-----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, PHk8sau+dSY+t8883P2nMg+dAf5afsw4fdB2gtL+hMZm/pU0S5sEEwiDlSmkNPLO wIAS8/d+SE23bIe8snHzyg== 0000950134-97-002428.txt : 19970401 0000950134-97-002428.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950134-97-002428 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE 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: 043146298 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11803 FILM NUMBER: 97568632 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PAD & PAPER CO OF DELAWARE INC CENTRAL INDEX KEY: 0000817647 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PUBLISHING [2741] IRS NUMBER: 251512956 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-03006 FILM NUMBER: 97568633 BUSINESS ADDRESS: STREET 1: 17304 PRESTON ROAD STREET 2: SUITE 700 CITY: DALLAS STATE: TX ZIP: 75252-5613 BUSINESS PHONE: 2126912000 MAIL ADDRESS: STREET 1: 17304 PRESTON ROAD STREET 2: SUITE 700 CITY: DALLAS STATE: TX ZIP: 75252 FORMER COMPANY: FORMER CONFORMED NAME: WILLIAMHOUSE REGENCY OF DELAWARE INC DATE OF NAME CHANGE: 19960328 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996 Commission file number 1-11803 AMERICAN PAD & PAPER COMPANY (Exact name of registrant as specified in its charter) Delaware 04-3164298 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 17304 Preston Road, Suite 700, Dallas, TX 75252-5613 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 733-6200 Commission file number 333-3006 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. (Exact name of registrant as specified in its charter) Delaware 25-1512956 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 17304 Preston Road, Suite 700, Dallas, TX 75252-5613 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 733-6200 Indicate by check mark whether each Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that each Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. American Pad & Paper Company Yes X No ----- ----- American Pad & Paper Company of Delaware, Inc. Yes X No ------ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 4, 1997, the aggregate market value of the common stock of American Pad & Paper Company held by non-affiliates was $221,056,000. DOCUMENTS INCORPORATED BY REFERENCE American Pad & Paper Company incorporates its 1997 Annual Proxy Statement to Stockholders. ================================================================================ 2 NOTE - PAGES 2-13 ARE OMITTED AND ARE BLANK PAGES. IMPORTANT NOTE - COMBINED FILING FOR AMERICAN PAD & PAPER COMPANY AND AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. American Pad & Paper Company (the "Company") and American Pad & Paper Company of Delaware, Inc. (AP&P Delaware) are filing a combined Annual Report on Form 10-K in accordance with general instruction J to Form 10-K. The Company owns 100% of the outstanding common stock of AP&P Delaware. The Company has 27,435,839 shares of outstanding common stock and is listed on the New York Stock Exchange. AP&P Delaware has issued $130 million of 13% Senior Subordinated Notes ("Notes") which trade on the over the counter market. The Company is a holding company with no operations and owns 100% of the outstanding common shares of WR Acquisition, Inc. ("WR Acquisition"). WR Acquisition is also a holding company with no operations which owns 100% of the outstanding common shares of AP&P Delaware. AP&P Delaware is the operating company in which all the operations of the Company take place. There are no differences between the Company and AP&P Delaware except as just described. The Company has followed full push-down accounting for the financial statements of AP&P Delaware such that the only differences between the two registrants relate to the capital structure just described. The management of the Company has determined that it would not be meaningful to the holders of the Company's common stock or to the holders of AP&P Delaware's Notes to receive Annual Reports on Form 10-K which are different and, as a result, the Company has elected to file only one Form 10-K and only one set of consolidated financial statements for both registrants. ITEM 1 BUSINESS GENERAL The Company is one of the largest manufacturers and marketers of paper-based office products (excluding 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, machine papers 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, machine papers and retail envelopes to many of the largest and fastest growing office products distributors. Established in 1888, the Company's Ampad division has been a leading supplier of pads and other paper-based writing products throughout its history. Acquired in October 1995, the Company's Williamhouse division is the leading supplier of mill branded, specialty and commodity business envelopes and machine papers 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, 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 net sales have grown at a compound annual rate of approximately 52.9% from 1992 to 1996. 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, 14 3 OfficeMax and Staples) have experienced significant growth over the past three years. 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. Certain office products, particularly envelopes, are sold predominantly through paper merchants/distributors or directly to end users. Paper merchants/distributors currently account for approximately 30% of the envelope market. The four largest paper merchants (Nationwide, 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 $200.5 million in 1996. HISTORY 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, 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 WR Acquisition and its wholly owned subsidiary, Williamhouse-Regency of Delaware, Inc., collectively referred to as "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. Williamhouse is a leading supplier to many of the largest and fastest growing paper merchants/distributors. The Company's management identified the Regency Division of Williamhouse as a nonstrategic asset following the Williamhouse acquisition and, on June 27, 1996, completed the sale of the Regency Division for approximately $47.9 million in gross proceeds. On June 28, 1996, the Company acquired Niagara Envelope Company, Inc. ("Niagara") for an aggregate purchase price of approximately $48.2 million, plus $5.0 million paid at closing 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 $106.0 million and operating income of approximately $8.5 million. The Company believes that the Niagara acquisition will strengthen the 15 4 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. On February 11, 1997, the Company acquired Shade/Allied, Inc. ("Shade/Allied") for an aggregate purchase price of $49.5 million. Shade/Allied supplies continuous forms to paper merchants/distributors and retail customers through four manufacturing facilities located near Green Bay, Seattle, Atlanta and Philadelphia. Shade/Allied realized net sales of approximately $90 million in 1996. The Company believes that the Shade/Allied acquisition will strengthen its presence in a fourth major product category, machine papers. Although the Company regularly engages in discussions with companies regarding potential acquisitions, it currently does not have any agreements or understandings relating to any future acquisitions. The Company's principal executive offices are located at 17304 Preston Road, Suite 700, Dallas, Texas 75252 and its telephone number is (972) 733-6200. 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 copy paper) in North America. The Company attributes this position and its continued opportunities for growth and profitability to the following competitive strengths: o 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. o 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 Nationwide, 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. o 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 21 strategically located manufacturing and distribution 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. 16 5 o 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 & Seel envelopes. Products introduced since 1992 accounted for over $155 million of the Company's 1996 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. o 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 work force. 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 1996, the Company reduced its fixed manufacturing costs from 7.4% to 5.0% of net sales and its selling, general and administrative expenses from 10.0% to 8.2% of net sales. o 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. GROWTH STRATEGY The Company's strategy is to maintain and strengthen its leadership position by focusing on the following: o 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. 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. o 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. o 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, envelopes and machine papers. 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 Niagara acquisition 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. 17 6 o 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 Williamhouse and Niagara acquisitions, previously distributed primarily through paper merchants/distributors, to the Ampad division's distribution channels under the Ampad and private label names. RECENT ACQUISITION On February 11, 1997, the Company completed its acquisition of Shade/Allied for approximately $49.5 million. Based in Green Bay, Wisconsin, Shade/Allied manufactures machine paper, primarily continuous computer forms, in facilities in four states. This acquisition signals entry into machine papers, the Company's fourth product category. PRODUCTS AND SERVICES Pads and Other Paper-Based Writing Products. The Company believes is one of the largest manufacturers and marketers of paper-based writing products (excluding copy paper) in North America, offering more than 2,400 SKUs of writing pads, notebooks and specialty papers. Many of the Company's writing products are 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 and office products superstore channels and sold over 18 billion envelopes in 1996. 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. Machine Papers. The Company is among the leading manufacturers of machine papers, a product category defined by the Company which includes inkjet papers, printed formats, fine papers, such as cotton content and laid papers, as well as continuous forms. 18 7 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 former Regency 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. The following chart illustrates the Company's principal products and customers and selected brands in its primary business segments: AMPAD DIVISION WILLIAMHOUSE DIVISION Products - - Pads and Notebooks - Business Envelopes - - Filing Supplies - Invitations - - Retail envelopes - Announcements - - Machine Papers - Christmas and Holiday Cards - Machine Papers Customers - - Office Products Superstores - Paper Merchants/Distributors - - Contract Stationers - Jobbers - - Wholesalers - Personalizing Businesses - - Buying Groups Selected Brands - - Ampad(R) - Century(TM) - - Embassy(R) - Huxley(TM) - - Evidence(R) - Karolton(R) - - Globe-Weis(R) - Kent(R) - - SCM(TM) - Peel & Seel(R) - - World Fibre(TM) - Williamhouse(TM) SALES, DISTRIBUTION AND MARKETING The Company markets its broad range of products to a wide variety of customers. In 1996, one customer, Staples, Inc., accounted for 10.8% of the Company's net sales. The Company markets its writing products, filing supplies, retail envelopes and machine papers 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 business envelopes and machine papers 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 sold directly to personalizing businesses (including the former Regency Division). The Company currently employs sales representatives throughout the United States and sells products to over 2,000 paper merchants/distributors in the United States and Canada. The Williamhouse acquisition provided the Company with the ability to manufacture and distribute retail envelopes directly to the Ampad division customers under the Ampad and private label names. The following chart illustrates some of the Company's key customers: 19 8 KEY CUSTOMERS Paper Office Products Superstores: Mass Merchandisers: Merchants/Distributors: Office Depot Wal-Mart Nationwide Office Max ResourceNet Staples Unisource Zellerbach Office Products Contract Stationers: Wholesalers: Warehouse Clubs: Boise Cascade Office Products S.P. Richards Sam's Warehouse Club BT Office Products United Stationers Corporate Express Office Depot* Staples* U.S. Office Products * 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 $200.6 million in 1996. For the same period on a pro forma basis, the Company's sales to the four largest paper merchants/distributors increased from $75.6 million to $118.4 million. PAPER RAW MATERIAL 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 the 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. Fluctuations in paper prices can have an effect on quarterly comparisons of the results of operations and financial condition of the Company. 20 9 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. The Company believes that these relationships afford it 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. 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 Stuart Hall division of Newell Co., Pen-Tab Industries, and the Tops division of Wallace Computer Services. In the filing supplies segment, the Company's key domestic competitors include Esselte AB and Smead Manufacturing. In the machine papers segment, the Company's key domestic competitors are CST/Bowater, Moore Business Forms and Willamette Industries. 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. Another competitor in this channel is 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 21 10 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(R) name will have a material adverse effect on its results of operations. EMPLOYEES As of December 31, 1996, the Company employed a total of 4,105 full-time persons, including 4,037 manufacturing, sales and administrative personnel and 68 corporate staff members. The Company has added approximately 250 employees as a result of the Shade /Allied acquisition. All the Company's operations are non-union except for the operations at the facilities located in Scottdale, Pennsylvania; Miamisburg, Ohio; Appleton, Wisconsin and Holland, New York which have, in total, approximately 1,100 union employees. The collective bargaining contracts covering the Company's employees will expire as follows: the Miamisburg contract expires May 31, 1997; the Appleton contract expires March 31, 1997; the Scottdale contract expires April 30, 1998 and the Holland contract expires December 7, 2000. 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. BACKLOG The Company does not consider backlog to be a significant factor is its business. Customer orders are generally received between one week and three months in advance of shipment dates and are satisfied with on hand finished goods inventory or completed manufacturing within the customers delivery deadlines. SEASONALITY The majority of the Company's business is not seasonal in nature. The sale of invitations, announcements, Christmas and holiday cards and presentation folders is directly affected by the timing of holidays and school schedules. Sales of these products will typically be highest during the third and fourth quarters of any year. ITEM 2 PROPERTIES PROPERTIES AND FACILITIES As of February 28, 1997, the Company operated manufacturing, distribution, office and warehouse space in the United States with a total floor area of approximately 4,087,000 square feet. Of this footage, approximately 849,000 square feet are leased and approximately 2,938,000 square feet are owned. The Company has five facilities in Fresno, Kosciusko, New Jersey, and New York City which aggregate approximately 300,000 square feet which are being subleased to third parties. The Company's lease agreements for these facilities expire from 1997 through 2009. 22 11 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 13 manufacturing and distribution facilities into 6 facilities. The Company's management continually evaluates the potential consolidation of manufacturing and distribution facilities. All of the Company's owned facilities are pledged as collateral under the Company's 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 as of February 28, 1997: 23 12
BUSINESS OWNED OR EXPIRATION OF SQUARE LOCATION DIVISION(1) LEASED LEASE (2) FEET - ---------------------------------- ----------- ------ ------------- ------ CALIFORNIA City of Industry........ W Owned - 85,000 City of Industry........ W Leased 2008(a)(b) 105,000 West Sacramento......... W Leased 2000(b) 37,000 Rancho Cucamonga........ W Leased 1996(b) 12,800 COLORADO Denver.................. W Leased 1997(b) 15,000 Denver.................. W Leased 1998 55,000 GEORGIA Gainesville............. A Owned - 70,000 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 term 25,200 Mattoon................. A Leased 1996(b) 58,900 Chicago................. W Leased 1996(b) 33,000 Chicago................. W Owned (c) 200,000 Chicago................. W Owned - 126,000 MASSACHUSETTS Westfield............... A Owned - 128,000 Holyoke................. A Owned (c) 572,416 MISSISSIPPI Kosciusko............... A Leased 1997(b)(d) 70,600 NEW JERSEY Bloomfield.............. W Leased 2003 94,000 NEW YORK New York City........... W Leased 1997 5,000 Holland................. W Owned - 168,000 OHIO Miamisburg.............. W Leased 1998(b)(e) 177,000 PENNSYLVANIA Scottdale............... W Owned - 400,000 Mt. Pleasant............ W Leased 1999(b) 11,000 Lancaster............... A Leased 2001 105,000 TENNESSEE Morristown.............. W Owned - 255,000 TEXAS Dallas.................. Corporate Leased 1998 30,000 Office Dallas.................. W Owned - 105,000 Corsicana............... W Owned - 250,000 UTAH North Salt Lake City.... A Owned - 110,000 North Salt Lake City.... A Leased 2001(f) 97,000 Clearfield.............. A Leased - 62,000 WASHINGTON Kent.................... A Leased 1997 13,500 Kent.................... W Leased 1999 24,000 WISCONSIN DePere.................. A Owned - 98,500 Green Bay............... A Leased 1997 17,000 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) Lease contains option to purchase. (b) Lease or sublease contains an extension or renewal option. (c) Two properties owned at this location. (d) Sublease contains option to assume prime lease. (e) Lease contains a right of first refusal. (f) Two leases at this location. 24 13 ITEM 3 LEGAL PROCEEDINGS 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. 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 $7,000 and $100,000 in 1995 and 1996, respectively, on environmental capital projects. The Company estimates that its environmental capital expenditures will be approximately $50,000 to $100,000 in each of 1997 and 1998. 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 and two of Shade/Allied's facilities has been the subject of certain soil and groundwater investigations and that the prior owner of the Niagara and the prior owner of one of the Shade/Allied facilities have indemnified the Company for certain environmental liabilities associated with historical use of the property. The Company currently believes that any environmental liabilities associated with such facilities would not be material or have been adequately covered by agreements with the former owners. 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. 25 14 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the stockholders of the Company during the quarter ended December 31, 1996. PART II ITEM 5 MARKET FOR THE REGISTRANTS' COMMON STOCK AND DEBT SECURITIES The common stock of the Company is listed on the New York Stock Exchange under the symbol "AGP". The quarterly high and low prices for the common stock since the Company's initial public offering of common stock on July 2, 1996 is shown below.
Quarter Ended Low Price High Price - ------------- --------- ---------- September 30, 1996 $ 14.375 $ 24.75 December 31, 1996 $ 18.375 $ 22.625
As of March 4, 1997, there were approximately 3,140 holders of common stock. The Company has not sold any unregistered securities during the last fiscal year. 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, AP&P Delaware. The payment of dividends by AP&P Delaware 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 related to the Notes. 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. 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 $6.11 per share (after giving effect to the recapitalization of the Company). 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. 26 15 ITEM 6 SELECTED FINANCIAL DATA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data set forth below for the years ended December 31, 1994, 1995 and 1996 have been derived from, and are qualified by reference to, the audited consolidated financial statements of the Company included elsewhere in this Form 10-K. The selected historical consolidated financial data set forth for the period August 1, 1992 to December 31, 1992 and for the year ended December 31, 1993 have been derived from the Company's audited financial statements not included in this Form 10-K. Effective July 31, 1992, the Company acquired Ampad Corporation (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 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 Form 10-K. 27 16
THE COMPANY PREDECESSOR ------------------------------------------------------- PERIOD PERIOD YEAR ENDED FROM FROM DECEMBER 31, 1/1/92- 8/1/92- ------------------------------------------- INCOME STATEMENT DATA (1) (2) (3) (4) 7/31/92 12/31/92 1993 1994 1995 1996 ------- -------- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales ............................ $ 63,238 $ 43,526 $ 109,095 $ 127,744 $ 257,160 $ 583,859 Cost of sales (5) .................... 55,737 37,610 93,309 120,695 209,633 458,449 --------- --------- --------- --------- --------- --------- Gross profit ......................... 7,501 5,916 15,786 7,049 47,527 125,410 Selling, general and administrative expenses .......................... 5,838 4,351 10,160 10,040 18,003 47,649 Management fees and services ......... -- 210 605 575 542 3,880 Nonrecurring compensation charge (6) . -- -- -- -- 27,632 -- --------- --------- --------- --------- --------- --------- Income (loss) from operations ........ 1,663 1,355 5,021 (3,566) 1,350 73,881 Interest expense ..................... 1,337 1,311 3,320 4,560 13,657 42,968 Other (income) expense ............... -- -- (167) (90) (735) (1,153) --------- --------- --------- --------- --------- --------- Income (loss) before income taxes .... 326 44 1,868 (8,036) (11,572) 32,066 Provision for (benefit from) income taxes ...................... 130 33 64 (488) (6,538) 13,852 --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary item .............................. 196 11 1,804 (7,548) (5,034) 18,214 Extraordinary loss from extinguishment of debt, net of income tax benefit ................. -- -- -- -- (9,652) (19,995) --------- --------- --------- --------- --------- --------- Net income (loss) .................... $ 196 $ 11 $ 1,804 $ (7,548) $ (14,686) $ (1,781) ========= ========= ========= ========= ========= ========= Net income (loss) per share: Before extraordinary item ......... $ (.17) $ .62 Extraordinary item ................ (.33) (.68) --------- --------- Net income (loss) ................. $ (.50) $ (.06) ========= ========= Pro forma weighted average number of common shares and common share equivalents outstanding (7) .. 29,607 29,607 ========= ========= OTHER DATA: Depreciation and amortization ........ $ 1,936 $ 79 $ 159 $ 942 $ 4,248 $ 14,253 Capital expenditures ................. $ 647 $ 948 $ 1,656 $ 942 $ 5,640 $ 15,109
DECEMBER 31, ------------------------------------------------------ BALANCE SHEET DATA: 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Working capital ....................... $ 8,774 $ 8,248 $ 1,170 $ 108,845 $ 77,857 Total assets .......................... $ 42,305 $ 47,893 $ 68,233 $ 504,356 $ 509,417 Long-term debt, less current maturities $ 11,301 $ 10,806 $ 19,889 $ 443,794 $ 269,812 Stockholders' equity (deficit) (8) .... $ 3,011 $ 4,815 $ (2,733) $ (66,421) $ 104,599
28 17 (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. (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. (3) Effective October 31, 1995, the Company acquired Williamhouse. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of Williamhouse, except for the Regency Division, have been included in the Company's results since the date of acquisition. The Regency Division was identified as a non-strategic asset at the date of the acquisition of Williamhouse and was reflected as an asset held for sale in the consolidated balance sheet through June 27, 1996, when it was sold. As such, the operating results of the Regency Division are excluded from the results of operations from the date of the Williamhouse acquisition. (4) Effective June 28, 1996, the Company acquired Niagara. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of Niagara for the six-month period ended December 31, 1996 have been included in the Company's results for the year ended December 31, 1996. (5) 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. (6) Includes non-cash stock option compensation charges of $24.3 million directly related to the Williamhouse acquisition as well as other non-recurring cash and non-cash charges aggregating $3.3 million. (7) 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 of the Company which occurred concurrent with its initial public offering of common stock and to give effect to the issuance of 12.5 million shares of common stock in the initial public offering. Common stock equivalents have been determined using the treasury stock method. (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. 18 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is one of the largest manufacturers and marketers of nationally branded and private label paper-based office products (excluding copy paper) in the $60 billion to $70 billion North American office products industry. The Company offers a broad assortment of products including writing pads, file folders, envelopes, machine papers and other paper-based products. Through its Ampad division, the Company is among the largest and most important suppliers of pads and other paper-based writing products, filing supplies, machine papers and retail envelopes to many of the largest and fastest growing office products distributors. Through its Williamhouse division, the Company is the leading supplier of mill branded, specialty and commodity business envelopes to paper merchants and distributors. The Company believes that its future operating results will not be directly comparable to its historical operating results because of its strategic acquisitions and the expected cost savings from integration of its acquisitions. The Company's business has not generally been seasonal in nature. Certain factors which have affected, and may affect prospectively, the operating results of the Company are discussed below. Strategic 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 June 28, 1996, the Company acquired Niagara, a national supplier of envelopes to fast growing distributors, for an aggregate purchase price of approximately $53.2 million, including costs of the acquisition and a $5 million one year consulting agreement with Niagara's former president. With these acquisitions, the Company became the largest supplier of envelopes to the national paper merchants. The Williamhouse acquisition was financed through the Company's old bank credit agreement and the assumption of senior subordinated notes. The Niagara acquisition was financed with proceeds from the sale of the Regency Division of Williamhouse. 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 $19.9 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 February 11, 1997, the Company acquired Shade/Allied, a national supplier of machine papers, principally continuous computer forms. The purchase price of $49.5 million was financed with borrowings under the Company's new bank credit agreement. The Company expects that Shade/Allied's products will be distributed by both the Ampad and Williamhouse divisions and that the manufacturing plants will be integrated into the Ampad division. This acquisition provided the Company with a more significant position in a fourth product category. Purchase Accounting Effects. The Company's acquisitions have been accounted for using the purchase accounting method. The acquisitions have currently affected, and will prospectively affect, the Company's results of operations in certain significant respects. The aggregate acquisition costs (including assumption of debt) are allocated to the net assets acquired based on the fair market value of such net assets. The allocations of the purchase price result in an increase in the historical book value of certain 30 19 assets such as property, plant and equipment and intangible assets, including goodwill, which results in incremental annual depreciation and amortization expense each year. Potential Operating Improvements. The Company has identified and is in the process of implementing cost reductions in connection with the acquisitions. 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 and Niagara's Buffalo 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, and the consolidation and integration of manufacturing and distribution facilities. These improvements were being implemented during 1996 and, except for the integration of certain manufacturing and distribution facilities, were completed by the end of 1996. However, because Williamhouse's and Niagara's selling, general and administrative ("SG&A") expenses were historically higher than the SG&A expenses of the Company. SG&A expenses as a percentage of net sales in 1996 were higher than the SG&A expenses to net sales percentage relationship in 1995 and 1994. Sale of Regency Division. The Company's management identified the Regency Division of Williamhouse as a nonstrategic asset following the acquisition of Williamhouse and, on June 27, 1996, sold the Regency Division for approximately $47.9 million in net proceeds. As a result, the financial statements of the Company included elsewhere herein reflect the Regency Division as "Assets Held for Sale" as of December 31, 1995. The Company used the net proceeds from the sale of the Regency Division to fund substantially all of the Niagara acquisition. 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. 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, 1994, 1995, and 1996. The results of operations for the year ended December 31, 1994 reflect the historical results of the Company and the results of SCM for the period from July 5, 1994 through December 31, 1994. The results of operations for the year ended December 31, 1995 reflect the historical results of the Company, the results of Globe-Weis from August 18, 1995 through December 31, 1995 and the results of Williamhouse for the two-month period ended December 31, 1995. The results of operations for the year ended December 31, 1996 include the results of operations of Niagara from June 28, 1996 through December 31, 1996.
YEAR ENDED DECEMBER 31, ---------------------- INCOME STATEMENT DATA: 1994 1995 1996 ---- ---- ---- Net sales ....................................... 100.0 100.0 100.0 ===== ===== ===== Gross profit .................................... 5.5 18.5 21.5 Selling, general and administrative expenses .... 7.9 7.0 8.2 Management fees and services .................... 0.4 0.2 0.6 Non-recurring compensation charge ............... -- 10.7 -- ----- ----- ----- Income (loss) from operations ................... (2.8) 0.6 12.7
31 20 Interest expense, net ........................... 3.6 5.3 7.4 Other income .................................... (0.1) (0.3) (0.2) ----- ----- ----- Income (loss) before taxes ...................... (6.3) (4.4) 5.5 Provision for (benefit from) income taxes ....... (0.4) (2.5) 2.4 ----- ----- ----- Income (loss) before extraordinary item ......... (5.9) (1.9) 3.1 Extraordinary loss from extinguishment of debt, net of income tax benefit .................... -- (3.8) (3.4) ----- ----- ----- Net loss ........................................ (5.9) (5.7) (0.3) ===== ===== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net sales for the year ended December 31, 1996 increased by $326.7 million, or 127.0%, to $583.9 million from $257.2 million for the year ended December 31, 1995. Of this net sales increase, $274.8 million is related to the acquisition of Williamhouse and Niagara and $35.2 million is related to the acquisition of Globe-Weis. Ampad division net sales increased by $16.7 million during 1996 compared to 1995 due to higher sales to the fast growing customer channels such as superstores, mass merchant stores and contract stationers. Gross profit for the year ended December 31, 1996 increased by $77.9 million, or 164.0%, to $125.4 million from $47.5 million for the year ended December 31, 1995. Approximately $69.5 million of the increase in gross profit is attributable to the acquisition of Williamhouse and Niagara. Gross profit margin increased to 21.5% for the year ended December 31, 1996 from 18.5% for the year ended December 31, 1995. The increase in gross profit margin is primarily attributable to higher margins of the Williamhouse division. SG&A expenses for the year ended December 31, 1996 increased $29.6 million, or 164.4%, to $47.6 million from $18.0 million for the year ended December 31, 1995. Approximately $20.2 million is attributable to the acquisition of Williamhouse and Niagara and $3.6 million to amortization of goodwill and intangibles related to the acquisitions. The remainder of the increase is due primarily to costs associated with the support of a significantly larger corporation. Management fees and services increased $3.3 million in 1996 due to the amortization of a consulting agreement with a former shareholder of Niagara and an increase in Bain Capital's management fees. Interest expense for the year ended December 31, 1996 increased $29.3 million to $43.0 million from $13.7 million for the year ended December 31, 1995. The increase is attributable primarily to higher levels of outstanding debt for a full year as a result of the acquisition of Williamhouse and Globe-Weis. The increase in interest expense was partially offset by a reduction of approximately $3.4 million in interest expense following the redemption of $70 million of the Notes in August 1996. The income tax provision for year ended December 31, 1996 reflects an effective tax rate of 43.2% versus an effective tax benefit rate of 56.5% for the year ended December 31, 1995. The effective tax rate for 1996 reflects a 40% combined statutory federal and state income tax rate adjusted for nondeductible expenses, primarily goodwill amortization. The effective tax rate for the year ended December 31, 1995 differs from the federal statutory income tax rate of 35% due to state income taxes and the reversal of a valuation allowance on deferred tax assets relating to the realizability of the Company's net operating loss carryforward. Extraordinary item represents an after tax loss on extinguishment of debt of $20.0 million ($33.0 million pretax) recognized as a result of the redemption of $70.0 million of senior subordinated 32 21 notes with a portion of the net proceeds from the initial public offering and the write off of a portion of the unamortized deferred financing costs related to the Notes and all of the deferred financing costs associated with the old bank credit agreement and the old accounts receivable facility. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net sales for the year ended December 31, 1995 increased by $129.5 million, or 101.4%, to $257.2 million from $127.7 million for the year ended December 31, 1994. Of this net sales increase, $45.8 million, or 35.4%, is related to the Williamhouse acquisition and $29.1 million, or 22.4%, is related to the Globe-Weis acquisition. The remaining increase of $54.6 million, or 42.2%, 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 3.0% of net sales in the year ended December 31, 1995, compared to 8.6% in 1994. Gross profit for the year ended December 31, 1995 increased by $40.5 million, or 579%, to $47.5 million, from $7.0 million for the year ended December 31, 1994. Approximately $13.6 million of the increase in gross profit is attributable to the Williamhouse 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; (iii) the Company's ability to pass along paper price increases to its customers beginning in 1995, and (iv) 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 18.5% from 5.5% 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 $8.0 million, 80.0%, to $18.0 million, from $10.0 million for the year ended December 31, 1994. Approximately $5.9 million of this increase related to the acquisitions. The balance of such increase related to higher amortization costs as a result of the acquisitions and the costs associated with the accounts receivable facility. 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. 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 0.6% from (2.8)% 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 Williamhouse and the Globe-Weis acquisitions. 33 22 Income tax benefit for the year ended December 31, 1995 reflects an effective tax rate of 56.5%, 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 deferred tax valuation allowance resulting from improved operating results. Extraordinary item represents an after tax loss on extinguishment of debt of $9.7 million ($16.2 million pretax) 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. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for the year ended December 31, 1996 was $23.2 million compared to cash provided by operating activities of $4.7 million for the year ended December 31, 1995. The increase in cash provided by operating activities is primarily due to higher net sales and earnings of the Company in 1996. 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. Cash used by operations for the years ended December 31, 1994 was $1.9 million. 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. Cash used in investing activities for the year ended December 31, 1996 and 1995 was $16.2 million and $131.3 million, respectively. The use of cash for the year ended December 31, 1996 was principally due to the Niagara acquisition ($53.0 million, net of cash received) and purchases of equipment ($14.6 million), offset by proceeds from the sale of the Regency Division and other assets held for sale ($49.3 million). The use of cash for the year ended December 31, 1995, was due to the Williamhouse 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 ($13.7 million). Cash used in financing activities for the year ended December 31, 1996 was $23.0 million as compared to a cash provision from financing activities of $144.9 million for the year ended December 31, 1995. During the year ended December 31, 1996, the Company (i) completed its initial public offering of 12.5 million shares of common stock for $172.8 million in net proceeds after deducting offering fees and expenses, (ii) refinanced its accounts receivable facility with a new $60.0 million facility, (iii) refinanced its bank credit agreement, (iv) redeemed $70.0 million of senior subordinated notes, (v) repaid $95.8 million of debt incurred under the old bank credit agreement, (vi) paid $7.7 million in redemption premiums on the Notes, (vii) repaid $10 million under the new accounts receivable facility with proceeds from the sale of the Regency Division, (viii) borrowed $54 million under the new accounts receivable facility and (ix) repaid WR seller notes for $25 million. Cash provided by financing activities for the years ended December 31, 1995 and 1994 was $144.9 million and $16.5 million, respectively, primarily due to periodic financings incurred in connection with the various acquisitions. Capital expenditures, excluding acquisitions, in the years ended December 31, 1996, 1995 and 1994 were $14.6 million, $3.9 million and $0.9 million, respectively. The Company expects that combined capital expenditure requirements will be approximately $18 million for 1997. 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. 34 23 Contemporaneously with the initial public offering, the Company refinanced and retired all remaining indebtedness under the old bank credit agreement with the proceeds of the loans under the new bank credit agreement. As a result of the refinancing, effective July 8, 1996, the Company borrowed $162.0 million in revolving loans and $6.5 million in swingline loans. The proceeds of these loans were used to (i) pay off the remaining $145.0 million in term loans, $5.0 million in revolver loans and $7.7 million in swingline loans outstanding under the old bank credit agreement and (ii) pay approximately $8.1 million in fees associated with the new bank credit agreement. The new bank credit agreement provides a revolving credit facility of $300 million . As of December 31, 1996, the Company had $155 million available for borrowing under its bank credit agreement. Loans made under the new bank credit agreement bear interest at a rate per annum equal to, at the Company's option, (i) a base rate plus an applicable margin or (ii) the LIBOR rate plus an applicable margin (as each term is defined in the new bank credit agreement). The applicable margin varies from 0% to 1.75%, based on the Company's level of debt as compared to earnings ("leverage ratio"). The Company's margin is currently 1.50%. Availability under the new bank credit agreement is subject to an unused commitment fee which, like the applicable margin, varies from 0.3% to 0.5% based on the Company's leverage ratio. The Company's current rate is 0.5%. Availability under the new bank credit agreement will 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 will terminate in 2001. The Company will be permitted to make acquisitions under the new bank credit agreement up to an aggregate of $25 million without consent of the agent bank and up to $50 million if, on a pro forma basis giving effect to such acquisition, the Company's leverage ratio is less than 3.0:1.0. As a result of the new bank credit agreement, the Company's effective interest rate under its senior credit facility was reduced by 189 basis points contemporaneously with the initial public offering. 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. On May 29, 1996, the Company refinanced its $45 million accounts receivable facility with a new $60 million accounts receivable facility. Under the new facility the Company may sell, on a revolving basis, an undivided interest in a designated pool of trade accounts receivable. At December 31, 1996, $54 million of accounts receivable were sold under the program. The agreement expires in 2000. On February 11, 1997, the Company acquired Shade/Allied for approximately $49.5 million, including acquisition costs, using proceeds from borrowings under its bank credit agreement. 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 new bank credit agreement and available cash on hand at December 31, 1996, 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 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. 35 24 The Company has entered into an interest rate protection agreement to minimize the impact from a rise in interest rates. INFLATION The Company believes that inflation has not had a material impact on its results of operations for the three years ended December 31, 1996. CERTAIN FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to the Company that are based on the beliefs of the management of the Company, as well as assumptions and estimates made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or the Company's management, identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the operations and results of operations of the Company as well as its customers and suppliers, including as a result of competitive factors and pricing pressures, shifts in market demand, general economic conditions and other factors, including those that affect wholesale and retail office products and the business activities of the Company's customers and suppliers. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. CHANGES IN ACCOUNTING STANDARDS The Company elected in 1996 to adopt the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation," which adoption did not have any effect on its financial condition or results of operations. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14(a) of the Exhibit Index for a listing of the Company's financial statements included with this Form 10-K. The Company is not required to provide the supplementary financial information required by Item 302 of Regulation S-K. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This section is not applicable as there were no changes in or disagreements with the Company's independent accountants on accounting and financial disclosure for the period covered by this Form 10-K. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This item is incorporated by reference from the Company's 1997 Annual Proxy Statement to Stockholders where the information can be found on pages 1 to 9. 36 25 ITEM 11 EXECUTIVE COMPENSATION This item is incorporated by reference from the Company's 1997 Annual Proxy Statement to Stockholders where the information can be found on pages 9 to 11. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This item is incorporated by reference from the Company's 1997 Annual Proxy Statement to Stockholders where the information can be found on pages 7 to 8. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This item is incorporated by reference from the Company's 1997 Annual Proxy Statement to Stockholders where the information can be found on pages 5 to 6. 37 26 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ITEM 14(a) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES PAGE ---- Report of Independent Accountants .............................. 43 Consolidated Balance Sheets at December 31, 1995 and 1996 ...... 44 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 ........................... 45 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 ........................... 46 Consolidated Statements of Stockholders' Equity (Deficit) years ended December 31, 1994, 1995, and 1996 .............. 48 Notes to Consolidated Financial Statements ..................... 49 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC AND SUBSIDIARY Report of Independent Accountants .............................. 67 Consolidated Balance Sheets at December 31, 1995 and 1996 ...... 68 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 ........................... 69 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 ........................... 70 Consolidated Statements of Stockholder's Equity (Deficit) years ended December 31, 1994, 1995, and 1996 .............. 72 Notes to Consolidated Financial Statements ..................... 73
ITEM 14(a)(2) FINANCIAL STATEMENT SCHEDULES The information required by this item is included in the consolidated financial statements or is omitted because the schedules are not applicable to the Company. ITEM 14(b) REPORTS ON FORM 8-K The Company did not file any Current Reports on Form 8-K during the fourth quarter of 1996. ITEM 14(b) EXHIBITS See Exhibit Index which follows on pages 40 and 41. 38 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of March 14, 1997. AMERICAN PAD & PAPER COMPANY AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. as Registrants /s/ Charles G. Hanson III - ------------------------------------ Charles G. Hanson III Chairman and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below as of March 14, 1997 by the following persons on behalf of the registrants and in the capacities indicated. /s/ Russell M. Gard - ---------------------------------- Russell M. Gard President, Chief Operating Officer and Director /s/ Robert C. Gay /s/ Jonathan S. Lavine - --------------------------------- ----------------------------------- Robert C. Gay Jonathan S. Lavine Director. Director /s/ Marc B. Wolpow /s/ Gregory M. Benson - --------------------------------- ----------------------------------- Marc B. Wolpow Gregory M. Benson Director. Director /s/ Scott R. Watterson /s/ Herbert M. Kohn - --------------------------------- ----------------------------------- Scott R. Watterson Herbert M. Kohn Director. Director /s/ Kevin W. McAleer /s/ William W. Solomon, Jr. - --------------------------------- ----------------------------------- Kevin W. McAleer William W. Solomon, Jr. Chief Financial Officer Vice President - Controller Principal Financial Officer Principal Accounting Officer 39 28 EXHIBIT EXHIBIT INDEX NO. DESCRIPTION - ------- --------------- 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.(1) 3.1 (i) Restated Certificate of Incorporation of the Company (3) 3.1 (ii) Amended and Restricted By-laws of the Company. (3) 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) 4.7 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 APP., Notepad Funding Corporation and certain subsidiaries. (1)+ 4.11 Credit Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent (3) 4.12 Security Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., certain other subsidiaries of American Pad & Paper Company, and Bankers Trust Company, as Collateral Agent. (3) 4.13 Pledge Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., the Lenders from time to time party thereto, and Bankers Trust Company, as Agent. (3) 4.14 Form of Revolving and Swingline Note of American Pad & Paper Company of Delaware, Inc. (3) 4.15 Subsidiary Guaranty, dated as of July 8, 1996, among each of the Company's subsidiaries named therein and Bankers Trust Company, as Agent for the Bank. (3) 10.1 Agreement and Plan of Merger, dated as of October 3, 1995, among the 40 29 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 Amended and Restricted Advisory Agreement, dated as of October 31, 1995, among American Pad & Paper Company of Delaware, Inc. and Bain Capital, Inc. (4) 10.7 Ampad Holding Corporation 1992 Key Employees Stock Option Plan. (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 1996 Key Employee Stock Incentive Plan (3) 10.21 1996 Non-Employee Director Stock Option Plan. (3) 10.22 Employment Agreement between the Company and Charles Hanson III. (2) 10.23 Employment Agreement between the Company and Russell Gard. (2) 10.24 Amended and Restated Advisory Agreement between American Pad & Paper Company and Bain Capital, Inc. (2) 10.25 Management Stock Purchase Plan .(3) 10.26 Employment Agreement between the Company and Timothy Needham. 10.27 Agreement and Plan of Merger by and between Shade/Allied, Inc. and American Pad & Paper Company of Delaware, Inc. 21.1 Subsidiaries of the Company. 23.1 Consent of Price Waterhouse LLP 27.1 Financial Data Schedule. - ----------------- (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) Incorporated by reference to the same-numbered exhibit to the Registration Statement on Form S-1 of American Pad & Paper Company (File No. 333-4000). (3) Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended June 30, 1996. (4) Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1996. 41 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES PAGE NO. -------- Responsibility for the Consolidated Financial Reports 43 Report of Independent Accountants 43 Consolidated Balance Sheets at December 31, 1995 and 1996 44 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 45 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 46 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996 48 Notes to Consolidated Financial Statements 49 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC AND SUBSIDIARY Report of Independent Accountants 67 Consolidated Balance Sheets at December 31, 1995 and 1996 68 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 69 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 70 Consolidated Statements of Changes in Stockholder's Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996 72 Notes to Consolidated Financial Statements 73
42 31 RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL REPORTS Company management is responsible for the preparation, accuracy and integrity of the consolidated financial statements and other financial information included in this Annual Report. This responsibility includes preparing the statements in accordance with generally accepted accounting principles and necessarily includes estimates that are based on management's best judgments. To help ensure the accuracy and integrity of Company financial data, management maintains internal controls which are designed to provide reasonable assurance that transactions are executed as authorized, that they are accurately recorded and that assets are properly safeguarded. These controls are monitored by internal financial and operations management. It is essential for all Company employees to conduct their business affairs in keeping with the highest ethical standards as outlined in our code of conduct policy. Careful selection of employees, and appropriate divisions of responsibility, also help us to achieve our control objectives. The financial statements have been audited by the Company's independent accountants, Price Waterhouse LLP. Their report is also shown on this page. The Board of Directors, acting through its Audit Committee composed entirely of outside directors, oversees the adequacy of the Company's control environment. The Audit Committee meets periodically with representatives of Price Waterhouse LLP and internal financial management to review accounting, control, auditing and financial reporting matters. The independent auditors also have full and free access to meet privately with the Audit Committee. Charles G. Hanson III Kevin W. McAleer Chief Executive Officer Chief Financial Officer --------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of American Pad & Paper Company In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) on page 38 present fairly, in all material respects, the financial position of American Pad & Paper Company and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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. PRICE WATERHOUSE LLP Dallas, Texas February 18, 1997 43 32 AMERICAN PAD & PAPER COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
DECEMBER 31, ---------------------- ASSETS 1995 1996 ------ --------- --------- Current assets: Cash $ 18,341 $ 2,290 Accounts receivable 29,483 57,054 Refundable income taxes 3,657 -- Inventories 93,061 105,667 Prepaid expenses and other current assets 927 4,739 Assets held for sale 42,578 -- Deferred income taxes 15,009 10,754 --------- --------- Total current assets 203,056 180,504 Property and equipment 106,768 133,090 Intangible assets 191,012 192,367 Other 3,520 3,456 --------- --------- Total assets $ 504,356 $ 509,417 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current liabilities: Current portion of long-term debt $ 11,834 $ 2,171 Accounts payable 37,048 44,932 Accrued expenses 44,835 55,041 Income taxes payable 494 503 --------- --------- Total current liabilities 94,211 102,647 Long-term debt 443,794 269,812 Deferred income taxes 30,070 30,981 Other 2,702 1,378 --------- --------- Total liabilities 570,777 404,818 --------- --------- Commitments and contingencies Stockholders' equity (deficit): Preferred stock, 150 shares authorized, 58 shares and no shares issued and outstanding, respectively 113,887 -- Common stock, voting, $.01 par value, 75,000 shares authorized, 7,307 shares and 27,400 shares issued and outstanding, respectively 73 274 Additional paid-in capital 14,234 300,721 Accumulated deficit (194,615) (196,396) --------- --------- Total stockholders' equity (deficit) (66,421) 104,599 --------- --------- Total liabilities and stockholders' equity (deficit) $ 504,356 $ 509,417 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 44 33 AMERICAN PAD & PAPER COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 --------- --------- --------- Net sales $ 127,744 $ 257,160 $ 583,859 Cost of sales 120,695 209,633 458,449 --------- --------- --------- Gross profit 7,049 47,527 125,410 --------- --------- --------- Operating expenses: Selling and marketing 5,059 6,254 16,964 General and administrative 4,981 11,749 30,685 Management fees and services 575 542 3,880 Nonrecurring compensation charge -- 27,632 -- --------- --------- --------- 10,615 46,177 51,529 --------- --------- --------- Income (loss) from operations (3,566) 1,350 73,881 Other income (expense): Interest (4,560) (13,657) (42,968) Other income, net 90 735 1,153 --------- --------- --------- Income (loss) before income taxes (8,036) (11,572) 32,066 and extraordinary item Provision (benefit) for income taxes (488) (6,538) 13,852 --------- --------- --------- Income (loss) before extraordinary item (7,548) (5,034) 18,214 Extraordinary loss from extinguishment of debt (net of income tax benefits of $6,434 and $13,009, respectively) -- (9,652) (19,995) --------- --------- --------- Net loss $ (7,548) $ (14,686) $ (1,781) ========= ========= ========= Pro forma income (loss) per share: Income (loss) before extraordinary item $ (.17) $ .62 Extraordinary item (.33) (.68) --------- --------- Net loss $ (.50) $ (.06) ========= ========= Pro forma weighted average shares outstanding 29,607 29,607
The accompanying notes are an integral part of these consolidated financial statements. 45 34 AMERICAN PAD & PAPER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994 1995 1996 --------- --------- --------- Cash flows from operating activities: Net loss $ (7,548) $ (14,686) $ (1,781) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 828 3,369 9,765 Amortization of goodwill and intangible assets 114 879 4,488 Noncash portion of nonrecurring compensation charge -- 25,998 -- Extraordinary loss on extinguishment of -- 9,652 19,995 debt Noncash interest expense and accretion of 135 -- -- discount Amortization of debt issuance costs 696 1,538 3,790 Gain on sale of assets (83) (140) (94) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 2,445 (22,025) (25,625) Refundable income taxes -- 101 3,657 Inventories 1,655 2,256 (2,030) Prepaid expenses and other (302) 905 1,721 Deferred tax asset, net (488) (13,141) 13,361 Accounts payable 3,433 4,979 1,819 Accrued expenses (2,782) 4,877 (4,294) Other assets and liabilities 11 147 (1,556) --------- --------- --------- Net cash provided by (used in) operating activities (1,886) 4,709 23,216 --------- --------- --------- Cash flows from investing activities: Purchase of stock and net assets of businesses, including acquisition costs (13,744) (129,701) (52,964) Purchases of property and equipment (942) (3,919) (14,609) Proceeds from sale of assets 83 140 2,056 Net cash generated from assets held for sale -- 2,213 49,277 --------- --------- --------- Net cash used in investing activities (14,603) (131,267) (16,240) --------- --------- ---------
(continued on next page) The accompanying notes are an integral part of these consolidated financial statements. 46 35 AMERICAN PAD & PAPER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 --------- --------- --------- Cash flows from financing activities: Net borrowings (repayments) under line of credit 7,057 (22,767) -- Proceeds from long-term debt 11,252 430,052 192,773 Repayment of long-term debt (1,192) (186,546) (380,317) Redemption premiums and penalties included in extraordinary loss -- (10,812) (7,700) Debt issuance costs (628) (35,032) (9,584) Redemption of preferred stock -- (61,478) -- Redemption of Class P common stock -- (4,464) -- Redemption of preferred stock options -- (9,188) -- Proceeds from old accounts receivable facility -- 45,000 -- Repayment of old accounts receivable facility -- -- (45,000) Net proceeds from net new accounts receivable facility -- -- 54,000 Proceeds from exercise of preferred stock options -- 130 -- Proceeds from initial public offering, net -- -- 172,801 --------- --------- --------- Net cash provided by (used in) financing activities 16,489 144,895 (23,027) --------- --------- --------- Net increase (decrease) in cash -- 18,337 (16,051) Cash, beginning of year 4 4 18,341 --------- --------- --------- Cash, end of year $ 4 $ 18,341 $ 2,290 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 3,575 $ 9,127 $ 38,785 ========= ========= ========= Income taxes $ 29 $ 99 $ 470 ========= ========= ========= Supplemental disclosure of noncash investing activity: Notes payable issued in consideration of purchase price $ -- $ 36,115 $ -- ========= ========= ========= Notes payable issued to purchase equipment $ -- $ 1,721 $ 500 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 47 36 AMERICAN PAD & PAPER COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) - --------------------------------------------------------------------------------
PREFERRED COMMON RETAINED STOCK STOCK EARNINGS -------------------- ------------------ PAID-IN (ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL ------ ------ ------ ------ ------- ------- ----- Balance at December 31, 1993 -- $ -- 6,667 $ 67 $ 2,933 $ 1,815 $ 4,815 Net loss -- -- -- -- -- (7,548) (7,548) --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1994 -- -- 6,667 67 2,933 (5,733) (2,733) Preferred stock dividend 90 175,365 -- -- (2,933) (172,432) -- Grant of stock options -- -- -- -- 25,998 -- 25,998 Redemption of preferred stock (32) (61,478) -- -- -- -- (61,478) Accrual of preferential distribution on Class P common stock -- -- -- -- 1,764 (1,764) -- Redemption of Class P common stock -- -- 640 6 (4,470) -- (4,464) Redemption of preferred stock options -- -- -- (9,188) -- (9,188) Proceeds from exercise of preferred stock options -- -- -- -- 130 -- 130 Net loss -- -- -- -- -- (14,686) (14,686) --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1995 58 113,887 7,307 73 14,234 (194,615) (66,421) Conversion of preferred stock to common stock (58) (113,887) 7,593 76 113,811 -- -- Proceeds from initial public offering of common stock -- -- 12,500 125 172,676 -- 172,801 Net loss -- -- -- -- -- (1,781) (1,781) --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1996 -- $ -- 27,400 $ 274 $ 300,721 $(196,396) $ 104,599 ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 48 37 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE 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"). 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 "AP&P Delaware") in exchange for a right to receive $140 million of merger consideration. The Company, principally using bank borrowings by AP&P 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 AP&P Delaware. The financial statements of the Company include the historical accounts and operations of the Company and AP&P Delaware. Included in the historical accounts and operations of AP&P Delaware are the accounts and operations of Ampad and of the envelope operations of Williamhouse and Niagara since their respective dates of acquisition. Additionally, the consolidated financial statements include the accounts of Notepad Funding Corporation ("Notepad"), a special purpose corporation utilized in the accounts receivable facility. All significant intercompany balances have been eliminated. American Pad & Paper Company of Delaware, Inc. The Company's wholly owned subsidiary, AP&P Delaware, is the issuer of 13% Senior Subordinated Notes ("Notes"). Terms of the Notes require, among other matters, that AP&P Delaware provide annual audited and quarterly unaudited financial statements to the holders of the publicly traded notes. The Company is providing the holders of the Notes with its quarterly and annual consolidated financial statements as well as its periodic reports as filed with the Securities and Exchange Commission. The Company believes that the financial information and debt compliance reporting needs of the holders of the Notes are satisfied by providing such consolidated financial statements. There are no material differences between the financial statements of the Company and of AP&P Delaware. The composition of the AP&P Delaware's stockholder's equity at December 31, 1996 consists of 100 shares of common stock, paid in capital of $201,799 and an accumulated deficit of $97,200 and, in total, is equal to the stockholders' equity of the Company. Business The Company is one of the largest manufacturers and marketers of paper-based office products in North America. The Company operates in one business segment, converting paper into office products and offers a broad assortment of products through two complementary divisions: Ampad (writing pads, file folders, retail envelopes, machine papers, and other paper-based office products) and Williamhouse (business envelopes and machine papers). The Company's products are distributed through large mass merchant retailers, office product superstores, warehouse clubs, major contract stationers, office products wholesalers, paper merchants, and independent dealers. Substantially all sales are to customers within the United States. 49 38 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- Pro Forma Information The pro forma information included in these financial statements and notes is unaudited. Quarterly Financial Information The quarterly financial information included in these financial statements is unaudited and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position, its results of operations and its cash flows. Operating results for any particular quarter are not necessarily indicative of results for the full fiscal year. 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 The Company considers all highly-liquid, interest-bearing instruments with an original maturity of three months or less to be cash equivalents. 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 volume rebates to customers based on their 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 periodic 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. 50 39 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- 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. Costs include material, labor and overhead. 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. Significant repairs or betterments which extend the useful life of an asset are capitalized and depreciated over the asset's remaining useful life. 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. Intangible assets represent trade names acquired in the WR acquisition and are amortized using the straight-line method. Trade names in the aggregate gross amount of $31,700 and $6,200 are amortized over 40 years and 15 years, respectively. The Company periodically reviews goodwill and other intangible assets to assess recoverability. Potential impairment is measured based on the expected undiscounted pre-tax and pre-interest 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, 1996. Amortization expense was $114 in 1994, $879 in 1995 and $4,488 in 1996. 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. Income Taxes The Company accounts for income taxes following the liability method, which 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. The Company periodically reviews the realizability of its deferred tax assets and, as needed, records valuation allowances when realizability of the deferred tax asset is not likely. 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. 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, 1996 of the Notes of $130,000 compares to the Notes' fair value of $153,400 based on quoted market rates, as determined at the end of 1996. 51 40 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- Pro Forma Earnings Per Share Given the changes in the Company's capital structure effected in connection with the initial public offering of the Company's common stock, historical earnings per common share amounts are not presented in the consolidated financial statements as they are not considered to be meaningful. Pro forma weighted average shares outstanding reflect conversion of the preferred stock into common stock for the same periods outstanding as the underlying common stock on which the preferred stock was issued and the initial public offering of common stock. The pro forma weighted average shares outstanding gives effect to the 8.1192-for-one stock split and has been adjusted to reflect as outstanding, using the treasury stock method at the estimated initial public offering price, all shares issuable upon the exercise of stock options granted subsequent to April 25, 1995 (one year prior to the initial public offering filing date pursuant to the Securities and Exchange Commission's rules). Reclassifications Certain amounts in the 1994 and 1995 consolidated financial statements, none of which have an effect on net income (loss), have been reclassified to conform with the presentation in the 1996 consolidated financial statements. 3. ACQUISITIONS WR Acquisition, Inc./Williamhouse-Regency The Company acquired WR Acquisition, Inc. and its wholly owned subsidiary Williamhouse-Regency of Delaware, Inc. through a merger transaction effective October 31, 1995. 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. 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 Company's bank credit agreement and an off-balance sheet accounts receivable facility. The aggregate acquisition costs have been 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 $39,252; property and equipment of $86,063; identifiable intangible assets of $37,900; deferred income tax liability of $24,340; accounts payable of $17,518; accrued expenses of $40,518; 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 $124,569. Accordingly, goodwill was recorded and is being amortized over 40 years. The operating results of AP&P Delaware have been included in the accompanying consolidated financial statements since the date of acquisition. The businesses acquired included 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 "Regency Division") acquired in the acquisition was identified by management at the date of acquisition as a nonstrategic asset held for sale. The purchase price allocated to the net assets acquired included the expected proceeds from sale plus the net cash flows expected to be generated from the Regency division from the 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 Regency Division. On June 27, 1996, the Regency Division was sold for net proceeds of $47,890. The net proceeds from the sale exceeded the carrying amount of the asset held for sale at December 31, 1996 by $1,599. As such, the preliminary purchase price allocation was adjusted resulting in a $959 addition to goodwill. During the six month period ended June 30, 1996, the 52 41 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- Regency division had operating income of $2,369 and interest carrying costs of $1,884, which have been excluded from the condensed consolidated statement of operations and included as adjustments to the carrying amount of the net assets held for sale through the date of sale. Niagara Envelope Company, Inc. Effective June 28, 1996, the Company acquired the stock of Niagara Envelope Company, Inc. ("Niagara"). 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. The aggregate acquisition costs totaled $48,202 and consisted of cash of $45,175 and direct acquisition costs of $3,027. Additionally, the Company paid $5,000 at closing under a one-year consulting services agreement. The Company principally financed the acquisition through proceeds from the sale of the Regency division described above. The aggregate acquisition cost has been allocated to the assets acquired and liabilities assumed as follows: cash of $238, accounts receivable of $10,946, inventories of $11,878, prepaid and other assets of $1,572, management services agreement of $5,000, property and equipment of $26,824, deferred income tax liability of $2,227, accounts payable of $6,064, accrued expenses of $10,464, other noncurrent liabilities of $381 and assumed debt of $3,900. The aggregate acquisition costs exceeded fair market value of the net assets acquired by $19,780. Accordingly, goodwill was recorded and is being amortized over 40 years. The operating results of this acquisition have been included in the accompanying consolidated financial statements since the date of acquisition. In 1996, the Company recorded $2,500 as management fees and services for the amortization of the consulting services agreement. Certain costs are expected to be incurred in connection with the Company's separate strategic plans to integrate and consolidate certain plant, administrative and sales functions of Williamhouse and Niagara the closure of Williamhouse's and Niagara's corporate headquarters and the associated net reduction of approximately 250 employees. Such costs, aggregating $23,500, include lease termination expenses, severance and contractual change of control benefits, the liabilities for which were included in the purchase price allocation within accrued expenses. Substantially all such actions are expected to be completed prior to June 30, 1997, except for the consolidation of certain plants which is not expected to be completed until December 31, 1998. 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. The aggregate acquisition costs totaled $19,958 and consisted of cash and seller issued notes of $17,869 and direct acquisition and financing costs of $2,089. The Company principally financed the acquisition through its financing arrangement with a commercial lender and notes issued to the seller. The allocation of the aggregate acquisition costs was as follows: inventories of $11,546, equipment of $6,747, and debt issuance costs of $1,665. 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. 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. The allocation of the aggregate acquisition cost to the assets acquired and liabilities assumed was as follows: 53 42 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- 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 and 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. Pro Forma Results of Operations The following summary presents the results of operations for the years ended December 31, 1995 and 1996 on a pro forma basis, as if the Niagara, WR and Globe acquisitions had occurred as of January 1, 1995 (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 transaction been consummated as of those earlier dates, nor are they indicative of results of operations which may occur in the future.
Year ended December 31, ---------------------------- 1995 1996 ----------- ----------- Net sales $ 617,869 $ 638,389 =========== =========== Income before income taxes $ 5,758 $ 38,180 =========== =========== Net income $ 3,678 $ 21,686 =========== =========== Net income per share $ 0.12 $ 0.73 ========== ===========
The following summary presents the results of operations shown above adjusted for the Company's initial public offering, and for the repayment of $70,000 in Notes and for the new bank credit agreement.
Year ended December 31, ---------------------------- 1995 1996 ----------- ----------- Net sales $ 617,869 $ 638,389 =========== =========== Income before income taxes $ 34,253 $ 51,914 =========== =========== Net income $ 21,482 $ 29,903 =========== =========== Net income per share $ 0.73 $ 1.01 ========== ===========
Shade/Allied, Inc. Effective February 11, 1997, the Company acquired all of the outstanding common and preferred stock of Shade/Allied, Inc., ("Shade/Allied") for approximately $49,500 in cash financed by the Company's bank credit agreement. This acquisition will be recorded following the purchase method of accounting and, accordingly, the purchase price will be allocated to the assets and liabilities at their fair market values. The excess of the purchase price over the fair market value of the net assets acquired will be allocated to goodwill and amortized on a straight-line basis over 40 years. The Company preliminarily expects that the purchase price will be allocated as follows: trade accounts receivable of $4,584, inventories of $5,941, 54 43 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- other current assets of $929, property, plant and equipment of $10,685, current liabilities of $13,877, long-term liabilities of $3,323 and goodwill of $44,561. The following summary presents the results of operations for the year ended December 31, 1996, on a pro forma unaudited basis, as if the Shade/Allied and Niagara acquisitions had occurred as of January 1, 1996 (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 results are for illustrative purposes only and do not purport to be indicative of actual results which would have occurred had the transactions been consummated as of those earlier dates, nor are they indicative of the results which may occur in the future. Net sales $730,801 ======== Income before income taxes $ 41,257 ======== Net income $ 23,434 ======== Net income per share $ 0.79 ========
4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
December 31, ---------------------- 1995 1996 -------- -------- Accounts receivable--trade $ 29,981 $ 56,431 Accounts receivable--other 2,013 2,839 Less allowance for doubtful accounts and reserves for customer deductions, returns and cash discounts (2,511) (2,216) -------- -------- $ 29,483 $ 57,054 ======== ========
The Company originally sold an undivided ownership interest in a revolving pool of trade accounts receivable for $45,000 in October 1995. On May 24, 1996, the Company entered into a new $60,000 accounts receivable facility with similar terms. At December 31, 1996, $54,000 of accounts receivable were sold under this facility. The accompanying balance sheets exclude the sold accounts receivable. 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 $1,823 in 1996 and is included in general and administrative expenses in the consolidated statement of operations. The agreement expires in 2000. Bad debt expense for 1994, 1995 and 1996 was immaterial. 55 44 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- 5. INVENTORIES Inventories consist of the following:
December 31, -------------------------- 1995 1996 --------- --------- Raw material and semi-finished goods $ 36,129 $ 41,505 Work in process 7,114 4,695 Finished goods 60,266 58,607 --------- --------- 103,509 104,807 LIFO reserve (10,448) 860 --------- --------- $ 93,061 $ 105,667 ========= =========
In connection with the WR and Niagara acquisitions, total inventories for financial accounting purposes were written up by $15,825 to fair market value including reversal of $7,339 related to historical LIFO reserves. Since the Company is on the LIFO method of accounting, such write-up formed 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. There were no liquidations of LIFO inventories in 1994. liquidation of LIFO layers in 1995 and 1996 was not material. 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
Estimated December 31, useful lives in ------------------- years 1995 1996 --------------- -------- -------- Land $ 4,949 $ 6,749 Buildings 40 22,997 30,532 Machinery and equipment 10-12 71,094 96,790 Office furniture and fixtures 3-5 5,747 8,263 Construction in progress 6,560 5,060 -------- -------- 111,347 147,394 Less accumulated depreciation and amortization 4,579 14,304 -------- -------- $106,768 $133,090 ======== ========
In connection with the WR and Niagara acquisitions, acquired property, plant and equipment was appraised at $39,016 in excess of (less than) historical book value including $1,298, $(541) and $32,903 allocated to land, buildings and machinery and equipment in 1995, respectively, and $(1,328) and $6,684 allocated to buildings and machinery and equipment in 1996, respectively. 56 45 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- 7. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets consist of the following:
December 31, ---------------------- 1995 1996 -------- -------- Goodwill $121,176 $146,006 Intangible assets, principally tradenames 37,900 38,169 Debt issuance costs 33,775 18,369 -------- -------- 192,851 202,544 Less accumulated amortization 1,839 10,177 -------- -------- $191,012 $192,367 ======== ========
8. ACCRUED EXPENSES Accrued expenses consist of the following:
December 31, ---------------------- 1995 1996 -------- -------- Acquisition integration costs $17,567 $12,695 Sales volume discounts 11,414 20,184 Salaries and wages 6,682 8,738 Interest 3,748 4,171 Other 5,424 9,253 ------- ------- $44,835 $55,041 ======= =======
9. BORROWINGS Long-term debt of the Company, which was incurred entirely by AP&P Delaware, consists of the following:
December 31, ---------------------- 1995 1996 -------- -------- Senior bank debt $219,843 $129,000 13% Senior Subordinated Notes due 2005 200,000 130,000 WR seller notes repaid in January 1996 25,157 -- Industrial revenue bonds 8,049 10,140 Capitalized lease obligations 2,579 2,843 -------- -------- 455,628 271,983 Less current portion 11,834 2,171 -------- -------- $443,794 $269,812 ======== ========
Future maturities of long-term debt at December 31, 1996 are $1,561 in 1998, $1,046 in 1999, $1,057 in 2000, $130,016 in 2001 and $136,132 thereafter. Senior Bank Debt Contemporaneously with the Company's initial public offering of common stock, the Company refinanced and retired all remaining indebtedness under the old bank credit agreement and entered into a new bank credit agreement. The new bank credit agreement is a revolving credit facility with a maximum availability of $300,000 with the following principal terms: Loans are made directly to AP&P Delaware 57 46 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- and are guaranteed by the Company and each of its subsidiaries, other than Notepad. Loans made under the new bank credit agreement bear interest at a rate per annum, equal to, at the Company's option, the base rate, plus an applicable margin, or a Eurodollar rate plus an applicable margin, as such terms are defined in the agreement. The applicable margin for base rate loans varies from 0% to .75% and the applicable margin for Eurodollar rate loans varies 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 is subject to an unused commitment fee which is a percentage of the unutilized revolving loan commitment. The percentage varies from .3% to .5% based on the Company's leverage ratio. Availability under the new bank credit agreement is reduced to the extent of the net proceeds of sales 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 be reduced by $50,000 in 1999 and $50,000 in 2000. The new bank credit agreement terminates in 2001. The Company is permitted to make acquisitions under the new bank credit agreement up to $25,000 per acquisition without the consent of the participating banks and up to $50,000 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 requires the Company to meet certain financial tests, including minimum levels of EBITDA (earnings before interest, taxes, depreciation, amortization and noncash charges, 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 new 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 new bank credit agreement requires the Company to continue its 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 new bank credit agreement is guaranteed by the Company and all its subsidiaries, except for Notepad, and is secured by substantially all assets of AP&P Delaware and a pledge of all capital stock of AP&P Delaware and its subsidiaries. Senior Subordinated Notes AP&P Delaware issued $200,000 of 13% Senior Subordinated Notes ("Notes") through a private placement in December 1995. In June 1996, AP&P Delaware completed an exchange of the privately-held notes for publicly-held notes with substantially identical terms. 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 on and after November 15, 2000, at AP&P 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 AP&P Delaware to redeem up to 35% of the Notes at redemption prices ranging from 111% to 113% of the face value of the Notes. Subsequent to the Company's initial public offering of common stock in July 1996, AP&P Delaware repaid $70,000 of the Notes. 58 47 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- The Notes are fully and unconditionally guaranteed by all subsidiaries of AP&P Delaware, except for Notepad, on a joint and several and senior subordinated basis, however, no guarantee from the Company exists. At December 31, 1996 there were no guarantor subsidiaries. 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. On December 1, 1995, $200,000 of proceeds were received from the Notes were used to repurchase $100,000 of publicly-held notes of Williamhouse-Regency assumed in the WR Acquisition and redeem preferred stock, preferred stock equivalents, and Class P common stock in the aggregate amount of $75,000. 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 a term loan from the old bank credit agreement. The WR seller notes bore interest at 1% and were 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, 1996, the Company had outstanding various industrial revenue bonds in the aggregate amount of $10,140. The industrial revenue bonds bear interest at rates ranging from 2.65% to 5.25%. Aggregate annual principal payments ranging from $300 to $700 are due through 2010. Payment of principal and interest on the industrial revenue bonds are guaranteed by the Company. The industrial revenue bonds are secured by letters of credit. At December 31, 1995 and 1996, letters of credit in the aggregate amount of $15,800 and $15,826, respectively, were outstanding. The Company incurred fees related to the financing transactions of approximately $33,200 and $8,620 in 1995 and 1996, respectively, 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 $19,995 ($33,004 pre-tax) is reflected in the consolidated statement of operations for the year ended December 31, 1996 as a result of $7,700 of prepayment penalties associated with the repayment of $70,000 of Notes and the write off of $25,304 of unamortized deferred financing costs in connection with such Notes and with the Company's old bank credit agreement. An extraordinary after-tax loss on extinguishment of debt of $9,652 ($16,086 pretax) is reflected in the consolidated 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. 10. STOCKHOLDERS' EQUITY, STOCK OPTIONS AND NONRECURRING COMPENSATION CHARGE Effective July 2, 1996, the Company sold 12,500 shares of common stock in an initial public offering. The net proceeds to the Company from the offering, which were received on July 8, 1996, amounted to $172,801 after deducting underwriting discounts, legal and accounting fees, registration and travel expenses. The Company used proceeds from the initial public offering and working capital to: (i) repay $95,800 on the indebtedness incurred under the old bank credit agreement, (ii) redeem $70,000 principal amount of the 13% Notes from the holders thereof on a pro rata basis, and (iii) pay $7,700 in redemption premium on such Notes. Prior to the completion of the initial public offering, the Company's shareholders approved an 8.1192-for-one stock split for all of the then outstanding common stock shares and common stock options. 59 48 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- Concurrently with the stock split, all of the outstanding preferred stock and preferred stock options were converted into shares of common stock and common stock options, respectively, using a conversion price determined by dividing the preferred stock liquidation value of $1,948.50 per share by the initial public offering price per share of $15. All common stock share amounts have been restated to reflect the stock split. The preferred stock 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 also converted on a share-for-share basis into common stock. At January 1, 1995, options for 1,026 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 758 shares and "Performance" stock options for 268 shares. The exercise price of all options equaled or exceeded the fair market value at date of grant. In connection with the WR acquisition effective October 31, 1995, 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 stock 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 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 WR 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 66 shares of common stock and 105 shares of preferred stock were granted to certain members of management in December 1995. The exercise prices of $0.007 per common share and $.028 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. 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. 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 and the sale of common stock to current or future employees, directors, consultants or advisers of the Company or its subsidiaries. During 1992, 1994 and 1995, the Company granted options to purchase 2,839 shares of common stock to three of its officers, who were also stockholders, at weighted average purchase prices ranging from $.007 to $1.65 per share. 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. On June 22, 1996 the 1992 Stock Plan was terminated by the Board of Directors. 1996 Stock Plan. On June 22, 1996, the Company adopted the 1996 Key Employees Stock Incentive Plan. The 1996 Stock Plan provides 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 60 49 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- 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 affords 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 shares of common stock of the Company have been 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. Stock options granted during 1996 under the Stock Plan generally have a maximum term of ten years and vest over four years. The Company granted options to purchase 742 shares of common stock at a weighted average purchase price of $15 per share. Non-Employee Director Plan. On June 22, 1996, the Company adopted the 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 shares of common stock upon effectiveness of the Non-Employee Director Plan or, for new directors, upon initial election or appointment to the Board. In addition, each director will receive an annual grant of options to purchase two thousand shares of common stock beginning on the latter of the date of such director's fourth anniversary of being elected to the Board or four years from the initial public offering date. 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 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 such options become exercisable. An aggregate of 350 shares of common stock have been reserved for issuance under the non-Employee Director Plan. During 1996, the Company granted options to purchase 125 shares of common stock to the Company's non-employee directors at a weighted average purchase price of $17.38 per share. Stock Purchase Plan. On June 22, 1996, the Company adopted the 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. 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 25% discount from the fair market value on the date of purchase. An aggregate of 250 shares of common stock have been reserved and 36 shares were issued in February 1997. For the three years ended December 31, 1996, stock option activity is as follows:
Shares Subject Average Exercise Average Fair to Option Price Price -------------- ---------------- ------------ Balance, January 1, 1994 903 $ 0.070 $ 0.070 Stock options granted 123 $ 0.440 $ 0.440 ------- Balance, December 31, 1994 1,026 $ 0.114 $ 1.735 Stock options granted 1,813 $ 0.141 $ 15.000 Redemption of preferred stock options (612) $ 0.028 $ 15.000 ------- Balance, December 31, 1995 2,227 $ 0.160 $ 9.330 Stock options granted 867 $ 15.343 $ 23.848 ------- Balance, December 31, 1996 3,094 $ 4.413 $ 13.397 =======
61 50 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- As of December 31, 1996, the following information is presented for stock options outstanding.
Stock Options ---------------------------------------------------------------------- Outstanding Exercisable ------------------------------------- -------------------------- Exercise Price Average Average Exercise Average Exercise Range Shares Life Price Shares Price - --------------- ------ ------- ---------------- ------ ---------------- $.0072 to $1.65 2,227 5.5 $ 0.13 2,227 $ 0.13 $ 15 742 9.6 $ 15.00 -- -- $15 to $21.375 125 9.7 $ 17.38 -- --
The average life is the average contractual life of the outstanding options in years. In 1996, the Company adopted the disclosure-only option under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, ("SFAS No. 123"). On a pro forma basis, if the Company had recorded compensation expense in 1996 for the stock options granted in accordance with the accounting provisions of SFAS No. 123, the pro forma net income before extraordinary item would have been $17,820 and the pro forma net income per share before extraordinary item would have been $.60. There would have been no pro forma effect in 1995 as the Company recorded a compensation charge based on the fair value of the stock options granted. The significant assumptions used to estimate the fair value of the stock options granted in 1996 include a risk free rate of return ranging from 6.5% to 6.75%, an expected option life of 10 years, an expected volatility of 27% and no expected dividend payments. 11. PENSION PLAN AND 401(K) PLAN The Company is a sponsor of two qualified defined benefit pension plans and a supplemental non- qualified benefit pension plan which were assumed as part of its acquisitions. The Company's liabilities under such plans are included in other liabilities in the consolidated balance sheet. The Company maintains retirement plans (401(k) plan) for the benefit of all employees who meet minimum age and service requirements. Company contributions to the plans may be made at the discretion of the board of directors. Contributions to the plans were approximately $557, $568, $1,239 for the years ended December 31, 1994, 1995 and 1996, respectively. 12. INCOME TAXES The provision (benefit) for income taxes consists of the following:
Year ended December 31, ---------------------------------------------- 1994 1995 1996 -------- -------- -------- Current Federal $ -- $ -- $ -- State -- 169 491 -------- -------- -------- -- 169 491 Deferred provision (benefit) (488) (6,707) 13,361 -------- -------- -------- Provision (benefit) for income taxes before extraordinary item (488) (6,538) 13,852 Deferred benefit relating to extraordinary item -- (6,434) (13,009) -------- -------- -------- Provision (benefit) for income taxes $ (488) $(12,972) $ 843 ======== ======== ========
62 51 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- A reconciliation between the statutory U.S. federal income tax rate and the Company's effective income tax rate is as follows:
Year ended December 31, ------------------------------------ 1994 1995 1996 ---- ---- ---- Federal income tax rate (35.0)% (35.0)% 35.0% Adjustment to valuation allowance 14.7 (15.3) -- Change in enacted rates .4 -- -- Effect of acquisition 19.3 -- -- Goodwill and intangible amortization -- .2 3.3 State taxes, net (5.2) (5.0) 4.9 Other, net (.3) (1.4) -- ---- ---- ---- Effective tax rate (6.1)% (56.5)% 43.2% ==== ==== ====
For the year ended December 31, 1996, the Company's statutory income tax benefit rate of 35.0% differed from the Company's effective income tax rate, including extraordinary item, of 89.8% due to the following reasons: goodwill and intangible asset amortization accounted for 113.6%; other nondeductible expenses accounted for 11.8%; state income taxes accounted for (5.0)% and other items accounted for 4.4%. For the year ended December 31, 1995, the Company's statutory income tax benefit rate of 35.0% differed from the Company's effective income tax benefit rate, including extraordinary item, of 46.9% due to the following reasons: state income taxes accounted for (5.0)%; release of a deferred tax asset valuation allowance accounted for (6.4)% and other items accounted for (0.5)% Temporary tax differences affected and categorized by financial statement line item are as follows:
December 31, --------------------------- 1995 1996 -------- -------- Current deferred tax assets (liabilities): Accrued expenses $ 10,523 $ 9,066 Accounts receivable and allowances 900 361 Inventory valuation (7,608) (7,763) Net operating losses and tax credits 11,194 9,090 -------- -------- Current deferred tax asset, net $ 15,009 $ 10,754 ======== ========
December 31, --------------------------- 1995 1996 -------- -------- Noncurrent deferred tax assets (liabilities): Tradenames and intangibles $(15,009) $(14,609) Property and equipment, net (21,291) (24,405) Noncash compensation expense credited to paid-in-capital 6,776 6,776 Other accrued liabilities 254 1,257 State income tax effect and other, net (800) -- -------- -------- Noncurrent deferred tax liability, net $(30,070) $(30,981) ======== ========
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. No benefit was recognized in 1994 for operating losses carried forward. 63 52 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- At December 31, 1996, the Company had net operating losses available to reduce future taxable income of approximately $19,319. These net operating losses expire in the years 2007 through 2011. 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 $1,363 of alternative minimum tax credit carried forward. The acquisition of WR 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. Annual minimum lease commitments under these leases amount to $3,206 in 1997, $1,989 in 1998, $1,347 in 1999, $1,011 in 2000, $622 in 2001 and $1,386 thereafter for an aggregate of $9,561. Total rent expense was approximately $853, $1,888, $3,551 for 1994, 1995 and 1996 respectively. Litigation There are various outstanding claims against the Company arising in the normal course of business. The Company 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, results of operations, or cash flows 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 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 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, 1994, 1995 and 1996, the Company incurred $575, $542 and $1,380, respectively, for management and directors' fees and out of pocket expenses to the principal shareholders (Bain Capital). Unpaid fees of $500 are included in accrued expenses in the consolidated balance sheets at December 31, 1996. There were no unpaid fees at December 31, 1995. In June 1996 the Company revised its management services agreement with Bain Capital, pursuant to which, for four years, the Company will pay Bain Capital an aggregate annual fee of no less than $2,250 plus a fee of 1% for completed acquisition transactions. In 1996, the Company paid Bain Capital $3,000 in fees in connection with the new bank credit agreement, which were included in debt issuance costs paid, $550 and $750, respectively, in fees in connection with the acquisition of Niagara and Shade/Allied, which were included as part of the purchase price, and $2,091 in connection with the Company's initial public offering of common stock. In 1995, the 64 53 AMERICAN PAD & PAPER COMPANY NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------- Company paid $7,000 to Bain Capital for services relating to the WR acquisition 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. The Company also paid $450 to Bain Capital relating to the Globe-Weis acquisition which was included in deferred financing fees. The Company paid Bain Capital $225 for services related to the SCM acquisition and the related financing of the transaction. At December 31, 1995, the Company had an outstanding note receivable for $112 from its chairman which was repaid in June 1996. At December 31, 1996, the Company had an outstanding note receivable of $324 from its executive vice president which is due in 1998, of which $53 was repaid in February 1997. 14. OTHER INFORMATION 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 1996, respectively. 15. QUARTERLY RESULTS OF OPERATIONS The Company's historical unaudited quarterly results of operations for each of the years ended December 31, 1995 and 1996 are summarized as follows:
1995 - Quarter Ended --------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Net sales $ 47,450 $ 44,772 $ 53,787 $ 111,151 Gross profit 5,296 7,924 10,258 24,049 Net income (loss) before extraordinary item 589 1,875 4,850 (12,348) Net income (loss) 589 1,875 4,850 (22,000) Net income (loss) per share before extraordinary item $ 0.02 $ 0.06 $ 0.16 $ (0.42) Net income (loss) per share 0.02 0.06 0.16 (0.74)
1996 - Quarter Ended --------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Net sales $ 120,108 $ 114,099 $ 173,606 $ 176,046 Gross profit 23,528 24,931 36,037 40,914 Net income (loss) before extraordinary item 133 691 6,925 10,465 Net income (loss) 133 (609) (11,770) 10,465 Net income (loss) per share before extraordinary item $ -- $ 0.02 $ 0.24 $ 0.36 Net income (loss) per share -- (0.02) (0.40) 0.36
65 54 66 55 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of American Pad & Paper Company of Delaware, Inc. (a wholly owned subsidiary of American Pad & Paper Company) In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) on page 38 present fairly, in all material respects, the financial position of American Pad & Paper Company of Delaware, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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. PRICE WATERHOUSE LLP Dallas, Texas February 18, 1997 67 56 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
DECEMBER 31, ---------------------- ASSETS 1995 1996 --------- --------- Current assets: Cash $ 18,341 $ 2,290 Accounts receivable 29,483 57,054 Income taxes receivable from AP&P 3,657 -- Inventories 93,061 105,667 Prepaid expenses and other current assets 927 4,739 Assets held for sale 42,578 -- Deferred income taxes 15,009 10,754 --------- --------- Total current assets 203,056 180,504 Property and equipment 106,768 133,090 Intangible assets 191,012 192,367 Other 3,520 3,456 --------- --------- Total assets $ 504,356 $ 509,417 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 11,834 $ 2,171 Accounts payable 37,048 44,932 Accrued expenses 44,835 55,041 Income taxes payable to AP&P 494 503 --------- --------- Total current liabilities 94,211 102,647 Long-term debt 443,794 269,812 Deferred income taxes 30,070 30,981 Other 2,702 1,378 --------- --------- Total liabilities 570,777 404,818 --------- --------- Commitments and contingencies Stockholder's equity (deficit): Common stock, voting, $.01 par value, 1000 shares authorized; 100 shares issued and outstanding -- -- Additional paid-in capital 28,998 201,799 Accumulated deficit (95,419) (97,200) --------- --------- Total stockholder's equity (deficit) (66,421) 104,599 --------- --------- Total liabilities and stockholder's equity (deficit) $ 504,356 $ 509,417 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 68 57 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 --------- --------- --------- Net sales $ 127,744 $ 257,160 $ 583,859 Cost of sales 120,695 209,633 458,449 --------- --------- --------- Gross profit 7,049 47,527 125,410 --------- --------- --------- Operating expenses: Selling and marketing 5,059 6,254 16,964 General and administrative 4,981 11,749 30,685 Management fees and services 575 542 3,880 Nonrecurring compensation charge -- 27,632 -- --------- --------- --------- 10,615 46,177 51,529 --------- --------- --------- Income (loss) from operations (3,566) 1,350 73,881 Other income (expense): Interest (4,560) (13,657) (42,968) Other income, net 90 735 1,153 --------- --------- --------- Income (loss) before income taxes (8,036) (11,572) 32,066 and extraordinary item Provision (benefit) for income taxes (488) (6,538) 13,852 --------- --------- --------- Income (loss) before extraordinary item (7,548) (5,034) 18,214 Extraordinary loss from extinguishment of debt (net of income tax benefits of $6,434 and $13,009, respectively) -- (9,652) (19,995) --------- --------- --------- Net loss $ (7,548) $ (14,686) $ (1,781) ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 69 58 AMERICAN PAD & PAPER COMPANYOF DELAWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 --------- --------- --------- Cash flows from operating activities: Net loss $ (7,548) $ (14,686) $ (1,781) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 828 3,369 9,765 Amortization of goodwill and intangible assets 114 879 4,488 Noncash portion of nonrecurring compensation charge -- 25,998 -- Extraordinary loss on extinguishment of -- 9,652 19,995 debt Noncash interest expense and accretion of 135 -- -- discount Amortization of debt issuance 696 1,538 3,790 costs Gain on sale of assets (83) (140) (94) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 2,445 (22,025) (25,625) Income taxes receivable from AP&P -- 101 3,657 Inventories 1,655 2,256 (2,030) Prepaid expenses and other (302) 905 1,721 Deferred tax asset, net (488) (13,141) 13,361 Accounts payable 3,433 4,979 1,819 Accrued expenses (2,782) 4,877 (4,294) Other assets and liabilities 11 147 (1,556) --------- --------- --------- Net cash provided by (used in) operating activities (1,886) 4,709 23,216 --------- --------- --------- Cash flows from investing activities: Purchase of stock and net assets of businesses, including acquisition costs (13,744) (129,701) (52,964) Purchases of property and equipment (942) (3,919) (14,609) Proceeds from sale of assets 83 140 2,056 Net cash generated from assets held for sale -- 2,213 49,277 --------- --------- --------- Net cash used in investing activities (14,603) (131,267) (16,240) --------- --------- ---------
(continued on next page) The accompanying notes are an integral part of these consolidated financial statements. 70 59 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 --------- --------- --------- Cash flows from financing activities: Net borrowings (repayments) under line of credit 7,057 (22,767) -- Proceeds from long-term debt 11,252 430,052 192,773 Repayment of long-term debt (1,192) (186,546) (380,317) Redemption premiums and penalties included in extraordinary loss -- (10,812) (7,700) Debt issuance costs (628) (35,032) (9,584) Proceeds from old accounts receivable facility -- 45,000 -- Repayment of old accounts receivable facility -- -- (45,000) Net proceeds from net new accounts receivable facility -- -- 54,000 Capital contribution by (distribution to) AP&P -- (75,000) 172,801 --------- --------- --------- Net cash provided by (used in) financing activities 16,489 144,895 (23,027) --------- --------- --------- Net increase (decrease) in cash -- 18,337 (16,051) Cash, beginning of year 4 4 18,341 --------- --------- --------- Cash, end of year $ 4 $ 18,341 $ 2,290 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 3,575 $ 9,127 $ 38,785 ========= ========= ========= Income taxes $ 29 $ 99 $ 470 ========= ========= ========= Supplemental disclosure of noncash investing activity: Notes payable issued in consideration of purchase price $ -- $ 36,115 $ -- ========= ========= ========= Notes payable issued to purchase equipment $ -- $ 1,721 $ 500 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 71 60 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT) (IN THOUSANDS) - -------------------------------------------------------------------------------
RETAINED COMMON EARNINGS STOCK PAID-IN (ACCUMULATED AMOUNT CAPITAL DEFICIT) TOTAL --------- --------- ------------ --------- Balance at December 31, 1993 $ -- $ 3,000 $ 1,815 $ 4,815 Net loss -- -- (7,548) (7,548) --------- --------- --------- --------- Balance at December 31, 1994 -- 3,000 (5,733) (2,733) Grant of AP&P stock options to management 25,998 -- 25,998 Dividend to AP&P -- -- (75,000) (75,000) Net loss -- -- (14,686) (14,686) --------- --------- --------- --------- Balance at December 31, 1995 -- 28,998 (95,419) (66,421) Capital contribution by AP&P -- 172,801 -- 172,801 Net loss -- -- (1,781) (1,781) --------- --------- --------- --------- Balance at December 31, 1996 $ -- $ 201,799 $ (97,200) $ 104,599 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 72 61 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS Organization and Basis of Presentation American Pad & Paper Company of Delaware, Inc. ("Delaware") is a wholly owned subsidiary of American Pad & Paper Company ("AP&P") (formerly Ampad Holding Corporation). AP&P 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. AP&P had no operations through July 31, 1992. On October 3, 1995, AP&P agreed to acquire in a merger transaction all of the outstanding stock of WR Acquisition, Inc. ("WR"). In a series of transactions, AP&P 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. AP&P, 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 AP&P. The transaction was accounted for as a purchase of the stock of WR by AP&P. As a result of the transactions, AP&P now owns 100% of WR which in turn owns 100% of AP&P Delaware. The financial statements of Delaware include the historical accounts and operations of Delaware and the accounts and operations of Ampad and of the envelope operations of Williamhouse and Niagara since their respective dates of acquisition. Additionally, the consolidated financial statements include the accounts of Notepad Funding Corporation ("Notepad"), a special purpose corporation utilized in the accounts receivable facility. All significant intercompany balances have been eliminated. American Pad & Paper Company AP&P is a holding company whose common stock is publicly traded on the New York Stock Exchange under the symbol "AGP" with no operations other than its investment in Delaware. Except for the preferred and common stock shares of AP&P issued, authorized and outstanding, and the related capital contributions by AP&P and dividends to AP&P, there are no material differences between the financial statements of AP&P and Delaware. AP&P has followed full push-down accounting in the presentation of the consolidated financial statements of Delaware. Business Delaware is one of the largest manufacturers and marketers of paper-based office products in North America. Delaware operates in one business segment, converting paper into office products and offers a broad assortment of products through two complementary divisions: Ampad (writing pads, file folders, retail envelopes, machine papers, and other paper-based office products) and Williamhouse (business envelopes and machine papers). Delaware's products are distributed through large mass merchant retailers, office product superstores, warehouse clubs, major contract stationers, office products wholesalers, paper merchants, and independent dealers. Substantially all sales are to customers within the United States. Pro Forma Information The pro forma information included in these financial statements and notes is unaudited. 73 62 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 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 Delaware considers all highly-liquid, interest-bearing instruments with an original maturity of three months or less to be cash equivalents. Revenue Recognition Delaware 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 Delaware for replacement or credit. Delaware also offers sales volume rebates to customers based on their 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 Delaware 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. Delaware performs periodic credit evaluations of its customers and does not require collateral. Historically, Delaware 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. Costs include material, labor and overhead. 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. Significant repairs or betterments which extend the useful life of an asset are capitalized and depreciated over the asset's remaining useful life. 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. Intangible assets represent trade names acquired in the WR acquisition and are amortized using 74 63 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- the straight-line method. Trade names in the aggregate gross amount of $31,700 and $6,200 are amortized over 40 years and 15 years, respectively. Delaware periodically reviews goodwill and other intangible assets to assess recoverability. Potential impairment is measured based on the expected undiscounted pre-tax and pre-interest 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, Delaware believes that no impairment of goodwill or intangible assets exists at December 31, 1996. Amortization expense was $114 in 1994, $879 in 1995 and $4,488 in 1996. 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. Income Taxes Delaware accounts for income taxes as if it were a separately reporting company for tax purposes. Delaware follows the liability method, which 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 Delaware'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. Delaware periodically reviews the realizability of its deferred tax assets and, as needed, records valuation allowances when realizability of the deferred tax asset is not likely. 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. 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, 1996 of the Notes of $130,000 compares to the Notes' fair value of $153,400 based on quoted market rates, as determined at the end of 1996. Reclassifications Certain amounts in the 1994 and 1995 consolidated financial statements, none of which have an effect on net income (loss), have been reclassified to conform with the presentation in the 1996 consolidated financial statements. Earnings per share Earnings per share are not presented because Delaware's common stock is not publicly traded. 75 64 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 3. ACQUISITIONS WR Acquisition, Inc./Williamhouse-Regency AP&P acquired WR Acquisition, Inc. and its wholly owned subsidiary Williamhouse-Regency of Delaware, Inc. through a merger transaction effective October 31, 1995. 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. 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 Company's bank credit agreement and an off-balance sheet accounts receivable facility. The aggregate acquisition costs have been 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 $39,252; property and equipment of $86,063; identifiable intangible assets of $37,900; deferred income tax liability of $24,340; accounts payable of $17,518; accrued expenses of $40,518; 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 $124,569. Accordingly, goodwill was recorded 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 included 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 "Regency Division") acquired in the acquisition was identified by management at the date of acquisition as a nonstrategic asset held for sale. The purchase price allocated to the net assets acquired included the expected proceeds from sale plus the net cash flows expected to be generated from the Regency division from the 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 Regency Division. On June 27, 1996, the Regency Division was sold for net proceeds of $47,890. The net proceeds from the sale exceeded the carrying amount of the asset held for sale at December 31, 1996 by $1,599. As such, the preliminary purchase price allocation was adjusted resulting in a $959 addition to goodwill. During the six month period ended June 30, 1996, the Regency division had operating income of $2,369 and interest carrying costs of $1,884, which have been excluded from the condensed consolidated statement of operations and included as adjustments to the carrying amount of the net assets held for sale through the date of sale. Niagara Envelope Company, Inc. Effective June 28, 1996, Delaware acquired the stock of Niagara Envelope Company, Inc. ("Niagara"). 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. The aggregate acquisition costs totaled $48,202 and consisted of cash of $45,175 and direct acquisition costs of $3,027. Additionally, Delaware paid $5,000 at closing under a one-year consulting services agreement. Delaware principally financed the acquisition through proceeds from the sale of the Regency division described above. The aggregate acquisition cost has been allocated to the assets acquired and liabilities assumed as follows: cash of $238, accounts receivable of $10,946, inventories of $11,878, prepaid and other assets of $1,572, management services agreement of $5,000, property and equipment of $26,824, deferred income tax liability of $2,227, accounts payable of $6,064, accrued expenses of $10,464, other noncurrent liabilities of $381 and assumed debt of $3,900. The aggregate acquisition costs exceeded fair market value of the net assets acquired by $19,780. Accordingly, goodwill was recorded and is being amortized over 40 years. The operating results of this acquisition have been included in the accompanying consolidated financial statements since the date of acquisition. In 1996, Delaware recorded $2,500 as management fees and services for the amortization of the consulting services agreement. 76 65 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- Certain costs are expected to be incurred in connection with Delaware's separate strategic plans to integrate and consolidate certain plant, administrative and sales functions of Williamhouse and Niagara the closure of Williamhouse's and Niagara's corporate headquarters and the associated net reduction of approximately 250 employees. Such costs, aggregating $23,500, include lease termination expenses, severance and contractual change of control benefits, the liabilities for which were included in the purchase price allocation within accrued expenses. Substantially all such actions are expected to be completed prior to June 30, 1997, except for the consolidation of certain plants which is not expected to be completed until December 31, 1998. Globe-Weis Effective August 16, 1995, Delaware 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. The aggregate acquisition costs totaled $19,958 and consisted of cash and seller issued notes of $17,869 and direct acquisition and financing costs of $2,089. Delaware principally financed the acquisition through its financing arrangement with a commercial lender and notes issued to the seller. The allocation of the aggregate acquisition costs was as follows: inventories of $11,546, equipment of $6,747, and debt issuance costs of $1,665. 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, Delaware 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. The aggregate acquisition cost totaled $14,372 and consisted of cash of $12,880 and direct acquisition and financing costs of $1,492. Delaware principally financed the acquisition through its financing arrangement with a commercial lender. 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 and 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. Pro Forma Results of Operations The following summary presents the results of operations for the years ended December 31, 1995 and 1996 on a pro forma basis, as if the Niagara, WR and Globe acquisitions had occurred as of January 1, 1995 (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 transaction been consummated as of those earlier dates, nor are they indicative of results of operations which may occur in the future. 77 66 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - --------------------------------------------------------------------------------
Year ended December 31, ------------------------- 1995 1996 -------- -------- Net sales $617,869 $638,389 ======== ======== Income before income taxes $ 5,758 $ 38,180 ======== ======== Net income $ 3,678 $ 21,686 ======== ========
The following unaudited pro forma summary presents the results of operations shown above adjusted for the capital contribution by AP&P following AP&P's initial public offering of common stock, Delaware's repayment of $70,000 in Notes and Delaware's new bank credit agreement.
Year ended December 31, ------------------------- 1995 1996 -------- -------- Net sales $617,869 $638,389 ======== ======== Income before income taxes $ 34,253 $ 51,914 ======== ======== Net income $ 21,482 $ 29,903 ======== ========
Shade/Allied, Inc. Effective February 11, 1997, Delaware acquired all of the outstanding common and preferred stock of Shade/Allied, Inc., ("Shade/Allied") for approximately $49,500 in cash financed by Delaware's bank credit agreement. This acquisition will be recorded following the purchase method of accounting and, accordingly, the purchase price will be allocated to the assets and liabilities at their fair market values. The excess of the purchase price over the fair market value of the net assets acquired will be allocated to goodwill and amortized on a straight-line basis over 40 years. Delaware preliminarily expects that the purchase price will be allocated as follows: trade accounts receivable of $4,584, inventories of $5,941, other current assets of $929, property, plant and equipment of $10,685, current liabilities of $13,877, long-term liabilities of $3,323 and goodwill of $44,561. The following summary presents the results of operations for the year ended December 31, 1996, on a pro forma unaudited basis, as if the Shade/Allied and Niagara acquisitions had occurred as of January 1, 1996 (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 results are for illustrative purposes only and do not purport to be indicative of actual results which would have occurred had the transactions been consummated as of those earlier dates, nor are they indicative of the results which may occur in the future. Net sales $730,801 ======== Income before income taxes $ 41,257 ======== Net income $ 23,434 ========
78 67 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
December 31, ---------------------- 1995 1996 -------- -------- Accounts receivable--trade $ 29,981 $ 56,431 Accounts receivable--other 2,013 2,839 Less allowance for doubtful accounts and reserves for customer deductions, returns and cash discounts (2,511) (2,216) -------- -------- $ 29,483 $ 57,054 ======== ========
Delaware originally sold an undivided ownership interest in a revolving pool of trade accounts receivable for $45,000 in October 1995. On May 24, 1996, Delaware entered into a new $60,000 accounts receivable facility with similar terms. At December 31, 1996, $54,000 of accounts receivable were sold under this facility. The accompanying balance sheets exclude the sold accounts receivable. The full amount of the allowance for doubtful accounts has been retained because Delaware 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 $1,823 in 1996 and is included in general and administrative expenses in the consolidated statement of operations. The agreement expires in 2000. Bad debt expense for 1994, 1995 and 1996 was immaterial. 5. INVENTORIES Inventories consist of the following:
December 31, -------------------------- 1995 1996 --------- --------- Raw material and semi-finished goods $ 36,129 $ 41,505 Work in process 7,114 4,695 Finished goods 60,266 58,607 --------- --------- 103,509 104,807 LIFO reserve (10,448) 860 --------- --------- $ 93,061 $ 105,667 ========= =========
In connection with the WR and Niagara acquisitions, total inventories for financial accounting purposes were written up by $15,825 to fair market value including reversal of $7,339 related to historical LIFO reserves. Since Delaware is on the LIFO method of accounting, such write-up formed 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. There were no liquidations of LIFO inventories in 1994. Liquidation of LIFO layers in 1995 and 1996 was not material. 79 68 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
Estimated December 31, useful lives in ------------------------------ years 1995 1996 --------------- ----------- ------------ Land $ 4,949 $ 6,749 Buildings 40 22,997 30,532 Machinery and equipment 10-12 71,094 96,790 Office furniture and fixtures 3-5 5,747 8,263 Construction in progress 6,560 5,060 ----------- ------------ 111,347 147,394 Less accumulated depreciation and amortization 4,579 14,304 ----------- ------------ $ 106,768 $ 133,090 =========== ============
In connection with the WR and Niagara acquisitions, acquired property, plant and equipment was appraised at $39,016 in excess of (less than) historical book value including $1,298, $(541) and $32,903 allocated to land, buildings and machinery and equipment in 1995, respectively, and $(1,328) and $6,684 allocated to buildings and machinery and equipment in 1996, respectively. 7. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets consist of the following:
December 31, ---------------------- 1995 1996 -------- -------- Goodwill $121,176 $146,006 Intangible assets, principally tradenames 37,900 38,169 Debt issuance costs 33,775 18,369 -------- -------- 192,851 202,544 Less accumulated amortization 1,839 10,177 -------- -------- $191,012 $192,367 ======== ========
8. ACCRUED EXPENSES Accrued expenses consist of the following:
December 31, ----------------------- 1995 1996 ------- ------- Acquisition integration costs $17,567 $12,695 Sales volume discounts 11,414 20,184 Salaries and wages 6,682 8,738 Interest 3,748 4,171 Other 5,424 9,253 ------- ------- $44,835 $55,041 ======= =======
80 69 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 9. BORROWINGS Long-term debt of Delaware, which was incurred entirely by Delaware, consists of the following:
December 31, ----------------------- 1995 1996 -------- -------- Senior bank debt $219,843 $129,000 13% Senior Subordinated Notes due 2005 200,000 130,000 WR seller notes repaid in January 1996 25,157 -- Industrial revenue bonds 8,049 10,140 Capitalized lease obligations 2,579 2,843 -------- -------- 455,628 271,983 Less current portion 11,834 2,171 -------- -------- $443,794 $269,812 ======== ========
Future maturities of long-term debt at December 31, 1996 are $1,561 in 1998, $1,046 in 1999, $1,057 in 2000, $130,016 in 2001 and $136,132 thereafter. Senior Bank Debt Contemporaneously with AP&P's initial public offering of common stock, Delaware refinanced and retired all remaining indebtedness under the old bank credit agreement and entered into a new bank credit agreement. The new bank credit agreement is a revolving credit facility with a maximum availability of $300,000 with the following principal terms: Loans are made directly to Delaware and are guaranteed by AP&P and each of its subsidiaries, other than Notepad. Loans made under the new bank credit agreement bear interest at a rate per annum, equal to, at Delaware's option, the base rate, plus an applicable margin, or a Eurodollar rate plus an applicable margin, as such terms are defined in the agreement. The applicable margin for base rate loans varies from 0% to .75% and the applicable margin for Eurodollar rate loans varies from .75% to 1.75%, each based on Delaware's leverage ratio and the type of loan. Availability under the new bank credit agreement is subject to an unused commitment fee which is a percentage of the unutilized revolving loan commitment. The percentage varies from .3% to .5% based on Delaware's leverage ratio. Availability under the new bank credit agreement is reduced to the extent of the net proceeds of sales of assets by Delaware, the net proceeds of an issuance of debt by Delaware or 50% of the net proceeds of an issuance of equity by AP&P or Delaware. Availability will be reduced by $50,000 in 1999 and $50,000 in 2000. The new bank credit agreement terminates in 2001. Delaware is permitted to make acquisitions under the new bank credit agreement up to $25,000 per acquisition without the consent of the participating banks and up to $50,000 per acquisition if, on a pro forma basis giving effect to such acquisition, Delaware's leverage ratio is less than 3.0 to 1.0. The new bank credit agreement requires Delaware to meet certain financial tests, including minimum levels of EBITDA (earnings before interest, taxes, depreciation, amortization and noncash charges, 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 new 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 81 70 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 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 new bank credit agreement requires Delaware to continue its interest rate cap covering a portion of the outstanding balance under the agreement. In January 1996, Delaware entered into a four-year agreement that entitles Delaware 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 new bank credit agreement is guaranteed by AP&P and all its subsidiaries, except for Notepad, 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 ("Notes") through a private placement in December 1995. In June 1996, Delaware completed an exchange of the privately-held notes for publicly-held notes with substantially identical terms. 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 on and 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 AP&P 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. Subsequent to AP&P's initial public offering of common stock in July 1996, Delaware repaid $70,000 of the Notes. The Notes are fully and unconditionally guaranteed by all subsidiaries of Delaware, except for Notepad, on a joint and several and senior subordinated basis, however, no guarantee from AP&P exists. At December 31, 1996, there were no guarantor subsidiaries. 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. On December 1, 1995, $200,000 of proceeds were received from the Notes were used to repurchase $100,000 of publicly-held notes of Williamhouse-Regency assumed in the WR Acquisition and provide a dividend to AP&P of $75,000. 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 a term loan from the old bank credit agreement. The WR seller notes bore interest at 1% and were 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, 1996, Delaware had outstanding various industrial revenue bonds in the aggregate amount of $10,140. The industrial revenue bonds bear interest at rates ranging from 2.65% to 5.25%. Aggregate annual principal payments ranging from $300 to $700 are due through 2010. Payment of principal and interest on the industrial revenue bonds are guaranteed by Delaware. The industrial revenue bonds are secured by letters of credit. At December 31, 1995 and 1996, letters of credit in the aggregate amount of $15,800 and $15,826, respectively, were outstanding. 82 71 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- Delaware incurred fees related to the financing transactions of approximately $33,200 and $8,620 in 1995 and 1996, respectively, 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 $19,995 ($33,004 pre-tax) is reflected in the consolidated statement of operations for the year ended December 31, 1996 as a result of $7,700 of prepayment penalties associated with the repayment of $70,000 of Notes and the write off of $25,304 of unamortized deferred financing costs in connection with such Notes and with Delaware's old bank credit agreement. An extraordinary after-tax loss on extinguishment of debt of $9,652 ($16,086 pretax) is reflected in the consolidated 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. 10. CAPITAL CONTRIBUTION AND NONRECURRING COMPENSATION CHARGE Effective July 2, 1996, AP&P sold 12,500 shares of common stock in an initial public offering. The net proceeds to AP&P from the offering, which were received on July 8, 1996 and contributed to Delaware, amounted to $172,801 after deducting underwriting discounts, legal and accounting fees, registration and travel expenses. Delaware used proceeds from the initial public offering and working capital to: (i) repay $95,800 on the indebtedness incurred under the old bank credit agreement, (ii) redeem $70,000 principal amount of the 13% Notes from the holders thereof on a pro rata basis, and (iii) pay $7,700 in redemption premium on such Notes. In 1995, AP&P issued preferred stock options to management and such issuance of the preferred stock options by AP&P was considered additional consideration to the option holders , which was directly related to the WR acquisition. Delaware recorded a nonrecurring, noncash compensation charge equal to the excess of fair market value over the exercise price of the preferred stock options of AP&P of $24,265 with a corresponding credit being recorded to additional paid-in capital. Additionally, options for 66 shares of common stock of AP&P and 105 shares of preferred stock of AP&P were granted to certain members of management in December 1995. The exercise prices of each common share and each 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. Delaware awarded additional compensation to executives and nonexecutives of $1,634 in 1995 in recognition of the significant transactions consummated during the year. Delaware does not expect this additional compensation to be awarded in future years. 11. PENSION PLAN AND 401(K) PLAN Delaware is a sponsor of two qualified defined benefit pension plans and a supplemental non-qualified benefit pension plan which were assumed as part of its acquisitions. Delaware's liabilities under such plans are included in other liabilities in the consolidated balance sheet. Delaware maintains retirement plans (401(k) plan) for the benefit of all employees who meet minimum age and service requirements. Delaware contributions to the plans may be made at the discretion of the board of directors. Contributions to the plans were approximately $557, $568, $1,239 for the years ended December 31, 1994, 1995 and 1996, respectively. 83 72 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 12. INCOME TAXES The provision (benefit) for income taxes consists of the following:
Year ended December 31, -------------------------------- 1994 1995 1996 -------- -------- -------- Current Federal $ -- $ -- $ -- State -- 169 491 -------- -------- -------- -- 169 491 Deferred provision (benefit) (488) (6,707) 13,361 -------- -------- -------- Provision (benefit) for income taxes before extraordinary item (488) (6,538) 13,852 Deferred benefit relating to extraordinary item -- (6,434) (13,009) -------- -------- -------- Provision (benefit) for income taxes $ (488) $(12,972) $ 843 ======== ======== ========
Delaware is included in AP&P's consolidated income tax returns. A reconciliation between the statutory U.S. federal income tax rate and the Company's effective income tax rate is as follows:
Year ended December 31, ---------------------------- 1994 1995 1996 ---- ---- ---- Federal income tax rate (35.0)% (35.0)% 35.0% Adjustment to valuation allowance 14.7 (15.3) -- Change in enacted rates .4 -- -- Effect of acquisition 19.3 -- -- Goodwill and intangible amortization -- .2 3.3 State taxes, net (5.2) (5.0) 4.9 Other, net (.3) (1.4) -- ----- ---- ---- Effective tax rate (6.1)% (56.5)% 43.2% ===== ==== ====
For the year ended December 31, 1996, Delaware's statutory income tax benefit rate of 35.0% differed from Delaware's effective income tax rate, including extraordinary item, of 89.8% due to the following reasons: goodwill and intangible asset amortization accounted for 113.6%; other nondeductible expenses accounted for 11.8%; state income taxes accounted for (5.0)% and other items accounted for 4.4%. For the year ended December 31, 1995, Delaware's statutory income tax benefit rate of 35.0% differed from Delaware's effective income tax benefit rate, including extraordinary item, of 46.9% due to the following reasons: state income taxes accounted for (5.0)%; release of a deferred tax asset valuation allowance accounted for (6.4)% and other items accounted for (0.5)%. Temporary tax differences affected and categorized by financial statement line item are as follows:
December 31, ---------------------- 1995 1996 -------- -------- Current deferred tax assets (liabilities): Accrued expenses $ 10,523 $ 9,066 Accounts receivable and allowances 900 361 Inventory valuation (7,608) (7,763) Net operating losses and tax credits 11,194 9,090 -------- -------- Current deferred tax asset, net $ 15,009 $ 10,754 ======== ========
84 73 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - --------------------------------------------------------------------------------
December 31, -------------------- 1995 1996 -------- -------- Noncurrent deferred tax assets (liabilities): Tradenames and intangibles $(15,009) $(14,609) Property and equipment, net (21,291) (24,405) Noncash compensation expense credited to paid-in-capital 6,776 6,776 Other accrued liabilities 254 1,257 State income tax effect and other, net (800) -- -------- -------- Noncurrent deferred tax liability, net $(30,070) $(30,981) ======== ========
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. No benefit was recognized in 1994 for operating losses carried forward. At December 31, 1996, Delaware had net operating losses available to reduce future taxable income of approximately $19,319. These net operating losses expire in the years 2007 through 2011. If certain substantial changes in Delaware's ownership should occur, there would be an annual limitation on the amount of the carryforwards which can be utilized. In addition, Delaware has approximately $1,363 of alternative minimum tax credit carried forward. The acquisition of WR 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 Delaware is obligated under noncancelable operating leases for office space and machinery and equipment which expire at various times through 1997. Annual minimum lease commitments under these leases amount to $3,206 in 1997, $1,989 in 1998, $1,347 in 1999, $1,011 in 2000, $622 in 2001 and $1,386 thereafter for an aggregate of $9,561. Total rent expense was approximately $853, $1,888, $3,551 for 1994, 1995 and 1996 respectively. Litigation There are various outstanding claims against Delaware arising in the normal course of business. Delaware believes that the claims are without merit and that any losses which might ultimately be sustained by Delaware would not be material to the financial position, results of operations, or cash flows of Delaware. Environmental Matters Delaware 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 Delaware is at all times in complete compliance with all such requirements, Delaware has made and will continue to make capital and other expenditures to comply with such requirements. Delaware 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. 85 74 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- Delaware settled its liability at four of these sites as a de minimis party. Delaware expects to be eligible for a de minimis settlement at the remaining site. 13. RELATED PARTY TRANSACTIONS For the years ended December 31, 1994, 1995 and 1996, Delaware expensed $575, $542 and $1,380, respectively, for management and directors' fees and out of pocket expenses to the principal shareholders of AP&P (Bain Capital). Unpaid fees of $500 are included in accrued expenses in the consolidated balance sheets at December 31, 1996. There were no unpaid fees at December 31, 1995. In June 1996 AP&P and Delaware revised its management services agreement with Bain Capital, pursuant to which, for four years, Delaware will pay Bain Capital an aggregate annual fee of no less than $2,250 plus a fee of 1% for completed acquisition transactions. In 1996, Delaware paid Bain Capital $3,000 in fees in connection with the new bank credit agreement, which were included in debt issuance costs paid, $550 and $750, respectively, in fees in connection with the acquisition of Niagara and Shade/Allied, which were included as part of the purchase price, and $2,091 in connection with the Company's initial public offering of common stock. In 1995, Delaware paid $7,000 to Bain Capital for services relating to the WR acquisition 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. The Company also paid $450 to Bain Capital relating to the Globe-Weis acquisition which was included in deferred financing fees. Delaware paid Bain Capital $225 for services related to the SCM acquisition and the related financing of the transaction. At December 31, 1995, Delaware had an outstanding note receivable for $112 from its chairman which was repaid in June 1996. At December 31, 1996, the Company had an outstanding note receivable of $324 from its executive vice president which is due in 1998, of which $53 was repaid in February 1997. Substantially all of Delaware's operations are conducted within the United States. Two customers accounted for 27% and one customer accounted for 11% of Delaware's total net sales for the year ended December 31, 1995 and 1996, respectively. 86 75 AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) - -------------------------------------------------------------------------------- 14. QUARTERLY RESULTS OF OPERATIONS Delaware's historical unaudited quarterly results of operations for each of the years ended December 31, 1995 and 1996 are summarized as follows:
1995 - Quarter Ended ----------------------------------------------- March 31 June 30 September 30 December 31 --------- --------- ------------ ----------- Net sales $ 47,450 $ 44,772 $ 53,787 $ 111,151 Gross profit 5,296 7,924 10,258 24,049 Net income (loss) before extraordinary item 589 1,875 4,850 (12,348) Net income (loss) 589 1,875 4,850 (22,000)
1996 - Quarter Ended ----------------------------------------------- March 31 June 30 September 30 December 31 --------- --------- ------------ ----------- Net sales $ 120,108 $ 114,099 $ 173,606 $ 176,046 Gross profit 23,528 24,931 36,037 40,914 Net income (loss) before extraordinary item 133 691 6,925 10,465 Net income (loss) 133 (609) (11,770) 10,465
87 76 EXHIBIT INDEX EXHIBIT DESCRIPTION NO. 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.(1) 3.1 (i) Restated Certificate of Incorporation of the Company (3) 3.1 (ii) Amended and Restricted By-laws of the Company. (3) 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) 4.7 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 APP., Notepad Funding Corporation and certain subsidiaries. (1)+ 4.11 Credit Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent (3) 4.12 Security Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., certain other subsidiaries of American Pad & Paper Company, and Bankers Trust Company, as Collateral Agent. (3) 4.13 Pledge Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., the Lenders from time to time party thereto, and Bankers Trust Company, as Agent. (3) 4.14 Form of Revolving and Swingline Note of American Pad & Paper Company of Delaware, Inc. (3) 4.15 Subsidiary Guaranty, dated as of July 8, 1996, among each of the Company's subsidiaries named therein and Bankers Trust Company, as Agent for the Bank. (3) 10.1 Agreement and Plan of Merger, dated as of October 3, 1995, among the 88 77 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 Amended and Restricted Advisory Agreement, dated as of October 31, 1995, among American Pad & Paper Company of Delaware, Inc. and Bain Capital, Inc. (4) 10.7 Ampad Holding Corporation 1992 Key Employees Stock Option Plan. (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 1996 Key Employee Stock Incentive Plan (3) 10.21 1996 Non-Employee Director Stock Option Plan. (3) 10.22 Employment Agreement between the Company and Charles Hanson, III. (2) 10.23 Employment Agreement between the Company and Russell Gard. (2) 10.24 Amended and Restated Advisory Agreement between American Pad & Paper Company and Bain Capital, Inc. (2) 10.25 Management Stock Purchase Plan .(3) 10.26 Employment Agreement between the Company and Timothy Needham. 10.27 Agreement and Plan of Merger by and between Shade/Allied, Inc. and American Pad & Paper Company of Delaware, Inc. 21.1 Subsidiaries of the Company. 23.1 Consent of Price Waterhouse LLP 27.1 Financial Data Schedule. - ----------------- (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) Incorporated by reference to the same-numbered exhibit to the Registration Statement on Form S-1 of American Pad & Paper Company (File No. 333-4000). (3) Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended June 30, 1996. (4) Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1996. 89 EX-10.26 2 EMPLOYMENT AGREEMENT - TIMOTHY NEEDHAM 1 EXHIBIT 10.26 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of July 2, 1996 between American Pad & Paper Company, a Delaware corporation (the "Company"), and Timothy Needham ("Executive"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: I. Employment. The Company shall employ Executive, and Executive hereby accepts employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 4 hereof (the "Employment Period"). I. Position and Duties. A. During the Employment Period, Executive shall serve as an Executive Vice President of the Company and shall have the normal duties, responsibilities and authority of an Executive Vice President, which shall consist of, among other things, coordinating the Company's sales and marketing efforts. A. Executive shall report to the Company's board of directors (the "Board") and the Company's chief executive officer, and Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and its Subsidiaries. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. A. For purposes of this Agreement, "Subsidiaries" shall mean any corporation of which the securities having a majority of the voting power in electing directors are, at the time of determination, owned by the Company, directly or through one of more Subsidiaries. 2 I. Base Salary and Benefits. A. During the first three years of the Employment Period, Executive's base salary shall be $300,000 per annum (the "Base Salary"), which salary shall be payable in regular installments in accordance with the Company's general payroll practices and shall be subject to customary withholding. Thereafter, the Base Salary shall be such higher rate as the Board may designate from time to time. The Company represents and warrants that, as of the date hereof, Executive has the third highest salary in the Company. In addition, during the Employment Period, Executive shall be entitled to participate in all of the Company's employee benefit programs for which senior executive employees of the Company and its Subsidiaries are generally eligible (including the Company's stock option program). A. In addition to the Base Salary, the Board will award a bonus to Executive following the end of each fiscal year during the Employment Period based upon a formula on Exhibit I attached hereto. In addition to the Base Salary and any bonuses payable to Executive pursuant to this paragraph, Executive shall be entitled to the following benefits during the Employment Period: 1. a maximum of three weeks vacation each year with salary, subject to additional weeks upon Board approval; 1. reimbursement for travel, entertainment and other business expenses reasonably incurred by Executive; 1. an automobile allowance of $500 per month; 1. reimbursement for all reasonable expenses relating to Executive's moving to Dallas, Texas area, purchasing a new residence in Dallas, Texas, and selling his New York residence, including all closing costs, inspection fees, packing and unpacking costs, but excluding any "points" paid to a broker or mortgage lender; 1. reimbursement for all reasonable costs relating to Executive's living in the Dallas, Texas area incurred during the first year following the date of this Agreement; 3 (vi) reimbursement for the cost of an annual physical, examination by a physician of Executive's choice; and (vii) reimbursement for the reasonable expenses of preparation of Executive's annual tax returns. A. Termination. The Employment Period shall continue until Executive's resignation, death or disability or other incapacity (as determined by the Board in its good faith judgment) or until the Board determines in its good faith judgment that termination of Executive's employment is in the best interests of the Company. In the event of Executive's resignation (other than due to a material breach by the Company of this Agreement) or termination for Cause, Executive shall not be entitled to receive his Base Salary or any fringe benefits or bonuses for periods after the termination of the Employment Period. Upon any other termination of the Employment Period, Executive shall be entitled to receive (i) his Base Salary, the health and disability benefits described in paragraph 3(a) and the fringe benefits described in paragraph 3(b) for a period of 12 months thereafter, and (ii) following the end of the fiscal year in which Executive's employment is terminated and the determination of the amount of bonus which Executive would have been entitled if he remained employed by the Company or its Subsidiaries for the entire fiscal year (the "Bonus Amount"), (A) 50% of the Bonus Amount if such termination occurs in the first six months of such fiscal year, or (B) 100% of the Bonus Amount if such termination occurs in the second six months of such fiscal year. A. For purposes of this Agreement, "Cause" shall mean (i) the willful and continued failure by Executive to perform his duties as an Executive Vice President of the Company or any of its Subsidiaries or his continued failure to perform duties reasonably requested or reasonably prescribed by the Board (other than as a result of Executive's death or disability), (ii) the engaging by Executive in conduct which is materially monetarily injurious to the Company or any of its Subsidiaries, (iii) gross negligence or willful misconduct by Executive in the performance of his duties which results in, or causes, material monetary harm to the Company or any of its Subsidiaries, or (iv) Executive's commission of a felony or other civil or criminal offense involving moral turpitude. In the case of (i), (ii) and (iii) above, finding of Cause for termination shall be made only after reasonable notice to Executive and an opportunity for Executive, together with 4 counsel, to be heard before the Board. A determination of Cause by the Board shall be effective only if agreed upon by a majority of the directors, which shall include at least one director who is not an employee of the Company or its Subsidiaries and is not employed by Bain Capital, Inc. ("Bain"). I. Confidential Information. Executive acknowledges that the information, observations and data obtained by him while employed by the Company and its Subsidiaries concerning the business or affairs of the Company or any other Subsidiary ("Confidential Information") are the property of the Company or such Subsidiary. Therefore, Executive agrees that he shall not disclose to any unauthorized person or use for his own purposes any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Executive's acts or omissions. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) relating to the Confidential Information, Work Product (as defined below) or the business of the Company or any Subsidiary which he may then possess or have under his control. I. Inventions and Patents. Executive acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) which relate to the Company's or any of its Subsidiaries' actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by Executive while employed by the Company and its Subsidiaries ("Work Product") belong to the Company or such Subsidiary. Executive shall promptly disclose such Work Product to the Board and perform all actions reasonably requested by the Board (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 5 I. Non-Compete, Non-Solicitation. A. In further consideration of the compensation to be paid to Executive hereunder, Executive acknowledges that in the course of his employment with the Company he shall become familiar with the Company's trade secrets and with other Confidential Information concerning the Company and its Subsidiaries and that his services shall be of special, unique and extraordinary value to the Company and its Subsidiaries. Therefore, Executive agrees that, during the Employment Period and for one year thereafter (the "Noncompete Period"), he shall not directly or indirectly own any interest in, manage, control, participate in, consult with, render services for, or in any manner engage in any business competing with the businesses of the Company or its Subsidiaries, as such businesses exist or are in process on the date of the termination of Executive's employment, within any geographical area in which the Company or its Subsidiaries engage or plan to engage in such businesses. Nothing herein shall prohibit Executive from being a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. A. During the Noncompete Period, Executive shall not directly or indirectly through another entity (i) hire any person who was an employee of the Company or any Subsidiary at any time during the three-month period prior to the expiration of the Employment Period or (ii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of the Company or any Subsidiary to cease doing business with the Company or such Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any Subsidiary (including, without limitation, making any negative statements or communications about the Company or its Subsidiaries) which interference causes material monetary damage to the Company or its Subsidiaries. I. Enforcement. If, at the time of enforcement of paragraph 5, 6 or 7 of this Agreement, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area. Because Executive's services are unique and because Executive has access to Confidential Information and Work Product, the 6 parties hereto agree that money damages would not be an adequate remedy for any breach of this Agreement. Therefore, in the event a breach or threatened breach of this Agreement, the Company or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security). In addition, in the event of an alleged breach or violation by Executive of paragraph 7, the Noncompete Period shall be tolled until such breach or violation has been duly cured. Executive agrees that the restrictions contained in paragraph 7 are reasonable. I. Executive's Representations. Executive hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that he has consulted with independent legal counsel regarding his rights and obligations under this Agreement and that he fully understands the terms and conditions contained herein. I. Survival. Paragraphs 4, 5, 6 and 7 and paragraphs 10 through 18 shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. I. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: Timothy Needham 154 West 18th St., Apt. 5B New York, NY 10011 7 with a copy to: Eric Wallach Rosenman & Colin 575 Madison Avenue New York, NY 10022 Notices to the Company: American Pad & Paper Company 17304 Preston Road, Suite 700 Dallas, TX 75252-5613 Attn.: Board of Directors with a copy to: Kirkland & Ellis 200 E. Randolph Drive Chicago, IL 60601 Attn.: James L. Learner or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement shall be deemed to have been given when so delivered or mailed. I. Severability. Whenever possible, each provision of this Agreement shall 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 invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. I. Complete Agreement; Amendments. This Agreement, the Stock Option Agreement dated the date hereof between the Company and Executive, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 8 I. No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party. I. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. I. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, successors and assigns, except that Executive may not assign his rights or delegate his obligations hereunder without the prior written consent of the Company. I. CHOICE OF LAW. ALL ISSUES AND QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, 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. I. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. I. Stock Transfers. Executive hereby agrees that he will not sell, pledge or otherwise transfer any interest in the 66,667 shares of the Company's common stock which Executive purchased in connection with the Company's initial public offering of its common stock before July 2, 1997, except pursuant to (a) a Sale of the Company (as defined in that certain Stock Option Agreement dated the date hereof between the Company and Executive), or (b) that certain Pledge Agreement date the date hereof between the Company and Executive. 20. Change of Control Payment. Executive hereby acknowledges that the $1,156,500 payment received on the date hereof constitutes payment in full of the Company's 9 obligation pursuant to that certain Change of Control Agreement between WR Acquisition, Inc. and the Executive. * * * * * 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. AMERICAN PAD & PAPER COMPANY By -------------------------- Its ------------------------- ----------------------------- TIMOTHY NEEDHAM 11 EXHIBIT I 1996 BONUS PROGRAM
Amount Target - ------ ------ 100% of Base Salary Company achieving $100 million of consolidated earnings before interest, taxes, depreciation and amortization, determined in accordance with GAAP ("EBITDA"), after giving effect to the sale of the ------ Regency business but not giving effect to the acquisition of Niagara Envelope or the bonuses under this Bonus Program. 60% of Base Salary Company achieving $89.2 million of EBITDA, after giving effect to the sale of the Regency business and the bonuses under this Bonus Program but not giving effect to the acquisition of Niagara Envelope.
Bonus amounts above 100% of Base Salary, below 60% of Base Salary and the determination of the allocation between 60% and 100% of Base Salary will be determined mutually between the Compensation Committee of the Board and Executive. The bonus for fiscal 1997 and 1998 will be defined mutually between the Compensation Committee of the Board and Executive. EX-10.27 3 AGREEMENT & PLAN OF MERGER 1 EXHIBIT 10.27 AGREEMENT AND PLAN OF MERGER BY AND BETWEEN SHADE/ALLIED INC. AND AMERICAN PAD AND PAPER COMPANY OF DELAWARE, INC. DATED AS OF JANUARY 6, 1997 -1- 2 TABLE OF CONTENTS
Page ---- ARTICLE I THE MERGER 1 1.1 The Merger 1 1.2 Effective Time of the Merger 1 1.3 Effect of Merger 1 1.4 Stockholders' Meeting 2 ARTICLE II THE SURVIVING CORPORATION 2 2.1 Certificate of Incorporation 2 2.2 By-Laws 2 2.3 Directors 2 2.4 Officers 2 ARTICLE III CONVERSION OF SHARES 3 3.1 Conversion of Shares 3 3.2 No Further Transfers 3 ARTICLE IV PAYMENT OF PURCHASE PRICE 3 4.1 Definitions 3 4.2 Certain Transactions 5 (a) Indebtedness 5 (b) Stay Bonus Costs 5 (c) Transaction Costs 5 (d) Mechanics of Payments 5 (e) Transaction Price 6 (f) Investor Documents 6 (g) Employment Agreement 6 4.3 Dissenting Common Shares 6 ARTICLE V CLOSING 7 5.1 Closing Transactions 7 (a) Closing; Delayed Closing 7 (b) Closing Transactions 7 5.2 Conditions to Parent's Obligations 7 5.3 Conditions to the Company's Obligations 9 ARTICLE VI PRE-CLOSING COVENANTS 11 6.1 Operation and Maintenance of the Business 11 6.2 Negative Covenants of the Company 12 6.3 Information 13 (a) Interim Reports 13 (b) Access 13 (c) Exclusivity 13
-i- 3 6.4 Consents Generally 14 6.5 Notice and Cooperation Generally 14 (a) Notice of Breach 14 (b) Efforts to Close 14 6.6 Real Estate Matters 14 (a) Title Insurance. 14 (b) Surveys. 15 (c) Lease-Related Materials. 15 (d) Costs and Expenses. 15 6.7 Copies of New Contracts 16 6.8 HSR Act 16 6.9 Schedules 16 (a) Delivery of Schedules 16 (b) Disclosure on Schedules 16 6.10 Tax Settlements 16 6.11 Sierra Employees 16 6.12 Closing Agreement 17 6.13 Credit Agreement 17 6.14 Acquisition 17 ARTICLE VIIREPRESENTATIONS AND WARRANTIES OF THE COMPANY 18 7.1 Corporate Organization, Power and Authorizations 18 7.2 Authorization of Transactions 18 7.3 Capital Stock and Related Matters 18 7.4 Absence of Conflicts 19 7.5 Subsidiaries 19 7.6 Financial Statements 19 7.7 Certain Developments 19 7.8 Title to, Condition and Sufficiency of Assets 20 (a) Owned Properties 20 (b) Leased Properties 20 (c) Leasehold Improvements. 21 (d) Real Property Used in The Business. 21 (e) No Proceedings 21 (f) Current Use 21 (g) Condition and Operation of Improvements 21 (h) Ownership of Assets 22 (i) Condition of the Assets 22 7.9 Taxes 22 7.10 Contracts and Commitments 23 (a) Listing 23 (b) Absence of Breach, Cancellation or Repudiation 24 (c) Copies 24 7.11 Proprietary Rights 25 (a) Listing. 25 (b) Ownership; Infringement 25
4 7.12 Litigation; Proceedings 25 7.13 Brokerage 25 7.14 Governmental Licenses and Permits 25 7.15 Employees 26 7.16 Employee Benefit Plans 26 7.17 Affiliate Transactions 27 7.18 Compliance with Laws 27 7.19 Environmental Matters. 27 (a) Compliance Generally 27 (b) Permits 27 (c) Claims 27 (d) Storage Tanks, Asbestos, PCBs, Disposal Areas. 28 (e) Hazardous Substance Liabilities. 28 (f) Other Environmental Liabilities 28 (g) Transaction-Triggered Requirements 28 (h) Assumption of Liabilities 28 (i) Environmental Liens 28 7.20 Absence of Undisclosed Liabilities 29 7.21 Disclosure 29 7.22 Sierra Assets. 29 ARTICLE VIIIREPRESENTATIONS AND WARRANTIES OF PARENT 29 8.1 Organization and Power 29 8.2 Authorization of Transaction 29 8.3 Absence of Conflicts 30 8.4 Brokerage 30 8.5 Litigation 30 8.6 Disclosure 30 ARTICLE IXTERMINATION 31 9.1 Termination 31 9.2 Effect of Termination 31 ARTICLE XADDITIONAL AGREEMENTS 32 10.1 Press Releases and Announcements 32 10.2 Expenses 32 10.3 Directors, Officers and Fiduciary Indemnification 32 10.4 Tax Treatment 33 10.5 Attorneys' Fees 33 10.6 Specific Performance 33 10.7 Severance Policy 33 ARTICLE XI MISCELLANEOUS 33 11.1 Non-Survival of Representations and Warranties 33 11.2 Amendment and Waiver 34 11.3 Notices 34 11.4 Binding Agreement; Assignment 35 11.5 Severability 35 11.6 No Strict Construction 35 11.7 Captions 35 11.8 Entire Agreement 36 11.9 Counterparts 36 11.10 Governing Law 36 11.11 Parties in Interest 36 11.12 Other Definitional Provisions 36
5 INDEX OF DEFINED TERMS Acquisition 1 Additional Bonus 4 Agreement 1 Alternative Transaction 13 Approval Date 2 Authorizations 25 Basic Price 3 Board 1 Bonus Plan 4 Certificate of Merger 1 CIT 4 Closing Date 7 Closing Transactions 7 Common Stock A-1 Company 1 Consent A-1 Constituent Corporations 1 Contract A-1 Controlled Group 27 Credit Agreement 17 closing agreement 23 Dissenting Common Shares 3 DOJ 16 defined benefit plan 26 defined contribution plan 26 Effective Time 1 Employment Agreement 4 Environmental and Safety Requirements A-1 Environmental Lien A-1 ERISA 17 Excludable Contract A-1 Financial Statements 19 Finova 4 FTC 16 GAAP A-2 Governmental Entity A-2 HLE 4 hereunder 36 hereof 36 herein 36 HSR Act 8 Improvements 21 Insider A-2 Investigating Parties 13 including 36 6 Investors 4 Knowledge A-2 Lancaster Property 14 Latest Balance Sheet 19 Leased Real Property A-2 Leasehold Improvements A-2 Leases 20 Legal Requirement A-2 Lien A-2 multiemployer plan 26 Mandatory Consent A-2 Material Adverse Effect A-3 Merger 1 Options A-3 Owned Real Property A-3 Parent 1 Parties A-3 Paying Agent 5 PBGC 27 Per Share Price 4 Permitted Liens A-3 Person A-3 Plans 26 Preferred Price 4 Preferred Share Price 4 Preferred Stock 3 Priority Agreement 6 Proprietary Rights A-3 qualifying event 17 Real Property 21 Sale Bonuses 4 Senior Debt 4 Sierra 12 Sierra Closing Date 16 Sierra Employees 16 Sierra Proceeds 4 Sierra Transactions 12 Special Bonus 4 Stay Bonus Costs 4 Stockholders A-4 Stockholders' Meeting 2 Subordinated Debt 4 Surveys 15 Surviving Corporation 1 Tax A-4 Tax Code A-4 Tax Return A-4 7 Taxable A-4 Taxes A-4 Taxing A-4 Termination Date 31 Title Commitments 14 Title Company 14 Title Policies 14 transaction-triggered 28 Transaction Costs 5 Transaction Documents A-4 Transaction Price 4 Unanimous Consent 2 Warrants A-4 WBCL 1 Welfare Plans 17 8 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this Agreement") is entered into as of January 6, 1997, by and between Shade/Allied Inc., a Wisconsin corporation ( Company"), and American Pad & Paper Company of Delaware, Inc., a Delaware corporation ( Parent"). Unless defined herein, capitalized terms used in this Agreement are defined in Exhibit A attached hereto. WITNESSETH The boards of directors of the Company (the Board") and Parent deem advisable and in their best interests to consummate the merger of Shade Acquisition, Inc., a Wisconsin corporation to be formed by Parent ( Acquisition"), with and into the Company (the Merger") upon the terms and conditions set forth herein and in accordance with the provisions of the Wisconsin Business Corporation Law ("WBCL"). At the Effective Time (as defined below), Parent shall own all of the issued and outstanding shares of capital stock of Acquisition. Acquisition and the Company are sometimes collectively referred to herein as the Constituent Corporations" and the Company, following the effectiveness of the Merger, is sometimes referred to herein as the Surviving Corporation." NOW, THEREFORE, in consideration of the premises, the mutual representations, warranties, covenants, agreements and conditions contained herein, and in order to set forth the terms and conditions of the Merger and the mode of carrying the same into effect, the parties hereby agree as follows: ARTICLE 1. THE MERGER 1. The Merger. Subject to the terms and conditions hereof, at the Effective Time (as defined below), Acquisition shall be merged with and into the Company and the separate existence of Acquisition shall thereupon cease, and the Company shall be the surviving corporation in the Merger. 2. Effective Time of the Merger. The Merger shall become effective as of the time and date of the filing of the articles of merger attached hereto as Exhibit B (the Certificate of Merger") with the Wisconsin Department of Financial Institutions in accordance with the provisions of the WBCL, or at the time specified in the Certificate of Merger, if later than the time of filing. The Certificate of Merger shall be filed as soon as practicable after the Closing. The date and time when the Merger shall become effective is herein referred to as the Effective Time." 3. Effect of Merger. At the Effective Time, the Constituent Corporations shall become a single corporation which shall be the Surviving Corporation. At such time, the separate existence of the Constituent Corporations shall cease and the Surviving Corporation shall have all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the WBCL. The Surviving Corporation shall thereupon and thereafter possess all liabilities of the Constituent Corporations. The title to all property owned by the Constituent Corporations shall henceforth be vested in the Surviving Corporation without reversion or impairment. -1- 9 4. Stockholders' Meeting. If required by applicable law in order to consummate the Merger, the Company, acting through the Board, shall, in accordance with applicable law, duly call, give notice of, convene and hold a special meeting of its Stockholders (a Stockholders' Meeting") as soon as practicable following the date hereof for the purpose of considering and taking action upon this Agreement. The Company shall, following the date of this Agreement, attempt to obtain the unanimous written consent of the Stockholders of the Company to the approval and adoption of the Merger, this Agreement and the transactions described in this Agreement (the Unanimous Consent"). The date on which the Stockholders of the Company approve the Merger, this Agreement and the transactions described in this Agreement by Unanimous Consent or at the Stockholders Meeting is hereinafter referred to as the Approval Date." ARTICLE 1. THE SURVIVING CORPORATION 5. Certificate of Incorporation. The Fourth Amended and Restated Articles of Incorporation of the Company, as in effect at the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation after the consummation of the Merger until amended in accordance with law. 6. By-Laws. The By-laws of the Company, as in effect at the Effective Time, shall be the By-laws of the Surviving Corporation immediately after the consummation of the Merger. 7. Directors. The directors of Acquisition, as in effect at the Effective Time, shall be the directors of the Surviving Corporation immediately after the consummation of the Merger. 8. Officers. The officers of Acquisition, as in effect at the Effective Time, will be the officers of the Surviving Corporation immediately after the consummation of the Merger. ARTICLE 1. CONVERSION OF SHARES 9. Conversion of Shares. As of the Effective Time, by virtue of the Merger and without any action on the part of any holder: 10. Each issued and outstanding share of Acquisition's common stock, par value $.01 per share, shall be converted into one share of the Surviving Corporation's common stock, par value $.01 per share. 11. Each issued and outstanding share of Common Stock (other than shares pursuant to which dissenter's rights have been exercised in accordance with the WBCL ( Dissenting Common Shares")), excluding any such shares held in the treasury of the Company, shall be converted into the right to receive an amount equal to the Per Share Price (as defined below). 12. Each share of Common Stock and Preferred Stock which is held in the Company's treasury shall be cancelled, and no payment shall be made in respect thereof. 10 (d) Each issued and outstanding Option and Warrant to purchase shares of Common Stock shall be converted into the right to receive an amount equal to the Per Share Price multiplied by the number of shares of Common Stock covered by such Option or Warrant and the Options and Warrants shall be canceled. (e) Each issued and outstanding share of the Company's 1993 Cumulative Preferred Stock, par value $.01 per share (the "Preferred Stock"), shall be converted into the right to receive an amount equal to the Preferred Share Price and the Preferred Stock shall be cancelled. 13. No Further Transfers. At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of Common Stock or Preferred Stock shall thereafter be made. ARTICLE 1. PAYMENT OF PURCHASE PRICE 14. Definitions. As used in this Agreement, the following terms shall have the meanings specified: 15. The Basic Price" shall be that amount equal to $10,089,337.22. 16. The "Transaction Price" shall be that amount equal to: (i) the Basic Price; plus (ii) the amount of the Sierra Proceeds; minus (iii) the amount of the Transaction Costs; minus (iv) the amount of the Stay Bonus Costs. 17. The "Sierra Proceeds" shall be the proceeds received by the Company net of all costs incurred or to be incurred (including, without limitation, any tax costs) by the Company in the Sierra Transactions described in Section 6.1(i) hereof. 18. The Per Share Price" shall be that amount equal to the Transaction Price dividend by 322,072.962. 19. The Senior Debt" means the amount of all of the outstanding and unpaid principal, accrued interest, accrued fees and other charges relating to all outstanding senior indebtedness of the Company for borrowed money to The CIT Group/Business Credit, Inc. ("CIT") and FINOVA Capital Corporation ("Finova") and any prepayment premium or penalties due upon payment of such indebtedness at Closing. 20. The Subordinated Debt" means the outstanding and unpaid principal, accrued interest, accrued fees and other charges relating to all outstanding subordinated indebtedness of the Company for borrowed money to those persons listed and identified on Schedule 4.1(f) to this Agreement (the Investors") and any prepayment premium or penalties due upon payment of such indebtedness at Closing. 21. The Preferred Price" shall be that amount equal to $10,009,550 plus the aggregate amount of all accrued and unpaid dividends on the Preferred Stock as of the Effective Time. 22. The Preferred Share Price" shall be that amount equal to the Preferred Price divided by 10,009.550. 11 23. The Stay Bonus Costs" shall mean the amount representing the following: 1. the amounts payable by the Company to Harold L. Ellsworth ("HLE") as a Special Bonus" and an Additional Bonus" pursuant to Section 12 of the Employment and Noncompetition Agreement between the Company and HLE dated as of September 1, 1994, as amended on January 3, 1997 (the Employment Agreement"); plus 2. all costs associated with the termination of the Employment Agreement as of the Closing; plus 3. the amounts payable by the Company to employees of the Company as Sale Bonuses" pursuant to the Company's Key Employee Sale Incentive Plan adopted by the Board of Directors of the Company on November 8, 1996 (the "Bonus Plan"). 24. The Transaction Costs" shall be the amount representing the sum of all fees and expenses incurred by the Company and the Investors in connection with the Merger, this Agreement and the transactions contemplated by this Agreement, including the fees and expenses of counsel, investment bankers, brokers, accountants and other experts incident to the negotiation and preparation of this Agreement and the consummation of the Merger, the Sierra Transactions and the other transactions described in this Agreement. Transaction Costs shall be evidenced by invoices delivered to Parent on or prior to the Closing Date. 25. Certain Transactions. 26. Indebtedness. At the Closing, the Company shall prepay the Senior Debt and the Subordinated Debt in full. Parent and Acquisition will provide to the Company the amounts necessary to fund the payments required of the Company under this Section 4.2(a) of this Agreement. 27. Stay Bonus Costs. At the Closing, the Company shall pay the Stay Bonus Costs in full. Parent and Acquisition will provide to the Company the amounts necessary to fund the payments required of the Company under this Section 4.2(b) of this Agreement. 28. Transaction Costs. At the Closing, the Company shall pay the Transaction Costs in full. Parent and Acquisition will provide to the Company the amounts necessary to fund the payments required of the Company under this Section 4.2(c) of this Agreement. 29. Mechanics of Payments. At the Closing, the Parent and Acquisition shall pay the Transaction Price and the Preferred Price to, or at the direction of, the Company. All payments under or pursuant to this Agreement shall be made by wire transfer of immediately available funds to an account designated by the recipient of such payment or by certified check if requested by the Company. At or prior to the Closing, the Company may designate Firstar Trust Company, or some other bank or trust company mutually acceptable to the Parent and the Company, to act as the "Paying Agent" for the receipt and disbursement of the Transaction Price and the Preferred Price and, in such event, the Parent, the Company and Acquisition shall execute a typical Paying Agent Agreement. All disbursements to the Stockholders shall be made: (i) only after delivery by such Person of executed stock certificates, Option Agreements, Warrants, stock powers and other documents as are reasonably satisfactory to Parent and the Company; and (ii) using the information contained on Schedule 4.2(d)-1 to this Agreement for the number of shares of Common Stock, and the number of shares of Common Stock covered by Options and Warrants, owned by each Stockholder; and (iii) using the information contained on Schedule 4.2(d)-2 to this Agreement for the number of shares of Preferred Stock owned by each Stockholder. Prior to the Closing Date, the Company may update the information on Schedules 4.1(f), 4.2(d)-1 and 4.2(d)-2 by written notice to the 12 Parent to reflect any changes which occur from and after the date of this Agreement in the information set forth in such Schedules; provided that, except as set forth in this Agreement, prior to the Closing Date, the Company shall not issue, authorize or sell any shares of its capital stock, or rights to acquire shares of its capital stock or enter into any agreement providing for the issuance or sale of its capital stock, except upon the exercise of any of the Options or Warrants listed on Schedule 4.2(d)-1 to this Agreement. 30. Transaction Price. The Transaction Price shall be paid as follows: (i) each holder of Common Stock shall receive that amount equal to the Per Share Price multiplied by the number of shares of Common Stock owned by such holder; and (ii) each holder of an Option or a Warrant shall receive that amount equal to the Per Share Price multiplied by the number of shares of Common Stock purchasable pursuant to the terms of such Option or Warrant, provided that for these purposes: (A) there shall be no deduction for the Option or Warrant exercise price and the Company shall be deemed to fully and irrevocably waive its rights to such exercise prices; and (B) all Options and Warrants shall be deemed to be fully vested and exercisable in full. 31. Investor Documents. At the Closing, the Company and the Investors shall execute such documents and materials as are necessary or appropriate to terminate the Priority and Amendment Agreement dated as of August 5, 1994 (the Priority Agreement"), the Subordinated Loan Agreements described in the Priority Agreement, all Shareholder Agreements in force and effect among the Investors and the Company and such other documents and agreements relating to loans to, and investments in, the Company by the Investors. 32. Employment Agreement. At the Closing, the Company and HLE shall execute such documents and materials as are necessary or appropriate to terminate the Employment Agreement. 33. Dissenting Common Shares. Notwithstanding anything to the contrary in this Agreement, Dissenting Common Shares shall not be converted into the right to receive the Per Share Price as provided in this Agreement but shall become the right to receive such consideration as may be determined to be due to the holder of the Dissenting Common Shares pursuant to the WBCL. If any holder of Dissenting Common Shares shall, after the Effective Time, withdraw or otherwise lose the rights of appraisal provided in the WBCL, the Dissenting Common Shares shall be deemed to be converted, as of the Effective Time, into the Per Share Price as is set forth in this Agreement without any interest thereon. 13 ARTICLE 1. CLOSING 34. Closing Transactions. 35. Closing; Delayed Closing. The Closing will occur at the offices of Quarles and Brady, 411 East Wisconsin Avenue, Milwaukee, Wisconsin at 10:00 a.m. on that date which is the earliest of: (i) that date which is five business days after the date on which the Company notifies the Parent that the Unanimous Consent has been obtained; or (ii) that date which is the date on which the Stockholders Meeting occurs; or (iii) that date which is agreed to by the Company and the Parent; provided that, the Closing shall occur no earlier than January 15, 1997. Notwithstanding the foregoing, if, on any date for the Closing described in the preceding sentence, any condition of Parent or the Company specified in Section 5.2 or Section 5.3 has not been satisfied (and will not be satisfied by the delivery of documents or actions taken by the parties at the Closing) or waived by Parent or the Company, as the case may be, then the date for the Closing will be extended to any date specified by Parent to the Company, or by the Company to Parent, with not less than five business days' prior notice (subject to Parent's and the Company's respective conditions to Closing being satisfied or waived on such specified date). The date upon which the Closing actually occurs is referred to as the Closing Date". 36. Closing Transactions. Subject to the conditions set forth in Sections 5.2 and 5.3, the parties will consummate the following transactions at the Closing (the Closing Transactions"): 37. there will be delivered to Parent, Acquisition and the Company, as applicable, the opinions, certificates and other documents and instruments required to be delivered to such parties under Sections 5.2 and 5.3; 38. the Parent, Acquisition and the Company shall cause the Certificate of Merger to be filed in accordance with the WBCL, and shall take any and all other lawful actions, and do any and all lawful other things necessary to effect the Merger and to enable the Merger to become effective; and 39. the Parties shall complete the transactions described in Section 4.2 of this Agreement. 40. Conditions to Parent's Obligations. The obligation of Parent to consummate the Closing Transactions is subject to the satisfaction (or waiver by Parent in writing) of the following conditions as of the time of the Closing: 41. The representations and warranties set forth in Article VII will be true and correct in all material respects at and as of the time of the Closing as if the Closing Date were substituted for the date of this Agreement throughout such representations and warranties; 42. The Company will have performed and complied in all material respects with all of the covenants and agreements required to be performed under this Agreement at or prior to the Closing; 43. No action or proceeding before any Governmental Entity will be pending or threatened wherein an unfavorable judgment, decree, injunction or order could prevent the consummation of the Closing Transactions or result in the Closing Transactions being declared unlawful or rescinded, or have a Material Adverse Effect; 44. There will have occurred no Material Adverse Effect; 45. All Mandatory Consents will have been obtained and be in full force and effect; 14 46. All filings (if any) required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act"), in connection with the Closing Transactions will have been made, and any waiting period required by the HSR Act in connection with the Closing Transactions will have expired or been terminated; 47. Parent will have received opinions, dated the Closing Date, of Quarles & Brady, legal counsel to the Company, in a form reasonably satisfactory to Parent; 48. Prior to Closing, no more than 155 shares of the outstanding Common Stock will have become Dissenting Shares in accordance with the requirements of the WBCL; 49. Parent will have obtained consent of the requisite lenders pursuant to the Credit Agreement; 50. On or prior to the Closing Date, the Company will have delivered to Parent all of the following (dated as of the Closing Date, except as otherwise indicated): 51. Copies of all Consents which have been obtained prior to the Closing; 52. A release and termination of each Lien on any asset which is not a Permitted Lien; 53. A certificate, dated not earlier than the third day prior to the Closing Date, of the secretary of state or similar governmental agency of the state under the laws of which Company is organized and each state in which Company is required to be qualified to do business stating that Company is in good standing or has comparable active status in such state; 54. A certificate from the Company certifying that each of the conditions set forth in Sections 5.2(a) and 5.2(b) have been and are satisfied as of the time of the Closing; 55. A certificate from the Secretary or an Assistant Secretary of the Company certifying that, in accordance with the Company's Articles of Incorporation, the holders of at least 67% of the issued and outstanding shares of Common Stock (on a fully diluted basis) have approved the Merger; 56. An agreement with each holder of Senior Debt and Subordinated Debt certifying that such holder will raise no objections and will agree to the retirement of their indebtedness pursuant to Section 4.2 of this Agreement; 1. Invoices evidencing the Transaction Costs; 57. Certificates from James Haggerty, Robert Wilson, Glen Yurjevich, Robert Krueger, Robert Rupp and Timothy Vanness certifying that each such Person shall release the Company (and all of its successors and assigns) from all obligations and liabilities in connection with or arising out of the Bonus Plan, upon the payment of the Stay Bonus Costs at the Closing; 15 58. A certificate from HLE certifying that the Employment Agreement shall automatically terminate upon the payment of the Stay Bonus Costs at the Closing; and 59. Such other documents or instruments as Parent reasonably requests and are reasonably necessary to effect the transactions contemplated by this Agreement. 60. The Sierra Transactions (as defined below) shall have been completed in accordance with Section 6.1(i) hereof. 61. All proceedings to be taken by the Company in connection with the consummation of the Closing Transactions and the other transactions contemplated by this Agreement and all certificates, opinions, instruments and other documents required to be delivered to Parent to effect the transactions contemplated by this Agreement will be reasonably satisfactory in form and substance to Parent. 62. Conditions to the Company's Obligations. The obligation of the Company to consummate the Closing Transactions is subject to the satisfaction (or waiver by the Company in writing) of the following conditions as of the Closing Date: 63. The representations and warranties set forth in Article VIII will be true and correct in all material respects at and as of the time of the Closing as if the Closing Date were substituted for the date of this Agreement throughout such representations and warranties; 64. Parent and Acquisition will have performed and complied : (i) in all respects with the obligations of Acquisition and the Parent under Section 4.2 of this Agreement; and (ii) in all material respects with all of the other covenants and agreements required to be performed by Parent and Acquisition under this Agreement at or prior to the Closing; 65. All filings (if any) required by the HSR Act in connection with the Closing Transactions will have been made, and any waiting period required by the HSR Act in connection with the Closing Transactions will have expired or been terminated; 66. No action or proceeding before any Governmental Entity will be pending or threatened wherein an unfavorable judgment, decree, injunction or order could prevent the consummation of the Closing Transactions or result in the Closing Transactions being declared unlawful or rescinded; 67. The Company will have received opinions, dated the Closing Date, of Kirkland & Ellis, legal counsel to Parent and Acquisition, in a form reasonably satisfactory to the Company; 68. On or prior to the Closing Date, Parent will have delivered to the Company all of the following: 69. Certificates, each dated not earlier than the third business day prior to the Closing Date, of the secretary of state or similar governmental agency of the state under the laws of which Parent and Acquisition are organized and each state in which Parent and Acquisition are required to be qualified to do business stating that Parent and Acquisition are in good standing or have comparable active status in such state; 16 70. A certificate of Parent and Acquisition dated as of the Closing Date certifying that each of the conditions set forth in Sections 5.3(a) and 5.3(b) has been and is satisfied as of the time of the Closing; and 71. Such other documents or instruments as the Company reasonably request and are reasonably necessary to effect the transactions contemplated by this Agreement; and 72. The Sierra Transactions shall have been completed in accordance with Section 6.1(i) hereof; 73. In accordance with the Company's Articles of Incorporation, the holders of at least 67% of the issued and outstanding shares of Common Stock (on a fully diluted basis) shall have approved the Merger; and 74. All proceedings to be taken by Parent and Acquisition in connection with the consummation of the Closing Transactions and the other transactions contemplated by this Agreement and all certificates, opinions, instruments and other documents required to be delivered to the Company to effect the transactions contemplated by this Agreement will be reasonably satisfactory in form and substance to the Company. ARTICLE 1. PRE-CLOSING COVENANTS 75. Operation and Maintenance of the Business. Prior to the Closing, unless disclosed on Schedule 6.1 or unless the Parent otherwise consents in writing, the Company will: 76. conduct its business and operations only in the ordinary course of business consistent with past practice (including with respect to maintenance of working capital balances, collection of accounts receivable and payment of accounts payable); 77. cause its current insurance (or reinsurance) policies not to be cancelled or terminated or any of the coverage thereunder to lapse, unless simultaneously with such termination, cancellation or lapse, replacement policies providing coverage equal to or greater than the coverage under the cancelled, terminated or lapsed policies are in full force and effect; 78. use commercially reasonable efforts, consistent with sound business practice, to keep in full force and effect its existence and all material rights, franchises, Proprietary Rights and contractual rights relating or pertaining to its business; 79. carry on its business in a manner consistent with the Company's past practices and, consistent with such past practices and to the extent prudent, use reasonable efforts to keep intact its present business organization, including the present business operations, physical facilities, working conditions and employees and its present relationships with lessors, licensors, suppliers, customers, independent contractors and others having business relations with it; 80. maintain its assets in such general state of repair as is reasonably necessary for the conduct of its business consistent with then-present needs and past practices, including replacement in accordance with reasonably prudent business practices of any inoperable, worn out or obsolete assets with assets of quality consistent with reasonably prudent business practices and then-current needs and, in the event of a 17 condemnation, casualty, loss or other material damage to any of the assets prior to the Closing Date, whether or not the Company is insured, use commercially reasonable efforts either to repair or replace such condemned or damaged property or to use the proceeds of such condemnation or insurance in such other manner as mutually agreed upon by Acquisition and the Company; 81. make capital and promotional expenditures in accordance with its past custom and practice; 82. maintain its books, accounts and records in accordance with past custom and practice as used in the preparation of the Latest Balance Sheet and the accompanying interim financial statements; 83. comply in all material respects with all applicable Legal Requirements, and all contractual obligations, applicable to its operations and business, and pay all applicable Taxes which are due and payable (other than any such Taxes which are being contested in good faith). 84. contribute its Sierra Coating Technologies Division (with the assets of such division described on Schedule 7.23A and Schedule 7.23B), to the capital of a subsidiary of the Company ( Sierra") and shall (no later than as of the close of the Company's business on the day immediately preceding the Closing Date) (A) spin off to the Company's stockholders the capital stock of Sierra; or (B) sell the capital stock or assets of Sierra to a group controlled by the stockholders of the Company or to a third party; or (C) shut down the business operations of Sierra and sell the assets of Sierra to a third party (collectively, the Sierra Transactions"); provided that, prior to such spin off or sale, Parent shall have the opportunity to review and approve such spin off or sale (such approval not to be unreasonably withheld). 85. Negative Covenants of the Company. Prior to the Closing, without Parent's prior written consent, the Company will not: 86. take any action that would require disclosure under Section 7.7(b), 7.7(c), 7.7(d) or 7.7(e); 87. enter into any contract, agreement or transaction, except for any Excludable Contract; 88. directly or indirectly declare or pay any dividends or make any distributions upon any of its capital stock or other equity securities except for dividends on the Preferred Stock; and 89. directly or indirectly redeem, purchase or otherwise acquire any of the Company's capital stock or other securities (including, without limitation, warrants, options and other rights to acquire such capital stock or other equity securities) except as set forth in this Agreement. 90. Information. 91. Interim Reports. The Company will provide to Parent copies of all financial statements, budgets or other summaries of actual financial information, if any, as and when the same are prepared on a monthly, quarterly, annual or other basis by the Company for internal management or reporting purposes. 92. Access. Without limiting the foregoing, from time to time at Parent's request upon reasonable prior notice and at reasonable times, the Company will provide to representatives of Parent and its financing parties and each of their agents, employees and accounting, tax, legal and other advisors (collectively, the Investigating Parties"): 93. access to the assets of the Company; 18 94. access to all records of account, insurance policies, Tax Returns, Contracts, and other books and records concerning the Company and its business and operations (except employee medical records) and such other relevant information and materials as may be reasonably requested (including the ability to make copies and abstracts thereof); and 95. the opportunity to discuss the affairs, finances and accounts of the Company with those directors (or equivalent officials), senior management employees, key sales representatives and present and former independent accountants of the Company which would reasonably be presumed to have information which would be relevant for the purposes of preparing for the financing and consummation of the Closing Transactions and the conduct of the Company's business and operations thereafter or the performance of such person's duty and responsibilities to the Company. All information derived by Parent or any of the Investigating Parties as a result of the above shall be governed by the terms and conditions of that certain Confidentiality Agreement between the Company and American Pad & Paper Company dated August 19, 1996, by which Parent agrees to be bound in the same manner as if it were an original party thereto. 96. Exclusivity. Until this Agreement is terminated by its terms and other than with respect to any Sierra Transaction, the Company will not (and the Company will not cause or permit any affiliate, director, officer, employee, stockholder or agent of the Company to) (collectively, Alternative Transaction"): 1. solicit, initiate or encourage the submission of any proposal or offer from any Person (including any of them) relating to any (A) liquidation, dissolution or recapitalization of, (B) merger or consolidation with or into, (C) acquisition or purchase of any material asset (or any material portion of the assets) of, or any equity interest in, or (D) similar transaction or business combination involving, the Company; or 2. participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any other Person to do or seek any of the foregoing. 1. Consents Generally. The Company will use commercially reasonable efforts to (a) obtain or cause to be obtained prior to the Closing Date all Mandatory Consents, and (b) cause each such Mandatory Consent to be effective as of the Closing Date (whether it is granted or entered into prior to or after the Closing), and Acquisition will use commercially reasonable efforts not to interfere with such efforts. 2. Notice and Cooperation Generally. 3. Notice of Breach. Promptly after it obtains Knowledge thereof, but in all events prior to the Closing, Parent will inform the Company, and the Company will inform Parent, of any fact or circumstance which, if it existed on the Closing Date, would constitute a breach of any representation or warranty of itself set forth in this Agreement or any breach of any of its covenants or agreements set forth in this Agreement, or any threatened or instituted proceeding of a type described in Section 5.2(c) or Section 5.3(d). 4. Efforts to Close. Each Party will use commercially reasonable efforts to cause the conditions to Parent's and the Company's obligations to consummate the Closing Transactions to be satisfied 19 (including the preparation, execution and delivery of all agreements and instruments contemplated hereunder to be executed and delivered by such Party in connection with or prior to the Closing). 5. Real Estate Matters. 6. Title Insurance. Parent acknowledges receipt of a commitment for an ALTA Owner's Title Insurance Policy for each parcel of Owned Real Property and the Leased Real Property located in Lancaster, Pennsylvania (the "Lancaster Property") (collectively, the Title Commitments"), issued by Commonwealth Land Title Insurance Company (the Title Company"). At the Closing, the Company shall cause the Title Company to issue title insurance policies (which may be in the form of a mark-up of the Title Commitments) in accordance with the Title Commitments, insuring the Company's fee simple or lease-hold interest in each such parcel of Owned Real Property or the Lancaster Property as of the Closing Date (including all recorded easements benefitting such parcel) with gap coverage through the date of recording, subject only to the Permitted Liens, in such amount as Parent determines to be the fair market value (including all Improvements thereon) of such Owned Real Property or Lancaster Property insured thereunder (collectively, the Title Policies"). Each of the Title Policies shall include the following endorsements (to the extent available in the respective jurisdiction, but regardless of whether any additional fee is charged for such endorsements): (a) an extended coverage endorsement (insuring over the general or standard exceptions) to the extent permitted by the Title Company; (b) an ALTA Form 3.1 zoning endorsement (with parking); (c) a survey endorsement (insuring that the parcel described therein is the same parcel shown on the Survey with respect to such parcel and that such Survey is an accurate survey thereof); (d) an access endorsement (insuring that such parcel has direct and unencumbered pedestrian and vehicular access to a public street); (e) if the Real Property covered by such policy includes two or more adjacent parcels, a contiguity endorsement (insuring that all of such adjacent parcels are contiguous to one another); (f) a tax parcel number endorsement (insuring the tax parcel number in the endorsement includes all of the Real Property insured thereunder and no other real property); (g) an ALTA Form 9 owner's comprehensive endorsement; (h) a non-imputation endorsement (insuring that coverage will not be defined to the Company on the basis of any knowledge imputed to the Company by any of its shareholders, directors, officers or employees prior to the Closing Date) and (i) such other endorsements as reasonably requested by Parent or Parent's lender (if any). The Company agrees to execute and deliver all affidavits, indemnities and such other agreements reasonably requested by the Title Company to obtain the Title Policies as set forth above. 7. Surveys. The Company shall obtain and deliver to Parent no later than ten (10) days prior to Closing, an update of the Company's most recent survey or if there is no existing survey, a new survey for each parcel of Owned Real Property and the Lancaster Property dated no earlier than the date of this Agreement for which a Title Policy is required, prepared by the previous surveyor, or if there is no existing survey, by Bock & Clark National Surveyors Network or other licensed surveyor satisfactory to Acquisition, and conforming to 1992 ALTA/ACSM Minimum Detail Requirements for Urban Land Title Surveys, including Table A Items Nos. 1 through 4 and 6 through 13, and such other standards as the Title Company requires as a condition to the removal of any survey exceptions from the Title Policies, and certified to the Company, Parent, Parent's lender (if any) and the Title Company, in a form satisfactory to such parties (collectively, the Surveys"). The Surveys shall not disclose any material survey defect or encroachment from or onto any of the Real Property which has not been cured or insured over prior to the Closing. Parent shall notify the Company of such survey defects or encroachment within five business days after delivery of the Surveys to Parent and Parent's counsel. 8. Lease-Related Materials. Prior to the Closing, the Company will obtain, with respect to each parcel of Leased Real Property other than the executive offices listed as items 5 through 8 on Schedule 7.8B, the following documents, in such forms as Acquisition may reasonably request: (i) estoppel letters 20 and memoranda of lease in recordable form from the lessor and/or sublessor(s) thereof, and (ii) non-disturbance agreements from the lender(s) of any such lessor and/or sublessor(s). 9. Costs and Expenses. All costs and expenses incurred pursuant to this Section 6.6 of this Agreement shall be the responsibility of the Parent and shall not be Transaction Costs for any purposes of this Agreement. 10. Copies of New Contracts. Promptly after it is entered into, the Company will deliver to Acquisition a true and correct copy of any written Contract (other than any Excludable Contract), and a complete and correct summary of the material terms and conditions of any oral Contract (other than any Excludable Contract), which is entered into by the Company after the date of this Agreement and prior to the Closing, whether or not Parent's consent to the entry into such Contract is required pursuant to Section 6.1 or Section 6.2. 11. HSR Act. Each party will use reasonable best efforts to prepare and, at such time as Acquisition designates, file with the United States Federal Trade Commission (the _FTC") and the Antitrust Division of the United States Department of Justice (the _DOJ"), any materials and information required to be filed with or provided to the FTC or the DOJ pursuant to the HSR Act with respect to the transactions contemplated by this Agreement. Parent shall cause Acquisition to pay the filing fees associated with any such filing. Parent, Acquisition and Company each will promptly supply any additional information which reasonably may be required or requested by the FTC or the DOJ. Parent, Acquisition and Company each will take all such actions and will file and use reasonable best efforts to have declared effective or approved, all documents and notifications with any governmental or regulatory bodies, as may be necessary or may reasonably be requested under federal antitrust laws for the consummation of the transactions contemplated by this Agreement. 12. Schedules. 13. Delivery of Schedules. Contemporaneously with the execution and delivery of this Agreement, the Company is delivering to the Parent the Schedules (other than Schedule 8.3) described in this Agreement, which are accompanied by a certificate signed by the President of the Company stating the Schedules are being delivered pursuant to this Agreement and are the Schedules referred to in this Agreement. The Schedules are deemed to constitute an integral part of this Agreement and to modify the representations, warranties, covenants or agreements of the Company contained in this Agreement. 14. Disclosure on Schedules. If a document or matter is disclosed in any Schedule to this Agreement, it shall be deemed to be disclosed for all purposes of this Agreement without necessity of specific repetition or cross- reference. All capitalized terms used in any Schedule shall have the definitions specified in this Agreement. 15. Tax Settlements. Prior to the Closing, the Company shall not enter into any Tax settlements, arrangements, agreements or resolutions with any Person without the prior written approval of Parent. 16. Sierra Employees. Effective as of the closing of the Sierra Transactions (the Sierra Closing Date"), employees of Sierra (the Sierra Employees") shall cease being covered under the Plans (as defined in Section 7.16 of this Agreement). On and after the Sierra Closing Date, Sierra shall assume and have sole responsibility for: (i) all liabilities under the Plans that are employee welfare benefit plans" (as such term is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ( ERISA")) (the Welfare Plans") for any unpaid claims incurred but not reported thereunder prior to the Sierra Closing Date by the Sierra Employees (and the dependents thereof); (ii) all liabilities, obligations and commitments arising under Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Tax Code relating to any qualifying event" (as such term is defined in Section 603 of ERISA) occurring with respect to any Sierra Employee at any time after the Sierra Closing Date; (iii) all liabilities, obligations and commitments for any post-retirement medical, dental or life insurance coverage for any individuals (and the dependents of such individuals) who are or have been Sierra 21 Employees and participants in the Welfare Plans at any time on or prior to the Sierra Closing Date to the extent such individuals (or dependents thereof) are entitled thereto under the terms of the Welfare Plans; and (iv) all liabilities, obligations and commitments for the payment of any life and disability insurance benefits to all employees and former employees of Sierra (other than the Sierra Employees) who, immediately prior to the Closing Date, are receiving or entitled to receive any such benefits under the Welfare Plans. 17. Closing Agreement. The Company has this day executed a Closing Agreement with certain of the Stockholders relating to the transactions described in this Agreement and has delivered a copy of the Closing Agreement to Parent. Prior to the Effective Time, the Company will comply with the Closing Agreement in all respects and will enforce any of its rights thereunder with respect to any of the Investors, Employees and Trusts (as such terms are defined in the Closing Agreement). 18. Credit Agreement. The Parent is a party to a Credit Agreement, dated July 8, 1996, with American Pad & Paper Company, WR Acquisition, Inc., Bankers Trust Company, Bank of Tokyo-Mitsubishi Trust Company, Bank One Texas, N.A., the Bank of Nova Scotia, the First National Bank of Boston and the lending institutions party thereto (the "Credit Agreement"). The Parent hereby represents and warrants to the Company, and agrees with the Company, that: (i) the Parent has, and will maintain at all times from and after the date hereof up to and including the Closing Date, sufficient borrowing availability under the Credit Agreement to close the Merger and the transactions described in this Agreement; and (ii) promptly after the date of this Agreement, Parent will use its reasonable best efforts to obtain all consents required under the Credit Agreement to the consummation of the Merger and the other transactions described in this Agreement. 19. Acquisition. Insofar as this Agreement purports to create any obligations or duties on the part of Acquisition (which is not a party hereto), Parent agrees to cause Acquisition to fully perform, satisfy and comply with all such obligations and duties. 20. Certain Employees. Prior to the Closing, the Company will use reasonable efforts to obtain a Certificate from each of Michael Domanik, Fred Haas and Pamela Swanson certifying that each such Person shall release the Company (and all of its successors and assigns) from all obligations and liabilities in connection with or arising out of the Bonus Plan upon the payment of the Stay Bonus Costs at the Closing. ARTICLE 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY As a material inducement to Parent to enter into this Agreement, the Company hereby makes the representations and warranties set forth in this Article VII. 21. Corporate Organization, Power and Authorizations. 22. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin and is qualified to do business in every jurisdiction in which the nature of its business or its ownership of property requires it to be qualified. (All such jurisdictions in which the Company is qualified are set forth on Schedule 7.1A attached hereto). The Company has all requisite corporate power and authority and all licenses, permits and authorizations necessary to own and operate its properties, to carry on its business as now conducted and to carry out the transactions contemplated by this Agreement. 23. The Company has previously delivered to Parent's counsel complete and correct copies of the Company's Articles of Incorporation and By-laws, as are presently in effect and with all amendments thereto, and complete and current copies of all minutes of meetings of the Board and Stockholders of the past five years. The Company is not in default in the performance, observation or fulfillment of either of its Articles of Incorporation or By-laws. 22 24. Authorization of Transactions. Except for obtaining stockholder approval as contemplated by Section 1.4 and in accordance with the applicable provisions of the WBCL, (i) the Company has full power and authority to execute and deliver this Agreement and all other Transaction Documents to which the Company is a party and to perform its obligations hereunder and thereunder, and (ii) no other proceeding or action on the part of the Company is necessary to approve and authorize the Company's execution and delivery of this Agreement or any other Transaction Document to which the Company is a party or the performance of the Company's obligations hereunder or thereunder. This Agreement and all other Transaction Documents to which the Company is a party have been, or will be at Closing, duly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof and thereof by the parties other than the Company, constitute the valid and binding agreements of the Company, enforceable against the Company in accordance with their terms, except as enforceability hereof or thereof may be limited by bankruptcy, insolvency or other laws affecting creditors' rights generally and limitations on the availability of equitable remedies. 25. Capital Stock and Related Matters. The authorized capital stock of the Company consists of (a) 9,975,000 shares of Common Stock, of which 2,497.002 shares are issued and outstanding, and (b) 25,000 shares of Preferred Stock, of which 10,009.55 shares are issued and outstanding. All of the issued and outstanding shares of Common Stock and Preferred Stock are owned of record and beneficially by the individuals or entities set forth on Schedules 4.2(d)-1 and 4.2(d)-2, with the number and type of stock owned set across their name. Except for the Options and Warrants set forth in Schedule 4.2(d)-1, the Company does not have outstanding any stock or securities convertible into or exchangeable for any shares of its capital stock, nor does it have outstanding any rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable into its capital stock. Except as set forth on Schedule 7.3, the Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock. All of the outstanding shares of the Common Stock and Preferred Stock are validly issued, fully paid and nonassessable, and such shares are not subject to, nor were they issued in violation of, any preemptive rights. 26. Absence of Conflicts. Except for Consents required under the HSR Act, or as set forth in Schedule 7.4, neither the execution, delivery and performance of this Agreement or any other Transaction Document by the Company nor the consummation by the Company of the transactions contemplated hereby or thereby (a) does or will (i) conflict with or result in any breach of any of the provisions of, (ii) constitute a default under, (iii) result in a violation of, (iv) give any third party the right to terminate or to accelerate any obligation under, or (v) result in the creation of any Lien upon any asset, in each case under the provisions of any indenture, mortgage, lease, loan agreement or other agreement, instrument or Contract or any Legal Requirement by which the Company is bound or by which Stockholders or any asset may be affected, or to which the Company or any asset is subject, or (b) without limiting the foregoing, requires any Consent of any Governmental Entity or any other Person. 27. Subsidiaries. Except as set forth on Schedule 7.5 and as may result from the Sierra Transactions, the Company does not own, directly or indirectly, any stock, partnership interest or joint venture interest in, or any security issued by, any other corporation, organization or entity. 28. Financial Statements. Attached to this Agreement as Schedule 7.6 are the following (collectively, the Financial Statements"): 29. the audited balance sheets of the Company and the related statements of income and cash flows for its fiscal years ending March 31 for each of 1994, 1995 and 1996; and 30. the November 30, 1996 unaudited balance sheet of the Company (the Latest Balance Sheet") and the related statements of income and cash flows for the eight-month period ending on November 30, 1996. Each such financial statement (in each case including the notes thereto, if any) has been prepared in accordance with GAAP subject (in the case of the statements described in clause (b) above) to 23 the lack of footnote disclosure and changes resulting from normal year-end adjustments, none of which changes would, if properly presented, in the aggregate, reflect a Material Adverse Effect. 31. Certain Developments. Other than pursuant to this Agreement, since the date of the Latest Balance Sheet, the Company has not: 32. suffered any theft, damage, destruction or casualty loss to any material asset or any material portion of the assets, or any substantial destruction of the Company's books and records (in each case whether or not covered by insurance); 33. sold, leased, assigned or transferred any material asset or any material portion of the assets (other than dispositions of obsolete or worn-out assets disposed of in the ordinary course of business and dispositions of assets which have been replaced with assets of equal or greater value and utility); 34. waived any right of material value; 35. entered into any other material transaction other than in the ordinary course of business, or materially changed any material business practice; or 36. made or granted any bonus or any wage, salary or compensation increase in excess of 4% of the immediately preceding bonus, wage, salary or other level of compensation paid to any employee or independent contractor, except pursuant to the express terms of any written Contract which is described on Schedule 7.10A or as otherwise described on Schedule 7.10A under any oral Contract, or except in the case of a promotion, in which case the increase may not be to an amount in excess of the top of the range of the position to which the employee has been promoted. 37. Title to, Condition and Sufficiency of Assets. 38. Owned Properties. Schedule 7.8A sets forth the address of all Owned Real Property, together with a true, correct and complete legal description of the land for each Owned Real Property. With respect to each parcel of Owned Real Property: (i) the Company has good and marketable fee simple title to such parcel, free and clear of all Liens as of the Closing Date, except Permitted Liens; (ii) except as set forth in Schedule 7.8A, 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 (iii) there are no outstanding options or rights of first refusal to purchase such parcel or any portion thereof or interest therein. 39. Leased Properties. Schedule 7.8B sets forth the address and a list of all leases, subleases, licenses, concessions and other agreements (written or oral) (collectively, the Leases") for all Leased Real Property. The Company has furnished to the Parent true, correct and complete copies of each written Lease (including all amendments, extensions, renewals, guaranties and other documents with respect thereto), and in the case of any oral Leases a written summary of the basic terms thereof. With respect to each Lease: (i) such Lease is in full force and effect; (ii) subject to obtaining any Consent described on Schedule 7.4, the consummation of the Closing Transactions will not cause a breach or default under such Lease or otherwise cause such Lease to cease to be in full force and effect on substantially the same terms as are presently in effect; (iii) the Company is not in breach or default in any material respect under, and no event has occurred which, with notice and/or lapse of time, would constitute such a 24 breach or default of the Company or permit lessor's unilateral termination, modification or acceleration of, such Lease; (iv) to the Company's Knowledge, no other party to such Lease is in breach or default in any material respect under such Lease, and no event has occurred which, with notice and/or lapse of time, would constitute such a breach or default or permit the Company's unilateral termination, modification or acceleration of such Lease; (v) the Company has not (and, to the Company's Knowledge, no other party to such Lease has) repudiated any provision thereof; (vi) there are no disputes, oral agreements, or forbearances in effect as to such Lease; (vii) such Lease has not been modified in any respect, except to the extent that such modifications are disclosed by the documents delivered to Acquisition; and (viii) the Company has not assigned, transferred, conveyed, mortgaged, deeded in trust or caused any Lien (other than any Permitted Lien) to exist with respect to any interest of the Company in such Lease, except for such Liens which shall be satisfied or released on or before the Closing Date. 40. Leasehold Improvements. Except as set forth in Schedule 7.8C, the Company has good title to the Leasehold Improvements, which shall be free and clear of all Liens as of the Closing Date, except Permitted Liens. 41. Real Property Used in The Business. Except as set forth in Schedule 7.8D, the Owned Real Property, Leased Real Property and Leasehold Improvements (collectively, the Real Property") include all of the real property used by the Company in the operation of the Business. 42. No Proceedings. There is no proceeding in eminent domain or any similar proceeding pending, or (to the Company's Knowledge) threatened, affecting the Company's interest in any Owned Real Property or Leased Real Property. There exists no writ, injunction, decree, order or judgment outstanding, nor any litigation, pending, or (to the Company's Knowledge) threatened, relating to the ownership, lease, use, occupancy or operation by the Company of any Owned Real Property or Leased Real Property. 43. Current Use. Except as set forth on Schedule 7.8F, to the Company's Knowledge: (i) the current use by the Company of the Real Property does not violate in any material respect any Legal Requirement, instrument of record or agreement affecting any Owned Real Property or Leased Real Property, and (ii) there is no violation in any material respect of any applicable covenant, condition, restriction, easement or agreement, in each case in any manner which could reasonably be likely to have a Material Adverse Effect. 44. Condition and Operation of Improvements. To the Company's knowledge, as to each parcel of Owned Real Property and, to the Company's Knowledge, as to each parcel of Leased Real Property: (i) all components of all buildings, fixtures and other improvements included upon or within such Owned Real Property or Leased Real Property and the Leasehold Improvements (the Improvements"), are in reasonably adequate condition to use, occupy or operate such facilities in the ordinary course of the Company's business, and there are no facts or conditions affecting any of the Improvements which would, individually or in the aggregate, interfere in any significant respect with the use, occupancy or operation thereof in the ordinary course of the Company's business and (ii) there are no material structural deficiencies in any Improvements. 45. Ownership of Assets. Other than with respect to the Real Property (which is addressed above), except as set forth on Schedule 7.8H, the Company owns good title in and to, or a valid leasehold interest in, all of the assets (as defined in Section 7.8(i) below), free and clear of all Liens (other than Permitted Liens). 46. Condition of the Assets. Other than with respect to the Real Property (which is addressed above), the Company's assets (other than assets, if any, that are not necessary for or material to the business or operation of the Company) are in a condition which is reasonably sufficient for the conduct of the business and operations of the Company in the ordinary course and there are no known latent defects with respect thereto. The assets include all non- affixed machinery, equipment and other tangible assets and property interests, intangible assets and other assets, rights and properties reasonably necessary for or material to the conduct of the business and operation of the Company as currently conducted. 25 47. Taxes. Except as set forth in Schedule 7.9 for each clause in this Section 7.9: the Company has timely filed all federal, state, local and foreign income, information and other Tax Returns which are required to be filed by it with respect to Taxes; all such Tax Returns have been prepared in compliance with all applicable Legal Requirements and are true, complete and accurate in all respects; all Taxes imposed upon the Company or upon any of the assets, income or franchises of the Company have been timely paid (or are being contested in good faith, in which case the Company has disclosed the same to Parent in writing) or, if not yet due and payable, did not, as of the date of the Latest Balance Sheet, exceed the reserve for Tax liability set forth on the Latest Balance Sheet, and do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the practice adopted by the Company in preparing its Financial Statements; the Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party; the Company has delivered to Parent correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by the Company since March 31, 1992; the Company has disclosed on such Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code; there are no actual or proposed Tax deficiencies, assessments or adjustments with respect to the Company or any assets or operations of the Company; no consent has been given with respect to the Company to extend the time in which any Tax may be assessed or collected by any Taxing authority; the Company has not extended the date on which any Tax Return was or is to be filed; there are no ongoing or pending Tax audits by any Taxing authority against the Company; the Company is not and, since November 4, 1988, has not been a member of an affiliated group (as defined in Section 1504(a) of the Tax Code) which files a consolidated return; since July 21, 1993, no material written claim has ever been received by the Company from a Taxing authority in a jurisdiction where the Company does not pay Taxes or file Tax Returns to the effect that the Company is or may be subject to Taxes assessed by such jurisdiction; the Company is not party to or bound by any agreement relating to the allocation or payment of Taxes with any Person who, to the Company's knowledge, has any current or potential contractual or other obligation to indemnify any other Person with Taxes; the Company has not made any payments, and is not and shall not become obligated (under any contract entered into on or before the Closing Date) to make any payments, that shall be non-deductible under Section 280G of the Code (or any corresponding provision of state, local or foreign income Tax law); and the Company will not be required (A) as a result of a change in method of accounting for a taxable year ending on or prior to the Closing Date, to include any adjustment in taxable income for any taxable year or portion thereof beginning after the Closing Date, (B) as a result of any closing agreement," as described in Section 7121 of the Code (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 year or portion thereof beginning after the Closing Date or (C) as a result of any deferred intercompany gain described in Treasury Regulation Sections 1.1502-13 or any excess loss account described in Treasury Regulation Sections 1.1502-19 (or any corresponding or similar provision or administrative rule of federal, state, local or foreign income tax law), to include any item of income in taxable income for any taxable year or portion thereof beginning after the Closing Date. 48. Contracts and Commitments. 49. Listing. Except for the Transaction Documents, any Contract described on Schedule 7.10A and any Excludable Contract, the Company is not a party to or bound by, and the Company is not subject to, any Contract, including any: 3. collective bargaining agreement or contract with any labor union or any bonus, pension, profit sharing, retirement or any other form of deferred compensation plan or any hospitalization insurance or similar plan or practice; 4. contract for the employment or engagement of any individual employee or other Person (including as an independent contractor or on a consulting basis) other than at the will of the Company, or any agreement to provide severance benefits upon any termination of employment or other engagement; 26 5. agreement, indenture or other Contract placing a Lien (other than any Permitted Lien) on any asset; 6. agreement with respect to the lending or investing of funds by the Company; 7. affiliation, license or royalty agreement; 8. guaranty of any obligation of any other Person, other than endorsements made for collection made in the ordinary course of business; 9. sales representation agreement; 10. agreement with any rating service or intellectual property licensing organization; 11. lease or agreement under which it is lessee of, or holds or operates, any personal property owned by any other party calling for payments in excess of $25,000 annually or entered into outside of the ordinary course of business; 12. lease or agreement under which it is lessor of or permits any third party to hold or operate any property, real or personal, owned or controlled by it; 13. agreement, contract or understanding pursuant to which the Company subcontracts work to third parties; 14. Contract relating to environmental, health or safety matters, including any relating to the treatment, storage, disposal, or handling of toxic or otherwise hazardous materials, substances or wastes; or 15. other agreement material to the business or operation of the Company, whether or not entered into in the ordinary course of business. 1. Absence of Breach, Cancellation or Repudiation. Except for any Leases (the breach, cancellation or repudiation of which is addressed in Section 7.8(d)), each of the items which is described or required to be described on Schedule 7.10A is in full force and effect; no item which is described or required to be described on Schedule 7.10A has been breached, cancelled or repudiated by the Company or (to the Company's Knowledge) by any other party thereto; no such other party has indicated in writing or orally to the Company that it will stop or decrease the rate of business done with the Company or that it desires to renegotiate its arrangements with the Company; the Company has performed all material obligations required to be performed by it in connection with the items which are described or required to be described on Schedule 7.10A and is not in receipt of any claim of default under any such item; and the Company has no present expectation or intention of not fully performing any obligation pursuant to any item which is described or required to be described on Schedule 7.10A. 2. Copies. The Company has furnished to the Parent access to a true and correct copies of all written contracts and other items which are described or required to be described on Schedule 7.10A, in each case together with all amendments, waivers or other changes thereto. 3. Proprietary Rights. 27 4. Listing. Schedule 7.11A sets forth a complete and correct list of: (i) all registered Proprietary Rights and all pending applications for registration of Proprietary Rights owned, filed or used by the Company and (ii) all other licenses or similar agreements or arrangements to which the Company is a party either as licensee or licensor for the Proprietary Rights. 5. Ownership; Infringement. Except as set forth on Schedule 7.11B, (i) the Company owns and possesses all right, title and interest in and to, or has a valid and enforceable right to use, each of the registered Proprietary Rights described or required to be described on Schedule 7.11A, free and clear of all Liens (other than Permitted Liens), and no claim by any third party contesting the validity, enforceability, use or ownership of any of the foregoing has been made since July 21, 1993, is currently outstanding or, to the Company's Knowledge, is threatened, (ii) no loss or expiration of any Proprietary Right of any such type or group of such Proprietary Rights is pending, reasonably foreseeable or, to the Company's Knowledge, threatened, (iii) the Company has not received any notice of, nor is the Company aware of any facts which indicate a likelihood of, any infringement or misappropriation by, or any conflict with, any third party with respect to any such Proprietary Right, including any demand or request that the Company license rights from a third party, (iv) the Company has not knowingly infringed, misappropriated or otherwise conflicted with any rights of any third party and the Company is not aware of any infringement, misappropriation or conflict which will occur as a result of the continued operation of the Company's business as currently conducted, and (vi) to the Company's Knowledge, the Proprietary Rights described or required to be described on Schedule 7.11A have not been infringed, misappropriated or conflicted by any third party. 6. Litigation; Proceedings. Except as set forth in Schedule 7.12 there are no actions, suits, proceedings, orders, judgments, decrees or investigations pending or threatened against or affecting the Company at law or in equity, or before or by any Governmental Entity, and there is no known basis for any of the foregoing. 7. Brokerage. Following the Closing, there will be no claims for brokerage commissions, finders' fees or similar compensation for which the Company shall be liable in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of the Company. 8. Governmental Licenses and Permits. Schedule 7.14 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 other similar rights (collectively, the Authorizations"), owned or possessed by the Company or used by the Company in the conduct of its business. The Company owns or possesses all right, title and interest in and to all of the Authorizations which are necessary to conduct its business as currently conducted. No loss or expiration of any Authorization is pending, reasonably foreseeable or, to the Company's Knowledge, threatened (including as a result of the transactions contemplated by this Agreement). 9. Employees. Except as set forth in Schedule 7.15, to the Company's Knowledge, no key executive employee and no group of employees or independent contractors of the Company has any plans to terminate his, her or its employment or relationship as an independent contractor with the Company. The Company has complied with all material applicable Legal Requirements relating to the employment of personnel and labor, including provisions thereof relating to wages, hours, equal opportunity, collective bargaining and the payment of social security and other taxes, the Worker Adjustment and Retraining Act (other than in connection with the transactions contemplated herein), and the Immigration Reform and Control Act of 1986. Since July 21, 1993, the Company has not experienced any strike, unfair labor practice claim or other material employee or labor dispute except as set forth in Schedule 7.15. The Company has not engaged in any unfair labor practice. To the Company's Knowledge, there is no organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of the Company. Schedule 7.15 sets forth the name and the annual or, as the case may be, hourly rate of compensation (including salary, bonuses and commissions) as of the date of this Agreement for each Person engaged by the Company (including independent contractors) who received 28 in calendar 1995 or who will receive in calendar 1996 taxable compensation from the Company in excess of $50,000 per year. 10. Employee Benefit Plans. Except as set forth on Schedule 7.16, the Company has no obligation to contribute to (or any other liability, including current or potential withdrawal liability, with respect to) (a) any multiemployer plan" (as that term is defined in Section 3(37) of ERISA), (b) any plan or arrangement, whether or not terminated, which provides medical, health, life insurance or other welfare-type benefits for current employees or current or future retired or terminated employees (except for limited continued medical benefit coverage required to be provided under Section 4980B of the Tax Code or as required under applicable state law), (c) any employee plan which is a defined benefit plan" (as that term is defined in Section 3(35) of ERISA), whether or not terminated, or (d) any employee plan which is defined contribution plan" (as that term is defined in Section 3(34) of ERISA), whether or not terminated. All such plans set forth on Schedule 7.16 shall be referred to herein collectively as the Plans". All Plans (and related trusts and insurance contracts) comply in form and in operation in all material respects with the applicable requirements of ERISA and the Tax Code. All required reports and descriptions (including Form 5500 Annual Reports, summary annual reports, PBGC-1s and summary plan descriptions) with respect to all Plans have been properly filed with the appropriate government agency or distributed to participants, and the Company has complied with the requirements of Section 4980B of the Tax Code. With respect to each Plan, all contributions, premiums or payments which are due on or before the Closing Date have been paid to such Plan. The assets of each Plan which is a defined benefit or defined contribution Plan exceed the liabilities accrued under each such Plan as of the Closing Date, determined as though the Plan was terminated on the Closing Date, or in the event the liabilities exceed the assets, the shortfall is recorded on the Latest Balance Sheet. The Company has not incurred any liability to the Pension Benefit Guaranty Corporation ( PBGC"), the Internal Revenue Service, any multiemployer plan or otherwise with respect to any employee pension benefit plan or with respect to any employee pension benefit plan currently or previously maintained by members of the controlled group of companies (as defined in Sections 414 of the Tax Code) that includes the Company (the Controlled Group") that has not been satisfied in full, and no condition exists that presents a material risk to the Company or any member of the Controlled Group of incurring such a liability, other than liability for premiums due the PBGC. With respect to any Plan that is a defined benefit plan" (as defined above) that has been frozen, notice has been provided as specified in and in accordance with Section 204(h) of ERISA. 11. Affiliate Transactions. Other than as described on Schedule 7.17, no Insider (a) is a party to any agreement, contract, commitment or transaction with the Company or which pertains to the business or operation of the Company (other than (i) in such Insider's capacity as an employee of the Company, the compensation for which is reflected on Schedule 7.17, and (ii) in connection with the sale of stock forms by the Company to such Insider in the ordinary course of business on commercially reasonable terms), or (b) has any interest in any asset of the Company. 12. Compliance with Laws. Except as set forth on Schedules 7.18 and 7.19, the Company and, to the Company's Knowledge, each of its independent contractors, agents and employees have complied with all applicable Legal Requirements which affect the business or operations of the Company or any assets of the Company (except Real Property, as to which compliance with laws is addressed in Section 7.8(f))and to which the Company is subject, and no claim has been filed against the Company since July 21, 1993 alleging a violation of any such Legal Requirement. Except as set forth on Schedules 7.18 and 7.19, the Company is not now subject (nor has the Company been subject since July 21, 1993) to any investigation, penalty assessment, or audit (in each case of which the Company has been made or became aware) by any Governmental Entity or to any other allegation that the Company (including any agent, representative or broker acting on behalf of the Company) violated the regulations of any such Governmental Entity or made a material false statement or omission to any Governmental Entity. 13. Environmental Matters. Except as set forth on Schedule 7.19: 14. Compliance Generally. To the Company's Knowledge, the Company has complied and is in material compliance with all Environmental and Safety Requirements. 29 15. Permits. To the Company's Knowledge, the Company has obtained and is in material compliance with, all permits, licenses and other authorizations that are required pursuant to Environmental and Safety Requirements for the occupation of its facilities and the operation of its business (all of which are listed on Schedule 7.19 hereto). 16. Claims. The Company has not received any claim, complaint, citation, report or other notice regarding any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, arising under Environmental and Safety Requirements. 17. Storage Tanks, Asbestos, PCBs, Disposal Areas. To the Company's Knowledge, no above-ground or underground storage tank, asbestos in any form or condition, polychlorinated biphenyls (PCBs) above 50 parts per million in electrical equipment owned by the Company, or landfill, surface or other disposal areas exists at any property currently or formerly owned, leased operated or occupied by the Company (although a comprehensive analysis for asbestos containing material has not been undertaken). 18. Hazardous Substance Liabilities. To the Company's Knowledge, the Company has not stored, disposed of, arranged for or permitted the disposal of, transported, handled or released any substance, including without limitation any hazardous substance, pollutant, contaminant or waste, or owned or operated any facility or property (and no such facility or property is contaminated by any such substance), in a fashion not otherwise in material compliance with Environmental and Safety Requirements so as to give rise to liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) of the Company pursuant to the Environmental and Safety Requirements, including without limitation any liability for response costs, corrective action, natural resources damages, personal injury, property damage or attorneys fees. 19. Other Environmental Liabilities. To the Company's Knowledge, 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 material investigatory, remedial or corrective obligations pursuant to Environmental and Safety Requirements, or give rise to any other material liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental and Safety Requirements, including any Environmental and Safety Requirement relating to onsite or offsite releases or threatened releases of hazardous or otherwise regulated materials, substances or wastes, personal injury, property damage or natural resources damage. 20. Transaction-Triggered Requirements. To the Company's Knowledge, neither the execution and delivery of this Agreement nor the consummation of the Closing Transactions imposes any obligations for site investigation or cleanup, or notification to or consent of a Governmental Entity or any other Person, pursuant to any transaction-triggered" Environmental and Safety Requirement. 21. Assumption of Liabilities. To the Company's Knowledge, the Company has not, either expressly or by operation of law, assumed or undertaken any liability or corrective or remedial obligation of any other Person relating to Environmental and Safety Requirements. 22. Environmental Liens. To the Company's Knowledge, no Environmental Lien has attached to any property owned, leased or operated by the Company arising out of any action or omission of the Company or any other Person. 23. Absence of Undisclosed Liabilities. As of the Closing, the Company will not have any known obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise, or whether due or to become due, regardless of when 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 (a) obligations under contracts or commitments described on Schedule 7.10A or under contracts or commitments which are not required to be disclosed thereon (but not liabilities for breaches thereof), (b) liabilities reflected on the Latest Balance Sheet, (c) liabilities which have arisen after the date of the Latest Balance Sheet in the ordinary course of business (none of which is a material and uninsured liability for breach of contract, breach of warranty, tort, infringement, claim or lawsuit), and (d) obligations or liabilities otherwise disclosed on Schedule 7.20. 30 24. Disclosure. With respect to the Company, neither this Agreement, nor any of the Schedules or Exhibits hereto, contains any untrue statement of a material fact or, when considered as a whole, omits a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading. 25. Sierra Assets. Schedule 7.22A lists all of the assets (having a value greater than $5,000) which have been or shall be contributed to Sierra by the Company. Schedule 7.22B lists all other assets (having a value greater than $5,000) of Sierra not described in Schedule 7.22A. ARTICLE 1. REPRESENTATIONS AND WARRANTIES OF PARENT As a material inducement to the Company to enter into this Agreement, Parent hereby makes the representations and warranties set forth in this Article VIII. 26. Organization and Power. Parent (i) is a corporation which is validly existing and in good standing (or has comparable active status) under the laws of the State of Delaware, (ii) shall own as of the Closing all of the outstanding capital stock of Acquisition, and (iii) is qualified to do business in every jurisdiction in which the execution, delivery and performance of its obligations under this Agreement require it to be so qualified. Parent has full power and authority to execute, deliver and perform its obligations under this Agreement and the other Transaction Documents to which it is a party. Acquisition will be, at the time of Closing, (i) a corporation which has been duly organized, is validly existing and is in active status under the laws of the State of Wisconsin; and (ii) qualified to do business in every jurisdiction which the performance of its obligations described in this Agreement require it to be so qualified. 27. Authorization of Transaction. Parent has full power and authority to execute and deliver this Agreement and all other Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder. No other proceedings or actions on the part of Parent are necessary to approve and authorize Parent's execution and delivery of this Agreement or any other Transaction Documents to which it is a party or the performance of Parent's obligations hereunder or thereunder. This Agreement constitutes, and each of the other Transaction Documents to which Parent is a party will when executed constitute, a valid and binding obligation of Parent, enforceable in accordance with their terms, except as enforceability hereof or thereof may be limited by bankruptcy, insolvency or other laws affecting creditors' rights generally and limitations on the availability of equitable remedies. Acquisition will have full power and authority to execute and deliver any Transaction Documents to which it may be a party and to perform its obligations thereunder. Any such Transaction Documents to which Acquisition may be a party will when executed constitute a valid and binding obligation of Acquisition, enforceable against Acquisition in accordance with its terms, except as enforceability thereof may be limited by bankruptcy, insolvency or other laws affecting creditors' rights generally and limitations on the availability or equitable remedies. 28. Absence of Conflicts. Except under the HSR Act, neither the execution, delivery and performance of this Agreement or any other Transaction Document by Parent or Acquisition, as the case may be, nor the consummation by Parent or Acquisition, as the case may be, of the transactions contemplated hereby or thereby, (a) does or will (i) materially conflict with or result in a breach of any of the provisions of, (ii) constitute a material default under, (iii) result in the violation of, (iv) give any third party the right to terminate or to accelerate any obligation under, or (v) require any consent, order, approval, authorization or other action of, or any filing with or notice to, any Governmental Entity or other Person, in each case under the certificate of incorporation or by-laws of Parent or Acquisition, as the case may be, or under the provisions of any indenture, mortgage, lease, loan agreement or other agreement or instrument to which Parent or Acquisition is bound or by 31 which either Parent or Acquisition or any of their respective assets are affected, or any Legal Requirement to which Parent or Acquisition or any of their respective assets is subject, or (b) without limiting the foregoing, require any Consent of any Governmental Entity or any other Person other than as described on Schedule 8.3. 29. 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 Parent or Acquisition. 30. Litigation. There are no actions, suits, proceedings, orders or investigations pending (or, to Parent's Knowledge, threatened) against or affecting Parent or Acquisition at law or in equity, or before or by any Governmental Entity, which could reasonably be expected to adversely affect Parent's performance under this Agreement or the other agreements contemplated hereby to which Parent is a party or the consummation of the transactions contemplated hereby or thereby. 31. Disclosure. With respect to Parent and Acquisition, neither this Agreement nor any of the Schedules or Exhibits hereto, contains any untrue statement of a material fact or, when considered as a whole, omits a material fact necessary to make the statements contained herein, in light of the circumstances in which they were made, not misleading. ARTICLE 1. TERMINATION 32. Termination. This Agreement may be terminated at any time prior to the Closing: 33. by mutual written agreement of the Company and Parent; 34. by either the Company or Parent if (i) the transactions contemplated by this Agreement have not been consummated by February 15, 1997 (the Termination Date") or (ii) there has been a material misrepresentation or breach on the part of the other party in the representations and warranties set forth in this Agreement, or (iii) events have occurred which have made it impossible to satisfy a condition precedent to the terminating party's obligations to consummate the transactions contemplated hereby (unless such terminating party's willful breach of this Agreement has caused the condition to be unsatisfied); 35. by the Company, by written notice to Parent, on any date determined for the Closing in accordance with Section 5.1(a) if each condition set forth in Section 5.2 and Section 5.3 has been satisfied (or will be satisfied by the delivery of documents or actions taken by the parties at the Closing) or waived in writing on such date and Parent has nonetheless refused to consummate the Closing Transactions; and 36. by Parent, by written notice to the Company, on any date determined for the Closing in accordance with Section 5.1(a) if each condition set forth in Section 5.2 and Section 5.3 has been satisfied (or will be satisfied by the delivery of documents or actions taken by the parties at the Closing) or waived in writing on such date and the Company has nonetheless refused to consummate the Closing Transactions. Notwithstanding the foregoing, (i) Parent may not rely on the failure of any condition precedent set forth in Section 5.2 to be satisfied if such failure was caused by Parent's failure to act in good faith or a breach of or failure to perform any of its representations, warranties, covenants or other obligations in accordance with the terms of this Agreement and (ii) the Company may not rely on the failure of any condition precedent set forth in Section 5.3 to be satisfied if such failure was caused by the Company's failure to act in good faith or a breach of or failure to perform any of its representations, warranties, covenants or other obligations in accordance with the terms of this Agreement. 32 37. Effect of Termination. If this Agreement is terminated as provided in Section 9.1, then this Agreement will forthwith become void and there will be no liability on the part of any Party to any other Party or any other Person in respect thereof; provided that 38. the obligations of the parties described in Sections 6.6(d), 9.2(d), 10.1, 10.2 and 10.5 will survive any such termination, 39. no such termination will relieve Parent from liability for any misrepresentation or breach of any representation, warranty, covenant or agreement set forth in this Agreement prior to such termination, and 40. no such termination of this Agreement will relieve the Company from liability for any misrepresentation or breach of any representation, warranty, covenant or agreement set forth in this Agreement prior to such termination. 41. if this Agreement is terminated pursuant to Section 9.1(c) or 9.1(d) hereof based on the failure of the condition specified in Section 5.2(i) hereof, the Parent shall promptly pay to the Company all Transaction Costs incurred by the Company, provided that the maximum amount payable by the Parent pursuant to this Section 9.2(d) of this Agreement shall be $200,000.00. ARTICLE 1. ADDITIONAL AGREEMENTS 42. Press Releases and Announcements. Except for any public disclosure which any Party in good faith believes is required by any Legal Requirement (in which case, if practicable, the disclosing Party will give the other Parties an opportunity to review and comment upon such disclosure before it is made): 43. prior to the Closing, no press releases related to this Agreement or any Closing Transaction will be issued or made without the mutual approval of the Company and Parent; and 44. after the Closing, the Investors will not make any press release or other public announcement of or with respect to the Company, the Surviving Corporation, this Agreement or any Closing Transaction without the Surviving Corporation's consent. 45. Expenses. Except as otherwise expressly provided herein, the Company, Parent and Acquisition each will pay all of their own fees, costs and expenses (including fees, costs and expenses of legal counsel, investment bankers, accountants, brokers or other representatives and consultants and appraisal fees, costs and expenses) incurred in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Transaction Documents, the performance of its obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby. 46. Directors, Officers and Fiduciary Indemnification. For a period of at least eight (8) years after the Effective Time, the Parent will, and will cause the Surviving Corporation to, maintain in effect (which in each case shall cover the same matters and be on terms (including without limitation, limits of liability in insurance policies) no less favorable than such articles of incorporation, bylaws or agreements and insurance policies of the Company as are in effect at the Effective Time): 33 47. bylaw provisions, articles of incorporation provisions, or other agreements indemnifying present or former directors and officers of the Company and its subsidiaries who serve or served as such at or prior to the Effective Time and former, present or future fiduciaries of any employee benefit plan of the Company who serve or served as such at or prior to the Effective Time; and 48. policies of insurance: (i) insuring such officers and directors of the Company and its subsidiaries against certain matters which arose at or prior to the Effective Time; and (ii) insuring such fiduciaries against certain matters which arose at or prior to, or which arise after, the Effective Time. 49. Tax Treatment. The Parties agree that for federal and state tax purposes they will treat the Merger as a sale of the Common Stock by the Stockholders to the Parent. 50. Attorneys' Fees. In the event of litigation between the Parties to enforce any provision of this Agreement, or for breach thereof, the Party obtaining a final nonappealable judgment in its favor shall be entitled to an award of its reasonable attorneys' fees and other expenses incurred in prosecuting or defending such action, as the case may be. 51. Specific Performance. The Parties agree that the assets and business of the Company as a going concern constitute unique property. There is no adequate remedy at law for the damage which any Party might sustain for failure of the other Parties to consummate the transactions contemplated by this Agreement, and accordingly, each Party shall be entitled, at its option, to the remedy of specific performance to enforce the consummation of the transactions described in this Agreement. 52. Severance Policy. Any Person who is an employee of the Company immediately prior to the Effective Time and whose employment with the Surviving Corporation is terminated by the Surviving Corporation on or prior to December 31, 1997 shall receive severance benefits from the Surviving Corporation which shall be not less than those calculated in accordance with the policies of the Company as in effect on December 1, 1996 and described in the Schedules attached to this Agreement. ARTICLE 1. MISCELLANEOUS 53. Non-Survival of Representations and Warranties. The representations and warranties made in this Agreement shall terminate at the Effective Time and shall have no further force or effect, and shall not be relied upon by any person, in any manner or for any reason, after the Effective Time and the Parties shall have no liability or obligation of any kind with respect to such representations and warranties from and after the Effective Time. 54. Amendment and Waiver. This Agreement may only be amended if such amendment is set forth in writing executed by the Company, the Parent, and the Surviving Corporation (if so existing at such time) before or after the Approval Date, but after the Approval Date, no amendment may be made which materially adversely affects the Stockholders without prior approval of the requisite Stockholders. No waiver of any provision of this Agreement shall be binding unless such waiver is in writing and signed by the party against whom such waiver is to be enforced. No failure by any Party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof will constitute a waiver of any such breach or any other covenant, duty, agreement or condition. 55. 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 or delivered by express courier service or telephonic facsimile transmission. Notices, demands and communications 34 to the Company, Parent or Surviving Corporation will, unless another address is specified in writing, be sent to the address indicated below: to Company prior to Closing: Shade/Allied Inc. P.O. Box 19730 Green Bay, WI 54307-9730 Attention: Robert M. Wilson Fax No. (414) 436-2365 with a copy (which copy will not constitute notice to Company) to: Quarles & Brady 411 East Wisconsin Avenue Milwaukee, WI 53202-4497 Attention: Patrick M. Ryan Fax. No.: (414) 271-3552 to the Parent and the Surviving Corporation: American Pad & Paper Company of Delaware, Inc. 17304 Preston Road, Suite 700 Dallas, TX 75252 Attention: Kevin W. McAleer Fax No.: (972) 733-6260 with copies (which copies will not constitute notice to Parent and Surviving Corporation) to: Kirkland & Ellis 200 East Randolph Drive Chicago, IL 60601 Attention: James L. Learner Fax No.: (312) 861-2200 56. Binding Agreement; Assignment. This Agreement and all of the provisions hereof will be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns; provided that (i) prior to the Effective Time, neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by the Company without the prior written consent of Parent (which consent will not be unreasonably withheld) and (ii) without the prior written consent of the Company (which consent will not be unreasonably withheld), neither this Agreement nor any 35 of the rights, interests or obligations hereunder may be assigned by Parent prior to the Closing; provided that, Parent may assign its rights under this Agreement and any of the provisions hereof (but not its obligations) to any affiliate of Parent (including, without limitation, Acquisition) or to any lenders providing financing to Parent (or their permitted assigns) without the consent of the Company. 57. Severability. Whenever possible, each provision of this Agreement will be interpreted in such a 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. 58. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent. In the event an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the parties, and no presumption or burden of proof will arise favoring or disfavoring any Person by virtue of the authorship of any of the provisions of this Agreement. 59. Captions. The captions 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. 60. Entire Agreement. This Agreement and the documents referred to herein 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. 61. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which taken together will constitute one and the same instrument. 62. Governing Law. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAW OF THE STATE OF WISCONSIN, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF WISCONSIN OR ANY OTHER JURISDICTIONS) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTIONS OTHER THAN THE STATE OF WISCONSIN. 63. Parties in Interest. 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, provided that the provisions of Sections 10.3 and 10.7 of this Agreement may be enforced by the Company, the Stockholders or any affected director, officer, fiduciary or employee of the Company or of the Surviving Corporation. 64. Other Definitional Provisions. The terms hereof," herein" and hereunder" and terms of similar import will refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, clause, Exhibit and Schedule references contained in this Agreement are references to Sections, clauses, Exhibits and Schedules in or attached to this Agreement, unless otherwise specified. Each defined term used in this Agreement has a comparable meaning when used in its plural or singular form. Each gender-specific term used in this Agreement has a comparable meaning whether used in a masculine, feminine or 36 gender-neutral form. Whenever the term including" is used in this Agreement (whether or not that term is followed by the phrase but not limited to" or without limitation" or words of similar effect) in connection with a listing of items within a particular classification, that listing will be interpreted to be illustrative only and will not be interpreted as a limitation on, or an exclusive listing of, the items within that classification. Each reference in this Agreement to any Legal Requirement will be deemed to include such Legal Requirement as it hereafter may be amended, supplemented or modified from time to time and any successor thereto, unless such treatment would be contrary to the express terms of this Agreement. Any term used but not defined in this Agreement shall have the meaning given to such term in Exhibit A to this Agreement, which Exhibit A is hereby incorporated herein by reference. * * * * 37 IN WITNESS WHEREOF, the parties have executed this Agreement and Plan of Merger as of the date first written above. SHADE/ALLIED INC. ------------------------------------- Harold L. Ellsworth President and Chief Executive Officer AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. ------------------------------------- Kevin W. McAleer Chief Financial Officer 38 Exhibit A DEFINED TERMS As used in the Agreement and Plan of Merger to which this Exhibit A is attached, the following terms will have the following respective meanings: "Common Stock" means the Company's common stock, par value $.01 per share. "Consent" means any consent, order, approval, authorization or other action of, or any filing with or notice to or other action with respect to, any Governmental Entity or any other Person which is required for any of the execution, delivery or performance of this Agreement or any other Transaction Document, the consummation of any Closing Transaction or other transaction contemplated hereby or thereby, or the conduct of the business or operation of the Company after the Effective Time, whether such requirement arises pursuant to any Legal Requirement or Contract, including any of the foregoing which is required in order to prevent a breach of or a default under or a termination or modification of any Contract, which right of breach, default, termination or modification results from the consummation of the Closing Transactions. "Contract" means any oral or written agreement, instrument, document, lease, employee benefit or welfare plan or other business or commercial arrangement (in each case, including any extension, renewal, amendment or other modification thereof) to which the Company is a party or by which it is bound or to which it is subject or which pertains to the business or properties of the Company. "Environmental and Safety Requirements" means all Legal Requirements concerning public health and safety, worker health and safety, or pollution or protection of the environment, including all those relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous or otherwise regulated materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation. "Environmental Lien" means any Lien, either recorded or unrecorded, in favor of any Governmental Entity and relating to any liability arising under Environmental and Safety Requirements. "Excludable Contract" means any customer or supplier purchase order and any other Contract entered into in the ordinary course of business with a Person who is unrelated to the Company or any Insider and under which the Company has monetary or in kind obligations which in the aggregate do not exceed $10,000 (or equivalent value) so long as the termination of such Contract could not reasonably be expected to have a Material Adverse Effect. 39 "GAAP" means generally accepted accounting principles applied in a manner consistent with those principles applied in preparing the March 31, 1996 audited balance sheet of the Company. "Governmental Entity" means any government, agency, governmental department, commission, board, bureau, court, arbitration panel or instrumentality of the United States of America or any state or other political subdivision thereof (whether now or hereafter constituted and/or existing) and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Insider" means any officer or director (or similar official) or Stockholder of the Company, any affiliate or natural or adoptive member of the immediate family of any of the foregoing Persons, or any Person in which any of the foregoing Persons directly or indirectly owns any material beneficial interest. The immediate family" of any individual means such individual's (and such individual's present or former spouse's) grandparents, parents, spouse, siblings, children and grandchildren. "Knowledge" (and any derivation thereof, whether or not capitalized) means only the current, actual knowledge and awareness (and shall not include any deemed or constructive knowledge or awareness) of the individuals specified in clause (i) or (ii) below, as the case may be, (i) in the case of Acquisition and the Parent, Charles G. Hanson, III, Russell M. Gard and Gregory M. Benson, and (ii) in the case of the Company, Harold L. Ellsworth, James Haggerty, Robert E. Krueger, Robert Rupp, Pamela Swanson, Timothy Vanness, Robert M. Wilson and Glen S. Yurjevich. "Leasehold Improvements" means all buildings, fixtures and other improvements located on each Leased Real Property which are owned by the Company under the terms and conditions of the Lease for such Leased Real Property. "Leased Real Property" means all real property for which the Company has the right of use or occupancy pursuant to any leasehold, subleasehold, license, concession or other similar real property interest which are held by the Company. "Legal Requirement" means all federal, state, foreign and local laws, statutes, codes, rules, regulations, ordinances, judgments, orders, decrees and the like of any Governmental Entity, including common law. "Lien" means any mortgage, pledge, hypothecation, lien (statutory or otherwise), preference, priority, security agreement, easement, covenant, restriction or other encumbrance of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any lease having substantially the same effect as any of the foregoing and any assignment or deposit arrangement in the nature of a security device). "Mandatory Consent" means any Consent listed on Schedule 7.4 and identified with an asterisk. 40 "Material Adverse Effect" means a material adverse effect on: (i) business, operations, financial condition, prospects or results of operations of the Company, taken as a whole, other than any such matters that may arise as a result of the transactions described in this Agreement or the announcement of the transactions described in this Agreement; or (ii) on the ability of Stockholders and the Company to perform their material obligations under this Agreement or any other Transaction Document. "Options" means outstanding options to acquire Common Stock. "Owned Real Property" means all land and all buildings, fixtures and other improvements located thereon (including, without limitation, all electrical, mechanical, plumbing and other building systems; fire protection, security and surveillance systems; telecommunications, computer, wiring and cable installations; irrigation and other water distribution systems; and all landscaping), and all easements, rights of way, tenements, hereditaments, appurtenances, privileges and other rights with respect thereto which are owned by the Company. "Parties" means Parent and the Company "Permitted Liens" means (i) Liens for Taxes, assessments or government charges or levies not yet delinquent, (ii) statutory and contractual Liens granted by the Company to any landlord, lessor or licensor, (iii) Liens reflected in the Financial Statements, (iv) those Liens reflected on Schedule 7.8H as of Closing and (v) with respect to any Real Property, in addition to (i) - (iv), (A) zoning, entitlement, building and other land use and similar laws or regulations imposed by any Governmental Entity having jurisdiction over such Real Property which are not violated by the current use, occupancy or operation thereof and any agreements entered into with respect to the same but only to the extent copies of such agreements have been provided to Parent, (B) easements, covenants, conditions, restrictions and other similar matters of record affecting title to the Real Property which would not impair the use or occupancy of such Real Property in the operation of the Company's business and (C) such other Liens as may be designated on Schedule 7.8H. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or any Governmental Entity. "Proprietary Rights" means all of the following items owned by, issued to or licensed to, the Company, along with all income, royalties, damages and payments due or payable at the Closing or thereafter, including damages and payments for past, present or future infringements or misappropriations thereof, the right to sue and recover for past infringements or misappropriations thereof and any and all corresponding rights that, now or hereafter, may be secured throughout the world: patents, patent applications, patent disclosures and inventions (whether or not patentable and whether or not reduced to practice) and any reissue, continuation, continuation-in-part, division, revision, extension or reexamination thereof; trademarks, service marks, trade dress, logos, trade names and corporate names together with all goodwill associated therewith, copyrights registered or unregistered and copyrightable works; mask works; and all registrations, applications and renewals for any of the foregoing; trade secrets and confidential information (including ideas, know-how, research and development information, drawings, 41 specifications, designs, plans, proposals, technical data, financial, business and marketing plans, and customer and supplier lists and related information if known to the Company); computer software and software systems (including data, databases and related documentation); other proprietary rights; licenses or other agreements to or from third parties regarding the foregoing; and all copies and tangible embodiments of the foregoing (in whatever form or medium), in each case including the items set forth on Schedule 7.11A. "Stockholders" shall mean all holders of Common Stock, Preferred Stock, Options and Warrants. "Tax" (and, with correlative meaning, Taxes", Taxable" and Taxing") means any (A) 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 profits, environmental (including under Section 59A of the Tax Code), customs, duties, real property, real property gains, personal property, capital stock, social security, unemployment, disability, payroll, license, employee or other tax of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing; (B) liability of any corporation for the payment of any amounts of the type described in clause (A) arising as a result of being (or ceasing to be) a member of any affiliated group" (as that term is defined in Section 1504(a) of the Tax Code) (or being included in any Tax Return relating thereto); and (C) liability for the payment of any amounts of the type described in clause (A) or (B) as a result of any express or implied obligation to indemnify or otherwise assume or succeed to the liability of any other Person. "Tax Code" means the Internal Revenue Code of 1986, as amended (including, where applicable, the Internal Revenue Code of 1954, as amended). "Tax Return" means any return, declaration, report, claim for refund, information return or other document (including any related or supporting schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of Taxes of any Person or the administration of any Legal Requirement relating to any Taxes. "Transaction Documents" means the agreements and instruments delivered pursuant hereto or thereto. "Warrants" means outstanding warrants to acquire Common Stock. 42 Exhibit B CERTIFICATE OF MERGER EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANTS
STATE OF DESCRIPTION INCORPORATION ----------- ------------- Subsidiary of American Pad & Paper Company (Registrant) WR Acquisition, Inc. Delaware Subsidiary of WR Acquisition, Inc. (not a Registrant) American Pad & Paper Company of Delaware, Inc. Delaware Subsidiaries of American Pad & Paper Company of Delaware, Inc. Delaware Shade/Allied, Inc. Wisconsin Notepad Funding Corporation Delaware
EX-23.1 5 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (N0. 333-17617) of American Pad & Paper Company of our report dated February 18, 1997 appearing on page 43 of this Form 10-K. PRICE WATERHOUSE LLP Dallas, Texas March 27, 1997 EX-27.1 6 F.D.S. - AMERICAN PAD & PAPER COMPANY
5 0000005588 AMERICAN PAD & PAPER COMPANY 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,290 0 59,270 (2,216) 105,667 180,504 147,394 (14,304) 509,417 102,647 269,812 0 0 274 104,325 509,417 583,859 583,859 458,449 509,978 1,153 0 42,968 32,066 13,852 18,214 0 19,995 0 (1,781) (.06) (.06)
EX-27.2 7 F.D.S. - AMERICAN PAD & PAPER OF DELAWARE, INC.
5 0000817647 AMERICAN PAD & PAPER OF DELAWARE, INC. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,290 0 59,270 (2,216) 105,667 180,504 147,394 (14,304) 509,417 102,647 269,812 0 0 0 104,559 509,417 583,859 583,859 458,449 509,978 1,153 0 42,968 32,066 13,852 18,214 0 19,995 0 (1,781) 0 0
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