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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
----------------
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 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 (I.R.S. EMPLOYER
JURISDICTION IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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.
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PEN-TAB INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
INDEX
<TABLE>
<C> <C> <S>
PART I.
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 7
Item 3. Legal Proceedings..................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders................................... 8
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matter................... 8
Item 6. Selected Financial Data............................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10
Item 8. Financial Statements and Supplementary Data........................................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. 14
PART III.
Item 10. Directors and Executive Officers of the Registrant.................................... 15
Item 11. Executive Compensation................................................................ 16
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 17
Item 13. Certain Relationships and Related Transactions........................................ 17
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 17
SIGNATURE......................................................................................... 19
EXHIBITS.......................................................................................... 20
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Pen-Tab Industries, Inc. ("Company" or "Registrant") was incorporated in
1997 in the state of Delaware, the successor corporation to a Virginia
corporation of the same name. The Company is a wholly owned subsidiary of Pen-
Tab Holdings, Inc. ("Holdings") a Virginia corporation.
The Company is a leading U.S. manufacturer of school, home and office supply
products. The Company's core products include binders, pads, filler paper,
spiral and coilless notebooks, planners, envelopes, school supplies and arts
and crafts products in hundreds of configurations. In 1992, the Company
recognized a previously unfulfilled demand for higher quality, upscale school
and office-related products. The Company pioneered a line of these
differentiated higher price point, branded products to serve the school and
office product markets. The Company has developed strong consumer recognition
for its proprietary office styles and its upscale school styles under the Pen-
Tab(R), Pen-Tab Pro(R) and Expert(R) brand names. These differentiated
products provide both the Company and the retailer with higher margins. The
Company, through its Vinylweld division, is also a leading supplier of vinyl
packaging products designed primarily for audio and video cassette tapes. For
fiscal 1997, core products represented an estimated 57.7% of revenue,
differentiated products represented an estimated 33.4% of revenue and
Vinylweld represented an estimated 8.9% of revenue. For fiscal 1997, school-
related products represented an estimated 59.7% of revenue, office-related
products represented an estimated 31.4% of revenue and Vinylweld represented
an estimated 8.9% of revenue.
The Company's move into differentiated products is primarily responsible for
the increases in sales and profitability. From 1993 to 1997, the Company's
sales have grown from $84.4 million to $96.6 million and EBITDA (as defined
herein) has grown from $5.7 million to $10.7 million. During the same period,
the Company's EBITDA margin increased from 6.7% to 11.0%. The Company's
strategy is to grow through continued internal design of new, differentiated
product lines and strategic acquisitions.
The Company has a long-standing customer base featuring strong mass
merchandisers, national discount stores, wholesale clubs, and office supply
superstores in the United States and Canada. The Company is headquartered in a
newly built, state-of-the-art 282,000 sq. ft. facility in Front Royal,
Virginia. The Company also maintains large, modern manufacturing facilities in
Chicago and Los Angeles. The Company has invested heavily in state-of-the-art
automated production equipment to provide a low cost manufacturing
environment. As of January 3, 1998, the Company employed approximately 650
people in its three facilities.
COMPETITIVE STRENGTHS
The combination of the Company's products, customers and proven track record
distinguishes it as a leading manufacturer and marketer of school, home and
office products in North America. The Company attributes this success and it's
continued opportunities for growth and profitability to the following
competitive strengths:
Market leader in differentiated, branded school, home and office products.
The Company is widely recognized as a market leader in differentiated, branded
school, home and office products. The Company has pioneered a line of high-
quality, functionally superior, higher price point and margin, branded items
to serve the school and office products markets. Demand for proprietary
differentiated products has risen steadily since 1993 when the Company first
introduced them and the Company expects a significant portion of its future
growth to come from increased sales of differentiated products.
Partnering reduces inventory risk. The Company's creative department has
strong design capabilities and together with senior sales and marketing
personnel have been successful in developing these relationships with major
customers. Senior sales management personally handle the Company's largest
accounts allowing the
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Company to design branded products in concert with its major customers,
tailoring high-quality, upscale products to meet a mutual vision. The
Company's differentiated branded school-related products are only mass-
produced once they have been pre-sponsored by a major customer.
Strong brand name recognition. Through the manufacturing of high-quality
products for over 60 years, the Company has developed strong brand recognition
with consumers, retailers and distributors. The Company focuses on building
its brand name by internally designing new, differentiated products and
product formats. This allows the Company to achieve higher margins than would
be achievable with core products. Several trademarks, sub-brands and
proprietary styles, including Pen-Tab(R), Pen-Tab Pro(R), Attitude(R), Tough
Tracks(R) and Expert(R), have been developed to service targeted market
sectors.
Modern, efficient and strategically located facilities. Over the past seven
years, the Company has invested approximately $23 million in the latest
advances in plant and capital equipment. Management has expanded manufacturing
capacity in advance of customer demand. The Company has available unused
manufacturing capacity to support an additional $50 million to $60 million in
sales of paper products with no significant additional capital expenditures.
Management believes the Company's heavy investment in technologically advanced
high-speed equipment provides it with one of the lowest manufacturing cost
environments in the school, home and office products industry. Moreover, with
large plants in or near the metropolitan areas of Los Angeles, Chicago and
Washington D.C., the Company is well positioned to serve the largest national
retailers and distributors in the United States. Its locations offer
additional expansion capacity and ready access to low-cost road and rail
transportation. The Company relocated to Virginia in October 1995 for improved
access to a skilled workforce, lower manufacturing costs and additional
expansion capacity.
Long-standing customer base. The Company has cultivated long-term customer
relationships with well-capitalized, high-growth retailers and distributors in
the school, home and office products industry. Management has identified the
fastest growing distribution channels in the Company's marketplaces and has
focused the resources of the Company on the key accounts in those channels.
The Company's customers include the nation's largest discount stores and mass
merchandisers, wholesale clubs, office supply superstores and contract
stationers. These customers are expected to benefit from the continuing
consolidation of retailers and distributors in the school and office products
category.
Leading edge information systems. The Company's state-of-the-art network and
MRP II software system manage the manufacturing, accounting, distribution,
inventory, sales and billing systems. The system links all of the Company's
locations to provide timely information for management. The Company has also
established electronic data interchange programs with numerous customers.
Experienced management team. Between them, Alan Hodes, Chief Executive
Officer of the Company, and Michael Greenberg, Executive Vice President of the
Company, have over 57 years with the Company. The Company has supplemented its
senior management ranks with a strong team of new sales, marketing and design
professionals within the past five years. Management has successfully
integrated the operations of acquired companies into the Company's existing
business.
GROWTH STRATEGY
The school, home and office products industry is a growing, consolidating
industry in which the Company has a significant market position. According to
the U.S. Department of Education and LINK Resources Corp., enrollment in
elementary and secondary schools is expected to rise to an estimated 54.4
million by the year 2000 from 50.7 million in 1995. This growth in enrollment,
coupled with an increased demand for high-quality, functionally superior,
creatively designed school-related products, provides a large potential market
for upscale, differentiated products. The Company's strategy is to fulfill the
demand for upscale, differentiated products in the school, home and office
products markets by pursuing the following:
Focus on rapidly growing customers. The Company serves many of the largest
and best-positioned customers in the school, home and office products industry
including mass merchandisers warehouse clubs,
2
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national office products superstores, and national contract stationers. Sales
to the three largest companies in each of these distribution channels
represent approximately 59.6% of the Company's 1997 net sales. Anticipating
further consolidation in the school, home and office products industry, the
Company expects that its national scope and broad product line will be
increasingly important in meeting the needs of its customers. The Company will
continue to target those customers driving consolidation in the school, home
and office products industry.
Continue to introduce differentiated products. Differentiated, higher value-
added, branded products give the Company a greater selection to offer its
customers and improve product line profitability for both the Company and its
customers. The Company plans to continue to distinguish itself from other
suppliers and improve profitability through product innovation,
differentiation and line extensions. The Company will accomplish this by
continued internal design of new, differentiated product lines.
Focus on partnering relationships. The Company will continue to utilize and
expand the integrated efforts of the creative department and senior sales and
marketing personnel to develop and foster partnering relationships with major
customers. Partnering should allow the Company to continue designing branded
products in concert with its major customers while expanding production of
upscale products that meet a mutual vision.
Broaden product distribution. The Company's market presence and distribution
strength position it to sell new or acquired product lines across its
distribution channels, including mass merchandisers, national office products
superstores, national contract stationers, and office product wholesalers. In
the future, the Company intends to strengthen its position in the contract
stationer market. The Company has a strong relationship with B.T. Office
Products International, Inc., one of the nation's largest contract stationers
and recently established relationships with two of the other large contract
stationers, Boise Cascade Office Products and U.S. Office Products. National
contract stationers account for approximately 25% of commercial office product
sales, a $25 billion to $30 billion market in 1995.
Growth through acquisition. In addition to the growth the Company expects to
come from the development of new, differentiated products and product lines
and expanding sales of existing products and product lines, the Company
actively evaluates acquisition candidates. Future strategic acquisitions may
be undertaken to broaden the Company's product lines, expand its manufacturing
capacity, and strengthen its presence within the various channels of
distribution in the worldwide market.
PRODUCTS AND SERVICES
The Company designs, manufactures and markets school, home and office-
related products, custom binders and other related packaging materials. The
Company's core products include binders, pads, filler paper, wirebound
notebooks, and envelopes. The Company manufactures over 500 variations of
these core products, based on differences in color, size, count, packaging and
other features.
Several years ago, management recognized a market need for well-designed,
high-quality, functionally superior school and office products. To serve this
need, the Company pioneered a new line of branded differentiated products with
value-added features. The Company's high-quality, fashion-forward school-
related designs and high quality, functionally superior, office-related
products have been very successful with major mass merchandisers and
consumers. Approximately 33 percent of the Company's 1997 sales are derived
from differentiated products, which have been developed over the last five
years.
School-related products (59.7% of 1997 net sales). The Company produces
tablets, spiral and coilless notebooks, filler paper and binders for the
school market. The Company's high-technology production equipment is designed
to produce these products in mass quantity in virtually any configuration
according to the customer needs. The Company also designs, assembles and
markets nylon binders, planners, knapsacks and other school products. Products
are packaged in a variety of quantities, rulings, sizes and papers.
3
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The Company is the recognized market leader for higher quality, upscale,
creatively designed school products largely for the teenage market. The
Company's design department has carefully researched market demands to develop
a range of product offerings. The Company created a broad line of innovative
styles and designs to appeal to segmented markets of school-age children
through its Pen-Tab Pro(R), Tough Tracks(R), Pro Ball(R) and Pen-Tab Online(R)
product lines. Durable nylon covers and colorful designs have been
incorporated into core products to differentiate its line. The value-added
products sell at retail price points for up to $20. Whereas certain basic
school supplies often work as a loss leader for retailers, the Company's
differentiated products give a mass merchandiser a fashion-forward image and
an attractive profit margin.
Leveraging its creative capabilities and experience, the Company has created
a brand name for high quality, upscale school supplies. For example, the "Pro
Ball" line is targeted at sports-minded school children and incorporates
embossed textured sports look and attractive color combinations. The Tough
Tracks(R) line incorporates a rugged, outdoors look which is targeted at
environmentally-conscious school children and utilizes textures, designs and
colors to appeal to the target market. The "Pro Series" is the Company's best
selling premium notebook line. Features of this line include pressboard
covers, inside pockets, coated double wire, extended tab dividers, and
heavyweight 20 lb. paper.
The Company also produces a variety of paper products for use in creative
and artistic leisure activities, including construction paper, poster paper,
tracing paper and drawing pads. These items are sold by the Company both in
conventional packaging and in innovative combination packs and jumbo bonus
packs. The Company distinguishes its arts and crafts packages by including
special "kids activity ideas" to encourage creativity.
Sales of school-related products are seasonal and peak during spring and
summer. Orders for back-to-school products are generally placed during
February through April, and shipped June through August. The Company builds a
substantial inventory of finished back-to-school products before shipment.
Certain differentiated products that are assembled by the Company from
materials manufactured overseas are only mass-produced with firm customer
commitments to limit inventory risk.
Management believes the growth opportunities for differentiated; creatively
designed school products remain largely untapped. The Company has numerous
exciting new products for the coming year, and management expects continued
growth from these items.
Office-related products (31.4% of 1997 net sales). The Company produces a
variety of similar products for the office, including pads and envelopes.
Sales of office products are not seasonal. New, differentiated products for
the office market have included double wire spiral pads with hard covers,
organizers and other high-quality, functionally superior products sold under
the Expert(R) and Platinum(R) brands.
The office products market represents significant growth potential for the
Company. Office products distribution is shifting to the Company's existing
core customer base of mass merchandisers wholesale clubs and office supply
superstores. In addition, the Company has recently established strong
relationships with several of the nation's largest contract stationers.
Management believes the same opportunity exists to develop innovative higher
quality products for the office supply market as in the school products
market. The Company's design department has already created several high-
quality, functionally superior designs for planners and pads in the office
supply market.
Custom packaging products (8.9% of 1997 net sales). The Company, under the
trade name Vinylweld, is a supplier of custom packaging products. Vinylweld's
customer strategy is to find innovative solutions to unique challenges in
packaging and product applications designed for the customer's product. The
Company utilizes the technology of vacuum-forming and radio frequency sealing
(often referred to as heat-sealing) to produce customized packaging which is
utilized by customers primarily for audio and video cassette tapes. The
Company also produces innovative packaging for the growing market of computer
compact disc cartridges. Vinylweld's working capital needs are low because it
operates in a made-to-order environment with little need to maintain
inventory.
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The Company is a leading supplier of packaging products to the publishing
industry for its audio and video cassette packages, including foreign language
tutorials, self-help guides and motivational packages. Customers include
Berlitz, Simon & Schuster, Barron's, Nightingale-Conant, Excel
Telecommunications, Inc., American Marketing, Syquest and Internet, Inc. The
Company believes it is one of the industry leaders in the production of
packaging for cassette tapes sold through infomercials.
SALES, DISTRIBUTION AND MARKETING
The Company markets its broad range of products to a wide variety of
customers through virtually every channel of distribution for school, home and
office products including the largest mass merchandisers, warehouse clubs,
office product superstores, and major contract stationers. The Company's
aggregate net sales to Costco and Target Stores accounted for approximately
21.7% and 17.4% of the Company's net sales for fiscal 1997, respectively. The
Company's top five customers accounted for approximately 56.2% of its net
sales in 1997.
The largest retailers, wholesalers and contract stationers have been rapidly
expanding as industry channels are undergoing consolidation. Management has
identified the fastest growing distribution channels in their marketplaces and
has focused the resources of the Company to the key accounts in those
channels. Management selectively pruned its customer base over the past
several years to concentrate on strong growth oriented companies, which
purchase a more profitable product mix.
The Company will continue to target those customers driving consolidation in
the office products industry and believes that it is strongly positioned to
meet the special requirements of these customers in the growing distribution
channels of the school, home and office products industry. Leading
merchandisers favor larger suppliers with national manufacturing capabilities,
such as the Company, that have implemented, automated ordering, manufacturing
and distribution practices. These customers seek suppliers, such as the
Company, who are able to offer broad product lines, higher value-added
innovative products, national distribution capabilities, low costs and
reliable service. Furthermore, as these customers continue to grow and
consolidate their supplier bases, the Company's ability to meet their special
requirements should be an increasingly important competitive advantage.
The Company has been the market leader in bringing a marketing focus to the
school and office products industry. The Company was the first in the industry
to introduce differentiated products which broke the $10 retail price barrier.
Retailers and consumers have demonstrated the market need for these products.
While some competitors have responded with imitations and licensed products,
the Company is still viewed as the market leader with innovative designs and
products.
Senior sales management personally handles the Company's largest accounts.
The Company also employs approximately 30 manufacturer representative agencies
with over 100 agents to market its products. The Company assists the
representative agencies in servicing these accounts. The Company's sales staff
is compensated by a base salary and a bonus based on performance. Manufacturer
representatives are compensated strictly based on commission.
Management starts its product plan by segmenting its customer base (e.g. for
the teen market, consumers with a focus on a sports, fashion, rugged or
"techie' image). Product designs are then evaluated through focus groups and
sample testing. The Company reinforces its product message with brand and
image advertising and promotion. Through over 60 years of customer presence,
Pen-Tab(R) has developed strong brand identity for quality products. Its Pen-
Tab Pro(R), Tough Tracks(R), Pen-Tab On-line(R), Expert(R) and Pen-Tab Paper
Store(R) lines are also building customer loyalty in segmented markets. The
Company typically leads marketing efforts with its core established product
lines and leverages this stable business to increase sales of its value-added
differentiated products.
Vinylweld sells an extensive line of stock and custom audio/video software
packaging in many configurations and price ranges. Customers vary from
individual authors of programs to Fortune 500 companies.
5
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Sales may be made direct to end-users or indirectly through a variety of
channels including: distributors, duplicators, multi-level marketers and
direct selling companies. Vinylweld has a core group of accounts with major,
long term, high volume customers which are personally handled by executive
sales management personnel. Additionally, the Company employs five field sales
people.
New product development by Vinylweld's customers drives the need for
packaging. In particular, CD-Rom applications are expanding and the number of
CD packaging design requests and orders are rapidly increasing. In addition,
Vinylweld intends to aggressively and actively promote its packaging
technology into a number of predominately untapped markets. Targets include
packaging design firms, consumer product manufacturers, equipment and
instrumentation manufacturers, and a number of other packaging motivated
sectors.
COMPETITION
The markets for the Company's products are highly competitive. The Company's
principal methods of competition are customer service, price, product
differentiation and breadth of product line offerings. The markets in which
the Company operates have become increasingly characterized by a limited
number of large companies selling under recognized trade names. These larger
companies, including the Company, have the economies of scale, national
presence, management information systems and breadth of product line required
by the major customers. In addition to branded product lines, manufacturers
also produce private-label products, especially in the context of broader
supply relationships with office product superstores and contract stationers.
The school, home and office products industry is fragmented, ranging from
large national manufacturers to single-facility, regional manufacturers. A few
manufacturers, including the Company, have developed strong brand name
recognition for a number of product lines. Other national companies include
Mead, Stuart Hall division of Newell Co. and American Pad & Paper Company. In
addition, the Company still competes with a large number of smaller, regional
companies, which have more limited product lines.
Vinylweld's primary competition comes from six competing manufacturers that
represent approximately 60% of the market. These competitors are primarily
privately held organizations ranging in size from a reported $3 million to $20
million in annual sales. The product range differs slightly from company to
company with some companies producing more than just audio/video cassette and
software packaging. Competitors generally have additional product lines
including binders, plastic dividers and inserts, and a wide variety of
specialty and miscellaneous products. In most cases, however, these additional
product lines are product adjuncts and do not directly compete in the vinyl
packaging market. Most of the competitors have not aggressively pursued
packaging business outside the vertical niche of audio/video and software
packaging.
INTELLECTUAL PROPERTY
The Company seeks trademark protection for all of its product line trade
names. The Company presently holds several trademarks covering designs,
symbols and trade names used in connection with its products, including Pen-
Tab(R), Pen-Tab Pro(R), Expert(R) and Pen-Tab Paper Store(R).
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EMPLOYEES
The Company had approximately 650 employees as of January 3, 1998.
Approximately 400 employees are represented by collective bargaining
agreements at the Illinois and California facilities. In California, the
employees are represented by the Graphic Communications Union Local No. 388-M
AFL-CIO, whose contract expires October 31, 1999. In Illinois, the employees
are represented by the Warehouse, Mail order, Office and Professional
Employees Local 743 Affiliated International Brotherhood, Teamsters AFL-CIO,
whose contract expires December 19, 1998. The Company enjoys an amicable
relationship with unionized labor. The following table provides information on
the Company's employees by operating function:
EMPLOYEES CATEGORIZED BY FUNCTION
<TABLE>
<S> <C>
Manufacturing......................................................... 590
Sales................................................................. 20
Administrative........................................................ 34
Executive............................................................. 6
---
Total................................................................. 650
===
</TABLE>
As of January 3, 1998, the Company's manufacturing employees numbered 190 in
the Virginia facility, 200 in the California facility and 200 in the Chicago
facility.
ITEM 2. PROPERTIES
In October 1995, the Company relocated its executive offices and its east
coast paper products manufacturing facilities from New York City to a 282,000
square foot building in Front Royal, Virginia. The new plant was designed to
reduce manufacturing costs, improve quality and enhance capacity. The Company
financed the new building with Industrial Revenue Development Bonds.
The following table summarizes the Company's facilities by location.
COMPANY FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE LEASE
LOCATION SQUARE FEET OWNED/LEASED PRODUCT CATEGORIES EXPIRATION
-------- ----------- ------------ ----------------------------- ----------
<S> <C> <C> <C> <C>
Front Royal, VA......... 282,000 Owned School, Office & Home N/A
City of Industry, CA.... 250,000 Leased School, Office & Home 2002
Chicago, IL............. 210,000 Leased Primarily Vinyl and Packaging 2009
</TABLE>
The Company's Front Royal, VA facility is pledged as collateral.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any
of the matters in which it is currently involved will have a material effect
on the financial condition or results of operations of the Company.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and
regulations, among other things, impose limitations on the discharge of
pollutants and establish standards for management of waste. While there can be
no assurance that the Company is at all times in complete compliance with all
such requirements, the Company believes that any such noncompliance is
unlikely to have a material adverse effect on the Company. As is the case with
manufacturers in general, if a release or threat of release of hazardous
materials occurs on or from the Company's properties or any associated
7
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offsite disposal location, or if contamination from prior activities is
discovered at any properties owned or operated by the Company, the Company may
be held liable for response costs and damages to natural resources. There can
be no assurance that the amount of any such liability would not be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
None
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS)
On February 4, 1997, Pen-Tab Industries, Inc., a Virginia corporation,
changed its name to Pen-Tab Holdings, Inc. On February 4, 1997 Holdings formed
a wholly owned subsidiary called Pen-Tab Industries, Inc., a Delaware
corporation. On February 4, 1997, the Company issued $75 million 10 7/8%
Senior Subordinated Notes due 2007 and Holdings effected a recapitalization
pursuant to which Holdings repurchased approximately 748 shares of Class A
common stock and 122 shares of Class B common stock from management
shareholders for approximately $47,858, converted an additional 20 shares of
Class A common stock and 358 shares of Class B common stock into redeemable
preferred stock, and sold 37 shares of Class A common stock, 3 shares of Class
B common stock and 125,875 shares of redeemable preferred stock to outside
investors for proceeds of approximately $15,010. Holdings' shareholders
concurrently approved an amendment to Holdings' articles of incorporation to
increase the number of authorized shares to 8,352,500, consisting of 6,000,000
shares of Class A Common Stock, par value $.01 per share, 2,000,000 shares of
Class B Common Stock, par value $.01 per share, 2,000,000 shares of Class B
Common Stock, par value $.01 per share, and 352,500 shares of redeemable
preferred stock. Following completion of the above transaction, Holdings'
shareholders approved a stock split pursuant to which each share of Holdings'
Class A Common Stock and Class B Common Stock then outstanding was converted
into 60,937.50 shares of such common stock.
The financial statements of Pen-Tab Industries, Inc. for fiscal years 1993,
1994 and 1995 represent the combined historical financial statements of Pen-
Tab Industries, Inc., a New York corporation, and its affiliated company Pen-
Tab Industries of California, Inc., a Delaware corporation, which were
controlled under common ownership. Intercompany accounts and transactions have
been eliminated in combination. Effective July 1, 1996, the two companies were
merged into a new Virginia corporation, called Pen-Tab Industries, Inc., with
no change in ownership, and accordingly, the historical book values of the
companies' assets and liabilities were carried forward to the new company. In
connection with the merger, Pen-Tab Industries, Inc. recorded a charge to
retained earnings of $295 relating to the cancellation of treasury stock
previously held by the two companies, and eliminated the treasury stock and
related additional capital balances.
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Set forth below are selected historical financial data and other financial
data of the Company as of the dates and for the periods presented. The
selected historical financial data as of January 1, 1994, December 31, 1994,
December 30, 1995, December 28, 1996 and January 3, 1998 and for the fiscal
years then ended were derived from the audited Financial Statements of the
Company.
The information contained in this table and accompanying notes should be
read in conjunction with the "Management Discussion and Analysis of Financial
Condition and Results of Operations," the audited Financial Statements and the
accompanying notes and schedules thereto appearing elsewhere.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales...................... $84,362 $90,472 $96,808 $106,869 $96,637
Cost of goods sold (a)......... 67,569 70,581 74,305 74,781 71,701
Gross profit................... 16,793 19,891 22,503 32,088 24,936
Selling, general and
administrative expenses....... 13,241 13,346 13,204 16,528 16,838
Relocation and reorganization
expenses (b).................. -- -- 1,906 -- 804
Interest expense, net.......... 2,097 2,410 2,883 2,436 8,194
Other (income) expense, net.... 50 (3) (55) (4) --
Income (loss) before income
taxes......................... 1,405 4,138 4,565 13,218 (900)
Income tax provision (benefit)
(c), (f)...................... 531 825 (343) (191) 1,945
Net income (loss).............. $ 874 $ 3,313 $ 4,908 $ 13,409 $(2,845)
OTHER FINANCIAL DATA
Pro forma income tax provision
(benefit) (c)................. $ -- $ 1,783 $ 1,948 $ 4,956 $ (338)
Pro forma net income (c)....... -- 2,355 2,617 8,262 (562)
Net cash provided by (used
in)operating activities....... 369 5,576 10,926 13,356 (768)
Net cash (used in) investing
activities.................... (1,807) (1,331) (8,521) (890) (1,562)
Net cash provided by (used in)
financing activities.......... 1,482 (4,163) (2,291) (13,191) 15,895
Adjusted EBITDA (d)............ 5,676 8,865 11,865 17,916 10,652
Adjusted EBITDA margin (d)..... 6.7% 9.8% 12.3% 16.8% 11.0%
Depreciation and amortization.. 2,174 2,317 2,760 2,352 2,554
Capital expenditures........... $ 2,012 $ 1,371 $ 9,322 $ 890 $ 1,562
Ratio of earnings to fixed
charges (e)................... 1.5x 2.4x 2.4x 5.8x --(e)
</TABLE>
<TABLE>
<CAPTION>
AS OF
-------------------------------------------
JAN. 1, DEC. 31, DEC. 30, DEC. 28, JAN. 3,
1994 1994 1995 1996 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets...................... $42,675 $41,711 $43,805 $43,504 $ 63,792
Long-term debt (including current
portion)......................... 30,427 26,890 28,000 24,210 82,754
Stockholders' equity (deficit).... $ 6,417 $ 8,770 $11,044 $15,052 $(28,005)
</TABLE>
- --------
(a) For fiscal 1993, the Company determined inventory cost using the first-in,
first-out (FIFO) method for approximately 50% of its inventory and the
last-in, first-out (LIFO) method for the remaining 50% of its inventory.
For fiscal 1994 and subsequent periods, the Company has used the LIFO
method to value its entire inventory.
(b) During fiscal 1995, the Company relocated its headquarters and its east
coast manufacturing facilities from Glendale, New York to Front Royal,
Virginia. The nonrecurring charges of $1,906 associated therewith are
reported as relocation expense in the statement of operations and retained
earnings. During fiscal 1997, the Company reorganized its sales and
marketing functions. The nonrecurring charges of $804 for recruitment and
acquisition costs of new sales and marketing executives as well as the
severance costs of terminated sales employees are reported as
reorganization expenses in the statement of operations and retained
earnings.
9
<PAGE>
(c) A portion of the Company was taxed as a "C" corporation under the Internal
Revenue Code during fiscal 1993 and 1994, and accordingly was subject to
federal and state income taxes. For all fiscal years thereafter until the
period ended February 3, 1997, the entire company elected to be treated as
an "S" corporation for federal income tax purposes under which income,
losses, deductions and credits were allocated to and reported by the
Company's shareholders based on their respective ownership interests.
Accordingly, no provision for income taxes was required for such periods,
except for state income taxes.
(d) Adjusted EBITDA is defined as net income before interest, income taxes,
depreciation and amortization and certain nonrecurring expenses (see (b)
above). Adjusted EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt.
However, Adjusted EBITDA should not be considered in isolation as a
substitute for net income(loss) or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a
company's profitability or liquidity. In addition, this measure of
Adjusted EBITDA may not be comparable to similar measures reported by
other companies. Adjusted EBITDA amounts for fiscal 1995 has been adjusted
for non-depreciation relocation expenses of $1,657, related to the
relocation of the Company's headquarters and east coast manufacturing
facilities from New York to Virginia and fiscal 1997 has been adjusted for
reorganization expenses of $804, related to the recruitment and
acquisition costs of new sales and marketing executives as well as the
severance costs of terminated sales employees. Adjusted EBITDA margin is
calculated as the ratio of Adjusted EBITDA to net sales for the period.
Funds depicted by Adjusted EBITDA are not available for management's
discretionary use due to functional requirements to conserve funds
primarily for capital replacement and expansion, and debt service
requirements.
(e) For purposes of the ratio of earnings to fixed charges, (i) earnings are
calculated as the Company's earnings before income taxes and fixed charges
and (ii) fixed charges include interest on all indebtedness, amortization
of deferred financing costs and one-third of operating lease expense.
Earnings before fixed charges for the year ended January 3, 1998 were
insufficient to cover fixed charges by $900.
(f) During fiscal 1997, the Company recorded a cumulative deferred tax
liability of $2,316 upon termination of the Company's "S" corporation
status.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the "Selected
Financial Data", the audited Financial Statement and the accompanying notes
and schedules thereto appearing elsewhere herein.
The Company is a leading U.S. manufacturer of school and office supply
products. The Company's products include binders, pads, spiral and coilless
notebooks, planners, envelopes, school supplies and arts and crafts products
in hundreds of configurations. The Company has developed strong consumer
recognition for its proprietary and upscale styles under the Pen-Tab(R), Pen-
Tab Pro(R), Pen-Tab Paper Store(R) and Expert(R) brand names. The Company is
also a supplier of vinyl packaging products designed primarily for audio and
video cassette tapes. Certain factors, which have affected, and may affect
prospectively, the operating results of the Company are discussed below.
Differentiated products. In 1992, the Company recognized a previously
unfulfilled demand for higher quality, functionally superior, upscale school
and office-related products. The Company pioneered a line of these higher
price point and margin, branded products to serve the school and office
products markets. Substantially all of the Company's increase in sales since
1992 is due to the introduction of differentiated products. Additionally, the
Company's differentiated products and product lines result in higher margins
for the Company and its customers. Demand for differentiated products has
risen steadily since 1992 when the Company first introduced them and the
Company expects a significant portion of its future growth to come from
increased sales of differentiated products.
Seasonality. As a result of the seasonal nature of the back-to-school sector
of the business, the Company's inventory and associated working capital
borrowings typically increase throughout the calendar year until the
10
<PAGE>
latter part of May and early June. At such time, the inventory is shipped to
customers, and converted into receivables. By the middle of September, account
collections occur and working capital borrowing is reduced.
Significant infrastructure investments. During the past seven years, the
Company has made approximately $23 million of infrastructure investments
including the relocation of the Company's headquarters and east coast
manufacturing facility from New York to Virginia in October 1995, and certain
capital equipment expenditures. The relocation and capital expenditures
provide the Company with available unused manufacturing capacity.
Paper prices. Paper represents the largest component of the Company's cost
of goods sold. While paper prices are currently at approximately the same
levels as in 1991, certain commodity grades have shown considerable price
volatility during that period. The Company's pricing policies generally enable
it to set product prices consistently with the Company's cost of paper at the
time of shipment. The Company believes that it is able to price its products
so as to minimize the impact of price volatility on dollar margins. However,
significant and unusual price fluctuations occurred during 1995 and 1996 which
were not all passed on to customers. As a result of new product introductions,
a substantial portion of which have little or no paper content, the Company
offers a broader and more diverse product mix which is less susceptible to
paper price fluctuations.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for the year ended January 3, 1998 decreased by $10.3 million, or
9.6%, to $96.6 million from $106.9 million for the year ended December 28,
1996. For the Pen-Tab segment differentiated product and core product sales
decreased $0.2 million and $8.2 million, respectively, for the year ended
January 3, 1998 as compared to the year ended December 28, 1996. Pen-Tab
segment pounds / units shipped increased approximately 4.8% for the year ended
January 3, 1998 compared to the year ended December 28, 1996, however revenues
are down $8.4 million or 8.7%. This results from material (paper and paper
related products) price decreases passed on to the customer in lower unit
selling prices during and subsequent to the year ended December 28, 1996 and
from changes in product mix. The remaining $1.9 million decrease in net sales
was caused by sales volume decreases in the Vinylweld segment.
Gross profit for the year ended January 3, 1998 decreased by $7.2 million,
or 22.3% to $24.9 million from $32.1 million for the year ended December 28,
1996. The gross profit percentage for the year ended January 3, 1998 was 25.8%
compared to 30.0% for the year ended December 28, 1996. The decrease in gross
profit margin is principally related to (i) a LIFO adjustment increasing gross
profit for the year ended December 28, 1996 by $3.6 million or 3.4% due to
significant decreases in the cost of paper versus a LIFO adjustment increasing
gross profit for the year ended January 3, 1998 by $0.3 million or 0.3% (ii)
significant and unusual paper price fluctuations caused the Company to
experience inventory losses of $3.1 million or 2.9% in the year ended December
28, 1996 due to selling higher priced inventory at the then current lower
selling prices , (iii) sales price decreases in 1997 causing a decrease in
gross margin due to the fixed components of factory overhead being spread over
less sales dollars amounting to approximately 0.6% and (iv) lower margins on
core products due to competitive market pricing pressures.
SG&A expenses for the year ended January 3, 1998 increased $0.3 million, or
1.9% to $16.8 million from $16.5 million for the year ended December 28, 1996.
As a percentage of net sales, SG&A expenses increased to 17.4% for the year
ended January 3, 1998 from 15.5% for the year ended December 28, 1996. This
increase is the result of (i) selling expenses being a higher percentage of
sales in 1997, 7.5%, as compared to 6.2% in 1996, principally due to the
following: increases in sales and marketing salaries and related expenses of
$0.3 million, commission expense being 1.3% of sales in 1997 versus 1.1% of
sales in 1996, due to changes in product mix and account mix, advertising
expense being 2.8% of sales in 1997 compared to 2.7% of sales in 1996 and (ii)
shipping expenses (principally freight out) being a higher percentage of
sales, 6.8% in 1997 versus 6.1% in 1996, due to lower product selling prices
during 1997.
11
<PAGE>
Interest expense for the year ended January 3, 1998 increased $6.1 million
to $8.4 million from $2.3 million for the year ended December 28, 1996. The
increase is principally due to the interest expense on the $75 million of
senior subordinated notes issued during February 1997.
Income tax provision for the year ended January 3, 1998 increased $2.1
million to $1.9 million from $(0.2) million for the year ended December 28,
1996. This increase includes a tax charge of $2.3 million to record a
cumulative deferred tax liability upon the termination of the Company's "S"
corporation election offset by $0.6 million deferred tax asset for a federal
net operating loss. The Company was taxed as an "S" corporation for federal
and state taxation purposes during 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the year ended December 28, 1996 increased by $10.1 million,
or 10.4%, to $106.9 million from $96.8 million for the year ended December 30,
1995. The increase is primarily due to sales of differentiated products
partially offset by a $2.1 million decrease in sales of Vinylweld products.
For the core product group, increased volumes were substantially offset by
lower prices resulting in flat sales between the periods.
Gross profit for the year ended December 28, 1996 increased by $9.6 million,
or 42.6%, to $32.1 million from $22.5 million for the year ended December 30,
1995. Gross profit margin increased to 30.0% for the year ended December 28,
1996 from 23.2% for the year ended December 30, 1995. The increase in gross
profit margin is related to (i) an increase in 1996 of sales of high margin
differentiated products, (ii) a LIFO adjustment decreasing gross profit in
1995 by $3.4 million due to significant increases in the cost of paper and
(iii) significant and unusual paper price fluctuations which caused the
Company to experience inventory gains of $1.8 million in 1995 due to selling
lower priced inventory at the then current higher selling prices and inventory
losses of $3.1 million in 1996 due to selling higher priced inventory at the
then current lower selling prices. Vinylweld gross profit percentage increased
5.7% in 1996 from 1995 due to productivity improvements in the plant. However,
decreases in unit volume caused gross profit to be flat between periods.
SG&A expenses for the year ended December 28, 1996 increased $3.3 million,
or 25.2%, to $16.5 million from $13.2 million for ended December 30, 1995. As
a percentage of net sales, SG&A expenses increased to 15.5% for the year ended
December 28, 1996 from 13.6% for the year ended December 30, 1995 as a result
of a multimedia advertising campaign launched in 1996. Vinylweld SG&A expenses
decreased by $0.4 million or 21.8% from $1.8 million in 1995 to $1.4 million
in 1996. The decrease is primarily attributed to an increase in non-commission
sales.
Income from operations for the year ended December 28, 1996 increased by
$6.3 million to $15.6 million from $9.3 million for the year ended December
30, 1995. Income from operations as a percentage of net sales for the year
ended December 28, 1996 increased to 14.6% from 9.6% for the year ended
December 30, 1995.
Interest expense for the year ended December 28, 1996 decreased $0.6 million
to $2.3 million from $2.9 million for the year ended December 30, 1995. The
decrease is attributable primarily to a lower interest rate which applied to
borrowings during 1996 compared to 1995. This was offset by a full year of
interest expense in 1996 on Industrial Revenue Bonds used to finance the
construction of the Virginia plant.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the year ended January 3, 1998 was
$0.8 million as compared to net cash provided by operating activities of $13.4
million for the year ended December 28, 1996. The decrease was primarily due
to lower income earned during 1997 and changes in the Company's working
capital accounts, principally inventory.
Net cash provided by financing activities for the year ended January 3, 1998
was $15.9 million as compared to net cash used in financing activities of
$13.2 million for the year ended December 28, 1996. The increase
12
<PAGE>
consisted of $72.6 million relating to the net proceeds of the issuance of
senior subordinated notes, offset by an increase in dividend distributions of
$30.8 million and a $12.7 million reduction in long-term debt.
Net cash provided by operating activities for the year ended December 28,
1996 was $13.4million as compared to $10.9 million for the year ended December
30, 1995. The increase was primarily attributable to an $8.5 million increase
in net income offset by $6.0 million increase in working capital. Such
increase in working capital was primarily attributable to higher accounts
receivable and inventory balance as of December 28, 1996.
Capital expenditures in the fiscal years 1997, 1996 and 1995 were $1.6
million, $0.9 million, and $8.6 million, respectively. The capital
expenditures for 1995 included $7.5 million for the construction of the
Company's headquarters and Virginia manufacturing facility. The Company
expects that capital expenditure requirements will be approximately $2.0
million for 1998. The Company believes capital expenditure levels are
sufficient to maintain competitiveness and to provide sufficient manufacturing
capacity. The Company expects to fund capital expenditures primarily from cash
generated from operating activities.
The Company's average working capital borrowings under its Credit Agreement
for the fiscal years 1997, 1996, and 1995 was $2.5 million, $24.9 million and
$29.7 million, respectively. The Company's maximum working capital borrowings
outstanding were $10.9 million, $39.4 million, and $44.1 million, respectively
for the same fiscal years.
The Credit Agreement and the Indenture impose certain restrictions on the
Company, including restrictions on its ability to incur indebtedness, pay
dividends, make investments, grant liens, sell its assets and engage in
certain other activities.
The information below relating to the Credit Agreement is a summary of the
material terms thereof qualified by reference to the complete text of the
documents. Borrowings under the Credit Agreement are available for working
capital and general corporate purposes, including letters of credit. The
Credit Agreement is secured by first priority liens on substantially all of
the Company's assets. The Credit Agreement expires on February 23, 1999,
unless extended. 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
expenditures to Interest Expense). The Company is not required to pay a
commitment fee on unused commitments under the Credit Agreement. The Credit
agreement permits the Company to prepay loans and to permanently reduce credit
commitments or letters of credit, in whole or in part, at any time in certain
minimum amounts.
The availability of the Credit Agreement is subject to various conditions
precedent. Advances are made under the Credit Agreement up to an aggregate
$35,000 based on a borrowing base comprised of eligible accounts receivable,
inventory and net fixed assets at the following advance rates: 85% of the
value of eligible accounts receivable, plus 55% of the value of eligible
inventory, plus approximately $5.0 million on net fixed assets (which
amortizes over time; minus a reserve of $2.5 million).
Management believes that based on current levels of operations and
anticipated internal growth, cash flow from operations, together with other
available sources of funds including the availability of seasonal borrowings
under the Credit Agreement will be adequate for the foreseeable future to make
required payments of principal and interest on the Company's indebtedness, to
fund anticipated capital expenditures and working capital requirements. The
ability of the Company to meet its debt service obligations and reduce its
total debt will be dependent, however, upon the future performance of the
Company which, in turn, will be subject to general economic conditions and to
financial, business and other factors, including factors beyond the Company's
control. A portion of the debt of the Company bears interest at floating
rates; therefore, its financial condition is and will continue to be affected
by changes in
prevailing interest rates.
The Company entered into a swap agreement, which expires February, 2002, to
swap its fixed rate of payment on the $75 million 10 7/8% Senior Subordinated
Notes for a floating rate payment. The floating rate is
13
<PAGE>
based upon a basket of LIBORS of three countries plus a spread, and is capped
at 12.5%. The interest rate resets every six months and at January 3, 1998,
the Company's effective interest rate under the swap agreement was 10.1%. The
Company can terminate the transaction at any time, at the then current fair
market value of the swap instrument
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended January 3, 1998.
YEAR 2000 COMPLIANCE
The company has determined that it will need to upgrade its
software/hardware so that its information systems will function properly with
respect to dates in the year 2000 and beyond. The Company has initiated
discussions with its significant suppliers, large customers and financial
institutions to ensure that those parties have appropriate plans to remediate
year 2000 issues where their systems interface with the Company's systems or
otherwise impact its operations. The Company's comprehensive year 2000
initiative is being managed by a team of internal staff augmented with
external consultants. The costs of the year 2000 upgrade are not expected to
be material to the financial position of the Company. The Company expects to
be year 2000 compliant by the end of 1998 fiscal year.
DISCLOSURES REGARDING ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
The Financial Accounting Standards Board has issued various new statements
including Statements Nos. 128, 129, 130, 131 and 132. The Company complied
with the requirements (disclosure) of Statements Nos 128 (basic earnings per
share) and 129 (disclosure about capital structure) in 1997. Statement Nos.
130 (comprehensive income), 131 (segment disclosures) and 132 (pension and
other postretirement benefit) are not effective until fiscal year 1998 and the
Company did not adopt early. Adoption of those standards will not materially
impact the Company's financial position, results of operations or cash flows,
and any effect, while not yet determined by the Company, will be limited to
the presentation of its disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Audited Financial Statements and schedule on pages F-F19.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not filed a form 8-K reporting a change of independent
auditors or any disagreement with the independent auditors.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages as of December 1997, and a
brief account of the business experience of each person who is a director or
executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alan Hodes.................... 54 Chief Executive Officer and Director
Dan Gallo..................... 45 President
Michael Greenberg............. 57 Executive Vice President
William Leary................. 38 Vice President, Chief Financial Officer and
Administrative Officer
Deborah Hodes................. 45 Vice President/Creative Director and Director
Thomas McWilliams............. 54 Director
David Howe.................... 33 Director
James Stevens................. 61 Director
</TABLE>
Alan Hodes joined Williamhouse-Regency in 1966. From 1972 to 1982, Mr. Hodes
served as Vice President of Williamhouse Regency and President of its Pen-Tab
division. Mr. Hodes and Michael Greenberg purchased Pen-Tab in 1982 from
Williamhouse-Regency. Mr. Hodes received his B.S. degree in Accounting from
Brooklyn College. He is married to Deborah Hodes.
Dan Gallo joined the Company on September 1, 1997. Mr. Gallo has over 20
years of experience in the Office Products Industry. He earned his Business
Administration and Marketing Degree at John Carroll University. Prior to
joining the Company, Mr. Gallo was employed as Vice President of Sales at
Sanford Corporation a division of Newell Company where he worked for 19 years.
During the course of his employment with Sanford, Mr. Gallo held several sales
related positions including Regional Sales Manager, National Account Manager
and National Field Sales Manager for both the commercial and retail markets.
He is credited with pioneering Sanford into the retail marketplace where they
currently hold a leadership position.
Michael Greenberg has been Executive Vice President since 1971. Mr.
Greenberg was Vice President of Vinylweld, Inc. the predecessor of the
Company's packaging business, when it was acquired by the Company. He was
previously Manufacturing Manager for Mohawk Tablet Company. Mr. Greenberg
graduated from the University of Illinois with a B.S. degree in Industrial
Engineering.
William Leary has been Vice President, Chief Financial and Administrative
Officer of the Company since 1991. Mr. Leary is a certified public accountant.
He was previously employed by Ernst & Young as a Senior Manager in the Audit
practice. Mr. Leary earned a Bachelors of Business Administration degree in
Accounting in 1982 from Bernard M. Baruch College of the City University of
New York.
Deborah Hodes has been Vice President/Creative Director of the Company since
1992. Ms. Hodes experience in the fashion related industry includes a position
as Fashion Director for a chain of specialty department stores and Assistant
to a leading clothing and fragrance designer. Ms. Hodes' education includes
the New York School of Interior Design, Parsons School of Design and
Chamberlayne College. Ms. Hodes is married to Alan Hodes.
Thomas McWilliams has been affiliated with CVC since 1983 and presently
serves as managing director of CVC as well as a member of CVC's investment
committee. From 1978 until 1983, Mr. McWilliams served as an executive
officer, including as vice president, president and chief operating officer,
of Shelter Resources Corporation, a publicly held holding company with
operating subsidiaries in the manufactured housing industry. From 1967 until
1978, Mr. McWilliams served in various corporate finance and management
positions at Citibank, N.A. Mr. McWilliams is currently a director of each of
Chase Brass Industries, Inc., Ergo Science Corporation and various privately
owned companies.
15
<PAGE>
David Howe has been employed at CVC since 1993. Prior thereto, he worked at
Butler Capital, a private investment company. He serves on the Board of
Directors of Aetna Industries, Inc., Brake-Pro, Inc., Cable Systems
International, Inc., Copes-Vulcan, Inc., Sinter Metals, Inc., Milk Specialties
Company and American-Italian Pasta Company. He also represents Citicorp on the
Board of Del Monte Foods Company. He is a graduate of Harvard College and
Harvard Business School.
James Stevens is presently a financial consultant and serves a variety of
organizations as a corporate director or as a trustee. From 1987 through 1994,
Mr. Stevens was affiliated with Prudential Insurance Company of America,
serving as Executive Vice President. He was also Chairman and Chief Executive
Officer of the Prudential Asset Management Group (August 1993 through December
1994), the Senior Officer in charge of the Private Placement Group (October
1987 through August 1993) and a member of the Operating Council. Mr. Stevens
is a former Managing Director of Dillon, Read & Co. Inc., a former Executive
Vice President of Citicorp/Citibank and a former Chairman of CVC.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company will reimburse directors for any out-of-pocket expenses incurred
by them in connection with services provided in such capacity. In addition,
the Company may compensate directors for services provided in such capacity.
COMPENSATION OF EXECUTIVE OFFICERS
The following summarizes the principal components of compensation of the
Company's Chief Executive Officer and each officer whose compensation exceeded
$100,000 for fiscal 1997. The compensation set forth below fully reflects
compensation for work performed on behalf of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL -------------------
NAME AND PRINCIPAL POSITION YEAR BONUS($)
--------------------------- ------ SALARY ($) --------
<S> <C> <C> <C>
Alan Hodes......................................... 1997 300,000 -0-
Chief Executive Officer 1996 300,000 -0-
Dan Gallo.......................................... 1997 220,000 118,000
President
Michael Greenberg.................................. 1997 228,800 -0-
Executive Vice President 1996 228,800 60,000
William Leary...................................... 1997 117,000 50,000
Vice President, Chief Financial and Administrative
Officer 1996 110,000 95,000
Deborah Hodes...................................... 1997 103,000 50,000
Vice President, Creative Director
</TABLE>
EMPLOYMENT AGREEMENTS
Currently, Pen-Tab Holdings, Inc. has employment agreements with Messrs.
Hodes and Greenberg. The employment agreements provides for (i) payment of a
base salary indexed to inflation, (ii) payment of bonuses of up to fifty
percent of base salary to be awarded at the discretion of the Company's Board
of Directors and (iii) certain fringe benefits. Each employment agreement
provides that the executive may be terminated by the Company only with cause,
and provides that the executive will not compete with the Holdings or its
subsidiaries
16
<PAGE>
during the period of employment and for the three years thereafter. Each
executive is entitled to receive a severance payment in the event of a
resignation caused by the relocation of the office at which the executive is
employed.
PENSION PLAN
The Company sponsors a 401(k) plan for all non-union employees meeting the
participation requirements. The Company matches the employee's contribution at
a rate of 50% on the employee's first 5% of wages.
The Company also contributes to a union sponsored multi-employer defined
contribution pension plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the Company's issued and outstanding capital stock is owned by
Holdings.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this form 10-K:
1) Financial statements and report of Ernst & Young LLP, Independent
Auditors
2) Financial statement schedules
3) Exhibits: the exhibits listed on the accompanying index to exhibits
are filed as part of this form 10-K.
(a) Reports of form 8-K: None.
(b) Exhibits: See item 14(a) above.
(c) Financial statement schedules: See item 14(a) above.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 on 15(d) 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: April 3, 1998 /s/ William Leary
By:__________________________________
William Leary
Vice President, Chief Financial
and
Administrative Officer (principal
financial
officer and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following person on behalf of the Registrant and
in the capacity and on the date indicated.
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE DATE
/s/ Alan Hodes Chief Executive April 3, 1998
- ----------------------------------- Officer and
Alan Hodes Director
/s/ William Leary Chief Financial April 3, 1998
- ----------------------------------- Officer
William Leary
/s/ Deborah Hodes Vice President and April 3, 1998
- ----------------------------------- Director
Deborah Hodes
/s/ Thomas McWilliams Director April 3, 1998
- -----------------------------------
Thomas McWilliams
/s/ David Howe Director April 3, 1998
- -----------------------------------
David Howe
/s/ James Stevens Director April 3, 1998
- -----------------------------------
James Stevens
18
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1) AND (2), (C) AND (D)
BALANCE SHEETS
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
STATEMENTS OF CASH FLOWS
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
CERTAIN EXHIBITS
YEAR ENDED JANUARY 3, 1998
PEN-TAB INDUSTRIES, INC.
FRONT ROYAL, VIRGINIA
The following financial statement schedule of Pen-Tab Industries, Inc. are
included in Item 14(d):
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pen-Tab Industries, Inc.
We have audited the accompanying balance sheets of Pen-Tab Industries, Inc.
as of December 28, 1996 and January 3, 1998, and the related statements of
operations and retained earnings, and cash flows for each of the three years
in the period ended January 3, 1998. Our audits also included the financial
statements schedule listed in the Index at Item 14(a). 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 financial position of Pen-Tab Industries, Inc.
at December 28, 1996 and January 3, 1998, and the results of its operations
and its cash flows for each of the three years in the period ended January 3,
1998, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Ernst & Young LLP
March 13, 1998
Vienna, Virginia
F-1
<PAGE>
PEN-TAB INDUSTRIES, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 111 $13,676
Accounts receivable (less allowances for discounts,
credits and doubtful accounts of $1,375 and $403)... 10,697 8,321
Inventories.......................................... 14,738 21,787
Prepaid expenses and other current assets............ 577 988
------- -------
Total current assets................................... 26,123 44,772
Property, plant and equipment, at cost:
Machinery and equipment.............................. 20,296 19,709
Furniture and fixtures............................... 1,069 1,490
Leasehold improvements............................... 150 170
Land and building.................................... 6,893 6,944
------- -------
28,408 28,313
Less: accumulated depreciation and amortization........ 11,641 12,538
------- -------
16,767 15,775
Other assets........................................... 614 3,245
------- -------
Total assets........................................... $43,504 $63,792
======= =======
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
PEN-TAB INDUSTRIES, INC.
BALANCE SHEETS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,774 $ 2,671
Accrued expenses and other current liabilities....... 1,424 1,023
Accrued interest on subordinated notes................. -- 3,330
Deferred income taxes................................ 9 140
Current portion of long-term debt.................... 16,037 540
------- --------
Total current liabilities.............................. 20,244 7,704
------- --------
Long-term debt......................................... 8,173 82,214
Deferred income taxes.................................. 35 1,879
Stockholders' equity (deficit):
Common Stock Class A $.01 par value, 1,000 shares
authorized; 800 shares issued at December 28, 1996,
0 shares issued at January 3, 1998.................. -- --
Common Stock Class B (non-voting) $.01 par value
1,000 shares authorized; 480 shares issued at
December 28, 1996, 0 shares issued at January 3,
1998................................................ -- --
Common Stock $.01 par value, 1,000 shares authorized;
0 shares issued at December 28, 1996 , 100 shares
issued at January 3, 1998........................... -- --
Retained earnings (deficit).......................... 15,052 (28,005)
------- --------
Total stockholder's equity (deficit)................... 15,052 (28,005)
------- --------
Total liabilities and stockholders' equity (deficit)... $43,504 $ 63,792
======= ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PEN-TAB INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Net sales.......................................... $96,808 $106,869 $ 96,637
Cost of goods sold................................. 74,305 74,781 71,701
------- -------- --------
Gross profit....................................... 22,503 32,088 24,936
Expenses:
Selling, general and administrative.............. 13,204 16,528 16,838
Other:
Interest income................................ -- -- (228)
Interest expense............................... 2,883 2,346 8,422
Relocation and reorganization expenses......... 1,906 -- 804
Other income--net.............................. (55) (4) --
------- -------- --------
Total expenses..................................... 17,938 18,870 25,836
------- -------- --------
Income (loss) before income taxes.................. 4,565 13,218 (900)
Income tax (benefit) provision..................... (343) (191) 1,945
------- -------- --------
Net income (loss).................................. 4,908 13,409 (2,845)
Retained earnings, beginning of year............... 9,065 11,339 15,052
Dividends.......................................... (2,634) (9,401) (40,212)
Adjustment for cancellation of treasury stock...... -- (295) --
------- -------- --------
Retained earnings, end of year..................... $11,339 $ 15,052 $(28,005)
======= ======== ========
Unaudited Pro Forma Data:
Historical income (loss) before income taxes..... $ 4,565 $ 13,218 $ (900)
Pro forma tax provision (benefit)................ 1,948 4,956 (338)
------- -------- --------
Pro forma net income (loss)...................... $ 2,617 $ 8,262 $ (562)
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PEN-TAB INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................. $ 4,908 $13,409 $(2,845)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 2,760 2,352 2,554
Amortization of debt issue costs................. 7 12 414
Deferred income taxes............................ (745) (351) 1,975
Provision for losses on accounts receivable...... 89 31 144
Changes in operating assets and liabilities:
Accounts receivable............................ 3,333 (1,559) 2,232
Inventories.................................... 1,207 (78) (7,049)
Prepaid expenses, other current assets and
other assets.................................. (53) (292) (507)
Accounts payable............................... (1,162) 1,026 (103)
Accrued expenses and other liabilities......... 823 (1,194) (913)
Accrued interest on subordinated notes......... -- -- 3,330
Other.......................................... (241) -- --
------- ------- -------
Net cash provided by (used in) operating activi-
ties.............................................. 10,926 13,356 (768)
------- ------- -------
INVESTING ACTIVITIES
Purchase of property, plant and equipment.......... (8,556) (890) (1,562)
Proceeds from sale of equipment.................... 35 -- --
Net cash used in investing activities.............. (8,521) (890) (1,562)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings................. 17,192 20,586 18,688
Repayments of long-term borrowings................. (24,349) (24,376) (35,144)
Proceeds from issuance of industrial development
revenue bonds..................................... 7,500
Proceeds from issuance of senior subordinated
notes............................................. -- -- 72,563
Dividends.......................................... (2,634) (9,401) (40,212)
------- ------- -------
Net cash (used in) provided by financing activi-
ties.............................................. (2,291) (13,191) 15,895
------- ------- -------
Increase (decrease) in cash and cash equivalents... 114 (725) 13,565
Cash and cash equivalents at beginning of year..... 722 836 111
------- ------- -------
Cash and cash equivalents at end of year........... $ 836 $ 111 $13,676
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest....................................... $ 2,776 $ 2,436 $ 5,109
======= ======= =======
Income taxes................................... $ 284 $ 123 $ 512
======= ======= =======
Non-cash transaction:
Services purchased related to the debt offering
and paid for by a reduction of proceeds
received...................................... $ -- $ -- $ 2,437
======= ======= =======
Purchase of machinery in exchange for
Promissory note...............................
$ 766 $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. RECAPITALIZATION, BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND
DESCRIPTION OF BUSINESS
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 4, 1997, the Company issued
$75 million 10 7/8% Senior Subordinated Notes due 2007 and Holdings effected a
recapitalization pursuant to which Holdings repurchased approximately 748
shares of Class A common stock and 122 shares of Class B common stock from
management shareholders for approximately $47,858, converted an additional 20
shares of Class A common stock and 358 shares of Class B common stock into
redeemable preferred stock, and sold 37 shares of Class A common stock, 3
shares of Class B common stock and 125,875 shares of redeemable preferred
stock to outside investors for proceeds of approximately $15,010. Holdings'
shareholders concurrently approved an amendment to Holdings' articles of
incorporation to increase the number of authorized shares to 8,352,500,
consisting of 6,000,000 shares of Class A Common Stock, par value $.01 per
share, 2,000,000 shares of Class B Common Stock, par value $.01 per share, and
352,500 shares of redeemable preferred stock. Following completion of the
above transactions, Holdings' shareholders approved a stock split pursuant to
which each share of Holdings' Class A Common Stock and Class B Common Stock
then outstanding was converted into 60,937.50 shares of such common stock.
The financial statements of Pen-Tab Industries, Inc. for fiscal 1995
represent the combined historical financial statements of Pen-Tab Industries,
Inc., a New York corporation, and its affiliated company Pen-Tab Industries of
California, Inc., a Delaware corporation, which were controlled under common
ownership. Intercompany accounts and transactions have been eliminated in
combination. Effective July 1, 1996, the two companies were merged into a new
Virginia corporation, called Pen-Tab Industries, Inc., with no change in
ownership, and accordingly, the historical book values of the companies assets
and liabilities were carried forward to the new company. In connection with
the merger, Pen-Tab Industries, Inc. recorded a charge to retained earnings of
$295 relating to the cancellation of treasury stock previously held by the two
companies, and eliminated the treasury stock and related additional capital
balances.
The Company, a wholly owned subsidiary of Holdings, is a leading
manufacturer of school, home and office supply products. Its products include
legal pads, wirebound notebooks, envelopes, school supplies, and arts and
crafts products. The Company is a primary supplier of many national discount
store chains, office supply super stores, and wholesale clubs throughout the
United States and Canada. The Company, through its Vinylweld division, is a
leading designer and manufacturer of vinyl packaging products. Sales are made
on open account and the Company generally does not require collateral.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting
The accompanying financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. The
1995 and 1996 fiscal years refer to the fifty-two week periods ended December
30, 1995 and December 28, 1996, respectively. The 1997 fiscal year refers to
the fifty-three week period ended January 3, 1998.
Revenue Recognition
Sales are recognized upon product shipment (FOB shipping point). All risks
and rewards of ownership pass to the customer upon shipment. Damaged or
defective products may be returned to the Company for replacement or credit.
F-6
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market and are valued using
the last-in, first-out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
on the straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized by the straight-line method over
the shorter of the estimated useful lives of the improvements or the lease
term.
Amortization of Debt Issue Costs
Debt issue costs are stated at cost and amortized to interest expense.
Amortization of debt issue costs is computed on the straight-line basis over
the maturity of the applicable debt, which range from one year for the Credit
Agreement, ten years for the Senior Subordinated Notes and twenty years for
the Industrial Development Revenue Bonds. The Company complies with Statements
of Financial Standards (FAS 121) "Accounting for the Impairment of Long-Lived
Assets" as related to its debt issue costs and other intangibles. The related
accumulated amortization expense at December 28, 1996 and January 3, 1998 was
$19 and $433, respectively. Unamortized debt issue costs at December 28, 1996
and January 3, 1998 were $221 and $2,866, respectively, and are included in
other assets.
Advertising Costs
The Company expenses the costs of advertising as incurred. Such costs
amounted to approximately $512, $2,934 and $2,658, for fiscal 1995, 1996, and
1997, respectively.
Income Taxes
The Company accounts for income taxes and the related assets and liabilities
in accordance with FAS 109, "Accounting for Income Taxes." Provisions for
income taxes are based upon earnings reported for financial statement purposes
and may differ from amounts currently payable or receivable because certain
amounts are recognized for financial reporting purposes in different periods
than they are for income tax purposes. Deferred income taxes result from
temporary differences between the financial statement amounts of assets and
liabilities and their respective tax bases. Also see Note 7.
Fair Value of Financial Instruments
The Company considers the recorded value of its monetary assets and
liabilities, which consist primarily of cash, cash equivalents, accounts
receivable, accounts payable and long-term debt, to approximate the fair value
of the respective assets and liabilities at December 28, 1996 and January 3,
1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-7
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Derivatives
Premiums paid on the interest swap agreement are amortized as interest
expense over the term of the agreement. Amounts received under the swap
agreement are recorded as a reduction of interest expense.
Risk and Uncertainties
The Company is potentially subjected to concentrations of credit risk with
trade accounts receivable. Because the Company has a large and diverse
customer base, there was no material concentration of credit risk related to
trade accounts receivable at January 3, 1998. Also during fiscal year 1997,
the Company increased inventories in anticipation of rising paper prices and
increased 1998 sales.
New Accounting and Auditing Pronouncements
The Financial Accounting Standards Board (FAS) has issued various new
statements including Statements Nos. 128, 129, 130, 131 and 132. FAS Statement
No. 128 was not applicable. The Company complied with the requirements
(disclosure) of Statement No. 129 (disclosure about capital structure) in
1997. Statement Nos. 130 (comprehensive income), 131 (segment disclosures) and
132 (pension and other postretirement benefit) are not effective until fiscal
year 1998 and the Company did not adopt early. Adoption of those standards
will not materially impact the Company's financial position, results of
operations or cash flows, and any effect, while not yet determined by the
Company, will be limited to the presentation of its disclosures.
Reclassification
Certain amounts included in prior years' financial statements have been
reclassified to conform to the current year format.
3. UNAUDITED PRO FORMA DATA
As described further in Note 7, the Company was taxed as an "S" corporation
during fiscal 1995 and 1996. Upon completion of the recapitalization described
in Note 1, Pen-Tab Industries, Inc. terminated its "S" corporation status. The
pro forma related statement of income and retained earnings for fiscal 1995,
1996 and 1997 reflect adjustments to the Company's income tax provision, as if
the Company had been taxed as a "C" corporation for the respective periods.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ ----------
<S> <C> <C>
Raw materials..................................... $ 7,445 $ 8,993
Work-in-process................................... 192 372
Finished goods.................................... 7,101 12,422
------- -------
$14,738 $21,787
======= =======
</TABLE>
It is estimated that inventories would have been $707 higher than reported
on January 3, 1998, and $963 higher than reported on December 28, 1996, if the
quantities valued on the LIFO basis were instead valued on
F-8
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
the first-in-first-out (FIFO) basis. For purposes of comparability, had LIFO
inventories been reported at values approximating current cost as would have
resulted from using the FIFO method and if no other assumptions were made as
to changes in income, income before taxes would have been approximately $3,430
higher in fiscal 1995 and $3,620 and $256 lower in fiscal 1996 and 1997,
respectively. The Company reports its inventory under the LIFO method in order
to better match its income and expenses.
During fiscal year 1995, inventory quantities were reduced causing a
liquidation of LIFO inventory layers that were carried at the lower costs that
prevailed in prior years. The effect of the liquidation was to decrease cost
of goods sold by approximately $1,032.
5. DIVIDENDS
Dividends for fiscal years 1995 and 1996 of $2,634 and $9,401, respectively,
were paid to the stockholders of the Company. Dividends for the fiscal year
1997 amounted to $40,212; including $5,695 paid to the stockholders of the
Company in the period to February 3, 1997 and $34,517 paid by the Company to
Holdings.
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ ----------
<S> <C> <C>
Collateralized loans payable to a bank............ $15,782 $ --
Senior Subordinated Notes......................... -- 75,000
Industrial development revenue bonds.............. 7,500 7,500
Promissory note payable........................... 568 --
Capital lease obligations......................... 360 254
------- -------
24,210 82,754
Less: current portion............................. 16,037 540
------- -------
$ 8,173 $82,214
======= =======
</TABLE>
The Company had collateralized loans payable to Bank of America under a Loan
and Security Agreement that expired on February 4, 1997, which provided for
loans based on specified percentages of accounts receivable, inventory, and
property, plant and equipment up to an aggregate maximum of $57,000. The
interest rate for borrowing was at LIBOR plus a sliding scale spread. On
February 4, 1997 the Company repaid the outstanding obligation on the Loan and
Security Agreement and entered into a new Credit Agreement with Bank of
America ("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. Except as noted below, all assets
of the Company are pledged as collateral for balances owing under this Credit
Agreement. The weighted average borrowing rate was 6.9% and 7.5% for fiscal
year 1996 and 1997, respectively.
F-9
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The 10 7/8% Senior Subordinated Notes are due in 2007. The Indenture
contains certain covenants that, among other things, limits the ability of the
Company to incur additional indebtedness. 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 at January 3, 1998, the Company's effective
interest rate under the swap agreement was 10.1%. The Company can terminate
the transaction at any time, at the then current fair market value of the swap
instrument.
The industrial development revenue bonds represent 20-year tax-exempt bonds
issued through the Town of Front Royal and the County of Warren, Virginia on
April 1, 1995. Interest is paid monthly, and is calculated using a floating
rate determined every 7 days with reference to a tax-exempt bond index (3.8%
as of January 3, 1998 plus a bank of letter of credit fee of 1.5%). The
industrial development revenue bonds are subject to a mandatory sinking fund
redemption commencing April 1, 1998, under which Pen-Tab is required to make
17 annual installments of $400, with a final installment of $700, due in 2015.
Repayment is collateralized by a bank standby letter of credit and a first
security interest in Pen-Tabs land and buildings in Front Royal, Virginia. The
bonds may be redeemed at the option of Pen-Tab, in whole or in part, on any
interest payment date.
During fiscal 1995, Pen-Tab purchased certain production machinery in
exchange for a promissory note in the amount of $766. The promissory note is
repayable in 10 semi-annual installments and bears interest at 8% per year.
Repayment of the note is collateralized by a first security interest in the
machinery purchased. On June 27, 1997 the Company retired the promissory note
in full.
7. INCOME TAXES
The Company elected to be treated as an "S" corporation for federal income
tax purposes for 1995 and 1996 under which income, losses, deductions and
credits were allocated to and reported by the company's stockholders based on
their respective ownership interests. Accordingly, no provision for income
taxes was required for 1995 and 1996, except for certain state income taxes.
Effective February 4, 1997, in conjunction with the Recapitalization described
in Note 1, the Company terminated its "S" corporation election.
Significant components of the provision benefit from for income taxes for
fiscal 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Current
Deferred Tax Assets Allowance for bad debts.................. $ 4 $-- $ 68
Inventory capitalization................................... 8 2 95
Unused net operating loss.................................. -- -- 232
---- --- ------
12 2 395
Deferred Tax Liability
LIFO reserve............................................... 334 11 535
---- --- ------
334 11 535
---- --- ------
Net Current Deferred Tax Liability....................... $322 $ 9 $ 140
==== === ======
Non-current
Deferred Tax Liability Property, plant and equipment......... $ 54 35 $1,879
==== === ======
</TABLE>
F-10
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The components of income tax expense (benefit) from continuing operations
are:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Current
Federal........................................... $ -- $ 95 $ --
State............................................. 402 -- (30)
----- ----- ------
402 95 (30)
Deferred
Federal........................................... (586) -- 1,691
State............................................. (159) (286) 284
----- ----- ------
(745) (286) 1,975
----- ----- ------
Income tax (benefit) provision...................... $(343) $(191) $1,945
===== ===== ======
</TABLE>
The Company's effective income tax rate varied from the statutory federal
income tax rate for fiscal years as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate................ $1,552 $4,494 $ (306)
State income taxes, net of federal benefit....... 365 99 (36)
Change in entity status.......................... (586) -- 2,343
(Income) loss taxed at shareholders level........ (1,552) (4,494) 108
Other, including permanent differences........... (122) (290) (164)
------ ------ ------
$ (343) $ (191) $1,945
====== ====== ======
</TABLE>
No valuation allowance has been recorded as of January 3, 1998 related to
the deferred tax assets. The Company believes it is more likely than not that
the Company's deferred tax assets will be realized.
During fiscal 1995, the Company recognized a federal income tax benefit
related to the change from "C" corporation status to "S" corporation status
under which a deferred tax credit of approximately $586 was recognized into
income. The net tax benefit represents the difference between the deferred tax
credit recognized and state income taxes payable for the year.
During fiscal 1997, the Company was taxed as an "S" corporation for the
period ended February 3, 1997 and as a "C" corporation for the period
thereafter. The Company recorded a cumulative deferred tax liability of $2,343
upon termination of the Company's "'S" corporation election. The Company has
available for federal income tax purposes a $640 net operating loss, which
expires in 2012.
8. LEASES AND COMMITMENTS
The Company rents certain office, manufacturing and warehouse facilities in
California and Chicago under leases which expire in May 2002 and December
2009, respectively. The Company also leases certain machinery and equipment
under agreements that expire in the year 2000.
F-11
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Future minimum lease payments under noncancellable operating and capital
leases are as follows, as of January 3, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING CAPITAL
----------- --------- -------
<S> <C> <C>
1998.................................................... $ 998 $137
1999.................................................... 998 115
2000.................................................... 1,039 32
2001.................................................... 983 --
2002.................................................... 584 --
Thereafter.............................................. 2,038 --
------ ----
Total................................................... $6,640 $284
====== ====
Imputed interest........................................ (30)
----
Present value........................................... $254
====
</TABLE>
Rent expense was approximately $1,852, $1,148 and $1,197 in fiscal 1995,
1996 and 1997, respectively, and included payments of $383 in fiscal 1995 to a
related party (company controlled by shareholders) for the Company's New York
premises.
Included in the property, plant and equipment balance are machinery and
equipment held under capitalized leases of $928 and $231 at December 28, 1996
and January 3, 1998, respectively. Amortization of the capital lease assets
are included in depreciation expense.
At December 28, 1996 and January 3, 1998, the Company had standby letters of
credit outstanding in the amounts of $457, respectively, issued by a bank on
behalf of Pen-Tab in connection with a workers compensation insurance program.
See also Note 6.
9. RELATED PARTY TRANSACTIONS
General and administrative expenses during fiscal 1995 include $100 paid to
a related party (company controlled by shareholders) for management and other
services. See also Note 8.
10. YEAR 2000 COMPLIANCE
The Company has determined that it will need to upgrade its
software/hardware so that its information systems will function properly with
respect to dates in the year 2000 and beyond. The Company has initiated
discussions with its significant suppliers, large customers and financial
institutions that those parties have appropriate plans to remediate year 2000
issues where their systems interface with the Company's systems or otherwise
impact its operations. The Company is assessing the extent to which its
operations are vulnerable should those organizations fail to remediate
properly their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff augmented with external consultants on a need basis. While
the Company believes its planning efforts are adequate to address its year
2000 concerns, there can be no guarantee that the systems of other companies
on which the Company's systems and operations rely will be converted on a
timely basis and will not have a material effect on the Company. The costs of
the Year 2000 upgrades are not expected to be material to the financial
position of the Company.
F-12
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. RELOCATION AND REORGANIZATION EXPENSES
During fiscal 1995, the Company relocated its headquarters and its east
coast manufacturing facilities from Glendale, New York to Front Royal,
Virginia. The non- recurring charges of $1,906 associated therewith are
reported as relocation expenses in the statements of income and retained
earnings. During fiscal 1997, the Company reorganized its sales and marketing
functions. The non-recurring charges of $804 for recruitment and acquisition
costs of new sales and marketing executives as well as the severance costs of
terminated sales employees are reported as reorganization expenses in the
statements of income and retained earnings.
12. MAJOR CUSTOMERS--SCHOOL, HOME AND OFFICE SEGMENT
During fiscal 1995, there were three customers each in excess of 10% of
revenues for the year. Such customers collectively accounted for 50.8% of the
Company's sales.
During fiscal 1996, there were two customers each in excess of 10% of
revenues for the year. Such customers collectively accounted for 37.4% of the
Company's sales.
During fiscal 1997, there were two customers each in excess of 10% of
revenues for the year. Such customers collectively accounted for 39.1% of the
Company's sales.
13. DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) plan in which nonunion full-time employees
meeting certain age and employment requirements are eligible for
participation. Participating employees can contribute between 2% and 15% of
their annual compensation. During fiscal 1995 and through September 1996, the
Company matched employee contributions at a rate of 20% of the employees
annual contributions up to 1% of the employees annual compensation. Effective
October, 1996 and thereafter, the Company matched employee contributions at a
rate of 50% of the employees annual contributions up to 2% of the employees
annual compensation. Total expense under the plan amounted to $32, $42 and
$136 in fiscal 1995, 1996 and 1997, respectively.
The Company also contributes to a union sponsored multi-employer defined
contribution pension plan. All union employees meeting certain employment
requirements are covered. Total expense under the union sponsored plan
amounted to $94, $21, and $24 in fiscal 1995, 1996 and 1997, respectively.
14. SUBSEQUENT EVENTS
Effective February 3, 1998, the net assets of $1,500 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.
F-13
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
15. SEGMENT INFORMATION
As described in Note 1, the Company operates in two business segments
consisting of school, home and office products, and vinyl packaging products.
The following table provides certain financial data regarding these two
segments.
<TABLE>
<CAPTION>
SCHOOL, HOME VINYL
AND OFFICE PACKAGING
PRODUCTS PRODUCTS TOTAL
------------ --------- --------
<S> <C> <C> <C>
1997
Net sales.................................... $88,014 $ 8,623 $ 96,637
Operating earnings........................... 6,905 389 7,294
Identifiable assets.......................... 61,578 2,214 63,792
Depreciation and amortization................ 2,356 198 2,554
Capital expenditures......................... 1,498 64 1,562
1996
Net sales.................................... $96,402 $10,467 $106,869
Operating earnings........................... 13,981 1,579 15,560
Identifiable assets.......................... 40,981 2,523 43,504
Depreciation and amortization................ 2,134 218 2,352
Capital expenditures......................... 794 96 890
1995
Net sales.................................... $84,280 $12,528 $ 96,808
Operating earnings........................... 6,322 1,071 7,393
Identifiable assets.......................... 40,782 3,023 43,805
Depreciation and amortization................ 2,650 110 2,760
Capital expenditures......................... 9,230 92 9,322
</TABLE>
For the purposes of the segment information provided above, operating
earnings are defined as net sales less related cost of goods sold, selling,
general and administration expenses and reorganization and relocation
expenses. In addition, intersegment sales are appropriately eliminated.
F-14
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
PEN-TAB INDUSTRIES, INC.
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BAD DEBTS CHARGE-OFF BALANCE AT END
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts for the years ended:
January 3, 1998............. $ 76 $144 $ (34) $ 186
December 28, 1996........... 75 31 (30) 76
December 25, 1995........... $ 190 $ 89 $ (204) $ 75
<CAPTION>
BALANCE AT
BEGINNING REBATE AND CHARGE-OFF BALANCE AT END
DESCRIPTION OF PERIOD CREDITS DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts for the years ended:
January 3, 1998............. $1,299 $ -- $(1,082) $ 217
December 28, 1996........... 527 963 (191) 1,299
December 25, 1995........... $ 397 $165 $ (35) $ 527
</TABLE>
F-15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Recapitalization Agreement dated as of January 9, 1997 by and among
Citicorp Venture Capital, Ltd., Pen-Tab Industries, Inc., Alan Hodes
and Michael Greenberg.**
3.1 Certificate of Incorporation of Pen-Tab Industries, Inc.**
3.2 By-laws of Pen-Tab Industries, Inc.**
4.1 Indenture dated as of February 1, 1997 between Pen-Tab Industries,
Inc. and United States Trust Company of New York.**
4.2 First Supplemental Indenture, dated as of May 7, 1997, between Pen-Tab
Industries, Inc. and United States Trust Company of New York.**
10.1 Second Amended and Restated Loan and Security Agreement dated as of
February 4, 1997 among Pen-Tab Industries, Inc., Pen-Tab Holdings,
Inc. (formerly known as Pen-Tab Industries, Inc.) and Bank of America
Illinois.**
10.2 Form of Notice of Borrowing.**
10.3 Form of Amended and Restated Revolving Note.**
10.4 Amended and Restated Trademark Agreement dated as of February 4, 1997
among Pen-Tab Industries, Inc., Pen-Tab Holdings, Inc. and Bank of
America Illinois.**
10.5 Pledge Agreement dated as of February 4, 1997 made by Pen-Tab
Holdings, Inc. in favor of Bank of America Illinois.**
10.6 First Amendment to Second Amended and Restated Loan and Security
Agreement dated as of February 4, 1997.*
10.7 Second Amendment and Waiver to Second Amended and Restated Loan and
Security Agreement dated as of June 9, 1997.*
10.8 Third Amendment to Second Amended and Restated Loan and Security
Agreement dated as of February 23, 1998.*
10.9 Indenture of Trust dated as of April 1, 1996 among The Fairfax County
Economic Development Authority and The First National Bank of
Maryland.**
10.10 Loan Agreement dated April 1, 1996 between the Fairfax County Economic
Development Authority and Forman Development Associates Limited
Partnership.**
10.11 Shareholders Agreement dated as of February 4, 1997 by and among Pen-
Tab Holdings, Inc., Citicorp Venture Capital, Ltd.., Alan Hodes,
Michael Greenberg and each other executive of Pen-Tab Holdings, Inc.
or its subsidiaries who acquires Class A Common Stock from the
Company.**
10.12 Registration Rights Agreement dated as of February 4, 1997 by and
among Pen-Tab Industries, Inc., Citicorp Venture Capital, Ltd., Alan
Hodes, Michael Greenberg.**
10.13 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc. and Alan Hodes.**
10.14 Pen-Tab Holdings, Inc. 1997 Stock Option Plan and Form of Agreement
Evidencing a Grant of a Nonqualified Stock Option under 1997 Stock
Option Plan.**
10.15 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc. and Michael Greenberg.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.16 First Amendment to Second Amended and Restated Loan and Security
Agreement, dated as of February 4, 1997 by and among Pen-Tab
Industries, Inc., Pen-Tab Holdings, Inc. (formerly known as Pen-Tab
Industries, Inc.) and Bank of America Illinois.**
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges. (See
pages 9 and 10 for calculation and definition.)
21.1 Subsidiaries of Pen-Tab Industries, Inc.**
25.1 Statement of Eligibility of Trustee on Form T-1.**
27.1 Financial Data Schedule.*
99 Pen-Tab Safe Harbor Statement.*
</TABLE>
- --------
* Filed herewith.
** Incorporated by reference from the Registrants Registration Statement on
Form S-4 (333-24519)
*** To be filed by amendment
<PAGE>
EXHIBIT 10.6
FIRST AMENDMENT
TO
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT dated as of February 4, 1997 is entered into by and
among PEN-TAB INDUSTRIES, INC., a Delaware corporation (the "Borrower"),
Pen-Tab Holdings, Inc. (formerly known as Pen-Tab Industries, Inc.), a Virginia
corporation (the "Parent") and BANK OF AMERICA ILLINOIS (the Bank").
WITNESETH:
---------
WHEREAS, the borrower, the Parent and the Bank are parties to a certain
Second Amended and Restated Loan and Security Agreement dated as of February 4,
1997 (herein called the "Credit Agreement"); and
WHEREAS, the borrower and the parent wish to amend the Credit Agreement to
contract the Termination Date and remove the commitment fee;
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Borrower, the Parent and the Bank hereby agree as
follows:
SECTION 1. AMENDMENTS.
----------
In reliance on the Borrower's and the Parent's warranties set forth in
Section 2 below, as of the date hereof the Credit Agreement is amended as
- ---------
follows:
(a) the definition of Termination Date in Section 1.1 of the Credit
Agreement is amended to read in its entirety as follows:
"Termination Date" menas February 3, 1998.
(b) Section 2.7 of the Credit Agreement is amended to read in its entirety
as follows:
Section 2.7. Intentionally Deleted
SECTION 2. WARRANTIES.
----------
To induce the Bank to enter into this agreement, the borrower and the
Parent warrant to the Bank as of the date hereof that:
<PAGE>
(a) The representations and warranties contained in the Credit
Agreement and the Loan Documents are true and correct in all material
respects on and as of the date hereof (except to the extent such
representations and warranties expressly refer to an earlier date); and
(b) No Default or Event of Default has occurred and is containing.
SECTION 3. GENERAL.
-------
(a) Terms used but not otherwise defined herein are used herein as
defined in the Credit Agreement.
(b) As hereby modified, the Credit Agreement shall remain in full force
and effect and is hereby ratified, approved and confirmed in all respects.
(c) This Amendment shall be binding upon and shall inure to the
benefit of the Borrower, the Parent and the Bank and the respective
successors and assigns of such Persons.
(d) This Amendment may be executed in any number of counterparts and by
the different parties on separate counterparts, and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same Amendment.
-2-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
BANK OF AMERICA ILLINOIS
By: /s/ L. Richard DiDonato
-----------------------------------
Name: L. Richard DiDonato
Title: Vice President
PEN-TAB INDUSTRIES, INC., a
Delaware corporation
By: /s/ William Leary
-----------------------------------
Name: William Leary
Title: Vice President
PEN-TAB HOLDINGS, INC. (formerly
known as Pen-Tab Industries, Inc.),
a Virginia Corporation
By: /s/ William Leary
-----------------------------------
Name: William Leary
Title: Vice President
-3-
<PAGE>
EXHIBIT 10.7
SECOND AMENDMENT AND WAIVER
TO
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
AND TO
THE AMENDED AND RESTATED
REIMBURSEMENT AGREEMENT
THIS SECOND AMENDMENT AND WAIVER (the "Amendment and Waiver") dated as of
June 9, 1997 is entered into by and among PEN-TAB INDUSTRIES, INC., a Delaware
corporation (the "Borrower"), Pen-Tab Holdings, Inc. (formerly known as Pen-Tab
Industries, Inc.), a Virginia corporation (the "Parent") and BANK OF AMERICA
ILLINOIS (the "Bank").
W I T N E S E T H:
- - - - - - - - -
WHEREAS, the Borrower, the Parent and the Bank are parties to a certain
Second Amended and Restated Loan and Security Agreement dated as of February 4,
1997, as amended and modified through the date hereof (herein called the "Credit
Agreement"; terms used but not otherwise defined herein are used herein as
defined in the Credit Agreement);
WHEREAS, the Borrower, the Parent and the Bank are also parties to a certain
Amended and Restated Reimbursement Agreement dated as of February 4, 1997
(herein called the "Reimbursement Agreement");
WHEREAS, the Borrower and the Parent have reported to the Bank the existence
of certain non-compliance with Section 11.2 of the Credit Agreement and certain
non-compliance with Section 7.1 of the Reimbursement Agreement, and have
requested that the Bank waive such noncompliance; and
WHEREAS, the Borrower and the Parent have further requested that the Credit
Agreement be amended (i) to revise the definition of Minimum Consolidated Net
Worth, and (ii) to permit the issuance of certain performance standby letters of
credit;
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Borrower, the Parent and the Bank hereby agree as
follows:
SECTION 1. WAIVER.
------
Subject to and upon the terms and conditions hereof and in reliance on the
Borrower's and the Parent's warranties set forth in Section 3 below, as of the
---------
date hereof, the Bank waives
<PAGE>
the Borrower's non-compliance with Section 11.2 of the Credit Agreement and the
Borrower's related non-compliance with Section 7.1 of the Reimbursement
Agreement from the Closing Date to and including the date hereof; provided, that
--------
at all times from the Closing Date to and including the date hereof the Minimum
Consolidated Net Worth shall have equalled or exceeded - $27,150,000.
SECTION 2. AMENDMENTS.
----------
Subject to and upon the terms and conditions hereof and in reliance on the
Borrower's and the Parent's warranties set forth in Section 3 below, as of the
---------
date hereof the Credit Agreement is amended as follows:
(a) Clause (a) of the definition of Minimum Consolidated Net Worth set
forth in Section 1.1 of the Credit Agreement is amended by replacing the
reference therein to "$-26,400,000" with a reference to "$-27,150,000".
(b) The first sentence of Section 2.2 of the Credit Agreement is amended
to read in its entirety as follows:
SECTION 2.2 LC Commitment. The Bank agrees to issue from time to time
-------------
before the Termination Date such performance standby letters of credit and
commercial and import letters of credit (such letters of credit being herein
collectively called "Letters of Credit" and individually a "Letter of
Credit") as the Borrower may request."
(c) Section 3.2 of the Credit Agreement is amended to read in its entirety
as follows:
SECTION 3.2 Expiration and other Terms. Each Letter of Credit may expire
--------------------------
before, on or after the Termination Date; provided, that with respect to each
--------
Letter of Credit expiring after the Termination Date, (i) the Borrower hereby
agrees to pledge cash collateral to the Bank, no later than thirty (30) days
prior to the Termination Date, in an amount, and pursuant to documentation,
satisfactory to the Bank, and (ii) with respect to commercial and import
Letters of Credit, in no event shall the expiration date exceed more than one
year from the date of issuance of such Letter of Credit."
SECTION 3. WARRANTIES.
----------
To induce the Bank to enter into this Amendment and Waiver, the Borrower
and the Parent warrant to the Bank as of the date hereof that:
<PAGE>
(a) After giving effect to this Amendment and Waiver, all representations
and warranties contained in the Credit Agreement, the Loan Documents, the
Reimbursement Agreement and the LC Documents are true and correct in all
material respects on and as of the date hereof (except to the extent such
representations and warranties expressly refer to an earlier date).
(b) After giving effect to this Amendment and Waiver, no Default or Event of
Default (such terms are used herein as defined in the Credit Agreement and the
Reimbursement Agreement) has occurred and is continuing.
(c) The execution, delivery and performance by the Borrower and the Parent
of this Amendment and Waiver have been duly authorized by all necessary
corporate and other action and do not and will not require any registration
with, consent or approval of, notice to or action by, an Person (including any
Governmental Authority) in order to be effective and enforceable. The Credit
Agreement and the Reimbursement Agreement as modified by this Amendment and
Waiver constitute the legal, valid and binding obligations of the Borrower and
the Parent, enforceable against them in accordance with the Credit Agreement's
and the Reimbursement Agreement's respective terms, without defense,
counterclaim or offset.
SECTION 4. GENERAL.
-------
(a) As hereby modified, each of the Credit Agreement and the Reimbursement
Agreement shall remain in full force and effect and is hereby ratified, approved
and confirmed in all respects.
(b) The Borrower and the Parent each acknowledge and agree that the
execution and delivery by the Bank of this Amendment and Waiver shall not be
deemed to create a course of dealing or otherwise obligate the Bank to execute
similar waivers under the same or similar circumstances in the future.
(c) This Amendment and Waiver shall be binding upon and shall inure to the
benefit of the Borrower, the Parent and the Bank and the respective successors
and assigns of such Persons.
(d) This Amendment and Waiver may be executed in any number of counterparts
and by the different parties on separate counterparts, and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same Amendment and Waiver.
* * * * *
-3-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
BANK OF AMERICA ILLINOIS
By: /s/ L. Richard DiDonato
-----------------------------------
Name: L. Richard DiDonato
Title: Vice President
PEN-TAB INDUSTRIES, INC., a
Delaware corporation
By: /s/ William Leary
-----------------------------------
Name: William Leary
Title: Vice President
PEN-TAB HOLDINGS, INC. (formerly
known as Pen-Tab Industries, Inc.),
a Virginia Corporation
By: /s/ William Leary
-----------------------------------
Name: William Leary
Title: Vice President
-4-
<PAGE>
EXHIBIT 10.8
THIRD AMENDMENT
TO
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT (this "amendment") dated as of February 23, 1998 is
entered into by and among PEN-TAB INDUSTRIES, INC., a Delaware corporation (the
"Borrower"), PEN-TAB HOLDINGS, INC. (formerly known as Pen Tab Industries,
Inc.), a Virginia corporation (the "parent"), and BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION (as successor by merger to Bank of America Illinois)
(the "Bank").
WITNESETH
---------
WHEREAS, THE Borrower, the Parent and the Bank are parties to a certain
Second Amended and Restated Loan and Security Agreement dated as of February 4,
1997, as amended and modified through the date hereof (herein called the "Credit
Agreement"; terms used but not otherwise defined herein are used herein as
defined in the Credit Agreement);
WHEREAS, the Borrower and the Parent have requested that the Credit
Agreement be retroactively amended in certain respects; and
WHEREAS, subject to the terms and conditions set forth herein, the Bank is
willing to so amend the Credit Agreement.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Borrower, the Parent and the Bank hereby agree as
follows:
SECTION 1. AMENDMENTS.
----------
Upon receipt of the documents and fees to be deliverd by the Borrower
pursuant to Section 2 below and in reliance on the Borrower's and the Parent's
---------
warranties set forth in Section 3 below, as of December 31, 1997 the Credit
---------
Agreement is amended as follows:
(a) The title page and the preamble to the Credit Agreement are bereby
amended by deleting each reference therein to "Bank of America Illinois" and in
its place substitutiong "Bank of America National Trust and Savings Association
(as successor by merger to Bank of America Illinois)".
<PAGE>
(b) The pricing matrix set forth in the definition of "Applicable Margin"
set forth in Section 1.1 of the Credit Agreement is hereby amended to read in
its entirety as set forth on Annex I hereto.
-------
(c) The definition of "Termination Date" in Section 1.1 of the Credit
Agreement is hereby amended to read in its entirety as follows:
"Termination Date" means February 3, 1999.
(d) Section 9.7(3) of the Credit Agreement is hereby amended by (i)
deleting the word "and" between clauses "(a) and "(b)" thereto and (ii) adding
to the end of such section immediately before the semicolon the following new
language:
", and (c) with computations showing as of the last day of such month, for
the four consecutive fiscal quarter period then ended, the ratio of (i)
Consolidated EBITDA minus Consolidated Capital Expenditures, to (ii)
Consolidated Fixed Changes."
(e) Section 1.1 of the Credit Agreement is hereby amended by adding the
following new definition in appropriate alphabetical order:
""Vinylweld" means Vinylweld, L.L.C., a Delaware limited liability
company."
(f) Section 3.10 of the Credit Agreement is hereby amended by (i)
renumbering paragraph "(2)" of such section to be paragraph "(3)" and (ii)
adding a new paragraph "(2)" immediately after paragraph "(1)" which reads in
its entirety as follows:
"(2)" The Borrower agrees to pay to the Bank a letter of credit fee for
each performance stand-by Letter of Credit in an amount equal to 1.0% per
annum of the undrawn face amount of each such performance stand-by Letter of
Credit, such fee to be payable in arrears on each Interest Payment Date."
(g) Section 10.2(7) of the Credit Agreement is hereby deleted and in its
place is substituted the following:
"(7)" Debt of Vinylweld of the type described in clause (6) of Section
-------
10.8; and
----
(8) Other unsecured Debt of a type not otherwise permitted pursuant to the
preceding clauses (1) through (7) in an aggregate amount not to exceed
------- --
$250,000."
<PAGE>
(h) Section 10.7 of the Credit Agreement is hereby amended by (i) deleting
the word "and" between clauses "(3)" and "(4)" therefore and (ii) adding to the
end of such section immediately before the period the following new language:
"and (5) the transfer by Borrower to Vinylweld of all of the existing assets
of the Borrower's Vinylweld division in exchange for the issuance by
Vinylweld to Borrower as of such date of not less than 80% of the membership
units of Vinylweld"
(i) Section 10.8 of the Credit Agreement is hereby amended by adding at the
end of such section immediately before the period the following new language:
"; and (6) loans, advances and capital contributions by the Borrower to, and
acquisitions by the Borrower of, capital stock of Vinylweld, provided, that
--------
(a) the aggregate amount of all such investments actually made by the
Borrower to Vinylweld (including the fair market value of all tangible
assets transferred by the Borrower to Vinylweld as a capital contribution or
otherwise) at any time outstanding shall in no event exceed $4,000,000 and
(b) at all times during which such investments remain outstanding Vinylweld
shall be a Subsidiary of the Borrower, provided, further, that the Borrower
-------- -------
may accept from Vinylweld a promissory note issued by Vinylweld in the
principal amount of up to $5,000,000 if the consideration for the issuance
of such note does not include the transfer of funds or tangible assets from
the Borrower to Vinylweld."
(j) Section 10.11 of the Credit Agreement is hereby amended by adding at the
end of such section immediately before the period the following new language:
"and the creation of Vinylweld"
(k) Section 11.1 of the Credit Agreement is amended to read in its entirety
as follows:
"Section 11.1. Debt Service Coverage Ratio. Not permit, as at December 31,
---------------------------
1998, for the four consecutive fiscal quarter period then ended, the ratio
of (a) Consolidated EBITDA minus Consolidated Capital Expenditures, to (b)
-----
Consolidated Fixed Charges to be less than 1.30:1."
(1) Section 11.2 of the Credit Agreement is amended to read in its entirety
as follows:
-3-
<PAGE>
"Section 11.2. Consolidated EBITDA. Not permit, at the end of any fiscal
-------------------
quarter set forth below, for the four consecutive fiscal quarter period then
ended, Consolidated EBITDA to be less than the minimum amount set forth below
opposite such fiscal quarter:
Fiscal Quarter Consolidated
Ending EBIDTA
- ------------------------- -----------------------
December 31, 1997 $10,000,000
March 31, 1998 8,800,000
June 30, 1998 10,500,000
September 30, 1998 13,000,000
SECTION 2. CONDITIONS PRECEDENT.
--------------------
Concurrently herewith the Borrower has paid the Bank a non-refundable
amendment fee of $7,500 and has delivered to the Bank the following, duly
executed and appropriately dated and in form and substance satisfactory to the
Bank:
(a) Counterparts of this Amendment duly executed by the Borrower and the
Parent; and
(b) Such other documents as the Bank may reasonably request.
SECTION 3. WARRANTIES.
----------
To induce the Bank to enter into this Amendment, the Borrower and the
Parent warrant to the Bank as of the date hereof that:
(a) After giving effect to this Amendment, all representations and
warranties contained in the Credit Agreement and the Loan Documents are true and
correct in all material respects on and as of the date hereof (except to the
extent such representations and warranties expressly refer to an earlier date).
(b) After giving effect to this Amendment, no Default or Event of Default
has occurred and is continuing.
(c) The execution, delivery and performance by the Borrower and the Parent
of this Amendment have been duly authorized by all necessary corporate and other
action and do not and will not require any registration with, consent or
approval of, notice to or action by, any Person (including any Governmental
Authority) in order to be effective and enforceable. The Credit Agreement as
modified by this Amendment constitutes
-4-
<PAGE>
the legal, valid and binding obligations of the Borrower and the Parent,
enforceable against them in accordance with its terms, without defense,
counterclaim or offset.
SECTION 4. GENERAL.
-------
(a) As hereby modified, the Credit Agreement shall remain in full force
and effect and is hereby ratified, approved and confirmed in all respects.
(b) The Borrower and the Parent each acknowledge and agree that the
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to execute similar
waivers under the same or similar circumstances in the future.
(c) This Amendment shall be binding upon and shall inure to the benefit of
the Borrower, the Parent and the Bank and their respective successors and
assigns.
(d) This Amendment may be executed in any number of counterparts and by
the different parties on separate counterparts, and each such counterpart shall
be deemed to be an original, but all such counterparts shall together constitute
but one and the same Amendment.
* * * * * *
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Marcia Clauson
----------------------------------
Name: MARCIA CLAUSON
Title: Managing Director
PEN-TAB INDUSTRIES, INC., a
Delaware corporation
By: /s/ William Leay
----------------------------------
Name: William Leay
Title: Vice President
PEN-TAB HOLDINGS, INC. (formerly
known as Pen-Tab Industries, Inc.)
a Virginia Corporation
By: /s/ William Leay
----------------------------------
Name: William Leay
Title: Vice President
<PAGE>
ANNEX I
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Offshore
Rate Base Rate
Debt Service Applicable Applicable
Tier Coverage Ratio Margin Margin
- -------------------------------------------------------------------
I Less than 1.50:1 2.25% 0.75%
- -------------------------------------------------------------------
II Greater than or equal 2.00% 0.50%
to 1.50:1 but less
than 1.75:1
- -------------------------------------------------------------------
III Greater than or equal 1.75% 0.25%
to 1.75:1 but less
than 2.25:1
- -------------------------------------------------------------------
IV Greater than or equal 1.50% 0.00%
to 2.25:1 but less
than 4.75:1
- -------------------------------------------------------------------
V Greater than or equal 1.25% 0.00%
to 3.25:1 but less
than 4.75:1
- -------------------------------------------------------------------
VI Greater than equal to 1.00% 0.00%
4.75:1
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