<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 3, 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 October 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 SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 3, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
a) Condensed Consolidated Balance Sheets
as of January 3, 1998 and October 3, 1998 1
b) Condensed Consolidated Statements of Operations
for the quarters and nine months ended
October 4, 1997 and October 3, 1998 2
c) Condensed Consolidated Statements of Cash Flows
for the nine months ended October 4, 1997 and
October 3, 1998 3
d) Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
<PAGE>
Pen-Tab Industries, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
January 3, October 3,
1998 1998
----------------- -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 13,676 $ -
Accounts receivable, net of allowances 8,321 36,975
Inventories 21,787 37,153
Prepaid expenses and other current assets 988 1,958
----------------- -------------------
Total current assets 44,772 76,086
Property, plant and equipment, net 15,775 52,443
Other assets 2,871 4,661
Goodwill 374 68,155
================= ===================
Total assets $ 63,792 $ 201,345
================= ===================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and bank overdraft $ 2,671 $ 3,395
Accrued expenses and other current liabilities 1,023 15,899
Accrued interest on subordinated notes 3,330 1,195
Accrued income taxes - 634
Accrued purchase price - Stuart Hall - 22,000
Deferred income taxes 140 -
Current portion of long-term debt 540 2,026
----------------- -------------------
Total current liabilities 7,704 45,149
Long-term debt - revolver - 14,061
Long term debt - term loan - 35,000
Long term debt - other 7,214 17,935
Senior subordinated notes 75,000 75,000
Deferred income taxes 1,879 2,019
Stockholders' (deficit) equity (28,005) 12,181
================= ===================
Total liabilities and stockholders' equity $ 63,792 $ 201,345
================= ===================
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
1
<PAGE>
Pen-Tab Industries, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------------------------- -------------------------------
October 4, October 3, October 4, October 3,
1997 1998 1997 1998
--------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 35,079 $ 43,299 $ 83,037 $ 98,739
Cost of goods sold 25,017 32,795
--------------- ---------------- -------------- -------------
Gross profit 10,062 10,504 22,750 24,928
Expenses:
Selling, general and administrative 5,493 6,983 13,658 16,005
Amortization of intangibles - 142 - 142
Interest expense - net 2,429 2,900 6,237 7,161
--------------- ---------------- -------------- -------------
Total expenses 7,922 10,025 19,895 23,308
--------------- ---------------- -------------- -------------
Income before income taxes 2,140 479 2,855 1,620
Income tax provision 568 182 3,262 616
--------------- ---------------- -------------- -------------
Net income (loss) $ 1,572 $ 297 $ (407) $ 1,004
=============== ================ ============== =============
Pro Forma Financial Data:
Historical income before taxes $ 2,140 $ 2,855
Pro forma income tax provision 813 1,085
=============== ==============
Pro forma net income $ 1,327 $ 1,770
=============== ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
2
<PAGE>
Pen-Tab Industries, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
October 4, October 3,
1997 1998
----------------- ----------------
<S> <C> <C>
Operating activities
Net (loss) income $ (407) $ 1,004
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,930 2,067
Amortization of intangibles and debt issuance costs 304 487
Deferred income taxes 2,343 -
Provision for losses on accounts receivable 114 286
Changes in operating assets and liabilities:
Accounts receivable (6,538) 8,258
Inventories (6,099) (2,283)
Prepaid expenses, other current assets and other assets (2,722) (1,526)
Accounts payable and bank overdraft (903) (1,782)
Accrued purchase price- Stuart Hall - 22,000
Accrued expenses and other current liabilities 2,276 3,367
Accrued interest on subordinated notes - (2,135)
----------------- ----------------
Net cash (used in) provided by operating activities (9,702) 29,743
----------------- ----------------
Investing activities
Sale of minority interest in Vinylweld L.L.C. - 125
Purchases of equipment (1,233) (2,275)
Purchase of Stuart Hall - (129,000)
----------------- ----------------
Net cash (used in) investing activities (1,233) (131,150)
----------------- ----------------
Financing activities
Borrowings under long-term debt 126,875 174,308
Repayments of long term debt (143,294) (125,759)
Issuance of senior subordinated notes, net of expense 75,000 -
Dividends to Pen-Tab Holdings (39,542) (18)
Equity contribution from Pen-Tab Holdings - 39,200
-------------------------------------
Net cash provided by financing activities 19,039 87,731
----------------- ----------------
Increase (decrease) in cash and cash equivalents 8,104 (13,676)
Cash and cash equivalents at beginning of period 111 13,676
----------------- ----------------
Cash and cash equivalents at end of period $ 8,215 $ -
================= ================
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
3
<PAGE>
PEN-TAB INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 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. and
Subsidiaries (the "Company"or "Pen-Tab"), a Delaware corporation. On February
3, 1998 the Company formed a subsidiary called Vinylweld L.L.C. (see note 7).
On August 20, 1998 the Company purchased all of the common stock of Stuart
Hall Company (see note 3). The accompanying unaudited condensed consolidated
financial statements of Pen-Tab Industries, Inc. and Subsidiaries 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 October 3, 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 periods ended October
4, 1997 and October 3, 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.
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 98-5, which is effective for fiscal years commencing after
December 15, 1998. SOP 98-5, Reporting on the Costs of Start-up Activities,
prescribes that start-up costs, including organization costs, should be
expensed as incurred. The Company expects to adopt SOP 98-5 during the first
quarter of fiscal year 1999 and is not expected to have material impact.
3. PURCHASE OF STUART HALL
Pen-Tab consummated the purchase of Stuart Hall Company, Inc. ("Stuart
Hall") a subsidiary of Newell Co., on August 20, 1998. The acquisition is
accounted for using the purchase accounting method. The aggregate acquisition
costs were allocated to the net assets acquired based on the fair market value
of such assets with the remainder allocated to goodwill.
4
<PAGE>
3. PURCHASE OF STUART HALL (CONTINUED)
The purchase price paid for Stuart Hall was $107.0 million plus an
estimated working capital adjustment of $22.0 million which is expected to be
paid during December 1998 in accordance with the acquisition agreement. The
purchase price was financed from an equity contribution from Holdings of $39.2
million and the balance in bank borrowings (see note 6). The allocation of
the purchase price to current assets was $53 million, property, plant and
equipment $37 million, intangible assets $68 million and assumed liabilities
of $(29) million. The goodwill arising from the acquisition of Stuart Hall
will be amortized over its expected useful life of 40 years using the
straight-line method of amortization.
See note 8 for the pro forma results of operations for the nine months
ended October 4, 1997 and October 3, 1998.
4. INVENTORIES
The Company uses the LIFO method of accounting to value inventories. The
components of inventories consist of the following:
January 3, October 3,
1998 1998
---------- ----------
Raw materials $ 8,993 $ 9,684
Work-in process 372 375
Finished goods 12,422 27,094
------- -------
$21,787 $37,153
======= =======
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.
However, Pen-Tab's current expectation is that its inventory levels will
remain consistent from year end to year end. Accordingly, interim LIFO
calculations are necessarily based on management's estimates of expected year-
end inventory levels and costs.
5. 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.
6. 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 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.
5
<PAGE>
6. SENIOR SUBORDINATED NOTES AND LONG-TERM DEBT (CONTINUED)
The fair value of the $75 million Senior Subordinated Notes is based on the
quoted market price of 88% of face value or $66 million at October 3, 1998.
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 August 20, 1998, in conjunction with the acquisition of Stuart Hall the
Company entered into a new Credit Agreement ("New Credit Agreement") with the
Bank of America National Trust and Savings Association and repaid the balance
owed on the Credit Agreement. The New Credit Agreement includes a $100
million three year revolving line of credit and a $35 million three year term
loan. The New Credit Agreement is secured by the assets and stock of the
Company and is guaranteed by Holdings. Availability on the revolving line of
credit is equal to the sum of 85% of accounts receivable and 60% of inventory
and is subject to a clean down provision which requires the outstanding
revolver balance to be below $25 million for 30 consecutive days during the
fourth quarter of the year. Under the terms of the New Credit Agreement the
Company is required to maintain certain financial ratios relating to cash flow
and net worth. The interest rate on the New Credit Agreement is LIBOR plus
2%.
7.
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 for $0.1 million. As of October 3, 1998, the minority
interest is $(0.0) million as a result of a negative equity position.
6
<PAGE>
8. Pro Forma Results
The pro forma condensed statements of operations are presented for the
purpose of providing investors and other interested parties with information
about the impact of the purchase of Stuart Hall by Pen-Tab on Pen-Tab's
financial statements as if the transaction had been consummated at an earlier
date. Pen-Tab consummated the purchase of Stuart Hall Company, Inc. a subsidiary
of Newell Co., on August 20, 1998. Pen-Tab is financing the stock purchase
through an equity contribution of $39.2 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 $22 million.
<TABLE>
<CAPTION>
Pen-Tab Stuart Pro Forma
Industries,Inc. Hall Company Results
Nine Months Nine Months Nine Months
Ended Ended Pro Forma ended
October 4, 1997 October 4, 1997 Adjustments October 4, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 83,037 $ 81,675 $ - $ 164,712
Cost of goods sold 60,287 56,452 (1,500)(1) 116,310
1,071 (2)
---------------- ------------------ ------------------ -----------------
Gross profit 22,750 25,223 429 48,402
Expenses:
Selling, general and administrative 13,658 12,958 (3,450)(1) 23,166
Amortization of intangibles - 1,070 (1,070)(3) 1,321
- - 1,321 (4)
Interest expense - net 6,237 797 4,500 (5) 11,534
Other (income) net - (73) - (73)
---------------- ------------------ ------------------ -----------------
Total expenses 19,895 14,752 1,301 35,948
---------------- ------------------ ------------------ -----------------
Income before income taxes 2,855 10,471 (872) 12,454
Income tax provision (benefit) 3,262 3,979 (2,508)(6) 4,733
---------------- ------------------ ------------------ -----------------
Net (loss) income $ (407) $ 6,492 $ 1,636 $ 7,721
================ ================== ================== =================
Pen-Tab Stuart Pro Forma
Industries Hall Results
Nine Months Nine Months Nine Months
Ended Ended Pro Forma ended
October 3, 1998 October 3, 1998 Adjustments October 3, 1998
----------------- ------------------ --------------- -------------------
Net sales $ 96,207 $ 71,873 $ - $ 168,080
Cost of goods sold 71,638 49,902 (1,500)(1) 121,111
1,071 (2)
---------------- ------------------ ------------------ -----------------
Gross profit 24,569 21,971 429 46,969
Expenses:
Selling, general and administrative 15,014 10,821 (3,450)(1) 22,385
Amortization of intangibles - 1,070 (1,070)(3) 1,321
1,321 (4)
Interest expense - net 7,101 754 4,500 (5) 12,355
Other expense net - 160 - 160
---------------- ------------------ ------------------ -----------------
Total expenses 22,115 12,805 1,301 36,221
---------------- ------------------ ------------------ -----------------
Income before income taxes 2,454 9,166 (872) 10,748
Income tax provision (benefit) 933 3,583 (432)(6) 4,084
---------------- ------------------ ------------------ -----------------
Net income (loss) $ 1,521 $ 5,583 $ (440) $ 6,664
================ ================== ================== =================
</TABLE>
Pro Forma Adjustments
- ---------------------
(1)Income from operations: reflects $6.6 million of operational synergies in
combining the two businesses including headcount reductions and freight out cost
savings from the reallocation of product shipments among the Company's three
manufacturing and distribution facilities. Synergies for the nine months are
seventy five percent or $4.95 million of which $1.5 million is allocated to cost
of goods sold and $3.45 million is allocated to SG & A expenses.
(2)Depreciation expense of $1.1 million due to a $14.3 million step up to fair
market value of the Stuart Hall Property,Plant and Equipment.
(3) Reverse existing goodwill amortization expense of $1.1 million on Stuart
Hall's statements of operations.
(4)Record goodwill of $68.1 million due to acquisition of Stuart Hall. Goodwill
is amortized over 40 years of which $1.3 million was recorded for the nine month
period as goodwill amortization expense.
(5) Interest expense; reflects acquisition debt as if the acquisition occurred
at the beginning of the period. Average annual acquisition debt of $71 million
at an interest rate of 7.45% (LIBOR plus 2%). In addition amortization of debt
issuance costs for the nine months is $0.6 million.
(6)Income Taxes; reflects adjustment to bring income taxes to an effective rate
of 38%.
7
<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 3, 1998 increased by $8.2 million,
or 23.4%, to $43.3 million from $35.0 million for the quarter ended October 4,
1997. Net sales for the nine months ended October 3, 1998 increased by $15.7
million, or 18.9%, to $98.7 million from $83.0 million for the nine months ended
October 4, 1997. For Pen-Tab differentiated product sales increased by $0.6
million to $14.6 million and core product sales increased by $4.4 million to
$23.3 million for the quarter ended October 3, 1998 as compared to the quarter
ended October 4. 1997. For Pen-Tab differentiated product sales increased by
$2.2 million to $32.5 million and core product sales increased by $10.6 million
to $56.7 million for the nine months ended October 3, 1998, as compared to the
nine months ended October 4, 1997. Stuart Hall Company sales were $2.6 million
for the period August 21, 1998, date of acquisition, to October 3, 1998. The
Vinylweld segment sales increased approximately $0.7 million to $2.9 million for
the quarter ended October 3, 1998 compared to the quarter ended October 4, 1997.
The Vinylweld segment sales increased approximately $0.3 million to $7.0 million
for the nine months ended October 3, 1998 compared to the nine months ended
October 4, 1997.
Gross profit for the quarter ended October 3, 1998 increased $0.4 million
or 4.4% to $10.5 million from $10.0 million for the quarter ended October 4,
1997. Gross profit for the nine months ended October 3, 1998 increased $2.2
million or 9.6% to $25.0 million from $22.7 million for the nine months ended
October 4, 1997. The gross profit percentage for the quarter ended October 3,
1998 was 24.5% compared to 28.7% for the quarter ended October 4, 1997. The
gross profit percentage for the nine months ended October 3, 1998 was 25.2%
compared to 27.4% for the nine months ended October 4, 1997. For Pen-Tab the
gross profit percentage declined to 25.8% for the nine months ended October 3,
1998 from 27.5% for the nine months ended October 4, 1997. The decline in gross
margin percentage of 1.8% was principally the results of (i) the sales mix
change from differentiated products 39.6% and core products 60.4% of sales for
the nine months ended October 4, 1997 to differentiated products 36.4% and core
products 63.6% of sales for the nine months ended October 3, 1998. The average
gross profit percentage for differentiated products is approximately 15%
higher than core products. This shift in mix towards core products accounts for
approximately 0.5% of the 1.8% decline in gross profit percentage. (ii) The
sales mix within nylon differentiated products ($17.9 million of sales for nine
months ended October 3, 1998 and $16.8 million of sales for the nine months
ended October 4, 1997) also changed. A greater percentage of the 1998 nylon
sales were in the good and better categories ( i.e basic nylon) and the lesser
percentage was in the best categories (i.e fashion). The good and better nylon
categories carry lower gross margin percentages than the best categories, which
caused the overall gross profit percentage in the nylon product category to
decrease to 42.6% for the nine months ended October 3, 1998 from 46.6% for the
nine months ended October 4, 1997. This accounts for approximately 0.8% of the
1.8% decline in gross profit percentage. For the Vinylweld segment the gross
profit percentage declined to 17.1% for the nine months ended October 3, 1998
from 22.5% for the nine months ended October 4, 1997. The decline in gross
margin is attributable to (i) approximately $0.7 million of one time low margin
sales taken to sustain the workforce during an unusual lull in normal customer
orders, (ii) lower margins required to obtain $0.5 million of initial sales from
new customers and (iii) a change in mix towards lower margin products.
SG&A expenses for the quarter ended October 3, 1998 increased $1.5 million,
or 27.1% to $7.0 million from $5.5 million for the quarter ended October 4,
1997. SG&A expenses for the nine months ended October 3, 1998 increased by $2.3
million or 17.2% to $16.0 million from $13.7 million for the nine months ended
October 4, 1997. As a percentage of net sales, SG&A expenses increased to
16.1% for the quarter ended October 3, 1998 from 15.7% for the quarter ended
October 4, 1997. As a percentage of net sales, SG&A expenses decreased to
16.2% for the nine months ended October 3, 1998 from 16.4% for the nine months
ended October 4, 1997. This decrease as a percentage of net sales is principally
the result advertising expenses incurred in 1997 for print and media which were
not repeated in 1998, and partially offset by an increase in sales and
marketing salaries, sales commissions, and shipping expenses.
8
<PAGE>
Amortization of intangibles for the quarter and nine months ended October
3, 1998 increased by $0.1 million from $0.0 million due to the amortization of
goodwill incurred by the acquisition of Stuart Hall.
Interest expense for the quarter ended October 3, 1998 increased $0.5
million to $2.9 million from $2.4 million for the quarter ended October 4, 1997
and increased by $0.9 million to $7.1 million for the nine months ended October
3, 1998 from $6.2 million for the nine months ended October 4, 1997. The
increase is due to interest expense incurred in conjunction with the
acquisition of Stuart Hall on August 20, 1998 and interest expense for the nine
months ended October 3, 1998 includes nine months of interest expense on the $75
million subordinated notes compared to eight months of interest expense on the
subordinated notes during the nine months ended October 4, 1997. The $75 million
subordinated notes were issued on February 4, 1997.
YEAR 2000 COMPATIBILITY
Pen-Tab is currently engaged in a company-wide effort to address the year
2000 compatibility issues that are likely to arise if computer programs and
embedded computer chips are unable to properly recognize dates in and after the
year 2000. The project is focused on three main areas: information technology
(IT) systems in Pen-Tab's computers and computer software, including those that
are linked to the systems of third parties; non-IT systems imbedded in
equipment; and Pen-Tab's business relationships with third parties such as
suppliers, customers and service providers. The thrust of Pen-Tab's project is
to address those systems and relationships which Pen-Tab judges to be material
to the their operations. Failure by Pen-Tab to timely resolve Year 2000
Compatibility issues could result, in the worst case, in an inability to
manufacture and distribute its product to customers and process its daily
business for some period of time. Based on Pen-Tab current status of the
project Pen-Tab believes the worst case scenario is unlikely. Pen-Tab is
expecting to fund all year 2000 project costs through its operating cash flow.
Pen-Tab has recently purchased a new certified Year 2000 compliant version
of its existing software to upgrade the IT systems. The implementation of the
recently purchased software is approximately 50% complete and is expected to be
completed by June 30, 1999. The purchase of the new software was purely for the
purpose of enhancing Pen-Tab's IT systems however, as a side benefit the new
system should resolve the Year 2000 compliance issues related to the IT system.
The cost associated with the acquisition of the new IT system are being
capitalized in accordance with SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The cost of the Year 2000
compliance project related to IT systems is expected to be $0.6 million of which
$0.4 million has been expended.
The Year 2000 compliance issue related Non-IT systems imbedded in equipment
is currently being evaluated by a company wide committee representing all
functional areas. The cost to remedy the Year 2000 compliance issue related to
Non-IT systems imbedded in equipment is not expected to be material. The review
and remediation of the Non-IT systems imbedded in equipment is expected to be
completed by December 31, 1999.
Pen-Tab has requested documentation from all significant customers,
suppliers and service providers that their organizations have addressed the Year
2000 compliance issues and will be ready for the year 2000. The cost to ensure
all significant customers, suppliers and service providers are Year 2000
compliant is not expected to be material. Pen-Tab expects to complete by
December 31, 1999.
Pen-Tab has developed a contingency plan for the Company's critical
information systems which is consisting of making its existing information
systems Year 2000 compliant. In addition Pen-Tab is formulating manual
intervention processes for critical company functions.
While Pen-Tab cannot warrant that all business systems of our business
partners, external agents, service providers or government agencies will be
timely with year 2000 compliance, the company expects no business interruptions
due to non-compliance by any particular entity. The Company believes that year
2000 issues will not materially affect future financial results or operating
performances.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended
October 3, 1998 was $29.7 million as compared to net cash used in operating
activities of $9.7 million for the nine months ended October 4, 1997. The
increase was primarily attributable to a $22.0 million additional liability for
the purchase of Stuart Hall.
Net cash used in investing activities was approximately $131.2 million
primarily due to the acquisition of Stuart Hall.
Net cash provided by financing activities for the nine months ended October
3, 1998 was $87.7 million as compared to net cash provided by financing
activities of $19.0 million for the nine months ended October 4, 1997. The net
cash provided by financing activities for the nine months ended October 3, 1998
was due to an increase in borrowings due to the acquisition of Stuart Hall and
an equity contribution from Pen-Tab Holdings of $39.2 million. During the nine
months ended October 4, 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 $16.4
million net repayment of long-term debt.
SEASONALITY AND KNOWN TRENDS
Pen-Tab experiences seasonality in its business operations. During Pen-Tab's
second and third quarters, net sales are higher than the first and fourth
quarters due to sales of back-to-school products.
FORWARD-LOOKING STATEMENTS
Written reports and oral statements made from time to time by Pen-Tab contain
"forward-looking statements." Forward looking statements can be identified by
the fact that they do not relate strictly to historical or current facts and by
their use of words such as "goals," "expects," "plans," "believes," "estimates,"
"forecasts," "projects," "intends," and other words of similar meaning. Such
statements are likely to address Pen-Tab's earnings, return on capital, capital
expenditures, project implementation, production growth, sales growth and
expense reductions. They are based on management's then-current information,
assumptions, plans, expectations, estimates and projections about their
industry. However, such statements are not guarantees of future performance,
and actual results and outcomes may differ materially from what is expressed
depending on a variety of factors, many of which are outside of Pen-Tab's
control.
Among the factors that could cause actual outcomes or results to differ
materially from what is expressed in these forward-looking statements are
changes in the demand for, supply of, and market prices of paper, changes in
economic conditions, changes in the availability and/or price of paper,
significant changes in rates of interest, inflation, or taxes, changes in Pen-
Tab's relationship with its employees and the potential adverse effects if labor
disputes or grievances were to occur, changes in accounting principles and
timely resolution of Year 2000 compatibility issues by Pen-Tab and its customers
and suppliers.
10
<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
------------------------
Form 8-K and Form 8-K/A related to the acquisition of Stuart Hall were
filed on September 4, 1998 and October 20, 1998, respectively.
11
<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
October 3, 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)
12
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<PERIOD-START> JUL-05-1998 JUL-06-1997
<PERIOD-END> OCT-03-1998 OCT-04-1997
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0 0
0 0
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<OTHER-SE> 12,181 (24,898)
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<OTHER-EXPENSES> 10,025 7,922
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