<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission file number 0-24415
JPS PACKAGING COMPANY
---------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1311495
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9201 Packaging Drive, DeSoto, Kansas 66018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 913-583-8730
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No (2) Yes X No
---------- ---------- ---------- ---------
As of September 30, 1998, JPS Packaging Company had 5,552,705 shares of common
stock outstanding. The market value of stock held by non-affiliates is
approximately $13.0 million.
<PAGE>
JPS PACKAGING COMPANY
FORM 10-Q
September 30, 1998
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
---------------------
The Consolidated Financial Statements included herein have been prepared by
Management, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although Management believes that the
disclosures are adequate to enable a reasonable understanding of the information
presented. It is recommended that these Consolidated Financial Statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's Registration Statement filed June 9, 1998 on Form S-4.
Except for historical information contained herein, the matters set forth in
this report or in oral statements made by officers of the Company are forward-
looking statements that involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. The Company's expectations respecting future revenues and profits
assume, among other things, reasonable continued growth in the general economy
which affects demand for the Company's products, reasonable stability in raw
material pricing, changes in which affect customer purchasing decisions as well
as the Company's revenues and margins. Investors are advised to consider these
and other risks and uncertainties that may be discussed in documents filed by
the Company with the Securities and Exchange Commission.
2
<PAGE>
JPS PACKAGING COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $18,618 $22,944 $61,572 $73,872
Cost of Goods Sold 17,261 22,030 56,486 68,046
------- ------- ------- -------
Gross Profit 1,357 914 5,086 5,826
SG&A Expenses 2,400 2,752 9,790 9,079
Transaction Expense and
Net Restructuring (Gain) - - 689 (988)
------- ------- ------- -------
Operating Loss (1,043) (1,838) (5,393) (2,265)
Interest Expense 22 - 22 -
Loss Before Income Taxes (1,065) (1,838) (5,415) (2,265)
------- ------- ------- -------
Income Taxes (Benefit)
(Note 4) - (625) (1,486) (772)
------- ------- ------- -------
Net Income (Loss) (1,065) (1,213) (3,929) (1,493)
======= ======= ======= =======
Net Income (Loss) Per
Share From Continuing
Operations, Basic and
Diluted $ (0.19) $ (0.22) $ (0.71) $ (0.27)
Average Number of Common
Shares Outstanding 5,553 5,536 5,542 5,536
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
JPS PACKAGING COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and equivalents $ 3,215 $ 333
Accounts receivable 11,164 13,108
Inventory (Note 3) 10,988 12,795
Other current assets 502 505
-------- --------
Total current assets 25,869 26,741
Property, Plant & Equipment 67,296 67,122
Accumulated Depreciation (37,990) (35,238)
-------- --------
Property, Plant and Equipment, net 29,306 31,884
Goodwill, net 2,423 2,644
Prepaid pension 471 478
Other 350 157
-------- --------
Total Assets $ 58,419 $ 61,904
======== ========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
JPS PACKAGING COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(In Thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 6,062 $ 3,697
Accrued customer rebates 1,342 1,477
Accrued vacation 661 565
Accrued workers' compensation reserve 58 266
Other accrued liabilities 2,544 2,730
------- -------
Total current liabilities 10,667 8,735
Deferred income taxes 3,591 3,291
------- -------
Total liabilities 14,258 12,026
Common stock, par value $0.01,
15,000,000 shares authorized;
5,552,705 shares issued and
outstanding at September 30, 1998 56 --
Preferred stock, par value $0.01,
1,000,000 shares authorized;
none outstanding at September 30, 1998 -- --
Additional paid-in capital 47,743 49,587
Retained earnings (deficit) (3,638) 291
------- -------
Total stockholders' equity 44,161 49,878
------- -------
Total liabilities and stockholders' equity $58,419 $61,904
======= =======
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
JPS PACKAGING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(3,929) $(1,493)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation & amortization 4,030 4,329
Deferred income taxes 300 472
Loss on disposal of assets 135 --
Restructuring gain -- (988)
Changes in assets and liabilities:
Accounts Receivable 1,944 (301)
Inventory 1,807 (838)
Accounts Payable 2,365 (688)
Net Restructuring Liability -- (728)
Other (616) 948
------- -------
Total adjustments $ 9,965 $ 2,206
------- -------
Net cash provided by operating activities $ 6,036 $ 713
Cash Flows from Investing Activities
Capital expenditures $(1,537) $(5,016)
Proceeds from sale of assets 171 3,567
------- -------
Net cash used by investing activities $(1,366) $(1,449)
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
JPS PACKAGING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 and SEPTEMBER 30, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash Flows from Financing Activities
Distributions from (to) Parent, net (1,788) 596
Net cash provided (used) ------- -------
by financing activities $(1,788) $ 596
------- -------
Net increase (decrease) in cash $ 2,882 $ (140)
Cash at beginning of period $ 333 $ 173
------- -------
Cash at end of period $ 3,215 $ 33
======= =======
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
JPS PACKAGING COMPANY
SEPTEMBER 30, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements include the accounts of two former
wholly owned subsidiaries of Sealright Co., Inc. (Sealright) and the accounts of
a portion of Sealright and another subsidiary. The resulting entity operates
the San Leandro, California, Raleigh, North Carolina, and Akron, Ohio,
facilities and is collectively referred to as JPS Packaging Company (the
Company).
On March 24, 1998, the Company was reorganized and incorporated as a
Delaware corporation (the reorganization). The Company is authorized to issue
15,000,000 shares of common stock, $0.01 par value, and 1,000,000 shares of
preferred stock, $0.01 par value. The Company has one wholly owned subsidiary,
incorporated in North Carolina.
The information included in these condensed consolidated financial
statements reflects all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
statement of the results for the interim periods presented.
A portion of selling, general and administrative expenses have been included
in the statements of operations based on management's estimate of an equitable
allocation of shared corporate services. These expenses approximate what the
Company would have incurred had it operated on a stand-alone basis for all
periods presented, but may not be indicative of the Company's cost structure in
the future. The estimated expense was approximately $1,200,000 in the third
quarter of 1997 and $0 in the third quarter of 1998. For the nine months ended
September 30, the estimated expense was $4,100,000 in 1997 and $2,500,000 in
1998. The amount of allocated corporate expense has decreased due to the
Company separating from Sealright on June 30, 1998.
8
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NOTE 2 - ACCOUNTING PRINCIPLES AND POLICIES
The accompanying financial statements have been prepared consistent with the
accounting principles and policies described more fully in Note 1 of the
Company's Registration Statement filed June 9, 1998 on Form S-4.
Net income per share for all periods is based on the number of common shares
issued in connection with the reorganization plus additional shares issued in
June of 1998. The effect of stock options was anti-dilutive and therefore, has
been excluded (see Note 5).
The Company adopted Financial Accounting Standards Board (FASB) Statement
No. 130, "Reporting Comprehensive Income," in the first quarter of 1998, however
the Company had no items that would be considered components of other
comprehensive income.
NOTE 3 - INVENTORIES
Inventories are stated at lower of cost or market. Finished products, work
in process and raw material inventories are carried at last-in, first-out (LIFO)
cost. Certain machine parts and supplies inventories are carried at first-in,
first-out (FIFO) cost. Inventories include the cost of material, labor and
factory overhead required in the production of the Company's products.
Inventories at September 30, 1998 and December 31, 1997 were:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Inventories Carried on LIFO Basis
Raw Materials $ 3,471 $ 3,639
Work-In-Process 2,075 1,418
Finished Goods 3,490 5,492
------- -------
Total FIFO Basis $ 9,036 $10,549
LIFO Basis in excess of FIFO Basis 344 231
------- -------
Total LIFO Basis $ 9,380 $10,780
Inventories Carried on FIFO basis 1,608 2,015
------- -------
Total $10,988 $12,795
======= =======
</TABLE>
Because the inventory determination under the LIFO method can only be made
at the end of each fiscal year based on the inventory levels and costs at that
time, interim LIFO determinations, including those at September 30, 1998, must
necessarily be based on management's estimate of expected year-end inventory
levels and costs. Since estimates of future inventory levels and prices are
subject to many factors beyond
9
<PAGE>
the control of management, interim financial results are subject to final year-
end LIFO inventory amounts. Accordingly, inventory components reported for the
period ended September 30, 1998, are estimates based on management's knowledge
of the Company's production cycle, the costs associated with this cycle and the
sales and purchasing volume of the Company.
NOTE 4 - INCOME TAXES
The operations of the Company were historically included in the consolidated
Federal income tax returns of Sealright. The policy of Sealright was to
allocate consolidated Federal income tax expense to members of the affiliated
group, including the Company, on a stand-alone basis. The Agreement and Plan of
Merger, dated as of March 2, 1998 provides for the reimbursement of 1998 tax
benefits to the Company provided that Huhtamaki Oy is able to realize the
benefit. In the event that Huhtamaki Oy is able to utilize this benefit, the
benefit associated with the Company's tax losses from January 1, 1998 to June
30, 1998, the Company will receive a commensurate cash payment from Huhtamaki
Oy. Due to the uncertainty of realization of this payment from Huhtamaki Oy,
such payment has not been reflected as a receivable from Huhtamaki Oy in the
accompanying financial statements, but has been reflected as capital distributed
to Sealright Co., Inc.
NOTE 5 - STOCK OPTIONS
Under the 1998 Long Term Compensation Plan, the Company may grant options to
selected executives and directors for up to 550,000 shares of common stock. In
the third quarter of 1998, the Company granted options to purchase 320,000
shares of common stock. The purchase price of each option, which has a ten year
life, is equal to the fair market value at the grant date. Vesting occurs at
the rate of twenty percent per year (directors options were fully vested at the
grant date). The Company accounts for stock options under APB opinion No. 25
and, accordingly, no compensation charge was required.
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
AND FINANCIAL CONDITION
Election of Chairman of the Board of Directors and Chief Executive Officer
On August 31, 1998, Leo Benatar was elected as Chairman of the Company's Board
of Directors. In addition, the Company hired N. Brian Stevenson as Chief
Executive Officer.
11
<PAGE>
Results of Operations
Three months ended September 30, 1998 and September 30, 1997
Net sales for the third quarter of 1998 were $18,618,000 versus $22,944,000 in
the third quarter of 1997, a decline of $4,326,000 or 18.9%. The decline in
revenue from the prior year is primarily due to a decline in the end-market
demand of five key customers of the San Leandro, California facility resulting
in approximately $2,872,000 of reduced revenue. In addition, approximately
$721,000 of the decline in revenue was a result of a reduction in sleeve
labeling accounts and softness in end-market demand for customers of the Akron,
Ohio facility. The Company also experienced a decline of approximately $733,000
in sleeve labeling equipment sales due to competitive pressures.
Consolidated gross profit was $1,357,000 for the third quarter of 1998 as
compared to $914,000 during the third quarter of 1997. The resulting gross
margin was 7.3% in 1998, an increase from 4.0% in 1997. Gross profit at the San
Leandro, California facility decreased approximately $337,000 as a result of the
reduced sales volume for the quarter. In addition, the Company experienced a
decline of approximately $318,000 in gross profit from reduced sleeve labeling
equipment sales. These declines were offset by improved margins at the Akron,
Ohio facility, which was adversely affected in 1997 by production inefficiencies
and capacity constraints associated with the closure of the Charlotte, North
Carolina facility, and resulting transfer of production.
Selling, general and administrative expenses were $2,400,000 for the third
quarter of 1998 as compared to $2,752,000 during the third quarter of 1997.
Selling, general and administrative expenses decreased by $352,000, or 12.8% as
a result of reduced corporate overhead and other cost savings initiatives.
12
<PAGE>
Nine months ended September 30, 1998 and September 30, 1997
Net sales for the nine months ending September 30, 1998 were $61,572,000
versus $73,872,000 during the same period in 1997, a decline of $12,300,000 or
16.7%. The decline in revenue from the prior year is primarily due to a decline
in the end-market demand of five key customers of the San Leandro, California
facility resulting in approximately $6,879,000 of reduced revenue. In addition,
approximately $3,485,000 of the decline in revenue was from a reduction in
sleeve labeling accounts and lost customers associated with the closure of the
Charlotte, North Carolina facility, and resulting transfer of production to the
Akron, Ohio facility as part of the restructuring program. The Company also
experienced a decline of approximately $1,936,000 in sleeve labeling equipment
sales due to competitive pressures.
Consolidated gross profit was $5,086,000 for the nine months ended September
30, 1998 as compared to $5,826,000 during 1997. The resulting gross margin was
8.3% in 1998, an increase from 7.9% in 1997. Gross profit at the San Leandro,
California facility decreased approximately $1,696,000 as a result of reduced
sales volume. In addition, the Company experienced a decline of approximately
$577,000 in gross profit from reduced sleeve labeling equipment sales. These
declines were offset by improved margins at the Akron, Ohio facility, which was
adversely affected in 1997 by production inefficiencies and capacity constraints
associated with the closure of the Charlotte, North Carolina facility, and
resulting transfer of production.
Selling, general and administrative expenses were $9,790,000 for the nine
months ended September 30, 1998 as compared to $9,079,000 during the same period
in 1997. Selling, general and administrative expenses increased by $711,000, or
7.8%, as a result of approximately $862,000 of non-recurring severance and
$464,000 of non-recurring retention costs associated with the merger. Adjusting
for these non-recurring items, operating SG&A expense was down approximately
6.8% as a result of reduced corporate overhead and other cost savings
initiatives.
13
<PAGE>
Liquidity and Capital Resources
For the first nine months of 1998, the Company's net loss was $3,929,000
compared to a net loss of $1,493,000 in 1997. Cash generated from operations
was $6,036,000 in 1998 as compared to $713,000 in 1997. After adjusting for
non-recurring selling, general and administrative expenses, transaction costs
and restructuring items, cash generated from operations was $8,051,000 in 1998
as compared to $713,000 in 1997.
For the first nine months of 1998, the Company had capital expenditures of
$1,537,000 for improvements to production related equipment. In 1997, the
Company sold one idle facility generating cash of $3,200,000. The proceeds from
this sale were used to fund working capital needs.
The Company historically relied on internally generated cash from operations
as well as funding from Sealright. As a result of the separation from
Sealright, the Company established a $15,000,000 credit facility, of which none
was borrowed at September 30, 1998 ($1,000,000 outstanding at June 30, 1998).
The facility is secured by certain assets of the Company, principally inventory,
receivables and property, plant, and equipment. The borrowing base on the
credit facility is limited based upon components of the Company's inventory and
receivable balances and any outstanding letters of credit the Company has
issued. At September 30, 1998, $12,879,000 was available under the credit
facility. The initial interest rate is the prime rate of Harris Trust and
Savings Bank or LIBOR plus 275 basis points. Management believes that cash
generated by operations and funds available under the revolving credit facility
will be sufficient to meet the Company's expected operating needs, planned
capital expenditures and debt service requirements.
Pursuant to its debt agreements, the Company must comply with various
financial covenants. As of September 30, 1998, the Company was in compliance
with its financial covenants.
14
<PAGE>
Year 2000 Compliance
The Company's information systems are not currently year 2000 compliant.
Management currently estimates that it will cost approximately $300,000 to
modify the information systems to become year 2000 compliant. The Company has
expended approximately $75,000 which has been charged to operations. The Company
is currently implementing the necessary changes, and management believes the
information systems should be year 2000 compliant by March 31, 1999. However,
there can be no assurance that the information systems will be compliant prior
to the beginning of year 2000 and could therefore have an adverse effect on the
future financial results of the Company. The Company does not currently have a
formal contingency plan in place should the information systems not be compliant
prior to the beginning of year 2000, and will develop the contingency plan by
March 31, 1999.
15
<PAGE>
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement supersedes and expands on
the segment disclosure requirements of SFAS No. 14. The statement requires
certain financial disclosures about business segments. The definition of
business segments had been changed from an industry definition to that of a
management definition. The Company will adopt the provisions of SFAS No. 131
effective December 31, 1998. The Company currently has one segment and does not
expect implementation to change segment reporting.
In February, 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. The statement standardizes
and expands the disclosure requirements of the prior pronouncements in order to
facilitate enhanced financial analysis. The Company will adopt the provisions
of SFAS No. 132 effective December 31, 1998.
In June, 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. The statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company
will adopt the provisions of SFAS No. 133 effective July 1, 1999. The Company
does not expect implementation to have any effect on its financial statements.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1.) Legal Proceeding
None
Item 2.) Changes in Securities
None
Item 3.) Defaults Upon Senior Securities
None
Item 4.) Submission of Matters to a Vote of Securities Holders
None
Item 5.) Other Materially Important Events
None
Item 6.) Exhibits and Reports on Form 8-K
None
SALES OF UNREGISTERED SECURITIES
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
JPS PACKAGING COMPANY
Date: November 3, 1998 /s/ N. Brian Stevenson
----------------------- -------------------------
By: N. Brian Stevenson
C.E.O
Date: November 3, 1998 /s/ John T. Carper
----------------------- ------------------------
By: John T. Carper
President and C.F.O
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's 10-Q for the nine months ended September 30, 1998 and is qualified
in its entirety by reference to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,215
<SECURITIES> 0
<RECEIVABLES> 11,437
<ALLOWANCES> 273
<INVENTORY> 10,988
<CURRENT-ASSETS> 25,869
<PP&E> 67,296
<DEPRECIATION> 37,990
<TOTAL-ASSETS> 58,419
<CURRENT-LIABILITIES> 10,667
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 44,105
<TOTAL-LIABILITY-AND-EQUITY> 58,419
<SALES> 61,572
<TOTAL-REVENUES> 61,572
<CGS> 56,486
<TOTAL-COSTS> 56,486
<OTHER-EXPENSES> 10,479
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (5,415)
<INCOME-TAX> (1,486)
<INCOME-CONTINUING> (3,929)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,929)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
