<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549-1004
Form 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended April 3, 1999
or
( )Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition period from __________ to __________
Commission file number 333-24519
Pen-Tab Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1833398
(State or other jurisdiction (I.R.S. Employer
Incorporation or organization) Identification Number)
167 Kelley Drive
Front Royal, VA 22630
Telephone: (540) 622-2000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of April 3, 1999, there
were outstanding 100 shares of common stock, $0.01 par value, all of which are
privately owned and are not traded on a public market.
<PAGE>
PEN-TAB INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED APRIL 3, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
a) Condensed Consolidated Balance Sheets as of April 3, 1999
and January 2, 1999 1
b) Condensed Consolidated Statements of Operations for the
quarters ended April 3, 1999 and April 4, 1998 2
c) Condensed Consolidated Statements of Cash Flows for the
quarters ended April 3, 1999 and April 4, 1998 3
d) Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
and Results of Operations Condition 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
<PAGE>
Pen-Tab Industries, Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
-------------- ---------------
(Unaudited)
<S> <C> <C>
Assets
Currents assets:
Cash and cash equivalents $ -- $ 20
Accounts receivable, net 18,028 15,770
Inventories, net 65,564 41,801
Deferred income taxes 1,384 1,384
Prepaid expenses and other current assets 840 611
-------------- ---------------
Total Current Assets 85,816 59,586
Property, plant and equipment, net 45,197 45,538
Other assets 4,109 4,339
Goodwill, net 73,836 72,480
-------------- ---------------
Total assets $208,958 $181,943
============== ===============
Liabilities and stockholder's equity:
Current liabilities:
Accounts payable and bank overdraft $ 8,640 $ 5,804
Accrued expenses and other current liabilities 19,477 8,224
Due to Newell Co. 20,822 18,546
Accrued interest - subordinated notes 1,265 3,324
Current portion of long term debt 5,405 5,810
-------------- ---------------
Total current liabilities 55,609 41,708
Long-term debt 135,700 119,339
Capitalized lease obligation 7,841 7,311
Deferred income taxes 1,387 3,068
Stockholder's equity 8,421 10,517
-------------- ---------------
Total liabilities and stockholder's equity $208,958 $181,943
============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statement
1
<PAGE>
Pen-Tab Industries, Inc.
Condensed Consolidated Statements of Operations
(Dollars in Thouands)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------
April 3, 1999 April 4, 1998
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $28,030 $18,218
Cost of goods sold 20,748 14,011
-------------- --------------
Gross profit 7,282 4,207
Expenses:
Selling, general and administrative 6,319 3,732
Amortization of goodwill 469 -
Interest expense, net 3,749 1,942
-------------- --------------
Total expenses 10,537 5,674
-------------- --------------
Loss before income taxes and minority interest (3,255) (1,467)
Income tax benefit (1,237) (502)
-------------- --------------
Loss before minority interest (2,018) (965)
Minority interest -- (11)
-------------- --------------
Net loss $(2,018) $ (954)
============== ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
2
<PAGE>
Pen-Tab Industries, Inc.
Condensed Consolidated Statements of Cash flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------
April 3, 1999 April 4, 1998
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net loss $ (2,018) $ (954)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,443 635
Amortization of goodwill 469 --
Amortization of debt issuance costs 269 114
Minority interest -- (11)
Provision for losses on accounts receivable 149 45
Changes in operating assets and liabilities:
Accounts receivable (2,406) (1,815)
Inventories (23,763) (8,040)
Prepaid expenses, other current assets and other 242 (736)
assets
Accounts payable and bank overdraft 14,090 (252)
Accrued expenses and other current liabilities 2,269 312
Accrued interest on subordinated notes (2,059) (2,131)
Deferred income taxes (1,681) --
-------------- --------------
Net cash used in operating activities (12,996) (12,833)
Investing activities
Purchase of equipment (1,487) (406)
Purchase price adjustment - purchase of Stuart Hall (1,946) --
-------------- --------------
Net cash used in investing activities (3,433) (406)
Financing activities
Proceeds from revolver borrowings 27,250 --
Repayments of revolver borrowings (8,250) --
Principal payments on long-term debt (2,174) (437)
Principal payments on capitalized lease obligations (339) --
Dividends (78) --
-------------- --------------
Net cash provided by (used in) financing activities 16,409 (437)
Decrease in cash and cash equivalents (20) (13,676)
Cash and cash equivalents at beginning of period 20 13,676
-------------- --------------
Cash and cash equivalents at end of period $ -- $ --
============== ==============
</TABLE>
See accompanying notes to unaudited condensend consolidated interim financial
statements
3
<PAGE>
Pen-Tab Industries, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
April 3, 1999
(Dollars in thousands)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Pen-
Tab Industries, Inc. have been prepared in accordance with generally accepted
accounting principles applicable for interim financial information and with the
instructions to form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended April 3, 1999 are not necessarily indicative of
the results that may be expected for the year ended January 2, 2000. All
references to fiscal quarter refer to the 13 week periods ended April 3, 1999
and April 4, 1998. These financial statements should be read in conjunction
with the audited financial statements of Pen-Tab Industries, Inc. as of January
2, 1999 and January 3, 1998 and for each of the three years in the period ended
January 2, 1999, included in the Company's form 10-K (#333-24519) as filed with
the Securities and Exchange Commission.
2. Recently Issued Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), which requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and that those instruments
shall be measured at fair value. SFAS No. 133 also prescribes the accounting
treatment for changes in the fair value of derivatives which depends on the
intended use of the derivative and the resulting designation. Designations
include hedges of the exposure to changes in the fair value of a recognized
asset or liability, hedges of the exposure to variable cash flows of a
forecasted transaction, hedges of the exposure to foreign currency translations,
and derivatives not designated as hedging instruments. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. The Company expects to adopt
SFAS No. 133 in the first quarter of the year 2000. The financial statement
impact of adopting SFAS No. 133 has not yet been determined.
4
<PAGE>
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
-------------- --------------
<S> <C> <C>
Raw materials $15,381 $17,242
Work-in-process 869 715
Finished goods 49,314 23,844
LIFO reserve, net - -
-------------- --------------
$65,564 $41,801
============== ==============
</TABLE>
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time. However,
Pen-Tab's current expectation is that its inventory levels will remain
consistent from year-end to year-end. Accordingly, interim LIFO calculations
are necessarily based on management's estimates of expected year-end inventory
levels and costs. Because these are subject to many forces beyond management's
control, interim results are subject to the final year-end LIFO inventory
valuation. Due to a decline in certain commodity grade paper prices, inventory
is being carried at the lower of cost or market, therefore no LIFO reserve
remains.
4. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
---------------- -----------------
<S> <C> <C>
Credit Facility:
Revolver $ 24,000 $ 5,000
Term Loan 33,500 34,250
Senior Subordinated Notes 75,000 75,000
Industrial development revenue bonds 6,700 7,100
Equipment notes payable 1,850 2,875
Capital lease obligations 7,896 8,235
---------------- -----------------
148,946 132,460
Less: current portion 5,405 5,810
---------------- -----------------
$143,541 $126,650
================ =================
</TABLE>
In conjunction with the acquisition of Stuart Hall on August 20, 1998, the
Company repaid the outstanding obligations on a Credit Agreement with Bank of
America and entered into a new $135 million Credit Facility ("Credit Facility")
with Bank of America which expires on August 20, 2001. The Credit Facility
includes a $100 million revolver and a $35 million term loan. The $100 million
revolver portion of the Credit Facility
5
<PAGE>
4. Long-Term Debt (Continued)
provides for advances based upon a borrowing base comprised of specified
percentages of eligible accounts receivable and inventory. The interest rate per
annum applicable to the Credit Facility is the prime rate, as announced by the
Bank plus 1% or at the Company's option, the Eurodollar rate plus 2%. The
Company is required to pay a commitment fee of 0.5% on the unused portion of the
$100 million revolver. Under the terms of the Credit Facility, the Company is
required to maintain certain financial ratios relating to cash flow, annually
reduce the principal balance of the revolver to $25 million for thirty
consecutive days during the period between September 30 and November 15 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 the Credit Facility.
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. The
Company can terminate the transaction at any time, at the then current fair
market value of the swap instrument.
5. Segment Information
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>
Quarter ended April 3, 1999
Net sales $ 25,959 $2,071 $ 28,030
Operating earnings (loss) 1,139 (176) 963
Interest expense, net 3,749 -- 3,749
Identifiable assets 205,066 3,892 208,958
Depreciation and amortization 1,383 60 1,443
Capital expenditures 1,309 178 1,487
Quarter ended April 4, 1998
Net sales $16,217 $2,001 $18,218
Operating earnings 527 (52) 475
Interest expense, net 1,942 -- 1,942
Identifiable assets 56,965 3,354 60,319
Depreciation and amortization 594 41 635
Capital expenditures 396 10 406
</TABLE>
6
<PAGE>
5. Segment Information (Continued)
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 amortization of goodwill. Inter-segment sales are
immaterial.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the quarter ended April 3, 1999 increased by $9.8 million or 53.9%
to $28.0 million from $18.2 million for the quarter ended April 4, 1998. The
increase in sales is primarily due to the acquisition of Stuart Hall on August
20, 1998. For the Pen-Tab segment, which includes the Stuart Hall operations,
differentiated higher margin product sales increased by $9.1 million and core
lower margin product sales increased by $0.7 million for the quarter ended April
3, 1999 as compared to the quarter ended April 4, 1998. The Vinylweld segment
sales remained flat at $2.0 million for the quarter ended April 3, 1999,
compared to $2.0 million for the quarter ended April 4, 1998
Gross profit for the quarter ended April 3, 1999 increased $3.1 million or 73.1%
to $7.3 million from $4.2 million for the quarter ended April 4, 1998. The
gross profit as a percentage of net trade sales for the quarter ended April 3,
1999 was 26.0% compared to 23.1% for quarter ended April 4, 1998. The increase
in gross profit margin of 2.9% is primarily due to a more favorable product mix
in the Pen-Tab segment as a result of the acquisition of Stuart Hall. For the
quarter ended April 3, 1999, differentiated product sales represented
approximately 49% of the Pen-Tab segment sales as compared to approximately 24%
for the quarter ended April 4, 1998.
SG&A expenses for the quarter ended April 3, 1999 increased $2.6 million to $6.3
million from $3.7 million for the quarter ended April 4, 1998. This increase is
principally due to increases in salary and fringe expenses associated with the
acquisition of Stuart Hall.
Amortization of goodwill for the quarter ended April 3, 1999 increased by $0.5
million from the quarter ended April 4, 1998. The increase is due to the
amortization of goodwill associated with the acquisition of Stuart Hall.
Interest Expense for the quarter ended April 3, 1999 increased by $1.8 million
to $3.7 million from $1.9 million for the quarter ended April 4, 1998. The
increase is primarily due to the debt incurred in conjunction with the
acquisition of Stuart Hall on August 20, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the quarter ended April 3, 1999 is
$13.0 million as compared to net cash used in operating activities of $12.8
million for the quarter ended April 4, 1998. The slight increase in the first
quarter of 1999 was due to increases in inventory offset by increases in
accounts payable and accrued expenses due to the acquisition of Stuart Hall in
August 1998.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used in investing activities for the quarter ended April 3, 1999 is
$3.4 million as compared to net cash used in investing activities of $0.4
million for the quarter ended April 4, 1998. The increase is principally due to
a final working capital purchase price adjustment of $1.9 million for the
purchase of Stuart Hall from Newell Co., as well costs associated with the
implementation of a new enhanced computer system.
Net cash provided by financing activities for the quarter ended April 3, 1999 is
$16.4 million compared to net cash used in financing activities of $0.4 million
for the quarter ended April 4, 1998. The increase was due to borrowing on the
Company's revolver portion of the Credit Facility to fund the seasonal increase
in working capital.
YEAR 2000 COMPATABILITY
Until recently, computer programs were generally written using two digits rather
than four to define the applicable year. Accordingly, such programs may be
unable to distinguish between the year 1900 and the year 2000. This could
result in system failures or data corruption for the Company, its customers or
suppliers, which could cause disruptions of operations. The Company is
currently engaged in a company-wide effort to address the year 2000
compatibility issues. The project is focused on three main areas: information
technology (IT) systems; non-IT systems imbedded in equipment; and the company's
business relationships with third parties, such as suppliers, customers, and
service providers. The thrust of the project is to address those systems and
relationships which the Company judges to be material to their operations.
Based on the Company's current project status, management feels it is unlikely
there will be any disruptions in manufacturing or distribution of products to
customers, or in their daily business processes. The Company is expecting to
fund all year 2000 project costs through its operating cash flow.
The Company has recently purchased a new certified Year 2000 compliant software
package to upgrade it's existing IT systems. The implementation of the recently
purchased software is expected to be complete by June 30, 1999. The purchase of
the new software was purely for the purpose of enhancing the Company's existing
IT systems; however, a side benefit of the software is its year 2000 compliance.
The cost associated with the acquisition of the new IT system are being
capitalized in accordance with SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The cost of the year 2000
compliance project related to IT systems is expected to be $0.2 million of which
$0.1 million has been expended.
The year 2000 compliance issue related to non-IT systems imbedded in equipment
is currently being evaluated by a company wide committee representing all
functional areas. The cost to remedy this issue is not expected to be material,
and is expected to be complete by September 30, 1999.
The Company has requested documentation from all significant customers,
suppliers, and
9
<PAGE>
YEAR 2000 COMPATABILITY (CONTINUED)
service providers that their organizations have addressed the year 2000
compliance issues and that their companies are ready. The cost to ensure all
significant customers, suppliers, and service providers are compliant is not
expected to be material, and will be complete by September 30, 1999.
The Company currently is developing contingency plans. The Company anticipates
that its internal systems will be Year 2000 compliant by September 30, 1999.
The Year 2000 readiness of 3rd parties with which the Company has a material
relationship and their products and services are being assessed.
While the Company cannot warrant that all business systems of its business
partners, external agents, service providers, or government agencies will be
timely with year 2000 compliance, the Company expects no business interruptions
due to non-compliance by any particular entity. The Company believes that year
2000 issues will not materially affect future financial results or operating
performances.
SEASONALITY AND KNOWN TRENDS
The Company experiences seasonality in its business operations. During the
Company's second and third quarters, net sales are higher that the first and
fourth quarters due to sales of back-to-school products.
FORWARD-LOOKING STATEMENTS
Written reports and oral statements made from time to time by the Company
contain "forward-looking statements." Forward looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts and by their use of words such as "goals", "expects", "plans", "believes",
"estimates", "forecasts", "projects", "intends",and other words of similar
meaning. Such statements are likely to address the Company's earnings, return on
capital, capital expenditures, project implementation, production growth, sales
growth and expense reductions. They are based on management's then-current
information, assumptions, plans, expectations, estimates and projections about
their industry. However, such statements are not guarantees of future
performance, and actual results and outcomes may differ materially from what is
expressed depending on a variety of factors, many of which are outside of the
Company's control.
Among the factors that could cause actual outcomes or results to differ
materially from what is expressed in these forward-looking statements are
changes in the demand for, supply of, and market price of paper, changes in
economic conditions, changes in the availability and/or price of paper,
significant changes in rates of interest, inflation, or taxes, changes in Pen-
Tab's relationship with its employees and the potential adverse effects if labor
disputes or grievances were to occur, changes in accounting principles and
10
<PAGE>
FORWARD LOOKING STATEMENTS (CONTINUED)
timely resolution of Year 2000 compatability issues by the Company and its
customers and suppliers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is impacted by changes in interest rates and certain
commodity prices, namely paper. The Company does not currently hold or issue
derivative instruments for trading or hedging purposes related to commodity
price fluctuations.
The Company's primary market risk is commodity price exposure. Based upon past
experience, the Company believes it can effectively pass through to its
customers commodity price fluctuations thus assisting the Company in mitigating
exposure related to commodity price fluctuations. In addition, the Company has
market risk related to interest rate exposure on its Credit Facility and swap
agreement. Interest rate swaps may be used to adjust interest rate exposure
when appropriate.
Based on the Company's overall commodity price and interest rate exposure at
April 3, 1999, management believes that a short-term change in any of the
exposures will not have a material effect on the consolidated financial
statements of the Company.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
Financial Data Schedule (filed only electronically with the SEC)
b.) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1999.
12
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q for the quarter ended April
3, 1999 to be signed on its behalf by the undersigned thereunto duly authorized.
Pen-Tab Industries, Inc.
(Registrant)
Date By: /s/ William Leary
- ---- ---------------------
May 18, 1999 William Leary
Vice President, Chief Financial
and Administrative Officer
(principal financial officer and
accounting officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-02-2000 JAN-02-1999
<PERIOD-START> JAN-03-1999 JAN-04-1998
<PERIOD-END> APR-03-1999 APR-04-1998
<CASH> 0 20
<SECURITIES> 0 0
<RECEIVABLES> 17,796 13,455
<ALLOWANCES> 252 2,315
<INVENTORY> 65,564 41,801
<CURRENT-ASSETS> 85,816 59,586
<PP&E> 61,534 61,760
<DEPRECIATION> 16,337 16,222
<TOTAL-ASSETS> 208,958 181,943
<CURRENT-LIABILITIES> 55,609 41,708
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 8,421 10,517
<TOTAL-LIABILITY-AND-EQUITY> 208,958 181,943
<SALES> 28,030 18,218
<TOTAL-REVENUES> 28,030 14,011
<CGS> 20,748 14,011
<TOTAL-COSTS> 27,536 17,743
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,749 1,942
<INCOME-PRETAX> (3,255) (1,467)
<INCOME-TAX> (1,237) (502)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,018) (954)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
