UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( x ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 333-8925
NATIONAL FIBERSTOK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2574778
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
5775 Peachtree Dunwoody Road 30342
Suite C-150 (Zip code)
Atlanta, Georgia
(Address of principal
executive offices)
<PAGE>
Registrant's telephone number, including area code: (404) 256-1123
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ( ) No ( x )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<PAGE>
<TABLE>
<CAPTION>
Outstanding as of
Class November 15, 1996
<S> <C>
Common Stock, $.01 par value 283,807 shares
</TABLE>
<PAGE>
<TABLE>
NATIONAL FIBERSTOK CORPORATION
FORM 10 - Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
INDEX
<CAPTION>
PART I. FINANCIAL INFORMATION Page Numbers
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1996 and
December 31, 1995 1
Condensed Statements of Operations for the three and
nine months ended September 30, 1996 and 1995 2
Condensed Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 3
Notes to Condensed Financial Statements
as of September 30, 1996 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
NATIONAL FIBERSTOK CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $4,277 $444
Accounts receivable 18,396 8,875
Inventories 11,698 5,592
Other 4,037 363
Total Current Assets 38,408 15,274
Property, plant and equipment, at cost 55,487 15,690
Less: Accumulated depreciation (7,862) (5,389)
Property, plant and
equipment, net 47,625 10,301
Other assets
Goodwill, net of accumulated amortization 24,986 8,146
Patents, net of accumulated amortization 18,925 -
Deferred financing costs, net of
accumulated amortization 5,355 589
Other 3,741 3,804
53,007 12,539
$139,040 $38,114
Liabilities and Stockholder's Equity
Current liabilities
Current portion of long-term debt $384 $2,105
Bank overdraft 2,385 2,354
Accounts payable 4,436 2,082
Accrued expenses and other 10,296 1,550
17,501 8,091
Noncurrent liabilities
Deferred income taxes 4,719 -
Other 1,695 1,884
6,414 1,884
Long-term debt
Long-term debt 102,345 9,847
Revolving line of credit - 7,050
Subordinated debt - 4,515
102,345 21,412
<PAGE>
Stockholder's equity
Common stock, $.01 par value 3 3
Additional paid-in capital 22,297 14,532
Accumulated deficit (9,520) (7,808)
12,780 6,727
$139,040 $38,114
Common shares outstanding 283,807 283,807
See notes to condensed financial statements.
</TABLE>
<PAGE>
NATIONAL FIBERSTOK CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $39,951 $19,295 $71,701 $53,122
Operating costs and expenses
Cost of sales 26,956 15,036 52,225 41,653
Selling and administrative 9,744 3,300 16,273 10,024
Total operating costs and
expenses 36,700 18,336 68,498 51,677
Operating income 3,251 959 3,203 1,445
Other expense (income)
Interest, net 3,273 803 4,673 2,389
Income (loss) before income taxes (22) 156 (1,470) (944)
Income tax expense (benefit) (8) - (555) -
Net income (loss) before
extraordinary item (14) 156 (915) (944)
Extraordinary loss on early
retirement of debt,
net of tax benefit
of $461 - - (798) -
Net income (loss) ($14) $156 ($1,713) ($944)
Per Share of Common Stock:
Net income (loss) before
extraordinary item ($0.05) $0.55 ($3.22) ($3.33)
Extraordinary item $0.00 $0.00 ($2.82) $0.00
Net income (loss)
($0.05) $0.55 ($6.04) ($3.33)
Dividends declared $0 $0 $0 $0
Average number of shares outstanding 283,807 283,807 283,807 283,807
<PAGE>
OTHER DATA:
Consistent with the Form S-4 filed with the Securities and Exchange Commission on October 17, 1996, the following financial
data has been disclosed.
EBITDA is provided because it is a measure of an issuer's ability to service its indebtedness commonly used by certain
investors. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not
be considered an alternative to net income as a measure of performance or to cash flow as a measure of liquidity.
EBITDA is defined as operating income, plus depreciation and amortization and reflects the elimination of non-cash charges
related to pension, deferred financing and change in vacation policy and the elimination of gain on disposal of equipment.
EBITDA $5,475 $1,775 $7,628 $3,920
See notes to condensed financial statements.
</TABLE>
<PAGE>
NATIONAL FIBERSTOK CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net loss ($1,713) ($897)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 4,718 2,694
Extraordinary loss on early retirement of debt, net
of income tax benefit 798 -
Imputed interest 61 85
Deferred income tax benefit (555) -
Net gain on disposal of property and equipment (238) (96)
Amortization of prepaid pension asset (119) (135)
Change in assets, liabilities and other 4,590 (768)
Net cash provided by operating activities 7,542 883
Cash flows from investing activities
Cash paid for business acquired, net of cash acquired (79,422) -
Proceeds from sale of assets 422 170
Purchases of property and equipment (1,957) (666)
Net cash used in investing activities (80,957) (496)
Cash flows from financing activities
Proceeds from issuance of long-term debt 100,000 -
Additional capital contribution 7,765 -
Payments on Term Loan A (7,400) (1,050)
Net (payments) borrowings on revolving line of credit (7,050) 500
Payments on other long-term debt (5,150) -
Payments on Term Loan B (4,500) -
Increase in deferred financing costs (3,963) -
Decrease in bank overdraft, net (2,354) -
Payments on capital leases (100) (30)
Net cash provided by (used in) financing activities 77,248 (580)
Net increase in cash 3,833 (193)
Cash, beginning of period 444 283
Cash, end of period $4,277 $90
See notes to condensed financial statements.
</TABLE>
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
Operating results for National Fiberstok Corporation (the "Company") for the
three- and nine-month periods ended September 30, 1996, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996.
NOTE 2: INVENTORIES
<TABLE>
The major classes of inventories were as follows (in thousands):
September 30, 1996 DECEMBER 31, 1995
<S> <C> <C>
Raw materials $ 6,295 $ 2,764
Work-in-process 1,446 969
Finished goods and customized
stock 3,957 1,859
$11,698 $5,592
</TABLE>
NOTE 3: ACQUISITION
On June 28, 1996, pursuant to a Stock Purchase Agreement, the Company acquired
all of the issued and outstanding capital stock of Transkrit Corporation and
subsidiaries ("Transkrit") for approximately $86.5 million plus transaction
costs. The acquisition has been accounted for using the purchase method of
accounting and accordingly, the results of operations of Transkrit have been
included in the statements of operations of the Company since June 29, 1996.
The excess of the consideration paid over the estimated fair value of net
assets acquired of approximately $17,000,000 has been recorded as goodwill and
is being amortized on the straight-line basis over 40 years. Subsequent to
the acquisition, Transkrit and all of its subsidiaries were merged into the
Company.
Concurrent with the consummation of the acquisition, the Company issued
$100,000,000 aggregate principal amount of unsecured 11 5/8% Senior Notes due
June 15, 2002 (the "Senior Notes"). Interest is payable semiannually
commencing December 15, 1996. In addition, DEC International, Inc. ("DEC"),
the Company's parent, made a capital contribution to the Company of
$7,800,000.
<PAGE>
The Company used the proceeds from the Senior Notes and DEC's capital
contribution to acquire the outstanding capital stock of Transkrit and to
repay $23,200,000 of existing long-term debt. As a result, the Company
recorded an extraordinary loss on early retirement of debt of $798,000 (net of
income tax benefit of $461,000) related to the payment of certain prepayment
penalties and unaccreted discount and the write-off of related unamortized
deferred finance costs.
<TABLE>
The following presents on an unaudited pro forma basis the Company's results of operations as though the acquisition and related
transactions had occurred on January 1, 1995 (in thousands):
For the Nine For the Nine
Month Period Ended Month Period Ended
September 30, 1996 September 30, 1995
<S> <C> <C>
Net sales $ 119,705 $ 124,377
Operating income 7,111 7,329
Net income (loss) (875) (606)
</TABLE>
NOTE 4: STOCK OPTION PLAN
DEC adopted the DEC International, Inc. 1996 Incentive Stock Incentive Plan
(the "1996 Plan") on June 28, 1996. The 1996 Plan is administered by the
Compensation Committee of the Board of Directors of DEC (the "Committee").
Under the 1996 Plan, the Committee may grant or award (a) DEC stock options
(which may be either incentive stock options ("ISOs"), within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or stock options
other than ISOs), (b) DEC stock appreciation rights granted in conjunction
with stock options or independently, (c) DEC restricted stock, (d) bonuses or
other compensation payable in DEC stock and/or (e) other DEC stock-based
awards to executive and other key salaried employees, including officers, as
well as consultants of the Company as designated by the Committee.
On July 1, 1996, the Committee granted 218,946 DEC stock options to certain
key salaried employees and officers of the Company with an exercise price of
$4.33 per share. The options vest over the lesser of attaining certain
financial performance measures or ten years.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
On June 28, 1996, pursuant to a Stock Purchase Agreement, the Company acquired
all of the issued and outstanding capital stock of Transkrit Corporation and
subsidiaries ("Transkrit") for approximately $86.5 million plus transaction
costs. The acquisition has been accounted for using the purchase method of
accounting and accordingly, the results of operations of Transkrit have been
included in the statements of operations of the Company since June 29, 1996.
The Company has four principal product lines : Mailer systems, direct mail
products, custom pressure sensitive labels and custom envelopes. The
following table summarizes the net sales by product line.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(in thousands)
<S> <C> <C> <C> <C>
Mailer systems $12,152 $ 0 $12,152 $ 0
Direct mail products 6,020 4,236 10,637 10,328
Custom pressure sensitive labels 9,718 891 11,303 2,618
Custom envelopes 12,061 14,168 37,609 40,176
$39,951 $19,295 $71,701 $53,122
</TABLE>
THIRD QUARTER OF 1996 COMPARED WITH THE THIRD QUARTER OF 1995:
Net sales for the three month period ended September 30, 1996 increased $20.7
million to $40.0 million, or 107.3%, from the comparable 1995 period. The
overall increase in net sales was due to the acquisition of Transkrit.
Specifically, the increase in net sales for mailer systems, direct mail
products and custom pressure sensitive labels was due to the above mentioned
acquisition. Net sales for custom envelopes decreased $2.1 million to $12.1
million, or 14.9%, from the comparable 1995 period. The decrease in net sales
for custom envelopes has been slightly impacted by a reduction in the average
unit sales price. The average unit sales price decreased 0.9% to $18.91 for
the three month period ended September 30, 1996 from $19.08 for the comparable
1995 period. This reduction in the average sales price is mainly due to lower
average paper prices passed on to customers in the form of reduced unit
pricing. In addition, custom envelope units shipped decreased 17.6% from
651.4 million units for the three month period ended September 30, 1995 to
536.5 million units for the comparable 1996 period. The decrease in units
shipped is the result of the Company redirecting its envelope sales effort
towards value-added, customized products, which generate greater margins,
rather than long-run, commodity envelopes. As a result, the Company has been
able to increase the profitability of its custom envelope product line by
20.9% for the three month period ended September 30, 1996 as compared to the
same 1995 period.
Gross profit, as a percentage of net sales, increased to 32.5% for the three
month period ended September 30, 1996 from 22.1% for the comparable 1995
period. This increase is attributable to the Company's focus on value-added,
customized products, reduction of production costs and the Transkrit
acquisition which added product lines with historically higher gross margins.
Selling and administrative expenses for the three month period ended September
30, 1996 increased $6.4 million to $9.7 million, or 195.3%, from the
comparable 1995 period. Selling and administrative expenses, as a percent of
net sales, increased to 24.4% for the three month period ended September 30,
1996 from 17.1% for the comparable 1995 period. The increase in these costs
<PAGE>
is attributable to the amortization of certain intangible assets recorded in
conjunction with the acquisition of Transkrit.
Operating income for the three month period ended September 30, 1996 was $3.3
million or 8.1% of net sales as compared to $1.0 million or 5.0% of net sales
for the comparable 1995 period. The increase in operating income is mostly
due to the acquisition of Transkrit.
Interest expense for the three month period ended September 30, 1996 was $3.3
million or 8.2% of net sales as compared to $.8 million or 4.2% of net sales
for the comparable 1995 period. The increase in interest expense is due to
the issuance of the Senior Notes to fund the acquisition of Transkrit.
Income tax benefit for the three month period ended September 30, 1996 of
$8,000 was due to the recognition of the tax benefit of the net operating loss
generated during this period. The income tax expense for the three month
period ended September 30, 1995 was reduced to zero due to the reduction in
the valuation allowance recorded in prior periods. Therefore, the effective
income tax rate was 36% and 0% for the three month periods ended September 30,
1996 and 1995, respectively.
EBITDA for the three month period ended September 30, 1996 was $5.5 million or
13.7% of net sales as compared to $1.8 million or 9.2% of net sales for the
comparable 1995 period. The increase in EBITDA is mostly attributable to the
increase in operating income mostly due to the acquisition of Transkrit.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1995:
Net sales for the nine month period ended September 30, 1996 increased $18.6
million to $71.7 million, or 35.0%, from the comparable 1995 period. The
overall increase in net sales was due to the acquisition of Transkrit.
Specifically, the increase in net sales for mailer systems, direct mail
products and custom pressure sensitive labels was due to the above mentioned
acquisition. Net sales for custom envelopes decreased $2.6 million to $37.6
million, or 6.5%, from the comparable 1995 period. The decrease in the net
sales for this product line is due to the decrease in the units shipped.
Custom envelope units shipped decreased 12.4% from 1,926.0 million units for
the nine month period ended September 30, 1995 to 1,688.5 million units for
the comparable 1996 period. The decrease in units shipped is the result of
the Company redirecting its envelope sales effort towards value-added,
customized products, which generate greater margins, rather than long-run,
commodity envelopes. Average unit sales prices have increased 4.8% from
$18.17 for the nine month period ended September 30, 1995 to $19.06 for the
comparable 1996 period. As a result, the Company has increased the
profitability of this product line by 29.0% for the nine month period ended
September 30, 1996 as compared to the same 1995 period.
Gross profit, as a percentage of net sales, increased to 27.2% for the nine
month period ended September 30, 1996 from 21.6% for the comparable 1995
period. This increase is attributable to the Company's focus on value-added,
customized products, reduction of production costs and the Transkrit
acquisition which added product lines with historically higher gross margins.
Selling and administrative expenses for the nine month period ended September
30, 1996 increased $6.3 million to $16.3 million, or 62.3%, from the
comparable 1995 period. Selling and administrative expenses, as a percent of
net sales, increased to 22.7% for the three month period ended September 30,
1996 from 18.9% for the comparable 1995 period. The increase in these costs
is attributable to the amortization of certain intangible assets recorded in
conjunction with the Transkrit acquisition.
Operating income for the nine month period ended September 30, 1996 was $3.2
million or 4.5% of net sales as compared to $1.5 million or 2.7% of net sales
<PAGE>
for the comparable 1995 period. The increase in operating income is mostly
due to the acquisition of Transkrit.
Interest expense for the nine month period ended September 30, 1996 was $4.7
million or 6.5% of net sales as compared to $2.3 million or 4.5% of net sales
for the comparable 1995 period. The increase in interest expense is due to the
issuance of the Senior Notes to fund the acquisition of Transkrit.
Income tax benefit for the nine month period ended September 30, 1996 was $.6
million and was due to the recognition of the tax benefit of the net operating
loss generated during this period. The income tax benefit for the nine month
period ended September 30, 1995 was reduced to $0 due to the valuation allow-
ance recorded. Therefore, the effective tax rate was 38% and 0% for the nine
month periods ended September 30, 1996 and 1995, respectively.
The extraordinary loss on early retirement of debt of $.8 million, net of
income tax benefit of $.5 million, for the nine month period September 30,
1996 was the result of certain costs recognized in retiring certain long-term
debt and subordinated debt in connection with the funding of the Transkrit
acquisition.
EBITDA for the nine month period ended September 30, 1996 was $7.6 million or
10.7% of net sales as compared to $3.9 million or 7.4% of net sales for the
comparable 1995 period. The increase in EBITDA is mostly attributable to the
increase in operating income due to the acquisition of Transkrit.
EBITDA is provided because it is a measure of an issuer's ability to service
its indebtedness commonly used by certain investors. EBITDA is not a measure
of financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flow as a measure of liquidity.
EBITDA is defined as operating income plus depreciation and amortization and
reflects the elimination of non-cash charges related to pension plans,
deferred financing and change in vacation policy and the elimination on gain
on disposal of equipment.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7.5 million and $.9 million for
the nine month periods ended September 30, 1996 and 1995, respectively. The
increase in cash provided by operating activities is due to the increase in
EBITDA and the better management of receivable collections and timing of
inventory purchases.
Net cash used in investing activities was $81.0 million and $.5 million for
the nine month periods ended September 30, 1996 and 1995, respectively. The
increase in cash used in investing activities is primarily the result of the
acquisition of Transkrit.
Capital expenditures, excluding acquisitions (but including purchases under
capital leases), were $5.9 million and $.7 million for the nine month periods
ended September 30, 1996 and 1995, respectively.
Net cash provided by (used in) financing activities was $77.2 million and
$(.6) million for the nine month periods ended September 30, 1996 and 1995,
respectively. Cash provided by financing activities for the nine month period
ended September 30, 1996 is primarily attributable to the $100 million long-
term debt raised to retire certain long-term and subordinated debt and to
acquire Transkrit. The cash used for financing activities for the nine month
period ended September 30, 1995 represents payments on long-term debt.
The Company has up to $20,000,000 of available borrowings from its senior
secured revolving credit facility (the "Revolving Credit"). Borrowings on the
Revolving Credit are limited to certain levels of receivables and inventories.
As of September 30, 1996, the outstanding balance on the Revolving Credit was
$0.
Management believes, based on current financial performance of the Company and
anticipated growth, that the cash provided by operations and the availability
under the Company's current revolving credit facility will provide sufficient
funds to support planned capital expenditures, working capital requirements,
debt service requirements and potential acquisitions. The Company anticipates
that it will be required to refinance the Senior Notes at maturity. No
assurance can be given that the Company will be able to refinance the Senior
Notes on terms acceptable to it, if at all. 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 which, in turn, will be
subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -
No reportable developments occurred in Legal Proceedings during the quarter
ended September 30, 1996.
Item 2. Changes in Securities - None.
Item 3. Defaults upon Senior Securities - None.
Item 4. Submission of matters to a vote of Security Holders - None.
Item 5. Other Information -
The Board of Directors of DEC International, Inc. ("DEC"), the Company's
parent, has appointed Stewart E. Elliott, Jr. as a director of DEC. Mr.
Elliott is the managing director of TCW/Crescent Mezzanine, L.L.C. which is a
stockholder of DEC's preferred stock.
Item 6.Exhibits and Reports on Form 8-K-
a) Exhibits
27 - Financial Data Schedule
b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL FIBERSTOK CORPORATION
Date: December 3, 1996 /s/Robert M. Miklas
___________________
Robert M. Miklas
President and Chief Executive Officer
(Principal Executive Officer)
Date: December 3, 1996 /s/Robert B. Webster
____________________
Robert B. Webster
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,277,000
<SECURITIES> 0
<RECEIVABLES> 19,017,210
<ALLOWANCES> (621,210)
<INVENTORY> 11,698,000
<CURRENT-ASSETS> 38,408,000
<PP&E> 55,487,000
<DEPRECIATION> (7,862,000)
<TOTAL-ASSETS> 139,040,000
<CURRENT-LIABILITIES> 17,501,000
<BONDS> 102,345,000
0
0
<COMMON> 3,000
<OTHER-SE> 12,777,000
<TOTAL-LIABILITY-AND-EQUITY> 139,040,000
<SALES> 71,701,000
<TOTAL-REVENUES> 71,701,000
<CGS> 52,225,000
<TOTAL-COSTS> 52,225,000
<OTHER-EXPENSES> 68,498,000
<LOSS-PROVISION> 109,062
<INTEREST-EXPENSE> 4,673,000
<INCOME-PRETAX> (1,470,000)
<INCOME-TAX> (555,000)
<INCOME-CONTINUING> (915,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (798,000)
<CHANGES> 0
<NET-INCOME> (1,713,000)
<EPS-PRIMARY> (6.04)
<EPS-DILUTED> (6.04)
</TABLE>
