<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) August 21, 1998
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)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
Pen-Tab Industries, Inc. ("Pen-Tab") issued a press release announcing that
on August 21, 1998, that it has completed the purchase of Stuart all Company
Inc. ("Stuart Hall"), a subsidiary of Newell Co. Stuart Hall, is a manufacturer
and marketer of school, home, and office supply products which will complement
Pen-Tab's current product offerings. The impact of the purchase is material to
Pen-Tab's consolidated results. Pen-Tab Industries is financing the stock
purchase through an equity contribution of $40 million from Pen-Tab Holdings and
$70 million of bank debt.
A copy of the press release is attached hereto as Exhibit 99.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired
(b) Pro Forma Financial Information
(c) Exhibits.
<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: By: /s/ William Leary
- ---------------------------- ---------------------
William Leary
Vice President, Chief Financial
and Administrative Officer
(principal financial officer
and accounting officer)
<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
Pen-Tab Industries, Inc. ("Pen-Tab") consummated the purchase of Stuart Hall
Company, Inc. ("Stuart Hall") a subsidiary of Newell Co., on August 20, 1998.
Pen-Tab is financing the stock purchase through an equity contribution of $40
million from its parent company, Pen-Tab Holdings, Inc. and the balance in bank
debt. The purchase price is $107 million plus a post closing purchase price
adjustment based on the closing date working capital balance. This post closing
purchase price adjustment is expected to be approximately $20 million. For
purposes of the pro forma condensed balance sheet as of July 4, 1998, the post
closing purchase price adjustment was estimated to be $38 million at that time.
The pro forma condensed balance sheet is presented at July 4, 1998 and the pro
forma condensed statement of operations is presented for the year ended January
3, 1998 and for the six month period ended July 4, 1998.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 3, 1998
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS PEN-TAB STUART PRO FORMA PRO FORMA
INDUSTRIES HALL ADJUSTMENTS RESULTS
(In thousands)
<S> <C> <C> <C> <C>
Net Sales.............................................. $96637 $87183 $ $183820
Cost of goods sold..................................... 71701 65732 -2000 135433
----------------------------------------------------------------
Gross profit.......................................... 24936 21451 3000 48347
Selling, general and administration
expenses. 17642 13128 -4593 26177
----------------------------------------------------------------
Income from operations................................. 7294 8323 6593 22210
Interest expense....................................... 8194 1252 6414 15860
----------------------------------------------------------------
(Loss) income before income tax
expense.............................................. -900 7071 179 6350
Income tax provision (benefit)......................... 1945 3183 -2715 2413
----------------------------------------------------------------
Net income (loss)...................................... $-2845 $3888 $2894 $3937
================================================================
</TABLE>
Pro Forma Adjustment
- --------------------
1) Income from operations; reflects the expected $6.6 million of operational
synergies in combining the two businesses including headcount reductions and
reallocation of product shipments among the three manufacturing and
distribution facilities.
2) Interest expense; reflects the acquisition debt as if the acquisition
occurred at the beginning of the year.
3) Income taxes; reflects adjustment to bring income taxes to an effective rate
of 38%.
<PAGE>
FOR THE YEAR ENDED JULY 4, 1998
<TABLE>
<CAPTION>
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS PEN-TAB STUART PRO FORMA PRO FORMA
INDUSTRIES HALL ADJUSTMENTS RESULTS
(In Thousands)
<S> <C> <C> <C> <C>
Net Sales.............................................. $55440 $52125 $107565
Cost of goods sold..................................... 41015 34989 -1000 74504
-------------------------------------------------------------------
Gross profit.......................................... 14425 17136 1000 33061
Selling, general and administrative
expenses............................................. 9022 7587 2297 3100
-------------------------------------------------------------------
Income from operations................................. 5403 9549 3297 18249
Interest expense....................................... 4261 626 3100 7987
-------------------------------------------------------------------
Income (loss) income before income taxes...............
1142 8923 197 10262
Income tax provision (benefit)......................... 542 4015 -657 3900
-------------------------------------------------------------------
Net income (loss)...................................... $600 $4908 $854 $6362
===================================================================
</TABLE>
Pro Forma Adjustment
- --------------------
1) Income from operations; reflects 50% or $3.3 million of operational
synergies in combining the two businesses including headcount reductions and
reallocation of product shipments among the three manufacturing and
distribution facilities.
2) Interest expense; reflects the acquisition debt as if the acquisition
occurred at the beginning of the year.
3) Income taxes; reflects adjustment to bring income taxes to an effective rate
of 38%.
<PAGE>
JULY 4, 1998
<TABLE>
<CAPTION>
-------------------
PEN-TAB STUART PRO FORMA PRO FORMA
------- ------ --------- ---------
HALL BALANCES
------ ---------
PRO FORMA CONDENSED BALANCE SHEET: (In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents................ $ 0 $ 1 $ 0 $1
Working capital.......................... 51813 29965 -13922 67856
Total assets............................. 82057 144709 26766 253532
Total debt............................... 95990 12175 70800 178965
Total stockholders' equity............... -27405 87702 -48502 11795
</TABLE>
Pro Forma Adjustments
- ---------------------
1) Working capital; reduction in inventory due to product rationalization and
increase in due to Newell (sellor) reflect the estimated post-closing
purchase price adjustment.
2) Total assets; reflects the write off of $49 million of goodwill on the
balance sheet of Stuart Hall at the date of acquisition and the recording of
$75 million of goodwill associated with Pen-Tab's purchase of Stuart Hall.
3) Total debt; reflects the bank debt incurred to acquire the stock of Stuart
Hall. $35 million is in the form of a fully drawn $35 million three year
term loan. $36 is in drawings under a 3 year $100 million dollar revolving
credit facility.
4) Total stockholders equity; reflects the write off of Stuart Hall's
stockholders equity of $88 million offset partially by the equity
contribution of $40 million from Pen-Tab Holdings, Inc.
<PAGE>
STUART HALL COMPANY, INC.
-------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------------------------------
AS OF DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------
<PAGE>
ARTHUR ANDERSEN LLP [ARTHUR ANDERSEN COMPANY LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Stuart Hall Company, Inc.:
We have audited the accompanying consolidated balance sheets of Stuart Hall
Company, Inc. (a Missouri corporation and wholly owned subsidiary of Newell Co.)
as of December 31,1997, 1996 and 1995, and the related consolidated statements
of income, stockholder's equity and cash flows for each of the three years in
the period ended December 31,1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Stuart Hall
Company, Inc. as of December 31,1997,1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
May 22, l998.
<PAGE>
STUART HALL COMPANY, INC.
-------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
--------------
AS OF DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND
ASSETS 1997 1996 1995 STOCKHOLDER'S EQUITY 1997 1996 1995
------ ---- ---- ---- -------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $1 $1 $1 Accounts payable $2,124 $2,111 $2,217
Accounts receivable, net 8,775 7,855 8,417 Accrued compensation 754 919 1,401
Receivable from parent 37 - - Other accrued liabilities 3,213 2,676 3,636
Inventories, net 20,056 18,179 29,352 Taxes payable to parent 3,095 4,046 5,131
Deferred income taxes 3,980 3,340 3,348 Other payable to parent - 1,649 18,822
Prepaid expenses and other 2,018 2,095 1,146 Current portion of long-term debt 986 986 986
------ ------ ------ Current portion of capitalized lease
Total current assets 34,867 31,470 42,264 obligation 914 848 787
------ ------ ------
TOTAL CURRENT LIABILITIES 11,086 13,235 32,980
LONG-TERM DEBT 2,875 3,861 4,847
CAPITALIZED LEASE OBLIGATION 9,303 10,217 11,065
OTHER ASSETS 45 52 61 DEFERRED INCOME TAXES 2,440 2,143 1,688
STOCKHOLDER'S EQUITY:
Common Stock-1,000 authorized
PROPERTY, PLANT AND EQUIPMENT, NET 24,310 26,152 29,363 and outstanding shares at $.01 par value 1 1 1
Additional paid in capital 75,576 75,576 75,576
Retained earnings 7,246 3,358 (2,157)
Cumulative translation adjustment (18) (3) (3)
------- ------ ------
TRADE NAMES AND GOODWILL, NET 49,287 50,714 52,309
Total stockholder's equity 82,805 78,932 73,417
------- ------ -------
Total liabilities and stockholder's
Total assets $108,509 $108,388 $123,997 equity $108,509 $108,388 $123,997
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
STUART HALL COMPANY, INC.
-------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------
(In thousands)
--------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
NET SALES $87,183 $85,653 $98,222
COST OF PRODUCTS SOLD 65,732 60,029 68,386
------- ------- -------
Gross income 21,451 25,624 29,836
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,922 12,550 12,686
------- ------- -------
Operating income 9,529 13,074 17,150
NONOPERATING EXPENSE:
Interest expense 1,252 1,330 1,503
Other, net 1,206 1,941 2,038
------- ------- -------
Income before income taxes 7,071 9,803 13,609
INCOME TAXES 3,183 4,288 5,645
------- ------- -------
Net income $3,888 $5,515 $7,964
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
STUART HALL COMPANY, INC.
-------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
-----------------------------------------------
(In thousands)
--------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
<TABLE>
<CAPTION>
Additional Cumulative
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment Total
------ ----------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $1 $75,576 $(10,121) $(1) $65,455
Net income - - 7,964 - 7,964
Foreign currency translation - - - (2) (2)
------ ----------- -------- ---------- -------
BALANCE, December 31, 1995 1 75,576 (2,157) (3) 73,417
Net income - - 5,515 - 5,515
Foreign currency translation - - - - -
------ ----------- -------- ---------- -------
BALANCE, December 31, 1996 1 75,576 3,358 (3) 78,932
Net income - - 3,888 - 3,888
Foreign currency translation - - - (15) (15)
------ ----------- -------- ---------- -------
BALANCE, December 31, 1997 $1 $75,576 $7,246 $(18) $82,805
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
STUART HALL COMPANY, INC.
-------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
--------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $3,888 $5,515 $7,96?
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 4,833 5,016 4,048
Deferred income taxes (343) 463 1,216
Loss on sale of equipment 16 43 102
Changes in current accounts -
Accounts receivable (920) 562 (553)
Receivable from/payable to parent, net (2,637) (18,258) (7,973)
Inventories (1,877) 11,173 3,806
Prepaid expenses and other 77 (949) (285)
Accounts payable 13 (106) (299)
Accrued expenses and other 357 (1,277) (4,387)
------- --------- ---------
Net cash provided by operating activities 3,407 2,182 3,639
------- --------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (1,693) (1,039) (3,748)
Proceeds from disposals of property, plant and equipment 120 630 1,834
------- --------- ---------
Net cash used in investing activities (1,573) (409) (1,914)
------- --------- ---------
FINANCING ACTIVITIES:
Payments of long-term debt (986) (986) (986)
Settlement of capital lease obligation (848) (787) (739)
------- --------- ---------
Net cash used in financing activities (1,834) (l,773) (1,725)
------- --------- ---------
Net change in cash - - -
CASH, beginning of year 1 1 1
------- --------- ---------
CASH, end of year $1 $l $1
------- --------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for -
Income taxes $4,478 $4,908 $3,480
Interest 1,055 1,205 1,351
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
STUART HALL COMPANY, INC.
-------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1997, 1996 AND 1995
--------------------------------
(1) Description of the Business-
---------------------------
Stuart Hall Company, Inc. ("Stuart Hall" or the "Company"), a wholly owned
subsidiary of Newell Co. ("Newell"), is a leading manufacturer and personal
marketer of school, office and personal communication paper products.
In 1992, all of the outstanding common stock of Stuart Hall was acquired by
Newell. The transaction was accounted for as a purchase business
combination. The excess cost over identifiable assets was recorded as
goodwill on the Company's books.
(2) Significant Accounting Policies-
------------------------------
Principles of consolidation-
---------------------------
The consolidated results of the Company include the accounts of its Canadian
affiliate. All intercompany accounts between the Company and its affiliate
are eliminated in consolidation
Use of estimates-
----------------
The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenue and expenses and related disclosures.
Revenue recognition-
-------------------
Sales of merchandise are recognized upon shipment to customers.
Allowances for doubtful accounts-
---------------------------------
Allowances for doubtful accounts totaled $149,000, $165,000 and $170,000 at
December 31, 1997, 1996 and 1995, respectively.
Inventories-
-----------
Inventories are stated at the lower of cost or market value. Cost of certain
domestic inventories was determined by the "last in, first-out" ("LIFO")
method. If the "first-in, first out" ("FIFO") inventory valuation method had
been used exclusively, inventories would have increased by $3,746,000,
$5,954,000 and $8,374,000 at December 31, 1997, 1996, and 1995,
respectively.
<PAGE>
-2-
The components of inventories at December 31, net of the LIFO reserve, were as
follows:
1997 1996 1995
----------- ----------- -----------
Materials and supplies $ 7,040,000 $ 7,065,000 $ 9,078,000
Work in process 1,083,000 203,000 577,000
Finished products 11,933,000 10,911,000 19,697,000
----------- ----------- -----------
$20,056,000 $18,179,000 $29,352,000
=========== =========== ===========
Inventory reserves at December 31, totaled $2,729,000 in 1997, $2,453,000 in
1996, and $3,340,000 in 1995.
Property, plant and equipment -
- -----------------------------
Property, plant and equipment at December 31 consisted of the following:
1997 1996 1995
----------- ----------- -----------
Land $ - $ - $ -
Buildings and improvements 16,721,000 16,651,000 16,541,000
Machinery and equipment 27,189,000 28,622,000 29,875,000
Furniture and fixtures 1,843,000 1,842,000 1,144,000
Construction in process 1,369,000 250,000 862,000
Accumulated depreciation (22,812,000) (21,213,000) (19,059,000)
----------- ----------- -----------
$24,310,000 $26,152,000 $29,363,000
=========== =========== ===========
Replacements and improvements are capitalized. Expenditures for maintenance and
repairs are charged to expense. The components of depreciation are provided by
annual charges to income calculated to amortize on the straight-line basis, the
cost of the depreciable assets over their depreciable lives. Estimated useful
lives determined by the Company are as follows:
Buildings and improvements 20-40 years
Machinery and equipment 5-12 years
Trade names and goodwill -
- ------------------------
The cost of trade names and goodwill are amortized over 40 years on a straight-
line basis. Total accumulated amortization of trade names and goodwill was
$7,755,000, $6,330,000 and $4,900,000 at December 31, 1997, 1996 and 1995,
respectively.
The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. If factors indicate that goodwill should be evaluated for possible
impairment, the Company would use an estimate of the
<PAGE>
-3-
undiscounted net cash flow over the remaining life of the goodwill in measuring
whether the goodwill is recoverable.
Accrued liabilities-
- -------------------
Other accrued liabilities at December 31 included the following:
1997 1996 1995
---------- ---------- ----------
Customer accruals $1,273,000 $ 857,000 $ 766,000
Workers compensation accrual 577,000 377,000 636,000
Other accruals1 1,363,000 1,442,000 2,234,000
---------- ----------- ----------
$3,213,000 $2,676,000 $3,636,000
========== =========== ==========
Customer accruals are promotional allowances and rebates given to customers
in exchange for their selling efforts. Workers' compensation is estimated based
upon historical claim experience.
Foreign currency translation-
- ----------------------------
The balance sheet accounts of the Company's Canadian affiliate are maintained in
Canadian dollars. These accounts are translated into U.S. dollars at the rates
of exchange in effect at fiscal year-end. Income and expense accounts are
translated at the average rates of exchange in effect during the year. The
related translation adjustment is made directly to a separate component of
stockholder's equity.
Accounting principles adopted-
- -----------------------------
ln 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." The adoption of this statement in 1996 was not material to the
consolidated financial statements.
<PAGE>
-4-
(3) Long-Term Debt -
--------------
The Company has a series of privately placed notes with CIT Group/Equipment
Financing Inc. The notes bear interest at various fixed amounts and mature
at various dates through 2001. Following is a summary of debt outstanding at
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
9.77% note, issued December 28, 1990, maturing
December 28, 2000 $251,000 $335,000 $418,000
9.61 % note, issued February 4, 1991, maturing
February 4, 2001 1,993,000 2,491,000 2,989,000
9.80% note, issued March 28, 1991, maturing
March 28, 2001 827,000 1,033,000 1,240,000
9.67% note, issued May 29, 1991, maturing
May 29, 2001 620,000 775,000 930,000
10.85% note, issued July 24, 1991, maturing
July 24, 2001 116,000 145,000 174,000
8.95% note, issued December 27, 1991, maturing
December 27, 2001 54,000 68,000 82,000
---------- ---------- ----------
3,861,000 4,847,000 5,833,001
Less - Current portion 986,000 986,000 986,000
---------- ---------- ----------
$2,875,000 $3,861,000 $4,847,000
========== ========== ==========
</TABLE>
The notes are subject to various financial and nonfinancial covenants with
which the Company is in compliance at December 31, 1997.
The aggregate maturities of long-term debt outstanding at December 31,
1997, are as follows:
Minimum
Year Payments
------------- -----------
1998 $986,000
1999 986,000
2000 986,000
2001 903,000
2002 -
Thereafter -
----------
$3,861,00
==========
<PAGE>
-5-
(4) Leases-
------
The Company leases certain facilities under long-term capitalizable leases
which are included in property, plant and equipment as buildings.
1997 1996 1995
----------- ----------- -----------
Buildings $13,720,000 $13,720,000 $13,720,000
Less- Accumulated amortization 4,330,000 3,418,000 2,507,000
----------- ----------- -----------
Total $ 9,390,000 $10,302,000 $11,213,000
=========== =========== ===========
Future minimum lease payments for assets under capital leases at December 31
are as follows:
1998 $1,649,000
1999 1,649,000
2000 1,649,000
2001 1,649,000
2002 1,649,000
Thereafter 5,615,000
-----------
$13,860,000
===========
Total minimum lease payments $13,860,000
Less- Amount representing interest 3,643,000
-----------
Present value of minimum lease payment 10,217,000
Less- Current maturities 914,000
-----------
Long-term obligation $9,303,000
===========
At December 31, the Company has minimum rental payments through the year
2003 under noncancellable operating leases as follows:
Minimum
Year Payments
------------- ----------
1998 $228,000
1999 195,000
2000 156,000
2001 122,000
2002 122,000
Thereafter 31,000
---------
$854,000
=========
Total rental expense for all operating leases was approximately $543,000,
512,000 and $567,000 in 1997, 1996 and 1995.
<PAGE>
-6-
(5) Retirement Plans-
----------------
Salaried and hourly employees that meet certain requirements are eligible to
participate in the Newell Pension Plan for Salaried and Clerical Employees.
The pension plan is administered by Newell. Factory hourly employees that
meet certain requirements are eligible to participate in the Paper Industry
Union Management Pension Fund, a multi-employer plan. The plan is
administered by a joint Board of Trustees consisting of four Union
representatives and four employer representatives from participating
companies. Newell pays the Company's portion of the plans' costs and funding
requirements. The Company reimburses Newell for these costs. Total expense
under these plans was $291,000, $188,000 and $245,000 for 1997, 1996, and
1995.
The employees of the Company are also eligible to participate in the Newell
Co. Long-Term Savings and Investment Plan. The Company matches a portion of
the employees contribution. Profit sharing expense was $89,000, $87,000 and
$87,000 for 1997, 1996 and 1995.
(6) Income Taxes-
------------
The Company accounts for income taxes as prescribed by SFAS No. 109,
"Accounting for Income Taxes." For U.S. income tax purposes, the Company's
income is included in Newell Co.'s consolidated Federal income tax return.
As a result, the Company records Federal taxes as an intercompany
transaction with Newell.
The provision for income taxes for the years ended December 31 consists of
the following (computed on the basis of the Company as a standalone entity
for U.S. Federal income tax purposes):
1997 1996 1995
---------- ---------- ----------
Current-
Federal $3,264,000 $3,540,000 $4,037,000
State 262,000 285,000 392,000
---------- ---------- ----------
3,526,000 3,825,000 4,429,000
Deferred (343,000) 463,000 1,216,000
---------- ---------- ----------
Total $3,183,000 $4,288,000 $5,645,000
========== ========== ==========
<PAGE>
-7-
The components of the net deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Deferred tax assets -
AccruaLs, not currently deductible for tax
purposes $ 539,000 $ 556,000 $ 509,000
Inventory reserves 787,000 409,000 1,390,000
Repair parts and supplies 1,046,000 955,000 837,000
Other 1,585,000 1,362,000 736,000
----------- ---------- ----------
3,957,000 3,282,000 3,472,000
Deferred tax liabilities -
Accelerated depreciation 2,417,000 2,085,000 1,812,000
---------- ---------- ----------
2,417,000 2,085,000 1,812,000
---------- ---------- ----------
Net deferred tax asset (liability) $1,540,000 $1,197,000 $1,660,000
========== ========== ==========
</TABLE>
The net deferred tax asset is classified in the consolidated balance sheets at
December 31 as follows
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Current net transferred income tax asset $3,980,000 $3,340,000 $3,348,000
Noncurrent deferred income tax liability (2,440,000) (2,143,000) (1,688,000)
---------- ---------- ----------
$1,540,000 $1,197,000 $1,660,000
========== ========== ==========
</TABLE>
A reconciliation of the U.S. statutory tax provision to the effective income tax
provision for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
l997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory Federal income tax $2,404,000 $3,333,000 $4,627,000
Add (deduct) effect of -
State income taxes, net of federal income
tax effect 282,000 372,000 499,000
Nondeductible trade goodwill 532,000 533,000 545,000
Other (35,000) 50,000 (26,000)
---------- ---------- -----------
Effective rate $3,183,000 $4,288,000 $5,645,000
========== ========== ===========
</TABLE>
<PAGE>
-8-
(7) Other Nonoperating Expense -
--------------------------
Total other nonoperating expense consists of the following expense(income)
items for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Trade names and goodwill amortization $1,427,000 $1,430,0OO $1,460,000
Management bonuses 426,000 702,000 539,000
Intercompany profit (153,000) (37,000) (64,000)
Loss on sale of machinery 16,000 43,000 102,000
Insurance proceeds (550,000) - -
Other (1,000) (197,000) 1,000
---------- ---------- ----------
$1,206,000 $1,941,000 $2,038,000
========== =========== ==========
</TABLE>
(8) Significant Customer-
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Sales to one customer accounted or 31.3%, 32.3% and 38.3% of net sales in
l997, 1996 and 1995. At December 31, 1997, 1996 and 1995, receivables from this
customer accounted for 25.1%, 14.7% and 24.3% of the Company's net trade
accounts receivable, respectively.
(9) Transactions with Newell Co.-
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Newell Co. provides centralized services to the Company including treasury
management, cash management, receivables processing, payables processing,
computer information services and payroll processing. Newell Co. allocated
$500,000 for these services to the Company annually. The management of Newell
Co. believes the allocations are reasonable, but they are not necessarily
indicative of the costs that would have been incurred had Stuart Hall been a
standalone company.
