<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 1, 2000
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 1, 2000, 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 1, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
<S> <C>
a) Condensed Consolidated Balance Sheets as of April 1, 2000
and January 1, 2000 1
b) Condensed Consolidated Statements of Operations for the
quarters ended April 1, 2000 and April 3, 1999 2
c) Condensed Consolidated Statements of Cash Flows for the
quarters ended April 1, 2000 and April 3, 1999 3
d) Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
</TABLE>
<PAGE>
Pen-Tab Industries, Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
April 1, January 1,
2000 2000
--------------- ---------------
(Unaudited)
Assets
<S> <C> <C>
Currents assets:
Cash and cash equivalents $ -- $ 175
Accounts receivable, net of allowances of $780 and
$3,794, respectively 19,157 21,353
Inventories, net 42,511 45,015
Prepaid expenses and other current assets 1,752 810
Deferred income taxes 6,871 6,871
--------------- ---------------
Total Current Assets 70,291 74,224
Property, plant and equipment, net of accumulated
depreciation of $23,338 and $21,771, respectively 41,331 42,307
Debt issuance costs, net 3,803 3,454
Goodwill, net 73,266 73,737
--------------- ---------------
Total assets $188,691 $193,722
=============== ===============
Liabilities and stockholder's equity:
Current liabilities:
Accounts payable and bank overdraft $ 5,856 $ 6,211
Accrued expenses and other current liabilities 9,533 10,556
Accrued interest on subordinated notes 918 3,065
Current portion of long-term debt 22,886 21,431
Current portion of capitalized lease obligation 916 809
--------------- ---------------
Total current liabilities 40,109 42,072
Long-term debt 136,124 134,456
Capitalized lease obligation 6,152 6,473
Deferred income taxes 6,871 6,871
Stockholder's (deficit) equity (565) 3,850
--------------- ---------------
Total liabilities and stockholder's (deficit)
equity $188,691 $193,722
=============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
1
<PAGE>
Pen-Tab Industries, Inc.
Condensed Consolidated Statements of Operations
Unaudited
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------
April 1, April 3,
2000 1999
-------------- --------------
<S> <C> <C>
Net sales $24,512 $25,960
Cost of goods sold 20,669 18,926
-------------- --------------
Gross profit 3,843 7,034
-------------- --------------
Expenses:
Selling, general and
administrative 5,815 5,895
Amortization of goodwill 471 469
Interest expense, net 4,402 3,578
-------------- --------------
Total expenses 10,688 9,942
-------------- --------------
Loss from continuing operations
before income tax benefit (6,845) (2,908)
Income tax benefit (2,601) (1,116)
-------------- --------------
Loss from continuing operations (4,244) (1,792)
-------------- --------------
Loss from operations of
discontinued segment, net of
taxes (167) (226)
-------------- --------------
Net loss $(4,411) $(2,018)
============== ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
2
<PAGE>
Pen-Tab Industries, Inc.
Condensed Consolidated Statements of Cash flows
Unaudited (Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------
April 1, April 3,
2000 1999
-------------- --------------
<S> <C> <C>
Operating activities
Net loss $(4,411) $ (2,018)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,690 1,443
Amortization of goodwill 471 469
Amortization of debt issuance costs 290 269
Deferred income taxes -- (1,681)
Provision for losses on accounts receivable 57 149
Provision for sales allowances and credits 349 --
Changes in operating assets and liabilities:
Accounts receivable 1,790 (2,406)
Inventories 2,504 (23,763)
Prepaid expenses and other current assets (942) 242
Accounts payable and bank overdraft (355) 2,836
Accrued expenses and other current liabilities (1,023) 11,577
Accrued interest on subordinated notes (2,147) (2,059)
-------------- --------------
Net cash used in operating activities (1,727) (14,942)
-------------- --------------
Investing activities
Purchase of equipment (714) (1,487)
Investment in debt issuance costs (639) --
-------------- --------------
Net cash used in investing activities (1,353) (1,487)
-------------- --------------
Financing activities
Proceeds from revolver borrowings 2,000 27,250
Repayments of revolver borrowings (1,000) (8,250)
Issuance of senior subordinated notes in lieu
of cash interest payment 4,078 --
Principal payments on long-term debt (1,955) (2,174)
Principal payments on capitalized lease obligations (214) (339)
Dividends to Pen-Tab Holdings (4) (78)
-------------- --------------
Net cash provided by financing activities 2,905 16,409
-------------- --------------
Decrease in cash and cash equivalents (175) (20)
Cash and cash equivalents at beginning of period 175 20
-------------- --------------
Cash and cash equivalents at end of period $ -- $ --
============== ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
3
<PAGE>
Pen-Tab Industries, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
April 1, 2000
(Dollars in thousands)
1. Basis of Presentation, Description of Business, Recent Developments and
Liquidity
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 1, 2000 are not necessarily indicative of
the results that may be expected for the year ended December 30, 2000. All
references to fiscal quarter refer to the 13 week periods ended April 1, 2000
and April 3, 1999. These financial statements should be read in conjunction
with the audited financial statements of Pen-Tab Industries, Inc. as of January
1, 2000 and January 2, 1999 and for each of the three periods in the year ended
January 1, 2000, included in the Company's form 10-K (#333-24519) as filed with
the Securities and Exchange Commission.
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 14 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.
On August 20, 1998, the Company acquired all of the capital stock of Stuart Hall
Company, Inc. ("Stuart Hall").
4
<PAGE>
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 Vinylweld L.L.C., is a leading designer and
manufacturer of vinyl packaging products. Sales are made on open account and the
Company generally does not require collateral.
Management change. On June 29, 1999, the Company appointed Marc English as
Chief Executive Officer. Mr. English was previously President and Chief
Executive Officer of CSS Industries' Cleo unit, a consumer products company
primarily engaged in the manufacturing and sale to mass-market retailers of
seasonal gift-wrap products. In addition, Mr. English has held marketing and
sales management positions with other companies, including CPS Corp., also in
the gift-wrap industry. Mr. English replaced Mr. Hodes who resigned from the
position as Chief Executive Officer of the Company.
Company Initiatives/Reorganization. Under the leadership of Marc English, the
Company performed a review of all operations with the goals of increasing market
share, streamlining operations, reducing debt and increasing profitability.
On December 30, 1999, the Company approved a plan to rationalize its
manufacturing operations. The plan includes a plant consolidation, equipment
moves, plant/product changes, and warehouse consolidation. The rationalization
is expected to result in an approximate 20% reduction in manufacturing space.
The fourth quarter of 1999 reorganization charge of $6.1 million represents the
Company's rationalization plan and includes employee termination costs,
including benefits, costs to exit facilities, lease termination costs, and
property taxes after ceasing operations. The major undertakings of the
rationalization plan are expected to be completed during the fourth quarter of
2000. Upon full implementation, the plan is expected to have a significant
positive effect on the Company's financial performance, resulting in an
estimated annualized cost savings of approximately $3 million.
On March 31, 2000, the Company decided to divest its vinyl packaging business
segment, which operates as Vinylweld L.L.C. The divestiture is anticipated to
occur by the end of the first quarter of 2001.
Covenant Violations/Amendments to Credit Facility/Note Holder Consent. As a
result of insufficient third quarter 1999 earnings, the Company was in default
of a covenant based on EBITDA (earnings before interest, taxes, depreciation,
amortization, and certain non-cash charges, as defined in the agreement) and
cash interest and principal payments (fixed charge coverage ratio) for the
twelve months ended October 2, 1999. On November 16, 1999, the Company amended
its credit facility to waive the fixed charge coverage ratio covenant default.
This amendment also provided that the interest rate increase by 0.625%.
5
<PAGE>
As a result of insufficient fourth quarter 1999 earnings, the Company was in
default of the fixed charge coverage ratio, annual clean up and the minimum net
worth covenants, as defined in the agreement, at and for the twelve months ended
January 1, 2000. In addition, due to the earnings shortfall and Enterprise
Resource Planning ("ERP") system implementation issues which led to higher than
expected inventories and accounts receivable collection delays, the Company was
in default of the annual revolver clean up provision. The clean up provision
requires the Company, for a period of not less than thirty days between
September 30 and November 15, to reduce the outstanding balance on the revolver
to $25 million or less. The Company was also in default of the borrowing base
formula, as defined in the agreement, whereby the balance outstanding on the
revolver was in excess of the borrowing base formula computed amount. On March
13, 2000, the Company amended its credit facility. The amendment (i) waived
the defaults, (ii) revised the borrowing base definition to provide for an over
advance of up to $16.5 million for the period of March 1, 2000 through July 15,
2000, (iii) increased the interest rate by 0.875% plus another 0.50% during the
over advance period, (iv) revised the annual clean up provision amount to $27
million from $25 million and revised the clean up period to be between October
15 and January 15 from between September 30 and November 15, (v) revised the
fixed charge coverage ratio to 1.00:1 (from 1.50:1) for the twelve month periods
ended March 31, 2000 and June 30, 2000 and to 1.50:1 (from 1.75:1) thereafter,
(vi) limits capital expenditures to $2 million for fiscal 2000 and (vii)
requires total debt, as defined in the agreement, not to exceed $153 million at
June 30, 2000. The Company paid fees of $0.6 million in conjunction with the
Credit Facility amendment and will amortize such fees over the remaining life of
the Credit Facility (March 2000 through August 2001).
Prior to the amendment discussed in the preceding paragraph and as a result of
the covenant violations described above, the Company was not allowed to make the
required interest payment of approximately $4 million due on February 1, 2000 to
the holders of the Company's $75 million 10.875% Senior Subordinated Notes due
2007. As a condition of the aforementioned amendment, the Company obtained
consent from substantially all of the note holders to accept the February 1,
2000 interest payment in the form of new notes with a maturity date of January
15, 2005, in aggregate principal amount substantially equal to such interest
payment, in lieu of a cash payment. As a result, the Company was deemed to have
made the cash interest payment and simultaneously issued new notes to existing
note holders in exchange for such cash payment.
Subsequent to January 1, 2000, a major stockholder of Holdings purchased
approximately 80% of the 10.875% Senior Subordinated Notes in the secondary
market.
Management, in conjunction with its debtors, have reviewed the Company's fiscal
2000 budget and cash flow forecasts, and believe these plans will allow the
Company to meet the debt covenant requirements of its debt agreements.
6
<PAGE>
2. Recently Issued Pronouncements
The Financial Accounting Standards Board has issued three new statements
including Statement No. 135 (Recision of Statement No. 75), Statement No. 136
(Transfer of Assets Involving a Not-for-Profit Organization That Raises or Holds
Contributions for Others) and Statement No. 137 (Deferral of Effective Date of
Statement No. 133). Statements No. 135 and 136 have no applicability to the
Company. Statement No. 137, which deferred the effective date of Statement No.
133 (Accounting for Derivative Instruments and Hedging Activities) is not
effective until fiscal year 2001 and the Company did not adopt early. Adoption
of this standard 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.
The American Institute of Certified Public Accountants has issued three new
statements including SOP 98-9 (Modification of SOP 97-2 on Software Revenue
Recognition), SOP 99-2 (Accounting for and Reporting of Postretirement Medical
Benefit (401(h)) Features of Defined Benefit Pension Plans) and SOP 99-3
(Accounting for and Reporting of Certain Defined Contribution Plan Investments
and Other Disclosure Matters). The aforementioned statements do not have a
material effect on the financial position, results of operations or cash flows
of the Company.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
April 1, January 1,
2000 2000
-------------- --------------
<S> <C> <C>
Raw materials $13,497 $17,858
Work-in-process 2,934 1,792
Finished goods 24,637 23,922
LIFO reserve, net 1,443 1,443
-------------- --------------
$42,511 $45,015
============== ==============
</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.
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.
7
<PAGE>
4. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
April 1, January 1,
2000 2000
---------------- ----------------
Credit Facility:
<S> <C> <C>
Revolver $ 42,500 $ 41,500
Term Loan 29,500 30,750
Senior Subordinated Notes 79,078 75,000
Industrial development revenue bonds 6,700 6,700
Equipment notes payable 1,232 1,937
Capital lease obligations 7,068 7,282
---------------- ----------------
166,078 163,169
Less: current portion 23,802 22,240
---------------- ----------------
$142,276 $140,929
================ ================
</TABLE>
In conjunction with the acquisition of Stuart Hall on August 20, 1998, the
Company entered into a $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 $35 million term loan
has aggregate maturities as follows: 1998 $750; 1999 $3,500; 2000 $5,500; 2001
$25,250. The $100 million revolver portion of the Credit Facility provides for
advances based upon a borrowing base comprised of specified percentages of
eligible accounts receivable and inventory. During March 1, 2000 through July
15, 2000 the borrowing base includes an overadvance of up to $16,500. The
interest rate per annum applicable to the Credit Facility is the prime rate, as
announced by the Bank plus 1.75% or at the Company's option, the Eurodollar rate
plus 3.5%. During an overadvance period the interest rate is increased by
0.50%. The Company is required to pay a commitment fee of 0.65% 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 (fixed charge coverage ratio, minimum EBITDA threshold and capital
expenditure limit), annually reduce the principal balance of the revolver to $27
million for thirty consecutive days during the period between October 15 and
January 15, limit total debt, as defined in the agreement, to $153 million at
June 30, 2000 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 have maturities of $4 million in 2005 and
$75 million 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 $75,000 of the 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
8
<PAGE>
interest rate resets every six months and at April 1, 2000, the Company's
effective interest rate under the swap agreement was 10.88%. The Company can
terminate the transaction on any interest reset date at the then current fair
market value of the swap instrument. A 1.0% change in the effective interest
rate would result in a $0.7 million change in interest expense.
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 (4.6% as
of April 1, 2000 plus a bank of letter of credit fee of 1.5%). The industrial
development revenue bonds are subject to a mandatory sinking fund redemption
which commenced 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 in the amount of $6.8
million and a first security interest in Pen-Tab's 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.
The Company has a series of equipment notes payable with CIT Group/Equipment
Financing Inc. The notes bear interest at various fixed amounts from 8.95% to
10.85% and mature at various dates through 2001. The aggregate maturities are
as follows: 2000 $986; 2001 $951.
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 1, 2000
Net sales (external customers) $ 24,512 $ 2,465 $ 26,977
Operating loss (2,443) (69) (2,512)
Interest expense, net 4,402 201 4,603
Identifiable assets 185,061 (3,630) 188,691
Depreciation and amortization 2,376 75 2,451
Capital expenditures 664 50 714
</TABLE>
9
<PAGE>
Segment Information (Continued)
<TABLE>
<CAPTION>
School, Home Vinyl
And Office Packaging
Products Products Total
------------------- ---------------- ---------------
<S> <C> <C> <C>
Quarter ended April 3, 1999
Net sales (external customers) $ 25,960 $ 2,070 $ 28,030
Operating earnings (loss) 670 (176) 494
Interest expense, net 3,578 171 3,749
Identifiable assets 205,066 3,892 208,958
Depreciation and amortization 2,121 60 2,181
Capital expenditures 1,309 178 1,487
</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 amortization of goodwill. Inter-segment sales are
immaterial.
10
<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 1, 2000 decreased by $1.5 million or 5.6%
to $24.5 million from $26.0 million for the quarter ended April 3, 1999.
Differentiated higher margin product sales decreased by $1.4 million and core
lower margin product sales decreased by $0.1 million for the quarter ended April
1, 2000 as compared to the quarter ended April 3, 1999.
Gross profit for the quarter ended April 1, 2000 decreased $3.2 million or 45.4%
to $3.8 million from $7.0 million for the quarter ended April 3, 1999. The
gross profit as a percentage of net trade sales for the quarter ended April 1,
2000 was 15.7% compared to 27.1% for quarter ended April 3, 1999. The decrease
in the gross profit percentage for the quarter is principally attributable to:
(i) Unfavorable manufacturing variances resulting from commencing the BTS ("Back
To School") seasonal inventory build during the second quarter of 2000 versus
the first quarter during 1999 and foreign sourcing of a portion of the BTS
converted paper products which also supported the planned later inventory build.
Finished goods inventory increased during the first quarter of 1999 by $25.5
million versus an increase of $0.7 million for the first quarter of 2000. (ii)
Variable costs associated with inventory reduction programs implemented during
the first quarter of 2000. Programs such as repacking and item substitution
generate spending but do not create any overhead absorbtion. (iii) An
unfavorable shift in product mix. For the quarter ended April 1, 2000,
differentiated higher margin product sales represented approximately 46% of
sales as compared to approximately 49% for the quarter ended April 3, 1999, and
(iv) lower recovery, by approximately $0.6 million, on closeout sales during the
first quarter of 2000 versus the first quarter of 1999.
SG&A expenses for the quarter ended April 1, 2000 remained relatively flat at
$5.8 million or 23.7% of net sales versus $5.9 million or 22.7% of net sales for
the quarter ended April 3, 1999.
Amortization of goodwill for the quarter ended April 1, 2000 remained flat at
$0.5 million from the quarter ended April 3, 1999.
Interest Expense, net for the quarter ended April 1, 2000 increased by $0.8
million to $4.4 million from $3.6 million for the quarter ended April 3, 1999.
The increase is primarily due to the increase in the revolver balance and the
increase in interest rates on the revolver and term loan associated with the
amendment to the Credit Facility and increases to LIBOR and the prime rate.
Discontinued Operations includes the operations of the Company's vinyl packaging
segment. In March 2000, the Company decided to divest this business. The
divestiture is anticipated to occur by the end of the first quarter of 2001.
Net sales for the vinyl packaging segment for the quarter ended April 1, 2000
increased by $0.4 million or 19.1% to $2.5 million from $2.1 million for the
quarter ended April 3, 1999. Loss, net of income tax benefits, for the quarter
ended April 1, 2000 was $0.2 million compared to a loss of $0.1 million for the
quarter ended April 3, 1999.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the quarter ended April 1, 2000 is
$1.8 million as compared to $14.9 million for the quarter ended April 3, 1999.
The decrease in cash used is related primarily to inventory reduction plans
implemented during the first quarter of 2000.
Net cash used in investing activities for the quarter ended April 1, 2000 is
$1.4 million as compared to $1.5 million for the quarter ended April 3, 1999.
Net cash provided by financing activities for the quarter ended April 1, 2000 is
$2.9 million compared to $16.4 million for the quarter ended April 3, 1999. The
decrease in cash provided is primarily due to lower borrowings on the revolver
for the quarter ended April 1, 2000.
As a result of insufficient third quarter 1999 earnings, the Company was in
default of a covenant based on EBITDA (earnings before interest, taxes,
depreciation, amortization, and certain non-cash charges, as defined in the
agreement) and cash interest and principal payments (fixed charge coverage
ratio) for the twelve months ended October 2, 1999. On November 16, 1999, the
Company amended its credit facility to waive the fixed charge coverage ratio
covenant default. This amendment also provided that the interest rate increase
by 0.625%.
As a result of insufficient fourth quarter 1999 earnings, the Company was in
default of the fixed charge coverage ratio covenant and the minimum net worth
covenant, as defined in the agreement, at and for the twelve months ended
January 1, 2000. In addition, due to the earnings shortfall and ERP system
implementation issues which led to higher than expected inventories and accounts
receivable collection delays, the Company was in default of the annual clean up
provision. The clean up provision requires the Company, for a period of not
less than thirty days between September 30 and November 15, to reduce the
outstanding balance on the revolver to $25 million or less. The Company was
also in default of the borrowing base formula, as defined in the agreement,
whereby the balance outstanding on the revolver was in excess of the borrowing
base formula computed amount. On March 13, 2000, the Company amended its credit
facility. The amendment (i) waived the defaults, (ii) revised the borrowing
base definition to provide for an over advance of up to $16.5 million for the
period of March 1, 2000 through July 15, 2000, (iii) increased the interest rate
by 0.875% plus another 0.50% during the over advance period, (iv) revised the
annual clean up provision amount to $27 million from $25 million and revised the
clean up period to be between October 15 and January 15 from between September
30 and November 15, (v) revised the fixed charge coverage ratio to 1.00:1 (from
1.50:1) for the twelve month periods ended March 31, 2000 and June 30, 2000 and
to 1.50:1 (from 1.75:1) thereafter, (vi) limits capital expenditures to $2
million for fiscal 2000 and (vii) requires total debt, as defined in the
agreement, not to exceed $153 million at June 30, 2000. The Company
12
<PAGE>
paid fees of $0.6 million in conjunction with the Credit Facility amendment and
will amortize such fees over the remaining life of the Credit Facility (March
2000 through August 2001).
Prior to the amendment discussed in the preceding paragraph and as a result of
the covenant violations described above, the Company was not allowed to make the
required interest payment of approximately $4 million due on February 1, 2000 to
the holders of the Company's $75 million 10.875% Senior Subordinated Notes due
2007. As a condition of the aforementioned amendment, the Company obtained
consent from substantially all of the note holders to accept the February 1,
2000 interest payment in the form of new notes with a maturity date of January
15, 2005, in aggregate principal amount substantially equal to such interest
payment, in lieu of a cash payment. As a result, the Company was deemed to have
made the cash interest payment and simultaneously issued new notes to existing
note holders in exchange for such cash payment.
Subsequent to January 1, 2000, a major stockholder of Holdings purchased
approximately 80% of the 10.875% Senior Subordinated Notes in the secondary
market.
The Company is currently engaged in discussions with the note holders of the
10.875% Senior Subordinated Notes regarding a conversion of such notes to non-
cash interest bearing securities or equity. Such conversion is required to take
place on or before June 30, 2000 in order for the Company to meet the total
debt, as defined in the Credit Facility, covenant threshold. Management believes
that it will be able to accomplish such a conversion and therefore meet the
Credit Facility covenant regarding total debt at June 30, 2000.
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 Facility, will be adequate for the foreseeable future to make required
payments 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. The majority 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.
SEASONALITY AND KNOWN TRENDS
The Company experiences seasonality in its business operations. During the
Company's second and third quarters, net sales are higher than the first and
fourth quarters due to sales of back-to-school products.
13
<PAGE>
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 and changes in accounting principles.
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 1, 2000, 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.
14
<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
Form 8-K filed on January 28, 2000, announcing the Company's inability
to make the interest payment due on February 1, 2000 on the 10 7/8%
Senior Subordinated Notes.
Form 8-K filed on March 13, 2000, announcing the intent of the Company
to obtain consent from the note holders to make the February 1, 2000
interest payment in the form of new notes.
15
<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
1, 2000 to be signed on its behalf by the undersigned thereunto duly authorized.
Pen-Tab Industries, Inc.
(Registrant)
Date By: /s/ William Leary
- ---- ---------------------
May 22, 2000 William Leary
Vice President, Chief Financial
and Administrative Officer
(principal financial officer and
accounting officer)
16
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