<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 April 4, 1998
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)
NOT APPLICABLE
--------------
(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)
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. As of April 3, 1998, there
were outstanding 100 shares of common stock, $0.01 par value, all of which are
privately owned and are not traded on a public market.
<PAGE>
PEN-TAB INDUSTRIES, INC.
AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED APRIL 4, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
a) Condensed Consolidated Balance Sheets
as of April 4, 1998 and January 3, 1998 (Audited) 1
b) Condensed Consolidated Statements of Income
for the Quarters Ended
April 4, 1998 and April 5, 1997 2
c) Condensed Consolidated Statements of Cash Flows
for the Quarters Ended April 4, 1998 and
April 5, 1997 3
d) Notes to Unaudited Condensed Consolidated 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. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
January 3, April 4,
1998 1998
Audited Unaudited
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,676 $ -----
Accounts receivable, net of allowances 8,321 10,091
Inventories 21,787 29,827
Prepaid expenses and other current assets 988 1,690
------------------ ------------------
Total current assets 44,772 41,608
Property, plant and equipment, net 15,775 15,546
Other assets 3,245 3,165
------------------ ------------------
Total assets $ 63,792 $ 60,319
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and bank overdraft $ 2,671 $ 2,419
Accrued expenses and other current liabilities 1,023 1,335
Accrued interest on subordinated notes 3,330 1,199
Deferred income taxes 140 140
Current portion of long-term debt 540 114
------------------ ------------------
Total current liabilities 7,704 5,207
Long-term debt 7,214 7,203
Senior subordinated notes 75,000 75,000
Deferred income taxes 1,879 1,879
Stockholders' equity (deficit) (28,005) (28,970)
Minority Interest ------ ------
------------------ ------------------
Total liabilities and stockholders' equity $ 63,792 $ 60,319
================== ==================
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
1
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PEN-TAB INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------
April 5, April 4,
1997 1998
Unaudited Unaudited
------------------ ------------------
<S> <C> <C>
Net sales $ 17,244 $ 18,218
Cost of goods sold 13,596 14,011
------------------ ------------------
Gross profit 3,648 4,207
Expenses:
Selling, general and administrative 3,353 3,732
Interest expense - net 1,570 1,942
------------------ ------------------
Total expenses 4,923 5,674
------------------ ------------------
Loss before income taxes and minority interest (1,275) (1,467)
Income tax (provision) benefit (1,938) 502
------------------ ------------------
(3,213) (965)
Minority Interest ----- (11)
------------------ ------------------
Net loss $ (3,213) $ (954)
================== ==================
Pro forma financial data:
Historical loss before income taxes $ (1,275) $ (1,467)
Pro forma income tax benefit 485 502
------------------ ------------------
Pro forma net loss $ (790) $ (965)
================== ==================
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
2
<PAGE>
PEN-TAB INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------
April 5, April 4,
1997 1998
Unaudited Unaudited
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,213) $ (954)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 623 635
Deferred income taxes 2,343 ------
Amortization of debt issue costs 45 114
Minority Interest (11)
Provision for losses on accounts receivable 33 45
Changes in operating assets and liabilities:
Accounts receivable 1,461 (1,815)
Inventories (11,398) (8,040)
Prepaid expenses, other current assets and other assets (139) (736)
Accounts payable and bank overdraft 891 (252)
Accrued expenses and other current liabilities (373) 312
Accrued interest on subordinated notes 1,382 (2,131)
----------------- -----------------
Net cash used in operating activities (8,345) (12,833)
----------------- -----------------
INVESTING ACTIVITIES
Purchase of equipment (454) (406)
----------------- -----------------
Net cash used in investing activities (454) (406)
----------------- -----------------
FINANCING ACTIVITIES
Net change in long-term debt (15,847) (437)
Issuance of senior subordinated notes, net of expense 72,000 -----
Dividends (39,687) -----
----------------- -----------------
Net cash provided by (used in) financing activities 16,466 (437)
----------------- -----------------
Increase (decrease) in cash and cash equivalents 7,667 (13,676)
Cash and cash equivalents at beginning of period 111 13,676
----------------- -----------------
Cash and cash equivalents at end of period $ 7,778 $ -
================= =================
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
3
<PAGE>
PEN-TAB INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 4, 1998
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
On February 4, 1997, Pen-Tab Industries, Inc., a Virginia corporation, changed
its name to Pen-Tab Holdings ("Holdings"). On February 4, 1997 Holdings
formed a wholly owned subsidiary called Pen-Tab Industries, Inc. (the
"Company"), a Delaware corporation. On February 3, 1998 the Company formed a
subsidiary called Vinylweld L.L.C. (see note 6). The accompanying unaudited
condensed consolidated financial statements of Pen-Tab Industries, Inc. 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
ended April 4, 1998 are not necessarily indicative of the results that may be
expected for the year ended January 2, 1999.
All references to fiscal quarter refer to the 13-week period ended April 4,
1998, and the 14-week period ended April 5, 1997. These financial statements
should be read in conjunction with the audited financial statements of Pen-Tab
Industries, Inc. as of January 3, 1998 and December 28, 1996 and for each of
the three years in the period ended January 3, 1998, included in the Company's
form 10-K (#333-24519) as filed with the Securities and Exchange Commission.
2. NEW ACCOUNTING AND AUDITING PRONOUNCEMENTS
The Financial Accounting Standards Board (FAS) has issued various new
statements including Statements Nos. 130, 131, and 132. The Company complied
with the requirements (disclosure) of Statement Nos. 130 (comprehensive
income), 131 (segment disclosures) , and 132 (pension and other post-
retirement benefit).
3. Inventories
The Company uses the LIFO method of accounting to value inventories. The
components of inventories consist of the following:
January 3, April 4,
1998 1998
---- ----
Raw materials $ 8,993 $12,835
Work-in process 372 128
Finished goods 12,422 16,864
------- -------
$21,787 $29,827
======= =======
4
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3. INVENTORIES (CONTINUED)
For the quarter ended April 4, 1998, the LIFO adjustment was calculated
based upon management's expected year-end inventory levels and cost, resulting
in no adjustment for the period.
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. 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 during the quarter ended
April 5, 1997 to record the cumulative deferred tax liability upon termination
of the Company's "S" corporation election.
Adjusted for income taxes, the Company's net loss for the quarter ended
April 5, 1997 would have been $790, had the Company been subject to federal
and state income taxes during such periods.
5. SENIOR SUBORDINATED NOTES AND LONG-TERM DEBT
On February 4, 1997, the Company issued $75,000 10 7/8% Senior Subordinated
Notes due 2007 and paid a dividend to Holdings in the amount of $34,517.
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 23, 1999, provides for advances based upon a borrowing base
comprised of specified percentages of eligible accounts receivable, inventory
and property, plant, and equipment, up to an aggregate maximum of $35,000.
The interest rate per annum applicable to the Credit Agreement is the prime
rate, as announced by the Bank plus a margin from 0.0% to 0.7% or at the
Company's option, the Eurodollar rate plus a margin from 1.0% to 2.2% (based
on the Company's ratio of EBITDA minus capital expenditure to interest
expense). Under the terms of the Credit Agreement, the Company is required to
maintain certain financial ratios relating to cash flow and working capital,
reduce the principle balance of any loans outstanding to zero for a period of
sixty days beginning September 30 of each fiscal year and restrict the amount
of dividends that can be paid during the year.
During November 1997, the Company entered into a swap agreement, which
expires February, 2002, to swap its fixed rate of payment on the $75,000 10
7/8% Senior Subordinated Notes for a floating rate payment. The floating rate
is based upon a basket of the LIBORS of three countries plus a spread, and is
capped at 12.5%. The interest rate resets every six months and the Company
can terminate the transaction at any time, at the then current fair market
value of the swap instrument.
On April 1, 1998, the Company made an annual installment of $400 on the
$7,500 industrial revenue development bonds.
6. MINORITY INTEREST
Effective February 3, 1998, the net assets of the Company's Vinylweld
division were contributed to a newly formed Delaware limited liability company
called Vinylweld L.L.C. The Company also sold 20% of the Vinylweld L.L.C. to
its new president. As of April 4, 1998, the minority interest is $(0.0)
million as a result of a negative equity position of Vinylweld L.L.C.
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 April 4, 1998 increased by $1.0 million, or
5.8%, to $18.2 million from $17.2 million for the quarter ended April 5, 1997.
For the Pen-Tab segment differentiated product sales increased $0.4 million for
the quarter ended April 4, 1998 as compared to the quarter ended April 5, 1997,
and core product sales increased $1.0 million for the quarter ended April 4,
1998 as compared to the quarter ended April 5, 1997. For the Pen-Tab segment,
pounds / units shipped increased approximately 7.8% for the quarter ended April
4, 1998 compared to the quarter ended April 5, 1997, increasing revenues by $1.4
million or 9.4%. This positive trend is the result of the Company's commitment
to it's growth strategy of (i) focusing on rapidly growing customers, (ii)
continuing the introduction of differentiated products, (iii) focusing on
partnering relationships, and (iv) broadening product distribution. The
Vinylweld segment sales decreased approximately $0.4 million for the quarter
ended April 4, 1998.
Gross profit for the quarter ended April 4, 1998 increased $0.6 million or
16.7% to $4.2 million from $3.6 million for the quarter ended April 5, 1997.
The gross profit percentage for the quarter ended April 4, 1998 was 23.1%
compared to 21.2% for the quarter ended April 5, 1997. The increase in gross
profit margin is principally related to, (i) a LIFO adjustment decreasing gross
profit for the quarter ended April 5, 1997 by $0.1 million or 0.5%, (ii) a lower
manufacturing variance during quarter ended April 4, 1998 of $0.2 million or
1.0% as a result of increased production levels and increased efficiency, and
(iii) changes in product mix.
SG&A expenses for the quarter ended April 4, 1998 increased $0.4 million,
or 12.1% to $3.7 million from $3.3 million for the quarter ended April 5, 1997.
As a percentage of net sales, SG&A expenses increased to 20.3% for the quarter
ended April 4, 1998 from 19.8% for the quarter ended April 5, 1997. This
increase is principally the result of (i) an increase in sales commissions and
advertising allowances and (ii) increases in sales and marketing salaries and
related expenses.
Interest expense for the quarter ended April 4, 1998 increased $0.4 million
to $1.9 million from $1.5 million for the quarter ended April 5, 1997. The
increase is principally due to the interest expense incurred for the full
quarter ended April 4, 1998 on the $75 million of senior subordinated notes
issued during February 1997.
Income tax provision for the quarter ended April 5, 1997 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 benefit for
the quarter ended April 4, 1998 is based upon the estimated "C" corporation
effective tax rate for the full year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the quarter ended April 4, 1998
was $12.8 million as compared to net cash used in operating activities of $8.3
million for the quarter ended April 5, 1997. The increase was primarily
attributable to a $4.1 million payment on February 4, 1998 for the accrued
interest on subordinated notes.
Net cash used in financing activities for the quarter ended April 4, 1998
was $0.4 million as compared to net cash provided by financing activities of
$16.5 million for the quarter ended April 5, 1997. During quarter ended April 5,
1997, the net cash provided by financing activities consisted of $75 million
relating to the issuance of senior subordinated notes, offset by an increase in
dividend distributions of $39.6 million and a $15.8 million repayment of long-
term debt.
6
<PAGE>
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 first quarter of
1998.
7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q for the quarter ended April
4, 1998 to be signed on its behalf by the undersigned thereunto duly authorized.
Pen-Tab Industries, Inc.
(Registrant)
Date: 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 3-MOS
<FISCAL-YEAR-END> JAN-02-1999 JAN-03-1998
<PERIOD-START> JAN-04-1998 DEC-29-1996
<PERIOD-END> APR-04-1998 APR-05-1997
<CASH> 0 7,778
<SECURITIES> 0 0
<RECEIVABLES> 10,312 9,315
<ALLOWANCES> 221 111
<INVENTORY> 29,827 26,136
<CURRENT-ASSETS> 41,608 43,834
<PP&E> 28,719 28,884
<DEPRECIATION> 13,173 12,253
<TOTAL-ASSETS> 60,319 64,042
<CURRENT-LIABILITIES> 5,207 6,907
<BONDS> 75,000 75,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (28,970) (27,849)
<TOTAL-LIABILITY-AND-EQUITY> 60,319 64,042
<SALES> 18,218 17,244
<TOTAL-REVENUES> 18,218 17,244
<CGS> 14,011 13,596
<TOTAL-COSTS> 3,732 3,352
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,942 1,570
<INCOME-PRETAX> (1,467) (1,275)
<INCOME-TAX> 502 (1,938)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (954) (3,213)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
