after giving effect to (a) the Recapitalization, (b) the refinancing of the Bank Credit Agreement and (c) the Niagara Acquisition, and as adjusted to reflect the sale by the Company of 12,500,000 shares of Common Stock pursuant to the Offering, assuming an initial public offering price of $16.00 per share, and the application of the net proceeds therefrom as described under "Use of Proceeds." This table should be read in conjunction with "Selected Historical Consolidated Financial Data" and "Unaudited Pro Forma Financial Data" included elsewhere in this Prospectus.
MARCH 31, 1996 -------------------------- PRO FORMA ACTUAL AS ADJUSTED ----------- ------------- (DOLLARS IN THOUSANDS) Short-term debt: Current maturities of long-term debt......... $ 13,066 $ 2,116 (1) =========== =========== Long-term debt, net of current maturities: Revolving credit facility................... -- 176,867 (1)(2) Term loans.................................. 231,625 -- (1) IRBs and other indebtedness................. 8,828 12,428 (3) Notes....................................... 200,000 130,000 (4) ----------- ----------- Total long-term debt...................... 440,453 319,295 ----------- ----------- Stockholders' equity (5): Preferred Stock, $0.01 par value, 150,000 shares authorized; 58,449 shares issued on an actual basis; and no shares issued on a pro forma, as adjusted basis............... 113,887 -- Common Stock, $0.01 par value, 75,000,000 shares authorized; 900,000 shares issued on an actual basis; 26,925,272 shares issued on a pro forma, as adjusted basis.......... 9 269 Additional paid-in capital.................. 14,240 313,067 Retained earnings (deficit)................. (194,429) (212,686)(6) ----------- ----------- Total stockholders' equity (deficit)...... (66,293) 100,650 ----------- ----------- Total capitalization.................... $ 374,160 $ 419,945 =========== ===========
- -------- (1) Reflects (i) the use of approximately $107,500 of the net proceeds to the Company to repay borrowings on the Term Loans under the Bank Credit Agreement after reclassification of $11,250 of current maturities of Term Loans to long-term debt and to pay certain expenses associated with, and funded from, the bank refinancing, (ii) use of approximately $135,375 of proceeds to the Company under the New Bank Credit Agreement to repay borrowings on the Term Loans under the Bank Credit Agreement, (iii) additional borrowings of $32,992 under the New Bank Credit Agreement to partially fund the Niagara Acquisition and (iv) additional borrowings of $8,500 to fund debt issuance costs and other expenses related thereto. (2) Does not reflect the expected repayment of debt from the estimated proceeds from the sale of the Personalizing Division. (3) Reflects debt to be assumed in the Niagara Acquisition of $3,900, less the current portion of $300. (4) Reflects the use of $70,000 of the net proceeds to the Company to partially redeem the Notes. (5) Does not include 2,156,000 shares of Common Stock reserved for issuance upon the exercise of options outstanding as of June 5, 1996 or 2,100,000 shares of Common Stock reserved for issuance under the 1996 Stock Plan, the Non-Employee Director Plan and the Management Stock Purchase Plan. See "Management--Stock Options." (6) Includes an after-tax extraordinary loss of approximately $18.3 million ($30.4 million pretax) related to writeoff of deferred financing costs from the repayment of debt and payment of the $7.7 million call premium on the partial redemption of the Notes with the net proceeds to the Company. 18 DILUTION The following table presents certain information concerning the pro forma net tangible book value per share of Common Stock as of March 31, 1996, assuming the consummation of the Recapitalization and the Niagara Acquisition, and as adjusted to reflect the sale of 12,500,000 shares of Common Stock by the Company in the Offering, at an assumed initial public offering price of $16.00 per share, after deducting the estimated offering expenses and underwriting discounts and commissions: Assumed initial public offering price per share.......... $ 16.00 Pro forma net tangible book value per share before the Offering(1)............................................. $(17.81) Increase per share attributable to payments by new investors............................................... $ 14.47 Adjusted pro forma net tangible book value per share after the Offering...................................... $ (3.34) ------- Dilution per share to new investors(2)................... $(19.34) =======
- -------- (1) Net tangible book value per share of Common Stock is determined by dividing the Company's pro forma tangible net worth at March 31, 1996 of $(256.8) million by the aggregate number of shares of Common Stock outstanding. (2) Dilution is determined by subtracting net tangible book value per share after the Offering from the initial public offering price per share. The following table summarizes, on a pro forma basis, as of March 31, 1996, the difference between the existing stockholders and the new investors with respect to the number of shares of Common Stock purchased (or to be purchased) from the Company, the total consideration paid (or to be paid) and the average price per share paid (or to be paid) by the existing stockholders and new investors, at an assumed initial public offering price of $16.00 per share, before deducting the estimated offering expenses and underwriting discounts and commissions:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- --------- Existing stockholders(1)..... 14,425,272 54% $ 3,130,000 2% $ .22 New investors(2)............. 12,500,000 46 200,000,000 98% 16.00 ---------- --- ------------ --- Total...................... 26,925,272 100% $203,130,000 100% ========== === ============ ===
- -------- (1) Does not include 2,156,000 shares of Common Stock reserved for issuance upon the exercise of options outstanding as of June 5, 1996 or 2,100,000 shares of Common Stock reserved for issuance under the 1996 Stock Plan, the Non-Employee Director Plan and the Management Stock Purchase Plan. See "Management--Stock Options." (2) Sales of Common Stock by the Selling Stockholders in the Offering will reduce the number of shares of Common Stock held by existing stockholders to 11,300,272, or approximately 42% of the total shares of Common Stock outstanding after the Offering (8,956,522 shares, or approximately 33% if the U.S. Underwriters' over-allotment option is exercised in full), and will increase the number of shares held by new investors to 15,625,000, or approximately 58% of the total shares of Common Stock outstanding after the Offering (17,968,750 shares, or approximately 67% if the U.S. Underwriters' over-allotment option is exercised in full). See "Principal and Selling Stockholders." 19 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data set forth below for the years ended December 31, 1993, 1994 and 1995 have been derived from, and are qualified by reference to the audited consolidated financial statements of the Company, included elsewhere in this Prospectus. The selected historical consolidated financial data set forth for the period August 1, 1992 to December 31, 1992 have been derived from the Company's audited financial statements not included in this Prospectus. The selected historical consolidated financial data set forth below for the three months ended March 31, 1995 and 1996 have been derived from the unaudited consolidated financial statements of the Company which, in the opinion of the Company, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation. Results for the three months ended March 31, 1996 are not necessarily indicative of results for the full year. Effective July 31, 1992, the Company acquired Ampad (the "Predecessor") from Mead. As such, the selected historical consolidated financial data set forth below for the period from January 1, 1992 through July 31, 1992 and the year ended December 31, 1991 have been derived from the Predecessor's unaudited financial statements, not included herein, and include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the results of the Predecessor for such periods. The selected historical consolidated financial data for the Predecessor are not comparable in certain respects to the selected historical consolidated financial data of the Company due to the effects of the acquisition of the assets of the Predecessor described in the notes hereto. The selected historical consolidated financial data set forth below should be read in conjunction with, and is qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and accompanying notes thereto included elsewhere in this Prospectus.
PREDECESSOR THE COMPANY -------------------- ----------------------------------------------------------- THREE MONTHS PERIOD PERIOD YEAR ENDED ENDED YEAR ENDED FROM FROM DECEMBER 31, MARCH 31, DECEMBER 31, 1/1/92- 8/1/92- ------------------------------- ----------------- 1991 7/31/92 12/31/92 1993 1994 1995 1995 1996 ------------ ------- -------- -------- -------- --------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) INCOME STATEMENT DATA(1)(2)(3): Net sales.............. $107,964 $63,238 $43,526 $104,277 $120,443 $ 259,341 $47,691 $121,418 Cost of sales(4)....... 96,959 55,737 37,610 88,491 113,394 211,814 42,394 97,889 -------- ------- ------- -------- -------- --------- ------- -------- Gross profit........... 11,005 7,501 5,916 15,786 7,049(4) 47,527 5,297 23,529 Selling, general and administrative expenses.............. 9,466 5,838 4,561 10,765 10,615 18,545 2,749 11,026 Nonrecurring compensation charge(5)............. -- -- -- -- -- 27,632 -- -- -------- ------- ------- -------- -------- --------- ------- -------- Income (loss) from operations............ 1,539 1,663 1,355 5,021 (3,566) 1,350 2,548 12,503 Interest expense....... 2,204 1,337 1,311 3,320 4,560 13,657 1,656 12,542 Other (income) expense............... (2,820) -- -- (167) (90) (735) (65) (269) -------- ------- ------- -------- -------- --------- ------- -------- Income (loss) before income taxes.......... 2,155 326 44 1,868 (8,036) (11,572) 957 230 Provision for (benefit from) income taxes.... 862 130 33 64 (488) (6,538) 366 102 -------- ------- ------- -------- -------- --------- ------- -------- Income (loss) before extraordinary item.... 1,293 196 11 1,804 (7,548) (5,034) 591 128 Extraordinary loss from extinguishment of debt, net of income tax benefit........... -- -- -- -- -- (9,652) -- -- -------- ------- ------- -------- -------- --------- ------- -------- Net income (loss)...... $ 1,293 $ 196 $ 11 $ 1,804 $ (7,548) $ (14,686) $ 591 $ 128 ======== ======= ======= ======== ======== ========= ======= ======== Pro forma income (loss) per share(6).......... $ (.95) $ .01 ========= ======== Pro forma weighted average number of common shares and common share equivalents outstanding(6)........ 15,540 16,562 ========= ======== OTHER DATA: Depreciation and amortization.......... $ 3,385 $ 1,936 $ 79 $ 159 $ 942 $ 4,248 528 $ 3,020 Capital expenditures... 1,243 647 948 1,656 942 5,640 2,530 2,321
20
PREDECESSOR THE COMPANY ------------ ----------------------------------------------- AS OF AS OF DECEMBER 31, AS OF MARCH 31, DECEMBER 31, ------------------------------ --------------- 1991 1992 1993 1994 1995 1996 ------------ ------ ------ ------ -------- --------------- (DOLLARS IN THOUSANDS) (UNAUDITED) BALANCE SHEET DATA (AT END OF PERIOD): Working capital........ $22,720 $8,774 $8,248 $1,170 $108,924 $109,238 Total assets........... 65,659 42,305 47,893 68,233 504,356 500,794 Long-term debt, less current maturities(7)......... -- 11,301 10,806 19,889 443,794 440,453 Stockholders' equity (deficit)(8).......... 54,769 3,011 4,815 (2,733) (66,421) (66,293)
- -------- (1) Effective July 5, 1994, the Company acquired the assets and assumed certain liabilities of SCM. The acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results have been included with the Company's results since the date of acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of the Notes to Consolidated Financial Statements of the Company included herein. (2) Effective August 16, 1995, the Company acquired the inventory and certain equipment of the file folder and hanging file product lines of the Globe- Weis office products division of Atapco. The acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results have been included in the Company's results since the date of acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," Note 3 of the Notes to the Consolidated Financial Statements of the Company and the audited statements of Net Sales and Cost of Sales of Globe-Weis included herein. (3) Effective October 31, 1995, the Company acquired Williamhouse in the Acquisition. The Acquisition has been accounted for under the purchase method and, accordingly, the operating results of Williamhouse, except for the Personalizing Division, for the two-month period ended December 31, 1995 have been included in the Company's results for the year ended December 31, 1995. The Personalizing Division was held for sale at December 31, 1995. As such, the operating results of the Personalizing Division are excluded from the results of operations for the two-month period ended December 31, 1995 (period subsequent to the Acquisition). See "Management's Discussion and Analysis of Financial Condition and Results of Operations," Note 3 of the Notes to Consolidated Financial Statements of the Company and the audited financial statements of Williamhouse included herein. (4) Inventory cost is determined using the LIFO method of valuation. Gross profit in the fourth quarter of 1994 was adversely impacted by a significant increase in paper prices resulting in a $5.4 million charge for LIFO in advance of the Company's raising selling prices in the first quarter of 1995. 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 now able to price its products so as to minimize the impact of price volatility on dollar margins. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." (5) Includes non-cash stock option compensation charges of $24.3 million directly related to the Acquisition as well as other non-recurring cash and non-cash charges aggregating $3.3 million. See Note 9 of the Notes to Consolidated Financial Statements of the Company included herein. (6) Pro forma earnings (loss) per share and pro forma weighted average number of shares and share equivalents outstanding have been adjusted to give effect to the Recapitalization. Common Stock equivalents have been determined using the treasury stock method. (7) Does not reflect the expected repayment of debt with the proceeds from the sale of the Personalizing Division for the year ended December 31, 1995 and the three months ended March 31, 1996. (8) For 1995, includes $4.5 million to pay the liquidation preference, including the return of original cost, of the Company's Class P Common Stock and $70.6 million to redeem a portion of its Preferred Stock. 21 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 computer forms and 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 and most important suppliers of pads and other paper-based writing products, filing supplies and 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 envelopes to paper merchants/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 the Acquisition. 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 Acquisitions. On October 31, 1995, the Company acquired Williamhouse, a leading supplier of envelopes to many of the largest and fastest growing distributors, for an aggregate purchase price (including assumption of debt) of approximately $300 million plus reimbursement of certain expenses to the sellers. On July 5, 1994, the Company acquired the assets and assumed certain liabilities of SCM, one of the industry leaders in hanging files and writing products. The aggregate acquisition consideration of $14.4 million, including fees and expenses, was financed through the incurrence of bank debt. On August 16, 1995, the Company acquired the file folder and hanging file product lines of Atapco's Globe-Weis office products division. Atapco was one of the leading providers of file folders and hanging files to office products superstores. The aggregate acquisition consideration of $19.7 million, including fees and expenses, was financed through the incurrence of bank debt and seller notes. The SCM Acquisition and the Globe- Weis Acquisition further strengthened the Company's position in the filing supplies and writing products categories. On December 20, 1993, Williamhouse acquired the principal assets of Kimberly-Clark Corporation's Karolton envelope business. The Karolton envelope business manufactures high quality envelopes made from fine and specialty grades of paper and Tyvek (R) (a high density polyurethane-based product made by Du Pont). The aggregate acquisition consideration of $9.6 million was financed through the incurrence of bank debt. On July 29, 1994, Williamhouse acquired the giant and X-ray envelope product lines from Huxley Envelope Corp. The aggregate acquisition consideration of $4.2 million, including a seller note, was principally financed through the incurrence of bank debt. Purchase Accounting Effects. The Company's acquisitions have been accounted for using the purchase accounting method. The Acquisition has currently affected, and will prospectively affect, the Company's results of operations in certain significant respects. The aggregate acquisition cost (including assumption of debt) of approximately $300 million was allocated to the net assets acquired based on the fair market value of such net assets. The preliminary allocation of the purchase price resulted in an increase in the historical book value of certain Williamhouse assets such as property, plant and equipment and intangible assets, including goodwill, which results, on a pro forma basis, in incremental annual depreciation and amortization expense of $7.0 million as of December 31, 1995. Potential Operating Improvements. The Company has identified and is in the process of implementing cost reductions in connection with the Acquisition that are expected to result in approximately $7.4 million of annual cost savings following the adoption of such measures. In addition, management plans to implement further identified cost reductions which are expected to improve operations beyond 1996. The most significant cost reduction actions involve closing Williamhouse's New York City headquarters, contractual changes in employee benefit and other insurance plans and the consolidation of sales and marketing and other administrative functions to eliminate duplicative functions, sales programs and sales personnel. However, because these improvements have not yet been fully implemented and Williamhouse's selling, general and administrative ("SG&A") expenses have historically been a higher percentage of net sales than those of the Company prior to the Acquisition, the Company's aggregate SG&A expenses may rise as a percentage of net sales in the near term. 22 Sale of Personalizing Division. The Company's management identified the Personalizing Division of Williamhouse as a nonstrategic asset following the Acquisition and has decided to pursue its sale. As a result, the financial statements of the Company included elsewhere in this Prospectus reflect the Personalizing Division as "Assets held for Sale" as of December 31, 1995 and March 31, 1996. On April 17, 1996, the Company signed a letter of intent with a potential buyer to sell the Personalizing Division. Under the terms of such letter, the Company will receive approximately $60 million in gross proceeds (subject to certain working capital adjustments) from the sale of the Personalizing Division, which it expects to complete by the end of June 1996. To date, the Company has not executed any definitive agreements with respect to such sale and, as a result, no assurance can be given that the proposed sale will be completed or, if completed, will be on the terms outlined herein. SCM Work Stoppage. Prior to the consummation of the SCM Acquisition, management was aware that work rules and associated costs at the SCM plant in Indiana were less favorable than those at other plants of the Company. As a result of management's efforts to bring the labor agreement at the Indiana plant more in line with market labor agreements, a labor strike occurred on September 1, 1994. Consequently, the Company closed the Indiana plant on February 15, 1995, and moved the equipment to other facilities operated by the Company. By July 1995, all machinery and equipment previously operated in Indiana was available for production in other Company facilities. Accordingly, the Company does not believe that such plant closure has had an ongoing material impact on the Company's operations. 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. This volatility negatively impacted the Company's earnings in 1994, particularly in the fourth quarter, as a result of the Company's inability to implement price changes in many of its product lines without giving its customers advance notification. 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 now able to price its products so as to minimize the impact of price volatility on dollar margins. In addition, as a result of acquisitions and new product introductions, the Company offers a broader and more diverse product mix which is less susceptible to paper price fluctuations. See "Risk Factors--Risks Associated with Fluctuations in Paper Costs." RESULTS OF OPERATIONS The following table summarizes the Company's historical results of operations as a percentage of net sales for the years ended December 31, 1993, 1994, and 1995 and the three month periods ended March 31, 1995 and 1996. The results of operations for the year ended December 31, 1995 reflect the historical annual results of the Company and the results of Williamhouse for the two-month period ended December 31, 1995:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------- ------------- 1993 1994 1995 1995 1996 ------- ------- ------- ----- ----- INCOME STATEMENT DATA: Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% ======= ======= ======= ===== ===== Gross profit.................... 15.1 5.9 18.3 11.1 19.4 Selling, general and administra- tive expenses.................. 10.3 8.9 7.2 5.8 9.1 Non-recurring compensation charge......................... -- -- 10.6 -- -- ------- ------- ------- ----- ----- Income (loss) from operations... 4.8 (3.0) 0.5 5.3 10.3 Interest expense, net........... 3.2 3.8 5.2 3.4 10.3 Other (income) expense.......... (0.2) (0.1) (0.2) (0.1) (0.2) ------- ------- ------- ----- ----- Income (loss) before taxes...... 1.8 (6.7) (4.5) 2.0 0.2 Provision for (benefit from) in- come taxes..................... 0.1 (0.4) (2.5) 0.8 -- ------- ------- ------- ----- ----- Income from continuing opera- tions before extraordinary item........................... 1.7 (6.3) (2.0) 1.2 0.2 Extraordinary loss from extin- guishment of debt, net of in- come tax benefit............... -- -- (3.7) -- -- ------- ------- ------- ----- ----- Net income (loss) from continu- ing operations................. 1.7% (6.3)% (5.7)% 1.2 % 0.2 % ======= ======= ======= ===== =====
23 THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 Net sales for the three months ended March 31, 1996 increased by $73.7 million, or 155%, to $121.4 million from $47.7 million for the three months ended March 31, 1995. Of this net sales increase, $64.3 million is related to the Acquisition and $15.9 million is related to the Globe-Weis Acquisition. Ampad division net sales, exclusive of Globe-Weis, decreased by $6.5 million in the first quarter of 1996 compared to the unusually strong first quarter of 1995. The strong 1995 first quarter was due to certain of the Company's customers increasing inventory levels in anticipation of price increases and supply shortages. Gross Profit for the three months ended March 31, 1996 increased by $18.2 million, or 343%, to $23.5 million from $5.3 million for the three months ended March 31, 1995. Approximately $15.5 million of the increase in gross profit is attributable to the Acquisition and $2.0 million is attributable to the Globe-Weis Acquisition. The gross profit from the Ampad division, exclusive of Globe-Weis, increased by $.7 million, due to increased gross margins. Gross profit margin increased to 19.4% for the three months ended March 31, 1996 from 11.1% for the three months ended March 31, 1995. The increase in gross profit margin is related to unfavorable inventory valuation of $2.6 million in the first quarter of 1995 due to rising paper prices. In addition, the Company's ability to maintain its dollar margins in the first quarter of 1996 despite a falling price environment led to higher margin percentages. SG&A expenses for the three months ended March 31, 1996 increased $8.2 million, or 302%, to $11.0 from $2.8 million for the three months ended March 31, 1995. Approximately $7.3 million of the increase is attributable to the Acquisition and includes $1.0 million of amortization of goodwill and intangibles and $.3 million of costs related to the off balance sheet financing of receivables. The remaining $.9 million of the increase is attributable to the Ampad division, primarily related to shifting of corporate activities from the Williamhouse division. As a percentage of net sales, SG&A expenses increased to 9.1% for the first three months of 1996 from 5.8% in the comparable period for the prior year as a result of higher SG&A expenses as a percentage of net sales of the Williamhouse division (11.0% for the period) compared to the Ampad division (5.6% for the period). Interest Expense for the three months ended March 31, 1996 increased $10.9 million to $12.5 million from $1.6 million for the three months ended March 31, 1995. The increase is attributable primarily to increased borrowings as a result of the sale of the Notes in December 1995, the Acquisition in October 1995 and the Globe-Weis Acquisition in August 1995. The income tax provision for the three month period ended March 31, 1996 reflects an effective tax rate of 44.4%, versus an effective tax rate of 38.3% for the three month period ended March 31, 1995. The increase is attributable primarily to the nondeductible goodwill amortization resulting from the Acquisition. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net sales for the year ended December 31, 1995 increased by $138.9 million, or 115%, to $259.3 million from $120.4 million for the year ended December 31, 1994. Of this net sales increase, $46.6 million, or 33%, is related to the Acquisition and $29.4 million, or 21%, is related to the Globe-Weis Acquisition. The remaining increase of $62.9 million, or 46%, is related to increased net sales in the base business, primarily as a result of price increases and, to a lesser extent, a change in product mix, partially offset by a decline in sales through non-strategic channels, particularly independent dealers. Net sales to independent dealers declined to less than 2% of net sales in the year ended December 31, 1995, compared to 8.5% in 1994. Net sales in the emerging channels (national office products superstores, national contract stationers and mass merchandisers) represented 52.0% of total net sales (63.4% of Ampad division sales) in the year ended December 31, 1995 as compared to 45.7% of total net sales (45.7% of Ampad division sales) in the year ended December 31, 1994. Gross profit for the year ended December 31, 1995 increased by $40.5 million, or 575%, to $47.5 million, from $7.0 million for the year ended December 31, 1994. Approximately $13.6 million of the increase in gross 24 profit is attributable to the Acquisition and an estimated $3.8 million increase is due to the Globe-Weis Acquisition. The remainder of the increase in gross profit is due to (i) higher variable margins associated with the gains in unit sales, product mix and pricing; (ii) lower fixed manufacturing costs primarily as a result of the SCM plant closure; and (iii) lower rate of paper price increases in 1995 compared with 1994 and the timing of the Acquisition, resulting in lower LIFO charges of approximately $2.5 million in 1995. Fixed manufacturing costs as a percentage of net sales declined as a result of the successful integration of the Globe-Weis manufacturing operations and the closing of the Indiana facility. Gross profit margin increased in the year ended December 31, 1995 to 18.3% from 5.9% in 1994. The increase is principally a result of higher variable margins, lower fixed manufacturing costs and lower LIFO charges. Excluding acquisitions, gross profit margin would have increased to 16.4% for the period ended December 31, 1995. SG&A expenses for the year ended December 31, 1995 increased by $7.9 million, or 74%, to $18.5 million, from $10.6 million for the year ended December 31, 1994. Approximately $5.9 million of this increase related to the Acquisition. The balance of such increase related to higher amortization costs as a result of the Acquisition and the costs associated with the Accounts Receivable Facility. SG&A as a percentage of net sales for the year ended December 31, 1995 decreased to 7.2% from 8.9% in 1994, as a result of higher revenues and cost efficiencies achieved from the successful integration of SCM and Globe-Weis operations into the Company's existing sales and administrative structure, combined with improved control of operating expenses. The non-recurring compensation charge of $27.6 million for the year ended December 31, 1995 was primarily the result of the issuance of options for Preferred Stock granted to existing option holders in order to maintain such holders' economic value in previously issued options for Common Stock as a result of the Preferred Stock Dividend and the grant of additional options in December 1995 at an exercise price below the fair market value at the date of grant. See Note 9 of the Notes to Consolidated Financial Statements of the Company included herein. Income (loss) from operations for the year ended December 31, 1995 increased by $4.9 million to $1.3 million from ($3.6) million in 1994, for the reasons stated above. Income (loss) from operations as a percentage of net sales for the year ended December 31, 1995 increased to .5% from (3.0)% for the year ended December 31, 1994. Interest expense for the year ended December 31, 1995 increased $9.1 million, or 198%, to $13.7 million from $4.6 million for the year ended December 31, 1994. The increase is attributable primarily to increased borrowings as a result of the Acquisition and the Globe-Weis Acquisition. Income tax benefit for the year ended December 31, 1995 reflects an effective tax rate of 46.9%, versus a 6.1% effective tax rate in 1994. The difference between the effective rate and the statutory rate in 1995 is due to a reduction in the SFAS No. 109 deferred tax valuation allowance resulting from improved operating results. Extraordinary item representing an after tax loss on extinguishment of debt of $9.6 million ($16.1 million pretax) was recognized as a result of $10.8 million of redemption premiums and prepayment penalties associated with the repurchase of the Old Debentures and the Company's bank debt and the write off of $5.3 million of unamortized deferred financing costs in connection with the redemption of the Old Debentures and the Company's debt refinancings. Supplemental 1995 Williamhouse Data. Although only two months of Williamhouse's post-Acquisition results are included in the Company's consolidated financial statements for the year ended December 31, 1995, the Company believes that the following combined twelve month unaudited comparative information is useful in evaluating the expected future contribution of the Williamhouse division to the Company's results of operations. Net sales for the year ended December 31, 1995 increased 6.9% to $265.2 million from $248.0 million for the year ended December 31, 1994. The increased sales are a result of both increased selling prices on commodity 25 and mill branded envelopes and increased sales volume of Christmas card product lines due to product expansion and more aggressive sales efforts. Gross profit for the year ended December 31, 1995 increased by $7.5 million, or 10.1%, to $82.0 million from $74.5 million for the year ended December 31, 1994 as a result of higher pricing offset partially by higher costs. Gross profit margin for the year ended December 31, 1995 increased slightly to 30.9% from 30.0% for the year ended December 31, 1994, as a result of price increases on selected products, partially offset by higher raw material costs for mill branded and commodity paper. SG&A expenses for the year ended December 31, 1995 increased to $48.0 million as compared to $45.2 million for the year ended December 31, 1994. EBITDA for the year ended December 31, 1995 increased by $9.4 million, or 23.8%, to $48.9 million from $39.5 million for the year ended December 31, 1994. EBITDA as a percentage of net sales for the year ended December 31, 1995 increased to 18.4% from 15.9% for the year ended December 31, 1994, as a result of the factors discussed above. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Net sales for the year ended December 31, 1994 increased by $16.2 million, or 15.5%, to $120.4 million from $104.3 million for the year ended December 31, 1993. The net sales increase is related to the SCM Acquisition in July 1994, which contributed $21.0 million through the end of 1994. Excluding the SCM Acquisition, net sales decreased by $4.8 million as a result of the discontinuation of the copy paper brokerage business ($10 million), partially offset by continued sales growth in the emerging distribution channels, which contributed 45% of sales during 1994 compared to 30% in 1993. Net sales from SCM operations were negatively affected as a result of the Indiana plant strike that occurred in the third quarter of 1994. As a result of the work stoppage at the Indiana plant, sales from that plant were $10.4 million for the period between September 1, 1994 through December 31, 1994 as compared to $22.8 million for the same period in 1993. Gross profit for the year ended December 31, 1994 decreased by $8.8 million, or 55.7%, to $7.0 million from $15.8 million for the year ended December 31, 1993. Gross profit margins decreased to 5.9% in 1994, from 15.1% in 1993. Gross profit margin decreased primarily as a result of a $7.0 million increase, or 5.8%, in the LIFO reserve and delayed implementation of price changes subsequent to increased raw material paper costs. Management believes that pricing delays negatively impacted gross profit margin by approximately 2.1%. In addition, as the Company began shifting its customer base to the emerging channels, it incurred certain non-recurring expenses. Such expenses were related to removing competitive products from customers' inventory, revising the Company's packaging and increasing the breadth of products offered by the Company in those channels. Furthermore, as a result of the work stoppage at the Indiana plant, gross profit at that plant decreased from $2.4 million for the period between September 1, 1993 and December 31, 1993, to $(.5) million for the same period in 1994. SG&A expenses for the year ended December 31, 1994 decreased by $.2 million, or 1.4%, to $10.6 million from $10.8 million for the year ended December 31, 1993. SG&A as a percentage of net sales in 1994 decreased to 8.9% from 10.3% in 1993 as a result of management's efforts to successfully integrate SCM's operations into the Company's existing sales and administrative structure. Income (loss) from operations for the year ended December 31, 1994 decreased by $8.6 million to $(3.6) million from $5.0 million for the year ended December 31, 1993. Income (loss) from operations as a percentage of net sales decreased to (3.0)% in 1994 from 4.8% in 1993 primarily as a result of the factors discussed above. Management believes that the Company's 1994 historical earnings are not comparable to the ongoing level of operations of the business which now reflect the full impact of the SCM, Globe-Weis and Williamhouse acquisitions. A prolonged work stoppage at SCM's Indiana plant (see "--Overview--SCM Work Stoppage") prevented the Company from operating the acquired assets at full capacity until 1995. Furthermore, with respect to Globe-Weis, the previous owner allocated to it corporate and other fixed overhead costs at levels higher than those allocated to it by the Company. The Company has operated the Globe-Weis assets profitably since their acquisition. Management believes Globe-Weis can contribute to improved overall ongoing results as compared to 1994 levels of business. Finally, the Company's former pricing policies delayed the aligning of the price the Company charged for its products with the market price for paper. 26 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the three months ended March 31, 1996 was $7.6 million compared to a use of cash of $10.3 million for the three months ended March 31, 1995. The $7.6 million of cash provided in the first quarter of 1996 was primarily due to an income tax refund of $3.6 million, a decrease in accounts receivable of $7.5 million, partially offset by a decrease in accounts payable ($.4 million) and accrued expenses ($1.5 million) and an increase in prepaid expenses ($1.1 million). The use of cash of $10.3 million in the first quarter of 1995 was primarily due to an increase in accounts receivable ($5.0 million) and inventories ($5.7 million) and a decrease in accrued expenses ($2.2 million), partially offset by an increase in accounts payable ($1.7 million). Net cash provided by operating activities for the year ended December 31, 1995 was $8.3 million compared to $1.9 million used by operations for the year ended December 31, 1994. The net cash provided for the year ended December 31, 1995 resulted primarily from an increase of $5.0 million in accounts payable, an increase in accrued expenses of $4.9 million, a decrease in inventories and increased margins on sales. The increase was partially offset by an increase in accounts receivable due to increased sales. Cash used by operations for the years ended December 31, 1994 and 1993 was $1.9 million and $1.7 million, respectively. The use of cash for the year ended December 31, 1994 was primarily due to an increase in inventories offset by an increased LIFO charge due to rising paper prices, and a decrease in accrued expenses, offset by an increase in accounts payable. The use of cash for the year ended December 31, 1993 resulted from increased inventories offset by an increase in accounts payable. Cash used in investing activities for the three months ended March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993, was $3.0 million, $.7 million, $131.2 million, $14.6 million and $.5 million, respectively. The use of cash for the three months ended March 31, 1996 and 1995 was primarily due to purchases of property and equipment. The use of cash for the year ended December 31, 1995, was due to the Acquisition ($122.7 million), the Globe-Weis Acquisition ($7.0 million) and purchase of equipment ($3.9 million). The use of cash for the year ended December 31, 1994, was due primarily to the SCM Acquisition ($14.4 million). The use of cash for the year ended December 31, 1993, was due to purchases of equipment offset by proceeds from the sale of the dated goods products line. Cash provided by financing activities for the three months ended March 31, 1995 and for the years ended December 31, 1995, 1994 and 1993, was $11.1 million, $144.9 million, $16.5 million and $2.2 million, respectively, primarily due to periodic financings incurred in connection with the various acquisitions. Cash used in financing activities for the three months ended March 31, 1996 was $2.9 million due to repayments of debt, partially offset by proceeds from the issuance of long-term debt. Capital expenditures, excluding acquisitions, in the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993 were $2.3 million, $3.9 million, $.9 million and $1.7 million, respectively. The Company expects that combined capital expenditure requirements will be approximately $12 million for 1996. The Company believes these capital expenditure levels will be sufficient to maintain competitiveness and to provide sufficient manufacturing capacity. The Company expects to fund capital expenditures primarily from cash generated from operating activities. As a result of the Transactions, the debt service costs associated with the borrowings under the Bank Credit Agreement and the Notes significantly increased the Company's liquidity requirements. Additional borrowings are available under the $45 million revolving credit facility portion of the Bank Credit Agreement. As of March 31, 1996, the Company did not have any borrowings under the revolving credit facility portion of the Bank Credit Agreement. The Bank Credit Agreement and the Indenture impose certain restrictions on the Company, including restrictions on its ability to incur indebtedness, pay dividends, make investments, grant liens, sell its assets and engage in certain other activities. In addition, the indebtedness of the Company under the Bank Credit Agreement is secured by substantially all of the assets of the Company, including the Company's real and personal property, inventory, accounts receivable, intellectual property and other intangibles. See "Description of Certain 27 Indebtedness--Bank Credit Agreement." The Company expects that cash flows from operating activities together with borrowings available under the Bank Credit Agreement or the New Bank Credit Agreement, as the case may be, will be sufficient to fund working capital needs, capital spending requirements, restructuring costs incurred in connection with the Acquisition and debt service requirements of the Company's capital structure for the foreseeable future. Concurrently with the Acquisition, the Company entered into the $45 million Accounts Receivable Facility. 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 or the New Bank Credit Agreement, as the case may be, and available cash on hand at March 31, 1996 of $20.1 million, will be adequate for the foreseeable future to make required payments of principal and interest on the Company's indebtedness, to fund anticipated capital expenditures and working capital requirements, including the aforementioned restructuring costs, and to enable the Company and its subsidiaries to comply with the terms of their debt agreements. However, actual capital requirements may change, particularly as a result of any acquisitions which the Company may make. The ability of the Company to meet its debt service obligations and reduce its total debt will be dependent, however, upon the future performance of the Company and its subsidiaries which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond the Company's control. A portion of the consolidated debt of the Company bears interest at floating rates; therefore, its financial condition is and will continue to be affected by changes in prevailing interest rates. The Company has entered into an interest rate protection agreement to minimize the impact from a rise in interest rates. The proceeds received by the Company from the Offering will be used to prepay certain of the Term Loans under the Bank Credit Agreement, to redeem certain of the Notes and to pay certain expenses. See "Use of Proceeds." Contemporaneously with the Offering, the Company intends to refinance and retire all remaining indebtedness under the Bank Credit Agreement with the proceeds of the loans under the New Bank Credit Agreement. Although the Company has not finalized the terms of the definitive New Bank Credit Agreement, Bankers Trust Company has, subject to certain conditions, committed to provide the facility. Although there can be no assurances that the Company will be successful in negotiating the New Bank Credit Agreement, or if successful, the terms of such facility, the Company anticipates that the New Bank Credit Agreement will provide a revolving credit facility of $300 million subject to the following principal terms: Loans made under the New Bank Credit Agreement will bear interest at a rate per annum equal to, at the Company's option, (i) the Base Rate plus the Applicable Margin or (ii) the Eurodollar Rate plus the Applicable Margin (as each term is defined in the New Bank Credit Agreement). The Applicable Margin for Base Rate loans will vary from 0% to .75% and the Applicable Margin for the Eurodollar Loans will vary from .75% to 1.75%, each based on the Company's consolidated level of debt as compared to consolidated EBITDA ("Leverage Ratio") and the type of loan. Availability under the New Bank Credit Agreement will be subject to an unused commitment fee which will be a percentage of the unutilized revolving loan commitment. This percentage will vary from .3% to .5% based on the Company's Leverage Ratio. Availability under the New Bank Credit Agreement will generally be reduced to the extent of the net proceeds of a sale of assets by the Company, the net proceeds of an issuance of debt by the Company or 50% of the net proceeds of an issuance of equity by the Company. Availability will also be reduced by $50 million in 1999 and $50 million in 2000. The New Bank Credit Agreement is expected to terminate in 2001. The Company will be permitted to make acquisitions under the New Bank Credit Agreement up to $25 million per acquisition without consent of the Required Banks (as defined in the New Bank Credit Agreement) and up to $50 million per acquisition if, on a pro forma basis giving effect to such acquisition, the Company's Leverage Ratio is less than 3.0 to 1.0. If the New Bank Credit Agreement had been in place on March 31, 1996, the initial interest rate would have been 7.5%. As a result of the New Bank Credit Agreement, the Company's effective interest rate under its senior credit facility is expected to be reduced by 156 basis points contemporaneously with the Offering. 28 On May 29, 1996, the Company signed a definitive agreement to acquire Niagara for a purchase price of approximately $50 million. In addition, the Company will enter into a one-year consulting services agreement with the former chief executive officer of Niagara pursuant to which the Company will make a $5.0 million payment at the closing of the Niagara Acquisition. The Company expects the Niagara Acquisition to be completed by the middle of July 1996. The Company expects to use existing cash balances as well as borrowings under New Bank Credit Agreement to fund the Niagara Acquisition. In the event the sale of the Personalizing Division is completed prior to the Offering, the Company has obtained the consent of its lenders under the Bank Credit Agreement to use the net proceeds from the sale to fund substantially all of the Niagara Acquisition. Otherwise, the Company will use the proceeds from the sale of the Personalizing Division to repay indebtedness. INFLATION The Company believes that inflation has not had a material impact on its results of operations for the three years ended December 31, 1995. CHANGES IN ACCOUNTING STANDARDS The Company has elected not to early adopt the provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation." The Company will adopt the reporting provisions of SFAS 123 in 1996. The Company expects the adoption to have no effect on its financial condition or results of operations. 29 INDUSTRY OFFICE PRODUCTS The North American office products industry, excluding contract office furniture and business machines, generates approximately $60 billion to $70 billion in annual sales at retail prices. The Company believes that the market has grown at an approximate average annual rate of 4% from 1992 to 1995. Office products include paper, envelopes, writing products, writing instruments, mailroom supplies, filing supplies, organizers, desktop accessories, business forms, binders, tape, printed products, staples and fastening products and other consumable items. The Company believes that the market for these products is approximately $30 billion to $35 billion at wholesale prices. The Company participates in the writing products, filing supplies and envelope segments of the industry. The writing products segment includes writing pads, notebooks, jotter pads, easels, flip charts, data pads, message pads, wire notebooks, certain business forms, specialty computer forms, business machine paper and other categories, including a wide range of stock keeping units ("SKUs") based on size, quality, finish, thickness, reusability/refillability and various customized features. The key raw materials for writing products are tablet and form grades of paper. The Company estimates that the writing products segment at wholesale prices is approximately $2.87 billion in size. The filing supplies segment includes suspension (hanging) files, expandable folders, manila folders, index cards, labels and related products. Estimated by the Company at approximately $1.5 billion at wholesale prices, the filing supplies segment is characterized by manufacturers with national brand coverage, large-scale production capabilities, wide-area distribution systems and standardized products. The key raw materials for filing supplies are paperboard, bristols, metal and plastics, all of which are available from a large number of suppliers. The envelope segment includes both standard size and specialty envelopes such as catalog mailing envelopes, envelopes closable by metal clasp or button-and-string, and giant, X-ray, remittance and overnight delivery envelopes. Envelopes are made from mill branded and commodity grades of paper or from Tyvek (R) (a high density polyurethane-based product made by Du Pont) and other non-woven material. According to the Envelope Manufacturers Association of America, the United States envelope market in 1995 was estimated to be approximately $2.8 billion dollars in net sales or 168.6 billion units at the manufacturers' level. The historical growth rate for envelopes has shown high correlation with that of Gross Domestic Product ("GDP"). The Company believes that demand for writing products, filing supplies and envelopes has not been significantly affected by the growth in electronic office tools such as e-mail and personal digital assistants and the Company does not expect these tools to have a significant impact on such demand for the foreseeable future. DISTRIBUTION Office products are distributed from the manufacturer to the end-user through several different channels, including retail channels such as national office product superstores, mass merchandisers and warehouse clubs; commercial channels such as national contract stationers; paper merchants/distributors; and other channels such as regional distributors, school campuses and direct mail. Office products, including writing products, filing supplies and a relatively small portion of envelopes, were traditionally distributed through contract stationers, wholesalers and independent dealers. Envelopes have been distributed primarily through paper merchants/distributors. Since the mid- 1980s, the office products industry has experienced significant changes in the channels through which office products are distributed such as the emergence of new channels, including national office product superstores, national contract stationers and mass merchandisers, and consolidation within these and other channels. As a result of these changes, approximately 6,800 office product distributors existed in 1994 compared with approximately 13,300 in 1987. Retail Channels. The Company estimates that total 1995 sales of office products to end-users in North America through retail channels were approximately $20 billion to $25 billion. Office products retailers typically serve small and medium-sized businesses, home offices and individuals. The national office products superstores 30 have experienced significant consolidation in recent years, with today's three dominant operators (Office Depot, OfficeMax and Staples) emerging from approximately 17 different superstore operators in 1986. Over the past three years, Office Depot, OfficeMax and Staples have each experienced average annual growth rates in excess of 30%. In addition, mass merchandisers (such as Wal-Mart) and warehouse clubs (such as Sam's Warehouse Club) are significant and growing retailers of office products, although both carry a smaller assortment than do the superstores. The three dominant national office superstores currently account for approximately 17% of total retail office products sales and approximately 6% of total office products sales. In addition to the growth experienced by these operators within the retail channel, the retail channel as a whole has also captured significant market share from other distribution channels. Commercial Channels. The Company estimates that total 1995 sales of office products to end-users in North America through commercial channels were approximately $25 billion to $30 billion. Commercial distributors typically serve large and medium-sized business customers through product catalogs and direct sales forces. Generally, commercial distributors stock products in distribution centers and deliver them to customers on a next-day basis against orders received electronically, by telephone or fax, or taken by a salesperson on the customer's premises. A growing segment within commercial channels is the contract stationer channel. Major contract stationers purchase in large quantities directly from manufacturers, rely upon wholesaler intermediaries to only a limited extent for inventory backup and product breadth, and offer significant volume-related discounts and a high level of service to their customers. Most contract stationers operate in only one or very few major metropolitan areas. There has been significant consolidation of contract stationers into national companies in recent years, and the Company expects this consolidation trend to continue. Major national participants include Boise Cascade Office Products, BT Office Products, Corporate Express, U.S. Office Products and the contract stationer divisions of Office Depot and Staples. These national contract stationers now account for approximately 25% of commercial office products sales and approximately 11% of total office products sales. Given this consolidation and opportunity for growth, suppliers capable of distributing a broad and deep product line nationwide, such as the Company, are best positioned to serve major contract stationers. Paper Merchants/Distributors Channel. According to industry sources, the paper merchant/distributor channel has been experiencing 6% to 7% growth over the past three years. Paper merchants/distributors sell a wide range of products including stationery, envelopes, and invitations and announcements to printers, thermographers, office products companies and large end-users. Total 1995 net sales of envelopes by the paper merchant/distributor channel are estimated to have been approximately $855 million. Envelopes, invitations and announcements made from branded paper are purchased from manufacturers that have been "designated" by paper mills to convert their proprietary paper into such products. A paper mill generally "designates" two manufacturers for its mill branded paper. A "designated" manufacturer has an advantage in purchasing branded paper directly from the mills at more favorable prices than from paper merchants/distributors and in accessing a dependable paper supply. Envelope manufacturers which supply a complete product offering of mill branded, specialty and commodity envelopes are best positioned to serve these paper merchants/distributors. The paper merchant/distributor channel has also experienced, and is continuing to experience, significant consolidation, with ResourceNet, Unisource and Zellerbach emerging as the channel's leaders. Other Channels. The Company estimates that total sales of office products to end-users in North America through other channels, such as regional distributors, school campuses and direct mail, are approximately $5 billion to $10 billion. The Company's strategy with respect to each of these distribution channels is to focus on the most rapidly growing customers, particularly dominant industry participants leading the trend towards consolidation such as Office Depot, OfficeMax, Staples, Wal-Mart and Sam's Warehouse Club in the retail channel; Boise Cascade Office Products, BT Office Products, Corporate Express, U.S. Office Products and the contract stationer divisions of Office Depot and Staples in the contract stationers channel; and ResourceNet, Unisource and Zellerbach in the paper merchant/distributor channel. The Company also believes there is significant opportunity to distribute envelope product lines through the rapidly growing retail channel under the Ampad and private label names. Prior to the Acquisition, Williamhouse sold envelopes primarily through the paper merchant/distributor channel. See "Business--Growth Strategy." 31 BUSINESS The Company is one of the largest manufacturers and marketers of nationally branded and private label paper-based office products (excluding computer forms and copy paper) in the $60 billion to $70 billion North American office products industry. The Company offers a broad product line including writing pads, file folders, envelopes and other office 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 and envelopes to many of the largest and fastest growing office products distributors. Acquired in October 1995, the Company's Williamhouse division is the leading supplier of mill branded, specialty and commodity envelopes to paper merchants/distributors. The Company's strategy is to grow by focusing on the largest and fastest growing office product distribution channels, making acquisitions, introducing new product lines, broadening product distribution across its channels and maintaining its position among the lowest-cost manufacturers in the industry. As a result of this strategy, the Company's sales have grown at a compound annual rate of approximately 34% from 1992 to 1995. For the year ended December 31, 1995, the Company had net sales of $617.2 million and income from operations of $57.3 million on the pro forma basis described herein. See "Unaudited Pro Forma Financial Data." COMPETITIVE STRENGTHS The combination of the Company's products and customers distinguishes it as a leading manufacturer and marketer of paper-based office products (excluding computer forms and copy paper) in North America. The Company attributes this position and its continued opportunities for growth and profitability to the following competitive strengths: . Market Leader. The Company has achieved market leadership in core products sold to customers in the largest and fastest growing office products channels by offering one of the broadest assortments of high quality products in the industry. Furthermore, the Company enjoys national brand awareness in many of its product lines, including Ampad, Century, Embassy, Evidence, Gold Fibre, Huxley, Karolton, Kent, Peel & Seel, SCM, Williamhouse and World Fibre. . Well-Positioned and Diversified Customer Base. The Company has substantial opportunities for growth within several distribution channels of the office products industry. The Company has focused on the largest and fastest growing office products channels. Several of the Company's largest customers, such as Boise Cascade Office Products, BT Office Products, Corporate Express, Office Depot, OfficeMax and Staples, are expected by industry analysts to experience annual revenue growth of 15% to 35% over the next five years. The Company's Williamhouse division maintains particularly strong relationships with the largest and fastest growing paper merchants/distributors in the market, including ResourceNet, Unisource and Zellerbach. The Company also maintains strong customer relationships across all of the other office products distribution channels, including mass merchandisers, warehouse clubs, office products wholesalers and independent dealers. . National Scale and Service Capability. The Company's extensive product line, multiple brands and broad price point coverage provide significant advantages and economies of scale in selling to and servicing its customers. The Company has become an increasingly important strategic partner to its customers as they seek higher value-added products, simplify their purchasing organizations and consolidate their relationships among selected national suppliers. The Company's national presence and network of 22 strategically located facilities have enabled it to maintain rapid and efficient order fulfillment standards. In addition, the Company's advanced EDI capabilities enable it to meet its customers' EDI requirements, executing automated transactions rapidly, efficiently and accurately. . Innovation/New Products. The Company has introduced several innovative products as part of its marketing strategy to differentiate itself from other suppliers and enhance profitability. Recent examples include Gold Fibre classic and designer notebooks, Papers with a Purpose, World Fibre ground-wood writing pads and Peel 32 & Seel envelopes. Products introduced since 1992 accounted for over $70 million of the Company's 1995 net sales. The Company's brand recognition and presence with its national customers allows it to more easily introduce new or acquired product lines to those customers. . Low-Cost Manufacturer. The Company believes it is among the lowest-cost manufacturers of paper-based office products in the industry. The Company ensures its low-cost manufacturing position through its paper purchasing and distribution advantages as well as its maintenance of modern and efficient manufacturing technology and a high quality workforce. The Company has been successful in reducing costs with each of its acquisitions in the last three years by continually streamlining its manufacturing processes and overhead structure. From 1992 to 1995, the Company reduced its fixed manufacturing costs from 7.4% to 5.2% of net sales and its selling, general and administrative expenses from 10.5% to 7.2% of net sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview." . Purchasing Advantages. The Company has strong relationships with most of the country's largest paper mills, many of which have been conducting business with the Company for more than 30 years. The Company is one of the largest purchasers of the principal paper grades used in its manufacturing operations. In addition, the Company has the largest number of designated mill relationships which involve some of the largest and most recognized paper mill brands such as Hammermill, Hopper, Neenah and Strathmore. These relationships afford the Company certain paper purchasing advantages, including stable supply and favorable pricing arrangements. . Proven Management Team With Successful Track Record. The Company's senior operating management team averages over 25 years each in the paper products industry. Management has succeeded in increasing sales and operating profitability by recognizing and acting on the transition to the fastest growing distribution channels, introducing higher value-added products, acquiring complementary product lines (Karolton in December 1993, SCM in July 1994 and certain product lines of Huxley and Globe-Weis in July 1994 and August 1995, respectively), improving manufacturing processes and reducing overhead and administrative costs. Upon completion of the Offering, the Company's senior management team will collectively own 865,516 shares of Common Stock (438,427 shares if the U.S. Underwriters' over-allotment is exercised in full) and hold currently exercisable options to purchase an additional 2,156,000 shares of Common Stock. Assuming an initial public offering price of $16.00 per share, these holdings represent on a fully- diluted basis approximately 10.3% of the outstanding Common Stock (8.9% if the U.S. Underwriters' over-allotment is exercised in full). GROWTH STRATEGY The Company's strategy is to maintain and strengthen its leadership position by focusing on the following: . Focus on Rapidly Growing Customers. The Company serves many of the largest and best positioned customers in the office products market segment including national office products superstores, mass merchandisers and warehouse clubs, national contract stationers and national paper merchants/distributors. For 1995 on a pro forma basis, approximately 15.3% of the Company's net sales were to national office product superstores, 7.8% to mass merchandisers and warehouse clubs, 9.1% to national contract stationers and 19.7% to the three largest national paper merchants/distributors. Anticipating further consolidation in the office products industry, the Company expects that its national scope and broad product line will be increasingly important in meeting the needs of its customers. The Company will continue to target those customers driving consolidation in the office products industry. . Continue to Introduce New Products. New, higher value-added products give the Company a greater selection to offer its customers and improve product line profitability for both the Company and its customers. The Company plans to differentiate itself from other suppliers and improve profitability through product innovation, differentiation and line extensions. . Pursue Complementary Product Line and Strategic Acquisitions. The office products industry is highly fragmented despite continuing consolidation among its manufacturers. The Company is leading consolidation among manufacturers of writing products, filing supplies and envelopes. The SCM and Williamhouse 33 acquisitions broadened the Company's product line to include filing products and envelopes and enhanced its presence in the growing distribution channels. The Globe-Weis acquisition and the Company's agreement to acquire Niagara demonstrate its commitment to strengthening its competitive and strategic position within its markets. The Company believes that there are significant opportunities to acquire companies in both its existing and complementary product lines. In addition, the Company intends to enter new office products markets through acquisitions of established companies in those markets. . Broaden Product Distribution. The Company's market presence and distribution strengths uniquely position it to sell new or acquired product lines across its distribution channels, including national office products superstores, national contract stationers, office product wholesalers and mass merchandisers. As an important part of its growth strategy, for example, the Company has successfully introduced the envelope product lines acquired in the Acquisition, previously distributed primarily through paper merchants/distributors, to the Ampad division's distribution channels under the Ampad and private label names. The Company estimates that this market opportunity is approximately $350 million in annual net sales. . Continue to Reduce Costs. The Company has identified and is in the process of implementing cost reductions in connection with the Acquisition that are expected to result in approximately $7.4 million of annual cost savings following the adoption of such measures. In addition, management plans to implement further identified cost reductions beyond 1996. RECENT ACQUISITION On May 29, 1996, the Company executed a purchase agreement to acquire Niagara for an aggregate purchase price of approximately $50 million, plus $5.0 million to be paid under a one-year consulting services agreement. Niagara supplies mill branded, specialty and commodity envelopes to paper merchants/distributors through four manufacturing facilities located near Buffalo, Chicago, Dallas and Denver. Niagara had 1995 net sales of approximately $106 million and operating income of approximately $8.5 million. The Company expects the Niagara Acquisition to be completed by the middle of July 1996. The Company believes that the Niagara Acquisition will strengthen the Company's distribution capabilities in the Midwest, provide additional manufacturing capacity and opportunities to achieve operating improvements through the consolidation of Niagara's operations with those of the Company. The completion of the Niagara Acquisition is subject to certain conditions. Although the Company regularly engages in discussions with companies regarding potential acquisitions, it currently does not have any agreements or understandings relating to acquisitions other than the Niagara Acquisition. SALE OF PERSONALIZING DIVISION The Company's management identified the Personalizing Division of Williamhouse as a nonstrategic asset following the Acquisition and has decided to pursue a sale of the Personalizing Division. As a result, the financial statements of the Company included elsewhere in this Prospectus reflect the Personalizing Division as "Assets held for Sale" as of December 31, 1995 and March 31, 1996. On April 17, 1996, the Company signed a letter of intent with a potential buyer to sell the Personalizing Division. Under the terms of such letter, the Company will receive approximately $60 million in gross proceeds (subject to certain working capital adjustments) from the sale of the Personalizing Division, which it expects to complete by the end of June 1996. To date, the Company has not executed any definitive agreements with respect to such sale and, as a result, no assurance can be given that the proposed sale will be completed or, if completed, will be on the terms outlined herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." PRODUCTS AND SERVICES Pads and Other Paper-Based Writing Products. The Company is the largest manufacturer and marketer of paper-based writing products (excluding computer forms and copy paper) in North America, offering more than 2,200 SKUs of writing pads, notebooks and specialty papers. Many of the Company's writing products are 34 available in multiple sizes, grades of paper (including recycled), and colors and with glued, perforated tops or wire binding. All writing products are offered under the Ampad brand name or a retailer's private label. During the past three years, the Company has focused on the introduction of new and innovative products such as Gold Fibre classic and designer notebooks, Papers with a Purpose and World Fibre ground-wood writing pads. The Company has also created innovative packaging, especially for sale through warehouse clubs (bulk and crate packaging), superstores and mass merchandisers. Filing Supplies. The Company is one of the three largest manufacturers of filing supplies in North America. The product line includes more than 800 SKUs of filing supplies including file folders, hanging files, index cards and expandable folders under the SCM and Globe-Weis brand names. The Company has been expanding its market share in filing supplies by focusing its sales efforts on large retail customers and contract stationers, where its writing products enjoy the leading market share position. Envelopes. The Company is the largest manufacturer of envelopes serving the paper merchant/distributor channel and sold over 10 billion envelopes in 1995. The Company's broad envelope product line includes products manufactured from mill branded paper, which is paper unique in color and texture to a particular mill, typically with an identifying watermark. The Company is the designated envelope manufacturer for 33 mill brands, which is approximately twice as many as its nearest competitor. These brands include the Hammermill, Strathmore and Beckett divisions of International Paper Company, the Hopper division of Georgia Pacific Corporation, the Neenah division of Kimberly-Clark Corporation and the Gilbert division of Mead. The Company also produces a wide variety of standard size and specialty envelopes made from commodity paper and Tyvek (R) (a high density polyurethane based product made by Du Pont), including booklet and catalog mailing envelopes, envelopes closable by metal clasp or button-and-string, Peel & Seel (pressure sensitive adhesion) envelopes, and giant, X-ray and remittance envelopes. The Company offers in excess of 30,000 SKUs of envelopes (which the Company believes is more than any of its competitors), providing its customers with a wide choice of paper grades, colors and sizes. Invitations and Announcements. The Company is among the largest manufacturers of invitations and announcements, Christmas and holiday cards, and presentation folders. These products are sold principally to paper merchants/distributors, personalizing businesses (including the Personalizing Division), and other wholesale outlets throughout the United States. The Company offers a wide variety of such products, primarily made from the same mill branded grades of paper used in manufacturing envelopes. 35 The following chart illustrates the Company's principal products and customers and selected brands in its primary business segments: AMERICAN PAD & PAPER COMPANY AMPAD DIVISION WILLIAMHOUSE DIVISION Products ------------------------------------------------------ .Pads and Notebooks . Envelopes . Invitations .Filing Supplies . Announcements .Envelopes . Christmas and Holiday Cards Customers ------------------------------------------------------ .Retailers . Paper Merchants/Distributors . Jobbers .Contract Stationers . Personalizing Businesses .Wholesalers .Buying Groups Selected Brands ------------------------------------------------------ .Ampad(R) . Century(TM) . Huxley(TM) .Embassy(R) . Karolton(R) .Evidence(R) . Kent(R) .Globe-Weis(R) . Peel & Seel(R) .Gold Fibre(R) . Williamhouse(TM) .SCM(TM) .World Fibre(TM) SALES, DISTRIBUTION AND MARKETING The Company markets its broad range of products to a wide variety of customers. In 1995, only two customers accounted for more than ten percent of the Company's net sales. The Company's aggregate net sales to Sam's Warehouse Club/Wal-Mart and Office Depot accounted for approximately 14.8% and 12.7% of the Company's net sales for 1995, respectively. The Company markets its writing products and filing supplies through virtually every channel of distribution for paper-based office products including the largest mass merchant retailers, office product superstores, warehouse clubs, major contract stationers, paper merchants/distributors and other traditional outlets for office supplies such as office product wholesalers, independent dealers, buying groups and mail order firms. The Company sells its envelopes principally to paper merchants/distributors and other wholesale outlets throughout the United States, primarily through an in-house sales force. In addition, mill branded products are 36 sold directly to personalizing businesses (including the Personalizing Division). The Company currently employs sales representatives at 20 locations throughout the United States and sells products to over 2,000 paper merchants/distributors in the United States and Canada. As an important part of its growth strategy, the Company has successfully introduced the envelope product lines acquired in the Acquisition, previously distributed primarily through paper merchants, to its existing office products distribution channels under the Ampad and private label names. The Company estimates that this market opportunity is approximately $350 million in net sales. The following chart illustrates some of the Company's key customers: KEY CUSTOMERS Office Products Mass Merchandisers: Paper Merchants/Distributors: Superstores: Wal-Mart ResourceNet Office Depot Unisource OfficeMax Zellerbach Staples Contract Stationers: Office Products Warehouse Clubs: Boise Cascade Office Wholesalers: Sam's Warehouse Club Products S.P. Richards BT Office Products United Stationers Corporate Express Office Depot* Staples* - -------- * Contract stationers division The Company has targeted and will continue to target those customers driving consolidation in the office products industry and believes that it is uniquely positioned to meet the special requirements of these customers in the growing distribution channels of the office products industry. These customers seek suppliers, such as the Company, who are able to offer broad product lines, higher value-added innovative products, national distribution capabilities, low costs and reliable service. Furthermore, as these customers continue to grow and they consolidate their supplier bases, the Company's ability to meet their special requirements will be an increasingly important competitive advantage. Recognizing Ampad's potential for growth through the changing distribution channels, Bain Capital and management purchased the Company from Mead in 1992. Since that time, management has enhanced the Company's scale, broadened its product line, expanded upon its national presence and strengthened its distribution capabilities through acquisition and innovation while simultaneously delivering higher customer service levels. As a result, the Company's sales through the most rapidly growing retail and commercial channels increased from $8.8 million in 1992 to $134.8 million ($164.5 million on a pro forma basis) in 1995. For the same period, the Company's sales to the three largest paper merchants/distributors increased from $75.6 million to $100.6 million. COMPETITION The markets for the Company's products are highly competitive. Competition is based largely on a company's ability to offer a broad range of products on a regional or national scale at competitive prices and to deliver these products on a timely basis. The Company has many local and regional competitors. The markets in which the Company operates have become increasingly characterized by a limited number of large companies selling under recognized trade names. These larger companies, including the Company, have the economies of scale, national presence, management information systems and breadth of product line required by the major customers. In addition to branded product lines, manufacturers also produce private-label products, especially in the context of broader supply relationships with office product superstores and contract stationers. The writing products industry is fragmented, ranging from large national manufacturers to localized jobbers and printers. A few manufacturers, including the Company, have developed strong brand name recognition for a limited number of product lines. Other national companies include Mead, the Tops division of Wallace Computer Services, the Stuart Hall division of Newell Co. and Pen-Tab Industries. 37 In the filing supplies segment, the Company's key domestic competitors include Smead Manufacturing and Esselte A.B. Envelope manufacturers compete in three distinct channels. In the paper merchant/distributor channel, where the Company competes, manufacturers sell a wide variety of mill branded, specialty and commodity envelope products to paper merchants/distributors. The Company's principal competitor in this channel is New York/National Envelope Group of National Envelope Corporation, a private company. Other competitors in this channel include Niagara (pending acquisition by the Company) and Murray Envelope Corp. In the direct channel, manufacturers sell customized envelopes directly to high volume corporate users and mass mailers. Mail-Well is the leading company in this channel. In the office products channel, manufacturers including Westvaco and Quality Park produce commodity mailing envelopes for retail sale. INTELLECTUAL PROPERTY The Company registers some of its material trademarks, tradenames and copyrights and has acquired patent protection for some of its proprietary processes. In the opinion of management, the Company has current trademark rights to conduct its business as now constituted. The Company has the right to use the Globe-Weis(R) name on a non-exclusive basis through August 1998, pursuant to the Company's purchase of certain file folder and hanging file assets from Atapco. The Company does not expect that the loss of the right to use the Globe-Weis name will have a material adverse effect on its results of operations. EMPLOYEES As of March 31, 1996, the Company employed a total of 3,198 full-time persons, including 3,170 manufacturing, sales and administrative personnel and 28 corporate staff members. In addition, the Personalizing Division (currently held as "Assets Held for Sale") had 1,832 employees at March 31, 1996. The Company expects to add approximately 650 employees as a result of the Niagara Acquisition (including 140 employees covered by a collective bargaining agreement). All the Company's operations are non-union except for the operations at the facilities located in Fresno, California; Scottdale, Pennsylvania; Miamisburg, Ohio; and Appleton, Wisconsin which have, in total, approximately 900 union employees. The collective bargaining contracts covering the Company's employees will expire as follows: the Miamisburg contract expires December 31, 1996; the Appleton contract expires March 31, 1997; and the Scottdale contract expires April 30, 1998. The Company is currently in the process of closing its Fresno facility, at which approximately 74 unionized members are employed. With the exception of a strike at the Company's Indiana plant, as described below, there have been no work stoppages at any Company facility during the last five years. The Company believes that its relations with its employees and unions are satisfactory. In July 1994, the Company acquired the writing products and filing supplies assets of SCM. Work rules and associated costs at SCM's plant in Indiana were less favorable than those at other plants of the Company. As a result of management's effort to bring the labor agreement at the Indiana plant more in line with market labor agreements, a labor strike occurred on September 1, 1994. Consequently, the Company closed the Indiana plant on February 15, 1995 and moved the equipment to other facilities operated by the Company. By July 1995, all machinery and equipment previously operated in Indiana was available for production in other facilities of the Company. PROPERTIES AND FACILITIES As of March 31, 1996, the Company operated manufacturing, distribution, office and warehouse space in the United States with a total floor area of approximately 3,499,716 square feet. Of this footage, approximately 989,500 square feet are leased and approximately 2,510,216 square feet are owned. The Personalizing Division operates through 10 primary facilities with a total floor space of approximately 736,500 square feet. As a result of the Niagara Acquisition, the Company expects to acquire four manufacturing facilities and two warehouses with a total floor area of approximately 470,000 square feet. The manufacturing facilities are located near Buffalo, Chicago, Dallas and Denver and the warehouses are located near Denver and Kent, Washington. 38 To provide a cost efficient supply of products to its customers, the Company maintains centralized management of nationwide manufacturing and distribution facilities. Since 1992, the Company has consolidated ten manufacturing and distribution facilities into five facilities. The Company's management is evaluating the potential closure of additional space acquired pursuant to the Acquisition. All of the Company's owned facilities are pledged as collateral under the Bank Credit Agreement and are expected to be similarly pledged under the New Bank Credit Agreement. The Company believes that substantially all of its property and equipment is in good condition and that it has sufficient capacity to meet its current and projected manufacturing and distribution needs in the foreseeable future. The following table describes the principal properties of the Company (other than sales service centers, sales office space, temporary warehouse space and facilities associated with the Personalizing Division) as of March 31, 1996:
BUSINESS OWNED OR EXPIRATION OF SQUARE LOCATION DIVISION (1) LEASED LEASE (2) FEET -------- ------------- -------- ----------------- ------- CALIFORNIA Fresno................ A Leased 1997(a) 42,900 Fresno................ A Leased 1997(a) 84,200 City of Industry...... W Owned 85,000 City of Industry...... W Leased 2008(b)(c) 105,000 West Sacramento....... W Leased 2000(c) 37,000 Rancho Cucamonga...... W Leased 1996(c) 12,800 COLORADO Denver................ W Leased 1998(c) 21,100 GEORGIA Moultrie.............. W Owned 50,000 ILLINOIS Mattoon............... A Leased month-to-month 29,200 Mattoon............... A Owned 261,800 Mattoon............... A Leased 3 month renewable 25,200 term Mattoon............... A Leased 1996(c) 58,900 Chicago............... W Leased 1996(c) 33,000 Chicago............... W Owned (d) 200,000 MASSACHUSETTS Westfield............. A Owned 128,000 Holyoke............... A Owned (d) 572,416 Millbury.............. W Leased 1996(c) 30,100 MISSISSIPPI Kosciusko............. A Leased 1997(a)(c)(e) 70,600 NEW JERSEY Bloomfield............ W Leased 2003 94,000 NEW YORK New York City......... W Leased 2009 22,000 OHIO Miamisburg............ W Leased 1998(c)(f) 177,000 PENNSYLVANIA Scottdale............. W Owned 400,000 Mt. Pleasant.......... W Leased 1999(c) 11,000 TENNESSEE Morristown............ W Owned 140,000
39
BUSINESS OWNED OR EXPIRATION OF SQUARE LOCATION DIVISION (1) LEASED LEASE (2) FEET -------- ------------- -------- ------------- ------- TEXAS Dallas........................ Corporate Leased 1998 14,500 Headquarters Corsicana..................... W Owned 250,000 UTAH North Salt Lake City.......... A Owned 110,000 North Salt Lake City.......... A Leased 2001(g) 97,000 WASHINGTON Kent.......................... W Leased 1999 24,000 WISCONSIN Appleton...................... W Owned 313,000
- -------- (1) "A" indicates operations associated with the Company's Ampad division and "W" indicates operations associated with the Company's Williamhouse division. (2) (a)Sublease. (b)Lease contains option to purchase. (c)Lease or sublease contains an extension or renewal option. (d)Two properties owned at this location. (e)Sublease contains option to assume prime lease. (f)Lease contains a right of first refusal. (g)Two leases at this location. LEGAL PROCEEDINGS The Company is a party to various litigation matters incidental to the conduct of its business. Management does not believe that the outcome of any of the matters in which it is currently involved will have a material adverse effect on the financial condition or results of operations of the Company. See "--Environmental, Health and Safety Matters." ENVIRONMENTAL, HEALTH AND SAFETY MATTERS The Company is subject to federal, state, and local environmental and occupational health and safety laws and regulations. Such laws and regulations impose limitations on the discharge of pollutants and establish standards for management of waste. While there can be no assurance that the Company is at all times in complete compliance with all such requirements, the Company has made and will continue to make capital and other expenditures to comply with such requirements. The Company spent approximately $7,200 in 1995 on environmental capital projects. The Company estimates that its environmental capital expenditures will be approximately $100,000 in each of 1996 and 1997. In 1996, the Company expects to make capital expenditures to upgrade waste water treatment equipment at one of its facilities. Thereafter, the Company expects to incur moderate environmental capital expenditures, which will be higher than historical levels as a result of the Company's increased size. As is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. The City of Industry, California facility of the Company's Williamhouse division is located within an area of regional groundwater contamination designated as the San Gabriel Valley National Priority List Area. The Company does not believe its operations have contributed to the contamination and to date the Company has not received a notice of potential liability with respect to that site. The Company is aware that one of Niagara's facilities has been the subject of certain soil and groundwater investigations and that the prior owner of such facility has indemnified Niagara for certain environmental 40 liabilities associated with historical use of the property. The Company currently believes that any environmental liabilities associated with such facility would not be material. The Company's Ampad division has been named a potentially responsible party ("PRP") under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), at five waste disposal sites. The Company settled its liability at four of these sites as a de minimis party. At the Spectron site in Elkton, Maryland, the Company paid approximately $1,300 in 1989 as a de minimis settlement for an initial removal action at the site. In 1995, the Company received a notice of a remedial action at the site, and based upon its allocation in 1989, expects to be eligible for a de minimis or de micromis settlement. The Company is aware that Niagara has been named a PRP at the Envirotek II site in Tonawanda, New York with respect to which Niagara expects to be eligible for a de minimis settlement. Although the Company endeavors to manage its wastes carefully, because CERCLA liability is strict and retroactive, it is possible that in the future the Company may be identified as a PRP with respect to other waste disposal sites. 41 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information with respect to the Directors and executive officers of the Company.
NAME AGE POSITION - ---- --- -------- Charles G. Hanson, III(1).............. 55 Chief Executive Officer and Director Russell M. Gard(1)..................... 48 Chief Operating Officer and Director Gregory M. Benson...................... 41 Executive Vice President, Chief Financial Officer, Director of Strategic Planning and Acquisitions, Secretary and Director Timothy E. Needham..................... 47 Executive Vice President John J. Grymes......................... 38 President--Williamhouse Division H. Craig Stoudt........................ 40 President--Ampad Division Robert C. Gay(1)(2).................... 44 Director Jonathan S. Lavine(3).................. 30 Director Marc B. Wolpow(1)(2)(3)................ 37 Director
- -------- (1) Member of the Executive Committee. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. The Company anticipates that at least two additional Directors will be appointed by the Board of Directors following the completion of the Offering. The Company expects that one or more of such Directors will also be appointed to the Audit and Compensation Committees. CHARLES G. HANSON, III has served as Chief Executive Officer and Director of the Company since 1992. From 1992 to 1995, Mr. Hanson also served as Chairman of the Board, Chief Executive Officer and Director of Ampad Corporation. Mr. Hanson was formerly the President and Chief Operating Officer of Stuart Hall Co. Inc. and Group Vice President of Pen-Tab Industries, Inc. RUSSELL M. GARD has served as Chief Operating Officer and Director of the Company since 1992. From 1992 to 1995, Mr. Gard also served as President, Chief Operating Officer and Director of Ampad Corporation. From 1990 to 1992, Mr. Gard was the Executive Vice President of Pen-Tab Industries, Inc. Mr. Gard served as the Chief Executive Officer of Herlitz International from 1988 to 1990. GREGORY M. BENSON has served as Executive Vice President and Director of Strategic Planning and Acquisitions since May 1996 and as Chief Financial Officer, Secretary and Director of the Company since 1992. From 1992 to 1995, Mr. Benson served as Chief Financial Officer, Chief Administrative Officer and Director of Ampad Corporation. Mr. Benson was at GE Capital Corporation from 1977 to 1992. TIMOTHY E. NEEDHAM has served as Executive Vice President since 1995. Mr. Needham served as Chairman of the Board of Williamhouse prior to the Acquisition and as a director from 1993 to 1995. From 1987 to 1995, Mr. Needham served as President of Williamhouse and from 1992 to 1995, as Chief Operating Officer of Williamhouse. JOHN J. GRYMES has served as President of the Company's Williamhouse division since May 1996 and served as Vice President of Sales--Williamhouse from November 1995 to May 1996. Mr. Grymes served as Vice President and National Sales Manager of Williamhouse Sales prior to the Acquisition from 1991 to 1995. From 1987 to 1991, Mr. Grymes served as Eastern Regional Sales Manager of Williamhouse Sales. 42 H. CRAIG STOUDT has served as President of the Company's Ampad division since May 1996 and served as Vice President, Sales and Marketing of the Company since 1994. From 1990 to 1994, prior to the SCM Acquisition, Mr. Stoudt served as Vice President, Sales of SCM Office Supplies, Inc. Mr. Stoudt served as Director of Sales, Boorum Division of Esselte Pendaflex from 1989 to 1990. ROBERT C. GAY has served as Director of the Company since 1992. Mr. Gay has been a Managing Director of Bain Capital since 1993 and has been a General Partner of Bain Venture Capital since 1989. From 1988 through 1989, Mr. Gay was a principal of Bain Venture Capital. Mr. Gay is Vice Chairman of the Board of Directors of IHF Capital, Inc., parent of ICON Health & Fitness Inc. In addition, Mr. Gay is a director of Alliance Entertainment Corp., GT Bicycles, Inc., GS Industries, Inc. and its subsidiary GS Technologies Operating Co., Inc., and Physio-Control International Corporation. JONATHAN S. LAVINE has served as Director of the Company since 1995. Mr. Lavine has been a Principal at Bain Capital since 1995 and was an associate at Bain Capital from 1993 to 1995. In 1992, Mr. Lavine was a consultant at McKinsey & Co. Mr. Lavine attended the Harvard Business School from 1990 to 1992. Previously, Mr. Lavine worked in the mergers and acquisitions department of Drexel Burnham Lambert, Incorporated. Mr. Lavine is also a director of Clarity Telecom, Inc. MARC B. WOLPOW has served as Director of the Company since 1995. Mr. Wolpow has been a Managing Director of Bain Capital since 1993 and was a Principal of Bain Venture Capital from 1990 through 1992. From 1988 to 1990, Mr. Wolpow was a Vice President in the corporate finance department of Drexel Burnham Lambert, Incorporated. Mr. Wolpow is also a director of Waters Corporation and FTD, Inc. Directors of the Company are currently elected annually by its stockholders to serve during the ensuing year or until a successor is duly elected and qualified. Executive officers of the Company are duly elected by the Board of Directors to serve until their respective successors are elected and qualified. There are no family relationships between any of the Directors or executive officers of the Company. Prior to the completion of the Offering, the Board will be divided into three classes, as nearly equal in number as possible, with each Director serving a three year term and one class being elected at each year's annual meeting of stockholders. Messrs. Lavine and Benson will be in the class of directors whose term expires at the 1997 annual meeting of the Company's stockholders. Messrs. Wolpow and Gard and one of the additional directors anticipated to be appointed by the Board following the Offering will be in the class of directors whose term expires at the 1998 annual meeting of the Company's stockholders. Messrs. Gay and Hanson and one of the additional directors anticipated to be appointed by the Board following the Offering will be in the class of directors whose term expires at the 1999 annual meeting of the Company's stockholders. At each annual meeting of the Company's stockholders, successors to the class of Directors whose term expires at such meeting will be elected to serve for three year terms and until their successors are elected and qualified. 43 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation earned for years ended December 31, 1993, 1994 and 1995 (as applicable) for the Chief Executive Officer and each of the four other most highly compensated executive officers of the Company as of the end of the last fiscal year. The amounts shown include compensation for services in all capacities that were provided to the Company. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------- ---------------------- ALL OTHER SECURITIES UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)(7) - --------------------------- ---- ---------- --------- ---------------------- ------------ Charles G. Hanson, III.... 1995 $250,000 $809,859(4) 55,801(5) $10,595 Chief Executive Officer Russell M. Gard........... 1995 225,000 723,837(4) 55,409(5) 7,553 Chief Operating Officer Gregory M. Benson......... 1995 175,000 400,000(4) 53,386(5) 6,683 Executive Vice President and Chief Financial Officer Timothy E. Needham(1)(2).. 1995 300,000 75,000 62(6) 2,012 Executive Vice President 1994 280,000 105,000 0 1,912 1993 260,000 58,500 48(6) 2,169 Edward Norton(1)(3)....... 1995 300,000 75,000 152(6) 4,342 1994 192,500 39,375 0 4,973 1993 175,000 40,000 90(6) 3,869
- -------- (1) For the first ten months of fiscal year 1995 (i.e., before the Transactions), Williamhouse paid the compensation for Messrs. Needham and Norton. After the Transactions, the Company paid such compensation. The compensation stated in the table for these executive officers includes amounts received from both the Company and Williamhouse for fiscal year 1995. Prior to its Acquisition, Williamhouse filed periodic reports under the Exchange Act and in connection therewith was previously required to disclose the compensation of Messrs. Needham and Norton for 1994 and 1993. As a result, such information is included herein. (2) Prior to November 1995, Mr. Needham was Chairman of the Board of Williamhouse. (3) Prior to November 1995, Mr. Norton was President of Williamhouse. Effective May 1996, Mr. Norton resigned his position with the Company. (4) Bonus levels were established by the Board based on the Company substantially exceeding operating targets established at the beginning of the year. (5) Such options were granted prior to the Recapitalization. Number shown incorporates the effects of the stock split and the Preferred Stock conversion pursuant to the Recapitalization. See "The Recapitalization." (6) Options were for common stock of WR Acquisition, Inc., the former parent corporation of Williamhouse ("WR Acquisition"). (7) The amounts shown for "All Other Compensation" for Messrs. Hanson, Gard and Benson include $4,595, $1,553 and $683, respectively, representing life insurance premiums paid by the Company for such individuals, and $6,000 representing a car allowance for each such individual. The amounts shown for 1995 for Mr. Norton include $3,992, representing the taxable portion of split dollar life insurance paid by Williamhouse; the amount for Mr. Needham includes $1,662, representing the taxable portion of group life insurance premiums paid by Williamhouse for Mr. Needham. All other amounts shown for Messrs. Needham and Norton represent a $350 contribution made by the Company on the behalf of each such individuals to Williamhouse's 401(k) Plan. The amounts shown for "All Other Compensation" for 1994 for Mr. Norton include $4,723, representing the taxable portion of split dollar life insurance premiums paid by Williamhouse; the amounts for 44 Mr. Needham include $1,662, representing the taxable portion of group term life insurance premiums paid by Williamhouse for Mr. Needham. All other amounts shown ($250 for each of Messrs. Needham and Norton) represent amounts contributed by Williamhouse on behalf of the named individuals to Williamhouse's 401(k) Plan. The amounts shown for "All Other Compensation" for 1993 for Mr. Norton include $3,719, representing the taxable portion of split dollar life insurance premiums paid by Williamhouse; the amounts for Mr. Needham include $2,019 representing the taxable portion of group term life insurance premiums paid by Williamhouse for Mr. Needham. All other amounts shown ($150 for each of Messrs. Needham and Norton) represent amounts contributed by Williamhouse on behalf of the named individuals to Williamhouse's 401(k) Plan. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information regarding stock options granted by the Company or WR Acquisition, as the case may be, to Mr. Hanson and the other named executives who received stock options during the last fiscal year.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(6) ----------------------------------------------------------------- ---------------------------- % OF TOTAL NUMBER OF OPTIONS MARKET SECURITIES GRANTED TO PRICE ON UNDERLYING EMPLOYEES EXERCISE OR DATE OF OPTIONS IN BASE PRICE GRANT EXPIRATION NAME GRANTED (#) FISCAL YEAR ($/SH) ($/SH)(5) DATE 0%($) 5%($) 10%($) ---- ----------- ----------- ----------- --------- ---------- -------- -------- ---------- Charles G. Hanson, III.. 55,801(1)(2) 33.9% $ 0.02(2) $9.08(2) (3) $505,557 $768,051 $1,241,918 Russell M. Gard......... 55,409(1)(2) 33.7 0.02(2) 9.08(2) (3) 502,006 762,655 1,233,193 Gregory M. Benson....... 53,386(1)(2) 32.4 0.02(2) 9.08(2) (3) 483,677 734,810 1,188,169 Timothy E. Needham...... 62.0(4) 11.2 1,312.50 2,625.00 2005 -- -- -- Edward Norton........... 152.0(4) 27.4 1,312.50 2,625.00 2005 -- -- --
- -------- (1) Options for Common Stock of the Company. (2) Such options were granted prior to the Recapitalization. Number shown incorporates the effect of the stock split and the Preferred Stock conversion pursuant to the Recapitalization. See "The Recapitalization." (3) Options will expire 15 months after the date of the termination of the executive officer's employment with the Company or any of its subsidiaries for any reason. (4) Options for common stock of WR Acquisition, the former parent corporation of Williamhouse. (5) Market price was determined in good faith by the Company's Board of Directors on the date of grant. (6) Amounts reflect certain assumed rates of appreciation set forth in the executive compensation disclosure rules of the Securities and Exchange Commission (the "Commission"). Actual gains, if any, on stock options exercises depend on future performance of the Company's stock and overall market conditions. For purposes of this calculation, the option terms were assumed to be ten years. See Note (3). The potential realizable value at assumed appreciation rates on options for common stock of WR Acquisition held by Messrs. Needham and Norton were not calculated. All such options were exercised immediately prior to the Acquisition. 45 FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning options exercised during or held outstanding at the end of the last fiscal year by Mr. Hanson and the other named executives. All outstanding options are currently exercisable. There were no options exercised in the last fiscal year for securities of the Company. The options listed in the table under the heading "Shares Acquired on Exercise" were sold to the Company in connection with the Transactions and the amounts received as a result of such sales are listed in the table under the heading "Value Realized." See "Stock Options--Option Repurchases."
NUMBER OF SECURITIES SHARES UNDERLYING VALUE OF UNEXERCISED ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY NAME ON EXERCISE (#) VALUE REALIZED ($) AT FY-END (#)(3) OPTIONS AT FY-END ($)(1)(3) ---- --------------- ------------------ -------------------- --------------------------- Charles G. Hanson, III.. 1,780.25(2) $3,406,400 813,937 $7,245,267 Russell M. Gard......... 1,690.95(2) 3,251,379 773,115 6,918,791 Gregory M. Benson....... 1,244.42(2) 2,401,584 568,947 5,112,134 Timothy E. Needham...... 372.00(4) 1,737,238 -- -- Edward Norton........... 302.00(4) 1,371,708 -- -- Martin R. Lewis......... 448.00(4) 2,045,895 -- --
- -------- (1) Assumes a fair market value for the Common Stock at December 31, 1995 equal to $9.08 after giving effect to the Recapitalization. (2) Number represents options for shares of Preferred Stock repurchased by the Company in connection with the Transactions and does not take into effect the Recapitalization. (3) Such options were granted prior to the Recapitalization. Number shown incorporates the effects of the stock split and the Preferred Stock conversion pursuant to the Recapitalization. See "The Recapitalization." (4) Options for common stock of WR Acquisition, the former parent corporation of Williamhouse. DIRECTOR COMPENSATION Directors of the Company currently do not receive a salary or an annual retainer for their services. The Company expects that following the Offering, non-employee Directors will be paid an annual retainer of approximately $20,000, plus reimbursement for expenses incurred in attending Board meetings. In addition, such Directors will receive options to purchase Common Stock under the Company's Non-Employee Director Plan. Directors who are also employees of the Company will not receive any additional compensation for serving on the Board. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors currently has three standing committees: (i) an Audit Committee; (ii) a Compensation Committee; and (iii) an Executive Committee. The Audit Committee will make recommendations to the Board of Directors regarding the independent auditors to be nominated for election by the stockholders and will review the independence of such auditors, approve the scope of the annual audit activities of the independent auditors, approve the audit fee payable to the independent auditors and review such audit results. Price Waterhouse LLP presently serves as the independent auditors of the Company. The Audit Committee is currently comprised of Messrs. Lavine and Wolpow. The Company expects that one or more of the two additional Directors will be appointed to the Audit Committee following the Offering. The duties of the Compensation Committee will be to provide a general review of the Company's compensation and benefit plans to ensure that they meet corporate objectives. In addition, the Compensation Committee will review the Chief Executive Officer's recommendations on (i) compensation of all officers of the Company and (ii) adopting and changing major Company compensation policies and practices, and report its recommendations to the whole Board of Directors for approval and authorization. The Board may also establish 46 other committees to assist in the discharge of its responsibilities. The Compensation Committee is currently comprised of Messrs. Gay and Wolpow. The Company expects that one or more of the two additional Directors will be appointed to the Compensation Committee following the Offering. The Executive Committee reviews the Company's strategic planning processes and has the power to exercise the authority of the Board on specific matters assigned to it by the Board from time to time. The Executive Committee is currently comprised of Messrs. Hanson, Gard, Gay and Wolpow. COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION The Compensation Committee of the Board of Directors is currently comprised of Messrs. Gay and Wolpow, each of which formerly served as an officer of the Company. Messrs. Gay and Wolpow are both Managing Directors of Bain Capital, which is a party to Management Advisory Agreement with the Company. See "Certain Relationships and Related Transactions--Management Advisory Agreement." MANAGEMENT AGREEMENTS Employment Agreements. In June 1996, the Company and Mr. Hanson entered into an employment agreement (the "Employment Agreement"), pursuant to which Mr. Hanson agreed to serve as the Chief Executive Officer of the Company for a period of three years. Under the Employment Agreement, Mr. Hanson will receive (i) an annual base salary equal to at least $450,000, (ii) an annual bonus up to 100% of his annual base salary (upon the Company achieving certain operating targets) and (iii) certain fringe benefits. Mr. Hanson will be entitled to receive a payment of $2.5 million upon a "change of control" of the Company (defined to include a person or group (other than Bain Capital) becoming an owner of more than 50% of the outstanding Common Stock or nominating a majority of the Directors who are then elected to the Board). If Mr. Hanson's employment is terminated for any reason prior to the termination of such agreement other than for Cause (as defined therein) or his resignation, he will be entitled to receive his base salary and fringe benefits for 24 months following such termination in addition to 50% of his bonus for the year in which his employment was terminated if the termination is during the first six months of the year or 100% if such termination was during the last six months of the year. Mr. Hanson has agreed not to compete with the Company for a period of two years following his termination of employment with the Company and not to disclose any confidential information at any time without the prior written consent of the Company. Mr. Hanson will participate on a pro rata basis in the over-allotment option granted to the U.S. Underwriters in the Offering. Except with respect to foregoing, Mr. Hanson has agreed under the Employment Agreement not to participate in any secondary offering of Common Stock or exercise any registration rights granted to him under the Registration Agreement (as defined) for a period ending on the earlier of (i) one year following the Offering or (ii) upon completion of a secondary offering. During such period, Mr. Hanson's estate may require the Company to purchase certain of his shares of Common Stock in the event Mr. Hanson dies during such period. Mr. Gard has entered into an employment agreement with the Company containing substantially similar terms. Under such agreement, Mr. Gard has agreed to serve as the Chief Operating Officer of the Company for (i) an annual base salary equal to at least $400,000, (ii) an annual bonus up to 100% of his annual base salary (upon the Company achieving certain operating targets) and (iii) certain fringe benefits. In addition, Mr. Gard will likewise participate on a pro rata basis in the over-allotment option granted to the U.S. Underwriters in the Offering and has also agreed not to participate in any secondary offering of Common Stock or exercise any registration rights granted to him under the Registration Agreement. 1992 Management Agreements. The Company, Mr. Hanson, and Tyler Capital Fund, L.P., Tyler Massachusetts, L.P., and Tyler International, L.P.-II (collectively, the "Tyler Entities") entered into a Management Agreement, dated as of December 31, 1992 (the "Management Agreement"), pursuant to which Mr. Hanson purchased from the Tyler Entities (i) 1,800 shares of Class P Common Stock, (ii) 16,200 shares of Common Stock, and (iii) 15% subordinated Ampad promissory notes ("Ampad Notes") in the aggregate 47 principal amount of $46,034.53, for an aggregate purchase price of $106,034.53. The Management Agreement also contained certain provisions relating to the terms of Mr. Hanson's employment, which have been superseded by the terms of the Employment Agreement. In connection with Mr. Hanson's relocation from New York to Dallas, Mr. Hanson received a $117,000 loan from the Company. At December 31, 1995, an aggregate of $112,000 remained outstanding under the loan (the largest amount during the last fiscal year). Interest on the loan accrues at an annual rate of 6.19%. In June 1996, the loan was forgiven in lieu of a bonus payment Mr. Hanson was otherwise entitled to receive. Messrs. Gard and Benson entered into similar management agreements with the Company and the Tyler Entities. Pursuant to their agreements, Messrs. Gard and Benson each purchased from the Tyler Entities (i) 1,800 shares of Class P Common Stock, (ii) 16,200 shares of Common Stock, and (iii) Ampad Notes in the aggregate principal amount of $40,000, for an aggregate purchase price of $100,000. Mr. Gard's management agreement has been superseded by his employment agreement. Mr. Benson's management agreement entitles him to receive an annual base salary of at least $175,000, a bonus of up to 100% of his average base salary and a severance payment if Mr. Benson's employment is terminated either without cause or due to death or permanent disability. Mr. Benson has agreed to certain restrictions on his ability to compete with the Company following his termination of employment. 1992 IRA Note Purchases. The Company, Mr. Hanson, the Tyler Entities and Mr. Hanson's Individual Retirement Account ("IRA") entered into a Note Purchase Agreement dated as of December 31, 1992 (the "IRA Note Purchase Agreement") pursuant to which Mr. Hanson's IRA purchased on his behalf from the Tyler Entities Ampad Notes in the aggregate principal amount of $13,965.47. Covenants contained in the IRA Note Purchase Agreement are similar to those in the Management Agreement described above. Messrs. Gard and Benson entered into similar IRA note purchase agreements with the Company, the Tyler Entities and their respective IRAs. Pursuant to Messrs. Gard's and Benson's agreements, the IRA of each purchased on their behalf from Tyler Entities Ampad Notes in the aggregate principal amount of $20,000.00. Change in Control Agreements. Prior to the Acquisition, WR Acquisition, the former parent corporation of Williamhouse, entered into change in control agreements (the "Change in Control Agreements") with Timothy E. Needham, Edward Norton and certain other officers of Williamhouse. As a result of the Acquisition, WR Acquisition became a wholly owned subsidiary of the Company. The term of each Change in Control Agreement will continue until the expiration of thirty-six (36) months after the Acquisition. Generally, each officer or employee is entitled to receive, upon termination of employment during the term of the Change in Control Agreements (unless such termination is because of death or disability, by the Company for "Cause" (as defined in the Change in Control Agreements), or by the officer or employee other than for "Good Reason" (as defined in the Change in Control Agreements)), (i) a lump sum severance payment equal to thirty-six (36) months of his or her current annual base salary, as it may subsequently be increased, (ii) all amounts accrued (but not paid) under any compensation plan of the Company plus a lump sum payment equal to three times the average annual amount accrued under any such plan for the three fiscal years preceding such termination, (iii) continued coverage for three years under Company's medical and disability plans and (iv) certain other specified payments. To date, the Company has paid approximately $2.25 million under such Change in Control Agreements and believes, based on current compensation levels, that the maximum amount of the severance payments that could be paid under the Change in Control Agreements will not exceed $11 million. STOCK OPTIONS 1992 Key Employees Stock Option Plan. On July 31, 1992, the Board of Directors of the Company adopted the Ampad Holding Corporation 1992 Key Employees Stock Option Plan, which authorizes grants of stock options (including options that are intended to qualify as "incentive stock options" within the meaning of 48 Section 422 of the Internal Revenue Code) and the sales of Common Stock to current or future employees, directors, consultants or advisers of the Company or its subsidiaries. The 1992 Stock Plan authorizes the granting of stock options for up to an aggregate of 200,000 shares of Common Stock (without giving effect to the Recapitalization). The number of shares issuable under the 1992 Stock Plan is subject to adjustment upon the occurrence of certain events (including, but not limited to, reorganizations, recapitalizations and stock dividends) to prevent any dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events. Under the 1992 Stock Plan, the Board is authorized to grant options for, or sell any class or classes of Common Stock at any time prior to the termination of the 1992 Stock Plan in such quantity, at such price, on such terms and subject to such conditions as established by the Board. The Company has not sold any shares of Common Stock under the 1992 Stock Plan. Currently, all options granted pursuant to the 1992 Stock Plan are exercisable and expire 15 months after the termination of the option holder's employment with the Company or any of its subsidiaries. Furthermore, pursuant to all existing agreements under which options have been granted under the 1992 Stock Plan, option holders are required to consent to a sale of all or substantially all of the assets or outstanding capital stock of the Company to any person or entity if such sale is approved by the Board or the holders of a majority of the Common Stock then outstanding. After giving effect to the Recapitalization, the following options issued under the 1992 Stock Plan will be outstanding: Mr. Hanson--options to purchase 813,937 shares of Common Stock at a weighted average purchase price of $.20 per share; Mr. Gard--options to purchase 773,115 shares of Common Stock at a weighted average purchase price of $.15 per share; and Mr. Benson--options to purchase 568,947 shares of Common Stock at a weighted average purchase price of $.11 per share. See "Fiscal Year-End Option Values." At the time of the issuance of the Preferred Stock, the Company granted options to purchase Preferred Stock to its existing option holders pursuant to the anti-dilution provisions of the 1992 Stock Plan. In December 1995, the Company repurchased certain of these options in connection with the Company's redemption of a portion of its Preferred Stock. Messrs. Hanson, Gard and Benson received approximately $3.4 million, $3.3 million and $2.4 million, respectively, as a result of such repurchases. All outstanding options to purchase Preferred Stock will be converted into options to purchase shares of Common Stock in connection with the Recapitalization. 1996 Stock Plan. Prior to the consummation of the Offering, the Company plans to adopt the American Pad & Paper Company 1996 Key Employees Stock Incentive Plan. The 1996 Stock Plan will provide for the granting to employees and other key individuals who perform services for the Company the following types of incentive awards: options to purchase Common Stock, stock appreciation rights with respect to the Common Stock, restricted shares of Common Stock, performance grants and other types of awards that the Compensation Committee deems to be consistent with the purposes of the 1996 Stock Plan. The 1996 Stock Plan will afford the Company flexibility in tailoring incentive compensation to support corporate and business objectives, and to anticipate and respond to changing business environments and competitive compensation practices. An aggregate of 1,500,000 shares of Common Stock of the Company will be reserved for issuance under the 1996 Stock Plan. Except for any other adjustments made by the Board of Directors relating to a stock split or certain other changes in the number of shares of Common Stock, or to reflect extraordinary corporate transactions, further increases in the number of shares authorized for issuance under the 1996 Stock Plan must be approved by the stockholders of the Company. Non-Employee Director Plan. Prior to the consummation of the Offering, the Company plans to adopt the American Pad & Paper Company Non-Employee Director Stock Option Plan. Pursuant to the Non-Employee Director Plan, each Director (other than Directors who are employees of the Company) will receive a one- time option grant to purchase 25,000 shares of Common Stock upon effectiveness of the Non-Employee Director Plan or, for new Directors, upon being elected to the Board. In addition, each Director will receive an annual grant of options to purchase 2,000 shares of Common Stock beginning on such Director's fourth anniversary of being elected to the Board. The initial one-time grants will vest over three years with 50% vesting in the first year and 25% in the remaining two years. The annual grants will vest in three equal installments. The exercise price for 49 all options granted under the Non-Employee Director Plan will be at fair market value as of the time of such grant. Options granted under the Non- Employee Director Plan will generally terminate ten years after the date of the grant. An aggregate of 350,000 shares of Common Stock will be reserved for issuance under the Non-Employee Director Plan. STOCK PURCHASE PLAN Prior to consummation of the Offering, the Company expects to adopt the American Pad & Paper Company Management Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is designed to provide equity incentives to selected members of the Company's management, including employee Directors and executive officers. The eligible participants will be selected by the Compensation Committee upon the recommendation of the Company's Chief Executive Officer. It is currently anticipated that approximately 35 management employees will initially be eligible to participate in the Purchase Plan. Under the Purchase Plan, eligible participants will be able to elect to purchase shares of Common Stock in lieu of up to 25% of their annual incentive bonuses. The Common Stock will be sold under the Purchase Plan at a 15% discount from the fair market value on the date of purchase. The aggregate maximum number of shares of Common Stock that will be reserved and available for issuance under the Purchase Plan will be 250,000 shares. 50 PRINCIPAL AND SELLING STOCKHOLDERS The table below sets forth certain information regarding the equity ownership of the Company as of June 1, 1996 and immediately following the Offering, assuming in each case the effectiveness of the Recapitalization, by (i) each person or entity who beneficially owns five percent or more of the Common Stock, (ii) each Director and executive officer named in the Summary Compensation Table, (iii) all Directors and current executive officers of the Company as a group and (iv) each Selling Stockholder. Unless otherwise stated, each of the persons named in the table has sole voting and investment power with respect to the securities beneficially owned by it or him as set forth opposite its or his name. Beneficial ownership of the Common Stock listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Exchange Act.
COMMON STOCK OWNED COMMON STOCK OWNED PRIOR TO THE OFFERING AFTER THE OFFERING (1) --------------------------- ------------------------ NUMBER OF PERCENTAGE OF SHARES BEING NUMBER OF PERCENTAGE OF NAME AND ADDRESS SHARES SHARES OFFERED (1) SHARES SHARES ---------------- ---------- ------------- ------------ ---------- ------------- PRINCIPAL STOCKHOLDERS: Bain Capital Funds...... 13,151,040(2) 91.2% 3,030,807(3) 10,120,233 37.6% c/o Bain Venture Capital Two Copley Place Boston, Massachusetts 02116 DIRECTORS AND EXECUTIVE OFFICERS: Charles G. Hanson, III (4)(5)................. 1,102,442 7.2 -- 1,102,442 4.0 Russell M. Gard (4)(6).. 1,061,621 7.0 -- 1,061,621 3.8 Gregory M. Benson (4)(7)................. 857,453 5.7 -- 857,453 3.1 Robert C. Gay (8)(9).... 13,151,040 91.2 3,030,807 10,120,233 37.6 Jonathan S. Lavine (8)(10)................ 986,309 6.8 227,306 759,003 2.8 Marc B. Wolpow (8)(11).. 986,309 6.8 227,306 759,003 2.8 Timothy E. Needham...... -- -- -- -- -- Edward Norton........... -- -- -- -- -- All Directors and executive officers as a group (9 persons)(12).. 16,172,556 97.5% 3,030,807 13,141,748 45.2 OTHER SELLING STOCKHOLD- ERS: Karl E. Lutz (13)....... 120,211 * 27,704 92,507 * Frederick H. Potts...... 288,505 2.0% 66,489 222,016 *
- -------- * Represents less than one percent. (1) Assumes no exercise of the U.S. Underwriters' over-allotment option and does not give effect to any purchases, if any, by such persons named in the table in the Offering. The Selling Stockholders (including Messrs. Hanson, Gard and Benson) have granted the U.S. Underwriters an option to purchase up to an aggregate of 2,343,750 additional shares to cover over- allotments, if any. (2) Includes 9,617,552 shares held by Tyler Capital Fund, L.P.; 1,970,570 shares held by Tyler Massachusetts, L.P.; 576,609 shares held by Tyler International, L.P.-II; 820,854 shares held by BCIP Associates ("BCIP Associates"); and 165,455 shares held by BCIP Trust Associates, L.P. ("BCIP Trust" and, collectively with BCIP Associates and the Tyler entities, the "Bain Capital Funds"). (3) Bain Capital Funds will sell their shares in the Offering on a pro rata basis. (4) The address of such person is c/o the Company, 17304 Preston Road, Dallas, Texas 75252. (5) Includes 813,937 shares of Common Stock that can be acquired through currently exercisable options. (6) Includes 773,115 shares of Common Stock that can be acquired through currently exercisable options. (7) Includes 568,947 shares of Common Stock that can be acquired through currently exercisable options. (8) The address of such person is c/o Bain Venture Capital, Two Copley Place, Boston, Massachusetts 02116. (9) Mr. Gay is a Director of the Company. Mr. Gay is also a general partner of Bain Venture Capital, the general partner of the Tyler entities, and a general partner of BCIP Associates and BCIP Trust. Accordingly, Mr. Gay may be deemed to beneficially own shares owned by the Bain Capital Funds, although Mr. Gay disclaims beneficial ownership of any such shares. (10) Mr. Lavine is a Director of the Company. Mr. Lavine is also a general partner of BCIP Associates and BCIP Trust. Accordingly, Mr. Lavine may be deemed to beneficially own shares owned by BCIP Associates and BCIP Trust, although Mr. Lavine disclaims beneficial ownership of any such shares. 51 (11) Mr. Wolpow is a Director of the Company. Mr. Wolpow is also a general partner of BCIP Associates and BCIP Trust. Accordingly, Mr. Wolpow may be deemed to beneficially own shares owned by BCIP Associates and BCIP Trust, although Mr. Wolpow disclaims beneficial ownership of any such shares. (12) Includes shares which may be deemed to be beneficially owned by Messrs. Gay, Lavine and Wolpow as a result of their relationships with the Bain Capital Funds and shares that Messrs. Hanson, Gard and Benson can acquire through currently exercisable options. (13) Karl E. Lutz, P.C. is partner of Kirkland & Ellis. Kirkland & Ellis has provided legal services to the Company over the past three years and expects to continue to do so in the future. Certain of Mr. Lutz's shares are held by an individual retirement account for his sole benefit. The Selling Stockholders (including Messrs. Hanson, Gard and Benson) have granted the U.S. Underwriters an option to purchase up to an aggregate of 2,343,750 additional shares to cover over-allotments, if any. The following table sets forth certain information regarding the equity ownership of the Company assuming the U.S. Underwriters' option is exercised in full:
COMMON STOCK NUMBER OF OWNED AFTER THE OFFERING(1) SHARES OFFERED -------------------------------- IN OVER-ALLOTMENT NUMBER OF PERCENTAGE OF NAME OPTION SHARES SHARES ---- ----------------- ---------------- --------------- Bain Capital Funds........ 1,858,889 8,261,344 30.7% Charles G. Hanson, III.... 155,829 946,613 3.4 Russell M. Gard........... 150,059 911,561 3.3 Gregory M. Benson......... 121,201 736,252 2.7 Karl E. Lutz.............. 16,992 75,516 * Fredrick H. Potts......... 40,780 181,236 *
- -------- * Represents less than one percent. (1) Assumes the U.S. Underwriters' over-allotment is exercised in full. The Company has agreed to pay all of the expenses of the Selling Stockholders in the Offering other than underwriting discounts and commissions. In the event the Underwriters' over-allotment is not exercised in full, the number of shares to be sold by the Selling Stockholders named above will be reduced proportionally. 52 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ACQUISITION ARRANGEMENTS In connection with the Acquisition, members of Williamhouse's management received substantial payments for their equity interests in Williamhouse. Messrs. Needham and Norton received approximately $1,737,238 and $1,371,708, respectively, at the closing of the Acquisition for their shares of Williamhouse and pursuant to other equity-based arrangements. Bain Capital was paid a fee of $5 million by the Company for, among other things, its services in analyzing, negotiating and arranging the financing for the Acquisition. Prior to the Acquisition, the Company recapitalized its Common Stock and Class P Common Stock into Common Stock, Class P Common Stock and approximately $200 million aggregate liquidation value of Preferred Stock. In connection with such recapitalization, the Company declared a dividend on its Class P Common Stock and Common Stock of one share of Preferred Stock for each ten shares of Class P Common Stock and Common Stock. In December 1995, the Company redeemed on a pro rata basis a portion of such Preferred Stock with an aggregate liquidation value of approximately $70.6 million. At the same time, the Company declared a cash dividend of approximately $4.5 million on its Class P Common Stock and, thereafter, converted all outstanding Class P Common Stock on a share-for-share basis into Common Stock. The executive officers of the Company received an aggregate of 5,400 shares of Preferred Stock as a result of the Preferred Stock Dividend and cash consideration of approximately $267,819 as a result of the redemption of certain of their shares of Preferred Stock. In addition, approximately $8,901,520 was used by the Company to repurchase from the executive officers of the Company options to acquire Preferred Stock. See "Management--Stock Options--1992 Key Employees Stock Option Plan." MANAGEMENT ADVISORY AGREEMENT In October 1995, the Company entered into a ten-year Management Advisory Agreement (the "Advisory Agreement") with Bain Capital to replace Bain Capital's prior agreement with the Company. Pursuant to the Advisory Agreement, Bain Capital will provide management consulting, advisory services and support, negotiation and analysis of financial alternatives, acquisitions and dispositions and other services agreed upon by the Company and Bain Capital. Under the Advisory Agreement, the Company (i) paid Bain Capital in connection with the offering of the Notes, in the aggregate, a cash financial advisory fee of $2.0 million, plus its out-of-pocket expenses and (ii) will pay Bain Capital an aggregate annual fee of no less than $2.0 million, plus its out-of-pocket expenses. The Company will also pay Bain Capital an aggregate fee of approximately $2.0 million, plus its out of pocket expenses, in connection with the Offering and an aggregate fee of approximately $3.0 million, plus its out of pocket expenses, in connection with the entering into of the New Bank Credit Agreement. In addition, the Company expects to pay Bain Capital a fee of approximately $300,000 for its services rendered in connection with the sale of the Personalizing Division and $550,000 for its services rendered in connection with the Niagara Acquisition. For the years ended December 31, 1995, 1994 and 1993, the Company paid Bain Capital $937,000, $684,000 and $431,000, respectively, in financial advisory fees pursuant to the Advisory Agreement or the prior agreement. Prior to the completion of the Offering, the Company and Bain Capital expect to amend the term of the Advisory Agreement to provide for an initial period of four years, subject to automatic one-year extensions beyond the initial term (not to exceed an aggregate of eight years) on each anniversary of the effective date of such amendment so long as Bain Capital continues to own at least 5% of the outstanding Common Stock. The Company believes that the fees received for the professional services rendered are at least as favorable to the Company as those which could be negotiated with a third party. 53 DESCRIPTION OF CERTAIN INDEBTEDNESS BANK CREDIT AGREEMENT On October 31, 1995, the Company and APPC entered into a Bank Credit Agreement with Bankers Trust Company, as agent for various lending institutions thereto (the "Agent"), providing for Term Loans of $245.0 million in the form of a multi-tranche facility, a revolving credit facility of $45.0 million and an IRB Letter of Credit facility of approximately $13.4 million. The Company used borrowings under the Bank Credit Agreement to provide funding necessary to consummate the Acquisition, with the revolving credit facility being used for working capital needs. Indebtedness under the Bank Credit Agreement is guaranteed by the Company and all current and future domestic subsidiaries of the Company except for the SPC (as defined), and is secured by (i) a perfected security interest in substantially all the assets and property (other than certain equipment secured by purchase money security interests) of the Company and its subsidiaries except for the SPC, and (ii) a first priority perfected pledge of all capital stock of the immediate parent corporation of APPC, the Company and its current subsidiaries except for the SPC. The maturity and interest rates of the Term Loans under the Bank Credit Agreement vary by tranche. The overall effective interest rate for borrowings under the Term Loans as of March 31, 1996 was 9.0%. The revolving credit facility is a five-year facility bearing interest at a floating rate based, at the Company's option, on either the Eurodollar plus 275 basis points (subject to an interest rate reduction of 25 to 50 basis points if the Company meets certain financial ratios) or the bank base rate plus 175 basis points (subject to an interest rate reduction of 25 to 50 basis points if the Company meets certain financial ratios). The revolving credit facility includes a letter of credit sublimit of $20 million. APPC is required to pay the lenders under the Bank Credit Agreement in the aggregate a commitment fee equal to 0.5% per annum, payable on a quarterly basis, on the daily average unused portion of this facility. As of March 31, 1996, the Company did not have any outstanding borrowings under the revolving credit facility. The Bank Credit Agreement requires APPC to meet certain financial tests, including minimum levels of consolidated EBITDA (as defined therein), minimum interest coverage and maximum leverage ratio. The Bank Credit Agreement also contains covenants which, among other things, limit the incurrence of additional indebtedness, payment of dividends, transactions with affiliates, asset sales, acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. The Bank Credit Agreement contains customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, ERISA, judgment defaults, failure of any guaranty or security agreement supporting the Bank Credit Agreement to be in full force and effect and change of control of the Company. NEW BANK CREDIT AGREEMENT Contemporaneously with the Offering, the Company intends to (i) refinance and retire all remaining indebtedness under the Bank Credit Agreement with a portion of the proceeds of the Offering, and (ii) enter into the New Bank Credit Agreement. The New Bank Credit Agreement will be a revolving credit facility with a maximum availability of $300 million with the following principal terms: Loans will be made under the New Bank Credit Agreement directly to APPC and will be guaranteed by the Company and each of its subsidiaries (other than the SPC). Loans made under the New Bank Credit Agreement will bear interest at a rate per annum equal to, at the Company's option, (i) the Base Rate plus the Applicable Margin or (ii) the Eurodollar Rate plus the Applicable Margin (as each term is defined in the New Bank Credit Agreement). The Applicable Margin for the Base Rate loans will vary from 0% to .75% and the Applicable Margin for Eurodollar Loans will vary from .75% to 1.75%, each based on the Company's Leverage Ratio and the type of loan. Availability under the New Bank Credit Agreement will be subject to an unused commitment fee which will be a percentage of the unutilized revolving loan commitment. This percentage will vary from .3% to .5% based on the Company's Leverage Ratio. Availability under the New Bank Credit Agreement will generally be reduced to the extent of the net proceeds of a sale of assets by the Company, the net proceeds of an issuance of debt by the Company or 50% of the net proceeds of an issuance of equity by the Company. Availability will also be reduced by $50 million in 1999 and $50 million in 2000. The New Bank Credit Agreement is expected to terminate in 2001. The Company 54 will be permitted to make acquisitions under the New Bank Credit Agreement up to $25 million per acquisition without the consent of the Required Banks and up to $50 million per acquisition if, on a pro forma basis giving effect to such acquisition, the Company's Leverage Ratio is less than 3.0 to 1.0. The New Bank Credit Agreement will be secured to the same extent as the Bank Credit Agreement and will contain similar restrictive covenants, financial tests and events of default. The foregoing description of the material terms of the New Bank Credit Agreement is qualified in its entirety by reference by the executed term sheet relating to the New Bank Credit Agreement, which has been filed as an exhibit to the registration statement to which this Prospectus is a part. NOTES The Notes were issued pursuant to the Indenture, dated as of December 1, 1995, by and among APPC, certain subsidiary guarantors and IBJ Schroder Bank & Trust Company, as Trustee (the "Trustee"). The net proceeds to APPC from the sale of the Notes were approximately $194 million (after deducting the initial purchasers' discount and certain fees and expenses). The net proceeds of such sale were used to (i) repurchase the Old Debentures of Williamhouse, (ii) to pay a cash dividend on the Class P Common Stock, (iii) to redeem a portion of the Preferred Stock, (iv) to pay related fees and expenses and (v) to provide for working capital. The Notes are limited in aggregate principal amount to $200 million and mature on November 15, 2005. Interest on the Notes accrues at the rate of 13% per annum and will be payable semi-annually in cash on each May 15 and November 15 commencing on May 15, 1996. The Notes are redeemable, at APPC's option, in whole at any time or in part from time to time, on and after November 15, 2000, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve- month period commencing on November 15 of the year set forth below, plus, in each case, accrued interest to the date of redemption:
YEAR PERCENTAGE ---- ---------- 2000..................... 106.500% 2001..................... 104.333 2002..................... 102.167 2003 and thereafter...... 100.000
At any time, or from time to time, on or prior to November 15, 1998, APPC may, at its option, use the net cash proceeds of one or more public equity offerings (as defined in the Indenture) to redeem up to 35% of the aggregate principal amount of Notes originally issued at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on November 15 of the year set forth below, plus, in each case, accrued interest to the date of redemption:
YEAR PERCENTAGE ---- ---------- 1995..................... 111.0% 1996..................... 113.0 1997..................... 113.0
provided that at least $100 million aggregate principal amount of Notes remains outstanding immediately after any such redemption. The Notes are unsecured obligations of APPC, ranking subordinate in right of payment to all Senior Debt of APPC. As of March 31, 1996, APPC had approximately $253.5 million of Senior Debt and the Subsidiary Guarantors (as defined) had approximately $8.6 million of Senior Debt (excluding guarantees of Senior Debt). As of March 31, 1996, the Company had approximately $45.7 million available to be drawn under the revolving credit portion and letter of credit facility of the Bank Credit Agreement. Each subsidiary of APPC (other than the SPC) (collectively, the "Subsidiary Guarantors") has fully and unconditionally guaranteed, on a senior subordinated basis, jointly and severally, the performance of APPC's obligations under the Indenture and the Notes. The guarantees are subordinated to Senior Debt of the Subsidiary Guarantors on the same basis as the Notes are subordinated to the Senior Debt of APPC. Under the Indenture (without giving effect to the restrictions in the Bank Credit Agreement), the Company could have incurred approximately $74 million of additional indebtedness, including indebtedness senior in right of payment to the Notes, at March 31, 1996. 55 The Indenture provides that upon the occurrence of a "change of control," each holder will have the right to require that APPC purchase all or a portion of such holder's Notes at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of purchase. "Change of Control" is defined under the Indenture to mean: (i) any sale, lease, exchange or other transfer of all or substantially all of the assets of the Company (other than to Bain Capital and certain related parties); (ii) the liquidation or dissolution of the Company; (iii) any person or group (other than Bain Capital and certain related parties) becoming the owner of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; or (iv) the replacement of a majority of the Board of Directors of the Company over a two-year period from the directors who constituted such Board of Directors at the beginning of such period without the approval of a majority of such Board of Directors then still in office. The Indenture governing the Notes contains certain covenants, including limitations on the incurrence of indebtedness, the making of restricted payments, transactions with affiliates, the existence of liens, disposition of proceeds of asset sales, the making of guarantees by subsidiaries, transfer and issuances of stock of subsidiaries, the imposition of dividend or other payment restrictions on subsidiaries, certain mergers and sales of assets, the application of proceeds from an initial public offering, and the ability of APPC to pay dividends to the Company. See "Risk Factors--Dividend Policy; Restrictions on Payment of Dividends." Such provisions of the Indenture may, in certain circumstances, make it more difficult or discourage a takeover of the Company, whether favored or opposed by management of the Company. The foregoing description of the material terms of the Indenture is qualified in its entirety by reference to the Indenture, which has been filed on an exhibit to the registration statement to which this Prospectus is a part. ACCOUNTS RECEIVABLE FACILITY The Accounts Receivable Facility was established simultaneously with the consummation of the Acquisition. Pursuant to the Accounts Receivable Facility, the Company and its subsidiaries are deemed to have sold to a wholly owned special purpose corporation of the Company (the "SPC") all of the receivables generated by the Company and its subsidiaries upon the creation of such receivables. The SPC then transfers the receivables purchased from the Company and its subsidiaries each day to a master trust (the "Trust"). The SPC is operated in a fashion intended to ensure that its assets and liabilities are distinct from those of the Company and its other affiliates, and that its assets are not available to satisfy claims of creditors of the Company and its subsidiaries. At the time of the Acquisition, the Company sold all of its receivables to the SPC. The SPC, in turn, transferred the receivables to the Trust in exchange for a "Variable Funding Certificate" and a "Transferor Certificate," each representing an undivided interest in the securities and other assets of the Trust. Immediately thereafter, the SPC sold the Variable Funding Certificate to Bankers Trust Company. The Trust has issued an aggregate principal amount of $60 million Class A Variable Rate Trade Receivables Backed Certificates, Series 1996-1 (the "Class A Certificates") and Class Board Variable Rate Trade Receivables Backed Certificates, Series 1996-1 (the "Class B Certificates"). The Class A Certificates are "revolving" certificates, the principal amount of which may be increased or decreased by the SPC, subject to certain standard conditions precedent. The Class B Certificates have a fixed principal amount and are subordinated to the Class A Certificates. The Class A Certificates and the Class B Certificates have a term of approximately 4 1/2 years until their scheduled amortization dates. The interest rate of the Class A Certificates is equal to a reserve-adjusted Eurodollar rate or an alternate base rate plus a given spread. The interest rate of the Class B Certificates is equal to a reserve-adjusted Eurodollar rate plus a given spread. The Company expects that the Class A Certificates have been rated AAA and the Class B Certificates have been rated BBB by Standard & Poor's Rating Group. The SPC used the proceeds of the issuance of the Class A Certificates and Class B Certificates to repay the Variable Funding Certificate described in the preceding paragraph. 56 DESCRIPTION OF CAPITAL STOCK GENERAL MATTERS At the time of the Offering the total amount of authorized capital stock of the Company will consist of 75,000,000 shares of Common Stock, par value $0.01 per share, and 150,000 shares of preferred stock, par value $0.01 per share (the "Serial Preferred Stock"). Upon completion of the Offering, 26,925,272 shares of Common Stock will be issued and outstanding and no shares of Preferred Stock will be issued and outstanding. As of March 31, 1996, there were 900,000 shares of Common Stock and 58,449 shares of Preferred Stock outstanding (each before giving effect to the Recapitalization) and each were held by 11 holders of record. The discussion herein describes the Company's capital stock, the Restated Certificate of Incorporation and By-laws as anticipated to be in effect upon consummation of the Offering. The following summary of certain provisions of the Company's capital stock describes all material provisions of, but does not purport to be complete and is subject to, and qualified in its entirety by, the Restated Certificate of Incorporation and the By-laws of the Company that are included as exhibits to the Registration Statement of which this Prospectus forms a part and by the provisions of applicable law. The Restated Certificate of Incorporation and By-laws will contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and which may have the effect of delaying, deferring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Board of Directors. COMMON STOCK The issued and outstanding shares of Common Stock are, and the shares of Common Stock being offered by the Company will be upon payment therefor, validly issued, fully paid and nonassessable. Subject to the prior rights of the holders of any Serial Preferred Stock, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such time and in such amounts as the Board of Directors may from time to time determine. See "Dividend Policy." The shares of Common Stock are not convertible and the holders thereof have no preemptive or subscription rights to purchase any securities of the Company. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the assets of the Company which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of Serial Preferred Stock then outstanding. Each outstanding share of Common Stock is entitled to one vote on all matters submitted to a vote of stockholders. There is no cumulative voting. The Common Stock has been approved for listing on the NYSE, subject to official notice of issuance, under the symbol "AGP." SERIAL PREFERRED STOCK The Company currently has an aggregate of 58,449 shares of Preferred Stock outstanding. All of the outstanding Preferred Stock will be converted into shares of Common Stock prior to the completion of the Offering contemplated hereby. See "The Recapitalization." The Company's Board of Directors may, without further action by the Company's stockholders, from time to time, direct the issuance of shares of Serial Preferred Stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding shares of Serial Preferred Stock would reduce the amount of funds available for the payment of dividends on shares of Common Stock. Holders of shares of Serial Preferred Stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of shares of Common Stock. Under certain circumstances, the issuance of shares of Serial Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent 57 management. Upon the affirmative vote of a majority of the total number of directors then in office, the Board of Directors of the Company, without stockholder approval, may issue shares of Serial Preferred Stock with voting and conversion rights which could adversely affect the holders of shares of Common Stock. Upon consummation of the Offering, there will be no shares of Serial Preferred Stock outstanding, and the Company has no present intention to issue any shares of Serial Preferred Stock. CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS The Restated Certificate of Incorporation provides for the Board to be divided into three classes, as nearly equal in number as possible, serving staggered terms. Approximately one-third of the Board will be elected each year. See "Management." Under the Delaware General Corporation Law, directors serving on a classified board can only be removed for cause. The provision for a classified board could prevent a party who acquires control of a majority of the outstanding voting stock from obtaining control of the Board until the second annual stockholders meeting following the date the acquiror obtains the controlling stock interest. The classified board provision could have the effect of discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company and could increase the likelihood that incumbent directors will retain their positions. The Restated Certificate of Incorporation provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. The Restated Certificate of Incorporation and the By-laws provides that, except as otherwise required by law, special meetings of the stockholders can only be called pursuant to a resolution adopted by a majority of the Board of Directors or by the chief executive officer of the Company. Stockholders will not be permitted to call a special meeting or to require the Board to call a special meeting. The By-laws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders of the Company, including proposed nominations of persons for election to the Board. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the Board or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given to the Company's Secretary timely written notice, in proper form, of the stockholder's intention to bring that business before the meeting. Although the By-laws do not give the Board the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, the By-laws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the Company. The Restated Certificate of Incorporation and By-laws provide that the affirmative vote of holders of at least 80% of the total votes eligible to be cast in the election of directors is required to amend, alter, change or repeal certain of their provisions. This requirement of a super-majority vote to approve amendments to the Restated Certification of Incorporation and By- laws could enable a minority of the Company's stockholders to exercise veto power over any such amendments. CERTAIN PROVISIONS OF DELAWARE LAW Following the consummation of the Offering, the Company will be subject to the "Business Combination" provisions of the Delaware General Corporation Law. In general, such provisions prohibit a publicly held Delaware corporation from engaging in various "business combination" transactions with any "interested stockholder" for a period of three years after the date of the transaction which the person became an "interested stockholder," unless (i) the transaction is approved by the Board of Directors prior to the date the "interested stockholder" obtained such status, (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder," owned at least 85% of the voting stock of 58 the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (a) persons who are directors and also officers and (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (iii) on or subsequent to such date the "business combination" is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" is defined to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an "interested stockholder" is a Person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS The Restated Certificate of Incorporation limits the liability of Directors to the fullest extent permitted by the Delaware General Corporation Law. In addition, the Restated Certificate of Incorporation will provide that the Company shall indemnify Directors and officers of the Company to the fullest extent permitted by such law. The Company anticipates entering into indemnification agreements with its current Directors and executive officers prior to the completion of the Offering. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is First National Bank of Boston. 59 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering there has been no market for the Common Stock of the Company. The Company can make no predictions as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Common Stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. See "Risk Factors--Potential Adverse Impact of Shares Eligible for Future Sale." Upon completion of the Offering, the Company expects to have 26,925,272 shares of Common Stock outstanding. In addition, 2,156,000 shares of Common Stock will be issuable upon the exercise of outstanding stock options. Of the shares outstanding after the Offering, the 15,625,000 shares of Common Stock (17,968,750 shares if the Underwriters' over-allotment is exercised in full) sold in the Offering will be freely tradeable without restriction under the Securities Act, except for any such shares which may be acquired by an "affiliate" of the Company (an "Affiliate"), as that term is defined in Rule 144 under the Securities Act, which shares will be subject to the volume limitations of Rule 144. An aggregate of 11,300,272 shares of Common Stock held by existing stockholders upon completion of the Offering will be "restricted securities" (as that phrase is defined in Rule 144) and may not be resold in the absence of registration under the Securities Act or pursuant to exemptions from such registration, including among others, the exemption provided by Rule 144 under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, if a period of at least two years has elapsed since the later of the date the "restricted securities" were acquired from the Company and the date they were acquired from an Affiliate, then the holder of such restricted securities (including an Affiliate) is entitled to sell a number of shares within any three-month period that does not exceed the greater of 1% of the then outstanding shares of the Common Stock (approximately 269,253 shares immediately after the Offering) or the average weekly reported volume of trading of the Common Stock on the NYSE during the four calendar weeks preceding such sale. The holder may only sell such shares through unsolicited brokers' transactions. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning the Company. Affiliates may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other requirements but without regard to the two-year holding period. Under Rule 144(k), if a period of at least three years has elapsed between the later of the date restricted securities were acquired from the Company and the date they were acquired from an Affiliate, as applicable, a holder of such restricted securities who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other restrictions described above. In June 1995, the Commission proposed reducing the two and three year bidding periods under Rule 144 described above to one and two years respectively. Ninety days after the date of this Prospectus, approximately 11,300,272 shares of Common Stock will be eligible for sale in the public market pursuant to Rule 144, subject to the volume limitations and other restrictions described above. Any employee of the Company who purchased his or her shares of Common Stock or received an option to purchase Common Stock pursuant to a written compensation plan or contract while the Company was not subject to the reporting requirements of the Exchange Act may be entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits nonaffiliates to sell their Rule 701 shares without having to comply with the current public information, holding period, volume limitation or notice provisions of Rule 144 and permits Affiliates to sell their Rule 701 shares without having to comply with the holding period provision of Rule 144, in each case beginning 90 days after the Company became subject to the reporting requirements of the Exchange Act. All of the outstanding options are currently exercisable by the holders thereof. The shares of Common Stock issuable upon the exercise of the outstanding options will be eligible for sale in the public market 90 days after the date of this Prospectus pursuant to Rule 701 under the Securities Act, subject to the volume limitations and other restrictions of Rule 144 described above. 60 Notwithstanding the foregoing, in connection with the Offering, the Company's executive officers, Directors and certain existing stockholders of the Company, who own in aggregate approximately 13,456,272 shares of Common Stock (including 2,156,000 shares which can be acquired through currently exercisable options), have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated ("Morgan Stanley") on behalf of the Underwriters, they will not (a) offer, pledge, sell contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by such person or are thereafter acquired directly from the Company), or (b) enter into any swap or similar agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (a) or (b) of this paragraph is to be settled by delivery of such Common Stock or such other securities, in cash or otherwise, for a period of 180 days after the date of this Prospectus, other than (i) the sale to the Underwriters of the shares of Common Stock under the Underwriting Agreement (as defined), (ii) the issuance by the Company of shares of Common Stock upon the exercise of an option sold or granted pursuant to an existing benefit plan of the Company and outstanding on the date of this Prospectus or (iii) transfer of shares of Common Stock in a bona fide charitable distribution or any estate planning distribution. REGISTRATION AGREEMENT The Company and substantially all of its existing stockholders, including the Bain Capital Funds and management, have entered into a registration agreement (the "Registration Agreement"). Under the Registration Agreement, the holders of a majority of the registrable securities owned by the Bain Capital Funds and related investors have the right at any time, subject to certain conditions, to require the Company to register any or all of their shares of Common Stock under the Securities Act on Form S-1 (a "Long-Form Registration") on three occasions at the Company's expense and on Form S-2 or Form S-3 (a "Short-Form Registration") on an unlimited number of occasions at the Company's expense. The Company is not required, however, to effect any such Long-Form Registration or Short-Form Registration within six months after the effective date of a prior demand registration and may postpone the filing of such registration for up to six months if the holders of a majority of the registrable securities agree that such a registration would likely have a material adverse effect on the Company. In addition, all holders of registrable securities are entitled to request the inclusion of any shares of Common Stock subject to the Registration Agreement in any registration statement at the Company's expense whenever the Company proposes to register any of its securities under the Securities Act, subject to certain conditions. In connection with all such registrations, the Company has agreed to indemnify all holders of registrable securities against certain liabilities, including liabilities under the Securities Act. Beginning 180 days after the date of the Prospectus, the holders of an aggregate of 11,078,256 shares of Common Stock will have demand registration rights pursuant to the Registration Agreement. 61 CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS GENERAL The following is a general discussion of the material United States federal income and estate tax consequences of the ownership and disposition of Common Stock by a Non-U.S. Holder. For this purpose, the term "Non-U.S. Holder" is defined as any person or entity that is, for United States federal income tax purposes, a foreign corporation, a non-resident alien individual, a foreign partnership or a non-resident fiduciary of a foreign estate or trust. This discussion does not address all aspects of United States federal income and estate taxes and does not deal with foreign, state and local consequences that may be relevant to such Non-U.S. Holders in light of their personal circumstances. Furthermore, this discussion is based on provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations promulgated thereunder and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change either retroactively or prospectively. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING JURISDICTION. Proposed United States Treasury Regulations were issued on April 15, 1996 (the "Proposed Regulations") which, if adopted, would affect the United States taxation of dividends paid to a Non-United States Holder on Common Stock. The Proposed Regulations are generally proposed to be effective with respect to dividends paid after December 31, 1997, subject to certain transition rules. The discussion below is not intended to be a complete discussion of the provisions of the Proposed Regulations, and prospective investors are urged to consult their tax advisors with respect to the effect the Proposed Regulations would have if adopted. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a nonresident alien) by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during the current calendar year and the two preceding calendar years (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to U.S. federal tax as if they were U.S. citizens. DIVIDENDS The Company currently does not intend to pay dividends on the Common Stock. See "Dividend Policy." In the event that dividends are paid on shares of Common Stock, dividends paid to a Non-U.S. Holder of Common Stock will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business of the Non-U.S. Holder within the United States and an Internal Revenue Service Form 4224 (or, if and when the Proposed Regulations become effective, an Internal Revenue Service Form W-8) is filed with the payor. Dividends that are effectively connected with the conduct of a trade or business within the United States are subject to United States federal income tax on a net income basis at applicable graduated individual or corporate rates. A foreign corporation receiving effectively connected dividends may, under certain circumstances, be subject to an additional "branch profits tax" at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) of the foreign corporation's effectively connected earnings and profits, subject to certain adjustments. Under current United States Treasury regulations, dividends paid to an address outside the United States are presumed to be paid to a resident of such country for purposes of the withholding discussed above, and, under the current interpretation of United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under the Proposed Regulations, to obtain a reduced rate of withholding under a treaty, a Non- United States Holder would generally be required to provide an Internal Revenue Service Form W-8 certifying such Non-United States Holder's entitlement to benefits under a treaty. The Proposed Regulations would also 62 provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends paid to a Non-United States Holder that is an entity should be treated as paid to the entity or those holding an interest in that entity. Certain certification and disclosure requirements must be complied with in order to be exempt from withholding under the effectively connected income exemption. A Non-U.S. Holder of Common Stock eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder will generally not be subject to United States federal income tax with respect to gain recognized on a sale or other disposition of Common Stock unless (i) the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States, (ii) in the case of a Non-U.S. Holder who is an individual and holds the Common Stock as a capital asset, such holder is present in United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, or (iii) the Company is or has been a "U.S. real property holding corporation" for United States federal income tax purposes within the shorter of the five-year period preceding such disposition or such holder's holding period. The Company is not and does not anticipate becoming a "U.S. real property holding corporation" for United States federal income tax purposes. If an individual Non-U.S. Holder falls under clause (i) above, he or she will be taxed on his or her net gain derived from the sale at regular graduated U.S. federal income tax rates. If an individual Non-U.S. Holder falls under clause (ii) above, he or she will be subject to a flat 30% tax on the gain derived from the sale which gain may be offset by U.S. capital losses. If a Non-U.S. Holder that is a foreign corporation falls under clause (i) above, it will be taxed on its gain at regular graduated U.S. federal income tax rates and may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified in an applicable income tax treaty. If the Company is a "U.S. real property holding corporation" at any time during the five-year period ending on the date of the disposition, a Non-U.S. Holder who has held more than 5% of the Common Stock at any time during the shorter of the five-year period ending on the date of the disposition (taking into account certain attribution rules) or such holder's holding period will be taxed on its gain at regular graduated U.S. federal income tax rates or, if higher, the graduated rates used for alternative minimum tax purposes. FEDERAL ESTATE TAX An individual Non-U.S. Holder who is treated as the owner of or has made certain lifetime transfers of an interest in the Common Stock will be required to include the value thereof in his gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX Under Treasury regulations, the Company must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld, if any, with respect to such dividends. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected with a trade or business in the United States of the Non-U.S. Holder or withholding was reduced or eliminated by an applicable income tax treaty. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty. Backup withholding (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) 63 will generally not apply to dividends paid to Non-U.S. Holders outside the United States that are either subject to the 30% withholding discussed above or that are not so subject because a tax treaty applies that reduces or eliminates such 30% withholding. In that regard, under temporary United States Treasury regulations, backup withholding will not apply to dividends paid on Common Stock to a Non-U.S. Holder at an address outside the United States unless the payor has actual knowledge that the payee is a U.S. person. Backup withholding and information reporting generally will apply to dividends paid to addresses inside the United States on shares of Common Stock to beneficial owners that are not "exempt recipients" or have failed to provide, in the manner required, certain identifying information. In general, backup withholding and information reporting will not apply to a payment of the proceeds of a disposition of Common Stock by or through a foreign office of a broker. If, however, such broker is, for United States federal income tax purposes, a U.S. person, a controlled foreign corporation, or a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, such payments will not be subject to backup withholding but will be subject to information reporting, unless (1) such broker has documentary evidence in its records that the beneficial owner is a Non-U.S. Holder and certain other conditions are met, or (2) the beneficial owner otherwise establishes an exemption. Payment by a United States office of a broker of the proceeds of a disposition of Common Stock is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is a Non-U.S. Holder, or otherwise establishes an exemption. The Proposed Regulations would, if adopted, alter the foregoing rules in certain respects. Among other things, the Proposed Regulations would provide certain presumptions under which a Non-United States Holder would be subject to backup withholding in the absence of the required certification. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is furnished to the IRS. 64 UNDERWRITERS Under the terms and subject to the conditions in the Underwriting Agreement, dated the date of this Prospectus (the "Underwriting Agreement"), the Company and the Selling Stockholders have agreed to sell 12,500,000 and 3,125,000 shares, respectively, of the Company's Common Stock and the U.S. Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated, BT Securities Corporation, CS First Boston Corporation, Goldman, Sachs & Co., Salomon Brothers Inc and Wasserstein Perella Securities, Inc. are serving as U.S. Representatives, have severally agreed to purchase, and the International Underwriters named below, for whom Morgan Stanley & Co. International Limited, Alex. Brown & Sons Incorporated, Bankers Trust International PLC, CS First Boston Limited, Goldman Sachs International, Salomon Brothers International Limited and Wasserstein Perella Securities, Inc. are serving as International Representatives, have severally agreed to purchase, the respective number of shares of Common Stock set forth opposite their names below:
NUMBER OF NAME SHARES ---- ---------- U.S. Underwriters: Morgan Stanley & Co. Incorporated........................... Alex. Brown & Sons Incorporated............................. BT Securities Corporation................................... CS First Boston Corporation................................. Goldman, Sachs & Co. ....................................... Salomon Brothers Inc........................................ Wasserstein Perella Securities, Inc. ....................... ---------- Subtotal.................................................. 12,500,000 ---------- International Underwriters: Morgan Stanley & Co. International Limited.................. Alex. Brown & Sons Incorporated............................. Bankers Trust International PLC............................. CS First Boston Limited..................................... Goldman Sachs International................................. Salomon Brothers International Limited...................... Wasserstein Perella Securities, Inc. ....................... ---------- Subtotal.................................................. 3,125,000 ---------- Total..................................................... 15,625,000 ==========
The U.S. Underwriters and the International Underwriters are collectively referred to as the "Underwriters". The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. Pursuant to the Agreement Between U.S. and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any U.S. Shares (as defined below) being sold by it for the account of anyone other than a United States or Canadian Person (as defined below) and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any International Shares (as defined below) being sold by it for the account of any United States or Canadian Person and (b) it has 65 not offered or sold, and will not offer or sell, directly or indirectly, any International Shares or distribute any prospectus relating to the International Shares within the United States or Canada or to any United States or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter and an International Underwriter, the foregoing representations and agreements (i) made by it in its capacity as a U.S. Underwriter shall apply only to shares purchased by it in its capacity as a U.S. Underwriter, (ii) made by it in its capacity as an International Underwriter shall apply only to shares purchased by it in its capacity as an International Underwriter, and (iii) do not restrict its ability to distribute any prospectus relating to the shares of Common Stock to any person. The foregoing limitations do not apply to stabilization actions or to certain other transactions specified in the Agreement Between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person) and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All shares of Common Stock to be purchased by the U.S. Underwriters and the International Underwriters under the Underwriting Agreement are referred to herein as the U.S. Shares and the International Shares, respectively. Pursuant to the Agreement Between U.S. and International Underwriters, sales may be made between the U.S. Underwriters and International Underwriters of any number of shares of Common Stock to be purchased pursuant to the Underwriting Agreement as may be mutually agreed. The per share price of any shares so sold shall be the Price to Public set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement Between U.S. and International Underwriters, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares of Common Stock, directly or indirectly, in Canada in contravention of the securities laws of Canada or any province or territory thereof and has represented that any offer of shares of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer is made. Each U.S. Underwriter has further agreed to send to any dealer who purchases from it any shares of Common Stock a notice stating in substance that, by purchasing such shares of Common Stock, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such shares of Common Stock in Canada or to, or for the benefit of, any resident of Canada in contravention of the securities laws of Canada or any province or territory thereof and that any offer of shares of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province of Canada in which such offer is made, and that such dealer will deliver to any other dealer to whom it sells any of such shares of Common Stock a notice to the foregoing effect. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that (a) it has not offered or sold and will not, during the period of six months from the date of the Offering, offer or sell any shares of Common Stock in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, going or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 and the Regulations with respect to anything done by it in relation to the shares of Common Stock offered hereby in, from or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the issue of the shares of Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988, or to any person to whom the document may lawfully be issued or passed on. 66 Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that it has not offered or sold, and agrees not to offer or sell, directly or indirectly, in Japan or to or for the account of any resident thereof, any of the shares of Common Stock acquired in connection with the distribution contemplated hereby, except for offers or sales to Japanese International Underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan. Each International Underwriter further agrees to send to any dealer who purchases from it any of the shares of Common Stock a notice stating in substance that, by purchasing such shares, such dealer represents and agrees that it has not offered or sold and will not offer or sell any of such shares, directly or indirectly in Japan or to or for the account of any resident thereof except pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan, and that such dealer will send to any other dealer whom it sells any of such shares of Common Stock a notice containing substantially the same statement as contained in the foregoing. The Underwriters propose to offer part of the shares of Common Stock directly to the public at the Price to Public set forth on the cover page hereof and part to certain dealers at a price which represents a concession not in excess of $ a share below the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain dealers. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Underwriters. At the request of the Company, the U.S. Underwriters have reserved for sale, at the initial public offering price, up to 781,250 shares to be issued by the Company and offered hereby for Directors, officers, employees, business associates and related persons of the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. Pursuant to the Underwriting Agreement, the Selling Stockholders have granted the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 2,343,750 additional shares of Common Stock at the Price to Public set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the Offering of the shares of Common Stock offered hereby. To the extent such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such U.S. Underwriter's name in the preceding table bears to the total number of shares of Common Stock offered by the U.S. Underwriters hereby. The Company, all of the Company's executive officers and Directors and certain other stockholders of the Company, who will own after the Offering in the aggregate approximately 13,456,272 shares of Common Stock (including 2,156,000 shares which can be acquired through currently exercisable options) have agreed that, without the prior written consent of Morgan Stanley, they will not (a) offer, pledge, sell contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by such person or are thereafter acquired), or (b) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (a) or (b) of this paragraph is to be settled by delivery of such Common Stock or such other securities, in cash or otherwise, for a period of 180 days after the date of this Prospectus, other than (i) the sale to the Underwriters of the shares of Common Stock under the Underwriting Agreement; (ii) the issuance by the Company of shares of Common Stock upon the exercise of an option sold or granted pursuant to an existing employee benefit plan of the Company and outstanding on the date of this Prospectus or (iii) transfer of shares of Common Stock in a bona fide charitable distribution or any estate planning distribution. 67 The Company, the Selling Stockholders and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Common Stock has been approved for listing on the NYSE, subject to official notice of issuance, under the symbol "AGP." In order to meet the requirements for listing of the Common Stock on that exchange, the U.S. Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. The rules of the National Association of Securities Dealers, Inc. (the "NASD") provide that no NASD member shall participate in a public offering of an issuer's securities where more than 10% of the net offering proceeds are intended to be paid to members participating in the distribution of the offering or associated or affiliated persons of such members, unless a "qualified independent underwriter" shall have been engaged on the terms provided in such rules. BT Securities Corporation ("BT Securities") may be deemed to be participating in such a transaction if greater than 10% of the net proceeds from the sale of the Common Stock is used to repay outstanding indebtedness of the Company to Bankers Trust Company, an affiliate of BT Securities, under the Bank Credit Agreement. In view of such potential use of proceeds, the Offering is being conducted in accordance with the rules of the NASD and Morgan Stanley is acting as "qualified independent underwriter" within the meaning of such rules. In connection therewith, Morgan Stanley has participated in the preparation of the Registration Statement of which this Prospectus forms a part. It has exercised its usual standards of "due diligence" with respect thereto and has recommended the maximum price at which the Common Stock may be offered hereby. Morgan Stanley will receive no separate fee for its services as qualified independent underwriter, although the Company has agreed to reimburse its expenses incurred as a result of such engagement. Pursuant to the provisions of Schedule E, NASD members may not execute transactions in Common Stock offered hereby to any accounts over which they exercise discretionary authority without the prior written approval of the customer, in accordance with Section 12 of Schedule E of the NASD Bylaws. BT Securities and its affiliates have from time to time in recent years performed various investment banking, banking and other financial advisory services for the Company for which it has received customary compensation. Such services included BT Securities acting as placement agent for the private placement of the Notes of APPC and for the private placement of Class A and Class B Variable Funding Certificates of the SPC. Bankers Trust Company, an affiliate of BT Securities, is the holder of the outstanding Variable Funding Certificates of the SPC. Wasserstein Perella Securities, Inc. has also received certain fees in connection with financial advisory services performed in connection with the Acquisition and related financings and acted as placement agent for the private placement of the Notes. PRICING OF OFFERING Prior to the Offering, there has been no public market for the shares of Common Stock of the Company. Consequently, the initial public offering price was determined by negotiation among the Company, the Selling Stockholders and the Representatives. Among the factors considered in determining the initial public offering price were the Company's record of operations, the Company's current financial condition and future prospects, the experience of its management, the economics of the industry in general, the general condition of the equity securities market and the market prices of similar securities of companies considered comparable to the Company. There can be no assurance that a regular trading market for the shares of Common Stock will develop after the Offering or, if developed, that a public trading market can be sustained. There can also be no assurance that the prices at which the Common Stock will sell in the public market after the Offering will not be lower than the price at which it is issued by the Underwriters in the Offering. EXPERTS The Company's consolidated financial statements as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 included in this Prospectus have been so included in reliance upon the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 68 The WR Acquisition, Inc. consolidated balance sheets as of October 31, 1995 and December 31, 1994, and the statements of operations, cash flows and changes in stockholders' equity (deficiency) for the ten months ended October 31, 1995 and each of the two years ended December 31, 1993 and 1994 have been included in this Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent accountants, appearing elsewhere herein, on the authority of said firm as experts in auditing and accounting. The Globe-Weis statements of net sales and cost of sales for the nine months ended July 31, 1994 and the twelve months ended July 31, 1995 included in this Prospectus have been so included in reliance upon the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Niagara Envelope Company, Inc. at December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Kirkland & Ellis, New York, New York (a partnership which includes professional corporations). Certain legal matters will be passed upon for the Underwriters by Davis Polk & Wardwell, New York, New York. Karl E. Lutz, whose professional corporation is a partner of Kirkland & Ellis, beneficially owns 120,211 shares of Common Stock and is a Selling Stockholder. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (of which this Prospectus is a part and which term shall encompass any amendments thereto) on Form S-1 pursuant to the Securities Act with respect to the Common Stock being offered in the Offering. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions of which are omitted as permitted by the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete; with respect to any such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. For further information about the Company and the securities offered hereby, reference is made to the Registration Statement and to the financial statements, schedules and exhibits filed as a part thereof. Upon completion of the Offering, the Company will be subject to the information requirements of the Exchange Act, and, in accordance therewith, will file reports and other information with the Commission. In addition, APPC and certain of its wholly owned subsidiaries are expected to be subject to the information requirements of the Exchange Act upon the effectiveness of their Registration Statement on Form S-1 (Commission File No. 333-3006) ("Exchange Offer Registration Statement") relating to the offering to exchange of the Notes for Notes registered under the Securities Act. The Registration Statement and the Exchange Offer Registration Statement, the exhibits and schedules forming a part thereof and the reports and other information filed by the Company or APPC with the Commission in accordance with the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material or any part thereof may also be obtained by mail from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. The Company intends to furnish its stockholders with annual reports containing audited financial statements and to make available quarterly reports containing unaudited summary financial information for the first three fiscal quarters of each fiscal year. 69 UNAUDITED PRO FORMA FINANCIAL DATA The Unaudited Pro Forma Consolidated Statement of Income for the year ended December 31, 1995 gives effect to (i) the Transactions, (ii) the Globe-Weis Acquisition, (iii) the pending sale of the Personalizing Division, (iv) the Recapitalization, (v) the refinancing of the Bank Credit Agreement, (vi) the Niagara Acquisition and (vii) the Offering and the application of the net proceeds therefrom as described under "Use of Proceeds," as if they had occurred on January 1, 1995. The Unaudited Pro Forma Consolidated Statement of Income for the three months ended March 31, 1996 gives effect to (i) the Recapitalization, (ii) the refinancing of the Bank Credit Agreement, (iii) the pending sale of the Personalizing Division, (iv) the Niagara Acquisition and (v) the Offering and the application of the net proceeds therefrom as described under "Use of Proceeds," as if they had occurred on January 1, 1996. The unaudited pro forma financial data are based on the historical financial statements of the Company, Williamhouse and Niagara and the assumptions and adjustments described in the accompanying notes. The Unaudited Pro Forma Consolidated Statements of Income do not (a) purport to represent what the Company's results of operations actually would have been if the foregoing transactions occurred as of the dates indicated or what such results will be for any future periods, or (b) give effect to certain non-recurring charges resulting from the Transactions, the refinancing of the Bank Credit Agreement and the Offering, including certain non-cash compensation charges directly related to the Acquisition and an extraordinary charge from the write-off of deferred financing fees and direct expenses resulting from the refinancing of the Bank Credit Agreement, a portion of the Notes and existing Ampad, Williamhouse and Niagara debt. The Unaudited Pro Forma Condensed Consolidated Balance Sheet at March 31, 1996 gives effect to (i) the Recapitalization, (ii) the refinancing of the Bank Credit Agreement, (iii) the Niagara Acquisition and (iv) the Offering and the application of the net proceeds therefrom to the Company as described under "Use of Proceeds," as if such transactions had occurred as of March 31, 1996. The historical financial statements of the Company already reflect (i) the Transactions, (ii) the Globe-Weis Acquisition and (iii) the pending disposal of the Personalizing Business as of March 31, 1996. The historical financial statements and the Unaudited Pro Forma Consolidated Statements of Income reflect the preliminary allocation of purchase price to the Company's tangible and intangible assets and liabilities. The final allocation of purchase price, and the resulting amortization expense may differ somewhat from the preliminary estimates primarily due to the final allocation being based on the actual proceeds to be received from the disposal of the Personalizing Division. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of the Notes to Consolidated Financial Statements of the Company included herein. The unaudited pro forma financial data are based upon assumptions that the Company believes are reasonable and should be read in conjunction with the Consolidated Financial Statements of the Company, Williamhouse and Niagara and the accompanying notes thereto included elsewhere in this Prospectus. 70 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
HISTORICAL WILLIAMHOUSE HISTORICAL THE COMPANY FOR THE NIAGARA FOR THE YEAR TEN-MONTH FOR THE ENDED GLOBE-WEIS PERIOD ENDED YEAR ENDED TRANSACTIONS DECEMBER 31, ACQUISITION OCTOBER 31, DECEMBER 31, AND OTHER COMPANY 1995 ADJUSTMENTS(1) 1995 1995 ADJUSTMENTS PRO FORMA ------------ -------------- ------------ ------------ ------------ --------- Net sales............... $259,341 $32,600 $219,366 $105,860 $ -- $617,167 Cost of sales........... 211,814 32,860 152,781 82,193 (375)(4) 481,804 2,339 (6) 1,108 (6) (916)(13) -------- ------- -------- -------- ------- -------- Gross profit............ 47,527 (260) 66,585 23,667 (2,156) 135,363 Selling, general and administrative expenses............... 18,545 358 39,866 15,187 1,820 (2(b)) 74,678 1,000 (3) 2,862 (3) (7,029)(5) 1,063 (10) (1,828)(11) (974)(11) 5,000 (12) (192)(13) (1,000)(14) Non-recurring compensation charge.... 27,632 -- 9,544 (33,809)(9) 3,367 -------- ------- -------- -------- ------- -------- Income (loss) from operations............. 1,350 (618) 17,175 8,480 30,931 57,318 Interest expense........ 13,657 -- 11,615 922 4,759 (2(a)) 30,953 Other (income) expense.. (735) -- (124) 217 -- (642) -------- ------- -------- -------- ------- -------- Income (loss) before income taxes........... (11,572) (618) 5,684 7,341 26,172 27,007 Provision for (benefit from) income taxes..... (6,538) (247)(7) 2,224 2,762 11,613 (8) 9,814 -------- ------- -------- -------- ------- -------- Net income (loss) from continuing operations and before extraordinary items.... $ (5,034) $ (371) $ 3,460 $ 4,579 $14,559 $ 17,193 ======== ======= ======== ======== ======= ======== Pro forma net earnings per common and common equivalent share from continuing operations and before extraordinary items(15)........................................................ $.59 ======== Pro forma weighted average number of common and common equivalent shares outstanding(15)... 29,063 ========
See accompanying notes. 71 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THE COMPANY NIAGARA FOR THE THREE FOR THE MONTHS THREE MONTHS ENDED ENDED TRANSACTIONS MARCH 31, MARCH 31, AND OTHER COMPANY 1996 1996 ADJUSTMENTS PRO FORMA ------------- ------------ ------------ --------- Net sales............... $121,418 $28,317 $149,735 Cost of sales........... 97,889 23,314 $ 277 (6) 121,245 (235)(13) -------- ------- ------ -------- Gross profit............ 23,529 5,003 (42) 28,490 Selling, general and administrative expenses............... 11,026 2,423 93 (3) 14,493 1,250 (12) (49)(13) (250)(14) -------- ------- ------ -------- Income from operations.. 12,503 2,580 (1,086) 13,997 Interest expense........ 12,542 147 (4,951)(2(a)) 7,738 Other (income) expense.. (269) 4 (265) -------- ------- ------ -------- Income before income taxes.................. 230 2,429 3,865 6,524 Provision for income taxes.................. 102 911 1,583 (8) 2,596 -------- ------- ------ -------- Net income from continuing operations and before extraordinary items.... $ 128 $ 1,518 $2,282 $ 3,928 ======== ======= ====== ======== Pro forma net earnings per common and common equivalent share(15)...................................................... $.14 ======== Pro forma weighted average number of common and common equivalent shares outstanding(15).............................. 29,063 ========
See accompanying notes. 72 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996 (DOLLARS IN THOUSANDS) The Unaudited Pro Forma Consolidated Statements of Income give effect to the following unaudited pro forma adjustments: (1) Reflects the inclusion of Globe-Weis unaudited historical results of operations for the seven and one-half months ended August 15, 1995. Globe-Weis' results after August 15, 1995 are included in the Company's historical results. Operating data for preacquisition periods for Globe- Weis are set forth below:
YEAR ENDED DECEMBER 31, 1995 ----------------- Net sales.............................................. $32,600 Cost of sales(a)....................................... 32,860 ------- Gross profit (loss).................................... (260) Selling, general and administrative expenses(a)........ 358 ------- Income (loss) from operations.......................... $ (618) =======
- -------- (a) Certain reclassifications were made to the unaudited historical results of operations to conform to the Company's presentation. (2(a)) Addition to pro forma interest expense is summarized below. The adjustments set forth below adjust historical interest expense for the year ended December 31, 1995 and the period ended March 31, 1996 to reflect use of the proceeds from the Offering, the assumption and contemporaneous refinancing of all but $3,900 of Niagara's indebtedness, and the refinancing of the Bank Credit Agreement with the proceeds from the New Bank Credit Agreement.
YEAR ENDED PERIOD ENDED DECEMBER 31, 1995 MARCH 31, 1996 ----------------- -------------- Elimination of Ampad, Williamhouse and Niagara historical interest expense.... $(26,194) $(12,689) -------- -------- Interest on the Notes after retirement of $70,000 from proceeds of the Offer- ing.................................... 16,900 4,225 Interest on $10,628 of existing IRB and other debt (Avg. 5.175%)............... 550 137 Interest on net borrowings of $176,867 under New Bank Credit Agreement at LIBOR (5.50%) plus 1.75% (including additional borrowings of $32,992 related to the Niagara Acquisition).... 12,823 3,206 Interest on $3,900 of IRB debt assumed in Niagara Acquisition................. 205 51 Bank fees on IRB letters of credit at 2.00% on $8,049 of outstanding debt.... 161 40 Interest on unused New Bank Credit Agreement commitment of $115,084 at 0.50%.................................. 575 144 Annual administrative fee on New Bank Credit Agreement....................... 200 50 Interest on amount of debt to be repaid from the proceeds from the sale of the Personalizing Division ($46,800 at an interest rate of LIBOR (5.50%) plus 1.75%). (The Company has signed a letter of intent to sell the Personalizing Division and is required, pursuant to the Bank Credit Agreement, to use any proceeds from asset sales to pay down debt.)........................ (3,393) (848) -------- -------- Cash interest expense................... 28,021 7,005 Amortization of debt issuance costs on New Bank Credit Agreement ($8,500 over five years)............................ 1,700 425 Amortization of remaining debt issuance costs from Notes after write-off of debt issuance costs of Notes repaid ($6,135 over ten years)................ 614 153 Amortization of debt issuance costs from Accounts Receivable Facility ($2,676 over five years)....................... 535 134 Amortization of other debt issuance costs.................................. 83 21 -------- -------- Pro forma interest expense.............. 30,953 7,738 -------- -------- Adjustment for net increase (decrease).. $ 4,759 $ (4,951) ======== ========
73 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME--(CONTINUED) (2(b)) In conjunction with entering into the Bank Credit Agreement, the Company also entered into a $45,000 off-balance sheet Accounts Receivable Facility. The interest rate on this facility is LIBOR (5.50%) plus 0.563% (6.063%) per annum. In accordance with SFAS No. 77, this discount rate on $45,000 equates to an annual charge of $2,728 to selling, general and administrative expenses as a "loss on sale" on receivables. The pro forma adjustment reflects the incremental charge above the historical discount recorded in 1995 by the Company ($423), offset by a $485 decrease in the discount that will result from an estimated $8,000 reduction in the Accounts Receivable Facility arising from the sale of the Personalizing Division. (3) Reflects the annual goodwill amortization ($2,988) and annual trade names amortization ($1,200) resulting from the purchase of Williamhouse and the annual goodwill amortization resulting from the Niagara Acquisition ($372). The Williamhouse acquisition resulted in an allocation of $37,900 to trade names and to goodwill of approximately $119,500. The Niagara Acquisition is expected to result in additional goodwill of $14,887. Trade names are being amortized over periods ranging from fifteen to forty years. Goodwill is being amortized over a forty year period. The pro forma adjustment for the year ended December 31, 1995 represents amortization expense for the ten-month period prior to the Williamhouse acquisition plus the annual amortization expense from the Niagara Acquisition. The adjustment for the three months ended March 31, 1996 represents amortization expense for the period resulting from the Niagara Acquisition. (4) Reflects the estimated recurring cost savings relating to manufacturing operations from conforming health, welfare and other employee benefit programs (assumed to be 50% allocated to cost of sales) related to the Williamhouse acquisition. The Company capped the cost of the employee benefit programs by increasing the use of managed care, obtaining a contractually guaranteed premium and increasing employee contributions to the plan. (5) Reflects the estimated recurring cost savings relating to selling, general and administrative ("SG&A") activities from management's consolidation plans as described below:
YEAR ENDED DECEMBER 31, 1995 ----------------------- Elimination of Williamhouse's New York City headquarters facility, including the facility's occupancy and maintenance costs as well as workforce reductions, primarily executive, legal, accounting and tax functions and associated direct overhead costs (net of increase in Ampad's Dallas, Texas headquarters staff).......................................... $4,912 Consolidation of regional data processing centers from three to one locations and elimination of redundant regional administrative positions by consolidating accounting, accounts payable, credit and collections functions in either Williamhouse's regional headquarters or Ampad's Dallas headquarters............................. 729 Consolidation of sales and marketing organizations, along with sales distribution and promotional activity program changes(a)......... 1,013 Cost reductions arising from conforming health, welfare and other employee benefit programs (assumed to be 50% allocated to SG&A) (See (4) above).......................................... 375 ------ $7,029 ======
-------- (a) The staff reductions in the sales and marketing organization principally represents excess sales force. The Williamhouse sales force had not been reduced in recognition of the continuing consolidation in the industry. Management does not expect to experience any decline in sales volumes or revenues as a result of these actions. 74 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME--(CONTINUED) (6) Represents additional depreciation expense resulting from the write-up of property, plant and equipment to fair market value for the Williamhouse acquisition and the Niagara Acquisition as summarized below:
ESTIMATED ADDITIONAL USEFUL LIFE FAIR VALUE ANNUAL IN YEARS WRITE-UP DEPRECIATION ----------- ---------- ------------ Williamhouse: Land............................... -- $ 1,443 $ -- Buildings.......................... 40 1,664 42 Machinery and Equipment............ 12 33,178 2,765 ------- ------ $36,285 $2,807 ======= ======
The adjustment for the Niagara Acquisition represents the additional depreciation on the write-up of Niagara's historical fixed assets and the additional depreciation on assets Niagara will acquire from affiliated parties prior to closing of the acquisition as follows:
ESTIMATED ADJUSTMENT USEFUL LIFE FAIR VALUE TO ANNUAL IN YEARS ADJUSTMENT DEPRECIATION ----------- ---------- ------------ Historical Niagara assets: Buildings.......................... 40 $(2,204) $ (55) Machinery and equipment............ 12 6,266 522 Furniture and fixtures............. 5 (170) (34) Other.............................. 3 (90) (30) Affiliated party assets: Land............................... -- 1,501 -- Buildings.......................... 40 3,932 98 Machinery and equipment............ 12 7,269 607 ------- ------ $16,504 $1,108 ======= ======
The adjustment for the year ended December 31, 1995 represents the additional depreciation expense on the write-up of the Williamhouse assets for the ten months prior to acquisition plus the annual additional depreciation expense related to Niagara. The adjustment for the period ended March 31, 1996 represents one quarter of the additional annual depreciation expense resulting from the Niagara Acquisition. (7) Reflects tax provision for pro forma adjustments to income before income taxes using an estimated effective income tax rate of 40%, which approximates the Company's combined statutory rate. (8) Reflects the income tax adjustment required to result in a pro forma provision (benefit) based on: (i) Ampad's, Williamhouse's and Niagara's respective historical tax provisions (benefit) using historical amounts and (ii) the direct tax effects of the pro forma adjustments described herein. The primary reason for the difference between the historical rate and the pro forma effective rate is that the goodwill resulting from the Williamhouse acquisition and the Niagara Acquisition is not tax deductible and, pursuant to SFAS No. 109, deferred taxes are not recognized on non-tax deductible goodwill in purchase accounting. (9) Represents the elimination of a portion of non-recurring stock option- related compensation expense to certain members of the Company's management directly related to the Williamhouse acquisition. (10) Represents the additional annual management fee above the historical fee paid by Ampad to equal an agreed upon prospective annual fee of $2,000 to be charged by Bain Capital for consulting and financial services to be provided to the Company. (11) Represents the elimination of historical amortization of Williamhouse deferred financing fees of $974 (which Williamhouse historically classified in SG&A) and the elimination of the one-time charge of $1,828 to write-off the remaining balance relating to refinanced debt. 75 (12) Represents the annual and one quarter amounts, respectively, of amortization of the purchase price allocated to a one year management services agreement resulting from the Niagara Acquisition. The Company does not expect this charge to be recurring. (13) Represents the elimination of historical rent expense related to property and equipment leased by Niagara from affiliated parties. Such assets will be acquired by Niagara contemporaneously with the Niagara Acquisition (see note (6) above). (14) Represents reductions to selling, general and administrative expenses resulting from the elimination of certain Niagara executive compensation and related benefits. (15) Pro forma net earnings per share from continuing operations and before extraordinary items has been computed using the weighted average number of common shares and common share equivalents outstanding during the period presented, adjusted for the Recapitalization and the Offering. Common share equivalents result from outstanding options to purchase Common Stock and have been determined using the treasury stock method. 76 UNAUDITED PRO FORMA AS ADJUSTED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
MARCH 31, 1996 --------------------------------------------- HISTORICAL ------------------- AMERICAN PAD & PAPER TRANSACTION COMPANY COMPANY NIAGARA ADJUSTMENTS PRO FORMA ----------- ------- ----------- --------- ASSETS Current assets: Cash......................... $ 20,108 $ 606 $(20,108)(1) $ 606 Restricted cash.............. 10,759 10,759 Accounts receivable, net..... 18,407 11,202 29,609 Inventories.................. 93,166 11,028 2,668 (3) 106,862 Prepaid expenses and other current assets.............. 2,026 372 2,398 Assets held for sale......... 43,572 43,572 Management services agree- ment........................ 5,000 (4) 5,000 Deferred income taxes, net... 14,744 216 14,960 --------- ------- -------- -------- Total current assets....... 202,782 23,424 (12,440) 213,766 Property and equipment, net... 106,758 11,326 16,504 (5) 134,588 Intangible assets, net........ 37,392 316 37,708 Debt issuance costs, net...... 32,524 (14,228)(6) 18,296 Goodwill, net................. 119,655 14,887 (2) 134,542 Other......................... 1,683 1,350 3,033 --------- ------- -------- -------- Total...................... $ 500,794 $36,416 $ 4,723 $541,933 ========= ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt........................ $ 13,066 $ 650 $(11,600)(7) $ 2,116 Accounts payable............. 36,689 6,782 43,471 Accrued expenses............. 43,271 2,638 6,000 (2) 51,909 Income taxes payable......... 518 953 1,471 --------- ------- -------- -------- Total current liabilities.. 93,544 11,023 (5,600) 98,967 Long-term debt............... 440,453 6,725 (127,883)(7) 319,295 Deferred income taxes........ 29,911 439 (11,983)(8) 18,367 Other........................ 3,179 1,475 4,654 --------- ------- -------- -------- Total liabilities.......... 567,087 19,662 (145,466) 441,283 --------- ------- -------- -------- Commitments and contingen- cies......................... Stockholders' equity (defi- cit): Niagara stockholders' equity...................... 16,754 (16,754)(9) Preferred stock, 150,000 shares authorized, 58,449 shares issued and outstanding and no shares outstanding on a pro forma, as adjusted basis........... 113,887 (113,887)(10) -- Common stock, voting, $.01 par value, 75,000,000 shares authorized, 900,000 shares issued and outstanding and 26,925,272 outstanding on a pro forma, as adjusted basis........... 9 260 (11) 269 Additional paid-in capital... 14,240 298,827 (11) 313,067 Accumulated (deficit)........ (194,429) (18,257)(12) (212,686) --------- ------- -------- -------- Total stockholders' equity (deficit)................. (66,293) 16,754 150,189 100,650 --------- ------- -------- -------- Total liabilities and stockholders' equity (def- icit)..................... $ 500,794 $36,416 $ 4,723 $541,933 ========= ======= ======== ========
See accompanying notes. 77 NOTES TO UNAUDITED PRO FORMA AS ADJUSTED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to the following unaudited pro forma adjustments: (1) Represents Company cash-on-hand used in the Niagara Acquisition (see notes (2) and (7) below). (2) Reflects management's preliminary allocation of purchase price for the Niagara Acquisition in accordance with the purchase method of accounting as follows:
Purchase price: Cash portion of purchase price (including $5,000 payment for management services agreement)........................ $ 55,000 Estimated fees and expenses............................... 2,000 Less purchase price reduction for debt assumed: Niagara historical debt.................................. (7,375) Incremental debt incurred to acquire assets of affiliated parties (see note (7) below)............................. (12,702)(a) -------- Total.................................................. $ 36,923 ======== Allocated as follows: Existing book value of Niagara............................ $ 16,754 Increase in inventory to estimated fair market value (see note (3) below).......................................... 2,668 Estimated increase in property and equipment to fair mar- ket value (see note (5) below)........................... 3,802 Acquisition of property and equipment from Niagara affili- ated parties contemporaneously with the acquisition (see note (5) below).......................................... 12,702 (a) Assumption of incremental debt issued by Niagara to ac- quire property and equipment from affiliated parties con- temporaneously with the acquisition (see note (7) be- low)..................................................... (12,702)(a) Management services agreement (see note (4) below)........ 5,000 Transaction related liabilities including severance and change in control benefits............................... (6,000) Increase in net deferred tax liabilities (see note (8) be- low)..................................................... (188) Increase in goodwill...................................... 14,887 -------- Total.................................................. $ 36,923 ========
-------- (a) Contemporaneously with the Niagara Acquisition, Niagara will acquire certain assets currently used in operations that are leased from affiliated parties. Niagara will incur debt, pre- closing, under its existing credit facilities to acquire the assets. (3) Represents the estimated write-up of work-in-progress and finished goods inventory in connection with the purchase price allocation. Since the Company calculates inventory under the LIFO method, this write-up will not result in a charge to cost of sales in any period following the Niagara Acquisition unless base year inventory levels are reduced. In any event, any resulting one-time charge would not be reflected in the accompanying Unaudited Pro Forma Consolidated Statements of Income due to its unusual, non-recurring nature. (4) Represents the contractual payment at closing of $5,000 for a one-year management services agreement in connection with the Niagara Acquisition. (5) Represents the estimated write-up in value of property and equipment to fair market value in connection with the purchase price allocation for the Niagara Acquisition of $3,802. Also represents the value of property and equipment to be acquired from affiliated parties of Niagara contemporaneously with the Niagara Acquisition of $12,702. 78 (6) Represents elimination of $22,728 of unamortized debt issuance costs related to early extinguishment of Term Loans under the Bank Credit Agreement and partial redemption of the Notes offset by incurrence of $8,500 of new debt issuance costs related to, and funded by, borrowings under the New Bank Credit Agreement. (7) Represents the change in long-term debt (and reclassification of current portion to long-term debt) as a result of the Refinancing, Offering and Niagara Acquisition as follows: Sources of funds: Net cash proceeds from the Offering........................ $185,200 Net cash proceeds from the New Bank Credit Agreement (including $32,992) of incremental borrowings to fund a portion of the Niagara Acquisition........................ 176,867(a) Borrowings under Niagara facilities, pre-closing, to fund purchase of property and equipment from affiliated parties................................................... 12,702(a) Cash on hand used to fund Niagara Acquisition.............. 20,108 -------- Total sources of funds................................... $394,887 ======== Uses of funds: Repayment of Term Loans under Bank Credit Agreement as of March 31, 1996............................................ $242,875(a) Repayment of a portion of the Notes........................ 70,000(a) Payment of redemption premium on the Notes................. 7,700 Repayment of Niagara debt assumed.......................... 16,177(a) Debt issuance costs related to the New Bank Credit Agree- ment...................................................... 8,500 Purchase of affiliated party property and equipment by Ni- agara..................................................... 12,702 Niagara cash purchase price (see note (2) above)........... 36,923 -------- Total uses of funds...................................... $394,887 ========
- -------- (a) The sum of the net decrease of indebtedness amounts to $139,483. (8) Represents the federal income tax benefit on the $22,728 extraordinary loss for write-off of debt issuance costs and the $7,700 call premium on the Notes of $12,171 (see note (6) above). Additionally reflects the net amount of deferred tax liabilities resulting from the allocation of purchase price for the Niagara Acquisition of $188 (see note (2) above). (9) Represents elimination of Niagara's historical stockholders' equity resulting from the application of purchase accounting in connection with the Niagara Acquisition. (10) Adjusted to give effect to the Recapitalization (see note (11) below). (11) Represents the estimated net proceeds from the Offering to the Company of $187,200 less $2,000 of fees (reduction in additional paid-in capital) to be paid to Bain Capital in connection with the Offering. Also reflects conversion of $113,887 of Preferred Stock to Common Stock to give effect to the Recapitalization (see note (10) above). (12) Represents the extraordinary loss of $22,728 of debt issuance costs write-off (see note (6) above), and $7,700 call premium on the Notes, net of $12,171 of related federal income tax benefit (at a 40% effective tax rate). 79 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES
PAGE ---- Report of Independent Accountants........................................ F-2 Consolidated Balance Sheets at December 31, 1994 and 1995 and March 31, 1996 (unaudited)........................................................ F-3 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)........................................................ F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)........................................................ F-5 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1996 (unaudited)................................. F-6 Notes to Consolidated Financial Statements............................... F-7 WR ACQUISITION, INC. AND SUBSIDIARIES PAGE ---- Independent Auditors' Report............................................. F-29 Consolidated Balance Sheets at December 31, 1994 and October 31, 1995.... F-30 Consolidated Statements of Operations for the years ended December 31, 1993 and 1994 and for the ten months ended October 31, 1995............. F-32 Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 1993 and 1994 and for the ten months ended Oc- tober 31, 1995.......................................................... F-33 Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1994 and for the ten months ended October 31, 1995............. F-34 Notes to Consolidated Financial Statements............................... F-35 GLOBE-WEIS PAGE ---- Report of Independent Accountants........................................ F-53 Statements of Net Sales and Cost of Sales for the nine months ended July 31, 1994 and twelve months ended July 31, 1995.......................... F-54 Notes to Statements of Net Sales and Cost of Sales....................... F-55 NIAGARA ENVELOPE COMPANY, INC. PAGE ---- Report of Independent Accountants........................................ F-56 Consolidated Balance Sheets at December 31, 1994 and 1995................ F-57 Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1993, 1994 and 1995.................................. F-58 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995..................................................... F-59 Notes to Consolidated Financial Statements............................... F-60 Consolidated Balance Sheets at March 31, 1995 and 1996 (unaudited)....... F-67 Consolidated Statements of Income and Retained Earnings for the three months ended March 31, 1995 and 1996 (unaudited)........................ F-68 Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and 1996 (unaudited)........................................... F-69 Notes to Consolidated Financial Statements (unaudited)................... F-70
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of American Pad & Paper Company (formerly Ampad Holding Corporation) In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows, and of changes in stockholders' equity (deficit) present fairly, in all material respects, the financial position of American Pad & Paper Company (formerly Ampad Holding Corporation) and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Dallas, Texas March 19, 1996, except as to Note 16 which is as of May 29, 1996 and the pro forma equity presentation in Note 2 which is as of June 4, 1996. F-2 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA EQUITY MARCH 31, DECEMBER 31, 1996 ---------------------------------------------------- MARCH 31, (UNAUDITED) A S S E T S 1994 1995 1996 (NOTE 2) ----------- ---------------------------------------------------- ----------- ----------- (UNAUDITED) Current assets: Cash............................ $ 4 $ 18,341 $ 20,108 Restricted cash (Note 2)........ 60 3,619 10,759 Accounts receivable, net (Note 4)............................. 16,965 25,943 18,407 Refundable income taxes......... 3,657 Inventories (Note 5)............ 32,974 93,061 93,166 Prepaid expenses and other current assets................. 831 927 2,026 Assets held for sale (Note 3)... 724 42,578 43,572 Deferred income taxes, net (Note 11)............................ 15,009 14,744 ------------------------ -------------------------- --------- Total current assets.......... 51,558 203,135 202,782 Property and equipment, net (Notes 3 and 6)......................... 8,889 106,768 106,758 Intangible assets, net of accumulated amortization of $200 and $508, respectively (Note 3).. 37,700 37,392 Deferred income taxes, net (Note 11).............................. 4,312 Debt issuance costs, net of accumulated amortization of $1,430, $846 and $2,054, respectively (Note 8)............ 958 32,929 32,524 Goodwill, net of accumulated amortization of $114, $793 and $1,521, respectively (Note 3).... 2,409 120,383 119,655 Other............................. 107 3,441 1,683 ------------------------ -------------------------- --------- Total......................... $68,233 $504,356 $ 500,794 ======================== ========================== ========= L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y (D E F I C I T) ------------------------------------------------------------------------------------ Current liabilities: Revolving line of credit (Note 8)............................. $22,767 $ $ Current portion of long-term debt (Note 8).................. 2,772 11,834 13,066 Accounts payable................ 15,240 37,048 36,689 Accrued expenses (Note 7)....... 7,928 44,835 43,271 Income taxes payable............ 494 518 Deferred income taxes, net (Note 11)............................ 1,681 ------------------------ -------------------------- --------- Total current liabilities...... 50,388 94,211 93,544 Long-term debt (Note 8)........... 19,889 443,794 440,453 Deferred income taxes (Note 11)... 30,070 29,911 Other............................. 689 2,702 3,179 ------------------------ -------------------------- --------- Total liabilities.............. 70,966 570,777 567,087 ------------------------ -------------------------- --------- Commitments and contingencies (Note 12) Stockholders' equity (deficit) (Note 9) Preferred stock, 150,000 shares authorized, 58,449 shares issued and outstanding......... 113,887 113,887 Class P common stock, $.01 par value; 100,000 shares authorized, 90,000 shares outstanding at December 31, 1994 and no shares outstanding at December 31, 1995 and March 31, 1996....................... 1 Common stock, voting, $.01 par value, 2,000,000 shares authorized, 810,000, 900,000 and 900,000 shares, respectively, issued and outstanding on an actual basis and 75,000,000 shares authorized and 14,425,272 shares issued and outstanding on a pro forma basis........... 8 9 9 144 Additional paid-in capital...... 2,991 14,240 14,240 127,992 Accumulated deficit............. (5,733) (194,557) (194,429) (194,429) ------------------------ -------------------------- --------- -------- Total stockholders' equity (deficit)..................... (2,733) (66,421) (66,293) (66,293) ------------------------ -------------------------- --------- -------- Total liabilities and stockholders' equity (deficit)..................... $68,233 $ 504,356 $ 500,794 ======================== ========================== =========
The accompanying notes are an integral part of these consolidated financial statements. F-3 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------- 1993 1994 1995 1995 1996 -------- -------- ---------- ------- ---------- (UNAUDITED) Net sales................. $104,277 $120,443 $259,341 $47,691 $121,418 Cost of sales............. 88,491 113,394 211,814 42,394 97,889 -------- -------- ---------- ------- ---------- Gross profit............ 15,786 7,049 47,527 5,297 23,529 Operating expenses: Selling and marketing... 4,920 5,059 6,254 1,162 3,328 General and administrative......... 5,845 5,556 12,291 1,587 7,698 Nonrecurring compensation charge (Note 9)............... 27,632 -------- -------- ---------- ------- ---------- Income (loss) from operations............... 5,021 (3,566) 1,350 2,548 12,503 Other income (expense): Interest................ (3,320) (4,560) (13,657) (1,656) (12,542) Other income, net....... 167 90 735 65 269 -------- -------- ---------- ------- ---------- Income (loss) before income taxes............. 1,868 (8,036) (11,572) 957 230 Provision (benefit) for income taxes............. 64 (488) (6,538) 366 102 -------- -------- ---------- ------- ---------- Income (loss) before extraordinary item....... 1,804 (7,548) (5,034) 591 128 Extraordinary loss from extinguishment of debt (net of income tax benefit of $6,434)....... (9,652) -------- -------- ---------- ------- ---------- Net income (loss)......... $ 1,804 $ (7,548) $ (14,686) $ 591 $ 128 ======== ======== ========== ======= ========== Pro forma income (loss) per share (unaudited): Income (loss) before extraordinary item (unaudited)............ $ (.33) $ .01 Extraordinary item (unaudited)............ (.62) ---------- ---------- Net income (loss) (unaudited)............ $ (.95) $ .01 ========== ========== Pro forma weighted average shares outstanding (unaudited).............. 15,539,989 16,562,493 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-4 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------- ------------------ 1993 1994 1995 1995 1996 ------- -------- --------- -------- -------- (UNAUDITED) Cash flows from operating activities: Net income (loss).......... $ 1,804 $ (7,548) $ (14,686) $ 591 $ 128 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation............... 159 828 3,369 490 1,984 Amortization of goodwill and intangible assets..... 114 879 38 1,036 Noncash portion of nonrecurring compensation charge.................... 25,998 Extraordinary loss on extinguishment of debt.... 9,652 Noncash interest expense and accretion of discount.................. 584 135 32 Amortization of debt issuance costs............ 619 696 1,538 206 1,208 Gain on sale of assets..... (159) (83) (140) (68) (16) Changes in assets and liabilities, net of effects of acquisitions: Decrease (increase) in restricted cash.......... (48) (12) (3,559) (19) (7,140) Decrease (increase) in accounts receivable...... (944) 2,457 (18,466) (5,038) 7,536 Decrease in refundable income taxes............. 101 3,657 Decrease (increase) in inventories.............. (5,006) 1,655 2,256 (5,728) (105) Decrease (increase) in prepaid expenses and other.................... 1,173 (302) 905 (712) (1,099) Decrease (increase) in deferred tax asset, net...................... 64 (488) (13,141) 347 106 Increase (decrease) in accounts payable ........ 2,565 3,433 4,979 1,747 (359) Increase (decrease) in accrued expenses ........ (2,225) (2,782) 4,877 (2,174) (1,540) Decrease (increase) in other assets............. (250) 154 1,756 Increase (decrease) in other liabilities ....... (92) 11 (7) (26) 477 ------- -------- --------- -------- -------- Net cash provided by (used in) operating activities.............. (1,756) (1,886) 4,709 (10,314) 7,629 ------- -------- --------- -------- -------- Cash flows from investing activities: Purchase of the stock of WR, including acquisition costs..................... (122,655) Purchases of property and equipment................. (1,656) (942) (3,919) (809) (2,321) Purchase of net assets, including acquisition costs..................... (13,744) (7,046) Proceeds from sale of assets.................... 1,166 83 140 68 16 Net cash generated from (used by) assets held for sale...................... 2,213 (646) ------- -------- --------- -------- -------- Net cash used in investing activities.... (490) (14,603) (131,267) (741) (2,951) ------- -------- --------- -------- -------- Cash flows from financing activities: Proceeds from sale of accounts receivable....... 45,000 Net borrowings (repayments) under line of credit...... 3,937 7,057 (22,767) 11,813 Proceeds from long-term debt...................... 11,252 430,052 25,272 Repayment of long-term debt...................... (1,725) (1,192) (186,546) (758) (27,380) Redemption premiums and penalties included in extraordinary loss........ (10,812) Debt issuance costs........ (628) (35,032) (803) Redemption of preferred stock..................... (61,478) Redemption of Class P common stock ............. (4,464) Redemption of preferred stock options............. (9,188) Proceeds from exercise of preferred stock options... 130 ------- -------- --------- -------- -------- Net cash provided by (used in) financing activities.............. 2,212 16,489 144,895 11,055 (2,911) ------- -------- --------- -------- -------- Net increase (decrease) in cash................. (34) -- 18,337 -- 1,767 Cash, beginning of period... 38 4 4 4 18,341 ------- -------- --------- -------- -------- Cash, end of period......... $ 4 $ 4 $ 18,341 $ 4 $ 20,108 ======= ======== ========= ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest................... $ 2,113 $ 3,575 $ 9,127 $ 203 $ 4,578 ======= ======== ========= ======== ======== Income taxes............... $ -- $ 29 $ 99 $ 3 $ 23 ======= ======== ========= ======== ======== Supplemental disclosure of noncash investing and financing activities: Payment-in-kind interest expense................... $ 482 $ -- $ -- $ -- $ -- ======= ======== ========= ======== ======== Notes payable issued in consideration of purchase price..................... $ -- $ -- $ 36,115 $ -- $ -- ======= ======== ========= ======== ======== Notes payable issued in consideration for equipment ................ $ -- $ 544 $ 1,721 $ 1,721 $ -- ======= ======== ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CLASS P RETAINED PREFERRED STOCK COMMON STOCK COMMON STOCK EARNINGS ----------------- --------------- -------------- PAID-IN (ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL ------- -------- ------- ------ ------- ------ ------- ------------ -------- Balance at December 31, 1992................... $ 90,000 $ 1 810,000 $ 8 $ 2,991 $ 11 $ 3,011 Net income.............. 1,804 1,804 ------- -------- ------- --- ------- --- ------- --------- -------- Balance at December 31, 1993................... 90,000 1 810,000 8 2,991 1,815 4,815 Net loss................ (7,548) (7,548) ------- -------- ------- --- ------- --- ------- --------- -------- Balance at December 31, 1994................... 90,000 1 810,000 8 2,991 (5,733) (2,733) Preferred stock dividend (Note 9)............... 90,000 175,365 (2,991) (172,374) Grant of stock options (Note 9)............... 25,998 25,998 Redemption of preferred stock (Note 9)......... (31,551) (61,478) (61,478) Accrual of preferential distribution on Class P common stock........... 1,764 (1,764) Redemption of Class P common stock (Note 9).. (90,000) (1) 90,000 1 (4,464) (4,464) Redemption of preferred stock options (Note 9)..................... (9,188) (9,188) Proceeds from exercise of preferred stock options (Note 9)....... 130 130 Net loss................ (14,686) (14,686) ------- -------- ------- --- ------- --- ------- --------- -------- Balance at December 31, 1995................... 58,449 113,887 900,000 9 14,240 (194,557) (66,421) Net income (unaudited).. 128 128 ------- -------- ------- --- ------- --- ------- --------- -------- Balance at March 31, 1996 (unaudited)....... 58,449 $113,887 -- -- 900,000 $9 $14,240 $(194,429) $(66,293) ======= ======== ======= === ======= === ======= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS Organization and Basis of Presentation American Pad & Paper Company (formerly Ampad Holding Corporation and referred to hereafter as "the Company") was incorporated on June 2, 1992 as a holding company to acquire all of the outstanding stock of Ampad Corporation ("Ampad"), the surviving entity from the merger between Ampad Acquisition Corporation and Ampad. The Company had no operations through July 31, 1992. On October 3, 1995, the Company agreed to acquire in a merger transaction all of the outstanding stock of WR Acquisition, Inc. ("WR") (the "Acquisition"). In a series of transactions, the Company exchanged 100% of the stock of its wholly-owned subsidiary, Ampad, for newly-issued shares of WR. WR then contributed Ampad to its wholly-owned subsidiary, Williamhouse-Regency of Delaware, Inc., renamed American Pad & Paper Company of Delaware, Inc. ( referred to hereafter on a pre-October 31, 1995 basis as "Williamhouse- Regency" and on a post-October 31, 1995 basis as "Delaware") in exchange for a right to receive $140 million of merger consideration. The Company, principally using bank borrowings by Delaware aggregating $245 million, funded WR's right to receive the merger consideration and WR in turn repurchased 100% of the WR shares not owned by the Company. The transaction was accounted for as a purchase of the stock of WR by the Company. As a result of the transactions, the Company now owns 100% of WR which in turn owns 100% of Delaware. The financial statements of the Company now present 100% of the historical accounts and operations of the Company and Ampad as well as the newly-acquired accounts of Williamhouse-Regency and its wholly-owned subsidiaries as of October 31, 1995, along with Williamhouse-Regency's consolidated operating results for the post-October 31, 1995 period (Note 3). Additionally, the consolidated financial statements include the accounts of Notepad Funding Corporation, a special purpose corporation utilized in the accounts receivable facility (Note 4). All significant intercompany balances have been eliminated. Certain prior year amounts have been reclassified for comparative purposes. Bain Capital, Inc. (Bain Capital) and its related investors, along with certain members of management, own all of the voting capital stock and preferred stock of the Company. Business The Company is one of the largest manufacturers and marketers of paper-based office products (excluding computer forms) in North America. It offers a broad assortment of products through two complementary businesses: Ampad (writing pads, file folders and other paper-based office products) and Williamhouse (envelopes). The Regency business (personalized stationery and invitations and greeting cards) was identified by the Company's management as of the acquisition date as a nonstrategic business to be sold and is consequently being held for sale as of December 31, 1995 and March 31, 1996 (unaudited) (Note 3). The Company's products are distributed through large mass merchant retailers, office product superstores, warehouse clubs, major contract stationers, office products wholesalers and independent dealers. Substantially all sales are to customers within the United States. Interim Financial Information The financial statements for the three months ended March 31, 1996 and 1995 are unaudited but include all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. Financial disclosures herein relating to matters subsequent to March 19, 1996 are unaudited. F-7 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in the preparation of the consolidated financial statements are as follows: Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents and Restricted Cash The Company considers all highly-liquid, interest-bearing instruments with an original maturity of three months or less to be cash equivalents. Restricted cash of $3,619 as of December 31, 1995 and $10,759 as of March 31, 1996 (unaudited) represents funds the Company, as servicer, has made available to the trustee of the trust that purchased the Company's trade accounts receivable (Note 4), in the event of nonperformance, defaults or other losses related to such receivables. Revenue Recognition The Company recognizes revenue upon shipment of the product. All risks and rewards of ownership pass to the customer upon shipment. Damaged or defective products may be returned to the Company for replacement or credit. The Company also offers sales rebates to customers based on level of sales activity. The effects of returns and discounts are estimated and recorded at the time of shipment. Volume rebates are estimated and recorded based on sales activity. Concentration of Credit Risk The Company sells its products into various wholesale and retail channels, primarily for the commercial office products marketplace. Management believes its credit policies are prudent and reflect normal industry terms and business risks. The Company performs credit evaluations of its customers and does not require collateral. Historically, the Company has not experienced significant losses related to individual customers or groups of customers in any particular industry or geographic area. An allowance is maintained at a level which management believes is sufficient to cover potential credit losses including potential losses on receivables sold. Inventories Inventories, which consist primarily of paper and converted paper products, are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method. Property and Equipment Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the individual assets. Repairs and maintenance costs are expensed as incurred. Goodwill and Intangible Assets Goodwill represents the cost in excess of fair value of the net assets of companies acquired in purchase transactions. Goodwill is amortized using the straight-line method over periods ranging from 20 to 40 years (Note 3). Intangible assets represent trade names acquired in the WR acquisition (Note 3). Trade names are amortized F-8 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) using the straight-line method. Trade names in the aggregate gross amount of $31,700 are amortized over 40 years. Trade names in the aggregate gross amount of $6,200 are amortized over 15 years. The Company periodically reviews goodwill and other intangible assets to assess recoverability. Impairment is measured based on the expected undiscounted cash flows of the operations giving rise to the goodwill and other intangible assets compared to the carrying cost of the related assets including goodwill and other intangible assets. Based upon its most recent analysis, the Company believes that no impairment of goodwill or intangible assets exists at December 31, 1995. Amortization expense was $114 in 1994, $879 in 1995 and $38 and $1,036 for the three months ended March 31, 1995 and 1996, respectively (unaudited). There was no amortization expense in 1993. Debt Issuance Costs Costs associated with debt issuances are capitalized and amortized to interest expense using the effective interest method over the terms of the related debt agreements (Note 8). Income Taxes The Company accounts for income taxes following the liability method, as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109 prescribes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax assets are recognized, net of any valuation allowance, for deductible temporary differences and tax operating loss and credit carryforwards. Deferred tax expense represents the change in the deferred tax asset or liability balances. Derivatives Premiums paid for interest rate cap agreements are amortized as interest expense over the term of the agreement. Amounts receivable under interest rate cap agreements are recorded as a reduction of interest expense (Note 8). Fair Value of Financial Instruments Carrying values of cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these assets and liabilities. The carrying value of senior bank debt bearing interest at floating rates approximates fair value. The carrying value at December 31, 1995 of the 13% Senior Subordinated Notes approximates fair value as the notes were issued in a private placement offering near the end of 1995. Earnings per share (unaudited) Given the changes in the Company's capital structure to be effected in connection with the anticipated initial public offering of the Company's common stock, historical earnings per common share amounts are not presented in the consolidated financial statements as they are not considered to be meaningful. Pro forma earnings per share (unaudited) is presented and reflects conversion of the preferred stock into common stock for the same periods outstanding as the underlying common stock on which the preferred stock was issued (Note 9). The pro forma weighted average shares outstanding (unaudited) 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 F-9 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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). The 1992 and 1994 stock option grants were not included in the 1995 calculation because they are antidilutive. Pro Forma Equity Presentation (unaudited) Pro forma stockholders' equity (unaudited) as of March 31, 1996 is presented to reflect, upon the closing of the initial public offering of the Company's common stock, the effect of the 8.1192-for-one stock split and the conversion of the preferred stock into common stock at a conversion rate based on an assumed initial public offering price of $16.00 per share. The pro forma stockholders' equity (unaudited) does not reflect the estimated net offering proceeds. 3. ACQUISITIONS WR Acquisition, Inc./Williamhouse-Regency The Company acquired WR and its wholly-owned subsidiary Williamhouse-Regency through a merger transaction effective October 31, 1995 (Note 1). The transaction was accounted for under the purchase method of accounting. Accordingly, the aggregate acquisition cost was allocated to the net assets acquired based on the fair market value of such net assets in accordance with Accounting Principles Board Opinion (APB) No. 16. The aggregate acquisition cost totaled $147,853 and consisted of cash of $140,000 and direct acquisition costs of $7,853. The acquisition was entirely financed through the Bank Credit Agreement (Note 8) and an off-balance sheet accounts receivable facility (Note 4). The aggregate acquisition cost has been preliminarily allocated to the assets acquired and liabilities assumed as follows: accounts receivable of $39,174; inventories of $49,496; prepaid expenses and other assets of $8,699; net assets held for sale of $40,851; property and equipment of $88,688; identifiable intangible assets of $37,900; deferred income tax liability of $27,644; accounts payable of $17,518; accrued expenses of $36,482; noncurrent liabilities of $2,019 and assumed debt of $152,905. The aggregate acquisition costs exceeded fair market value of the net assets acquired by $119,613. Accordingly, goodwill was recorded in accordance with APB No. 16 and is being amortized over 40 years. The operating results of Delaware have been included in the accompanying consolidated financial statements since the date of acquisition. The businesses acquired include the Williamhouse division, a manufacturer of a wide range of mill branded, specialty and commodity envelopes; and the Regency division, which provides custom imprinting services. The Regency personalized stationery and invitations division (the Personalizing Division) acquired in the Acquisition was held for sale at December 31, 1995 and March 31, 1996 (unaudited). The purchase price allocated to the net assets acquired includes the expected proceeds from sale plus the net cash flows expected to be generated from the Personalizing Division from date of acquisition through the expected date of sale (the holding period), offset by interest expense incurred during the holding period on debt incurred to finance the purchase of the Personalizing Division. During the period from acquisition through December 31, 1995 and the three month period ended March 31, 1996 (unaudited), the Personalizing Division had an operating loss of $913 and operating income of $2,011, respectively, and interest carrying costs of $556 and $942, respectively, which have been excluded from the statement of operations and included as adjustments to the carrying amount of the net assets held for sale in the consolidated balance sheet at December 31, 1995 and March 31, 1996 (unaudited). On April 17, 1996, the Company signed a letter of intent with a potential buyer to sell the Personalizing Division. The Company expects the Personalizing Division will be sold prior to October 31, 1996. F-10 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Certain costs are expected to be incurred in connection with integrating and consolidating certain plant, administrative and sales functions of Williamhouse-Regency with the Company, and the closure of Williamhouse- Regency's corporate headquarters and the associated net reduction of approximately 200 employees. Such costs, aggregating $17,500, include lease termination expenses, severance and contractual change of control benefits, the liability for which was included in the purchase price allocation within accrued expenses. Substantially all such actions are expected to be completed prior to October 31, 1996. Globe-Weis Effective August 16, 1995, the Company acquired the inventories and certain equipment of the file folder and hanging file folder product lines of Globe- Weis's ("Globe") office products division from Globe's parent. For financial reporting purposes, this acquisition was accounted for under the purchase method of accounting. Accordingly, the aggregate acquisition cost was allocated to the net assets acquired based on the fair value of such net assets in accordance with APB No. 16. The aggregate acquisition costs totaled $19,669 and consisted of cash of $6,622, notes issued to the seller of $10,958 and direct acquisition and financing costs of $2,089. The Company principally financed the acquisition through its financing arrangement with a commercial lender as described in Note 8 and notes issued to the seller. The allocation of the aggregate acquisition costs was as follows: inventories of $12,848, equipment of $5,156, and debt issuance costs of $1,665. The purchase agreement provides for a purchase price adjustment mechanism pending receipt of final priced inventory listings from Globe. The purchase price has not yet been finalized. The purchase price allocation was based on management's estimate of the final purchase price. Management does not believe the actual purchase price will vary significantly from their estimate. The operating results of this acquisition have been included in the accompanying consolidated financial statements since the date of acquisition. SCM Office Supplies Effective July 5, 1994, the Company acquired the assets and assumed certain liabilities of SCM Office Supplies, Inc. For financial reporting purposes, this acquisition was accounted for under the purchase method of accounting. Accordingly, the aggregate acquisition cost was allocated among the net assets acquired based on the fair market value of such net assets in accordance with APB No. 16. The aggregate acquisition cost totaled $14,372 and consisted of cash of $12,880 and direct acquisition and financing costs of $1,492. The Company principally financed the acquisition through its financing arrangement with a commercial lender as described in Note 8. The allocation of the aggregate acquisition cost to the assets acquired and liabilities assumed was as follows: accounts receivable of $7,922, inventories of $6,857, prepaid expenses and other assets of $16, debt issuance costs of $628, property and equipment of $5,441, net deferred income tax assets of $1,553, accounts payable of $4,235, and accrued liabilities of $6,333. The aggregate acquisition cost exceeded fair market value of the net assets acquired by approximately $2,523. Accordingly, goodwill was recorded in accordance with APB No. 16. The goodwill is being amortized over 20 years. The operating results of this acquisition have been included in the accompanying consolidated financial statements since the date of acquisition. The following summary presents the results of operations for the years ended December 31, 1994 and 1995, on an unaudited pro forma basis, as if the WR, Globe and SCM acquisitions had occurred as of January 1, 1994 (with appropriate adjustments for amortization of intangible assets, interest expense, elimination of duplicate selling and administrative expenses and the related income tax effects). The pro forma operating results are for illustrative purposes only and do not purport to be indicative of the actual results which would have occurred had the transactions been consummated as of those earlier dates, nor are they indicative of results of operations which may occur in the future. F-11 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, ------------------- 1994 1995 --------- -------- (UNAUDITED) Net sales............................................. $454,667 $511,307 ========= ======== Income (loss) before income taxes and extraordinary item................................................. $ (25,700) $ 4,108 ========= ======== Net income (loss) before extraordinary item........... $ (18,300) $ 3,428 ========= ======== Net income (loss) from continuing operations after extraordinary item................................... $ (18,300) $ (6,224) ========= ========
4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
DECEMBER 31, ------------------ MARCH 31, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) Accounts receivable--trade.................. $17,376 $25,539 $17,263 Accounts receivable--other.................. 64 2,013 2,795 Less allowance for doubtful accounts and reserves for customer deductions and cash discounts.................................. (475) (1,609) (1,651) -------- -------- ------- $ 16,965 $ 25,943 $18,407 ======== ======== =======
The Company sold an undivided ownership interest in a revolving pool of trade accounts receivable for $45,000 in October 1995. The sold accounts receivable are excluded from receivables in the accompanying balance sheets. The full amount of the allowance for doubtful accounts has been retained because the Company has retained substantially the same risk of credit loss as if the receivables had not been sold through the recourse provision of the receivable sale agreement. Under the agreement, the maximum amount of the purchaser's investment is subject to change based on the level of eligible receivables and restrictions on concentrations of receivables. The total cost of the program was $423 in 1995 and $323 for the three months ended March 31, 1996 (unaudited) and is included in general and administrative expenses in the consolidated statement of operations. The agreement expires in 2000. Bad debt expense for 1993, 1994, 1995 and for the three months ended March 31, 1995 and 1996 (unaudited) was immaterial. 5. INVENTORIES Inventories consist of the following:
DECEMBER 31, ------------------ MARCH 31, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) Raw materials and semi-finished goods ..... $15,784 $36,129 $33,368 Work in process............................ 2,689 7,114 9,203 Finished goods............................. 20,467 60,266 59,409 -------- -------- ------- 38,940 103,509 101,980 LIFO reserve............................... (5,966) (10,448) (8,814) -------- -------- ------- $ 32,974 $ 93,061 $93,166 ======== ======== =======
F-12 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In connection with the Acquisition (Note 3), Williamhouse-Regency's total inventories for financial accounting purposes were written up by $13,948 to fair market value at October 31, 1995, including reversal of $6,695 related to Williamhouse-Regency's historical LIFO reserves. Since the Company is on the LIFO method of accounting, such write-up will form the historical base year cost for the acquired inventories and will not impact the statement of operations unless a decrement of base inventory quantities occurs. During the two months subsequent to October 31, 1995, certain acquired inventory quantities were liquidated and $453 of the fair value write-up was charged to cost of sales. Inventory quantities of Ampad were reduced during 1995 which resulted in liquidation of LIFO inventory layers carried at lower costs which prevailed in prior years. The effect of the liquidation of Ampad inventory in 1995 was to decrease cost of sales by $557 and to increase net income by $334. There were no liquidations of LIFO inventories in 1994 or 1993. 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
ESTIMATED DECEMBER 31, USEFUL LIVES IN ----------------- MARCH 31, YEARS 1994 1995 1996 --------------- ------- -------- ----------- (UNAUDITED) Land........................ $ 31 $ 4,949 $ 4,961 Buildings................... 40 642 22,997 22,866 Machinery and equipment..... 10-12 6,274 71,094 70,302 Office furniture and fix- tures...................... 3-5 2,891 5,747 6,432 Construction in progress.... 261 6,560 8,760 ------- -------- -------- 10,099 111,347 113,321 Less accumulated deprecia- tion and amortization...... (1,210) (4,579) (6,563) ------- -------- -------- $ 8,889 $106,768 $106,758 ======= ======== ========
In connection with the Acquisition (Note 3), acquired property, plant and equipment was appraised at $36,285 in excess of historical book value as of October 31, 1995, including $1,443, $1,664 and $33,178 allocated to land, buildings and machinery and equipment, respectively. Depreciation expense was $159 in 1993, $828 in 1994, $3,369 in 1995 and $490 and $1,984 for the three months ended March 31, 1995 and 1996, respectively (unaudited). F-13 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, -------------- MARCH 31, 1994 1995 1996 ------ ------- ----------- (UNAUDITED) Acquisition integration costs........................ $2,003 $17,567 $15,534 Sales volume discounts............................... 2,436 11,414 5,211 Salaries and wages................................... 1,148 6,682 5,395 Interest............................................. 472 3,748 10,651 Other................................................ 1,869 5,424 6,480 ------ ------- ------- $7,928 $44,835 $43,271 ====== ======= =======
8. BORROWINGS Long-term debt of the Company, which was incurred entirely by Delaware and is subject to mandatory repayments under certain conditions (as described below), consists of the following:
DECEMBER 31, ----------------- MARCH 31, 1994 1995 1996 ------- -------- ----------- (UNAUDITED) Senior bank debt: Term Loan A due 1996-2000.................... $ $ 69,843 $ 92,875 Term Loan B due 1996-2002.................... 65,000 65,000 Term Loan C due 1996-2003.................... 45,000 45,000 Term Loan D due 1996-2004.................... 40,000 40,000 13% Senior Subordinated Notes due 2005......... 200,000 200,000 WR seller notes payable due January 1996....... 25,157 Industrial revenue bonds....................... 8,049 8,049 Capitalized lease obligations.................. 2,579 2,480 Floating rate bank debt........................ 16,458 15% subordinated notes payable to stockholders and management................................ 3,563 8.5% to 15% Ampad seller notes................. 2,485 Other.......................................... 155 115 ------- -------- -------- 22,661 455,628 453,519 Less: current portion.......................... (2,772) (11,834) (13,066) ------- -------- -------- $19,889 $443,794 $440,453 ======= ======== ========
Future maturities of long-term debt at December 31, 1995 are as follows: 1996................................................................ $ 11,834 1997................................................................ 16,787 1998................................................................ 21,179 1999................................................................ 27,654 2000................................................................ 31,162 Thereafter.......................................................... 347,012 -------- $455,628 ========
F-14 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Senior Bank Debt The Company entered into a bank credit agreement effective October 31, 1995 consisting of $245,000 of term loans in the form of a multitranche facility, a $45,000 revolving credit facility and an IRB Letter of Credit Facility of $13,400 (the "Bank Credit Agreement"). Interest rates on the term loans are floating and based, at the Company's option, on either the Eurodollar rate (as defined in the agreement) plus 275 to 400 basis points or the bank base rate (as defined in the agreement) plus 175 to 300 basis points. The basis point additions vary by tranche. Interest is payable quarterly under the bank base rate option and on the last day of the selected interest period under the Eurodollar rate option. If the interest period on Eurodollar loans exceeds three months, then interest payments are due every three months (at December 31, 1995, the Company selected the Eurodollar rate option). The effective interest rates by tranche at December 31, 1995 and March 31, 1996 (unaudited) are as follows:
MARCH 31, 1996 DECEMBER 31, 1995 (UNAUDITED) ---------------------- ---------------------- EURODOLLAR BANK BASE EURODOLLAR BANK BASE OPTION RATE OPTION OPTION RATE OPTION ---------- ----------- ---------- ----------- Term Loan A.................... 8.66% 10.25% 8.22% 10.07% Term Loan B.................... 9.28% 10.88% 8.72% 10.75% Term Loan C.................... 9.66% 11.25% 9.10% 11.13% Term Loan D.................... 9.91% 11.75% 9.34% 11.38%
The revolving credit facility is a five-year facility bearing interest at a floating rate based, at the Company's option, on either the Eurodollar rate plus 275 basis points or the bank base rate plus 175 basis points, or an effective rate of 8.66% at December 31, 1995 and 8.13% at March 31, 1996 (unaudited) under the Eurodollar rate option and 10.25% at December 31, 1995 and 10.00% at March 31, 1996 (unaudited) under the bank base rate option, respectively. A commitment fee of 0.5% is payable quarterly on the unused portion of the facility. The revolving credit facility includes a letter of credit sublimit of $20,000. There were no borrowings outstanding under this facility at December 31, 1995 or March 31, 1996 (unaudited). The Bank Credit Agreement requires the Company to meet certain financial tests, including minimum levels of EBITDA (as defined in the agreement), minimum interest coverage and maximum leverage ratio. The agreement also contains covenants which, among other things, limit the incurrence of additional indebtedness, dividends, transactions with affiliates, asset sales, acquisitions, mergers, and other matters customarily restricted in such agreements. The Bank Credit Agreement contains customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, ERISA, judgment defaults, failure of any guaranty or security agreement supporting the bank credit agreement to be in full force and effect and change of control. The Bank Credit Agreement required the Company to purchase an interest rate cap covering a portion of the outstanding balance under the agreement. In January 1996, the Company entered into a four-year agreement that entitles the Company to receive from the counterparty on a quarterly basis the amount, if any, by which LIBOR exceeds 6.5% for the first two years of the agreement and 7.5% for the last two years on a notional principal amount of $100,000. The counterparty to this agreement is a large financial institution. The Bank Credit Agreement provides for mandatory prepayment, subject to certain exceptions, upon the occurrence of certain events including, but not limited to, asset sales (including the net assets held for sale as described in Note 3), certain debt and equity issuances, insurance recovery events and the accumulation of Excess Cash Flows, as defined (with a requirement to pay 50% of Excess Cash Flow for the period ended December 31, 1995 and 75% of Excess Cash Flow per annum thereafter). F-15 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Bank Credit Agreement is guaranteed by the Company and all its subsidiaries, except for Notepad Funding Corporation, and is secured by substantially all assets of Delaware and a pledge of all capital stock of Delaware and its subsidiaries. Senior Subordinated Notes Delaware issued $200,000 of 13% Senior Subordinated Notes through a private placement in December 1995. The notes are unsecured and subordinated to all senior bank debt. Interest is payable semi-annually on May 15 and November 15. The notes are redeemable after November 15, 2000, at Delaware's option, at redemption prices ranging from 106.5% of the face value of the notes in 2000 to 100% of the face value of the notes in 2003 or thereafter. Additionally, at any time on or prior to November 15, 1998, Delaware may, at its option, use the proceeds of public equity offerings of the Company or Delaware to redeem up to 35% of the notes at redemption prices ranging from 111% to 113% of the face value of the notes. The notes require Delaware to file a registration statement with the Securities Exchange Commission within 120 days of issuance to exchange the notes for new notes (the Exchange Notes) of Delaware having terms substantially identical to the notes. Delaware must use its best efforts to cause such registration statement to be declared effective within 180 days after issuance of the notes and consummate the exchange within 225 days after issuance of the notes. The notes are fully and unconditionally guaranteed by all subsidiaries of Delaware, except for Notepad Funding Corporation, on a joint and several and senior subordinated basis (Note 14), however, no guarantee from the Company exists. The notes contain restrictive covenants which, among other things, limit dividends, repurchase of capital stock and investments, incurrence of additional indebtedness, transactions with affiliates and other matters customarily restricted in such agreements. Other WR seller notes in the amount of $25,157 outstanding at December 31, 1995, were repaid in January 1996 from the proceeds of the remaining borrowings issuable under Term Loan A of the Bank Credit Agreement. The WR seller notes bore interest at 1% and are classified as long-term in the consolidated balance sheet at December 31, 1995 since such debt was refinanced with long- term debt. At December 31, 1995, the Company's subsidiaries had outstanding various industrial revenue bonds in the aggregate amount of $8,049. The industrial revenue bonds bear interest at rates ranging from 5.10% to 5.25%. Aggregate annual principal payments ranging from $350 to $2,970 are due through 2010. Payment of principal and interest on the industrial revenue bonds are guaranteed by the Company or various wholly-owned subsidiaries. The industrial revenue bonds are secured by letters of credit. At December 31, 1995 and March 31, 1996 (unaudited), letters of credit in the aggregate amount of $15,800 and $12,677, respectively, were outstanding. At December 31, 1994, the Company had outstanding notes payable to various lenders in the aggregate amount of approximately $22,700 with effective interest rates ranging from 8% to 15%. All of the notes payable outstanding at December 31, 1994, were either refinanced with the proceeds of the Bank Credit Agreement or repaid in accordance with their terms. At December 31, 1994, the Company had a revolving line of credit with a commercial lender with an outstanding balance of $22,767. The revolving line of credit carried an interest rate of 1.5% above the bank's prime rate (an effective rate of 10% at December 31, 1994). The facility was repaid and terminated in 1995 and replaced by the Bank Credit Agreement. F-16 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The proceeds from the Bank Credit Agreement were used to consummate the Acquisition (Note 3), and refinance existing indebtedness of the Company and Williamhouse-Regency. On December 1, 1995, $200,000 of proceeds were received from the 13% Senior Subordinated Notes which were used to repurchase $100,000 of publicly-held notes of Williamhouse-Regency assumed in the Acquisition and redeem preferred stock, preferred stock equivalents, and Class P common stock in the aggregate amount of $75,000 (Note 9). The Company incurred fees related to the transactions of approximately $33,200, which have been deferred and are being amortized using the effective interest method over the respective lives of the agreements. An extraordinary after-tax loss on extinguishment of debt of $9,652 ($16,086 pretax) is reflected in the statement of operations for the year ended December 31, 1995 as a result of $10,812 of prepayment penalties associated with the repurchase of Williamhouse-Regency's $100,000 of notes and Ampad's bank debt and the write-off of $5,274 of unamortized deferred financing costs in connection with Williamhouse-Regency's notes redemption and Ampad's debt refinancings. 9. STOCKHOLDERS' EQUITY, STOCK OPTIONS AND NONRECURRING COMPENSATION CHARGE At January 1, 1995, options for 126,405 shares of common stock had been issued to certain members of the Company's management under the 1992 Key Employee Stock Option Plan (the "1992 Plan") in two separate tranches--"Core" stock options for 93,428 shares and "Performance" stock options for 32,977 shares. The exercise price of all options equaled or exceeded the fair market value at date of grant and the vesting date for both "Core" and "Performance" stock options is ten years from grant date, unless an Acceleration Event, as defined, occurs. In connection with the Acquisition of WR effective October 31, 1995 (Note 3), the Company's equity was recapitalized via a stock dividend of one share of preferred stock for every ten shares of common stock and Class P common and options to purchase common stock. Concurrently, preferred stock options were granted to holders of common stock options and the respective exercise prices were adjusted to maintain option holders' pro rata economic interests pursuant to antidilution provisions included in the existing stock option plans. The preferred stock has a liquidation and fair value of $1,948.50 per share, has no dividend rights and, except as required by law, is nonvoting. As of December 31, 1995, after giving effect to satisfaction of its preferred redemption values, the Company's Class P common stock was converted on a share-for-share basis into common stock. The issuance of the preferred stock options was considered additional consideration to restore the option holders' economic position as a result of the recapitalization, which was directly related to the Acquisition. Receipt of such consideration resulted in a nonrecurring, noncash compensation charge equal to the excess of fair market value over the exercise price of the preferred stock options of $24,265 with a corresponding credit being recorded to additional paid-in capital. The adjustment to the underlying common stock option's prices did not result in additional compensation expense in accordance with generally accepted accounting principles. Additionally, options for 8,109 shares of common stock and 810.9 shares of preferred stock were granted to certain members of management in December 1995. The exercise prices of $0.06 per common share and $3.60 per preferred share were below the fair market value of the respective classes of stock at date of grant, resulting in a noncash compensation charge equal to the aggregate excess of fair market value over the exercise price, or $1,733, with a corresponding credit being recorded to additional paid-in capital. F-17 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes the option activity for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1996:
COMMON STOCK PREFERRED STOCK ---------------------- ------------------------ NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE --------- ------------ --------- ------------- Outstanding, December 31, 1992 and 1993..................... 111,236 $ 0.42 Granted in 1994............... 15,169 $ 25.00 ------- Outstanding, December 31, 1994......................... 126,405 $0.42-$25.00 Granted in 1995............... 8,109 $ .06 13,451.4 $3.60-$214.29 Redeemed in 1995.............. (4,715.4) ------- -------- Outstanding, December 31, 1995 and March 31, 1996 (unau- dited)....................... 134,514 $ .06-$3.57 8,736.0 $3.60-$214.29 ======= ========
All options are exercisable at December 31, 1995 and March 31, 1996 (unaudited). The Company has elected not to early adopt the provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock Based Compensation." The Company will adopt the reporting provisions of SFAS 123 in 1996. The Company expects the adoption to have no effect on its financial condition or results of operations. The Company awarded additional compensation to executives and nonexecutives of $1,634 in 1995 in recognition of the significant transactions consummated during the year. The Company does not expect this additional compensation to be awarded in future years. 10. PENSION PLAN AND 401(K) PLAN The Company is liable for a supplemental, nonqualified, noncontributory, defined benefit pension plan covering certain former Ampad executives, which was assumed in the initial acquisition of Ampad in June 1992. Benefits are based on a percentage of prior compensation less expected social security benefits. The present value of the liability associated with this plan is $678, $636 and $611 at December 31, 1994, 1995, and March 31, 1996 (unaudited), respectively, and is included in other liabilities in the consolidated balance sheet. The Company maintains a retirement plan (401(k) plan) for the benefit of all employees who meet minimum age and service requirements. Company contributions to the plan may be made at the discretion of the board of directors. Contributions to the plan were approximately $515, $557, $568, $51 and $78 for the years ended December 31, 1993, 1994, 1995, and the three months ended March 31, 1995 and 1996 (unaudited), respectively. 11. INCOME TAXES The provision (benefit) for income taxes consists of the following:
THREE MONTHS YEARS ENDED ENDED DECEMBER 31, MARCH 31, -------------------- --------------- 1993 1994 1995 1995 1996 ---- ----- -------- ----- ----- (UNAUDITED) Current: Federal............................ $ $ $ $ $ 21 State.............................. 169 3 --- ----- -------- ----- ----- 169 24 Deferred provision (benefit) for in- come taxes.......................... 64 (488) (13,141) 366 78 --- ----- -------- ----- ----- $64 $(488) $(12,972) $ 366 $ 102 === ===== ======== ===== =====
F-18 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A reconciliation between the statutory U.S. federal income tax rate and the Company's effective tax rate is as follows:
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, --------------------- --------------------- 1993 1994 1995 1995 1996 ----- ----- ----- --------- --------- (UNAUDITED) Federal income tax rate..... 35.0 % (35.0)% (35.0)% 35.0 % 35.0% Adjustment to valuation al- lowance ................... (31.9)% 14.7 % (6.4)% Effect of acquisition....... 19.3 % 2.8% Change in enacted rates..... (7.8)% .4 % Miscellaneous permanent dif- ferences................... .9 % .4% State taxes, net............ 6.2 % (5.2)% (5.0)% 5.0 % 5.0% Other, net.................. 1.9 % (.3)% (1.4)% (1.7)% 1.2% ----- ----- ----- --------- --------- Effective tax rate.......... 3.4 % (6.1)% (46.9)% 38.3 % 44.4% ===== ===== ===== ========= =========
Temporary tax differences affected and categorized by financial statement line item are as follows:
DECEMBER 31, ----------------- MARCH 31, 1994 1995 1996 ------- -------- ----------- (UNAUDITED) Current deferred tax assets (liabilities): Accrued expenses............................ $ 1,102 $10,523 $10,503 Accounts receivable and allowances.......... 191 900 900 LIFO reserve................................ (2,478) (7,608) (7,608) NOL/credits................................. (496) 11,194 10,949 ------- -------- -------- Current deferred tax asset (liability), net........................................ $(1,681) $15,009 $14,744 ======= ======== ======== DECEMBER 31, ----------------- MARCH 31, 1994 1995 1996 ------- -------- ----------- (UNAUDITED) Noncurrent deferred tax assets (liabili- ties): Trademarks and intangibles.................. $ $(15,009) $(15,009) Property and equipment, net................. 2,709 (21,291) (21,291) NOL carryforwards........................... 4,073 Noncash compensation expense credited to paid-in-capital............................ 6,776 6,776 Other accrued liabilities................... 235 254 254 Deferred financing costs.................... (15) Seller note discount........................ (117) State taxes effect and other, net........... (804) (800) (641) ------- -------- -------- Noncurrent deferred tax asset (liability), net........................................ 6,081 (30,070) (29,911) Deferred tax asset valuation allowance...... (1,769) ------- -------- -------- Noncurrent deferred tax asset (liability), net........................................ $ 4,312 $(30,070) $(29,911) ======= ======== ========
The valuation allowance represents the amount of the deferred tax assets which may not be realized through taxable income from future operations. The Company's provision for income taxes may be impacted by adjustments to the valuation allowance which may be required if circumstances change regarding the realizability of the deferred tax assets in future periods. F-19 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The effect on the income tax provision related to the valuation allowance was a benefit of $1,769 for the year ended December 31, 1995. Deferred tax assets valuation allowances recorded in prior years were reversed in 1995 as a result of management's assessment of future realizability of deferred tax assets. For the year ended December 31, 1994, the effect on the income tax provision related to the valuation allowance was a charge of $1,180. The charge primarily related to an increase in the NOL carryforwards for which no benefit was recognized during 1994. At December 31, 1995, the Company has net operating losses available to reduce future taxable income of approximately $25,007. These net operating loss carryforwards expire in the years 2007 through 2010. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of the carryforwards which can be utilized. In addition, the Company has approximately $1,200 of alternative minimum tax credit carryforwards. The acquisition of WR (See Note 3) resulted in a change in control of WR. Consequently the utilization of these credits in future periods are subject to limitation. 12. COMMITMENTS AND CONTINGENCIES Commitments The Company is obligated under noncancelable operating leases for office space and machinery and equipment which expire at various times through 1997. Future minimum lease commitments under these leases are as follows:
YEARS ENDING DECEMBER 31, ------------ 1996............................................................ $ 2,110 1997............................................................ 2,026 1998............................................................ 1,894 1999............................................................ 1,430 2000............................................................ 1,214 Thereafter...................................................... 6,503 -------- Total minimum lease payments.................................. $ 15,177 ========
Total rent expense under noncancelable operating leases was approximately $775, $853, $1,888 and $148 and $1,122 for 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited) respectively. In October 1995, the Company entered into a ten-year management services agreement with Bain Capital, pursuant to which the Company will pay Bain Capital an aggregate annual fee of no less than $2.0 million. Litigation There are various outstanding claims against the Company arising in the normal course of business. Management, on the advise of counsel, believes that the claims are without merit and that any losses which might ultimately be sustained by the Company would not be material to the financial position or results of operations of the Company. Environmental Matters The Company is subject to federal, state, and local environmental and occupational health and safety laws and regulations. Such laws and regulations impose limitations on the discharge of pollutants and establish F-20 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) standards for management of waste. While there can be no assurance that the Company is at all times in complete compliance with all such requirements, the Company has made and will continue to make capital and other expenditures to comply with such requirements. The Company's Ampad division had been named a potentially responsible party under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, at five waste disposal sites. The Company settled its liability at four of these sites as a de minimis party. The Company expects to be eligible for a de minimis settlement at the remaining site. 13. RELATED PARTY TRANSACTIONS For the years ended December 31, 1993, 1994 and 1995, the Company paid $431, $684 and $937, respectively, for management and directors' fees to the principal shareholders (Bain Capital). No fees were paid for the three month periods ended March 31, 1995 and 1996 (unaudited). Unpaid fees of $128 and $500 are included in accrued expenses in the consolidated balance sheets at December 31, 1994 and March 31, 1996 (unaudited). There were no unpaid fees at December 31, 1995. Included in other assets in the consolidated balance sheet at December 31, 1994, 1995 and March 31, 1996 (unaudited) is a note receivable of $106, $112 and $114, respectively, due from an officer and shareholder of the Company. Interest expense is accrued monthly at an annual rate of 6.19% and the note is due in 1998. The Company paid $7,000 to Bain Capital for services relating to the Acquisition of WR and the related financing of the transaction. Of this amount, $4,300 was included in deferred financing fees and $2,700 was a direct acquisition expense allocated to the net assets acquired as discussed in Note 3. The Company also paid $450 to Bain Capital relating to the Globe-Weis acquisition (Note 3) which was included in deferred financing fees and subsequently included as a component of the extraordinary loss from extinguishment of debt. The Company paid Bain Capital $225 in 1994 for services related to the SCM acquisition and the related financing of the transaction. F-21 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES The 13% Senior Subordinated Notes of Delaware are guaranteed by substantially all of the subsidiaries of Delaware. The subsidiary guarantees are full, unconditional and joint and several. Each of the guarantor subsidiaries are wholly-owned. The Company is not a guarantor of this debt. Separate financial statements of the guarantor subsidiaries are not presented because management has determined that they would not be material to investors. However, condensed consolidating financial information as of December 31, 1995 and for the year then ended, and as of March 31, 1996 and for the three months then ended (unaudited) are presented. The condensed consolidating financial information of Delaware is as follows: CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1995 ------------------------------------------------------------- GUARANTOR NONGUARANTOR CONSOLIDATED DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ ASSETS Current assets: Cash..................... $ 18,295 $ 33 $ 13 $ $ 18,341 Restricted cash.......... 3,619 3,619 Accounts receivable...... (13,490) (154) 39,587 25,943 Intercompany receivable (payable)............... 75,423 (72,255) (3,168) -- Refundable income taxes................... 3,657 3,657 Inventories.............. 74,112 18,949 93,061 Assets held for sale..... 864 41,714 42,578 Deferred income taxes.... 17,395 (2,386) 15,009 Other current assets..... 879 48 927 -------- -------- ------- -------- -------- Total current assets... 180,754 (14,051) 36,432 203,135 -------- -------- ------- -------- -------- Property and equipment.... 73,097 37,357 110,454 Less: accumulated depreciation............. (3,438) (248) (3,686) -------- -------- ------- -------- -------- Net property and equipment............. 69,659 37,109 106,768 -------- -------- ------- -------- -------- Investment in subsidiaries............. 41,575 (41,575) Intangible assets, net.... 34,196 3,504 37,700 Debt issuance costs, net.. 30,160 182 2,587 32,929 Goodwill, net............. 107,076 13,307 120,383 Other..................... 3,311 130 3,441 -------- -------- ------- -------- -------- Total assets........... $466,731 $ 40,181 $39,019 $(41,575) $504,356 ======== ======== ======= ======== ======== DECEMBER 31, 1995 ------------------------------------------------------------- GUARANTOR NONGUARANTOR CONSOLIDATED DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long- term debt............... $ 10,652 $ 1,182 $ $ $ 11,834 Accounts payable and accrued expenses........ 62,869 19,014 81,883 Income taxes payable..... 494 494 -------- -------- ------- -------- -------- Total current liabilities........... 74,015 20,196 94,211 -------- -------- ------- -------- -------- Long-term debt............ 442,134 1,660 443,794 Other liabilities......... 2,702 2,702 Deferred income taxes..... 14,301 15,769 30,070 -------- -------- ------- -------- -------- Total liabilities...... 533,152 37,625 570,777 -------- -------- ------- -------- -------- Commitments and contingencies............ Stockholder's equity: Common stock............. 1 10 (11) Additional paid-in capital................. 28,998 37,370 (37,370) 28,998 Retained earnings........ (95,419) 2,555 1,639 (4,194) (95,419) -------- -------- ------- -------- -------- Total stockholder's equity................ (66,421) 2,556 39,019 (41,575) (66,421) -------- -------- ------- -------- -------- Total liabilities and stockholder's equity.. $466,731 $ 40,181 $39,019 $(41,575) $504,356 ======== ======== ======= ======== ========
F-22 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1996 (UNAUDITED) ------------------------------------------------------------- GUARANTOR NONGUARANTOR CONSOLIDATED DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ ASSETS Current assets: Cash..................... $ 20,026 $ 69 $ 13 $ $ 20,108 Restricted cash.......... 10,759 10,759 Accounts receivable...... (8,862) (77) 27,346 18,407 Intercompany receivable (payable)............... 83,157 (79,132) (4,025) -- Inventories.............. 75,731 17,435 93,166 Assets held for sale..... 764 42,808 43,572 Deferred income taxes.... 17,302 (2,260) (298) 14,744 Other current assets..... 2,009 17 2,026 -------- -------- ------- -------- -------- Total current assets... 200,886 (21,140) 23,036 202,782 -------- -------- ------- -------- -------- Property and equipment.... 75,061 38,260 113,321 Less: accumulated depreciation............. (5,892) (671) (6,563) -------- -------- ------- -------- -------- Net property and equipment............. 69,169 37,589 106,758 -------- -------- ------- -------- -------- Investment in subsidiaries............. 29,447 (29,447) Intangible assets, net.... 33,924 3,468 37,392 Debt issuance costs, net.. 29,911 160 2,453 32,524 Goodwill, net............. 107,672 11,983 119,655 Other..................... 1,556 127 1,683 -------- -------- ------- -------- -------- Total assets........... $472,565 $ 32,187 $25,489 $(29,447) $500,794 ======== ======== ======= ======== ======== MARCH 31, 1996 (UNAUDITED) ------------------------------------------------------------- GUARANTOR NONGUARANTOR CONSOLIDATED DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long- term debt............... $ 11,886 $ 1,180 $ $ $ 13,066 Accounts payable and accrued expenses........ 75,036 4,924 79,960 Income taxes payable..... (1,841) 2,359 518 -------- -------- ------- -------- -------- Total current liabilities........... 85,081 8,463 93,544 -------- -------- ------- -------- -------- Long-term debt............ 438,793 1,660 440,453 Other liabilities......... 3,179 3,179 Deferred income taxes..... 11,805 18,106 29,911 -------- -------- ------- -------- -------- Total liabilities...... 538,858 28,229 567,087 -------- -------- ------- -------- -------- Commitments and contingencies............ Stockholder's equity: Common stock............. 1 10 (11) Additional paid-in capital................. 28,998 23,392 (23,392) 28,998 Retained earnings........ (95,291) 3,957 2,087 (6,044) (95,291) -------- -------- ------- -------- -------- Total stockholder's equity................ (66,293) 3,958 25,489 (29,447) (66,293) -------- -------- ------- -------- -------- Total liabilities and stockholder's equity.. $472,565 $ 32,187 $25,489 $(29,447) $500,794 ======== ======== ======= ======== ========
F-23 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS The following condensed consolidating statement of operations includes the results of operations of Delaware for the year ended December 31, 1995, including the results of Williamhouse-Regency and Notepad Funding Corporation for the post-October 31, 1995 period.
GUARANTOR NONGUARANTOR CONSOLIDATED DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ Net sales............... $238,989 $20,352 $ $ $259,341 Cost of sales........... 197,033 14,781 211,814 -------- ------- ------ ------- -------- Gross profit ........... 41,956 5,571 47,527 -------- ------- ------ ------- -------- Operating expenses: Selling and marketing............ 5,730 524 6,254 General and administrative....... 13,278 741 (1,728) 12,291 Nonrecurring compensation charge.. 27,632 27,632 -------- ------- ------ ------- -------- Income (loss) from operations .......... (4,684) 4,306 1,728 1,350 -------- ------- ------ ------- -------- Other income (expense): Interest.............. (13,531) (37) (89) (13,657) Other income, net..... 735 1,728 (1,728) 735 -------- ------- ------ ------- -------- Income (loss) before income taxes........... (17,480) 4,269 1,639 (11,572) Provision (benefit) for income taxes........... (8,252) 1,714 (6,538) -------- ------- ------ ------- -------- Income (loss) before equity in net earnings of subsidiaries and extraordinary item..... (9,228) 2,555 1,639 (5,034) Equity in net earnings of subsidiaries........ 4,194 (4,194) -------- ------- ------ ------- -------- Income (loss) before extraordinary item..... (5,034) 2,555 1,639 (4,194) (5,034) Extraordinary loss from extinguishment of debt, net.................... (9,652) (9,652) -------- ------- ------ ------- -------- Net income (loss)....... $(14,686) $ 2,555 $1,639 $(4,194) $(14,686) ======== ======= ====== ======= ========
F-24 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) ------------------------------------------------------------- GUARANTOR NONGUARANTOR CONSOLIDATED DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ Net sales............... $87,586 $36,989 $ $(3,157) $121,418 Cost of sales........... 72,009 29,037 (3,157) 97,889 ------- ------- ---- ------- -------- Gross profit ........... 15,577 7,952 23,529 ------- ------- ---- ------- -------- Operating expenses: Selling and marketing............ 2,488 840 3,328 General and administrative....... 7,412 1,130 8 (852) 7,698 ------- ------- ---- ------- -------- Income (loss) from operations .......... 5,677 5,982 (8) 852 12,503 ------- ------- ---- ------- -------- Other income (expense): Interest.............. (12,388) (56) (98) (12,542) Other income, net..... 653 (384) 852 (852) 269 ------- ------- ---- ------- -------- Income (loss) before income taxes........... (6,058) 5,542 746 230 Provision (benefit) for income taxes........... (4,335) 4,139 298 102 ------- ------- ---- ------- -------- Income (loss) before equity in net earnings of subsidiaries........ (1,723) 1,403 448 128 Equity in net earnings of subsidiaries........ 1,851 (1,851) ------- ------- ---- ------- -------- Net income (loss)....... $ 128 $ 1,403 $448 $(1,851) $ 128 ======= ======= ==== ======= ========
F-25 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED CONSOLIDATING CASH FLOW INFORMATION The following condensed consolidating cash flow information includes the cash flows of Delaware for the year ended December 31, 1995, including the results of Williamhouse-Regency and Notepad Funding Corporation for the post- October 31, 1995 period.
GUARANTOR NONGUARANTOR CONSOLIDATED DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL --------- ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities............. $ 44,346 $ 2,674 $(42,311) $ $ 4,709 Investing activities Purchase of the stock of WR, including acquisition costs...... (122,655) (122,655) Purchase of net assets, including acquisition costs.................. (7,046) (7,046) Other................... 1,075 (2,641) (1,566) --------- ------- -------- ------- --------- Net cash used in investing activities... (128,626) (2,641) (131,267) --------- ------- -------- ------- --------- Financing activities Proceeds from sale of accounts receivable.... 45,000 45,000 Net repayment under line of credit.............. (22,767) (22,767) Proceeds from issuance of debt................ 430,052 430,052 Repayment of long-term debt................... (186,546) (186,546) Redemption premiums and penalties included in extraordinary loss..... (10,812) (10,812) Debt issuance costs..... (32,356) (2,676) (35,032) Dividends paid.......... (75,000) (75,000) --------- ------- -------- ------- --------- Net cash provided by financing activities... 102,571 42,324 144,895 --------- ------- -------- ------- --------- Net increase in cash.... 18,291 33 13 18,337 Cash, beginning of year................... 4 4 --------- ------- -------- ------- --------- Cash, end of year....... $ 18,295 $ 33 $ 13 $ $ 18,341 ========= ======= ======== ======= =========
F-26 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED CONSOLIDATING CASH FLOW INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) ------------------------------------------------------------- GUARANTOR NONGUARANTOR CONSOLIDATED DELAWARE SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities............. $ 7,255 $374 $ $ $ 7,629 Investing activities: Other.................. (2,613) (338) (2,951) -------- ---- ---- ------- -------- Net cash used in investing activities... (2,613) (338) (2,951) -------- ---- ---- ------- -------- Financing activities: Proceeds from issuance of debt.............. 25,272 25,272 Repayment of long-term debt................. (27,380) (27,380) Debt issuance costs... (803) (803) -------- ---- ---- ------- -------- Net cash provided by financing activities... (2,911) (2,911) -------- ---- ---- ------- -------- Net increase in cash.... 1,731 36 1,767 Cash, beginning of period................. 18,295 33 13 18,341 -------- ---- ---- ------- -------- Cash, end of period..... $ 20,026 $ 69 $ 13 $ $ 20,108 ======== ==== ==== ======= ========
15. INDUSTRY SEGMENTS The Company conducts its business operations in two industry segments: the Ampad Division, which primarily manufactures and markets a broad line of office supplies including writing products, filing supplies, and commodity and speciality envelopes and the Williamhouse Division, which primarily designs and manufactures a wide range of mill branded, specialty and commodity envelope products, invitations and announcements and greeting cards. There were no intersegment sales in 1995. For the three month period ended March 31, 1996 (unaudited), the Williamhouse division had sales of $644 to the Ampad division. Prior to the acquisition of WR, the Company operated in one segment consisting of the Ampad Division. Substantially all of the Company's operations are conducted within the United States. Two customers accounted for 27%, and one customer accounted for 11%, of the Company's total net sales for the year ended December 31, 1995 and the three month period ended March 31, 1996 (unaudited), respectively. F-27 AMERICAN PAD & PAPER COMPANY (FORMERLY AMPAD HOLDING CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table represents industry segment information. Intersegment sales are transferred at competitive prices. Operating profit by segment consists of total sales less operating expenses, and exclude general corporate expenses, net interest expense or income taxes. Corporate assets are principally cash, cash equivalents, residual interests in a portfolio of accounts receivable sold, debt issuance costs and net assets held for sale.
FOR THE FOR THE YEAR THREE MONTHS ENDED ENDED DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------ (UNAUDITED) ($ IN THOUSANDS) Net sales: Unaffiliated customers Ampad Division................................. $212,687 $ 57,023 Williamhouse Division.......................... 46,654 64,395 --------- -------- Total net sales to unaffiliated customers.... $259,341 $121,418 ========= ======== Operating profit: Ampad Division................................... $ 21,997 4,540 Williamhouse Division............................ 8,478 8,793 --------- -------- Total operating profit....................... 30,475 13,333 General corporate expense........................ (29,125)(1) (830) Interest expense................................. (13,657) (12,542) Other income, net................................ 735 269 --------- -------- Income (loss) before income taxes............ $ (11,572) $ 230 ========= ======== Capital expenditures: Ampad Division................................... $ 2,551 $ 538 Williamhouse Division............................ 3,089 1,783 --------- -------- Total capital expenditures................... $ 5,640 $ 2,321 ========= ======== Depreciation and amortization of plant and equipment: Ampad Division................................... 2,333 $ 445 Williamhouse Division............................ 1,036 1,539 --------- -------- Total depreciation and amortization of plant and equipment............................... $ 3,369 $ 1,984 ========= ======== AS OF AS OF DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------ (UNAUDITED) Identifiable assets: Ampad Division................................... $ 76,928 $ 75,539 Williamhouse Division............................ 327,743 316,018 Corporate assets................................. 137,055 132,639 Eliminations..................................... (37,370) (23,402) --------- -------- Total assets................................. $504,356 $500,794 ========= ========
- -------- (1) Includes $27,632 nonrecurring compensation charge (Note 9). 16. SUBSEQUENT EVENT (UNAUDITED) On May 29, 1996, the Company signed a definitive agreement to acquire the stock of the Niagara Envelope Company, Inc. The purchase price will approximate $50 million, plus a $5 million management services agreement with the Seller to be paid at closing. The Company expects the acquisition to be consummated by mid-July 1996. F-28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder WR Acquisition, Inc.: We have audited the accompanying consolidated balance sheets of WR Acquisition, Inc. and subsidiaries as of December 31, 1994 and October 31, 1995, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the years in the two-year period ended December 31, 1994 and the ten months ended October 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WR Acquisition, Inc. and subsidiaries as of December 31, 1994 and October 31, 1995 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1994 and the ten months ended October 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP /s/ KPMG Peat Marwick LLP January 10, 1996 F-29 WR ACQUISITION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, OCTOBER 31, 1994 1995 ------------ ------------ ASSETS CURRENT ASSETS: Cash............................................... $ 170,000 $ -- Accounts receivable, less allowances of $837,000 at December 31, 1994 and $636,000 at October 31, 1995.............................................. 30,772,000 39,174,000 Inventories........................................ 34,141,000 35,548,000 Current assets of discontinued operations.......... 23,581,000 14,603,000 Prepaid expenses................................... 511,000 1,054,000 ------------ ------------ Total current assets............................. 89,175,000 90,379,000 ------------ ------------ DUE FROM AMPAD....................................... -- 54,306,000 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT: Land and buildings................................. 23,070,000 30,258,000 Machinery, equipment, leasehold improvements and construction in progress.......................... 81,787,000 75,279,000 ------------ ------------ 104,857,000 105,537,000 Less accumulated depreciation and amortization..... 54,225,000 53,134,000 ------------ ------------ Net property, plant and equipment.................. 50,632,000 52,403,000 ------------ ------------ OTHER ASSETS: Deferred financing costs, less accumulated amorti- zation............................................ 6,248,000 23,125,000 Funds held for construction........................ -- 2,633,000 Cash surrender value of officers' life insurance policies, net of loans of $1,236,000 at December 31, 1994 and $1,769,000 at October 31, 1995....... 646,000 260,000 Intangibles, less accumulated amortization......... 378,000 350,000 Other assets....................................... 533,000 644,000 ------------ ------------ Total other assets............................... 7,805,000 27,012,000 ------------ ------------ PURCHASE PRICE FOR THE COMMON STOCK OF WR ACQUISITION, INC. AND CERTAIN RELATED COSTS......... -- 147,854,000 ------------ ------------ NON CURRENT ASSETS OF DISCONTINUED OPERATIONS........ 29,145,000 27,439,000 ------------ ------------ TOTAL ASSETS..................................... $176,757,000 $399,393,000 ============ ============
See accompanying Notes to Consolidated Financial Statements. F-30 WR ACQUISITION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, OCTOBER 31, 1994 1995 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Accounts payable................................. $ 16,499,000 $ 17,518,000 Accrued expenses................................. 14,536,000 18,982,000 Taxes payable.................................... 354,000 -- Current installments of long-term debt........... 8,558,000 11,844,000 Current liabilities of discontinued operations... 9,380,000 9,100,000 ------------ ------------ Total current liabilities...................... 49,327,000 57,444,000 ------------ ------------ Non-current liabilities............................ 2,179,000 2,019,000 Deferred tax liabilities--net...................... 3,610,000 3,740,000 Long-term debt (less current installments)......... 144,750,000 319,380,000 Notes payable to selling stockholders.............. -- 25,157,000 Non-current liabilities of discontinued opera- tions............................................. 8,375,000 5,689,000 STOCKHOLDERS' EQUITY (DEFICIENCY): Class A common stock, par value $.01 per share, 11,619 shares authorized, issued and outstanding..................................... 1,000 1,000 Common stock, par value $.01 per share, 50,000 shares authorized; 10,478 issued at December 31, 1994 and 13,243 at October 31, 1995; 10,405 outstanding at December 31, 1994 and 13,243 at October 31, 1995................................ 1,000 1,000 Additional paid-in capital....................... 42,007,000 56,135,000 Retained earnings................................ 21,841,000 25,080,000 Distribution to stockholders of the excess of purchase price over book value of net assets of W.R. Holdings, Inc. arising from the December 29, 1986 Recapitalization....................... (95,253,000) (95,253,000) Common stock held in treasury, at cost, 73 shares at December 31, 1994............................... (81,000) -- ------------ ------------ Total stockholders' equity (deficiency)........ (31,484,000) (14,036,000) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY).................................. $176,757,000 $399,393,000 ============ ============
See accompanying Notes to Consolidated Financial Statements. F-31 WR ACQUISITION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED TEN MONTHS -------------------------- ENDED DECEMBER DECEMBER OCTOBER 31, 1993 31, 1994 31, 1995 ------------ ------------ ----------------- Net sales........................ $176,934,000 $248,008,000 $219,366,000 Cost of sales.................. 118,626,000 173,536,000 152,781,000 ------------ ------------ ------------ Gross profit..................... 58,308,000 74,472,000 66,585,000 Selling, general and adminis- trative expenses.............. 39,765,000 44,906,000 39,866,000 Compensation expense relating to stock options.............. -- 294,000 9,544,000 ------------ ------------ ------------ Operating income................. 18,543,000 29,272,000 17,175,000 Interest expense............... 13,621,000 11,750,000 11,615,000 Interest income................ (626,000) (284,000) (124,000) ------------ ------------ ------------ Earnings from continuing operations before taxes on income.......................... 5,548,000 17,806,000 5,684,000 Provision for taxes on income.. 1,988,000 6,080,000 2,224,000 ------------ ------------ ------------ Earnings from continuing opera- tions........................... 3,560,000 11,726,000 3,460,000 Discontinued operations: Loss from operations, net of tax benefits of $280,000, $380,000 and $110,000 in 1993, 1994 and 1995, respectively... (432,000) (1,328,000) (221,000) ------------ ------------ ------------ Net earnings..................... $ 3,128,000 $ 10,398,000 $ 3,239,000 ============ ============ ============
See accompanying Notes to Consolidated Financial Statements. F-32 WR ACQUISITION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE TEN MONTHS ENDED OCTOBER 31, 1995
CLASS A ADDITIONAL DISTRIBUTION TREASURY COMMON COMMON PAID-IN RETAINED TO STOCK, STOCK STOCK CAPITAL EARNINGS STOCKHOLDERS AT COST TOTAL ------- ------- ----------- ----------- ------------ -------- ------------ Balance at December 31, 1992................... $ -- $ 1,000 $10,477,000 $ 8,315,000 $(95,253,000) $(81,000) $(76,541,000) Net earnings........... -- -- -- 3,128,000 -- -- 3,128,000 Issuance of Class A common stock for cash.................. 100 -- 1,999,900 -- -- -- 2,000,000 Issuance of Class A common stock for redemption of debt.... 900 -- 29,236,100 -- -- -- 29,237,000 ------- ------- ----------- ----------- ------------ -------- ------------ Balance at December 31, 1993................... 1,000 1,000 41,713,000 11,443,000 (95,253,000) (81,000) (42,176,000) Net earnings........... -- -- -- 10,398,000 -- -- 10,398,000 Compensation relating to stock options...... -- -- 294,000 -- -- -- 294,000 ------- ------- ----------- ----------- ------------ -------- ------------ Balance at December 31, 1994................... 1,000 1,000 42,007,000 21,841,000 (95,253,000) (81,000) (31,484,000) Net earnings........... -- -- -- 3,239,000 -- -- 3,239,000 Proceeds and compensation relating to exercise of stock options............... -- -- 13,424,000 -- -- -- 13,424,000 Reissuance of treasury stock................. -- -- (81,000) -- -- 81,000 -- Issuance of common stock for cash........ -- -- 785,000 -- -- -- 785,000 ------- ------- ----------- ----------- ------------ -------- ------------ Balance at October 31, 1995................... $ 1,000 $ 1,000 $56,135,000 $25,080,000 $(95,253,000) $ -- $(14,036,000) ======= ======= =========== =========== ============ ======== ============
See accompanying Notes to Consolidated Financial Statements. F-33 WR ACQUISITION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED --------------------------- TEN MONTHS ENDED DECEMBER DECEMBER OCTOBER 31, 1993 31, 1994 31, 1995 ------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings...................... $ 3,128,000 $ 10,398,000 $ 3,239,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.... 7,237,000 8,860,000 5,598,000 Provision for (benefit from) losses on accounts receivable... 121,000 372,000 (132,000) Compensation expense relating to stock options................... -- 294,000 10,723,000 Deferred tax liabilities--net.... 2,194,000 (158,000) 130,000 Write-off of deferred financing costs........................... 2,712,000 108,000 1,828,000 Change in assets and liabilities: Increase in accounts receivable..................... (6,274,000) (7,624,000) (8,838,000) Increase in inventories......... (1,951,000) (1,350,000) (1,407,000) Decrease (increase) in prepaid expenses....................... 156,000 (188,000) (543,000) Increase in accounts payable.... 2,328,000 7,894,000 1,019,000 Increase in accrued expenses.... 1,707,000 3,983,000 4,446,000 Increase (decrease) in taxes payable........................ 1,404,000 (1,050,000) (354,000) (Decrease) increase in other-- net............................ (1,424,000) 196,000 152,000 Discontinued operations--net.... (8,116,000) 366,000 7,718,000 ------------- ------------ ------------- Cash provided by operating activities.................... 3,222,000 22,101,000 23,579,000 ------------- ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment--net................... (2,869,000) (4,348,000) (6,363,000) Acquisitions of inventory and machinery and equipment.......... (9,728,000) (4,124,000) -- Funds held for construction....... -- -- (2,633,000) ------------- ------------ ------------- Cash used for investing activities.................... (12,597,000) (8,472,000) (8,996,000) ------------- ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt...... (155,820,000) (34,961,000) (47,168,000) Proceeds from Recapitalization.... 152,500,000 -- -- Proceeds from long-term debt...... 9,597,000 17,600,000 5,200,000 Issuance of Class A common stock.. 2,000,000 -- -- Additions to deferred financing costs............................ (7,374,000) (442,000) (19,679,000) Proceeds from exercise of stock options.......................... -- -- 2,701,000 Proceeds from issuance of debt to effect Merger.................... -- -- 219,843,000 Issuance of common stock.......... -- -- 785,000 Purchase price for the common stock of WR Acquisition, Inc. and certain related costs............ -- -- (147,854,000) Notes payable to selling stockholders..................... -- -- 25,157,000 Advances to Ampad................. -- -- (54,306,000) Investment in trust............... -- -- (34,518,000) Proceeds from sale of accounts receivable....................... -- -- 35,086,000 ------------- ------------ ------------- Cash provided by (used for) financing activities.......... 903,000 (17,803,000) (14,753,000) ------------- ------------ ------------- DECREASE IN CASH AND CASH EQUIVALENTS....................... (8,472,000) (4,174,000) (170,000) Cash and cash equivalents at beginning of period.............. 12,816,000 4,344,000 170,000 ------------- ------------ ------------- Cash and cash equivalents at end of period........................ $ 4,344,000 $ 170,000 $ -- ============= ============ =============
See accompanying Notes to Consolidated Financial Statements. F-34 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION OF THE COMPANY WR Acquisition, Inc. ("Acquisition") was incorporated under Delaware law on November 17, 1986 for the purpose of acquiring W.R. Holdings, Inc. ("Holdings") and its wholly-owned subsidiary Williamhouse-Regency of Delaware, Inc. (the "Company"). On December 29, 1986, Acquisition acquired all of the capital stock of Holdings through a recapitalization. On May 13, 1993, Acquisition completed a recapitalization (the "Recapitalization") and Holdings was merged into Acquisition, whereupon the Company became a direct, wholly- owned subsidiary of Acquisition. (See Notes 8 and 10.) On October 31, 1995, all of Acquisition's outstanding capital stock was acquired by American Pad & Paper Company ("Ampad") through a new wholly-owned subsidiary, WHR Acquisition, Inc. The consolidated financial statements are presented on a historical basis, prior to giving effect to a new basis of accounting for the merger (the "Merger") described below. The financial statements reflect the following transactions relating to Ampad's acquisition of Acquisition's capital stock and the related financing executed by Williamhouse-Regency of Delaware, Inc., a wholly-owned subsidiary of Acquisition, on October 31, 1995: Borrowings under bank credit agreement...................... $219,843,000 Sale of accounts receivable*................................ 46,988,000 Purchase of shares from former shareholders of Acquisition: Cash...................................................... 117,544,000 Installment notes given to former shareholders of Acquisition.............................................. 25,157,000 Certain related costs of the selling shareholders......... 5,153,000 Repayment of debt*.......................................... 41,525,000 Proceeds advanced to Ampad.................................. 54,306,000 Investment in trust......................................... 34,518,000 Costs of financing*......................................... 19,663,000
* Includes components relating to both continuing and discontinued operations. The purchase price for the common stock of WR Acquisition, Inc. and certain related costs amounted to $147,854,000 and has been reflected as an asset on the balance sheet prior to allocation. The $266,831,000 of borrowings were used to purchase shares from the stockholders, pay expenses of the Merger, and repay debt of both the Company and Ampad. Pursuant to an agreement and plan of merger dated October 3, 1995, on October 31, 1995 Acquisition acquired Ampad Corporation, a wholly-owned subsidiary of Ampad, in exchange for newly issued shares of Acquisition's common stock. Ampad Corporation was then merged into the Company, a wholly- owned subsidiary of Acquisition, and WHR Acquisition, Inc. was merged into Acquisition simultaneously with Ampad's purchase of Acquisition. Consequently, Acquisition became a wholly-owned subsidiary of Ampad and the Company became an indirect, wholly-owned subsidiary of Ampad. Acquisition does not have any properties and does not engage in any business, other than through the operations of the Company and its wholly- owned subsidiaries. (2) ACCOUNTING POLICIES A summary of the significant accounting policies which affect the Company's consolidated financial statements is listed below: F-35 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Principles of Consolidation and Basis of Presentation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. Prior years figures have been restated to reflect discontinued operations (See Note 16). Inventories: Inventories are stated at the lower of cost or market (net realizable value). The Company values its inventories on the last-in, first-out (LIFO) method. Depreciation and Amortization: Property, plant and equipment are stated at cost. These assets, including assets recorded under capitalized leases, are depreciated on the straight-line method at rates which vary based upon their estimated useful lives. Leasehold improvements are amortized on the straight-line method over the shorter of the terms of the related leases or their useful lives. Depreciation and amortization of property, plant and equipment from continuing operations was $6,374,000 and $7,683,000 for the years ended December 31, 1993 and 1994, respectively and $4,592,000 for the ten months ended October 31, 1995 . Expenditures for maintenance and repairs are charged, as incurred, to operations. The costs of acquisitions, additions and betterments are capitalized. When property, plant and equipment is sold or otherwise disposed of, the cost and the accumulated depreciation are eliminated from the accounts. Deferred financing costs primarily relate to the issuance of debt to fund the Merger (See Note 1). Deferred financing costs are amortized on the straight-line method over the term of the related obligations. Amortization of deferred financing costs from continuing operations was $838,000 and $1,138,000 for the years ended December 31, 1993 and 1994, respectively and $974,000 for the ten months ended October 31, 1995. Intangibles: Intangibles are amortized, primarily on the straight-line method, over the period of the expected benefits. Amortization of intangibles from continuing operations was $18,000 for the year ended December 31, 1994 and $21,000 for the ten months ended October 31, 1995. (3) ACQUISITIONS On December 20, 1993, KECA Corporation, a newly formed, wholly-owned subsidiary of the Company, acquired the principal assets of Kimberly-Clark Corporation's Karolton Envelope business for a purchase price of $9,597,000. Karolton Envelope is a full-line envelope convertor based in Miamisburg, Ohio and West Sacramento, California. The Company financed the transaction under its senior secured financing facility. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of this acquisition have been included in the accompanying financial statements since the date of acquisition. The following pro forma information has been prepared assuming the acquisition of Karolton Envelope had occurred on January 1, 1993. This pro forma information has been prepared for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 1993, or of the results which may occur in the future. Furthermore, no effect has been given in the pro forma F-36 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) information for operating and synergistic benefits that are expected to be realized as a result of the acquisition because precise estimates of such benefits cannot be quantified. Management implemented certain cost saving measures as of the date of consummation of the acquisition. This pro forma information does not reflect the impact of such measures.
1993 ------------ (UNAUDITED) Net sales.................................................... $220,609,000 Earnings from continuing operations.......................... $ 3,233,000
On July 29, 1994, two wholly-owned subsidiaries of the Company acquired from Huxley Envelope Corporation its Giant, Filing and X-Ray envelope business segments for a purchase price of $4,249,000. The Company financed the transaction under its senior secured financing facility, a note payable to the seller and cash. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of this acquisition have been included in the accompanying financial statements since the date of acquisition. This acquisition did not have a material impact on the financial position or results of operations of the Company. During the year ended December 31, 1993 and the ten months ended October 31, 1995, the Company completed certain other acquisitions whose aggregate purchase price did not have a material impact on the financial position or results of operations of the Company. (4) ACCOUNTS RECEIVABLE The Company entered into an agreement to sell, on a revolving basis, an undivided interest in a designated pool of trade accounts receivable to a trust on October 31, 1995. Accordingly, the Company transferred $46,988,000 and Ampad transferred $33,412,000 of accounts receivable to the trust. The trust sold investor certificates representing an interest in $45,000,000 of trust assets for which the Company received cash of $45,000,000 and credited due from Ampad for $33,044,000. The Company holds seller certificates representing an interest in the remaining assets of the trust of $34,518,000 which is included in accounts receivable in the Company's balance sheet at October 31, 1995. The Company has retained substantially the same risks for all losses, credits or other adjustments on receivables owned by the trust as if the receivables had not been sold. Accordingly, the full amount of the allowance for doubtful accounts has been retained. (5) INVENTORIES The major components of inventories of continuing operations are as follows:
DECEMBER 31, OCTOBER 31, 1994 1995 ------------ ----------- Finished goods and work in progress................ $19,521,000 $20,902,000 Raw materials...................................... 14,620,000 14,646,000 ----------- ----------- Total inventories.................................. $34,141,000 $35,548,000 =========== ===========
The Company values its inventories on the LIFO method. Had the first-in, first-out (FIFO) method been used, inventories would have been $1,869,000 and $6,695,000 higher than reported at December 31, 1994 and October 31, 1995 respectively. (6) INCOME TAXES Acquisition, the Company and its subsidiaries file a consolidated federal income tax return. F-37 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The provision for taxes on income from continuing operations is as follows:
YEARS ENDED TEN MONTHS ------------------------- ENDED DECEMBER 31, DECEMBER 31, OCTOBER 31, 1993 1994 1995 ------------ ------------ ----------- Current: Federal income taxes................. $1,902,000 $5,317,000 $1,938,000 State and local income taxes......... 301,000 786,000 156,000 Deferred: Federal income taxes................. (148,000) 152,000 125,000 State and local income taxes......... (67,000) (175,000) 5,000 ---------- ---------- ---------- Provision for taxes on income.......... $1,988,000 $6,080,000 $2,224,000 ========== ========== ==========
The difference between the provision computed at the statutory rate and the actual provision on consolidated earnings from continuing operations is as follows:
YEARS ENDED TEN MONTHS ------------------------- ENDED DECEMBER 31, DECEMBER 31, OCTOBER 31, 1993 1994 1995 ------------ ------------ ----------- Federal income taxes at statutory rate................................ 35.0% 35.0% 35.0% Tax on permanent differences, net of federal jobs tax credit............. .6 (1.6) 0.1 State and local income taxes, net of related federal income tax benefit.. 2.8 .4 1.8 Other--net........................... (2.6) .3 2.2 ---- ---- ---- Effective tax rate................... 35.8% 34.1% 39.1% ==== ==== ====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities of continuing operations are presented below:
DECEMBER 31, OCTOBER 31, 1994 1995 ------------ ----------- Deferred tax assets: Allowance for doubtful accounts..................... $ 378,000 $ 211,000 Inventory--uniform capitalization................... 495,000 364,000 Vacation pay accruals............................... 754,000 573,000 Other............................................... 850,000 560,000 ---------- ---------- Total gross deferred tax assets..................... 2,477,000 1,708,000 ---------- ---------- Deferred tax liabilities: Depreciation........................................ 6,029,000 5,382,000 Other............................................... 58,000 66,000 ---------- ---------- Total gross deferred tax liabilities................ 6,087,000 5,448,000 ---------- ---------- Net deferred tax liabilities........................ $3,610,000 $3,740,000 ========== ==========
The ultimate realization of deferred tax assets is dependant upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. As of October 31, 1995, management considers all deferred tax assets to be realizable. F-38 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company adopted, effective January 1, 1993, the Financial Accounting Standards Board's ("FASB") Statement 109, "Accounting for Income Taxes." The adoption of FASB 109 did not have a material impact on the Company's consolidated financial position or results of operations for the year ended December 31, 1993. (7) ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, OCTOBER 31, 1994 1995 ------------ ----------- Salaries and wages................................. $ 4,344,000 $ 4,438,000 Taxes, other than taxes on income.................. 402,000 4,293,000 Interest........................................... 1,014,000 4,455,000 Sales volume discounts............................. 5,179,000 3,638,000 Other.............................................. 3,597,000 2,158,000 ----------- ----------- Total accrued expenses............................. $14,536,000 $18,982,000 =========== ===========
F-39 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) DEBT ARRANGEMENTS Long-term debt is comprised of the following:
DECEMBER 31, 1994 OCTOBER 31, 1995 ----------------------- ------------------------ CURRENT LONG-TERM CURRENT LONG-TERM ---------- ------------ ----------- ------------ Senior secured financing facil- ity: Senior bank financing term loans and revolving credit facility due in varying amounts from 1996 through 2004........................ $ -- $ -- $10,000,000 $209,843,000 Term loans due through 1998 payable to banks with quarterly principal payments of $1,461,250 except for the final payment of $2,392,000.................. 5,845,000 14,082,000 -- -- Revolving credit line due 1998 payable to banks....... -- 20,000,000 -- -- Senior subordinated debentures due 2005 payable to institu- tions with interest at 11 1/2%.......................... -- 100,000,000 -- 100,000,000 Industrial revenue bond, interest at 7 3/4%; with monthly principal payments varying from $11,000 to $16,300 due through 2000 (less unamortized discount of $41,000 in 1994)................. 132,000 720,000 -- -- Industrial revenue bonds, in- terest at 89.2% of prime; with quarterly principal payments varying from $85,000 to $57,000 due through 2002...... 341,000 2,102,000 -- -- Industrial revenue bonds, interest at 3.99%; with annual principal payments of $700,000 due through 1998.............. 700,000 1,400,000 700,000 1,400,000 Industrial revenue bonds, interest ranging from 4.24% to 4.28% in 1994 and 4.28% in 1995; with annual principal payments of $480,000 due through 1998.................. 800,000 2,475,000 480,000 960,000 Industrial revenue bonds, interest at 5.11%; with quarterly principal payments varying from $320,000 to $395,000 due through 2010..... -- -- 320,000 4,880,000 Note payable, interest at prime plus 1.75%; with quarterly principal payments of $62,500 due through 1998.............. 250,000 688,000 -- -- Other, interest ranging from 2.0% to 3.0%; due through 2004.......................... 490,000 3,283,000 344,000 2,297,000 ---------- ------------ ----------- ------------ Total long-term debt........... $8,558,000 $144,750,000 $11,844,000 $319,380,000 ========== ============ =========== ============
In connection with the Recapitalization in 1993, $100,000,000 in aggregate principal amount of senior subordinated debentures were issued in a private placement. The senior subordinated debentures bore interest at the rate of 11 1/2% per annum, payable June 15 and December 15, and matured on June 15, 2005, unless redeemed prior to such date. The senior subordinated debentures were unsecured, general obligations of the Company, and were subordinated to all senior debt of the Company and its subsidiaries, including the senior secured financing F-40 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) facility. Payment of the principal and interest on the senior subordinated debentures was guaranteed by Acquisition. On December 1, 1995, $99,990,000 of the senior subordinated debentures were redeemed at a price of 109% of the aggregate principal amount, plus accrued interest, excluding $10,000 in principal amount which was not tendered in response to the offer. Payment of this outstanding debenture was made on February 22, 1996. In connection with the Recapitalization, the Company repaid, at par, all $27,500,000 in aggregate principal amount of the senior variable rate notes; repaid, at par, all $50,000,000 in aggregate principal amount of the 12 3/4% senior notes; repaid, at par, all $45,000,000 in aggregate principal amount of the 13 1/2% senior subordinated notes; and repaid, at par, $25,000,000 in aggregate principal amount (of the $40,000,000 in aggregate principal amount outstanding) of the 14% subordinated debentures. The remaining $15,000,000 in aggregate principal amount of the 14% subordinated debentures were exchanged, at par, for 5,715 shares of Acquisition's Class A common stock; and all $15,000,000 in aggregate principal amount of Acquisition's 14 1/2% junior subordinated debentures were exchanged, at 90% of par, for 5,142 shares of Acquisition's Class A common stock. (See Note 10.) In connection with the Merger on October 31, 1995, new debt in the amount of $219,843,000 was issued. The existing term and revolving credit loans, in the amounts of $15,544,000 and $20,000,000, respectively, were redeemed. The Company wrote-off unamortized deferred financing costs, in the amount of $1,762,000, related to the redemption of these loans. In addition, the Company retired, ahead of scheduled maturities, certain industrial revenue bonds and other indebtedness totaling $5,981,000. Ampad, Acquisition and the Company entered into a Bank Credit Agreement with Bankers Trust Company as agent (the "Agent"), providing for term loans of $245.0 million and a revolving credit facility of $45.0 million. Loans under the Bank Credit Agreement are comprised of a multi-tranche facility with principal payments scheduled from 1996 through 2004 in the form of (i) a term loan facility (the "Tranche A Term Loan Facility") in the amount of $95.0 million ($25.2 million of which will be borrowed in January 1996), (ii) a second term loan facility (the "Tranche B Term Loan Facility") in the amount of $65.0 million, (iii) a third term loan facility (the "Tranche C Term Loan Facility") in the amount of $45 million, (iv) a fourth term loan facility (the "Tranche D Term Loan Facility", and together with the Tranche A Term Loan Facility, the Tranche B Term Loan Facility and the Tranche C Term Loan Facility, the "Term Loan Facilities") in the amount of $40.0 million, (v) a revolving credit facility (the "Revolving Credit Facility", and together with the Term Loan Facilities, the "Senior Bank Financing") in the amount of $45 million which includes a letter of credit sub-limit of $20.0 million and (vi) an IRB letter of credit facility in the amount of $13.4 million. Ampad and the Company used the Senior Bank Financing to provide funding necessary to consummate the acquisition and merger described in Note 1, with the Revolving Credit Facility being used for working capital needs. Indebtedness under the Bank Credit Agreement is guaranteed by Ampad, Acquisition and the Company and all current and future domestic subsidiaries of the Company and is secured by (i) a perfected security interest in substantially all the assets and property of the Company and its subsidiaries, and (ii) a first priority perfected pledge of all capital stock of the Company and its current subsidiaries. Indebtedness under the Bank Credit Agreement varies by tranche. The Tranche A Term Loan Facility is a five-year facility with quarterly principal payments scheduled from 1996 through 2000 and bears interest at a rate (at the Company's option) of (a) the Eurodollar Rate (as defined in the Bank Credit Agreement) plus 275.0 basis points less an interest reduction discount of 25 basis or 50 basis points if the Company meets certain targets for its coverage and leverage ratios (the "Interest Reduction Discount") or (b) the applicable base rate of Bankers Trust Company, which is the higher of 1/2 of 1% in excess of the Adjusted Certificate of Deposit Rate (as defined in the Bank Credit Agreement) and the prime lending rate announced from time to time by Bankers Trust Company (the "Base Rate") plus 175.0 basis points less the Interest Reduction Discount, if applicable. F-41 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Tranche B Term Loan Facility is a seven-year facility with quarterly principal payments scheduled in 2001 and 2002, with nominal quarterly payments prior to that time, and bears interest at a rate (at the Company's option) of (a) the Eurodollar Rate plus 337.5 basis points or (b) the Base Rate plus 237.5 basis points. The Tranche C Term Loan Facility is an eight-year facility with quarterly principal payments scheduled in 2003, with nominal annual principal payments prior to that time, and bears interest at a rate (at the Company's option) of (a) the Eurodollar Rate plus 375.0 basis points or (b) the Base Rate plus 275.0 basis points. The Tranche D Term Loan Facility is an eight and one-half year facility with quarterly principal payments scheduled for 2004, with nominal annual principal payments prior to that time and bears interest at a rate (at the Company's option) of (a) the Eurodollar Rate plus 400.0 basis points or (b) the Base Rate plus 300.0 basis points. The Revolving Credit Facility is a five-year facility bearing interest at a rate (at the Company's option) of (a) the Eurodollar Rate plus 275.0 basis points less the Interest Reduction Discount, if applicable. In addition, the Bank Credit Agreement provides for mandatory repayment, subject to certain expectations, of the Senior Bank Financing upon the occurrence of certain events including, but not limited to, asset sales, certain equity and debt issuances, insurance recovery events and the accumulation of excess cash (with a requirement to pay 50% of Excess Cash Flow (as defined therein) for the period ending on December 31, 1995 and 75% of Excess Cash Flow per annum thereafter), each subject to certain exceptions. The Revolving Credit Facility may be repaid and reborrowed. The Company is required to pay the lenders under the Bank Credit Agreement in the aggregate a commitment fee equal to 1/2 of 1% per annum, payable on a quarterly basis, on the daily average unused portion of the Aggregate Unutilized Commitment (as defined in the Bank Credit Agreement). The Company also is required to pay to the lenders participating in the Revolving Credit Facility letter of credit fees equal to the Applicable Eurodollar Margin (as defined in the Bank Credit Agreement) in effect as of such time for loans under the Revolving Credit Facility and to the lender issuing a letter of credit a facing fee of 0.25% on the average daily stated amount of each outstanding letter of credit issued by such lender and its customary administrative charges in connection with such letters of credit. The Bank Credit Agreement requires the Company to meet certain financial tests, including minimum levels of consolidated EBITDA (as defined therein), minimum interest coverage and maximum leverage ratio. The Bank Credit Agreement also contains covenants which, among other things, limit the incurrence of additional indebtedness, dividends, transactions with affiliates, asset sales, acquisitions, mergers, prepayment of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. The Bank Credit Agreement contains customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, ERISA, judgement defaults, failure of any guaranty or security agreement supporting the Bank Credit Agreement to be in full force and effect and change of control of Ampad. The Company and certain of its subsidiaries had letters of credit issued to guaranty the payment obligation due, as required, for industrial revenue bond financings. At December 31, 1994 and October 31, 1995, the amounts were $5,375,000 and $8,740,000, respectively. In addition, the Company had letters of credit issued for other than industrial revenue bond financings. As of December 31, 1994 and October 31, 1995, the amounts were $2,102,000 and $2,602,000, respectively. Certain manufacturing facilities of the Company were financed from the proceeds of industrial revenue bonds. Lease purchase and other financing arrangements, directly or indirectly, with the respective industrial development authorities provide that the Company may purchase the manufacturing facilities at any time during the lease or financing term. At December 31, 1994 and October 31, 1995, the net book value of manufacturing facilities acquired pursuant to these lease purchase and other financing arrangements was approximately $16,122,000 and $12,162,000, respectively. Such assets are included within property, plant and equipment. F-42 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Payments of the principal and interest on the industrial revenue bonds are guaranteed by one or more of the following: Acquisition, the Company or a wholly-owned subsidiary. The aggregate amount of long-term debt, including industrial revenue bonds, maturing during each of the years in the five-year period subsequent to October 31, 1995 is as follows: 1996, $11,844,000; 1997, $16,785,000; 1998, $21,793,000; 1999, $27,697,000; 2000, $6,003,000 and $247,102,000 thereafter. (9) NOTES PAYABLE TO SELLING STOCKHOLDERS On October 31, 1995, in conjunction with the Merger, Acquisition issued notes payable, due January 3, 1996, bearing interest at 1%, to certain selling stockholders who elected to defer payment, for an aggregate of 4,383 shares of common stock, until 1996 rather than on the Merger date. Acquisition issued letters of credit to guaranty the payment obligation due. Subsequent to October 31, 1995, the notes were refinanced on a long term basis; and therefore, the notes have been reflected as a non-current liability on the October 31, 1995 financial statements. (10) STOCKHOLDERS' EQUITY (DEFICIENCY) Class A Common Stock: In 1993, in connection with the Recapitalization, Acquisition's Certificate of Incorporation was amended to authorize the issuance of 11,619 shares, par value $.01 per share, of Acquisition's Class A common stock. The Class A common stock is identical to Acquisition's common stock, except for a preference on liquidation equal to $2,625 per share, the initial purchase price thereof, and is convertible on a share-for-share basis into common stock. On May 13, 1993, in connection with the Recapitalization, 762 shares were issued to the Chief Executive Officer of Acquisition and the Company, for $2,000,000; 5,715 shares were exchanged for $15,000,000 in aggregate principal amount of the 14% subordinated debentures due 1998, at par; and 5,142 shares were exchanged for $15,000,000 in aggregate principal amount of the 14 1/2% junior subordinated debentures due 1998, at 90% of par. (See Note 8). Common Stock: On December 29, 1986, in connection with the 1986 recapitalization, holders of the common stock of Holdings received an aggregate of $100,000,000, or $100,000 per share, resulting in an excess of cost over book value of the net assets acquired in the amount of $95,253,000. This was treated as a distribution to stockholders resulting in a reduction of stockholders' equity. Stock Option Plan: In March, 1987, the Board of Directors adopted a Stock Option Plan which provides for the granting of stock options for shares of Acquisition's common stock to key employees of the Company and its subsidiaries who are responsible for managing the operations of the Company and its subsidiaries. The Stock Option Plan provided for an aggregate of 1,722 shares of common stock to be available for stock grants. The exercise price for the options was $1,000 per share, which was the fair value of the stock on the date of grant. In May, 1993, in connection with the Recapitalization, the Stock Option Plan was amended, making 1,243 shares of Acquisition's common stock available for grant. Of these shares, 688 were granted to key employees of the Company and its subsidiaries in 1993 and the remaining 555 shares were granted in 1995. The exercise price of these options was $1,312.50 per share, which represented one half of the negotiated per share price for F-43 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the Class A common stock issued pursuant to the Recapitalization. The aggregate compensation expense related to the 1,243 shares granted of $1,631,000 was being amortized over the period January, 1994 through May, 1998. As a result of the change in control of Acquisition resulting from the Merger, the stock options, which were vesting over a period of five years, became 100% vested. As a result, in accordance with the Emerging Issues Task Force 85-45 "Business Combinations: Settlement of Stock Options and Awards," Acquisition recorded compensation expense of $9,544,000 from continuing operations for the ten month period ended October 31, 1995. A summary of transactions under the plan is as follows:
DECEMBER 31, ------------- OCTOBER 31, 1993 1994 1995 ------ ------ ----------- Outstanding and exercisable, January 1............. 1,317 2,283 2,283 Granted at $1,000 per share........................ 278 -- -- Granted at $1,312.50 per share..................... 688 -- 555 Exercised at $1,000 per share...................... -- -- (1,595) Exercised at $1,312.50 per share................... -- -- (1,243) ------ ------ ------ Outstanding and exercisable........................ 2,283 2,283 -- ====== ====== ====== Available for grant................................ 555 555 -- ====== ====== ======
(11) COMMITMENTS AND CONTINGENCIES The Company is involved in various litigation incidental to the conduct of its business, the outcome of which is not expected to be material to the Company's financial position or results of operations. Change in Control Severance Compensation Agreements: Prior to the Merger, the Company entered into change in control severance compensation agreements with certain of its executives. These agreements are effective for thirty six months after the Merger and provide for income and benefit protection upon termination of employment (as defined). The Company believes that the maximum amount of the severance payments that could be paid will not exceed $11 million based upon current compensation. This liability has been assumed by Ampad. Leases: Future minimum payments under operating leases, primarily for buildings and equipment relating to continuing operations, consisted of the following at October 31, 1995:
AMOUNTS ----------- 1996.......................................................... $ 2,001,000 1997.......................................................... 1,872,000 1998.......................................................... 1,711,000 1999.......................................................... 1,172,000 2000.......................................................... 956,000 Later years................................................... 6,474,000 ----------- Total minimum lease payments.................................. $14,186,000 ===========
Rent expense from continuing operations was $1,565,000 and $2,358,000 for the years ended December 31, 1993 and 1994, respectively and $1,552,000 for the ten months ended October 31, 1995. F-44 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (12) EMPLOYEE BENEFIT PLANS On March 11, 1992, the Board of Directors authorized the termination of the Company's defined benefit plan covering certain salaried and non-union employees. The termination was effective June 30, 1992, and all participants in the plan became fully vested as of that date. As of October 31, 1995, the initial payout for the account of each participant, using current U.S. Government approved discount rates, has been made. Excess assets are to be distributed based upon a formula adopted by the plan and approved by the Internal Revenue Service. These payments will commence in early 1996 and will consist of lump-sum payments. It is anticipated that this distribution will be substantially completed by June 30, 1996. The Company established a voluntary 401(k) savings plan covering certain salaried and non-union employees effective July 1, 1992. The Company's matching contribution, based on employee contributions, is vested after five years of participation. The Company's matching contribution from continuing operations amounted to $79,000 and $146,000 for the years ended December 31, 1993 and 1994, respectively, and $171,000 for the ten months ended October 31, 1995. (13) EXECUTIVE INCENTIVE COMPENSATION PLAN The Company's executive incentive compensation plan, which commenced in 1983, provides for incentive awards to certain key executives of the Company and its subsidiaries. The plan is administered by the Board of Directors. At the end of each year during the life of the plan, the Board will make cash awards based upon the attainment of annual predefined operating profit objectives. Awards under the plan are charged to operations in the year earned. For the ten months ended October 31, 1995, $600,000 was charged to continuing operations. Attainment of the annual predefined objective will be based on results of operations for the twelve months ended December 31, 1995. In 1993 and 1994, awards of $650,000 and $1,010,000 were charged to continuing operations, respectively. (14) STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information from continuing operations is as follows:
YEARS ENDED ------------------------- TEN MONTHS ENDED DECEMBER 31, DECEMBER 31, OCTOBER 31, 1993 1994 1995 ------------ ------------ ----------- Cash paid for: Interest............................. $ 18,883,000 $ 16,298,000 $10,372,000 Income taxes......................... $ 2,332,000 $ 6,725,000 $ 5,906,000
The Consolidated Statement of Cash Flows for 1993 excludes the effect of certain non-cash financing activities related to the Recapitalization. (See Notes 8 and 10.) The following is a summary of the non-cash effects of this transaction. Decrease in long-term debt.................................... $(30,000,000) Increase in Class A common stock.............................. 1,000 Increase in additional paid-in capital........................ 29,999,000 ------------ $ -- ============
F-45 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Consolidated Statement of Cash Flows for 1995 excludes the effect of certain non-cash financing activities related to the Merger. The following is a summary of the non-cash effects of this transaction. Increase in treasury stock.......................................... $81,000 Decrease in additional paid-in capital.............................. (81,000) ------- $ -- =======
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, Trade Accounts Receivable, Trade Accounts Payable: The carrying amount of cash, trade accounts receivable and trade accounts payable approximates fair value because of the short maturity of these instruments. As is customary for the industry, the Company performs ongoing credit evaluations of its customers financial condition and generally requires no collateral. Long-term Debt: At October 31, 1995, the estimated fair value of the Company's term loans was $219,843,000, which was the carrying amount of these long-term debt instruments. The estimated fair value of the Company's term loans was based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's senior subordinated debentures was $109,000,000, which was the redemption price, (See Note 8), while the carrying value of these long-term debt instruments was $100,000,000. It was not practical to estimate the fair value of the Company's industrial revenue bonds which are not publicly traded, or considered comparable to any financial instruments currently in the market. As of October 31, 1995, these industrial revenue bonds have a carrying amount of $8,740,000, including $1,500,000 which is currently due. The bonds have interest rates ranging from 3.99% to 5.11%. The bonds are due on varying dates through the year 2010. Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (16) DISCONTINUED OPERATIONS In December, 1995, the management of Ampad made a decision to sell the Personalizing segment of the business. The Company expects to sell the discontinued operations at a gain within one year. Accordingly, the consolidated financial statements have been restated to report separately the net assets and operating results of this segment. The Company's prior years operating results have been restated to reflect continuing operations. The Company allocated interest to the discontinued operations in the amounts of $5,837,000, $4,823,000 and $2,130,000 for the years ended December 31, 1993 and 1994 and the ten months ended October 31, 1995, respectively. Consolidated interest that is not attributable to specific operations of the Company was allocated based on the ratio of net assets of the discontinued operations to the sum of total net assets of the consolidated company plus consolidated debt that is not attributable to specific operations of the Company or debt of the discontinued operations that will be assumed by a buyer. F-46 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (17) GUARANTOR SUBSIDIARIES OF 13% SENIOR SUBORDINATED NOTES DUE NOVEMBER 15, 2005 On December 1, 1995, the Company sold, at par, $200 million of 13% Senior Subordinated Notes due November 15, 2005 (the "13% Notes"). The 13% Notes are guaranteed by all of the Company's principal subsidiaries. The following financial information presents condensed consolidating financial statements for (i) the Company only ("Parent"); (ii) the guaranteeing subsidiaries on a combined basis ("Guarantor Subsidiaries") and (iii) the Company on a consolidated basis. The following statements do not include WR Acquisition, Inc., which is not a party to the 13% Senior Subordinated Notes agreement. The guarantor subsidiaries include the discontinued operations prior to allocation of interest and elimination of management fee. F-47 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) WILLIAMHOUSE-REGENCY OF DELAWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS ($000'S OMITTED)
WILLIAMHOUSE- WILLIAMHOUSE REGENCY OF REGENCY OF DELAWARE, INC. GUARANTOR INTERCOMPANY DELAWARE, INC. (PARENT) SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ -------------- DECEMBER 31, 1994 CURRENT ASSETS Cash.................... $ 138 $ 887 $ -- $ 1,025 Accounts receivable, net.................... 15,639 27,582 -- 43,221 Inventories............. 21,497 24,177 (1,716) 43,958 Prepaid expenses........ 478 493 -- 971 -------- -------- -------- -------- Total current assets.. 37,752 53,139 (1,716) 89,175 -------- -------- -------- -------- Property, plant and equipment.............. 55,467 110,018 -- 165,485 Less accumulated depre- ciation and amortiza- tion................... 25,956 60,264 -- 86,220 -------- -------- -------- -------- Net property, plant and equipment.............. 29,511 49,754 -- 79,265 -------- -------- -------- -------- Advances to and receivable from Acquisition............ 184,329 -- -- 184,329 Advances to and investment in subsidiaries........... 16,533 -- (16,533) -- Advances to Parent...... -- 38,057 (38,057) -- Deferred financing costs, less accumulated amortization........... 5,978 604 -- 6,582 Other assets............ (876) 336 2,275 1,735 -------- -------- -------- -------- Total assets.......... $273,227 $141,890 $(54,031) $361,086 ======== ======== ======== ======== CURRENT LIABILITIES Accounts payable and other current liabilities............ $ 14,207 $ 24,867 $ (103) $ 38,971 Current installments of long-term debt......... 6,726 3,630 -- 10,356 -------- -------- -------- -------- Total current liabilities.......... 20,933 28,497 (103) 49,327 -------- -------- -------- -------- Non-current liabilities............ 2,179 -- -- 2,179 Deferred tax liabilities--net....... 3,202 1,942 (428) 4,716 Long-term debt (less current installments).. 139,120 12,899 -- 152,019 Advances from Parent.... -- 10,399 (10,399) -- Advances from subsidiaries........... 38,057 -- (38,057) -- Stockholders' equity (deficiency) Common stock............ 845 659 (1,004) 500 Additional paid-in capital................ 67,931 56,523 (1,936) 122,518 Retained earnings....... 960 30,971 (2,104) 29,827 -------- -------- -------- -------- Total stockholders' equity (deficiency).. 69,736 88,153 (5,044) 152,845 -------- -------- -------- -------- Total liabilities and stockholders' equity (deficiency)......... $273,227 $141,890 $(54,031) $361,086 ======== ======== ======== ========
F-48 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) WILLIAMHOUSE-REGENCY OF DELAWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS ($000'S OMITTED)
WILLIAMHOUSE- WILLIAMHOUSE REGENCY OF REGENCY OF DELAWARE, INC. GUARANTOR INTERCOMPANY DELAWARE, INC. (PARENT) SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ -------------- OCTOBER 31, 1995 CURRENT ASSETS Cash.................... $ (719) $ 758 $ -- $ 39 Accounts receivable, net.................... 21,920 17,397 103 39,420 Inventories............. 23,755 24,218 (2,742) 45,231 Prepaid expenses........ 951 3,995 -- 4,946 -------- -------- -------- -------- Total current assets.. 45,907 46,368 (2,639) 89,636 -------- -------- -------- -------- Property, plant and equipment.............. 61,127 102,932 -- 164,059 Less accumulated depre- ciation and amortiza- tion................... 28,871 55,880 -- 84,751 -------- -------- -------- -------- Net property, plant and equipment.............. 32,256 47,052 -- 79,308 -------- -------- -------- -------- Due from Ampad.......... 54,306 -- -- 54,306 Advances to and receivable from Acquisition............ 158,751 -- -- 158,751 Advances to and investment in subsidiaries........... 16,050 -- (16,050) -- Advances to Parent...... -- 48,662 (48,662) -- Deferred financing costs, less accumulated amortization........... 22,928 445 -- 23,373 Other assets............ 1,475 423 2,275 4,173 Purchase price for the common stock of WR Acquisition, Inc. and certain related costs.................. 147,854 -- -- 147,854 -------- -------- -------- -------- Total assets.......... $479,527 $142,950 $(65,076) $557,401 ======== ======== ======== ======== CURRENT LIABILITIES Accounts payable and other current liabili- ties................... $ 25,812 $ 17,463 $ -- $ 43,275 Current installments of long-term debt......... 10,662 2,767 -- 13,429 -------- -------- -------- -------- Total current liabili- ties................. 36,474 20,230 -- 56,704 -------- -------- -------- -------- Non-current liabili- ties................... 2,019 -- -- 2,019 Deferred tax liabilities--net....... (2,444) 8,409 (786) 5,179 Long-term debt (less current installments).. 317,020 6,611 -- 323,631 Advances from Parent.... -- 3,416 (3,416) -- Advances from subsidiar- ies.................... 48,662 -- (48,662) -- Stockholders' equity(deficiency) Common stock............ 845 662 (1,007) 500 Additional paid-in capi- tal.................... 83,529 61,398 (8,434) 136,493 Retained earnings....... (6,578) 42,224 (2,771) 32,875 -------- -------- -------- -------- Total stockholders' equity (deficiency).. 77,796 104,284 (12,212) 169,868 -------- -------- -------- -------- Total liabilities and stockholders' equity (deficiency)......... $479,527 $142,950 $(65,076) $557,401 ======== ======== ======== ========
F-49 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) WILLIAMHOUSE-REGENCY OF DELAWARE, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS ($000'S OMITTED)
WILLIAMHOUSE- WILLIAMHOUSE- REGENCY OF REGENCY OF DELAWARE, INC. GUARANTOR INTERCOMPANY DELAWARE, INC. (PARENT) SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ -------------- YEAR ENDED DECEMBER 31, 1993 Net sales............... $ 79,301 $215,048 $ -- $294,349 Cost of sales......... 50,114 140,095 144 190,353 -------- -------- ------- -------- Gross profit............ 29,187 74,953 (144) 103,996 Selling, general and administrative ex- penses............... 24,553 53,241 -- 77,794 -------- -------- ------- -------- Operating income........ 4,634 21,712 (144) 26,202 Management fee charged by Parent............ (8,491) 8,491 -- -- Interest expense...... 18,718 1,622 -- 20,340 Interest income....... (319) (311) -- (630) -------- -------- ------- -------- Earnings before taxes on income................. (5,274) 11,910 (144) 6,492 Provision for taxes on income............... (1,689) 3,910 50 2,271 -------- -------- ------- -------- Net earnings............ $ (3,585) $ 8,000 $ (194) $ 4,221 ======== ======== ======= ======== YEAR ENDED DECEMBER 31, 1994 Net sales............... $135,073 $232,979 $ -- $368,052 Cost of sales......... 94,372 154,079 154 248,605 -------- -------- ------- -------- Gross profit............ 40,701 78,900 (154) 119,447 Selling, general and administrative ex- penses............... 29,229 56,893 -- 86,122 -------- -------- ------- -------- Operating income........ 11,472 22,007 (154) 33,325 Management fee charged by Parent............ (5,486) 5,486 -- -- Interest expense...... 15,946 1,311 -- 17,257 Interest income....... (253) (71) -- (324) -------- -------- ------- -------- Earnings before taxes on income................. 1,265 15,281 (154) 16,392 Provision for taxes on income............... 103 5,754 (54) 5,803 -------- -------- ------- -------- Net earnings............ $ 1,162 $ 9,527 $ (100) $ 10,589 ======== ======== ======= ======== TEN MONTHS ENDED OCTOBER 31, 1995 Net sales............... $109,849 $201,986 $ -- $311,835 Cost of sales......... 77,442 130,496 1,026 208,964 -------- -------- ------- -------- Gross profit............ 32,407 71,490 (1,026) 102,871 Selling, general and administrative ex- penses............... 27,243 45,890 -- 73,133 Compensation expense relating to stock op- tions... 8,837 1,886 -- 10,723 -------- -------- ------- -------- Operating income........ (3,673) 23,714 (1,026) 19,015 Management fee charged by Parent............ (4,444) 4,444 -- -- Interest expense...... 13,360 720 -- 14,080 Interest income....... (117) (8) -- (125) -------- -------- ------- -------- Earnings before taxes on income................. (12,472) 18,558 (1,026) 5,060 Provision for taxes on income............... (3,868) 6,239 (359) 2,012 -------- -------- ------- -------- Net earnings............ $ (8,604) $ 12,319 $ (667) $ 3,048 ======== ======== ======= ========
F-50 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) WILLIAMHOUSE-REGENCY OF DELAWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS ($000'S OMITTED)
WILLIAMHOUSE- WILLIAMHOUSE- REGENCY OF REGENCY OF DELAWARE, INC. GUARANTOR DELAWARE, INC. (PARENT) SUBSIDIARIES CONSOLIDATED -------------- ------------ -------------- DECEMBER 31, 1993 Net cash provided by operating activities........................ $ 1,062 $ 9,065 $ 10,127 --------- -------- --------- Cash flows from investing activities Additions to property, plant and equipment--net.................... (2,344) (2,377) (4,721) Acquisitions of inventory and machinery and equipment........... (9,728) (693) (10,421) --------- -------- --------- Cash used for investing activities...................... (12,072) (3,070) (15,142) --------- -------- --------- Cash flows from financing activities Repayments of long-term debt....... (169,666) (3,977) (173,643) Proceeds from Recapitalization..... 152,500 -- 152,500 Proceeds from long-term debt....... 9,597 -- 9,597 Additions to deferred financing costs............................. (7,374) -- (7,374) Advances from Parent............... 2,387 14,413 16,800 Advances from (to) subsidiaries.... 15,131 (15,131) -- --------- -------- --------- Cash provided by (used for) financing activities............ 2,575 (4,695) (2,120) --------- -------- --------- (Decrease) increase in cash and cash equivalents.................. (8,435) 1,300 (7,135) Cash and cash equivalents at beginning of period............... 12,672 23 12,695 --------- -------- --------- Cash and cash equivalents at end of period............................ $ 4,237 $ 1,323 $ 5,560 ========= ======== ========= DECEMBER 31, 1994 Net cash provided by operating ac- tivities.......................... $ 9,140 $ 16,829 $ 25,969 --------- -------- --------- Cash flows from investing activi- ties Additions to property, plant and equipment--net.................... (3,404) (2,829) (6,233) Acquisitions of inventory and ma- chinery and equipment............. (1,293) (2,831) (4,124) --------- -------- --------- Cash used for investing activi- ties............................ (4,697) (5,660) (10,357) --------- -------- --------- Cash flows from financing activi- ties Repayments of long-term debt....... (33,098) (3,953) (37,051) Proceeds from long-term debt....... 16,600 1,000 17,600 Additions to deferred financing costs............................. (177) (622) (799) Advances from (to) Parent.......... 7,701 (7,598) 103 Advances from (to) subsidiaries.... 432 (432) -- --------- -------- --------- Cash used for financing activi- ties............................ (8,542) (11,605) (20,147) --------- -------- --------- Decrease in cash and cash equiva- lents............................. (4,099) (436) (4,535) Cash and cash equivalents at begin- ning of period.................... 4,237 1,323 5,560 --------- -------- --------- Cash and cash equivalents at end of period............................ $ 138 $ 887 $ 1,025 ========= ======== =========
F-51 WR ACQUISITION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) WILLIAMHOUSE-REGENCY OF DELAWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS ($000'S OMITTED)
WILLIAMHOUSE- WILLIAMHOUSE- REGENCY OF REGENCY OF DELAWARE, INC. GUARANTOR DELAWARE, INC. (PARENT) SUBSIDIARIES CONSOLIDATED -------------- ------------ -------------- OCTOBER 31, 1995 Net cash provided by operating ac- tivities........................... $ 1,117 $ 15,532 $ 16,649 --------- -------- --------- Cash flows from investing activities Additions to property, plant and equipment--net..................... (5,735) (2,821) (8,556) Funds held for construction......... (2,633) -- (2,633) --------- -------- --------- Cash used for investing activi- ties............................. (8,368) (2,821) (11,189) --------- -------- --------- Cash flows from financing activities Repayments of long-term debt........ (43,248) (7,151) (50,399) Proceeds from long-term debt........ 5,200 -- 5,200 Additions to deferred financing costs.............................. (19,679) -- (19,679) Proceeds from exercise of stock op- tions.............................. 2,701 -- 2,701 Proceeds from issuance of debt to effect Merger...................... 219,843 -- 219,843 Purchase price for the common stock of WR Acquisition, Inc. and certain related expenses................... (147,854) -- (147,854) Advances to Ampad................... (54,306) -- (54,306) Investment in trust................. (34,518) -- (34,518) Proceeds from sale of accounts re- ceivable........................... 35,086 11,902 46,988 Advances from (to) Parent........... 36,183 (10,605) 25,578 Advances from (to) subsidiaries..... 6,986 (6,986) -- --------- -------- --------- Cash provided by (used for) fi- nancing activities............... 6,394 (12,840) (6,446) --------- -------- --------- Decrease in cash and cash equiva- lents.............................. (857) (129) (986) Cash and cash equivalents at begin- ning of period..................... 138 887 1,025 --------- -------- --------- Cash and cash equivalents at end of period............................. $ (719) $ 758 $ 39 ========= ======== =========
F-52 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of American Pad & Paper Company of Delaware, Inc. (successor to Ampad Corporation) We have audited the accompanying statements of net sales and cost of sales of the Globe-Weis Office Products Group product lines purchased by American Pad & Paper Company of Delaware, Inc. (successor to Ampad Corporation) from American Trading and Production Corporation for the twelve months ended July 31, 1995 and the nine months ended July 31, 1994. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of net sales and cost of sales are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in these statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of these statements. We believe that our audits provide a reasonable basis for our opinion. The accompanying historical statements were prepared for the purposes of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the registration statement on Form S-1 of American Pad & Paper Company) as described in Note 3 and are not intended to be a complete presentation of the results of operations of the product lines purchased from American Trading and Production Corporation. In our opinion, the historical statements referred to above present fairly, in all material respects, the net sales and cost of sales of the product lines acquired, as described in Note 2, for the twelve months ended July 31, 1995 and the nine months ended July 31, 1994, in conformity with generally accepted accounting principles. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Dallas, Texas March 22, 1996 F-53 GLOBE-WEIS (OFFICE PRODUCTS GROUP PRODUCT LINES ACQUIRED FROM AMERICAN TRADING AND PRODUCTION CORPORATION) STATEMENTS OF NET SALES AND COST OF SALES
NINE MONTHS TWELVE MONTHS ENDED ENDED JULY 31, 1994 JULY 31, 1995 ------------- ------------- (IN THOUSANDS) Net sales........................................... $43,762 $60,047 Cost of sales....................................... 37,754 54,706 ------- ------- Gross profit........................................ $ 6,008 $ 5,341 ======= =======
The accompanying notes are an integral part of these statements. F-54 GLOBE-WEIS (OFFICE PRODUCTS GROUP PRODUCT LINES ACQUIRED FROM AMERICAN TRADING AND PRODUCTION CORPORATION) NOTES TO STATEMENTS OF NET SALES AND COST OF SALES 1. DESCRIPTION OF BUSINESS Globe-Weis is one of five brand names marketed by the Office Products Group of American Trading and Production Corporation (ATAPCO). The Globe-Weis brand comprises file folders, hanging file folders, expandables, file guides, storage cases and trays. The products are distributed through the large mass merchant retailers, office products superstores, office products wholesalers and contract stationers. 2. ACQUISITION On August 16, 1995, the inventory and certain equipment of the file folder and hanging file folder product lines of Globe-Weis were acquired by Ampad Corporation ("Ampad") in a transaction accounted for as a purchase by Ampad. Ampad is the predecessor to American Pad & Paper Company of Delaware, Inc. (hereafter referred to as the "Company") as a result of Ampad's merger with and into the Company effective October 31, 1995. The Company also entered into a license agreement with ATAPCO for use of the Globe-Weis name and other trade names. The acquired product lines are hereafter referred to as the Globe-Weis assets. Sales of the acquired product lines represented approximately 59% of the sales of the Globe-Weis brand. The Globe-Weis product lines not acquired remain an ongoing business of ATAPCO. 3. BASIS OF PRESENTATION The accompanying statements of net sales and cost of sales were prepared for the purpose of complying with the rules and regulations of the Securities Exchange Commission ( SEC) (for the inclusion in the registration statement on Form S-1 of the Company's parent American Pad & Paper Company). The acquisition of the Globe-Weis assets constituted a significant acquisition to the Company and its parent pursuant to regulations of the SEC. ATAPCO did not maintain separate, complete accounting records for each of the product lines within the Office Products Group, nor did ATAPCO allocate general and administrative expenses or selling and marketing expenses to individual product lines. Accordingly, complete financial statements of the acquired Globe-Weis assets are not presented. However, in accordance with approval from the SEC staff, audited net sales and cost of sales information is presented for the twelve months ended July 31, 1995 (month-end closest to acquisition date) and the nine months ended July 31, 1994. The statements of net sales and cost of sales include only those net sales and cost of sales directly related to the production and distribution of the acquired product lines. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Globe-Weis recognized revenue from the sale of products upon shipment to the customer. Costs of sales are recorded when the related revenue is recognized. Concentration of Customers During the twelve months ended July 31, 1995, three customers accounted for 79% of net sales. Three customers accounted for 81% of net sales during the nine months ended July 31, 1994. Cost of Sales Cost of sales were determined at standard cost, which approximates actual first-in, first-out cost in accordance with generally accepted accounting principles. Standard cost for raw material inventory includes material, freight, duties and brokerage fees. Standard cost for work in process and finished goods inventories include material, direct labor and overhead with costs allocated by identifiable activity. Revaluations of standard costs were amortized to cost of sales based on inventory turnover. Obsolescence and other variances to standard cost were charged to cost of sales in the period incurred. F-55 REPORT OF INDEPENDENT AUDITORS The Board of Directors Niagara Envelope Company, Inc. We have audited the accompanying balance sheets of Niagara Envelope Company, Inc. as of December 31, 1995 and 1994 and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Niagara Envelope Company, Inc. at December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Ernst & Young LLP Buffalo, New York February 16, 1996 F-56 NIAGARA ENVELOPE COMPANY, INC. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31 ---------------- 1994 1995 ------- ------- ASSETS Current assets: Cash........................................................ $ 126 $ 50 Accounts receivable: Trade..................................................... 10,676 10,936 Other..................................................... 84 48 ------- ------- 10,760 10,984 Inventory (Note 2).......................................... 11,519 10,710 Note receivable--shareholder (Note 3)....................... 120 131 Prepaid income taxes........................................ 32 75 Prepaid expenses and other assets........................... 150 132 Deferred taxes.............................................. 278 216 ------- ------- Total current assets.................................... 22,985 22,298 Note receivable--shareholder (Note 3)........................ 441 312 Property, plant and equipment (Note 4): Land........................................................ 34 34 Buildings................................................... 5,600 5,649 Leasehold improvements...................................... 1,078 1,052 Machinery and equipment..................................... 13,116 13,749 Office furniture and equipment.............................. 4,189 3,948 Construction in progress.................................... 15 490 ------- ------- 24,032 24,922 Less accumulated depreciation and amortization.............. 13,259 13,951 ------- ------- Net property, plant and equipment............................ 10,773 10,971 Intangible pension asset..................................... 494 316 Restricted temporary cash investments (Note 7)............... 74 6 Investment in joint venture (Note 5)......................... 161 347 Other assets.............................................. 588 628 ------- ------- Total assets............................................ $35,516 $34,878 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade..................................... $ 5,902 $ 6,093 Accrued expenses (Note 8)................................... 2,338 2,044 Accrued expenses for plant closure and relocation costs (Note 14).................................................. 137 210 Current portion--long-term debt (Note 7).................... 410 618 ------- ------- Total current liabilities................................. 8,787 8,965 Long-term debt (Note 7)...................................... 14,304 8,747 Accrued pension liability (Note 10).......................... 50 562 Deferred compensation........................................ 811 917 Deferred taxes............................................... 354 439 ------- ------- Total liabilities....................................... 24,306 19,630 Shareholders' equity (Note 12): Capital stock: Preferred, no par value: Class A, authorized 20,000 shares, issued and outstanding 500 shares.............................................. 500 500 Common, no par value: Class A, voting, authorized 12,000 shares, issued and outstanding 5,163 shares................................ 52 52 Class B, non-voting, authorized 12,000 shares, issued and outstanding 5,780 shares................................ 58 58 Additional paid-in capital.................................. 361 361 Retained earnings........................................... 10,249 14,780 Accumulated pension adjustment.............................. (10) (503) ------- ------- Total shareholders' equity.............................. 11,210 15,248 ------- ------- Total liabilities and shareholders' equity.............. $35,516 $34,878 ======= =======
See accompanying notes. F-57 NIAGARA ENVELOPE COMPANY, INC STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 -------------------------- 1993 1994 1995 ------- ------- -------- Sales............................................... $82,901 $84,005 $105,859 Cost of goods sold.................................. 66,817 65,910 82,192 ------- ------- -------- Gross profit........................................ 16,084 18,095 23,667 Distribution expenses............................... 5,975 6,055 6,001 Selling and marketing expenses...................... 4,084 3,614 3,934 General and administrative expenses................. 5,210 5,218 5,251 ------- ------- -------- Income from operations.............................. 815 3,208 8,481 Other income (expense): Interest income................................... 55 125 58 Interest expense.................................. (693) (953) (922) Management fees................................... -- -- 80 (Loss) gain on sale of equipment.................. (1) (37) 164 Equity in earnings of joint venture............... -- 61 186 Plant closure and relocation costs................ (1,097) (682) (336) Pension curtailment............................... -- -- (157) Other............................................. (167) (373) (213) ------- ------- -------- (1,903) (1,859) (1,140) ------- ------- -------- Income before income taxes.......................... (1,088) 1,349 7,341 Income tax provision: Current--Federal.................................. 17 154 2,287 -- State................................... 5 48 328 Deferred.......................................... (335) 343 147 ------- ------- -------- (313) 545 2,762 ------- ------- -------- Net (loss) income................................... (775) 804 4,579 Retained earnings at beginning of year.............. 10,316 9,493 10,249 ------- ------- -------- 9,541 10,297 14,828 Dividends declared on preferred stock ($95 per share).................................... 48 48 48 ------- ------- -------- Retained earnings at end of year.................... $ 9,493 $10,249 $ 14,780 ======= ======= ========
See accompanying notes. F-58 NIAGARA ENVELOPE COMPANY, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ---------------------- 1993 1994 1995 ------ ------ ------ OPERATING ACTIVITIES Net Income........................................... $ (775) $ 804 $4,579 Adjustments to reconcile net income to net cash pro- vided by operating activities: Depreciation and amortization...................... 1,374 1,328 1,486 Deferred taxes..................................... (335) 343 147 (Gain) loss on sale of equipment................... 1 37 (164) Equity in earnings of joint venture................ -- (61) (186) Changes in: Accounts receivable.............................. (164) (1,392) (223) Inventory........................................ 801 (746) 809 Prepaid expenses and other assets................ 230 83 18 Other assets..................................... (13) (120) (40) Prepaid income taxes............................. (446) 415 (44) Accounts payable, trade.......................... 916 1,053 191 Accrued expenses................................. 392 107 (221) Accrued pension liability net of non-cash changes......................................... 22 (204) 197 Deferred compensation............................ (27) (46) 106 ------ ------ ------ TOTAL ADJUSTMENTS...................................... 2,751 797 2,076 ------ ------ ------ NOT CASH PROVIDED BY OPERATING ACTIVITIES.............. 1,976 1,601 6,655 INVENTING ACTIVITIES (Purchase) sale of temporary cash investments........ (2,003) 1,929 68 Net proceeds from notes receivable--shareholder...... 86 118 119 Purchase of property and equipment................... (4,126) (2,979) (1,685) Proceeds from sale of equipment...................... 2 8 164 Investment in joint venture.......................... -- (100) -- ------ ------ ------ Net cash used in investing activities................ (6,041) (1,024) (1,334) FINANCING ACTIVITIES Proceeds from term loan agreements................... -- 3,000 -- Repayment under term loan agreements................. (95) (9,102) (109) (Repayment) net proceeds from revolving credit facil- ity................................................. -- 7,160 (4,940) (Repayment) of demand note payable................... 156 (1,576) -- Proceeds from industrial revenue bond................ 4,500 -- -- Repayment under industrial revenue bond ............. -- (300) (300) Bond issuance costs.................................. (295) -- -- Dividends............................................ (48) (48) (48) ------ ------ ------ Net cash provided by (used in) financing activities.. 4,218 (866) (5,397) ------ ------ ------ Net increase (decrease) in cash...................... 153 (289) (76) Cash at beginning of year............................ 262 415 126 ------ ------ ------ Cash at end of year.................................. $ 415 $ 126 $ 50 ====== ====== ====== Cash paid (received) during the period for: Income taxes....................................... $ 698 $ (213) $2,734 ====== ====== ====== Interest........................................... $ 687 $ 886 $1,005 ====== ====== ====== Non-cash activities: (Decrease) increase in intangible pension asset.... $ (53) $ 22 $ (178) ====== ====== ====== Increase (decrease) in accumulated pension adjust- ment.............................................. $ 73 $ (242) $ 493 ====== ====== ======
See accompanying notes. F-59 NIAGARA ENVELOPE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1995 (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Niagara Envelope Company, Inc. (the Company) manufactures and distributes envelopes. The Company sells its products primarily to paper wholesalers located in the United States. The Company has operating divisions in Buffalo, New York; Chicago, Illinois; Dallas, Texas and Denver, Colorado, and a warehouse in Seattle, Washington. The Company also has a joint venture located in Hattiesburg, Mississippi. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amount of revenues and expenses during the year. Actual results could differ from those estimates. Inventory Inventory is stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for paper raw material, work in process, and finished goods inventory, and the first-in, first-out (FIFO) method for non-paper raw material inventory which comprises 12% and 14% of inventory at December 31, 1994 and 1995, respectively. Property, Equipment and Depreciation Property and equipment are stated at cost. Depreciation is provided on both the straight-line and declining balance methods over the estimated useful lives of the assets or the lease term for leasehold improvements as follows:
YEARS --------- Buildings....................................................... 31.5 - 39 Leasehold improvements.......................................... 5 - 16 Automotive equipment............................................ 3 - 4 Machinery and equipment......................................... 5 - 12 Office furniture and equipment.................................. 5 - 10
Maintenance and repairs are charged against income; significant renewals and improvements are capitalized. Financing Fees Deferred financing fees, which are included in other assets, are being amortized over the life of the related debt. Revenue Recognition The company recognizes revenue from the sale of products upon shipment to the customer. Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. F-60 NIAGARA ENVELOPE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. INVENTORY Inventory consisted of the following at December 31, 1994 and 1995:
1994 1995 ------- ------- Raw material............................................ $ 5,854 $ 4,953 Work in process......................................... 212 696 Finished goods.......................................... 6,383 6,911 ------- ------- 12,449 12,560 Less: LIFO reserve.................................... (930) (1,850) ------- ------- $11,519 $10,710 ======= =======
3. NOTE RECEIVABLE--SHAREHOLDER Note receivable--shareholder represents an amount due from a shareholder of the Company with an interest rate of prime plus 1/4% (8.75% at December 31, 1994 and 1995) due in monthly installments of $14 including interest. 4. PROPERTY, PLANT AND EQUIPMENT Buildings include $1,009 and $949 at December 31, 1994 and 1995, respectively, which represents the net book value of building, building additions, etc., located on land owned by an affiliate. The land is leased by the Company under a long-term lease. The lease has two renewal options which, if exercised, would enable the Company to lease the property through January 31, 2000. 5. INVESTMENT IN JOINT VENTURE In March 1994, the Company acquired a 50% interest in the common stock of a joint venture, Niagara-Murray Envelope Company, Inc., for $100. The joint venture is a Mississippi manufacturer of paper envelopes with exclusive rights to sell envelopes in a five-state area in the Southeastern section of the United States. This investment is recorded on the equity method. The following summarizes the related transactions:
1993 1994 1995 ---- ------ ------ Purchase from................................................ $-- $ 107 $ 251 Sales to..................................................... -- 2,000 2,589 Payables to.................................................. -- 30 -- Receivable from.............................................. -- 170 353
6. LETTERS OF CREDIT At December 31, 1995, the Company had one letter of credit totaling $796 which accrued a fee of 1% per annum and supported the Company's workers compensation reserves and one letter of credit in the amount of $4,108 which accrued a fee of 1% per annum and supported the Industrial Development Revenue Bonds. F-61 NIAGARA ENVELOPE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. LONG-TERM DEBT Long-term debt at December 31, 1994 and 1995 consisted of the following:
1994 1995 ------- ------ Term not payable in monthly principal installments of $50, be- ginning in September 1996 through August 2001, with interest at prime plus 1/2% or LIBOR rate plus 2% (7.9375% (LIBOR option) at December 31, 1995), secured by virtually all assets of the Company, excluding those securing the Industrial Development Revenue Bonds.................................................. $ 3,000 $3,000 Term note payable in yearly installments through 1997 of $136 including interest at 7%, secured by computer software and hardware with a net book value of approximately $190 at Decem- ber 31, 1995................................................... $ 354 $ 245 Revolving credit facility totaling $12,000, due August 3, 1997, secured by virtually all assets of the Company excluding those securing the Industrial Development Revenue Bonds. Interest payable at prime or LIBOR rate plus 1 1/2% (7.4375% (LIBOR op- tion) on first $1,600 and 8.5% (prime rate) on balance at De- cember 31, 1994 and 1995)...................................... 7,160 2,220 Industrial Development Revenue Bonds secured by land, building, and equipment with an original cost of approximately $5,136 payable in quarterly installments of $75 plus interest that fluctuates with the weekly average yield on United States Trea- sury obligations (5.25% at December 31, 1995), through 2008.... 4,200 3,900 ------- ------ 14,714 9,365 Less: current portion.......................................... 410 618 ------- ------ Long-term debt................................................. $14,304 $8,747 ======= ======
Payments due for the five years subsequent to December 31, 1995 are as follows: 1996.................................. $ 618 1997.................................. 3,247 1998.................................. 900 1999.................................. 900 2000.................................. 900 Thereafter............................ 2,800
The restricted temporary cash investments represent unexpended bond proceeds restricted to certain capital expenditures. 8. ACCRUED EXPENSES Accrued expenses included the following:
1994 1995 ------ ------ Payroll.................................................... $ 649 $ 766 Workers' compensation and medical insurance................ 664 615 Dividend................................................... 12 12 Interest................................................... 140 56 Pension.................................................... 507 266 Other...................................................... 170 93 Property taxes............................................. 196 236 ------ ------ $2,338 $2,044 ====== ======
F-62 NIAGARA ENVELOPE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9. DEFERRED COMPENSATION PLANS The Company entered into a deferred compensation agreement with the former Chairman of the Board who is now deceased. The agreement provides for annual payments to his surviving spouse for her lifetime. The present value of required future payment, determined using an 8.9% discount factor, is $811 and $789 at December 31, 1994 and 1995, respectively. 10. RETIREMENT PLANS Defined Benefit Plans The Company has two pension plans covering substantially all employees. The Company's funding policy has been to contribute annually at least the minimum required by ERISA. The Plans provide monthly benefits under a flat benefit formula. The Company's pension plan expense for the years ended December 31, 1993, 1994 and 1995 is as follows:
1993 1994 1995 ------ ------ ------ Service cost--benefits earned during the year.... $ 261 $ 278 $ 147 Interest cost on projected benefit obligation.... 306 341 275 Actual return on assets.......................... (323) 80 (578) Net amortization and deferral.................... 77 (359) 369 ------ ------ ------ Net periodic pension cost........................ $ 321 $ 340 $ 213 ====== ====== ====== The funded status of the plans, based on actuarial computations at September 30, 1994 and 1995 is presented below. Plan assets are stated at fair value and composed of fixed rate securities and equity investments. The average assumed discount rate is 7.25% and 6.25% in 1994 and 1995, respectively. The average expected long-term rate of return of plan assets is 7.75% in 1994 and 1995. 1994 1995 ------ ------ Actuarial present value of benefit obligation: Accumulated benefit obligation vested........... $3,454 $4,604 ====== ====== Accumulated benefit obligation.................. $3,764 $4,920 ====== ====== Projected benefit obligation for service rendered to date......... $3,764 $4,920 Plan assets at fair value........................ 3,207 4,092 ------ ------ Projected benefit obligation in excess of plan assets........................ (557) (828) Unrecognized transition amount................... 157 90 Unrecognized net loss............................ 2 503 Unrecognized prior service cost.................. 345 226 Adjustment required to recognize minimum liability..................... (504) (819) ------ ------ Accrued pension liability........................ $ (557) $ (828) ====== ======
F-63 NIAGARA ENVELOPE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Such amount is included in the accompanying balance sheets under the following captions:
1994 1995 ----- ----- Accrued expenses............................................ $(507) $(266) Accrued pension liability................................... (50) (562) ----- ----- $(557) $(828) ===== =====
Defined Contribution Plans During 1995, the Company froze the benefits accrued under its defined benefit pension plan for certain union employees and initiated a defined contribution plan for the participants under Section 401(k) of the Internal Revenue Code. As a result of freezing the defined benefit plan, the Company has recognized a loss of $157 representing previously unrecognized prior service cost associated with this plan. The 401(k) plan requires the Company to contribute 2% of each participants compensation to the plan and also permits participants to contribute up to 15% of their defined compensation. The Company's contribution to the plan in 1995 was $99. The Company also has a deferred compensation plan for non-union employees under Section 401(k) of the Internal Revenue Code. Under terms of the plan, participants may elect to contribute up to 15% of their defined compensation. In addition, the Company will contribute 50% of each of the participant's contribution up to a maximum of 4% of defined compensation. Total contributions to the plans in 1993, 1994 and 1995 approximated $184, $193, and $226, respectively. 11. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 1994 and 1995 are as follows (in thousands):
1994 1995 ----- ----- Employee compensation....................................... $ 312 $ 348 Accrued expenses............................................ 128 107 Discontinued operations..................................... 47 71 Other....................................................... 78 19 ----- ----- Total deferred tax assets................................. 565 545 Pension benefits............................................ $ (59) $ (77) Property, plant and equipment............................... (573) (584) Gain on joint venture....................................... -- (84) Other....................................................... (9) (23) ----- ----- Total deferred tax liabilities............................ (641) (768) ----- ----- Net deferred tax liabilities................................ $ (76) $(223) ===== =====
The deferred tax assets results primarily from worker's compensation accruals, medical expense accruals, deferred compensation and the accrual for closure and relocation of plants. Deferred liabilities resulted primarily from depreciation differences. F-64 NIAGARA ENVELOPE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) A reconciliation of the expected tax expense to actual tax expense for the years ended December 31, 1993, 1994 and 1995 is as follows:
1993 1994 1995 ----- ---- ------ Federal income tax (benefit) expense computed at statutory rate.................................... $(370) $458 $2,496 State taxes--net of federal effect................. 3 32 217 Meals and entertainment expense.................... 14 34 36 Premiums on officers life insurance................ 50 43 29 Other.............................................. (10) (22) (16) ----- ---- ------ $(313) $545 $2,762 ===== ==== ======
12. CAPITAL STOCK Holders of the Company's Class A preferred stock are entitled to cumulative dividends at the annual rate of 9.5% of the stated value but only if, when and as declared by the Board of Directors. Dividends are not permitted on any common stock unless all dividends to which the holders of Class A preferred stock are entitled, have been declared and paid or are to be paid. Each share of Class A preferred stock is entitled to one vote with the voting common stock, not as a separate class, on any proposal for the corporation to merge or consolidate with another corporation or for the corporation to liquidate. Whenever the total amount of unpaid dividends on the outstanding Class A preferred stock is equal to or greater than 40% of the stated value of such shares, each is entitled to one vote with the voting common stock of the Company, not as a separate class, on all matters with respect to which the voting common stock has a right to vote. When all dividends are paid on Class A preferred stock, the special voting right terminates; and other than the preceding, the Class A preferred stock has no voting rights. The Company has the right to redeem the preferred stock, in whole or in part, at any time at $1,000 per share. In the event of any liquidation, dissolution or winding up of the corporation and the distribution of its assets, the holders of shares of the Class A preferred stock shall be entitled to receive $1,000 per share before any amount is distributed to the holders of any common stock. 13. OPERATING LEASES Real Property Leases The Company is obligated on noncancelable real property leases expiring on various dates through 2000. Certain of the leases require additional rentals based on real estate taxes and include options to renew at an increased amount. Future minimum annual lease payments for the next five years are as follows:
AMOUNT ------ Year Ending December 31, 1996................................ $844 1997................................ 778 1998................................ 603 1999................................ 165 2000................................ 11
Approximately $490 of the 1996 future minimum lease payments is due to related parties under agreements that expire at various dates from 1996 through 2000. F-65 NIAGARA ENVELOPE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rental expense for real property amounted to $1,330, $1,008, and $873 in 1993, 1994 and 1995, respectively, including rental expense to related parties of $627, $448 and $462 in 1993, 1994 and 1995, respectively. EQUIPMENT LEASES The Company is also a lessee under noncancelable equipment lease agreements. Certain of the agreements are with related party lessors. Future minimum annual lease payments are as follows:
YEAR ENDED DECEMBER 31 AMOUNT ---------------------- ------ 1996............................... $1,318 1997............................... 1,020 1998............................... 491 1999............................... 154 2000............................... 71 Thereafter......................... 5
Approximately $604 of the 1996 future minimum lease payments is due to related parties under agreements that expire at various dates through 1999. Equipment rent expense amounted to $1,567, $1,642 and $1,601 in 1993, 1994 and 1995, respectively, including rent expense to related parties of $710, $684 and $664 in 1993, 1994 and 1995, respectively. 14. PROVISION FOR PLANT CLOSURE AND RELOCATION COSTS The provision for plant closure and relocation costs at December 31, 1995 represents the estimated additional costs associated with the closure of Niagara Envelope's Jacksonville facility. F-66 NIAGARA ENVELOPE COMPANY, INC. BALANCE SHEETS MARCH 31, 1995 AND 1996 (UNAUDITED--IN THOUSANDS)
1995 1996 ------- ------- ASSETS Current assets: Cash....................................................... $ 3 $ 606 Accounts receivable: Trade.................................................... 12,926 11,067 Other.................................................... 58 -- Inventory.................................................. 11,807 11,028 Note receivable--shareholder............................... 120 135 Prepaid expenses and other current assets.................. 103 372 Deferred taxes............................................. 278 216 ------- ------- Total current assets................................... 25,295 23,424 Note receivable--shareholder............................... 413 276 Property, plant and equipment, net......................... 10,830 11,326 Intangible pension asset................................... 494 316 Investment in joint venture................................ 193 397 Other assets............................................... 622 677 ------- ------- $37,847 $36,416 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdraft............................................. $ 1,252 $ 1,711 Accounts payable........................................... 5,024 5,071 Accrued expenses........................................... 3,899 3,591 Current portion--long-term debt............................ 410 650 ------- ------- Total current liabilities.................................... 10,585 11,023 Long-term debt............................................... 13,379 6,725 Deferred compensation........................................ 806 913 Deferred income taxes........................................ 354 439 Accrued pension.............................................. 50 562 ------- ------- 14,589 8,639 Total liabilities...................................... 25,174 19,662 ======= ======= Shareholders' equity: Capital stock: Preferred, no par value: Class A, authorized 20,000 shares, issued and outstand- ing 500 shares......................................... 500 500 Common, no par value: Class A, voting, authorized 12,000 shares, issued and outstanding 5,163 shares................................ 52 52 Class B, non-voting, authorized 12,000 shares, issued and outstanding 5,780 shares................................ 58 58 Additional paid-in capital................................. 361 361 Retained earnings.......................................... 11,712 16,286 Accumulated pension adjustment............................. (10) (503) ------- ------- Total shareholders' equity............................. 12,673 16,754 ------- ------- $37,847 $36,416 ======= =======
See accompanying notes. F-67 NIAGARA ENVELOPE COMPANY, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED--IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1995 1996 ------- ------- Net sales.................................................... $26,628 $28,317 Cost of goods sold........................................... 20,163 21,760 Distribution expenses........................................ 1,584 1,554 Selling and marketing expenses............................... 936 982 General and administrative expenses.......................... 1,320 1,441 ------- ------- 24,003 25,737 ------- ------- Income from operations....................................... 2,625 2,580 Interest income.............................................. 13 11 Interest expense............................................. (253) (147) Other expense................................................ (36) (15) ------- ------- (276) (151) ------- ------- Income before income taxes................................... 2,349 2,429 Provision for income taxes................................... 874 911 ------- ------- Net income................................................... 1,475 1,518 Retained earnings at beginning of period..................... 10,249 14,780 ------- ------- 11,724 16,298 Dividends declared on preferred stock ($23.75 per share)..... (12) (12) ------- ------- Retained earnings at end of period........................... $11,712 $16,286 ======= =======
See accompanying notes. F-68 NIAGARA ENVELOPE COMPANY, INC. STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED--IN THOUSANDS)
1995 1996 ------- ------- OPERATING ACTIVITIES Net income.................................................. $ 1,475 $ 1,518 Adjustments to reconcile net income to cash provided by op- erating activities: Depreciation and amortization............................. 361 411 Changes in operating assets and liabilities: Accounts receivable..................................... (2,224) (83) Inventories............................................. (288) (318) Prepaid expenses and other current assets............... 79 (165) Bank overdraft.......................................... 1,252 1,711 Accounts payable........................................ (878) (1,022) Accrued expenses........................................ 1,419 1,333 ------- ------- Cash provided by operating activities....................... 1,196 3,385 INVESTING ACTIVITIES Purchase of property and equipment.......................... (418) (766) Investment in joint venture................................. (32) (50) Increase in other assets.................................... 40 (43) Proceeds from note receivable--shareholder.................. 28 32 ------- ------- Cash used by investing activities........................... (382) (827) FINANCING ACTIVITIES Dividends paid.............................................. (12) (12) Repayment of long-term borrowings........................... (925) (1,990) ------- ------- Cash used by financing activities........................... (937) (2,002) ------- ------- Net (decrease) increase in cash............................. (123) 556 Cash--beginning of period................................... 126 50 ------- ------- Cash--end of period......................................... $ 3 $ 606 ======= =======
See accompanying notes. F-69 NIAGARA ENVELOPE COMPANY, INC. NOTES TO INTERIM FINANCIAL STATEMENTS MARCH 31, 1995 AND 1996 (UNAUDITED) 1. GENERAL The unaudited financial information furnished herein reflects all adjustments, which in the opinion of management are of a normal recurring nature, to fairly state the Company's financial position and results from operations for the periods presented. This information should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1995. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the entire year ending December 31, 1996. 2. INVENTORY Inventories consist of the following (in thousands):
MARCH 31 ---------------- 1995 1996 ------- ------- Raw material.................................................. $ 4,922 $ 4,660 Work in-process............................................... 212 528 Finished goods................................................ 8,765 7,125 ------- ------- 13,899 12,313 Less: LIFO reserve.......................................... (2,092) (1,285) ------- ------- $11,807 $11,028 ======= =======
F-70 [LOGO] AMERICAN PAD & PAPER CO ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued June 5, 1996 15,625,000 Shares American Pad & Paper Company COMMON STOCK ---------- OF THE 15,625,000 SHARES OF COMMON STOCK OFFERED HEREBY, 3,125,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 12,500,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." OF THE 15,625,000 SHARES OF COMMON STOCK OFFERED HEREBY, 12,500,000 SHARES ARE BEING SOLD BY THE COMPANY AND 3,125,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $15 AND $17. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. ---------- THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE, SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, UNDER THE SYMBOL "AGP." ---------- SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------- PRICE $ A SHARE ----------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS -------- -------------- ----------- ------------ Per Share...................... $ $ $ $ Total(3)....................... $ $ $ $
- ----- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities act of 1933, as amended. (2) Before deducting expenses payable by the Company estimated at $1,300,000. (3) The Selling Stockholders have granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 2,343,750 additional shares at the price to public less underwriting discounts and commissions for the purpose of covering over- allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Selling Stockholders will be $ , $ and $ respectively. See "Underwriters." ---------- The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to the approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1996 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ---------- MORGAN STANLEY & CO. International ALEX. BROWN & SONS International BANKERS TRUST INTERNATIONAL PLC CS FIRST BOSTON GOLDMAN SACHS INTERNATIONAL SALOMON BROTHERS INTERNATIONAL LIMITED WASSERSTEIN PERELLA SECURITIES, INC. , 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of estimated expenses, to be paid solely by the Company, of the issuance and distribution of the securities being registered: Securities and Exchange Commission registration fee......... $99,138.00 NASD filing fee............................................. 29,250.00 NYSE original listing fee................................... * Blue Sky fees and expenses (including attorneys' fees and expenses).................................................. * Printing expenses........................................... * Accounting fees and expenses................................ * Transfer agent's fees and expenses.......................... * Legal fees and expenses..................................... * Miscellaneous expenses...................................... * ---------- Total................................................... $ * ==========
- -------- * To be provided by Amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company is incorporated under the laws of the State of Delaware. Section 145 of the General Corporation Law of the State of Delaware ("Section 145") provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was illegal. A Delaware corporation may indemnify any persons who are, or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred. The Company's Restated Certificate of Incorporation will provide for the indemnification of Directors and officers of the Company to the fullest extent permitted by Section 145. In that regard, the Restated Certificate of Incorporation will provide that the Company shall indemnify any person whom it has the power to indemnify by Section 145 from or against any and all of the expenses, liabilities or other matters referred to or covered in Section 145, and such indemnification is not exclusive of other rights II-1 to which such person shall be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity for or in behalf of the Company and/or any subsidiary of the Company and as to action in another capacity while holding such office and shall continue as to such person who has ceased to be a director, officer, employee, or agent of the Company and/or subsidiary of the Company and shall inure to the benefit of the heirs, executors, and administrators of such person. The Company expects to obtain Directors and officers insurance prior to the completion of the Offering. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Company has not sold any securities within the last three years. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
NUMBER DESCRIPTION ------ ----------- 1.1* Form of Underwriting Agreements. 2.1 Stock Purchase Agreement, dated May 29, 1996, by and among American Pad & Paper Company of Delaware, Inc., Niagara Envelope Company, Inc. and the person named therein.+ 3.1(i)* Restated Certificate of Incorporation of the Company. 3.1(ii)* By-laws of the Company. 4.1 Indenture, dated as of December 1, 1995, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Trustee (including Form of Note).(2) 4.2 Purchase Agreement, dated as of November 17, 1994, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Initial Purchasers.(1) 4.3 Registration Rights Agreement, dated as of December 1, 1995, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Initial Purchasers named therein.(1) 4.4 Credit Agreement, dated as of October 31, 1995, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions and Bankers Trust Company, as Agent.(1)+ 4.5 Security Agreement, dated as of October 31, 1995, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., certain other subsidiaries of American Pad & Paper Company of Delaware, Inc. and Bankers Trust Company, as Collateral Agent.(1)+ 4.6 Pledge Agreement, dated as of October 31, 1995, by American Pad & Paper Company of Delaware, Inc. and the Subsidiary Guarantors in favor of Bankers Trust Company, as Collateral Agent.(1)+ 4.7 Notepad funding Receivables Master Trust Pooling and Servicing Agreement, dated October 31, 1995, among APPC, Notepad Funding Corporation and Manufacturers and Traders Trust Company (the "Pooling and Service Agreement"). (1)+ 4.8 Series 1995-1 Supplement to the Pooling and Service Agreement, dated October 31, 1995. (1)+ 4.9 Revolving Certificate Purchase Agreement, dated October 31, 1995 among APPC, Notepad Funding Corporation, Bankers Trust Company and the Purchasers described therein. (1)+ 4.10 Receivables Purchase Agreement, dated October 31, 1995, among APPC, Notepad Funding Corporation and certain subsidiaries. (1)+ 4.11* Term Sheet relating to New Bank Credit Agreement. 5.1 Opinion and consent of Kirkland & Ellis. 10.1 Agreement and Plan of Merger, dated as of October 3, 1995, among the Company, WHR Acquisition, Inc. and WR Acquisition, Inc.(1)+ 10.2 Amendment No. 1 to WHR Merger Agreement, dated as of October 31, 1995, among the Company, WHR Acquisition, Inc. and WR Acquisition, Inc.(1) 10.3 Stock Purchase Agreement, dated as of October 30, 1995, among WR Acquisition, Inc. and the Company.(1)
II-2
NUMBER DESCRIPTION ------ ----------- 10.4 Tax Sharing Agreement, dated as of October 30, 1995, among American Pad & Paper Company of Delaware, Inc. and the Subsidiary Guarantors.(1) 10.5 Agreement and Plan of Merger, dated as of October 31, 1995, among Williamhouse Regency of Delaware, Inc. and Ampad Corporation.(1) 10.6 Advisory Agreement, dated as of October 31, 1995, among American Pad & Paper Company of Delaware, Inc. and Bain Capital, Inc.(1) 10.7 Ampad Holding Corporation 1992 Key Employees Stock Option Plan.(1) 10.8 Amended and Restated Management Agreement between the Company and Charles G. Hanson.(1) 10.9 Amended and Restated Management Agreement between the Company and Russell M. Gard.(1) 10.10 Amended and Restated Management Agreement between the Company and Gregory M. Benson.(1) 10.11 Preferred Stock Redemption Agreement between the Company and the stockholders named therein.(1) 10.12 Asset Purchase Agreement, dated as of June 29, 1994, by and between Huxley Envelope Corp., The Kent Paper Co., Inc. and Williamhouse of California, Inc.(2)+ 10.13 Lease Agreement for City of Industry, California.(1) 10.14 Lease Agreement for Dubuque, Iowa.(1) 10.15 Lease Agreement for Miamisburg, Ohio.(1) 10.16 Lease Agreement for North Salt Lake City, Utah.(1) 10.17 Lease Agreement for Tacoma, Washington.(1) 10.18 Change of Control Agreement between WR Acquisition, Inc. and certain officers of American Pad & Paper Company of Delaware, Inc.(1) 10.19 Registration Rights Agreement, dated as of July 31, 1992, between the Company and the stockholders named therein. (2) 10.20* Form of 1996 Key Employee Stock Incentive Plan. 10.21* Form of Non-Employee Director Stock Option Plan. 10.22* Employment Agreement between the Company and Charles Hanson, III. 10.23* Employment Agreement between the Company and Russel Gard. 10.24* Amended and Restated Advisory Agreement between APPC and Bain Capital, Inc. 10.25* Form of Management Stock Purchase Plan. 21.1 Subsidiaries of the Company. (2) 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of KPMG Peat Marwick LLP. 23.3 Consent of Kirkland & Ellis (included in Exhibit 5.1). 23.4 Consent of Ernst & Young LLP. 24.1 Powers of Attorney (included in signature page). (2) 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. + The Company agrees to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to such agreement upon request by Commission. (1) Incorporated by reference to the same-numbered exhibit to the Registration Statement on Form S-1 of American Pad & Paper of Delaware, Inc. (File No. 333-3006). (2) Previously Filed. (b) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore has been omitted. II-3 ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriter at closing specified in the underwriting agreement certificates in such denominations and registered in such names as requested by the Underwriter to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS, ON JUNE 5, 1996. American Pad & Paper Company /s/ Gregory M. Benson By: ____________________________ GREGORY M. BENSON CHIEF FINANCIAL OFFICER * * * * PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE * Chief Executive Officer June 5, 1996 - ------------------------------------- and Director (principal CHARLES G. HANSON, III executive officer) * Director June 5, 1996 - ------------------------------------- RUSSELL M. GARD /s/ Gregory M. Benson Chief Financial June 5, 1996 - ------------------------------------- Officer and GREGORY M. BENSON Director (principal financial and accounting officer) * Director June 5, 1996 - ------------------------------------- JONATHAN S. LAVINE * Director June 5, 1996 - ------------------------------------- MARC B. WOLPOW * Director June 5, 1996 - ------------------------------------- ROBERT C. GAY * Pursuant to Power of Attorney previously filed with the Commission. /s/ Gregory M. Benson Attorney-in-Fact June 5, 1996 - ------------------------------------- GREGORY M. BENSON II-5 EXHIBIT INDEX
EXHIBIT PAGE NO. DESCRIPTION NO. ------- ----------- ---- 1.1* Form of Underwriting Agreements. 2.1 Stock Purchase Agreement, dated May 29, 1996, by and among American Pad & Paper Company of Delaware, Inc., Niagara Envelope Company, Inc. and the person named therein.+ 3.1(i)* Restated Certificate of Incorporation of the Company. 3.1(ii)* By-laws of the Company. 4.1 Indenture, dated as of December 1, 1995, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Trustee (including Form of Note).(2) 4.2 Purchase Agreement, dated as of November 17, 1994, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Initial Purchasers.(1) 4.3 Registration Rights Agreement, dated as of December 1, 1995, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Initial Purchasers named therein.(1) 4.4 Credit Agreement, dated as of October 31, 1995, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions and Bankers Trust Company, as Agent.(1)+ 4.5 Security Agreement, dated as of October 31, 1995, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., certain other subsidiaries of American Pad & Paper Company of Delaware, Inc. and Bankers Trust Company, as Collateral Agent.(1)+ 4.6 Pledge Agreement, dated as of October 31, 1995, by American Pad & Paper Company of Delaware, Inc. and the Subsidiary Guarantors in favor of Bankers Trust Company, as Collateral Agent.(1)+ 4.7 Notepad funding Receivables Master Trust Pooling and Servicing Agreement, dated October 31, 1995, among APPC, Notepad Funding Corporation and Manufacturers and Traders Trust Company (the "Pooling and Service Agreement"). (1)+ 4.8 Series 1995-1 Supplement to the Pooling and Service Agreement, dated October 31, 1995. (1)+ 4.9 Revolving Certificate Purchase Agreement, dated October 31, 1995 among APPC, Notepad Funding Corporation, Bankers Trust Company and the Purchasers described therein. (1)+ 4.10 Receivables Purchase Agreement, dated October 31, 1995, among APPC, Notepad Funding Corporation and certain subsidiaries. (1)+ 4.11* Term Sheet relating to New Bank Credit Agreement. 5.1 Opinion and consent of Kirkland & Ellis. 10.1 Agreement and Plan of Merger, dated as of October 3, 1995, among the Company, WHR Acquisition, Inc. and WR Acquisition, Inc.(1)+ 10.2 Amendment No. 1 to WHR Merger Agreement, dated as of October 31, 1995, among the Company, WHR Acquisition, Inc. and WR Acquisition, Inc.(1) 10.3 Stock Purchase Agreement, dated as of October 30, 1995, among WR Acquisition, Inc. and the Company.(1) 10.4 Tax Sharing Agreement, dated as of October 30, 1995, among American Pad & Paper Company of Delaware, Inc. and the Subsidiary Guarantors.(1) 10.5 Agreement and Plan of Merger, dated as of October 31, 1995, among Williamhouse Regency of Delaware, Inc. and Ampad Corporation.(1) 10.6 Advisory Agreement, dated as of October 31, 1995, among American Pad & Paper Company of Delaware, Inc. and Bain Capital, Inc.(1) 10.7 Ampad Holding Corporation 1992 Key Employees Stock Option Plan.(1) 10.8 Amended and Restated Management Agreement between the Company and Charles G. Hanson.(1)
EXHIBIT PAGE NO. DESCRIPTION NO. ------- ----------- ---- 10.9 Amended and Restated Management Agreement between the Company and Russell M. Gard.(1) 10.10 Amended and Restated Management Agreement between the Company and Gregory M. Benson.(1) 10.11 Preferred Stock Redemption Agreement between the Company and the stockholders named therein.(1) 10.12 Asset Purchase Agreement, dated as of June 29, 1994, by and between Huxley Envelope Corp., The Kent Paper Co., Inc. and Williamhouse of California, Inc.(2)+ 10.13 Lease Agreement for City of Industry, California.(1) 10.14 Lease Agreement for Dubuque, Iowa.(1) 10.15 Lease Agreement for Miamisburg, Ohio.(1) 10.16 Lease Agreement for North Salt Lake City, Utah.(1) 10.17 Lease Agreement for Tacoma, Washington.(1) 10.18 Change of Control Agreement between WR Acquisition, Inc. and certain officers of American Pad & Paper Company of Delaware, Inc.(1) 10.19 Registration Rights Agreement, dated as of July 31, 1992, between the Company and the stockholders named therein. (2) 10.20* Form of 1996 Key Employee Stock Incentive Plan. 10.21* Form of Non-Employee Director Stock Option Plan. 10.22* Employment Agreement between the Company and Charles Hanson, III. 10.23* Employment Agreement between the Company and Russel Gard. 10.24* Amended and Restated Advisory Agreement between APPC and Bain Capital, Inc. 10.25* Form of Management Stock Purchase Plan. 21.1 Subsidiaries of the Company. (2) 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of KPMG Peat Marwick LLP. 23.3 Consent of Kirkland & Ellis (included in Exhibit 5.1). 23.4 Consent of Ernst & Young LLP. 24.1 Powers of Attorney (included in signature page). (2) 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. + The Company agrees to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to such agreement upon request by Commission. (1) Incorporated by reference to the same-numbered exhibit to the Registration Statement on Form S-1 of American Pad & Paper of Delaware, Inc. (File No. 333-3006). (2) Previously Filed. EX-2.1 2 STOCK PURCHASE AGREEMENT DATED MAY 29, 1996 EXHIBIT 2.1 STOCK PURCHASE AGREEMENT BY AND AMONG AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC., NIAGARA ENVELOPE COMPANY, INC., AND THE PERSONS LISTED ON THE SCHEDULE OF SELLERS ATTACHED HERETO MAY 29, 1996 TABLE OF CONTENTS Page
ARTICLE I PURCHASE AND SALE OF STOCK................................. 1 1.1 Stock Purchase....................................... 1 1.2 Purchase Price....................................... 1 1.3 Purchase Price Adjustment............................ 2 ARTICLE II CONDITIONS TO CLOSING...................................... 6 2.1 Conditions to Buyer's Obligations at the Closing..... 6 2.2 Conditions to the Sellers' Obligations at the Closing 9 ARTICLE III COVENANTS PRIOR TO CLOSING................................. 10 3.1 Affirmative Covenants of the Company and the Sellers. 10 3.2 Negative Covenants of the Company and the Sellers.... 12 3.3 Exclusivity.......................................... 13 3.4 Covenants of Buyer................................... 13 ARTICLE IV REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COMPANY. 14 4.1 Organization and Corporate Power..................... 14 4.2 Authorization of Transactions........................ 14 4.3 Subsidiaries; Investments............................ 14 4.4 Absence of Conflicts................................. 15 4.5 Capitalization....................................... 15 4.6 Financial Statements................................. 15 4.7 Absence of Undisclosed Liabilities................... 16 4.8 Absence of Certain Developments...................... 16 4.9 Assets............................................... 17 4.10 Environmental and Safety Matters..................... 19 4.11 Taxes................................................ 20 4.12 Contracts and Commitments............................ 22 4.13 Proprietary Rights................................... 23 4.14 Litigation; Proceedings.............................. 24 4.15 Brokerage............................................ 24 4.16 Governmental Licenses and Permits.................... 24
4.17 Employees............................................ 24 4.18 Employee Benefit Plans............................... 25 4.19 Insurance............................................ 27 4.20 Officers and Directors; Bank Accounts................ 27 4.21 Affiliate Transactions............................... 27 4.22 Compliance with Laws................................. 28 4.23 Product Warranty..................................... 28 4.24 Product Liability.................................... 28 4.25 Closing Date......................................... 28 ARTICLE V REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE SELLERS. 29 5.1 Authorization of Transactions........................ 29 5.2 Absence of Conflicts................................. 29 5.3 Shares............................................... 29 5.4 Brokerage............................................ 29 5.5 Closing Date......................................... 29 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER.................... 30 6.1 Organization and Corporate Power..................... 30 6.2 Authorization........................................ 30 6.3 No Violation......................................... 30 6.4 Governmental Authorities and Consents................ 30 6.5 Brokerage............................................ 30 6.6 Litigation........................................... 31 6.7 Closing Date......................................... 31 6.8 Purchase for Investment.............................. 31 6.9 Financing Arrangements............................... 31 ARTICLE VII TERMINATION................................................ 31 7.1 Termination.......................................... 31 7.2 Effect of Termination................................ 32 7.3 Deposit.............................................. 32 ARTICLE VIII SURVIVAL; INDEMNIFICATION.................................. 32 8.1 Survival............................................. 32 8.2 Indemnification...................................... 32
8.3 Arbitration Procedure................................ 35 8.4 Remedies............................................. 37 8.5 Effect of Taxes and Insurance........................ 37 ARTICLE IX ADDITIONAL AGREEMENTS...................................... 37 9.1 Press Releases and Announcements..................... 37 9.2 Further Transfers.................................... 37 9.3 Tax Matters.......................................... 38 9.4 Transition Assistance................................ 40 9.5 Investigation and Confidentiality.................... 40 9.6 Expenses............................................. 41 9.7 Noncompetition and Nonsolicitation................... 41 9.8 Sellers' Representative.............................. 42 9.9 Additional Information for SEC Filings............... 43 9.10 Approval of Services Agreement Payment............... 43 ARTICLE X MISCELLANEOUS.............................................. 44 10.1 Amendment and Waiver................................. 44 10.2 Notices.............................................. 44 10.3 Binding Agreement; Assignment........................ 45 10.4 Severability......................................... 46 10.5 No Strict Construction............................... 46 10.6 Captions and Headings................................ 46 10.7 Entire Agreement..................................... 46 10.8 Counterparts......................................... 46 10.9 Governing Law........................................ 46 10.10 No Third Party Beneficiaries......................... 46 ARTICLE XI CERTAIN DEFINITIONS........................................ 47
STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement") is made as of May 29, --------- 1996, by and among Niagara Envelope Company, Inc., a Delaware corporation (the "Company"), the Persons set forth on the Schedule of Sellers attached hereto - -------- ------------------- (collectively, the "Sellers" and each, individually, a "Seller"), Frederick G. ------- ------ Pierce, II, as the Sellers' agent and representative (the "Sellers' -------- Representative"), and American Pad & Paper Company of Delaware, Inc., a Delaware - -------------- corporation ("Buyer") (the Company, the Sellers, the Sellers' Representative and ----- the Buyer being collectively referred to herein as the "Parties" or individually ------- as a "Party"). Certain capitalized terms used herein are defined in Article XI ----- hereof. The authorized capital stock of the Company consists of 12,000 shares of Class A Voting Common Stock, no par value per share, 12,000 shares of Class B Non-Voting Common Stock, no par value per share, 20,000 shares of Class A Preferred Stock, no par value per share, and 20,000 shares of Class B Preferred Stock, no par value per share (collectively, the "Company Stock"), of which ------------- 5,163 shares of Class A Voting Common Stock , 5,780 shares of Class B Non-Voting Common Stock, 500 shares of Class A Preferred Stock and no shares of Class B Preferred Stock are issued and outstanding. The Sellers own beneficially and of record 100% of the outstanding Company Stock. On the terms and subject to the conditions set forth in this Agreement, Buyer desires to acquire from the Sellers, and the Sellers desire to sell to Buyer, all of the outstanding shares of Company Stock. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF STOCK -------------------------- 1.1 STOCK PURCHASE. On the terms and subject to the conditions set -------------- forth in this Agreement, on the Closing Date (as defined in Section 1.4), Buyer will purchase from the Sellers, and the Sellers will sell and transfer to Buyer, all of the outstanding shares of Company Stock, free and clear of all Liens. 1.2 PURCHASE PRICE. -------------- (a) The total purchase price to be paid to the Sellers for the outstanding Company Stock (the "Purchase Price") at the Closing will be -------------- $50,000,000, as adjusted in accordance with Section 1.3(c) hereof. Buyer will pay such Purchase Price by wire transfer of immediately available funds to an account or accounts designated by the Sellers' Representative not less than five business days prior to the Closing. (b) After the Closing, the Purchase Price may be further increased or decreased, as the case may be, in accordance with Sections 1.3(h)-(j) hereof. (c) The Sellers' Representative shall allocate the Purchase Price among the Sellers in accordance with the percentages set forth opposite each Seller's name (the "Pro Rata Shares") on the Schedule of Sellers attached --------------- ------------------- hereto. Any adjustments to the Purchase Price in accordance with the terms of this Agreement shall be adjusted with respect to each Seller in accordance with such Pro Rata Shares. 1.3 PURCHASE PRICE ADJUSTMENT. ------------------------- (a) As used in this Agreement: "Affiliate Payments" shall mean any cash payments (other than salary ------------------ and benefits paid in the ordinary course of business, which shall include all payments made to the Sellers' Representative as compensation for service to the Company) made to an Affiliate of Sellers after the Balance Sheet Date and prior to the Closing Date. "Balance Sheet Date" shall mean (i) May 31, 1996 in the event that the ------------------ Closing occurs on or prior to June 30, 1996, or (ii) June 30, 1996 in the event that the Closing occurs after June 30, 1996. "Consolidated Net Asset Value" shall mean, the excess of the net book ---------------------------- value of the Company's and its Subsidiaries' consolidated assets over the Company's and its Subsidiaries' consolidated liabilities (excluding Indebtedness for Borrowed Money), as determined in accordance with United States generally accepted accounting principles ("GAAP") applied in a manner consistent with that ---- used in preparing the Company's December 31, 1995 audited financial statements and the Affiliated Entities' books and records as of December 31, 1995 adjusted for the fair value purchase price to be paid by the Company, except that (i) the LIFO reserve for inventory will be determined using the reserve as of (A) April 30, 1996 in the event the Closing Date is on or prior to June 15, 1996, (B) May 31, 1996 in the event the Closing Date is after June 15, 1996 and on or prior to June 30, 1996 and (C) June 30, 1996 in the event the Closing Date is after June 30, 1996, (ii) raw material actual purchase cost will be based on a mutually acceptable evaluation, (iii) pension reserves and the resulting pension expense will be based upon a valuation performed which the parties shall use reasonable best efforts to perform within 30 days of the Closing and shall in no event perform later than 75 days after the Closing and the discount rate used in the December 31, 1995 audited financials to determine pension reserves will be adjusted for the percentage change in the 10-year Treasury bond from December 31, 1995 to the Closing Date and (iv) a $75,000 reserve for environmental liabilities will be included in the determination of Consolidated Net Asset Value. "Indebtedness for Borrowed Money" shall mean, with respect to any ------------------------------- Person at any date, without duplication: (i) all obligations of such Person for borrowed money or in respect of loans or advances; (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (iii) all obligations in respect of letters of credit, whether or not drawn, and 2 bankers' acceptances issued for the account of such Person (except (a) to the extent such obligations have been issued with respect to liabilities reflected on the balance sheet of such Person and (b) to the extent set forth on Schedule -------- 1.3(a)); (iv) all capitalized lease liabilities of such Person; (v) all interest - ------ rate protection agreements of such Person (valued on a market quotation basis); (vi) all obligations of such Person secured by a contractual lien; (vii) all guarantees of such Person in connection with any of the foregoing (except to the extent such obligations have been issued with respect to liabilities reflected on the balance sheet of such Person); (viii) all financial penalties imposed, whether or not such penalties have been paid, on the Company as a consequence of a prepayment of outstanding indebtedness made by the Company on the Closing Date; and (ix) all income taxes payable pertaining to the Affiliated Entities. (b) At least five (5) business days prior to the Closing, the Company in good faith shall prepare an unaudited estimated consolidated balance sheet of the Company and its Subsidiaries dated as of the Closing Date, an estimate of the Consolidated Net Asset Value as of the close of business on the Balance Sheet Date (the "Estimated Closing Consolidated Net Asset Value"), an estimate ---------------------------------------------- of Indebtedness For Borrowed Money as of the close of business on the Balance Sheet Date (the "Estimated Indebtedness"), and an estimate of the Affiliate ----------------------- Payments as of the close of business on the Closing Date (the "Estimated --------- Affiliate Payments"), all based on the Company's and its Subsidiaries' books and - ------------------ records and other information then available. If any item on (or which, under GAAP, should be reflected on) the December 31, 1995 audited financial statements or the Affiliated Entities books and records is not reflected in accordance with GAAP, Consolidated Net Asset Value will nonetheless be computed in accordance with GAAP; provided that in no event shall an entry be made on the financial statements of the Company reflecting as a liability any amount for which the Sellers or the Sellers' Representative, but not the Company, are liable, including, without limitation, under the terms of this Agreement. In computing Consolidated Net Asset Value all accounting entries will be taken into account regardless of their amount, all known errors and omissions will be corrected and all known proper adjustments will be made. The Consolidated Net Asset Value will be determined using the same procedures and practices as if the Balance Sheet Date was a fiscal year end. In addition, a physical inventory will be taken within five business days prior to the Closing. (c) If Estimated Closing Consolidated Net Asset Value is greater than or less than $35,964,000, the Purchase Price to be paid at Closing shall be increased or decreased by the amount of such excess or shortfall, as the case may be. In addition, the Purchase Price to be paid at Closing shall be decreased by the amount of the Estimated Indebtedness and the Estimated Affiliate Payments (such Purchase Price, as adjusted, the "Estimated Purchase ------------------ Price"). The Estimated Purchase Price will be increased by an amount equal to - ----- the product of 8% multiplied by the Estimated Purchase Price multiplied by the fraction, the numerator of which shall equal the number of days elapsed from the Balance Sheet Date through and excluding the Closing Date and the denominator of which shall equal 365 . (d) As promptly as practicable, but in no event later than ninety (90) days after the Closing Date, Buyer will deliver to the Sellers' Representative an audited balance sheet of the Company and Affiliated Entities dated as of the Balance Sheet Date (the "Closing Balance Sheet") and other audit procedures --------------------- relating to the period between the Balance Sheet Date and the Closing 3 Date which will reflect Buyer's determination, as of the close of business on the Balance Sheet Date, of the Consolidated Net Asset Value (the "Closing ------- Consolidated Net Asset Value") and the Indebtedness For Borrowed Money (the - ---------------------------- "Closing Indebtedness") and, as of the close of business on the Closing Date, of - --------------------- the Affiliate Payments (the "Closing Affiliate Payments"). -------------------------- (e) If the Sellers' Representative disagrees with Buyer's determination of Closing Consolidated Net Asset Value, the Closing Indebtedness or the Closing Affiliate Payments, Sellers' Representative shall notify Buyer in writing of such disagreement (such notice setting forth the basis for such disagreement in reasonable detail) within thirty (30) days of Buyer's delivery of the Closing Balance Sheet to the Sellers' Representative. Buyer and Sellers' Representative thereafter shall negotiate in good faith to resolve any such disagreements. If Buyer and Sellers' Representative are unable to resolve any disagreements within thirty (30) days after the Sellers' Representative delivers its notice of disagreement, Buyer and Sellers' Representative shall submit the dispute to a "Big Six" public accounting firm jointly selected by Buyer and Sellers' Representative (which shall be Arthur Andersen, Deloitte Touche or Coopers & Lybrand) for resolution. The "Big Six" public accounting firm selected in accordance with this Section 1.3(e) shall be referred to as the "Independent Auditor." - -------------------- (f) Buyer and Sellers' Representative shall use their best efforts to cause the Independent Auditor to resolve all disagreements over the Closing Consolidated Net Asset Value, the Closing Indebtedness or the Closing Affiliate Payments as soon as practicable, but in any event within sixty (60) days after submission of the disputes to the Independent Auditor. The resolution of such disagreements and the determination of the Closing Consolidated Net Asset Value, the Closing Indebtedness or the Closing Affiliate Payments by the Independent Auditor shall be final and binding on Buyer, Sellers' Representative and all Sellers. (g) The Independent Auditor will determine the allocation of its costs and expenses in determining the Closing Consolidated Net Asset Value or the Closing Indebtedness based upon the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. For example, if the Sellers' Representative claims the Closing Consolidated Net Asset Value or the Closing Indebtedness is $1,000 greater than the amount determined by Buyer's accountants, and Buyer contests only $500 of the amount claimed by the Sellers' Representative, and if the Independent Auditor ultimately resolves the dispute by awarding Seller $300 of the $500 contested, then the costs and expenses of arbitration will be allocated 60% (i.e. 300 / 500) to Buyer and 40% (i.e. 200 / 500) to the Sellers' Representative (on behalf of the Sellers). (h) If the Closing Consolidated Net Asset Value (as finally determined pursuant to this Section 1.3) is less than the Estimated Closing Consolidated Net Asset Value, Sellers' Representative shall pay Buyer the amount of such shortfall, plus an amount of interest at a rate equal to the lesser of 8% or the maximum rate permitted by applicable usury laws from the Closing Date to the date of payment. If the Closing Consolidated Net Asset Value (as finally determined pursuant to this Section 1.3) is greater than the Estimated Closing Consolidated Net Asset Value, Buyer shall pay Sellers' Representative the amount of such excess, plus an amount of interest at a 4 rate equal to the lesser of 8% or the maximum rate permitted by applicable usury laws from the Closing Date to the date of payment. (i) If the Closing Indebtedness (as finally determined pursuant to this Section 1.3) is greater than the Estimated Indebtedness, Sellers' Representative shall pay Buyer the amount of such excess, plus an amount of interest at a rate equal to the lesser of 8% or the maximum rate permitted by applicable usury laws from the Closing Date to the date of payment. If the Closing Indebtedness (as finally determined pursuant to this Section 1.3) is less than the Estimated Indebtedness, Buyer shall pay Sellers' Representative the amount of such shortfall, plus an amount of interest at a rate equal to the lesser of 8% or the maximum rate permitted by applicable usury laws from the Closing Date to the date of payment. (j) If the Closing Affiliate Payments (as finally determined pursuant to this Section 1.3) is greater than the Estimated Affiliate Payments, Sellers' Representative shall pay to Buyer the amount of such excess, plus an amount of interest at a rate equal to the lesser of 8% or the maximum rate permitted by applicable usury laws from the Closing Date to the date of payment. If the Closing Affiliate Payments (as finally determined pursuant to Section 1.3) is less than the Estimated Affiliate Payments, Buyer shall pay to the Sellers' Representative the amount of such shortfall, plus an amount of interest at a rate equal to the lesser of 8% or the maximum rate permitted by applicable usury laws from the Closing Date to the date of payment. (k) All payments required to be paid by Buyer or Sellers' Representative pursuant to Section 1.3(h), (i) or (j) may be netted against other payments to be received by such party pursuant to Section 1.3(h), (i) and (j). The net amount owed to Buyer or to Sellers' Representative, pursuant to Section 1.3(h), (i) and (j) shall be paid by delivery of immediately available funds to an account or accounts designated by Buyer or Sellers' Representative, as the case may be. All such payments shall be made within three (3) business days after the Closing Consolidated Net Asset Value and the Closing Indebtedness are finally determined pursuant to this Section 1.3 1.4 CLOSING. ------- (a) Subject to the conditions contained in this Agreement, the closing of the transactions contemplated by this Section 1 (the "Closing") will occur at ------- a site designated by Buyer in New York City, New York, at 10 a.m. local time on the date which is within five business days after the date on which the conditions to Closing set forth in Article II hereof have been satisfied or waived, or at such other time and on such other date as the parties hereto mutually agree (the "Closing Date"). ------------ (b) Subject to the conditions contained in this Agreement, the parties agree to consummate the following deliveries on the Closing Date: (i) The Sellers' Representative will deliver to Buyer certificates representing the Company Stock and Preferred Stock owned by the Sellers, duly endorsed for transfer with all requisite state and federal transfer stamps affixed thereto and accompanied by duly executed stock powers; 5 (ii) Buyer will deliver to the Sellers' Representative the Purchase Price by wire transfer of immediately available funds; and (iii) There shall be delivered to Buyer, Sellers' Representative and the Company, as the case may be, the opinions, certificates and other documents and instruments to be delivered under Article II hereof. ARTICLE II CONDITIONS TO CLOSING --------------------- 2.1 CONDITIONS TO BUYER'S OBLIGATIONS AT THE CLOSING. The obligation ------------------------------------------------ of Buyer to consummate the transactions contemplated by Section 1 of this Agreement is subject to the satisfaction of the following conditions on or before the Closing Date: (a) the representations and warranties set forth in Articles IV and V hereof and all other representations and warranties of the Company and the Sellers set forth in this Agreement will be true and correct in all material respects at and as of the Closing Date as though then made and as though the Closing Date were substituted for the date of this Agreement throughout such representations and warranties (without taking into account any disclosures made by the Company or the Sellers' Representative to Buyer pursuant to Section 4.25 or Section 5.5 hereof) except that the date of this Agreement will be substituted for the Closing Date with respect to Section 4.8(a) as it relates to a material adverse change in customers or employee relations; (b) the Sellers and the Company will have performed and complied in all material respects with all of the covenants and agreements required to be performed by them under this Agreement prior to the Closing; (c) the Company shall have obtained consents and approvals (i) from all governmental agencies that are required for the consummation of the transactions contemplated hereby or the other agreements contemplated hereby, including, without limitation, approval pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR") and, (ii) from those --- third parties required in order to prevent a breach of, default under or a termination, change in terms or conditions or modification of, any instrument, contract, lease, license or other agreement listed on Schedule 2.1(c) hereto; --------------- (d) no suit, action or other proceeding, injunction, final judgment, order or decree relating thereto, will be pending or threatened before any court or any governmental or regulatory body or authority which is reasonably likely to restrain or prohibit the transactions contemplated hereby or to result in material damages in connection with the transactions contemplated hereby or which would have a materially adverse effect on such transactions or the business, financial condition, operating results, assets, operations or business prospects of the Company; no investigation that would result in any such suit, action or proceeding shall be pending nor threatened and no such judgment, order or decree will have been entered and not subsequently dismissed with prejudice; 6 (e) Buyer's existing lender, Bankers Trust Company, shall have consented to the transactions contemplated hereby; (f) Buyer will have received an opinion (addressed to Buyer and Bankers Trust Company, Buyer's lender), dated the Closing Date, of Lippes, Silverstein, Mathias & Wexler, LLP, counsel for the Company and the Sellers, with respect to the matters set forth in Exhibit A attached hereto, in form and --------- substance reasonably satisfactory to Buyer and its counsel; (g) The Company shall have obtained and delivered to Buyer, at the Buyer's cost and expense, a commitment for an ALTA Owner's or Leasehold Policy of Title Insurance, as the case may be (the "Title Commitments"), for each ----------------- parcel of real property identified on Schedule 4.9 as a material real property ------------ (the "Material Real Property"), issued by a title insurer satisfactory to Buyer ---------------------- (the "Title Insurer"), in such amount as Buyer reasonably determines to be the ------------- fair market value (including all improvements thereon), insuring the Company's (or its Affiliated Entities') interest in such parcel as of Closing, subject only to Permitted Liens. The Company will provide Buyer with title insurance policies ("Title Policies") on or before the Closing, from the Title Insurer -------------- based upon the Title Commitments, at Sellers' cost and expense. Each such Title Policy will be dated as of the date of closing and (a) insure title to the applicable parcels of real estate and all recorded easements benefitting such parcels, subject only to Permitted Liens, (b) contain an "extended coverage endorsement" insuring over the general exceptions contained customarily in such policies, (c) contain an ALTA Zoning Endorsement 3.1, with parking (or equivalent), (d) contain an endorsement insuring that the parcel described in such Title Policy is the parcel shown on the survey delivered with respect to such parcel, (e) contain an endorsement insuring that each street adjacent to such parcel is a public street and that there is direct and unencumbered pedestrian and vehicular access to such street from such parcel, (f) if the real estate covered by such policy consists of more than one record parcel, contain a "contiguity" endorsement insuring that all of the record parcels are contiguous to one another, (g) contain a non-imputation endorsement, (h) contain a tax number endorsement and (i) contain such other endorsements as Buyer and Buyer's lender, if any, may reasonably request. (h) The Company shall have procured and delivered to Buyer, at the Buyer's cost and expense, current surveys of each parcel of the Material Real Property (the "Surveys"), prepared by a licensed surveyor satisfactory to Buyer, ------- and conforming to applicable requirements and certified to Buyer, Buyer's lender and the Title Insurer, within 30 days of the Closing Date, in a form satisfactory to such parties. The Survey shall disclose the location of all improvements, easements, party walls, sidewalks, roadways, utility lines and such matters shown customarily on such surveys, show access affirmatively to public streets and roads. No Survey shall disclose any survey defect or encroachment from or onto any of the real property which has not been cured or insured over prior to the Closing; (i) The Company shall have obtained and delivered to Buyer a non- disturbance agreement in form and substance satisfactory to Buyer and Buyer's lender from each lender encumbering the leased real property in Aurora, Colorado. 7 (j) The Company shall have obtained an estoppel letter (the "Estoppel -------- Letter") with respect to each parcel of leased real property from the landlords, - ------ lessors, sublessors or licensors for such property in form and content reasonably satisfactory to Buyer (and Buyer's lender, if any), stating that: a copy of the lease, attached to the estoppel letter is a true, correct and complete copy of the lease, sublease, license or tenancy agreement and represents the entire agreement between the landlord and the Company; to the landlord's knowledge the Company is not in breach or default under the lease, and no event has occurred which would with notice or passage of time, or both, constitute a breach or default or permit termination, modification, or acceleration under any such lease, tenancy agreement, license or sublease and the landlord has not repudiated any provision of the lease, tenancy agreements, license or sublease; all rent and other payments owed by the tenant to the landlord have been paid to date, to the landlord's knowledge there are no disputes, oral agreements or forbearance agreements in effect as to the lease, that the landlord consents to the assignment of the lease, and containing such other statements or agreements as Buyer or Buyer's lender may reasonably request. (k) The Company shall have obtained a termination of Lease with respect to the leased real property in Jacksonville, Florida, which shall include a full release from liability in favor of the Company, as tenant under the lease, in form and substance reasonably satisfactory to Buyer. (l) The Sellers' Representative shall have entered into a services agreement with Buyer, substantially in the form of Exhibit B (the "Services -------- Agreement"), pursuant to which the Sellers' Representative shall receive - --------- $5,000,000 at Closing. (m) on or prior to the Closing Date, the Sellers' Representative will have delivered to Buyer all of the following: (i) a certificate from the Sellers' Representative in the form set forth in Exhibit C-1 attached hereto, dated the Closing Date, stating that the ----------- preconditions specified in Sections 2.1(a)-(d) and 2.1(i), inclusive, have been satisfied; (ii) a certificate from the Company in the form set forth in Exhibit ------- C-2 attached hereto, dated the Closing Date, stating that the preconditions - --- specified in Sections 2.1(a)-(d) and 2-1(i), inclusive, have been satisfied; (iii) copies of all lien releases, third party and governmental consents, approvals, licenses, permits and filings required by Buyer to be obtained in connection with the consummation of the transactions contemplated herein, including, without limitation, a copy of the HSR termination letter; (iv) certified copies of the resolutions of the Company's board of directors and stockholders approving the transactions contemplated by this Agreement; and (v) such other documents or instruments as Buyer reasonably requests to effect the transactions contemplated hereby. 8 (n) the restrictions on the Company imposed by the Niagara- Murray Envelope Company, Inc. joint venture arrangement will have been amended in form satisfactory to Buyer in its sole discretion or terminated. (o) all proceedings to be taken by the Company, the Sellers and the Sellers' Representative in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to be delivered by the Company, the Sellers and the Sellers' Representative to effect the transactions contemplated hereby reasonably requested by Buyer will be satisfactory in form and substance to Buyer and its counsel. Any condition specified in this Section 2.1 may be waived by Buyer; provided that no such waiver will be effective unless it is set forth in a writing executed by Buyer. 2.2 CONDITIONS TO THE SELLERS' OBLIGATIONS AT THE CLOSING. The ----------------------------------------------------- obligation of the Sellers to consummate the transactions contemplated by Section 1 is subject to the satisfaction of the following conditions on or before the Closing Date: (a) the representations and warranties set forth in Article VI hereof will be true and correct in all material respects at and as of the Closing Date as though then made and as though the Closing Date were substituted for the date of this Agreement throughout such representations and warranties; (b) Buyer will have performed and complied in all material respects with all of the covenants and agreements required to be performed by it under this Agreement prior to the Closing; (c) the Company shall have obtained consents and approvals from all governmental agencies that are required for the consummation of the transactions contemplated hereby or the other agreements contemplated hereby, including, without limitation, approval pursuant to the HSR; (d) the Sellers' Representative will have received an opinion, dated the Closing Date, of Kirkland & Ellis, counsel to Buyer, with respect to the matters set forth in Exhibit D attached hereto, in form and substance reasonably --------- satisfactory to the Sellers' Representative and its counsel; (e) no suit, action or other proceeding, injunction, final judgment, order or decree relating thereto, will be pending or threatened before any court or any governmental or regulatory body or authority which is reasonably likely to restrain or prohibit the transactions contemplated hereby or to result in material damages in connection with the transactions contemplated hereby or which would have a materially adverse effect on such transactions or the business, financial condition, operating results, assets, operations or business prospects of the Buyer; no investigation that would result in any such suit, action or proceeding shall be pending nor threatened and no such judgment, order or decree will have been entered and not subsequently dismissed with prejudice; 9 (f) Buyer shall have entered into the Services Agreement with the Sellers' Representative, and the Sellers' Representative shall have received payment of amounts due to him thereunder. (g) On or prior to the Closing Date, Buyer will have delivered to the Sellers' Representative all of the following: (i) a certificate from Buyer in the form set forth in Exhibit E --------- attached hereto, dated the Closing Date, stating that the preconditions specified in Sections 2.2(a) and (b) above have been satisfied; and (ii) certified copies of the resolutions of Buyer's board of directors approving the transactions contemplated by this Agreement; and (h) all corporate proceedings to be taken by Buyer in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to be delivered by Buyer to the Sellers' Representative to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Sellers' Representative and his counsel. Any condition specified in this Section 2.2 may be waived by the Sellers; provided that no such waiver will be effective unless it is set forth in a writing executed by the Sellers' Representative. ARTICLE III COVENANTS PRIOR TO CLOSING 3.1 AFFIRMATIVE COVENANTS OF THE COMPANY AND THE SELLERS. On or prior ---------------------------------------------------- to the Closing, except as otherwise expressly provided herein, the Sellers will cause the Company to, and Company will (and, in the case of clauses (h) and (i) hereof, in addition to the Company, each Seller will): (a) conduct its business (including, without limitation, its cash management practices, the collection of receivables, purchases of inventory and customary inventory level practices, payment of payables and incurrence of capital expenditures) only in the usual and ordinary course of business in accordance with past custom and practice and keep its organization and properties intact (including its present business operations, physical facilities, working conditions and employees and its present relationships with lessors and licensors); (b) use its best efforts to preserve present business relationships with all material customers, suppliers and distributors of the Company, to the extent such relationships are beneficial to the Company and its business; 10 (c) maintain its physical facilities and equipment in good operating condition and repair (ordinary wear and tear excepted), maintain insurance reasonably comparable to that in effect on the date hereof, maintain inventory, supplies and spare parts at customary operating levels consistent with past practices, replace in accordance with past practice any inoperable, worn out or obsolete assets with assets of comparable quality and, in the event of a casualty, loss or damage to any of the assets prior to the Closing Date for which the Company is insured, either repair or replace such assets or, if Buyer agrees, transfer the proceeds of such insurance to Buyer; (d) maintain its books, accounts and records in accordance with past custom and practice as used in the preparation of the Financial Statements (as defined in Section 4.6); (e) maintain in full force and effect the existence of all Proprietary Rights (as defined in Section 4.13); (f) encourage the Company's employees to continue their employment with the Company both before and after the Closing; (g) comply with all legal requirements and contractual obligations applicable to the operations and business of the Company and pay all applicable taxes; (h) promptly inform Buyer in writing of any variances from the representations and warranties contained in Article IV or Article V hereof or any breach of any covenant hereunder by the Company or any Seller; (i) cooperate with Buyer and use best efforts to cause the conditions to Buyer's obligation to close specified in Section 2.1 above to be satisfied and execute and deliver such further instruments of conveyance and transfer and take such additional action as Buyer may reasonably request to effect, consummate, confirm or evidence the transactions contemplated by this Agreement; (j) permit Buyer and its employees, agents, lenders or potential lenders, investors and accounting and legal representatives to have reasonable access, upon reasonable notice, to its books, records, key personnel, independent accountants, legal counsel, facilities, equipment and other things reasonably related to the Company or its business; (k) cause the Company's unaudited March 31, 1996 and 1995 financial statements and December 31, 1995, 1994 and 1993 audited financial statements in Regulation S-X format to be delivered to Buyer on or prior to the date hereof; and (l) prior to Closing, the Company and the Sellers' Representative shall have caused the following to occur: (i) all of the capital stock of the Affiliated Entities to be transferred to the Company (provided that the Naples, Florida and Derby, New York properties will be 11 transferred out of the Affiliated Entities prior to the transfer of the capital stock to the Company); (ii) the lease of real property for the Company's former manufacturing facility located in Jacksonville, Florida shall have been terminated without any further obligation of Company; (iii) the note receivable on the Company's books from the Sellers' Representative in the original principal amount of $1,000,000 shall have been paid in full or forgiven; (iv) the Company's rights under the life insurance policy on the Sellers' Representative's mother shall have been terminated; (v) the Company's obligation to make annuity payments to the Sellers' Representative's mother shall have been terminated; (vi) the employment agreement between the Company and the Sellers' Representative shall have been terminated without any further obligation of the Company; (vii) the equipment described on Schedule 3.1(l) shall have been --------------- transferred to the Company and the leases relating thereto shall have been terminated; and (viii) the Company's insurance coverage relating to any of the properties described in the proviso to Section 3.1(l)(i) and the Jacksonville, Florida facility shall have been terminated; (m) use its best efforts to support Buyer's efforts to retain the Company's customers including, without limitation, requiring its directors, officers and key employees to attend meetings and participate in discussions with Buyer and the Company's customers to retain such customers. 3.2 NEGATIVE COVENANTS OF THE COMPANY AND THE SELLERS. Prior to the ------------------------------------------------- Closing, without Buyer's prior written consent, the Sellers will not permit the Company to, and the Company will not: (a) take any action that would require disclosure under Section 4.8 below; (b) redeem or otherwise acquire, any shares of its capital stock, or make any loan or enter into any transaction with or distribute any assets or property to any of its officers, directors, stockholders or Affiliates; (c) sell, lease, license or otherwise dispose of any interest in any of the Company's assets, other than sales of inventory in the ordinary course of business consistent with 12 past practice, or permit, allow or suffer any of the assets to be subjected to any Lien, other than Permitted Liens; (d) terminate or modify any material contract or any government license, permit or other authorization; (e) enter into any new, or amend any existing, material contracts, agreements or commitments; (f) institute any material change in the conduct of its business, or any change in its methods of purchase, sale, lease, management, marketing, operation or accounting; and (g) take or omit to take any action which could be reasonably anticipated to cause a material adverse change prior to Closing in the Company's assets or financial condition. 3.3 EXCLUSIVITY. Neither the Company nor any Seller nor any ----------- representative of the foregoing Seller shall, directly or indirectly, through any officer, director, employee, agent or otherwise, solicit, initiate or participate in any discussions or negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, any proposal or offer from any Person (including any of such Person's officers, directors, employees, agents or other representatives) relating to any sale, liquidation, dissolution, recapitalization, restructuring or refinancing of the Company or any acquisition of the issued or unissued capital stock or other securities of the Company or any substantial portion of the assets of the Company (including any acquisition structured as a merger, consolidation or share exchange) (each of the foregoing an "Acquisition Proposal"). Except for -------------------- the Company's contractual relationship with Bowles, Hollowell, Conner & Co., the Company and the Sellers represent and warrant that they have terminated all contacts, discussions and negotiations with all third parties regarding any Acquisition Proposal. The Company and the Sellers will promptly notify Buyer if any Acquisition Proposal, or any inquiry or contact with any Person with respect thereto (whether or not in writing), is made, and will apprise Buyer as to all of the terms and details of such Acquisition Proposal or inquiry or contact. 3.4 COVENANTS OF BUYER. Prior to the Closing, Buyer will: ------------------ (a) inform the Sellers' Representative in writing of any material variances from the representations and warranties contained in Article VI hereof or any breach of any covenant hereunder by Buyer; and (b) cooperate with the Sellers' Representative and use best efforts to cause the conditions to the Sellers' obligation to close specified in Section 2.2 to be satisfied. 13 ARTICLE IV REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COMPANY --------------------------- As a material inducement to Buyer to enter into this Agreement, the Company and the Sellers jointly and severally hereby represent and warrant that: 4.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation -------------------------------- duly organized, validly existing and in good standing under the laws of the state of Delaware and is qualified to do business and is in good standing in every jurisdiction in which the nature of its business or its ownership of property requires it to be qualified, which jurisdictions are set forth on Schedule 4.1 hereto, except where the failure to be so qualified would have a - ------------ material adverse effect on the Company's business, financial condition or results of operation. The Company has all requisite corporate power and authority and all licenses, permits and authorizations necessary to own and operate its properties and to conduct its business as presently conducted and as proposed to be conducted. The copies of the Company's articles of incorporation and by-laws which have been furnished to Buyer reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete in all material respects. The Company is not in default under or in violation of any provision of its articles of incorporation or by-laws. 4.2 AUTHORIZATION OF TRANSACTIONS. The Company has all requisite ----------------------------- corporate power and authority to deliver this Agreement and to consummate the transactions contemplated hereby. The board of directors of the Company has duly approved this Agreement and has duly authorized the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. No other corporate proceedings on the part of the Company are necessary to approve and authorize the execution and delivery of this Agreement. This Agreement and the other documents contemplated hereby to which the Company is a party have been duly executed and delivered by the Company and constitute the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. 4.3 SUBSIDIARIES; INVESTMENTS. Schedule 4.3 attached hereto ------------------------- ------------ correctly sets forth the name of each Subsidiary, the jurisdiction of its incorporation and the Persons owning the outstanding capital stock of such Subsidiary. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, possesses all requisite corporate power and authority and all material licenses, permits and authorizations necessary to own its properties and to carry on its business as now being conducted and is qualified to do business in every jurisdiction in which its ownership of property requires it to qualify, except where the failure to be so qualified would have a material adverse effect on the Company's business, financial condition or results of operation. All of the outstanding shares of capital stock of each Subsidiary are validly issued, fully paid and non-assessable, and all such shares are owned by the Company or another Subsidiary free and clear of any Lien and not subject to any option or right to purchase any such shares. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to any Subsidiary. There are no voting trusts, proxies or any other agreements 14 or understandings with respect to the voting of the capital stock of any Subsidiary. No Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock. Except as set forth on Schedule 4.3, neither the Company nor any ------------ Subsidiary owns or holds the right to acquire any shares of stock or any other security or interest in any other Person. 4.4 ABSENCE OF CONFLICTS. Except as set forth on Schedule 4.4 -------------------- ------------ hereto, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby do not and will not (a) conflict with or result in any breach of any of the provisions of, (b) constitute a default under, (c) result in a violation of, (d) give any third party or governmental authority the right to terminate or to accelerate any obligation under, (e) result in the creation of any Lien, security interest, charge or encumbrance upon the Company's assets under, or (f) require any authorization, consent, approval, exemption or other action by or notice to or filing with any court or other governmental body under, the provisions of the articles of incorporation or by-laws of the Company or any indenture, mortgage, material lease, loan agreement or other material agreement or instrument to which the Company is bound or affected, or any law, statute, rule or regulation or any judgment, order or decree to which the Company is subject. 4.5 CAPITALIZATION. Schedule 4.5 attached hereto accurately sets -------------- ------------ forth the authorized and outstanding capital stock of the Company and the name and number of shares of capital stock held by each stockholder of the Company. All of the issued and outstanding shares of the Company Stock have been duly authorized, are validly issued, fully paid and nonassessable, are not subject to, nor were they issued in violation of, any preemptive rights, and are owned of record by the Sellers, as fully described on Schedule 4.5. Except for this ------------ Agreement, there are no outstanding or authorized options, warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights or other agreements or commitments to which the Company or any Seller is a party or which are binding upon the Company or any Seller providing for the issuance, disposition or acquisition of any of the Company's capital stock or for the sharing of proceeds received in connection with the sale or disposition of any of the Company's capital stock. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Company. There are no voting trusts, proxies or any other agreements or understandings with respect to the voting of the capital stock of the Company. The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock. 4.6 FINANCIAL STATEMENTS. The Company has furnished Buyer with -------------------- copies (attached hereto as Schedule 4.6) of its audited balance sheets as of ------------ December 31, 1995 (the "Latest Balance Sheet") and December 31, 1994 and the -------------------- related statements of income and cash flow for the years ended December 31, 1995 and 1994 (including in all cases the notes thereto, if any). Each of the foregoing financial statements (collectively, the "Financial Statements") is -------------------- consistent with the books and records of the Company and presents fairly the Company's financial position, results of operations and cash flows as of and for the periods referred to therein, prepared in accordance with GAAP consistently applied. 15 4.7 ABSENCE OF UNDISCLOSED LIABILITIES. The Company has no ---------------------------------- obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise, whether or not known, whether due or to become due and regardless of when or by whom asserted) arising out of transactions entered into at or prior to the Closing, or any action or inaction at or prior to the Closing, or any state of facts existing at or prior to the Closing, except (i) obligations under contracts or commitments described on Schedule 4.12 hereto or any other ------------- Schedule hereto or under contracts and commitments entered into in the ordinary course of business which are not required to be disclosed thereon (but, in either case, not liabilities for breaches thereof), (ii) liabilities reflected on the liability side of the Latest Balance Sheet, (iii) liabilities which have arisen after the date of the Latest Balance Sheet in the ordinary course of business or otherwise in accordance with the terms and conditions of this Agreement (none of which is a liability for breach of contract, breach of warranty, tort or infringement, or a claim, lawsuit or environmental liability), and (iv) liabilities otherwise expressly set forth on Schedule 4.7 ------------ hereto. 4.8 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth on Schedule ------------------------------- -------- 4.8 hereto and except as expressly contemplated by this Agreement, since - --- December 31, 1995, the Company has not: (a) suffered a material adverse change in the business, financial condition, operating results, earnings, assets, customer, supplier or employee relations or business condition of the Company; (b) redeemed or purchased, directly or indirectly, any shares of its capital stock; (c) borrowed any amount or issued or exchanged any notes or other evidences of any Indebtedness for Borrowed Money or incurred or become subject to any obligations or liabilities (whether absolute or contingent), except current liabilities incurred in the ordinary course of business consistent with past practice and liabilities under contracts entered into in the ordinary course of business consistent with past practice; (d) discharged or satisfied any Lien or encumbrance or paid any obligation or liability, other than liabilities paid in the ordinary course of business, or prepaid any amount of Indebtedness for Borrowed Money; (e) mortgaged, pledged or subjected to any Lien, charge or any other encumbrance, any portion of its properties or assets, except Liens for current taxes and assessments not yet due and payable; (f) sold, leased, assigned or transferred (including, without limitation, transfers to stockholders or any employees or Affiliates of any Seller) any tangible assets or Proprietary Rights or other intangible assets, except in the ordinary course of business consistent with past practice, or canceled without fair consideration any debts or claims owing to or held by it, or disclosed any proprietary confidential information to any Person; 16 (g) suffered any theft, damage, destruction, casualty loss or other extraordinary loss to its tangible assets exceeding $50,000, whether or not covered by insurance; (h) entered into, amended or terminated any material lease, contract, agreement or commitment, or taken any other action or entered into any other transaction other than in the ordinary course of business and in accordance with past custom and practice, or entered into any transaction with any Insider (as defined in Section 4.21 below), or entered into any other material transaction, other than in the ordinary course of business; (i) entered into or renegotiated any employment contract or collective bargaining agreement, written or oral, or made or granted any increase in any employee benefit plan or arrangement, or amended or terminated any existing employee benefit plan or arrangement or adopted any new employee benefit plan or arrangement; (j) changed the employment terms for any employee or agent or made or granted any bonus or any wage, salary or compensation increase to any director, officer, employee or sales representative, group of employees or consultant, except in the ordinary course of business, in accordance with past customs and practice; (k) conducted its business (including, without limitation, control of inventory, pricing, incurrence of capital expenditures, credit practices and maintenance and repair of assets) other than in the ordinary course of business in accordance with past custom and practice; (l) made any capital expenditures (or commitments therefor) in excess of $100,000, either individually or in the aggregate; (m) made any loans or advances to, or guarantees for the benefit of, any Persons in excess of $25,000; or (n) entered into any lease of capital equipment or real estate involving rental in excess of $100,000 per annum. 4.9 ASSETS. ------ (a) Owned Real Properties. Schedule 4.9 sets forth a list of all U.S. --------------------- ------------ real property and foreign real property owned by the Company (or its Affiliated Entities) and used by the Company in the operation of its business (collectively, the "Owned Real Property"). With respect to each such parcel of ------------------- Owned Real Property: (i) the Company has good and marketable title to such parcel; (ii) such parcel is free and clear of all encumbrances, except Permitted Liens; (iii) there are no leases, subleases, licenses, concessions, or other agreements, written or oral, granting to any person the right of use or occupancy of any portion of such parcel; and (iv) there are no outstanding actions or rights of first refusal to purchase such parcel (other than the right of the Buyer pursuant to this Agreement), or any portion thereof or interest therein. 17 (b) Leased Properties. Schedule 4.9 sets forth a list of all of the ----------------- ------------ leases and subleases ("Leases") and each leased and subleased parcel of real ------ property in which the Company has a leasehold and subleasehold interest (the "Leased Real Property"). Each of the Leases are in full force and effect and - --------------------- the Company has a valid and existing leasehold or subleasehold interest under each of the Leases. The Company has delivered to Buyer complete and accurate copies of each of the Leases described in the Schedule 4.9. With respect to ------------ each Lease listed on the Schedule 4.9: (i) the Lease is legal, valid, binding, ------------ enforceable and in full force and effect; (ii) the Lease will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms following the Closing; (iii) neither the Company nor, to the knowledge of the Company and the Sellers' Representative, any other party to the Lease is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute such a breach or default or permit termination, modification or acceleration under the Lease; (iv) no party to the Lease has repudiated in writing any provision thereof; (v) there are no disputes, oral agreements, or forbearance programs in effect as to the Lease; (vi) the Lease has not been modified in any respect, except to the extent that such modifications are disclosed by the documents delivered to Buyer; (vii) the Company has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the Lease; and (viii) the Lease is fully assignable to Buyer without the necessity of any consent or the Company shall obtain all necessary consents prior to the Closing. (c) Real Property Disclosure. Except as disclosed on Schedule 4.9, ------------------------ ------------ there is no Real Property leased or owned by the Company (or its Affiliated Entities) used in the Company's business. The Owned Real Property and Leased Real Property is referred to collectively herein as the "Real Property". ------------- (d) No Proceedings. There are no proceedings in eminent domain or -------------- other similar proceedings pending or, to the knowledge of the Sellers' Representative and the Company (or its Affiliated Entities), threatened, affecting any portion of the Real Property. There exists no writ, injunction, decree, order or judgment outstanding, nor any litigation, pending or, to the knowledge of the Company (or its Affiliated Entities) and the Sellers threatened, relating to the ownership, lease, use, occupancy or operation by any Person of the Real Property. (e) Current Use. To the knowledge of the Sellers' Representative and ----------- the Company (or its Affiliated Entities), the current use of the Owned Real Property does not violate any instrument of record or agreement affecting such Owned Real Property. To the knowledge of the Sellers' Representative and the Company, there is no violation of any covenant, condition, restriction, easement, agreement or order of any governmental authority having jurisdiction over any of the Owned Real Property that affects such real property or the use or occupancy thereof. No damage or destruction has occurred with respect to any of the Owned Real Property that, individually or in the aggregate, has had or resulted in, or will have or result in, a significant adverse effect on the operation of the Company's business. (f) Personal Property. Except as set forth on Schedule 4.9, the ----------------- ------------ Company has good and marketable title to, or a valid leasehold interest in, the personal properties and assets, tangible or intangible, used by it, or shown on the Latest Balance Sheet or acquired thereafter, free and clear of all Liens, except for properties and assets disposed of in the ordinary course of business 18 since the date of the Latest Balance Sheet and except for Liens disclosed on the Latest Balance Sheet (including any notes thereto) and Liens for current property taxes not yet due and payable. (g) Ownership. The Company owns, or has a valid leasehold interest --------- in, all of the assets used in the conduct of business as presently conducted. (h) Condition of Assets. To the knowledge of the Sellers' ------------------- Representative and the Company (or its Affiliated Entities) buildings and all material components of all buildings, structures and other improvements included within the Real Property and all of the Company's machinery, equipment and other tangible assets and personal property used by the Company in the conduct of its business are in good condition and repair, except for ordinary wear and tear not caused by neglect, and are useable in the ordinary course of business. 4.10 ENVIRONMENTAL AND SAFETY MATTERS. -------------------------------- (a) Except as set forth in Schedule 4.10, the Company and its ------------- Subsidiaries have complied and are in compliance with all Environmental and Safety Requirements. (b) Without limiting the generality of the foregoing, the Company and its Subsidiaries have obtained and complied with, and are in compliance with, all permits, licenses and other authorizations that may be required pursuant to Environmental and Safety Requirements for the occupation of its facilities and the operation of its business; a list of all such permits, licenses and other authorizations is set forth on Schedule 4.10 attached hereto. ------------- (c) The Company and its Subsidiaries have not received any written or oral notice, report or other information regarding any actual or alleged violation of Environmental and Safety Requirements or any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, relating to the Company or its facilities and arising under Environmental and Safety Requirements. (d) Except as set forth on Schedule 4.10, none of the following exists ------------- at any property or facility owned, leased or used by the Company or its Subsidiaries: (i) underground storage tanks; (ii) asbestos-containing material in any form or condition; (iii) materials or equipment containing polychlorinated biphenyls; or (iv) landfills, surface impoundments, or other disposal areas. (e) The Company and its Subsidiaries have not treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including without limitation any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in violation of applicable law or in a manner that has given or could give rise to liabilities of the Company or its Subsidiaries, including any liability for corrective action costs, personal injury, property damage, response costs, natural resources damages or attorney fees pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or the Resource Conservation and ------ Recovery Act, as amended ("RCRA"), or any other Environmental and Safety ---- Requirements. 19 (f) Except as set forth in Schedule 4.10, no facts, events or ------------- conditions relating to the past or present facilities, properties or operations of the Company will prevent, hinder or limit continued compliance with Environmental and Safety Requirements, give rise to any investigatory, remedial or corrective obligations pursuant to Environmental and Safety Requirements, or give rise to any other liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental and Safety Requirements, including, without limitation, any relating to onsite or offsite releases or threatened releases of hazardous materials, substances or wastes, personal injury, property damage or natural resources damage. (g) Neither this Agreement nor the consummation of the transactions that are the subject of this Agreement will result in any obligations for site investigation or cleanup, or notification to, or consent of, government agencies or third parties, pursuant to any of the so-called "transaction-triggered" or "responsible property transfer" Environmental and Safety Requirements. (h) Neither the Company nor its Subsidiaries have, either expressly or by operation of law, assumed or undertaken any liability, including, without limitation, any obligation for corrective or remedial action, of any other Person relating to Environmental and Safety Requirements. (i) "Environmental and Safety Requirements" means all applicable ------------------------------------- federal, state, local and foreign statutes, regulations, ordinances and similar provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including, without limitation, all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as now in effect. 4.11 TAXES. ----- (a) The Company, each of its Subsidiaries and each Affiliated Group have filed all Tax Returns (or have filed valid extensions with respect to such Tax Returns) which they are required to file under applicable laws and regulations; all such Tax Returns are complete and correct in all material respects and have been prepared in compliance with all applicable laws and regulations in all material respects; the Company, each of its Subsidiaries and each Affiliated Group in all material respects have paid all Taxes due and owing by them (whether or not such Taxes are required to be shown on a Tax Return) and have withheld and paid over to the appropriate taxing authority all Taxes which they are required to withhold from amounts paid or owing to any employee, equityholder, creditor or other third party; neither the Company, any of its Subsidiaries nor any Affiliated Group has waived any statute of limitations with respect to any Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency; the Company and its Subsidiaries have not incurred any liability for Taxes other than in the ordinary course of business; the assessment of any additional Taxes for periods for which Tax Returns have been filed by the 20 Company, each of its Subsidiaries and each Affiliated Group shall not exceed the recorded liability therefor on the most recent audited consolidated balance sheet of the Company (excluding any amount recorded which is attributable solely to timing differences between book and Tax income); except as set forth in Schedule 4.11 hereto no foreign, federal, state or local tax audits or - ------------- administrative or judicial proceedings are pending or being conducted with respect to the Company, any Subsidiary or any Affiliated Group, no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority and no written notice indicating an intent to open an audit or other review has been received by the Company from any foreign, federal, state or local taxing authority; and there are no material unresolved questions or claims concerning the Company's any of its Subsidiaries' or any Affiliated Group's Tax liability. (b) Neither the Company nor any of its Subsidiaries has made an election under Code Section 341(f). Neither the Company nor any of its Subsidiaries is liable for the Taxes of another Person that is not a Subsidiary of the Company under (a) Treasury Regulation Section 1.1502-6 (or comparable provisions of state, local or foreign law), (b) as a transferee or successor, (c) by contract or indemnity or (d) otherwise. Neither the Company nor any of its Subsidiaries is a party to any tax sharing agreement. The Company, each of its Subsidiaries and each Affiliated Group have disclosed on their federal income Tax Returns any position taken for which substantial authority (within the meaning of Code Section 6662(d)(2)(B)(i)) did not exist at the time the return was filed. Neither the Company nor any of its Subsidiaries has made any payments, is obligated to make payments or is a party to an agreement that could obligate it to make any payments that would not be deductible under Code Section 280G. (c) No claim has ever been made by a taxing authority in a jurisdiction where the Company or any Subsidiary does not file tax returns that the Company or such Subsidiary is or may be subject to taxes assessed by such jurisdiction. (d) There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of the Company or any Subsidiary. (e) Except as set forth in Schedule 4.11 hereto, neither the Company ------------- nor any Subsidiary will be required (i) as a result of a change in method of accounting for a taxable period ending on or prior to the Closing Date, to include any adjustment in taxable income for any taxable period (or any portion thereof) or (ii) as a result of any "closing agreement," as described in Code Section 7121 (or any corresponding provision of state, local or foreign income Tax law), to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date. (f) The Company has not been a member of an Affiliated Group other than the one of which Company was the common parent, or filed or been included in a combined, consolidated or unitary income Tax Return, other than one filed by the Company. (g) Buyer will not be required to deduct and withhold any amount pursuant to Code Section 1445(a) upon the transfer of the Shares to the Buyer. 21 (h) Except as set forth on Schedule 4.11 hereto, neither the Company ------------- nor any Subsidiary owns any interest in real property in the State of New York or in any other jurisdiction in which a tax (other than a net income or franchise tax) is imposed on the gain on a transfer of an interest in real property. (i) Wented Company has made a valid election under Code Section 1362 and under any corresponding provision of applicable state, local or foreign law to be an S corporation and such election will be in effect immediately prior to the Closing Date. Except as set forth on Schedule 4.11 hereto, none of the Affiliated Entities has or will have any liability for tax under Code Section 1374 or under any corresponding provision of applicable state, local or foreign law. 4.12 CONTRACTS AND COMMITMENTS. ------------------------- (a) Except as specifically contemplated by this Agreement and except as set forth on Schedule 4.12 hereto, the Company is not a party to or bound by, ------------- whether written or oral, any: (i) collective bargaining agreement or contract with any labor union, whether formal or informal; (ii) contract for the employment of any officer, individual employee or group of employees or other person on a full-time, part-time or consulting basis or any severance agreements; (iii) agreement or indenture relating to the borrowing of money or to mortgaging, pledging or otherwise placing a Lien on any of the Company's assets; (iv) agreements with respects to the lending or investing of funds; (v) guaranty of any obligation for borrowed money or otherwise, other than endorsements made for collection; (vi) license, sublicense or royalty agreements; (vii) lease or agreement under which the Company is lessee of, or holds or operates, any personal property owned by any other party for which annual rental exceeds $100,000; (viii) lease or agreement under which the Company is lessor of or permits any third party to hold or operate any property, real or personal, owned or controlled by it for which annual rental exceeds $100,000; (ix) contract or group of related contracts with the same party for the purchase or sale of raw materials, commodities, supplies, products or other personal property or for the furnishing or receipt of services which either calls for performance over a period of more than 6 months or involves a sum in excess of $100,000 or which may not be terminable with less than six months' notice; (x) contract relating to the distribution, marketing or sales of its products or services (including contracts to provide advertising allowances or promotional services) involving more than $100,000; (xi) franchise agreements; (xii) contract which prohibits it from freely engaging in business anywhere in the world; (xiii) agreements, contracts or understandings pursuant to which the Company subcontracts work to third parties; or (xiv) any other agreement material to the Company, whether or not entered into in the ordinary course of business. (b) Except for this Agreement and the transactions contemplated hereby, the Company is not a party to or bound by any agreement, whether written or oral, pertaining to any sale, liquidation, dissolution, recapitalization, restructuring or refinancing of the Company or any acquisition of the issued or unissued capital stock or other securities of the Company or any substantial portion of the assets of the Company (including any acquisition structured as a merger, consolidation or share exchange). (c) Except as specifically contemplated by this Agreement, or disclosed on Schedule 4.12, (i) no contract or commitment required to be ------------- disclosed on Schedule 4.12 has been, ------------- 22 to the knowledge of the Sellers' Representative and the Company, breached or canceled by the other party since December 31, 1995 (ii) since December 31, 1995, no material customer or supplier has advised the Company in writing that it will stop or decrease the rate of business done with the Company, and (iii) to the knowledge of the Company and the Sellers' Representative, the Company has performed all of the obligations required to be performed by the Company in connection with the contracts or commitments required to be disclosed on Schedule 4.12, and is not in receipt of any written claim of default under any - ------------- contract or commitment required to be disclosed on the Schedule 4.12. ------------- (d) The Company has provided Buyer with a true and correct copy of all written contracts which are referred to on Schedule 4.12, together with all ------------- amendments, waivers or other changes thereto. Schedule 4.12 contains a summary ------------- description of all material terms of all oral contracts referred to therein. 4.13 PROPRIETARY RIGHTS. ------------------ (a) Schedule 4.13 hereto contains a complete and accurate list of all ------------- patented and registered Proprietary Rights owned by the Company and all pending patent applications and applications for the registration of other Proprietary Rights owned by the Company. Schedule 4.13 also contains a complete and ------------- accurate list of all trade names and unregistered trademarks and service marks owned by the Company; all computer software owned and/or used by the Company, other than commercially available software with a license fee of less than $1,000; and all licenses granted by the Company to any third party with respect to Proprietary Rights and all such licenses granted by any third party to the Company. The Company has delivered to Buyer correct and complete copies of all documents embodying such licenses. Except as set forth on Schedule 4.13, (A) to ------------- the knowledge of the Company and the Sellers' Representative, the Company owns and possesses all right, title and interest in and to, or has a valid and enforceable written license to use, all of the Proprietary Rights necessary for the operation of its business as presently conducted ; (B) the Company is not in breach of any license or other grant of rights with respect to Proprietary Rights; (C) the Company has received no written notice of any claim by any third party contesting the validity, enforceability, use or ownership of any Proprietary Rights owned or used by the Company; (D) the Company has not received any information as to any infringement or misappropriation by, or conflict with, any third party with respect to the Proprietary Rights of the Company, nor has the Company received any claims alleging infringement or misappropriation, or other conflict with, any Proprietary Rights of any third party; (E) to the knowledge of the Company and the Sellers' Representative, the Company has not infringed, misappropriated or otherwise conflicted with any Proprietary Rights of any third party, nor will continued conduct of the Company's business as currently conducted or as proposed to be conducted infringe, misappropriate or otherwise conflict with the Proprietary Rights of any third party; and (F) all Proprietary Rights owned or used by the Company immediately prior to the Closing will be owned or available for use by the Company on identical terms and conditions immediately subsequent to the Closing. (b) The Proprietary Rights comprise all of the proprietary or intellectual property rights used in the operation of the Company and its business as currently conducted and as proposed to be conducted. The Company has taken all reasonable actions to maintain and protect the 23 Proprietary Rights which it owns and uses and will continue to maintain and protect the Proprietary Rights prior to the Closing so as to not adversely affect the validity or enforceability of the Proprietary Rights. To the knowledge of the Company and the Sellers' Representative, the owners of any Proprietary Rights licensed to the Company have taken all necessary actions to maintain and protect the Proprietary Rights which are subject to such licenses. The Proprietary Rights owned or used by the Company immediately prior to the Closing hereunder will be available for use on identical terms and conditions immediately subsequent to the Closing hereunder. (c) "Proprietary Rights" shall mean all patents, all trademarks, ------------------ service marks, trade dress, trade names and corporate names and all of the goodwill of the business associated therewith; all copyrights; all registrations, applications and renewals for any of the foregoing; all inventions; all proprietary trade secrets, confidential information, formulae, compositions, manufacturing and production processes and techniques, research information, drawings, specifications, designs, plans, technical and computer data, documentation and software, and all other proprietary rights. 4.14 LITIGATION; PROCEEDINGS. Except as set forth on Schedule 4.14 ----------------------- ------------- hereto, there are no actions, suits, proceedings, orders, claims or investigations pending or, to the knowledge of the Company and Sellers' Representative, threatened against or affecting the Company, or to which the Company may be bound or affected, at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. 4.15 BROKERAGE. Except as set forth on Schedule 4.15 hereto, there --------- ------------- are no claims for brokerage commissions, finders' fees, investment bankers' fees or similar compensation in connection with the transactions contemplated by this Agreement, based on any arrangement or agreement made by or on behalf of the Company. 4.16 GOVERNMENTAL LICENSES AND PERMITS. Schedule 4.16 hereto --------------------------------- ------------- contains a complete listing and summary description of all permits, licenses, franchises, certificates, approvals and other authorizations of foreign, federal, state and local governments or authorities or other similar rights owned, possessed or used by the Company in the conduct of its business and the ownership and use of its Real Property (collectively, the "Licenses"). Except -------- as indicated on Schedule 4.16, the Company owns or possesses all right, title ------------- and interest in and to all of the Licenses, and the Licenses constitute all permits, licenses, franchises, certificates, approvals and other authorizations used in the conduct of the Company's business. Seller is in compliance in all material respects with the terms and conditions of such Licenses and has received no written notices that it is in violation of any of the terms or conditions of such Licenses. No loss or expiration of any License is pending or, to the knowledge of the Company and the Sellers' Representative, threatened or reasonably foreseeable, other than expiration in accordance with the terms thereof. 4.17 EMPLOYEES. --------- (a) No key Employee and no group of Employees of the Company has delivered any written notice to the Company of any plans to terminate his, her or their employment with the 24 Company. The Company has complied in all material respects with all applicable laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and the payment of social security and other taxes. Except as set forth in Schedule 4.17 hereto, within ------------- the past five years, the Company has not experienced any strikes, grievances, unfair labor practices claims or other employee disputes and there are no material labor relations disputes with Employees of the Company nor are such disputes, to the knowledge of the Company and the Sellers' Representative, threatened. (b) "Employees" shall mean all current employees of the Company other --------- than temporary employees. Schedule 4.17 hereto sets forth a complete and ------------- accurate list of all Employees as of the Closing Date, their permanent classifications, if applicable, their hourly rates of compensation or base salaries, as applicable, and their dates of employment. In addition, to the extent any Employees are on leaves of absence, Schedule 4.17 shall indicate the ------------- nature of each such leave of absence and each such Employee's anticipated date of return to active employment. Schedule 4.17 hereto sets forth a complete and ------------- accurate list of all temporary employees, their dates of employment and hours worked during 1995. 4.18 EMPLOYEE BENEFIT PLANS. ---------------------- (a) Schedule 4.18(a) hereto contains an accurate and complete list of ---------------- (i) each "employee benefit plan" (as such term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) at any ----- time contributed to, maintained or sponsored by the Company, or with respect to which the Company has any liability or potential liability; and (ii) each other retirement, savings, thrift, deferred compensation, severance, stock ownership, stock purchase, stock option, performance, bonus, incentive, vacation or holiday pay, travel, fringe benefit, hospitalization or other medical, disability, life or other insurance, and any other written welfare benefit policy, trust, understanding or arrangement contributed to, maintained or sponsored by any of the Sellers for the benefit of any present or former employee, officer or director of the Company, or with respect to which the Company has any liability or potential liability. Each item listed on Schedule 4.18(a) is referred to ---------------- herein as a "Benefit Plan." ------------ (b) Except as set forth on Schedule 4.18(a) hereto, Schedule 4.18(b) ---------------- ---------------- hereto contains an accurate and complete list of each collective bargaining agreement and each other written agreement, arrangement, commitment, understanding, plan, or policy pursuant to the terms of which the Company is now or may in the future be obligated to make any payment or provide any benefits to, with or for the benefit of any current or former employee, officer, director or consultant of the Company (including, without limitation, each employment, compensation, termination or consulting agreement or arrangement). Each item listed on Schedule 4.18(b) is referred to herein as a "Compensation Commitment." ---------------- ----------------------- (c) Each Benefit Plan that is intended to be qualified within the meaning of Section 401(a) of the Code and each trust which forms a part of any such Benefit Plan (i) has received a determination from the Internal Revenue Service that such Benefit Plan is qualified under Section 401(a) of the Code and that such related trust is exempt from taxation under Section 501(a) of the Code, and nothing has occurred since the date of such determination that could materially 25 adversely affect the qualification of such Benefit Plan or the exemption from taxation of such related trust; and (ii) is in compliance with the requirements of Sections 401(a)(4) and 410(b) of the Code for each plan year of such Benefit Plan commencing on or before the Closing Date. (d) Except as set forth on Schedule 4.18(d) hereto, the Company does ---------------- not currently contribute to, maintain, sponsor or have any liability with respect to any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA) that is subject to Section 302 of ERISA or Section 412 of the Code, and none of the Sellers has contributed to, maintained or sponsored or has any liability with respect to any such employee pension benefit plan for any time during the six-year period immediately preceding the Closing Date. (e) Except as set forth on Schedule 4.18(e) hereto, none of the ---------------- Benefit Plans or Compensation Commitments obligates the Company to pay any separation, severance, termination or similar benefit solely as a result of any transaction contemplated by this Agreement or solely as a result of a change in control or ownership within the meaning of Section 280G of the Code. (f) Except as set forth on Schedule 4.18(f) hereto, (i) each Benefit ---------------- Plan and any related trust, insurance contract or fund has been maintained, funded and administered in compliance, in all material respects, with its respective terms and the terms of any applicable collective bargaining agreements and in compliance with all applicable laws and regulations, including, but not limited to, ERISA and the Code; (ii) there has been no application for or waiver of the minimum funding standards imposed by Section 412 of the Code with respect to any Benefit Plan, and neither the Company nor any Seller is aware of any facts or circumstances that would materially change the funded status of any such Benefit Plan; (iii) no asset of the Company that is to be acquired by the Buyer, directly or indirectly, pursuant to this Agreement is subject to any lien under ERISA or the Code; (iv) the Company has not incurred any liability under Title IV of ERISA (other than for contributions not yet due) or to the Pension Benefit Guaranty Corporation (other than for payment of premiums not yet due); and (v) there are no pending or, to the knowledge of the Sellers' Representative and the Company, threatened actions, suits, investigations or claims with respect to any Benefit Plan or Compensation Commitment (other than routine claims for benefits) which could result in liability to the Company (whether direct or indirect), and neither the Company nor any Seller has any knowledge of any facts which could give rise to (or be expected to give rise to) any such actions, suits, investigations or claims. (g) Except as set forth on Schedule 4.18(g) hereto, (i) the Company ---------------- has complied with the health care continuation requirements of Part 6 of Title I of ERISA; and (ii) the Company has no obligation under any Benefit Plan or otherwise to provide health benefits to former employees of the Company or any other person, except as specifically required by Part 6 of Title I of ERISA. (h) Except as set forth on Schedule 4.18(h) hereto, (i) the Company ---------------- has not incurred any liability on account of a "partial withdrawal" or a "complete withdrawal" (within the meaning of Sections 4205 and 4203, respectively, of ERISA) from any Benefit Plan subject to Title IV of ERISA which is a "multiemployer plan" (as such term is defined in Section 3(37) of ERISA) (a "Multiemployer Plan"), no such liability has been asserted, and there are no ------------------ events or 26 circumstances which could result in any such partial or complete withdrawal; and (ii) the Company is not bound by any contract or agreement or has any obligation or liability described in Section 4204 of ERISA. To the best knowledge of the Company, each Multiemployer Plan complies in form and has been administered in accordance with the requirements of ERISA and, where applicable, the Code; and each Multiemployer Plan is qualified under Section 401(a) of the Code as amended to the date hereof. (i) Except as set forth on Schedule 4.18(i), the actions contemplated ---------------- by this Agreement will not give rise to any liability with respect to any "employee welfare benefit plan" (as such term is defined in Section 3(1) of ERISA) that is a "multiemployer plan" (as such term is defined in Section 3(37) of ERISA). (j) The Company does not have any liability with respect to any "employee benefit plan" (as defined in Section 3(3) of ERISA) solely by reason of being treated as a single employer under Section 414 of the Code with any other trade, business or entity. (k) Except as set forth on Schedule 4.18(k) hereto, the Company does ---------------- not contribute to, maintain or sponsor or have any liability with respect to any employee benefit plan, agreement or arrangement applicable to employees of the Company located outside the United States (the "Foreign Plans"). Each Foreign ------------- Plan set forth on Schedule 4.18(k) is in compliance in all material respects ---------------- with all laws applicable thereto and the respective requirements of such Foreign Plan's governing documents. There are no actions, suits or claims (other than routine claims for benefits) with respect to any Foreign Plan, and no circumstances exist which could give rise to any such actions, suits or claims. (l) With respect to each Benefit Plan and each Compensation Commitment, the Company has provided the Buyer with true, complete and correct copies of (to the extent applicable) (i) all documents pursuant to which the Benefit Plan or Compensation Commitment is maintained, funded and administered, (ii) the most recent annual report (Form 5500 series) filed with the IRS (with applicable attachments), (iii) the most recent financial statement, (iv) the most recent actuarial valuation of benefit obligations, and (v) the most recent determination letter received from the IRS and the most recent application to the IRS for such determination letter. 4.19 INSURANCE. Schedule 4.19 hereto lists and briefly describes --------- ------------- each insurance policy maintained by the Company. All of such insurance policies are in full force and effect, and the Company is not in default with respect to its obligations under any such insurance policies. 4.20 OFFICERS AND DIRECTORS; BANK ACCOUNTS. Schedule 4.20 hereto ------------------------------------- ------------- lists all officers and directors of the Company, and all of the Company's bank accounts (designating each authorized signatory and the level of each signatory's authorization). 4.21 AFFILIATE TRANSACTIONS. Except as set forth on Schedule 4.21 ---------------------- ------------- hereto, no officer, director, stockholder or employee of the Company or any person related by blood or marriage to any such Person in which any such person owns any beneficial interest (collectively, "Insiders"), is a party to any -------- agreement, contract, commitment or transaction with the Company or 27 which pertains to the Company or has any interest in any property, whether real, personal or mixed, or tangible or intangible, relating to the Company or its business. 4.22 COMPLIANCE WITH LAWS. -------------------- (a) Except as set forth on Schedule 4.22 hereto, the Company and its ------------- officers, directors, agents and employees have complied in all material respects with all applicable laws and regulations of foreign, federal, state and local governments and all agencies thereof which affect the business, business practices (including, but not limited to, the Company's sales and distribution of its products and services) or assets of the Company or to which the Company may be subject, and no claims, complaints, suits, proceedings, investigations or hearings have been commenced or, to the knowledge of the Company and the Sellers' Representative, threatened against the Company alleging a violation of any such laws or regulations. (b) To the knowledge of the Company and the Sellers' Representative, the Company has not given or agreed to give any money, gift or similar benefit (other than incidental gifts of articles of nominal value) to any actual or potential customer, supplier, governmental employee, Insider or any other person in a position to assist or hinder the Company in connection with any actual or proposed transaction concerning the business. 4.23 PRODUCT WARRANTY. Except as disclosed on Schedule 4.23 hereto, ---------------- ------------- all products designed, manufactured, merchandised, serviced, distributed, sold or delivered by the Company at any time prior to the Closing Date have been in conformity, in all material respects, with all applicable contractual commitments and all express or implied warranties. No liability exists for replacement therefor or other damages in connection with such sales or deliveries at any time prior to the Closing Date. No products heretofore sold by the Company are now subject to any guarantee or warranty other than the Company's standard terms and conditions of sale, a copy of which has been delivered to the Buyer. 4.24 PRODUCT LIABILITY. Except as disclosed on Schedule 4.24 hereto, ----------------- ------------- there is no existing liability, claim or obligation arising from or alleged to arise from any actual or alleged injury to person or property as a result of the ownership, possession or use of any product manufactured, sold, leased or delivered by the Company. 4.25 CLOSING DATE. All of the representations and warranties ------------ contained in this Article IV and elsewhere in this Agreement and all information delivered in any Schedule, attachment or Exhibit hereto or in any writing delivered to Buyer are true and correct on the date of this Agreement and will be true and correct on the Closing Date, except to the extent that the Company has advised Buyer otherwise in writing prior to the Closing. 28 ARTICLE V REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE SELLERS ---------------------------------------------------------- As a material inducement to Buyer to enter into this Agreement, the Sellers severally and not jointly represent and warrant to Buyer that: 5.1 AUTHORIZATION OF TRANSACTIONS. Each Seller has all requisite ----------------------------- power and authority to enter into this Agreement and the other documents contemplated hereby to which such Seller is a party, and to perform its obligations hereunder and thereunder. This Agreement and the other documents contemplated hereby to which each Seller is a party have been duly executed and delivered by such Seller and constitute the valid and binding agreements of such Seller, enforceable in accordance with their terms. 5.2 ABSENCE OF CONFLICTS. Neither the execution and the delivery of -------------------- this Agreement and the other documents contemplated hereby to which any Seller is a party, nor the consummation of the transactions contemplated hereby and thereby, will (a) conflict with, result in a breach of any of the provisions of, (b) constitute a default under, (c) result in the violation of, (d) give any third party or governmental authority the right to terminate or to accelerate any obligation under, (e) result in the creation of any lien, security interest or charge or encumbrance upon the Company Stock under, or (f) require any authorization, consent, approval, execution or other action by or notice to any court or other governmental body under, the provisions of any indenture, mortgage, lease, loan agreement or other material agreement or instrument to which such Seller is bound or affected, or any statute, regulation, rule, judgment, order, decree or other restriction of any government, governmental agency or court to which such Seller is subject. No notice to, filing with or authorization, consent or approval of any government or governmental agency by any Seller is necessary for the consummation of the transactions contemplated by this Agreement and the other documents contemplated hereby to which any Seller is a party. 5.3 SHARES. The Sellers, in the aggregate, hold of record and ------ beneficially own all of the issued and outstanding shares of Company Stock, free and clear of Liens or any other restrictions on transfer (other than any restrictions under the Securities Act of 1933, as amended, and state securities laws). No Seller is a party to any option, warrant, right, contract, call, put or other agreement or commitment providing for the disposition or acquisition of any capital stock of the Company (other than this Agreement). No Seller is a party to any voting trust, proxy or other agreement or understanding with respect to the voting of any capital stock of the Company. 5.4 BROKERAGE. Except as set forth on Schedule 4.15 hereto, there --------- ------------- are no claims for brokerage commissions, finders' fees, investment bankers' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of any Seller. 5.5 CLOSING DATE. All of the representations and warranties ------------ concerning the Sellers contained in this Article V and elsewhere in this Agreement and all information delivered 29 in any Schedule, attachment or Exhibit hereto or in any writing delivered to Buyer are true and correct on the date of this Agreement and will be true and correct on the Closing Date, except to the extent that the Sellers' Representative has advised Buyer otherwise in writing prior to the Closing. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER --------------------------------------- As a material inducement to the Sellers to enter into this Agreement, Buyer hereby represents and warrants that: 6.1 ORGANIZATION AND CORPORATE POWER. Buyer is a corporation duly -------------------------------- organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite corporate power and authority to enter into this Agreement and the other agreements contemplated hereby and perform its obligations hereunder and thereunder. 6.2 AUTHORIZATION. The execution, delivery and performance of this ------------- Agreement and the other agreements contemplated hereby by Buyer and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all requisite corporate action on the part of Buyer, and no other corporate proceedings on its part are necessary to authorize the execution, delivery or performance of this Agreement or the other agreements contemplated hereby. Each of this Agreement and the other agreements contemplated hereby constitutes a valid and binding obligation of Buyer, enforceable against the Buyer in accordance with its terms. 6.3 NO VIOLATION. Buyer is not subject to or obligated under its ------------ certificate of incorporation, its by-laws, any applicable law, or rule or regulation of any governmental authority, or any agreement or instrument, or any license, franchise or permit, or subject to any order, writ, injunction or decree, which would be breached or violated by its execution, delivery or performance of this Agreement or the other agreements contemplated hereby. 6.4 GOVERNMENTAL AUTHORITIES AND CONSENTS. Except for such filings ------------------------------------- required by the HSR Act, Buyer is not required to submit any notice, report or other filing with any governmental authority in connection with the execution or delivery by it of this Agreement or the consummation of the transactions contemplated hereby. Except for any approval required pursuant to the HSR Act, no consent, approval or authorization of any governmental or regulatory authority or any other party or Person is required to be obtained by Buyer in connection with its execution, delivery and performance of this Agreement and the other agreements contemplated hereby or the transactions contemplated hereby or thereby. 6.5 BROKERAGE. There are no claims for brokerage commissions, --------- finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Buyer. 30 6.6 LITIGATION. There are no actions, suits, proceedings, orders or ---------- investigations pending or, to the best of Buyer's knowledge, threatened against or affecting Buyer at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which would adversely affect Buyer's performance under this Agreement or the other agreements contemplated hereby or the consummation of the transactions contemplated hereby or thereby. 6.7 CLOSING DATE. All of the representations and warranties ------------ contained in this Article VI and elsewhere in this Agreement and all information delivered in any Schedule, attachment or Exhibit hereto or in any writing delivered to the Company, the Sellers or Sellers' Representative are true and correct on the date of this Agreement and will be true and correct on the Closing Date, except to the extent that Buyer has advised the Sellers' Representative otherwise in writing prior to the Closing. 6.8 PURCHASE FOR INVESTMENT. Buyer is purchasing all of the issued ----------------------- and outstanding shares of Company Stock for investment and not for resale or distribution. The shares of Company Stock purchased hereunder will not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of in violation of any applicable securities laws or regulations. 6.9 FINANCING ARRANGEMENTS. The commitment letter from Buyer's ---------------------- lender, attached hereto as Exhibit F, has not been terminated or revoked. --------- ARTICLE VII TERMINATION ----------- 7.1 TERMINATION. This Agreement may be terminated at any time prior ----------- to the Closing: (a) by mutual written consent of Buyer and the Sellers' Representative; (b) by either Buyer, on the one hand, or the Sellers' Representative, on the other, if there has been a material misrepresentation in or breach of the representations and warranties or covenants set forth in this Agreement on the part of the Sellers or the Company (in the case of Buyer) or Buyer (in the case of the Sellers' Representative) or if events have occurred which have made it impossible to satisfy a condition precedent to the terminating party's obligation to consummate the transactions contemplated hereby, unless such terminating party's breach of this Agreement has caused such condition to be unsatisfied; (c) by the Sellers' Representative if on or after June 15, 1996 (i) all of the conditions to Buyer's obligation at the Closing, (other than Section 2.1(e)) have been satisfied, (ii) the Sellers' Representative notifies the Buyer that the Sellers are prepared to close the transactions contemplated by this Agreement, (iii) Buyer does not agree to waive any remaining conditions to 31 Buyer's obligation at Closing and (iv) Buyer does not notify the Sellers' Representative on such date that Buyer will deposit $5 million (the "Deposit") ------- with a mutually agreeable escrow agent within two business days of such notice; (d) by either Buyer or the Sellers' Representative if the transactions contemplated by this Agreement have not been consummated by July 15, 1996; provided that the party seeking termination pursuant to clause (c) of this Section 7.1 (or the Company or the Sellers, in the case of a termination sought by the Sellers' Representative) is not in breach of any of its representations, warranties or covenants contained in this Agreement. In the event of termination by the Sellers' Representative or Buyer pursuant to this Section 7.1, written notice thereof (describing in reasonable detail the basis therefor) shall promptly be delivered to the other party. 7.2 EFFECT OF TERMINATION. In the event of termination of this --------------------- Agreement by either Buyer or the Sellers' Representative as provided above, this Agreement will forthwith become void and there will be no liability on the part of any party hereto to any other party hereto or its shareholders, directors or officers in respect thereof, except for the obligations of the parties hereto in Sections 9.1, 9.5 and 9.6, except as provided in Section 7.3 below and except that nothing herein will relieve any party from any breach of this Agreement prior to such termination. 7.3 DEPOSIT. In the event that the Sellers' Representative ------- terminates this Agreement pursuant to Section 7.1(d) above, the Deposit will be paid to the Sellers' Representative as liquidated damages. Buyer and the Sellers' Representative will promptly notify the escrow agent of such payment. ARTICLE VIII SURVIVAL; INDEMNIFICATION ------------------------- 8.1 SURVIVAL. Except as set forth in the following sentence, all -------- representations, warranties, covenants and agreements set forth in this Agreement or in any writing delivered in connection with this Agreement will survive the Closing Date and the consummation of the transactions contemplated hereby and will not be affected by any examination made for or on behalf of Buyer, the knowledge of any of its officers, directors, stockholders, employees or agents, or the acceptance of any certificate or opinion. Sections 4.1, 4.2, 4.3, 4.4, 4.6, 4.8, 4.9(b), (d), (e) and (h), 4.12, 4.13, 4.14, 4.16, 4.17, 4.18, 4.19, 4.20, 4.22, 4.23, 4.24 and 4.25 (to the extent it relates to the aforementioned representations) will not survive the Closing Date and the consummation of the transactions contemplated hereby. 8.2 INDEMNIFICATION. --------------- (a) Subject to the limitations set forth in (b) below, the Sellers jointly and severally agree to indemnify Buyer, its Affiliates, officers, directors, stockholders, employees, agents, representatives, successors and permitted assigns (collectively, the "Buyer Parties") and hold each of them ------------- harmless against and pay on behalf of or reimburse such Buyer Parties in respect of any loss, liability, demand, claim, action, cause of action, cost, damage, deficiency, tax, penalty, fine 32 or expense, whether or not arising out of third party claims (including, without limitation, interest, penalties, reasonable attorneys' fees and expenses and all amounts paid in investigation, defense or settlement of any of the foregoing) (collectively, "Losses") which any such Buyer Party may suffer, sustain or ------ become subject to, as a result of, in connection with, relating or incidental to or by virtue of: (i) the breach of the Company's or the Sellers' representations or warranties contained in Article IV (to the extent such representations survive the Closing Date) or Article V hereof or elsewhere in this Agreement, (ii) the breach of any covenant or agreement of the Company or the Sellers (including, without limitation, as set forth in Section 9.3(d)) contained in this Agreement; (iii) any claims of any brokers or finders claiming by, through or under the Company or the Sellers; and (iv) the ownership or lease of the Company's former Jacksonville, Florida facility or any liability arising from Environmental and Safety Requirements at such facility (other than workers' compensation claims). (b) The indemnification provided for in Section 8.2(a) above is subject to the following limitations: (i) the Sellers will be liable to Buyer with respect to claims referred to in subsection (a)(i) above only if Buyer gives the Sellers' Representative written notice thereof for claims arising from breaches of the representations and warranties (w) set forth in Section 4.7 (only as such representation relates to the Company and not the Affiliated Entities) on or prior to March 31, 1998; (x) set forth in Section 4.10 within five years after the Closing Date; (y) set forth in Section 4.11 prior to the expiration of the applicable statute of limitation with respect thereto; and (z) set forth in Sections 4.5, 4.7 (as such representation relates to the Affiliated Entities), 4.9(a), (c), (f) and (g), 4.15, 4.21 and Article V as to which claims may be made at any time (the "Survival Period"); --------------- (ii) the Sellers will not be liable to Buyer for any Loss arising under subsections (a)(i) (except for breaches of the representations and warranties set forth in Article V and Section 4.7) and (a)(v) above unless the aggregate amount of all such Losses relating to all such breaches exceeds $500,000 in the aggregate, and then only to the extent that such Losses, in the aggregate, exceed such amount; provided that the second $250,000 of Losses applied against the basket set forth in clause (iii) below will be deemed to be applied against this clause (ii) as well as clause (iii) below; (iii) the Sellers will not be liable to Buyer for any Loss arising under a breach of Section 4.7 (as such breach relates to the Company and not the Affiliated Entities) unless the aggregate amount of all such Losses relating to all such breaches exceeds $500,000, and then only to the extent that such Losses, in the aggregate, exceed such amount; (iv) notwithstanding the foregoing, the Sellers will be liable to Buyer for any Loss arising under Section 4.7 (as such breach relates to the Affiliated Entities); (v) except with respect to breaches of the representations set forth in Section 4.10 and Section 4.7 (as such breaches relate to the Affiliated Entities), in no event 33 will the Sellers be liable for any Losses of Buyer in an amount in excess of $10,000,000. With respect to breaches of the representations set forth in Section 4.10 and Section 4.7 (as such breaches relate to the Affiliated Entities) and Losses pursuant to subsection (a)(v) above, in no event will the Sellers be liable for any such Losses of Buyer in an amount in excess of the $10,000,000; and (vi) with respect to breaches of the representations set forth in Section 4.10, the Sellers will not be liable to Buyer for any individual Loss unless the amount of such Loss exceeds $25,000, and if such Loss exceeds $25,000 it will be subject to the provisions of clause (ii) above. Notwithstanding any implication to the contrary contained in this Agreement, so long as Buyer delivers written notice of a claim to the Sellers' Representative within the foregoing respective Survival Period, the Sellers shall be required to jointly and severally indemnify Buyer for all Losses that Buyer may suffer with respect to such claim through the date of the claim, the end of the survival period, and beyond. (c) Buyer agrees to indemnify the Sellers and hold each of them harmless against any Loss which they may suffer, sustain or become subject to, as the result of a breach of any representation, warranty, covenant, or agreement by Buyer contained in this Agreement. (d) If a party hereto seeks indemnification under this Section 8.2, such party (the "Indemnified Party") shall give written notice to the other ----------------- party (the "Indemnifying Party") of the facts and circumstances giving rise to ------------------ the claim. In that regard, if any suit, action, claim, liability or obligation shall be brought or asserted by any third party which, if adversely determined, would entitle the Indemnified Party to indemnity pursuant to this Section 8.2, the Indemnified Party shall promptly notify the Indemnifying Party of the same in writing, specifying in detail the basis of such claim and the facts pertaining thereto and the Indemnifying Party, if it so elects, shall assume and control the defense thereof (and shall consult with the Indemnified Party with respect thereto), including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all necessary expenses. If the Indemnifying Party elects to assume and control the defense, the Indemnified Party shall have the right to employ counsel separate from counsel employed by the Indemnifying Party in any such action and to participate in the defense thereof, but the fees and expenses of such counsel employed by the Indemnified Party shall be at the expense of the Indemnified Party unless (i) the employment thereof has been specifically authorized by the Indemnifying Party in writing, or (ii) the Indemnifying Party has failed to assume the defense and employ counsel, in which case the fees and expenses of the Indemnified Party's counsel shall be paid by the Indemnifying Party. The Indemnifying Party shall not be liable for any settlement of any such action or proceeding effected without the written consent of the Indemnifying Party, however, if there shall be a final judgment for the plaintiff in any such action, the Indemnifying Party agrees to indemnify and hold harmless the Indemnified Party from and against any loss or liability by reason of such judgment. (e) The Indemnifying Party shall pay the Indemnified Party in immediately available funds promptly after the Indemnified Party provides the Indemnifying Party with written 34 notice of a claim hereunder and the parties reasonably agree that there is a reasonable basis for such claim or a final result, determination, finding, judgment and/or award is made pursuant to the terms of Section 8.3. (f) Any indemnification payments paid under this Section 8.2 will be treated as an adjustment to the Purchase Price. (g) Subject to the terms and conditions set forth in this Section 8.2, in the event of a breach of any representation, warranty, covenant or agreement contained in this Agreement, the Buyer or the Sellers, as the case may be, may, at such party's option, set-off all or any portion of the Losses which such party suffers, sustains or becomes subject to as a result of such breach against any amounts due or to become due to the Sellers or Buyer, as the case may be, whether pursuant to this Agreement or otherwise. 8.3 ARBITRATION PROCEDURE. --------------------- (a) The Buyer, the Sellers and the Sellers' Representative agree that the arbitration procedure set forth below shall be the sole and exclusive method for resolving and remedying claims for money damages arising out of the provisions of Section 8.2 (the "Disputes"). Nothing in this Section 8.3 shall -------- prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined below) or availing itself of the other remedies set forth in Section 8.4 below. The parties hereby agree and acknowledge that, except as otherwise provided in this Section 8.3 or in the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time, the arbitration procedures and any Final Determination hereunder shall be governed by, and shall be enforced pursuant to the Uniform Arbitration Act and applicable provisions of New York law. (b) In the event that any party asserts that there exists a Dispute, such party shall deliver a written notice to each other party involved therein specifying the nature of the asserted Dispute and requesting a meeting to attempt to resolve the same. If no such resolution is reached within ten business days after such delivery of such notice, the party delivering such notice of Dispute (the "Disputing Person") may, within 45 business days after ---------------- delivery of such notice, commence arbitration hereunder by delivering to each other party involved therein a notice of arbitration (a "Notice of Arbitration") --------------------- and by filing a copy of such Notice of Arbitration with the appropriate office of the American Arbitration Association. Such Notice of Arbitration shall specify the matters as to which arbitration is sought, the nature of any Dispute, the claims of each party to the arbitration and shall specify the amount and nature of any damages, if any, sought to be recovered as a result of any alleged claim, and any other matters required by the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time to be included therein, if any. (c) The Sellers' Representative and Buyer each shall select one independent arbitrator expert in the subject matter of the Dispute (the arbitrators so selected shall be referred to herein as "Sellers' Arbitrator" and ------------------- "Buyer's Arbitrator," respectively). In the event that either party fails to ------------------ select an independent arbitrator as set forth herein within 20 days from delivery of a Notice 35 of Arbitration, then the matter shall be resolved by the arbitrator selected by the other party. Sellers' Arbitrator and Buyer's Arbitrator shall select a third independent arbitrator expert in the subject matter of the dispute, and the three arbitrators so selected shall resolve the matter according to the procedures set forth in this Section 8.3. If Sellers' Arbitrator and Buyer's Arbitrator are unable to agree on a third arbitrator within 20 days after their selection, Sellers' Arbitrator and Buyer's Arbitrator shall each prepare a list of three independent arbitrators. Sellers' Arbitrator and Buyer's Arbitrator shall each have the opportunity to designate as objectionable and eliminate one arbitrator from the other arbitrator's list within 7 days after submission thereof, and the third arbitrator shall then be selected by lot from the arbitrators remaining on the lists submitted by Sellers' Arbitrator and Buyer's Arbitrator. (d) The arbitrator(s) selected pursuant to paragraph (c) will determine the allocation of the costs and expenses of arbitration based upon the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. For example, if Buyer submits a claim for $1,000, and if the Sellers' Representative contests only $500 of the amount claimed by Buyer, and if the arbitrator(s) ultimately resolves the dispute by awarding Buyer $300 of the $500 contested, then the costs and expenses of arbitration will be allocated 60% (i.e. 300 / 500) to the Sellers' Representative and 40% (i.e. 200 / 500) to Buyer. (e) The arbitration shall take place in New York City and shall be conducted under the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time in the State of New York, except as otherwise set forth herein or as modified by the agreement of all of the parties to this Agreement. The arbitrator(s) shall conduct the arbitration so that a final result, determination, finding, judgment and/or award (a "Final ----- Determination") is made or rendered as soon as practicable, but in no event - ------------- later than 90 business days after the delivery of the Notice of Arbitration nor later than 10 days following completion of the arbitration. The Final Determination must be agreed upon and signed by the sole arbitrator or by at least two of the three arbitrators (as the case may be). The Final Determination shall be final and binding on all parties and there shall be no appeal from or reexamination of the Final Determination, except for fraud, perjury, evident partiality or misconduct by an arbitrator prejudicing the rights of any party and to correct manifest clerical errors. (f) Buyer and the Sellers' Representative may enforce any Final Determination in any state or federal court having jurisdiction over the dispute. For the purpose of any action or proceeding instituted with respect to any Final Determination, each party hereto hereby irrevocably submits to the jurisdiction of such courts, irrevocably consents to the service of process by registered mail or personal service and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may have or hereafter have as to personal jurisdiction, the laying of the venue of any such action or proceeding brought in any such court and any claim that any such action or proceeding brought in such court has been brought in an inconvenient forum. (g) If any party shall fail to pay the amount of any damages, if any, assessed against it within 10 days of the delivery to such party of such Final Determination, the unpaid amount shall bear interest from the date of such delivery at the maximum rate permitted by applicable usury laws. Interest on any such unpaid amount shall be compounded semi-annually, 36 computed on the basis of a 360-day year consisting of twelve 30-day months and shall be payable on demand. In addition, such party shall promptly reimburse the other party for any and all costs or expenses of any nature or kind whatsoever (including, but not limited to, all attorneys' fees) incurred in seeking to collect such damages or to enforce any Final Determination. 8.4 REMEDIES. Except as provided in Section 8.3 hereof regarding the -------- requirements of using the arbitration procedure set forth therein for resolving and remedying claims for money damages arising out of the provisions of Section 8.2, Buyer and the Sellers' Representative each have and retain all other rights and remedies existing in their favor at law or equity, including, without limitation, any actions for specific performance and/or injunctive or other equitable relief (including, without limitation, the remedy of rescission) to enforce or prevent any violations of the provisions of this Agreement. Without limiting the generality of the foregoing, each Seller hereby agrees that in the event such Seller (or the Sellers' Representative, on behalf of such Seller) fails to convey the Company Stock to Buyer in accordance with the provisions of this Agreement, Buyer's remedy at law may be inadequate. In such event, Buyer shall have the right, in addition to all other rights and remedies it may have, to specific performance of the obligations of the Sellers to convey the Company Stock. 8.5 EFFECT OF TAXES AND INSURANCE. Losses of the Buyer shall be ----------------------------- adjusted to give credit to the Seller for (i) any net reduction in federal, state or local income or franchise Tax liability when and as realized at any time by the Buyer in connection with the Losses for which indemnification is sought hereunder, and (ii) any amounts when and as recovered by the Buyer with respect to the matter for which the Buyer is being indemnified under insurance policies for the benefit of the Buyer that reduce Losses that would otherwise be sustained, except to the extent by which the Buyer can demonstrate the premiums of such policies have increased as a result of such recovery. ARTICLE IX ADDITIONAL AGREEMENTS --------------------- 9.1 PRESS RELEASES AND ANNOUNCEMENTS. Prior to the Closing Date, -------------------------------- press releases related to this Agreement and the transactions contemplated herein, or other announcements to the employees, customers or suppliers of the Company will be prepared jointly by the Sellers' Representative and Buyer and none will be issued without the mutual approval of the Sellers' Representative and Buyer, except any public disclosure which is required by law or regulation (in which case the disclosure shall be prepared jointly by the Sellers' Representative and Buyer). After the Closing Date, no press releases related to this Agreement or the transactions contemplated hereby and the transactions contemplated herein, or other announcements to the employees, customers or suppliers of the Company will be issued without Buyer's consent. 9.2 FURTHER TRANSFERS. The Company, the Sellers and the Sellers' ----------------- Representative will execute and deliver such further instruments of conveyance and transfer and take such additional action as Buyer may reasonably request to effect, consummate, confirm or evidence the transfer to Buyer of the Company Stock and any other transactions contemplated hereby. 37 9.3 TAX MATTERS. The following provisions shall govern the ----------- allocation of responsibility as between Buyer, the Company and Sellers for certain Tax matters following the Closing Date: (a) Tax Periods Ending on or Before the Closing Date. The Sellers' ------------------------------------------------ Representative shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company and the Subsidiaries for all periods ending on or prior to the Closing Date which are filed after the Closing Date. All items of income, gain, deduction, loss and credit shall be reported on such Tax Returns in a manner consistent with prior Tax Returns except to the extent prohibited by applicable statute or regulations. The Sellers' Representative shall permit the Buyer to review and comment on each such Tax Return at least 10 days prior to filing, and shall not unreasonably refuse to take such comments into account so long as they are (i) not inconsistent with prior Tax Returns or (ii) prohibited by applicable statute or regulations. Buyer shall pay, or shall cause the Company and/or the Subsidiaries to pay, all Taxes of the Company and the Subsidiaries with respect to such periods, and Sellers shall reimburse Buyer for Taxes of the Company and the Subsidiaries with respect to such periods within fifteen (15) days of payment by the Buyer, the Company and/or the Subsidiaries of such Taxes to the extent such Taxes are not accrued on the Closing Balance Sheet. (b) Tax Periods Beginning Before and Ending After the Closing Date. -------------------------------------------------------------- Buyer shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of the Company and its Subsidiaries for Tax periods which begin before the Closing Date and end after the Closing Date, and shall pay, or shall cause the Company and/or the Subsidiaries to pay, all Taxes of the Company and the Subsidiaries with respect to such periods. Sellers shall pay to Buyer within fifteen (15) days of the date on which Taxes are paid with respect to such periods an amount equal to the portion of such Taxes which relates to the portion of such Taxable period ending on the Closing Date to the extent such Taxes are not accrued on the Closing Balance Sheet. For purposes of this Section, in the case of any Taxes that are imposed on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Closing Date, the portion of such Taxes which relates to the portion of such Taxable period ending on the Closing Date shall (x) in the case of any Taxes other than Taxes based upon or related to income, be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction the numerator of which is the number of days in the Taxable period ending on the Closing Date and the denominator of which is the number of days in the entire Taxable period, and (y) in the case of any Tax based upon or related to income be deemed equal to the amount which would be payable if the relevant Taxable period ended on the Closing Date. Any credits relating to a Taxable period that begins before and ends after the Closing Date shall be taken into account as though the relevant Taxable period ending on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of the Company and any of its Subsidiaries, as applicable. (c) To the extent not accrued on the Closing Balance Sheet, Sellers shall reimburse Buyer for any Taxes of the Company and the Subsidiaries, or for any increase in such Taxes, in any taxable period (including, but not limited to, as a result of a change in accounting method) attributable to the transfer of all of the capital stock of the Affiliated Entities to the Company, including, but not limited to, a resulting termination of an election made by any of the 38 Affiliated Entities under Code Section 1362 or under any corresponding provision of any state, local or foreign law. (d) Cooperation on Tax Matters. -------------------------- (i) Buyer, the Company and Sellers shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Section and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Company and Sellers agree (A) to retain all books and records with respect to Tax matters and pertinent to the Company and its Subsidiaries relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or Sellers, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (B) to give the other party reasonable written notice prior to transferring , destroying or discarding any such books and records and, if the other party so requests, the Company or Sellers, as the case may be, shall allow the other party to take possession of such books and records. (ii) Buyer and Sellers further agree, upon request, to use their best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). (e) Certain Taxes. All transfer, documentary, sales, use, stamp, ------------- registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement (including any New York State Gains Tax, New York State Transfer Tax and any similar tax imposed in other states or subdivisions), shall be paid by Sellers when due, and Sellers will, at their own expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees, and, if required by applicable law, Buyer will, and will cause its affiliates to, join in the execution of any such Tax Returns and other documentation. (f) Sellers will furnish Buyer prior to the Closing a certification pursuant to Treasury Regulation Section 1.897-2 to the effect that the Company is not a "United States real property holding corporation" as defined in Code Section 897. (g) Inclusion in Buyer's Consolidated Returns. In each taxable period ----------------------------------------- during which (i) the Company and the Subsidiaries, or any subset thereof, are members of an Affiliated Group the common parent of which is Buyer and (ii) such Affiliated Group has elected to, or is required by applicable law to, file a combined, consolidated or unitary return, the Company and the Subsidiaries, or such subset thereof, shall be included in such combined, consolidated or unitary 39 return except to the extent that the Company or a Subsidiary is not eligible under applicable law to be included in such combined, consolidated or unitary return. 9.4 TRANSITION ASSISTANCE. Neither the Company nor the Sellers will --------------------- in any manner take any action which is designed, intended, or might be reasonably anticipated to have the effect of discouraging customers, suppliers, lessors, licensors and other business associates from maintaining the same business relationships with the Company after the date of this Agreement as were maintained with the Company prior to and at the date of this Agreement. 9.5 INVESTIGATION AND CONFIDENTIALITY. --------------------------------- (a) Prior to the Closing Date, Buyer may make or cause to be made such investigation of the Company as it deems necessary or advisable to familiarize itself therewith. Each Seller will cause the Company to, and the Company will cause its officers, directors, employees and agents (including attorneys and accountants) (the "Company's Agents") to, at reasonable times during normal ---------------- business hours, permit Buyer and its employees, agents, accounting and legal representatives and lenders (and such lenders' audit staff) and their representatives to have full and complete access, at all reasonable times, to the Company's facilities and to the Company's books, records, invoices, contracts, leases, personnel, facilities, equipment and other data and information. Each Seller will cause the Company to, and the Company will cause the Company's Agents to, at reasonable times during normal business hours, permit Buyer to inspect the facilities and to discuss the affairs, finances and accounts of the Company with the directors, officers, independent accountants, key employees, key customers, key sales representatives and key suppliers of the Company. (b) If the transactions contemplated by this Agreement are not consummated, Buyer will use its reasonable best efforts to maintain the confidentiality of all information and materials reasonably designated by the Company as confidential, except as required by law or legal process, and Buyer and its representatives will return to the Company originals of and destroy copies of all materials obtained from the Company in connection with the transactions contemplated by this Agreement. Whether or not the transactions contemplated hereby are consummated, the Sellers, the Sellers' Representative and the Company will use their reasonable best efforts to maintain the confidentiality of all information and materials regarding Buyer and its Affiliates reasonably designated by Buyer as confidential, except as required by law or legal process, and Buyer and its representatives will return to the Company originals of and destroy copies of all materials obtained from the Company in connection with the transactions contemplated by this Agreement. If the transactions contemplated by this Agreement are consummated, each Seller and the Sellers' Representative agrees to use its reasonable best efforts to maintain the confidentiality of all proprietary and other non-public information regarding the Company, except as required to file tax returns and as required by law or legal process, and to turn over to Buyer at the Closing all such materials (and all copies thereof) that they have in their possession. In the event of the breach of any of the provisions of this Section 9.5, the non- breaching party, in addition and supplementary to other rights and remedies existing in its favor, may apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief (without the posting of bond or other security) in order to enforce or prevent any violations of the provisions hereof. 40 (c) In the event that any party reasonably believes after consultation with counsel that it is required by law to disclose any confidential information described in this Section 9.5, the disclosing party will (i) provide the other party with prompt notice before such disclosure in order that such other party may attempt to obtain a protective order or other assurance that confidential treatment will be accorded such confidential information and (ii) cooperate with the other party in attempting to obtain such order or assurance. The provisions of this Section 9.5 shall not apply to any information, documents or materials which are, as shown by appropriate written evidence, in the public domain or, as shown by appropriate written evidence, shall come into the public domain, other than by reason of default by the applicable party bound hereunder or its Affiliates. 9.6 EXPENSES. Except as otherwise provided herein, Buyer and the -------- Sellers will each pay all of their own expenses (including fees and expenses of legal counsel, investment bankers, or other representatives and consultants and appraisal fees and expenses) incurred in connection with the negotiation of this Agreement and the other agreements contemplated hereby and the performance of its or their obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby (whether consummated or not); it being understood that the Sellers will pay amounts due, if any, to Bowles, Hollowell, Conner & Co. under the terms of a certain engagement letter, dated November 15, 1995, and all other fees and expenses listed on Schedule 4.15 ------------- hereto. To the extent that the Buyer or the Company pays or becomes liable for any of the expenses of the Sellers or the Sellers' Representative, the Purchase Price shall be reduced dollar-for-dollar. 9.7 NONCOMPETITION AND NONSOLICITATION. ---------------------------------- (a) As an inducement to Buyer to enter into this Agreement and consummate the transactions contemplated hereby, each Seller agrees as follows: (i) During the period from the Closing Date to and including the fifth anniversary of the Closing Date (the "Noncompete Period"), such Seller shall not ----------------- have any Affiliation (as defined below) with any Person or other business entity or enterprise anywhere in the world which engages in or proposes to engage in the manufacture, merchandising, distribution or sale of any products or goods manufactured, merchandised, distributed or sold by the Company or Buyer as of the Closing Date (the "Products"). Nothing contained herein shall be construed -------- to prohibit such Seller from purchasing (x) securities of Buyer or (y) up to an aggregate of 2% of any class of the outstanding voting securities of any Person whose securities are listed on a national securities exchange or traded in the NASDAQ national market system (a "Public Company") or up to an aggregate of 5% -------------- of any other class of securities of any Public Company (including, for purposes of calculating the percentage of such securities which may be purchased by such Seller, the securities of such Public Company then owned by all Affiliates of such Seller to the extent such Persons are acting in concert or otherwise constitute a "group" for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934), as amended, if such Seller does not have an active role in the management of such Public Company, it being understood that the exercise of voting rights with respect to any such voting securities, in and of itself, shall not constitute such a role. For purposes of this subparagraph (a)(i), the term "Affiliation" shall ----------- 41 mean any direct or indirect interest in such entity or enterprise, whether as an officer, director, employee, investor, partner, stockholder, sole proprietor, trustee, consultant, agent, representative, broker, promoter or otherwise; and (ii) During the Noncompete Period, such Seller shall not, and shall not permit any of his Affiliates to (x) induce or attempt to induce any employee of Buyer, the Company or their Subsidiaries to leave the employ of Buyer, the Company or such Subsidiary, or in any way interfere with the relationship between Buyer, the Company or their Subsidiaries and any employee thereof, (y) hire directly or indirectly any person who was an employee of Buyer, the Company or their Subsidiaries within 180 days prior to the time such employee was hired by such Person, or (z) induce or attempt to induce any customer, supplier, licensee or other business relation of Buyer, the Company or their Subsidiaries to cease doing business with Buyer, the Company or their Subsidiaries or in any way interfere with the relationship between any such customer, supplier, licensee or business relation of Buyer, the Company or any Subsidiary. Notwithstanding anything in this Section 9.7 to the contrary, if at any time, in any judicial proceeding, any of the restrictions stated in this Section 9.7 are found by a final order of a court of competent jurisdiction to be unreasonable or otherwise unenforceable under circumstances then existing, the Sellers and Buyer agree that the period, scope or geographical area, as the case may be, shall be reduced to the extent necessary to enable the court to enforce the restrictions to the extent such provisions are allowable under law, giving effect to the agreement and intent of the parties that the restrictions contained herein shall be effective to the fullest extent permissible. The Sellers and Buyer acknowledge and agree that money damages may not be an adequate remedy for any breach or threatened breach of the provisions of this Section 9.7 and that, in such event, the other party or its successors or assigns may, in addition to any other rights and remedies existing in its favor, apply to any court of competent jurisdiction for specific performance, injunctive and/or other relief in order to enforce or prevent any violations of the provisions of this Section 9.7 (including the extension of the Noncompete Period by a period equal to the length of court proceedings necessary to stop such violation). Any injunction shall be available without the posting of any bond or other security. In the event of an alleged breach or violation by any Seller of any of the provisions of this Section 9.7, the Noncompete Period will be tolled for such Seller until such alleged breach or violation is resolved. The Sellers agree that the restrictions contained in this Section 9.7 are reasonable in all respects. 9.8 SELLERS' REPRESENTATIVE. ----------------------- (a) By the Sellers' execution of this Agreement, the Sellers' Representative is hereby designated by each of the Sellers to serve as the representative of the Sellers with respect to the matters expressly set forth in this Agreement to be performed by the Sellers' Representative. (b) Each of the Sellers, by their execution of this Agreement, hereby irrevocably appoints the Sellers' Representative as the agent, proxy and attorney-in-fact for such Seller for all purposes of this Agreement, including, without limitation, full power and authority on such Sellers' behalf (i) to consummate the transactions contemplated herein, and in the event of such 42 consummation, to receive and disburse payments, as the case may be, on behalf of such Seller for the Company Stock pursuant to Section 1.4(b); (ii) to pay such Seller's expenses (whether incurred on or after the date hereof) incurred in connection with the negotiation and performance of this Agreement, it being understood that such expenses shall be allocated among the Sellers pro rata based on the Sellers' Pro Rata Shares; (iii) to disburse any funds received hereunder to such Seller and each other Seller; (iv) to execute and deliver any certificates required hereunder, including delivery of any stock certificates representing the Company Stock; (v) to execute and deliver on behalf of such Seller any amendment hereto; provided, that such amendment does not treat any Seller disproportionately relative to any of the other Sellers; (vi) to take all other actions to be taken by or on behalf of such Seller in connection herewith; (vii) to negotiate, settle, compromise and otherwise handle all claims of Buyer pursuant to Section 1.3 hereof; (viii) to pay or accept any amounts pursuant to Article I hereof; (ix) to negotiate, settle, compromise and otherwise handle all claims for indemnification made by the Buyer pursuant to Article VIII hereof; and (x) to do each and every act and exercise any and all rights which such Seller or the Sellers (collectively) are permitted or required to do or exercise under this Agreement. Each of the Sellers agrees that such agency and proxy are coupled with an interest, and are therefore irrevocable without the consent of the Sellers' Representative. (c) Neither the Sellers' Representative nor any agent employed by him shall incur any liability to any Seller relating to the performance of his duties hereunder, except for fraud or bad faith. 9.9 ADDITIONAL INFORMATION FOR SEC FILINGS. -------------------------------------- (a) The Company shall use its best efforts to promptly provide Buyer with all financial statements and other financial data relating to the Company and its Subsidiaries that is required to be included by Buyer's parent, American Pad & Paper Company ("APP"), in any registration statement filed by APP with the --- Securities and Exchange Commission (the "SEC") and shall use its best efforts to --- obtain for APP the signed written consent of the Company's independent auditors to be named as experts in any such registration statement and the signed audit report of such independent auditors with respect to any audited financial statements of the Company and its Subsidiaries required to be included in such registration statement, in each case, in the form required by SEC regulations. The Company shall also provide APP with such other information regarding the Company and its Subsidiaries as APP may request to comply with the SEC laws, rules and regulations relating to any such registration statement. Buyer shall pay or reimburse, as the case may be, the Sellers for any reasonable out-of- pocket expenses incurred by the Sellers on behalf of the Company to comply with this Section 9.9 which the Sellers would not have incurred but for the requirements of this Section 9.9. (b) Buyer shall indemnify and hold harmless the Sellers from and against any liability which the Sellers shall incur as a result of any public offering by Buyer of its securities which is registered under the Securities Act of 1933, as amended. 43 9.10 APPROVAL OF SERVICES AGREEMENT PAYMENT. Each Seller who holds -------------------------------------- voting stock of the Company will vote to approve the Payment (as defined in the Services Agreement) and payments pursuant to certain stay bonus and change of control agreements with Francis Ritgert and Jeffery Lennox in a separate vote of the shareholders of the Company that meets the requirements of Code Section 280G(b)(5)(B) and deliver a copy of the shareholder agreement or resolution evidencing such vote to Buyer at or prior to the Closing. ARTICLE X MISCELLANEOUS ------------- 10.1 AMENDMENT AND WAIVER. This Agreement may be amended and any -------------------- provision of this Agreement may be waived; provided, that any such amendment or waiver will be binding upon a party only if such amendment or waiver is set forth in a writing executed by the Buyer, the Company and the Sellers' Representative. No course of dealing between or among any Persons having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any party under or by reason of this Agreement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. 10.2 NOTICES. All notices, demands and other communications given or ------- delivered under this Agreement will be in writing and will be deemed to have been given when personally delivered, mailed by first class mail (return receipt requested), delivered by a reputable express courier service or transmitted by facsimile or telecopy. Notices, demands and communications to the Sellers, the Sellers' Representative, the Company and the Buyer will, unless another address is specified in writing, be sent to the addresses indicated below: Notices to the Company (prior to Closing): ----------------------------------------- Niagara Envelope Company, Inc. 737 Delaware Ave. Buffalo, NY 14209 Attention: Frederick G. Pierce, II with a copy to: -------------- Lippes, Silverstein, Mathias & Wexler, LLP 700 Guaranty Building 28 Church Street Buffalo, NY 14202 Attention: Gerald S. Lippes Robert J. Olivieri 44 Notices to the Sellers and the Sellers' Representative: ------------------------------------------------------ Frederick G. Pierce, II 227 Nottingham Terrace Buffalo, NY 14216 with a copy to: -------------- Lippes, Silverstein, Mathias & Wexler, LLP 700 Guaranty Building 28 Church Street Buffalo, NY 14202 Attention: Gerald S. Lippes Notices to Buyer (and, upon Closing, the Company): ------------------------------------------------- American Pad & Paper Company of Delaware, Inc. c/o Bain Capital, Inc. Two Copley Place Boston, MA 02116 Attention: Marc B. Wolpow Robert C. Gay with a copy to: -------------- Kirkland & Ellis 200 East Randolph Drive Chicago, IL 60601 Attention: Karl E. Lutz, P.C. James L. Learner 10.3 BINDING AGREEMENT; ASSIGNMENT. ----------------------------- (a) This Agreement and all of the provisions hereof will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, except that neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned or delegated by the Company, any Seller or the Sellers' Representative without the prior written consent of Buyer. (b) Buyer may, at its sole discretion, assign, in whole or in part, its rights and obligations pursuant to this Agreement to one or more of its Affiliates. (c) Buyer may assign its rights under this Agreement (including its right to indemnification) for collateral security purposes to any of its lenders providing financing for the 45 transactions contemplated hereby and all extensions, renewals, replacements, refinancings and refundings thereof in whole or in part. 10.4 SEVERABILITY. Whenever possible, each provision of this ------------ Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement. 10.5 NO STRICT CONSTRUCTION. The language used in this Agreement ---------------------- shall be deemed to be the language chosen by the parties hereto to express their collective mutual intent, and no rule of strict construction shall be applied against any person. The term "including" as used herein shall be by way of example and shall not be deemed to constitute a limitation of any term of provision contained herein. 10.6 CAPTIONS AND HEADINGS. The captions and headings used in this --------------------- Agreement are for convenience of reference only and do not constitute a part of this Agreement and will not be deemed to limit, characterize or in any way affect any provision of this Agreement, and all provisions of this Agreement will be enforced and construed as if no caption had been used in this Agreement. 10.7 ENTIRE AGREEMENT. This Agreement and the documents referred to ---------------- herein and therein contain the entire agreement between the parties and supersede any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 10.8 COUNTERPARTS. This Agreement may be executed in multiple ------------ counterparts, each of which shall be deemed an original but all of which taken together will constitute one and the same instrument. 10.9 GOVERNING LAW. THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL ------------- GOVERN ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEABILITY OF THIS AGREEMENT AND THE EXHIBITS AND SCHEDULES HERETO, AND THE PERFORMANCE OF THE OBLIGATIONS IMPOSED BY THIS AGREEMENT, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. 10.10 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, express ---------------------------- or implied, is intended to confer on any Person other than the parties and their respective successors and assigns any rights or remedies under or by virtue of this Agreement. 46 ARTICLE XI CERTAIN DEFINITIONS ------------------- For purposes of this Agreement, the following terms shall have the meanings set forth below: "Affiliate" of any particular Person means any other Person controlling, --------- controlled by or under common control with such particular Person, where "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of voting securities, contract or otherwise. "Affiliated Entities" means each of Wented Company, an Illinois ------------------- corporation, and Wented Company of Texas, a Delaware corporation. "Affiliated Group" means an affiliated group as defined in Section 1504 ---------------- of the Code (or any analogous combined, consolidated or unitary group under state, local or foreign income Tax law) of which the Company is or has been a member. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Knowledge" shall mean (i) with respect to the Sellers' Representative, --------- his or her actual knowledge, and (ii) with respect to the Company, the actual knowledge of those persons set forth in Schedule 11 hereto. ----------- "Liens" means any mortgage, pledge, security interest, encumbrance, lien ----- or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof), any sale of receivables with recourse against the Company or any Seller, any Affiliate of the Company or such Seller, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar statute other than to reflect ownership by a third party of property leased to the Company or any Seller under a lease which is not in the nature of a conditional sale or title retention agreement, or any subordination arrangement in favor of another Person (other than any subordination arising in the ordinary course of business). "Permitted Liens" means: --------------- (i) tax Liens with respect to taxes not yet due and payable or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with GAAP; (ii) deposits or pledges made in connection with, or to secure payment of, utilities or similar services, workers' compensation, unemployment insurance, old age pensions or other social security obligations; (iii) interests or title of a lessor under any lease set forth on Schedule -------- 4.9; - --- 47 (iv) mechanics', materialmen's or contractors' Liens or encumbrances or any similar Lien or restriction arising in the ordinary course of business for amounts not yet due and payable; and (v) easements, rights-of-way, restrictions and other similar charges and encumbrances of record not interfering with the ordinary conduct of the business of the Company or materially detracting from the value of the assets of the Company. "Person" means an individual, a partnership, a corporation, an association, ------ a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Subsidiary" means, with respect to any Person, any corporation, ---------- partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, (i) a Person or Persons shall be deemed to have a majority ownership interest in a partnership, association or other business entity if such Person or Persons shall be allocated a majority of partnership, association or other business entity gains or losses or shall be or control the managing director or general partner of such partnership, association or other business entity; and (ii) the Affiliated Entities will be treated as Subsidiaries of the Company. "Tax" means any (i) federal, state, local or foreign income, gross --- receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, value added, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, social security, unemployment, disability, payroll, license, employee or other withholding, or other tax, of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing; (ii) liability of the Company for the payment of any amounts of the type described in clause (i) arising as a result of being (or ceasing to be) a member of any Affiliated Group (or being included (or required to be included) in any Tax Return relating thereto); and (iii) liability of the Company for the payment of any amounts of the type described in clause (i) as a result of any express or implied obligation to indemnify or otherwise assume or succeed to the liability of any other Person. "Tax Returns" means returns, declarations, reports, claims for refund, ----------- information returns or other documents (including any related or supporting schedules, statements of information) filed or required to be filed in connection with the determination, assessment or collection of Taxes of any party of the administration of any laws, regulations or administrative requirements relating to any Taxes. * * * * 48 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. NIAGARA ENVELOPE COMPANY, INC. By: /s/ Frederick G. Pierce, II ---------------------------------------- Its: --------------------------------------- /s/ Frederick G. Pierce, II ------------------------------------------- Frederick G. Pierce, II, both individually and in his capacity as the Sellers' Representative /s/ Phyllis Wendt Pierce ------------------------------------------- Phyllis Wendt Pierce MARINE MIDLAND BANK, AS TRUSTEE, IN TRUST FOR THE USES AND PURPOSES AND UPON THE TERMS CONTAINED IN THE RESOLUTION AND DECLARATION OF TRUST CREATING THE BUFFALO FOUNDATION, AS AMENDED, ADOPTED BY THE BOARD OF DIRECTORS OF SAID TRUSTEE, COPIES OF WHICH WERE FILED IN THE OFFICES OF THE SECRETARY OF STATE OF NEW YORK AND ERIE COUNTY CLERK, PURSUANT TO THE PROVISIONS OF CHAPTERS 622 AND 623 OF THE LAWS OF 1926, PURSUANT TO INSTRUMENT OF GIFT IN TRUST DATED MAY 8, 1996 BETWEEN PHYLLIS W. PIERCE AS DONOR, THE BUFFALO FOUNDATION AND MARINE MIDLAND BANK AS SUCH TRUSTEE By: /s/ Henry Bradley ---------------------------------------- Its: --------------------------------------- 49 THE BUFFALO FOUNDATION By: /s/ ---------------------------------------- Its: Director --------------------------------------- PHYLLIS W. PIERCE AND FREDERICK G. PIERCE II, AS TRUSTEES OF TRUST UNDER ARTICLE SEVENTH OF LAST WILL AND TESTAMENT OF FREDERICK S. PIERCE /s/ Frederick G. Pierce, II ------------------------------------------- Frederick G. Pierce II, Trustee /s/ Phyllis W. Pierce ------------------------------------------- Phyllis W. Pierce, Trustee GAYLORD SMYTHE L.L.C. By: /s/ Frederick G. Pierce, II ---------------------------------------- Manager AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. By: /s/ Gregory M. Benson ---------------------------------------- Its: --------------------------------------- 50 LIST OF EXHIBITS ---------------- Exhibit A Form of Opinion of Counsel to the Company and the Sellers Exhibit B Services Agreement Exhibit C Closing Certificates from the Sellers' Representative and the Company Exhibit D Form of Opinion of Counsel to Buyer Exhibit E Closing Certificate from Buyer Exhibit F Commitment Letter from Buyer's Lender LIST OF DISCLOSURE SCHEDULES ---------------------------- Schedule 1.3(a) Letters of Credit Schedule 2.1(c) Consents Required for Closing Schedule 3.1(l) Equipment to be Transferred Schedule 4.1 Organization and Corporate Power Schedule 4.3 Subsidiaries; Investments Schedule 4.4 Absence of Conflicts Schedule 4.5 Capitalization Schedule 4.6 Financial Statements Schedule 4.7 Absence of Undisclosed Liabilities Schedule 4.8 Absence of Certain Developments Schedule 4.9 Assets Schedule 4.10 Environmental Safety Matters Schedule 4.11 Taxes Schedule 4.12 Contracts and Commitments Schedule 4.13 Proprietary Rights Schedule 4.14 Litigation; Proceedings Schedule 4.15 Brokerage Schedule 4.16 Governmental Licenses and Permits Schedule 4.17 Employees Schedule 4.18 Employee Benefit Plans Schedule 4.19 Insurance Schedule 4.20 Officers and Directors; Bank Accounts Schedule 4.21 Affiliate Transactions Schedule 4.22 Compliance with Laws Schedule 4.23 Product Warranty Schedule 4.24 Product Liability EX-5.1 3 OPINION AND CONSENT OF KIRKLAND & ELLIS EXHIBIT 5.1 KIRKLAND & ELLIS PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS 200 East Randolph Drive Chicago, Illinois 60601 312 861-2000 Facsimile: 312 861-2200 June 5, 1996 American Pad & Paper Company 17304 Preston Road, Suite 700 Dallas, Texas 75252 Re: American Pad & Paper Company Registration Statement on Form S-1 Registration No. 333-4000 ------------------------------------------------------------- Ladies and Gentlemen: We are acting as special counsel to American Pad & Paper Company, a Delaware corporation (the "Company"), in connection with the proposed registration by the Company of 12,500,000 shares (the "Primary Shares") of its Common Stock, par value $.01 per share (the "Common Stock"), to be issued and sold by the Company and up to 5,468,750 shares (the "Secondary Shares" and together with the Primary Shares, the "Shares") of Common Stock to be sold by certain stockholders of the Company (the "Selling Stockholders"), pursuant to a Registration Statement on Form S-1 (Registration No. 333-4000), originally filed with the Securities and Exchange Commission (the "Commission") on April 25, 1996 under the Securities Act of 1933, as amended (the "Act") (such Registration Statement, as amended or supplemented, is hereinafter referred to as the "Registration Statement"). The Shares are to be sold pursuant to an underwriting agreement (the "Underwriting Agreement") between the Company, the Selling Stockholders and Morgan Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated, BT Securities Corporation, CS First Boston Corporation, Goldman, Sachs & Co., Salomon Brothers Inc. and Wasserstein Perella Securities, Inc., as representatives of the several United States underwriters, and Morgan Stanley & Co. International Limited, Alex. Brown & Sons Incorporated, Bankers Trust International PLC, CS First Boston Limited, Goldman Sachs International, Salomon Brothers International Limited and Wasserstein Perella Securities, Inc., as representatives of the several international underwriters. In that connection, we have examined such corporate proceedings, documents, records and matters of law as we have deemed necessary to enable us to render this opinion. American Pad & Paper Company June 5, 1996 Page 2 For purposes of this opinion, we have assumed the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies and the authenticity of the originals of all documents submitted to us as copies. We have also assumed the legal capacity of all natural persons, the genuineness of the signatures of persons signing all documents in connection with which this opinion is rendered, the authority of such persons signing on behalf of the parties thereto other than the Company and the due authorization, execution and delivery of all documents by the parties thereto other than the Company. As to any facts material to the opinions expressed herein, we have relied upon the statements and representations of officers and other representations of the Company and others. Our opinion expressed below is subject to the qualifications that we express no opinion as to the applicability of, compliance with, or effect of (i) any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent conveyance, moratorium or other similar law affecting the enforcement of creditors' rights generally, (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), (iii) public policy considerations which may limit the rights of parties to obtain certain remedies and (iv) any laws except the internal laws of the State of Texas, the General Corporation law of the State of Delaware and the federal law of the United States of America. Based upon and subject to the foregoing qualifications, assumptions and limitations and the further limitations set forth below, we hereby advise you that in our opinion: (1) The Company is a corporation validly existing and in good standing under the laws of the State of Delaware. (2) Upon the effectiveness of the Restated Certificate of Incorporation of the Company, the Primary Shares will be duly authorized, and, when (i) the Registration Statement becomes effective under the Act, (ii) the Board of Directors of the Company has taken all necessary action to approve the issuance and sale of the Primary Shares and (iii) the Primary Shares have been duly executed and delivered on behalf of the Company and issued in accordance with the terms of the Underwriting Agreement upon receipt of the consideration to be paid therefor, the Primary Shares will be validly issued, fully paid and nonassessable. (3) Upon the effectiveness of the Restated Certificate of Incorporation of the Company, the Secondary Shares will be duly authorized and, when the Registration Statement becomes effective under the Act, will be validly issued, fully paid and nonassessable. American Pad & Paper Company June 5, 1996 Page 3 We hereby consent to the filing of this opinion with the Commission as Exhibit 5.1 to the Registration Statement. We also consent to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. This opinion and consent may be incorporated by reference in a subsequent registration statement on Form S-1 filed pursuant to Rule 462(b) under the Act with respect to the registration of additional securities for sale in the offering contemplated by the Registration Statement. We do not find it necessary for the purposes of this opinion, and accordingly we do not purport to cover herein, the application of the securities or "Blue Sky" laws of the various states to the issuance and sale of the Primary Shares and the sale of the Secondary Shares. This opinion is limited to the specific issues addressed herein, and no opinion may be inferred or implied beyond that expressly stated herein. We assume no obligation to revise or supplement this opinion should the present laws of the States of Texas or Delaware or the federal law of the United States be changed by legislative action, judicial decision or otherwise. This opinion is furnished to you in connection with the filing of the Registration Statement and is not to be used, circulated, quoted or otherwise relied upon for any other purpose. Very truly yours, /s/ Kirkland & Ellis KIRKLAND & ELLIS EX-23.1 4 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Amendment No. 1 to Form S-1 of our report dated March 19, 1996, relating to the consolidated financial statements of American Pad & Paper Company (formerly Ampad Holding Corporation) and our report dated March 22, 1996, relating to the statements of net sales and cost of sales of Globe-Weis, which appear on page F-2 and page F-53, respectively, in such Prospectus. We also consent to the references to us under the heading "Experts" in such Prospectus. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Dallas, Texas June 5, 1996 EX-23.2 5 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors WR Acquisition, Inc. We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP New York, New York June 4, 1996 EX-23.4 6 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.4 Consent of Ernst & Young LLP We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 16, 1996, with respect to the financial statements of Niagara Envelope Company, Inc. included in the Registration Statement (Form S-1 No. 333-4000) and related Prospectus of American Pad and Paper Company for the registration of 15,625,000 shares of its common stock. /s/ Ernst & Young LLP Buffalo, New York June 4, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN PAD & PAPER COMPANY FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 20,108 0 17,263 (1,651) 93,166 202,782 106,758 (6,563) 500,794 93,544 440,453 0 113,887 9 (180,189) 500,794 121,418 121,418 97,889 97,889 11,206 88 12,542 230 102 128 0 0 0 128 0 0
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