<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 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)
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 July 3, 1998, there were
outstanding 100 shares of common stock, $0.01 par value, all of which are
privately held and are not traded on a public market.
<PAGE>
PEN-TAB INDUSTRIES, INC.
AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED JULY 4, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
a) Condensed Consolidated Balance Sheets
as of January 3, 1998 and July 4, 1998 1
b) Condensed Consolidated Statements of Operations
for the quarters and six months ended
July 5, 1997 and July 4, 1998 2
c) Condensed Consolidated Statements of Cash Flows
for the six months ended July 5, 1997 and
July 4, 1998 3
d) Notes to 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
<PAGE>
PEN-TAB INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
January 3, July 4,
1998 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,676 $ 0
Accounts receivable, net of allowances 8,321 30,780
Inventories 21,787 32,243
Prepaid expenses and other current assets 988 383
--------------- ---------------
Total current assets 44,772 63,406
Property, plant and equipment, net 15,775 15,546
Other assets 3,245 3,105
--------------- ---------------
Total assets $ 63,792 $ 82,057
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and bank overdraft $ 2,671 $ 5,376
Accrued expenses and other current liabilities 1,023 2,688
Accrued interest on subordinated notes 3,330 3,249
Deferred income taxes 140 140
Current portion of long-term debt 540 140
--------------- ---------------
Total current liabilities 7,704 11,593
Long-term debt 7,214 20,990
Senior subordinated notes 75,000 75,000
Deferred income taxes 1,879 1,879
Stockholders' equity (deficit) (28,005) (27,405)
Minority Interest
--------------- ---------------
Total liabilities and stockholders' equity $ 63,792 $ 82,057
=============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
1
<PAGE>
PEN-TAB INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
----------------------------------- -----------------------------
July 5, July 4, July 5, July 4,
1997 1998 1997 1998
---------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 30,713 $ 37,221 $ 47,958 $ 55,440
Cost of goods sold 21,675 27,004 35,271 41,015
---------------- --------------- ------------ -------------
Gross profit 9,038 10,217 12,687 14,425
Expenses:
Selling, general and administrative 4,812 5,289 8,165 9,022
Interest expense - net 2,238 2,320 3,808 4,261
---------------- --------------- ------------ -------------
Total expenses 7,050 7,609 11,973 13,283
---------------- --------------- ------------ -------------
Income before income taxes and minority interest 1,988 2,608 714 1,142
Income tax provision 756 1,046 2,694 542
---------------- --------------- ------------ -------------
1,232 1,562 (1,980) 600
Minority Interest (Loss) Income - 0
---------------- --------------- ------------ -------------
Net (loss) income $ 1,232 $ 1,562 $ (1,980) $ 600
================ =============== ============ =============
Pro forma financial data:
Historical income before income taxes $ 1,988 714
Pro forma income tax provision 756 271
---------------- ------------
Pro forma net income $ 1,232 $ 443
================ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
2
<PAGE>
PEN-TAB INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
July 5, July 4,
1997 1998
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (1,980) $ 600
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 1,214 1,278
Deferred income taxes 2,387
Amortization of debt issue costs 191 230
Minority Interest 0
Provision for losses on accounts receivable 73 262
Changes in operating assets and liabilities:
Accounts receivable (15,253) (22,721)
Inventories (12,344) (10,456)
Prepaid expenses, other current assets and other assets (3,153) 515
Accounts payable and bank overdraft 2,265 2,706
Accrued expenses and other current liabilities 5,215 1,665
Accrued interest on subordinated notes (80)
-------------- ---------------
Net cash used in operating activities (21,385) (26,001)
-------------- ---------------
INVESTING ACTIVITIES
Purchase of equipment (808) (1,050)
-------------- ---------------
Net cash used in investing activities (808) (1,050)
-------------- ---------------
FINANCING ACTIVITIES
Net change in long-term debt (13,231) 13,375
Issuance of senior subordinated notes, net of expense 75,000 -----
Dividends (39,687) -----
-------------- ---------------
Net cash provided by financing activities 22,082 13,375
-------------- ---------------
Increase (decrease) in cash and cash equivalents (111) (13,676)
Cash and cash equivalents at beginning of period 111 13,676
-------------- ---------------
Cash and cash equivalents at end of period $ - $ -
============== ===============
</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
JULY 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, inc. ("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 July 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 July 5,
1997 and July 4, 1998. 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.
Certain 1997 balances have been reclassified to conform to the 1998 financial
statement presentation.
2. NEW ACCOUNTING AND AUDITING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS No. 133), which requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position and that those instruments shall be measured at fair value.
FAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
Company expects to adopt FAS No. 133 during the first quarter of year 2000 and
it is not expected to have a material impact.
3. INVENTORIES
The Company uses the LIFO method of accounting to value inventories. The
components of inventories consist of the following:
<TABLE>
<CAPTION>
January 3, July 4,
1998 1998
---------- --------
<S> <C> <C>
Raw materials $ 8,993 $11,871
Work-in process 372 100
Finished goods 12,422 20,272
------- -------
$21,787 $32,243
======= =======
</TABLE>
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.
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 periods 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.
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.
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 July 4, 1998, the minority interest is $(0.0) million as a
result of a negative equity position.
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 4, 1998 increased by $6.5 million, or
21.2%, to $37.2 million from $30.7 million for the quarter ended July 5, 1997.
Net sales for the six months ended July 4, 1998 increased by $7.5 million, or
15.6%, to $55.5 million from $48 million for the six months ended July 5, 1997.
For the Pen-Tab segment differentiated product sales increased by $1.3 million
and core product sales increased $5.1 million.for the quarter ended July 4, 1998
as compared to the quarter ended July 5. 1997. For the Pen-Tab segment
differentiated product sales increased by $1.6 million and core product sales
increased by $6.2 million for the six months ended July 4, 1998, as compared to
the six months ended July 5, 1997. For the Pen-Tab segment, pounds / units
shipped increased approximately 33.5% for the quarter ended July 4, 1998
compared to the quarter ended July 5, 1997, increasing revenues by $6.4 million
or 22.5%. For the Pen-Tab segment, pounds/units shipped increased approximately
by 22.2% for the six months ended July 4, 1998 compared to the six months ended
July 5, 1997. 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 increased approximately $1 million for the quarter ended
July 4, 1998 compared to the quarter ended July 5, 1997. The Vinylweld segment
sales decreased approximately $0.3 million for the six months ended July 4, 1998
compared to the six months ended July 5, 1997.
Gross profit for the quarter ended July 4, 1998 increased $1.2 million or
13.0% to $10.2 million from $9.0 million for the quarter ended July 5, 1997.
Gross profit for the six months ended July 4, 1998 increased $1.7 million or
13.7% to $14.4 million from $12.7 million for the six months ended July 5, 1997.
The gross profit percentage for the quarter ended July 4, 1998 was 27.4%
compared to 29.4% for the quarter ended July 5, 1997. The gross profit
percentage for the six months ended July 4, 1998 was 26.0% compared to 26.5% for
the six months ended July 5, 1997. For the Pen-Tab segment the decrease in the
gross profit percentage is attributable to a change in the product mix. Core
products, which carry lower gross profit percentages, increased to 60.0% and
65.2 % of the product mix sold for the quarter and six months ended July 4,
1998 as compared to 55.5% and 62.8% of the product mix sold for the quarter and
six months ended July 5, 1997 and in the inverse the differentiated products
which carry higher gross profit percentages declined as a percentage of the
product mix sold for the quarter and six months ended July 4, 1998 as compared
to July 5, 1997.
SG&A expenses for the quarter ended July 4, 1998 increased $0.5 million, or
9.9% to $5.3 million from $4.8 million for the quarter ended July 5, 1997. SG&A
expenses for the six months ended July 4, 1998 increased by $0.9 million or
10.5% to $9.0 million from $8.1 million for the six months ended July 5, 1997.
As a percentage of net sales, SG&A expenses decreased to 14.2% for the quarter
ended July 4, 1998 from 15.7% for the quarter ended July 5, 1997. As a
percentage of net sales, SG&A expenses decreased to 16.3% for the six months
ended July 4, 1998 from 17.0% for the six months ended July 5, 1997. This
decrease as a percentage of net sales is principally the result of a decrease in
advertising expenses partially offset by an increase in sales and marketing
salaries and shipping expenses.
Interest expense for the quarter ended July 4, 1998 increased $0.1 million
to $2.3 million from $2.2 million for the quarter ended July 5, 1997. The
increase is principally due to an increase in seasonal borrowings which
directly correlate to the increase in sales volume.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended July 4, 1998
was $26.0 million as compared to net cash used in operating activities of $21.4
million for the six months ended July 5, 1997. The increase was primarily
attributable to a $4.1 million payment on February 4, 1998 for the accrued
6
<PAGE>
interest on subordinated notes and the increase in accounts receivable from the
aforementioned sales growth.
Net cash provided in financing activities for the six months ended July 4,
1998 was $13.4 million as compared to net cash provided by financing activities
of $22.1 million for the six months ended July 5, 1997. The net cash provided
in financing activities for the six months ended July 4, 1998 was due to an
increase in borrowings to allow for operations at an accelerated rate. During
the six months ended July 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.
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 second 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 July
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> 6-MOS 6-MOS
<FISCAL-YEAR-END> JAN-02-1999 JAN-03-1998
<PERIOD-START> APR-05-1998 APR-06-1997
<PERIOD-END> JUL-04-1998 JUL-05-1997
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 31,042 25,950
<ALLOWANCES> 262 73
<INVENTORY> 32,243 27,082
<CURRENT-ASSETS> 63,406 53,567
<PP&E> 29,362 29,245
<DEPRECIATION> 13,816 12,885
<TOTAL-ASSETS> 82,057 73,472
<CURRENT-LIABILITIES> 11,593 15,442
<BONDS> 82,214 82,689
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (27,405) (26,616)
<TOTAL-LIABILITY-AND-EQUITY> 82,057 73,472
<SALES> 37,221 30,713
<TOTAL-REVENUES> 37,221 30,713
<CGS> 27,004 21,675
<TOTAL-COSTS> 5,289 4,812
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,320 2,238
<INCOME-PRETAX> 2,608 1,988
<INCOME-TAX> 1,046 756
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,562 1,232
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
