<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended October 4, 1997
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 333-24519
PEN-TAB INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1833398
(State or other jurisdiction (I.R.S. Employer
Incorporation or organization) Identification Number)
167 KELLEY DRIVE
FRONT ROYAL, VA 22630
TELEPHONE: (540) 622-2000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. None.
<PAGE>
PEN-TAB INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 4, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
a) Condensed Balance Sheets
as of October 4, 1997 and December 28, 1996 1
b) Condensed Statements of Income
for the Quarter and Nine Months Ended
October 4, 1997 and September 30, 1996 2
c) Condensed Statements of Cash Flows
for the Nine Months Ended October 4, 1997 and
September 30, 1996 3
d) Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURE 9
<PAGE>
PEN-TAB INDUSTRIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 28, October 4,
1996 1997
--------------- ---------------
(HOLDINGS-
COMBINED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 111 $ 8,215
Accounts receivable, net of allowances 10,697 17,121
Inventories 14,738 20,837
Prepaid expenses and other current assets 577 102
--------------- ---------------
Total current assets 26,123 46,275
Property, plant and equipment, net 16,767 16,113
Other assets 614 3,507
--------------- ---------------
Total assets $ 43,504 $ 65,895
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and bank overdraft $ 2,774 $ 1,871
Accrued expenses and other current liabilities 1,468 3,744
Deferred income taxes ---- 430
Current portion of long-term debt 16,037 25
--------------- ---------------
Total current liabilities 20,279 6,070
Long-term debt 8,173 7,766
Senior subordinated notes ---- 75,000
Deferred income taxes ---- 1,957
Stockholders' equity (deficit) 15,052 (24,898)
--------------- ---------------
Total liabilities and stockholders' equity $ 43,504 $ 65,895
=============== ===============
</TABLE>
See accompanying notes to unaudited condensed interim financial statements.
1
<PAGE>
PEN-TAB INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------------- ---------------------------------
September 30, October 4, September 30, October 4,
1996 1997 1996 1997
-------------- --------------- -------------- ---------------
(HOLDINGS - (HOLDINGS -
COMBINED) COMBINED)
<S> <C> <C> <C> <C>
Net sales $ 38,059 $ 35,079 $ 90,865 $ 83,037
Cost of goods sold 25,598 25,017 62,345 60,287
-------------- --------------- -------------- ---------------
Gross profit 12,461 10,062 28,520 22,750
Expenses:
Selling, general and administrative 4,988 5,493 13,202 13,658
Interest expense - net 829 2,429 2,029 6,237
-------------- --------------- -------------- ---------------
Total expenses 5,817 7,922 15,231 19,895
-------------- --------------- -------------- ---------------
Income before income taxes 6,644 2,140 13,289 2,855
Income tax provision 76 (568) (31) (3,262)
-------------- --------------- -------------- ---------------
Net income (loss) 6,720 1,572 13,258 (407)
============== =============== ============== ===============
Allocation of net income (loss):
Pen-Tab Holdings, Inc. 6,720 0 13,258 (2,515)
Pen-Tab Industries, Inc. 0 1,572 0 2,108
-------------- --------------- -------------- ---------------
6,720 1,572 13,258 (407)
============== =============== ============== ===============
Pro forma financial data:
Historical income before income taxes 6,644 2,140 13,289 2,855
Pro forma income tax provision (2,757) (813) (5,249) (1,085)
-------------- --------------- -------------- ---------------
Pro forma net income $ 3,887 $ 1,327 $ 8,040 $ 1,770
============== =============== ============== ===============
</TABLE>
See accompanying notes to unaudited condensed interim financial statements.
2
<PAGE>
PEN-TAB INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
September 30, October 4,
1996 1997
-------------- ---------------
(HOLDINGS -
COMBINED)
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 13,258 $ (407)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,807 2,234
Deferred income taxes ---- 2,343
Provision for losses on accounts receivable 132 114
Changes in operating assets and liabilities:
Accounts receivable (10,154) (6,538)
Inventories 1,982 (6,099)
Prepaid expenses and other assets (27) (2,722)
Accounts payable and bank overdraft 875 (903)
Accrued expenses and other current liabilities 388 2,276
-------------- ---------------
Net cash provided by (used in) operating activities 8,261 (9,702)
-------------- ---------------
INVESTING ACTIVITIES
Purchase of equipment (625) (1,233)
-------------- ---------------
Net cash used in investing activities (625) (1,233)
-------------- ---------------
FINANCING ACTIVITIES
Net decrease in long-term debt (3,398) (16,419)
Issuance of senior subordinated notes ---- 75,000
Dividends (5,956) (39,542)
-------------- ---------------
Net cash (used in) provided by financing activities (9,354) 19,039
-------------- ---------------
(Decrease) / increase in cash and cash equivalents (1,718) 8,104
Cash and cash equivalents at beginning of period 836 111
-------------- ---------------
Cash and cash equivalents at end of period $ (882) $ 8,215
============== ===============
</TABLE>
See accompanying notes to unaudited condensed interim financial statements.
3
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
OCTOBER 4, 1997
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Pen-Tab
Industries, Inc. (the "Company"), a Delaware corporation formed February 4,
1997, have been prepared in accordance with generally accepted accounting
principles applicable 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 the quarter and nine months ended October 4,
1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997.
Amounts presented as of December 28, 1996 and for the quarter and nine month
period ended September 30, 1996 represent financial information of Pen-Tab
Holdings, Inc., the predecessor of Pen-Tab Industries, Inc. Such financial
information represents the combined historical financial statements of
Pen-Tab Industries, Inc., a New York corporation, and its affiliated company
Pen-Tab of California, Inc., a Delaware corporation, which was controlled
under common ownership in the period to July 1, 1996. Effective July 1,
1996, the two companies were merged into a new Virginia corporation with no
change in ownership and accordingly, the historical book values of the
companies' assets and liabilities were carried forward to the new company.
Intercompany accounts and transactions for such periods were eliminated in
combination.
All references to fiscal quarter refer to the 13-week periods ended October
4, 1997 and September 30, 1996. These financial statements should be read in
conjunction with the audited financial statements of Pen-Tab Holdings, Inc.
as of December 28, 1996 and December 30, 1995 and for each of the three
years in the period ended December 28, 1996, included in the Company's
registration statement on Form S-4 (#333-24519) as filed with the Securities
and Exchange Commission.
2. INVENTORIES
The Company uses the LIFO method of accounting to value inventories. The
components of inventories consist of the following:
December 28, October 4,
1996 1997
Raw materials $ 7,445 $10,275
Work-in process 192 414
Finished goods 7,101 10,148
------- -------
$14,738 $20,837
For the quarter ended October 4, 1997, the LIFO adjustment was
calculated based upon management's expected year-end inventory levels and
cost, allocated to the quarter based on expected sales for the year.
4
<PAGE>
An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that
time. Accordingly, interim LIFO calculations are necessarily based on
management's estimates of expected year-end inventory levels and costs.
3. INCOME TAXES
The Company was taxed as an "S" corporation for the five-week period
ended February 4, 1997 and a "C" corporation for the period thereafter. The
Company recorded a one-time tax charge of 2,343 in the quarter ended April
5, 1997 to record the cumulative deferred tax liability upon termination of
the Company's "S" corporation election.
The Company was taxed as an "S" corporation for the quarter and
nine-month period ended September 30, 1996 respectively.
Adjusted for income taxes, the Company's net income for the nine months
ended October 4, 1997 and September 30, 1996 would have been $1,770 and
$8,040, respectively, had the Company been taxed as a "C" corporation for
such periods and, accordingly, been subject to federal and state income
taxes.
4. CHANGES IN STOCKHOLDER'S EQUITY
The changes in stockholder's equity accounts of Pen-Tab Industries, Inc. are
summarized as follows:
<TABLE>
<CAPTION>
Common Contributed
Stock Capital Deficit Total
<S> <C> <C> <C> <C>
Balance - Opening $ --- $ --- $ --- $ ---
Contribution of assets and
liabilities by Pen-Tab Holdings, Inc 7,036 7,036
Net income for the period February 5, 1997
to October 4, 1997 2,108 2,108
Dividend to Holdings (34,042) (34,042)
------ ------ -------- --------
Balance - October 4, 1997 $ --- $ 7,036 $(31,934) $(24,898)
===== ======= ======== ========
</TABLE>
The net income for the nine months ended October 4, 1997 includes a $2,515
loss attributable to the financial results of Pen-Tab Holdings, Inc. for the
period from December 28, 1996 to February 4, 1997. Dividends for the nine
months ended October 4, 1997 amounted to $39,542, including $5,500 paid to
the stockholder's of Pen-Tab Holdings, Inc. in the period to February 4,
1997 and $34,042 paid by Pen-Tab Industries to Pen-Tab Holdings, Inc.
5. CHANGES IN LONG-TERM DEBT AND SENIOR SUBORDINATED NOTES
On February 4, 1997, the Company issued $75,000 10 7/8% Senior
Subordinated Notes due 2007 and paid a dividend to its parent company
(Pen-Tab Holdings, Inc.) in the amount of $34,042. Concurrently, the Company
repaid the outstanding obligation under the Loan and Security Agreement and
entered into a new Credit Agreement with the Bank of America Illinois (The
Credit Agreement). The Credit Agreement, which expires on February 4, 1998,
provides for advances based on a borrowing base comprised or specified
percentages of eligible accounts receivable, inventory and fixed assets, up
to an aggregate maximum of $35,000. The interest rate for borrowing is at
bank prime rate plus a sliding scale spread, or at the Company's option, at
LIBOR plus a sliding scale spread. The Company is also required to reduce
the principle balance outstanding to zero for a period of sixty days
beginning September 30 of each fiscal year.
5
<PAGE>
On November 3, 1997 the Company entered into an interest rate swap
transaction where it swapped its fixed rate payment on the $75,000 10 7/8%
Senior Subordinated Notes for a floating rate payment. The initial rate is 9.81%
and the interest rate resets every three months. The floating rate is based on a
basket of the LIBORS of Germany, Canada and Australia. The transaction includes
an interest rate cap of 12.5%. The term of the transaction is until February
2002, cancelable by the Company at any time.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONs
Net sales for the quarter ended October 4, 1997 decreased by $3.0
million, or 7.8%, to $35.1 million from $38.1 million for the quarter ended
September 30, 1996. For the first nine months of 1997 net sales of $83.0 million
were $7.8 million, or 8.6% lower than the same period in 1996. Differentiated
product sales increased $0.9 million from the nine months ended October 4, 1997
as compared to the nine months ended September 30, 1996, and core product sales
decreased $7.2 million from the nine months ended October 4, 1997 as compared to
the nine months ended September 30, 1996. For the Pen-Tab segment pounds / units
shipped increased approximately 7.0% for the nine months ended October 4, 1997
compared to the nine months ended September 30, 1996, however revenues are down
$6.3 million or 7.6%. This results from material (paper and paper related
products) price decreases passed on to the customer in lower unit selling prices
during and subsequent to the nine months ended September 30, 1996 and in changes
in product mix. The remaining $1.5 million decrease in net sales was caused by
sales volume decreases in the Vinylweld segment.
Gross profit for the quarter ended October 4, 1997 decreased by
$2.4 million, or 19.2% to $10.1 million from $12.5 million for the quarter ended
September 30, 1996. Gross profit for the nine months ended October 4,
1997 decreased by $5.8 million or 20.2% to $22.8 million from $28.6 million for
the nine months ended September 30, 1996. The gross profit percentage for the
nine months ended October 4, 1997 was 27.4% compared to 31.4% for the nine
months ended September 30, 1996. The decrease in gross profit margin is
principally related to (i) a LIFO adjustment increasing gross profit for the
nine months ended September 30, 1996 by $4.0 million or 4.4% due to significant
decreases in the cost of paper and a LIFO adjustment increasing gross profit for
the nine months ended October 4, 1997 by $0.2 million or 0.2% (ii) significant
and unusual paper price fluctuations caused the Company to experience inventory
losses of $3.1 million or 3.4% in the first nine months of 1996 due to selling
higher priced inventory at the then current lower selling prices and (iii)
volume decreases and changes in sales mix.
SG&A expenses for the quarter ended October 4, 1997 increased $0.5
million, or 10.1% to $5.5 million from $5.0 million for the quarter ended
September 30, 1996. For the nine months ended October 4, 1997, SG&A expenses
increased by $0.5 million or 3.4% to $13.7 million from $13.2 million for the
nine months ended September 30, 1996. As a percentage of net sales, SG&A
expenses increased to 16.5% for the nine months ended October 4, 1997 from 14.5%
for the nine months ended September 30, 1996. This increase is principally the
result of (i) an increase in pounds / units shipped in the Pen-Tab segment of
approximately 7% coupled with decreases in unit selling prices resulting in an
increase in freight expenses as a percentage of sales and (ii) increases in
sales and marketing salaries and related expenses.
Interest expense for the quarter ended October 4, 1997 increased $1.6
million to $2.4 million from $0.8 million for the quarter ended September 30,
1996. For the nine months ended October 4, 1997, interest expense increased $4.2
million to $6.2 million. The increase is principally due to the interest expense
on the $75 million of senior subordinated notes issued during February 1997.
Income tax provision for the quarter ended July 5, 1997 increased $0.7
million to $0.6 million from $(0.1) million for the quarter ended September 30,
1996. For the nine months ended October 4, 1997, income tax provision increased
$3.2 million to $3.3 million. This increase includes a one-time tax charge of
$2.3 million to record the cumulative deferred tax liability upon termination of
the Company's "S" corporation election. The tax provision for the nine months
ended October 4, 1997 is based upon the estimated "C" corporation effective tax
rate for the full year. The Company was taxed as an "S" corporation for federal
and state taxation purposes during 1996, and accordingly, the Company's tax
provision for the quarter and nine months ended September, 1996 consisted of
certain state taxes payable.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended October
4, 1997 was $9.7 million as compared to net cash provided by operating
activities of $8.3 million for the nine months ended September 30, 1996. The
decrease was primarily due to lower income earned during 1997 and changes in the
Company's working capital accounts.
Net cash provided by financing activities for the nine months ended
October 4, 1997 was $19.0 million as compared to net cash used in financing
activities of $9.4 million for the nine months ended September 30, 1996. The
increase consisted of $75 million relating to the issuance of senior
subordinated notes, offset by an increase in dividend distributions of $33.6
million and a $13.0 million reduction in long-term debt.
PART 11. OTHER INFORMATION
Item 1. Legal Proceedings.
- --------------------------
Not applicable.
Item 2. Changes in Securities.
- ------------------------------
Not applicable.
Item 3. Defaults upon Senior Securities.
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
Not applicable.
Item 5. Other Information.
- --------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits
--- --------
Financial Data Schedule (filed only electronically with the SEC)
(b) Reports on From 8-K
No reports on Form 8-K were filed during the third quarter
of 1997.
8
<PAGE>
SIGNATURE
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.
Pen-Tab Industries, Inc.
(Registrant)
Date: November 18, 1997 By: /s/ William Leary
- ------------------------- ---------------------
William Leary
Vice President, Chief Financial and
Administrative Officer
(principal financial officer
and accounting officer)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-03-1998 DEC-28-1996
<PERIOD-START> JUL-06-1997 JUN-30-1996
<PERIOD-END> OCT-04-1997 SEP-30-1996
<CASH> 8215 0
<SECURITIES> 0 0
<RECEIVABLES> 17258 19529
<ALLOWANCES> 137 339
<INVENTORY> 20837 12678
<CURRENT-ASSETS> 46275 32192
<PP&E> 29643 28917
<DEPRECIATION> 13530 11873
<TOTAL-ASSETS> 65895 49956
<CURRENT-LIABILITIES> 6070 7127
<BONDS> 78483 24483
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (24898) 18346
<TOTAL-LIABILITY-AND-EQUITY> 65895 49956
<SALES> 35079 38059
<TOTAL-REVENUES> 35079 38059
<CGS> 25017 25598
<TOTAL-COSTS> 5493 4988
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2429 829
<INCOME-PRETAX> 2140 6644
<INCOME-TAX> 568 (76)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1572 6720
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
