<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 July 5, 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 JULY 5, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
a) Condensed Balance Sheets
as of July 5, 1997 and December 28, 1996 1
b) Condensed Statements of Income
for the Quarter and Six Months Ended
July 5, 1997 and June 29, 1996 2
c) Condensed Statements of Cash Flows
for the Six Months Ended July 5, 1997 and
June 29, 1996 3
d) Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. Other Information
Item 1. Legal Proceedings 7
Item 2. Changes in Securities 7
Item 3. Defaults upon Senior Securities 7
Item 4. Submission of Matters to a Vote of
Security Holders 7
Item 5. Other Information 7
Item 6. Exhibits and Reports on Form 8-K 7
SIGNATURE 8
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PEN-TAB INDUSTRIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 28, July 5,
1996 1997
------------ -----------
(HOLDINGS-
COMBINED)
ASSETS
Current assets:
Cash and cash equivalents $ 111 $ ---
Accounts receivable, net of allowances 10,697 25,877
Inventories 14,738 27,082
Prepaid expenses and other current assets 577 608
------------ -----------
Total current assets 26,123 53,567
Property, plant and equipment, net 16,767 16,360
Other assets 614 3,545
------------ -----------
Total assets $ 43,504 $ 73,472
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and bank overdraft $ 2,774 $ 5,039
Accrued expenses and other current liabilities 1,468 6,683
Deferred income taxes --- 430
Current portion of long-term debt 16,037 3,290
------------ -----------
Total current liabilities 20,279 15,442
Long-term debt 8,173 7,689
Senior subordinated notes --- 75,000
Deferred income taxes --- 1,957
Stockholders' equity (deficit) 15,052 (26,616)
------------ -----------
Total liabilities and stockholders' equity
$ 43,504 $ 73,472
============ ===========
See accompanying notes to unaudited condensed interim financial statements.
1
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PEN-TAB INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
Quarter Ended Six Months Ended
-------------------- --------------------
June 29, July 5, June 29, July 5,
1996 1997 1996 1997
-------- -------- -------- --------
(HOLDINGS- (HOLDINGS-
COMBINED) COMBINED)
<S> <C> <C> <C> <C>
Net sales $ 34,832 $ 30,713 $ 52,806 $ 47,958
Cost of goods sold 23,383 21,675 36,747 35,271
-------- -------- -------- --------
Gross profit 11,449 9,038 16,059 12,687
Expenses:
Selling, general and administrative 5,145 4,812 8,214 8,165
Interest expense - net 684 2,238 1,200 3,808
-------- -------- -------- --------
Total expenses 5,829 7,050 9,414 11,973
-------- -------- -------- --------
Income before income taxes 5,620 1,988 6,645 714
Income tax provision (65) (756) (107) (2,694)
-------- -------- -------- --------
Net income (loss) 5,555 1,232 6,538 (1,980)
======== ======== ======== ========
Allocation of net income (loss):
Pen-Tab Holdings, Inc. 5,555 0 6,538 (2,515)
Pen-Tab Industries, Inc. 0 1,232 0 535
-------- -------- -------- --------
5,555 1,232 6,538 (1,980)
======== ======== ======== ========
Pro forma financial data:
Historical income before income
taxes 5,620 1,988 6,645 714
Pro forma income tax provision (2,108) (756) (2,492) (271)
-------- -------- -------- --------
Pro forma net income $ 3,512 $ 1,232 $ 4,153 $ 443
======== ======== ======== ========
</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)
Six Months Ended
-----------------------
June 29, July 5,
1996 1997
---------- ----------
(HOLDINGS -
COMBINED)
OPERATING ACTIVITIES
Net income (loss) $ 6,538 $ (1,980)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,207 1,214
Deferred income taxes --- 2,387
Provision for losses on accounts receivable 90 73
Changes in operating assets and liabilities:
Accounts receivable (20,172) (15,253)
Inventories (8,745) (12,344)
Prepaid expenses and other current assets 42 (2,962)
Accounts payable and bank overdraft 3,234 2,265
Accrued expenses and other current liabilities 2,030 5,215
---------- ----------
Net cash used in operating activities (15,776) (21,385)
---------- ----------
INVESTING ACTIVITIES
Purchase of equipment (525) (808)
---------- ----------
Net cash used in investing activities (525) (808)
---------- ----------
FINANCING ACTIVITIES
Net increase/(decrease) in long-term debt 17,264 (13,231)
Issuance of senior subordinated notes, net of expense --- 72,000
Dividends (1,799) (39,687)
---------- ----------
Net cash provided by financing activities 15,465 22,082
---------- ----------
Decrease in cash and cash equivalents (836) (111)
Cash and cash equivalents at beginning of period 836 111
---------- ----------
Cash and cash equivalents at end of period $ - $ -
========== ==========
See accompanying notes to unaudited condensed interim financial statements.
3
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JULY 5, 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 six months ended July 5,
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 six month
period ended June 29, 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 July 5,
1997 and June 29, 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, July 5,
1996 1997
------------ -------
Raw materials $ 7,445 $10,719
Work-in process 192 96
Finished goods 7,101 16,267
------- -------
$14,738 $27,082
======= =======
For the quarter ended July 5, 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.
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.
4
<PAGE>
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 six-month
period ended June 29, 1996 respectively.
Adjusted for income taxes, the Company's net income for the six months
ended July 5, 1997 and June 29,1996 would have been $443 and $4,153,
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 stockholders'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 July 5, 1997 535 535
Dividend to Holdings (34,187) (34,187)
------ -------- -------- --------
Balance -- July 5, 1997 $ --- $ 7,036 $(33,652) $(26,616)
====== ======== ======== ========
</TABLE>
The net income for the six months ended July 5, 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 six months
ended July 5, 1997 amounted to $39,687, including $5,500 paid to The
Stockholders of Pen-Tab Holdings, Inc. in the period to February 4, 1997 and
$34,187 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 $34,187. 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 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>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the quarter ended July 5, 1997 decreased by $4.1 million, or
11.7%, to $30.7 million from $34.8 million for the quarter ended June 29, 1996.
For the first six months of 1997 net sales of $48.0 million were $4.8 million,
or 9.2% lower than the same period in 1996. Differentiated product sales
decreased $3.4 million from the six months ended July 5, 1997 as compared to the
six months ended June 29, 1996, whereas core product sales remained flat between
the same periods. For the Pen-Tab segment pounds / units shipped increased
approximately 9.0% for the six months ended July 5, 1997 compared to the six
months ended June 29, 1996, however revenues are down $3.4 million or 7%. 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
six months ended June 29, 1996 and in changes in product mix. The remaining $1.4
million decrease in net sales was caused by sales volume decreases in the
Vinylweld segment.
Gross profit margin for the quarter ended July 5, 1997 decreased by $2.4
million, or 21.0% to $9.0 million from $11.4 million for the quarter ended June
29, 1996. Gross profit margin for the six months ended July 5, 1997 decreased by
$3.4 million or 21.0% to $12.7 million from $16.1 million for the six months
ended June 29, 1996. The gross profit percentage for the six months ended July
5, 1997 was 26.45% compared to 30.4% for the six months ended June 29, 1996. The
decrease in gross profit margin is related to (i) a LIFO adjustment increasing
gross profit for the six months ended June 29, 1996 by $2.3 million or 4.4% due
to significant decrease in the cost of paper and a LIFO adjustment decreasing
gross profit for the six months ended July 5, 1997 by $0.2 million or 0.4% (ii)
significant and unusual paper price fluctuations caused the Company to
experience inventory losses of $2.5 million or 4.7% in the first six months of
1996 due to selling higher priced inventory at the then current lower selling
prices and (iii) a $3.4 million decrease in net sales for the six months ended
July 5, 1997 as compared to the six months ended June 29, 1996 of differentiated
products which carry a gross profit percentage in excess of 40%.
SG&A expenses for the quarter ended July 5, 1997 decreased $0.3 million, or
5.8% to $4.8 million from $5.1 million for the quarter ended June 29, 1996.
For the six months ended July 5, 1997, SG&A expenses decreased by $0.1 million.
As a percentage of net sales, SG&A expenses increased to 17.0% for the six
months ended July 5, 1997 from 15.6% for the six months ended June 29, 1996.
This increase is principally the result of (i) an increase in pounds / units
shipped in the Pen-Tab segment of approximately 9% coupled with decreases in
unit selling prices resulting in an increase in freight expenses as percentage
of sales and (ii) the six months ended July 5, 1997 contained 27 weeks whereas
the six months ended June 29, 1996 contained only 26 weeks thus incurring an
extra week of expenses and (iii) the fixed components of SG&A remained
relatively unchanged however the decrease in sales of 9.2% caused SG&A to be a
greater percentage of sales.
Interest expense for the quarter ended July 5, 1997 increased $1.5 million
to $2.2 million from $0.7 million for the quarter ended June 29, 1996. For the
six months ended July 5, 1997, interest expense increased $2.6 million to $3.8
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 $0.8 million from $0.1 million for the quarter ended June 29, 1996.
For the six months ended July 5, 1997, income tax provision increased $2.6
million to $2.7 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 six months ended
July 5, 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 six months ended June 29, 1996 consisted of
certain state taxes payable.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended July 5, 1997
was $21.4 million as compared to $15.8 million for the six months ended June 29,
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 six months ended July 5,
1997 was $22.0 million as compared to $15.4 million for the six months ended
June 29, 1996. The increase consisted of $75 million relating to the issuance
of senior subordinated notes, offset by an increase in dividend distributions of
$37.7 million and a $30.4 million change in long-term debt.
PART II. 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 Form 8-K
------------------------
No reports on Form 8-K were filed during the second
quarter of 1997.
7
<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: August 15, 1997 By: /s/ William Leary
- ---------------------- -----------------------------
William Leary
Vice President, Chief Financial and
Administrative Officer
(principal financial officer
and accounting officer)
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-03-1998 DEC-28-1996
<PERIOD-START> APR-06-1997 DEC-29-1996
<PERIOD-END> JUL-05-1997 JUL-05-1997
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 27,755 27,755
<ALLOWANCES> 1,878 1,878
<INVENTORY> 27,082 27,082
<CURRENT-ASSETS> 53,567 53,567
<PP&E> 29,245 29,245
<DEPRECIATION> 12,885 12,885
<TOTAL-ASSETS> 73,472 73,472
<CURRENT-LIABILITIES> 15,442 15,442
<BONDS> 82,689 82,689
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (26,616) (26,616)
<TOTAL-LIABILITY-AND-EQUITY> 73,472 73,472
<SALES> 30,713 47,958
<TOTAL-REVENUES> 30,713 47,958
<CGS> 21,675 35,271
<TOTAL-COSTS> 4,812 8,165
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,238 3,808
<INCOME-PRETAX> 1,988 714
<INCOME-TAX> 756 2,694
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,232 (1,980)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
