SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File No. 0-24188
JOTAN, INC.
(Exact name of small business issuer as specified in its charter)
Florida 59-3181162
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Issuer's telephone number, including area code (904) 355-2592
-------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the issuer was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS - State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practicable
date: 21,414,013 shares of common stock, $.01 par value, as of August 10, 1998.
INDEX
Jotan, Inc.
Part I - Financial Information Page
Item I -- Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
for the Three Months and Six Months ended
June 30, 1998 and 1997 2
Condensed Consolidated Balance Sheets at
June 30, 1998 and 1997 3 and 4
Condensed Consolidated Statements of Cash
Flows for the Six Months ended
June 30, 1998 and 1997 5 and 6
Notes to Condensed Consolidated Financial
Statements 7
Item II -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item III -- Liquidity and Capital Resources 10
Part II - Other Information
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 13
1
Jotan, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended June 30 Six months ended June 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
Sales $ 17,385,462 $ 18,973,980 $ 33,246,946 $ 25,763,187
Cost of sales 12,887,519 13,621,011 24,017,172 18,369,154
------------ ------------ ------------ ------------
Gross profit 4,497,943 5,352,969 9,229,774 7,394,033
Operating expenses 4,977,173 4,590,539 9,848,150 6,531,864
Amortization of goodwill
and non-compete 147,660 793,490 339,981 1,065,998
------------ ------------ ------------ ------------
Operating income (loss) ( 626,890) ( 31,060) ( 958,357) ( 203,829)
Other income 935 215 5,268 10,125
Interest expense (1,146,490) ( 980,869) (2,201,215 (1,301,467)
------------ ------------ ------------ ------------
Income (loss) before
taxes (1,772,445) (1,011,714) (3,154,304) (1,495,171)
Income tax expense - - - -
------------ ------------ ------------ ------------
Net income (loss) (1,772,445) (1,011,714) (3,154,304) (1,495,171)
Amounts attributable to
preferred stock 300,217 220,625 672,194 320,834
------------ ------------ ------------ ------------
Net income (loss)
attributable to common
shareholders $ (2,072,662) $ (1,232,339) $ (3,826,498) $ (1,816,005)
============ ============ ============ ============
Net income (loss)
per share
Basic $ (.11) $ (.22) $ (.31) $ (.32)
======== ======== ======== ========
Diluted $ (.11) $ (.22) $ (.31) $ (.32)
======== ======== ======== ========
Weighted average number
of shares outstanding:
Basic 18,995,951 5,696,611 12,383,020 5,687,964
========== ========== ========== ==========
Diluted 18,995,951 5,696,611 12,383,020 5,687,964
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
2
Jotan, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
June 30
1998 1997
---------- ----------
Assets
Current assets:
Cash $ - $ 536,288
Accounts receivable, net 9,741,518 10,372,866
Inventory 7,636,301 7,786,435
Other current assets 1,738,986 1,056,353
---------- ----------
Total current assets 19,116,805 19,751,942
---------- ----------
Property and equipment, net 4,549,317 5,072,792
Goodwill, net 1,912,780 27,043,921
Non-compete agreements, net 1,648,539 6,162,000
Other assets 534,433 879,113
---------- ----------
Total assets $27,761,874 $58,909,768
=========== ===========
See notes to condensed consolidated financial statements.
3
Jotan, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
June 30
1998 1997
---------- ----------
Liabilities and stockholders' equity
Current liabilities:
Bank overdraft $ 975,496 $ -
Trade payables 4,417,614 5,779,624
Accrued expenses 3,933,123 4,631,418
Current portion of long-term debt,
and capital leases 9,715,740 3,957,000
Other 1,115,204 329,564
---------- ----------
Total current liabilities 20,157,177 14,697,606
---------- ----------
Capitalized lease obligations 3,800,072 3,907,801
Other liabilities 2,154,785 121,561
Long-term debt, less current maturities
Related parties 9,951,183 8,710,000
Others 17,474,707 20,924,040
---------- ----------
33,380,747 33,663,402
---------- ----------
Redeemable preferred stock with related
parties 12,932,747 9,340,000
Stockholders' equity (deficit)
Preferred stock:
Authorized shares - 10,000,000
Issued and outstanding shares to
related party - 1,435,705 in 1998
and 1,265,823 in 1997 14,357 12,658
Voting common stock, $.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares -
21,414,013 in 1998 and 5,696,611
in 1997 214,140 56,966
Additional paid-in capital 3,692,211 4,639,611
Retained earnings (deficit) (42,629,505) ( 3,500,475)
----------- -----------
Total stockholders' equity (deficit) (38,708,797) 1,208,760
----------- -----------
Total liabilities and stockholders' equity $27,761,874 $58,909,768
=========== ===========
See notes to condensed consolidated financial statements.
4
Jotan. Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30
1998 1997
------------ ------------
Cash flows from operating activities
Net income (loss) $( 3,154,304) $( 1,495,171)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization expense 671,041 1,266,192
Stock compensation expense - 25,800
Changes in operating assets and liabilities:
Accounts receivable, net ( 184,559) ( 2,852,061)
Inventory ( 351,992) ( 334,912)
Other current assets ( 72,486) ( 214,515)
Other assets ( 258,566) 484,249
Trade payables ( 3,010,571) 974,991
Accrued expenses 528,171 920,439
Other current liabilities ( 432,000) ( 592,557)
Other liabilities 31,622 -
------------ ------------
Net cash (used in) provided by operating
activities ( 6,233,644) ( 1,817,545)
Cash flows from investing activities
Proceeds from sale of property and equipment - 1,000,000
Purchase of property and equipment ( 32,494) ( 137,235)
Purchase of business, Cove, net of
cash acquired - ( 2,625,000)
Purchase of business, Southland, net of
cash acquired - ( 37,721,235)
------------ ------------
Net cash used in investing activities ( 32,494) ( 39,483,470)
------------ ------------
Cash flows from financing activities
Conversion of trade payable to notes payable 3,402,460 -
Proceeds from (payments) on line of
credit borrowings ( 504,393) ( 1,594,076)
Payments on long-term debt and capitalized
leases ( 496,556) ( 1,500,219)
Proceeds from senior revolver - 6,080,884
Proceeds from acquisition revolver - 2,625,000
Proceeds from senior term debt - 16,122,500
Proceeds from senior subordinated debt 1,250,000 8,710,000
Proceeds from issuance of redeemable
preferred stock, net of issuance costs 250,000 9,340,000
Proceeds from issuance of warrants - 650,000
------------ ------------
Net cash provided by financing activities 3,901,511 40,434,089
------------ ------------
Net increase (decrease) in cash and
cash equivalents ( 2,364,627) ( 866,926)
Cash and cash equivalents at beginning
of period 1,389,131 1,403,214
------------ ------------
Cash and cash equivalents at end of period $( 975,496) $ 536,288
============ ============
5
Jotan. Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Six months ended June 30
1998 1997
------------- ------------
Purchase of business, Cove, net of
cash acquired
Inventory $ - $( 383,500)
Property and equipment - ( 278,750)
Other assets - ( 2,850)
Goodwill - ( 2,054,037)
Notes payable and capitalized leases - 94,137
------------- ------------
$ - $( 2,625,000)
============= ==============
Purchase of business, Southland, net of
cash acquired
Accounts receivable $ - $( 5,967,581)
Inventory - ( 5,789,881)
Other current assets - ( 517,889)
Property and equipment - ( 4,069,138)
Other assets - ( 820,802)
Trade payables - 3,278,692
Accrued expenses - 3,488,497
Other current liabilities - 922,121
Other liabilities - 122,486
Non - Compete - ( 6,600,000)
Goodwill - ( 25,500,563)
Notes payable and capitalized leases - 3,732,823
------------- ------------
$ - $(37,721,235)
============= =============
See notes to condensed consolidated financial statements.
6
Jotan Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. The Business and Basis of Presentation
Description of Business
The Company is a distributor of packaging and shipping supplies with twenty
distribution centers and two production facilities located throughout the United
States. The Company sells to a broad customer base including industrial, moving
and storage, air freight, and perishable food market segments. Prior to March
1997, Jotan, Inc. was a southeast regional distributor of packaging materials
providing "Just On Time As Needed" delivery service for its industrial
customers.
On March 4, 1997, the Company completed the acquisition of 100% of the stock of
Southland Holding Company ("SHC"). The subsidiaries of SHC and one affiliate of
the Company merged with and into SHC in 1997 which changed its name to Southland
Container Packaging Corp. ("Southland"). Southland is a distributor of packaging
and shipping supplies with eleven distribution centers throughout the United
States. Southland served primarily the moving and storage industry, but also
provided packaging products to the air freight and perishable food markets. As
of June 20, 1997, the Company completed the acquisition of the assets of Cove
Container Corporation ("Cove"). Cove is a distributor of packaging and shipping
supplies with a distribution center located in Pontiac, Michigan, and a
manufacturing facility in West Branch, Michigan. Cove serves both the industrial
and the moving and storage industry segments.
Basis of Presentation
The accompanying financial statements are unaudited and, in the opinion of
management, reflect all the adjustments that are necessary for a fair
presentation of the financial position and results of operations for the periods
presented. All such adjustments are of a normal and recurring nature.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire year. The financial
statements at June 30, 1998 and June 30, 1997 reflect the combined accounts of
the Company and its subsidiaries. Certain information and footnote disclosure
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
2. Long-Term Debt
Long-term debt consists of the following at June 30, 1998:
Senior Secured Term Loan A with interest at LIBOR plus 2.75%. $ 8,159,323
Senior Secured Term Loan B with interest at LIBOR plus 3.25%. 7,615,718
Senior Secured Revolving Line of Credit with interest
at LIBOR plus 2.75%. 7,576,491
Subordinated Debt with related parties, interest at 12.5%. 9,951,183
Senior Subordinated PIK notes with related parties
evidencing accrued interest due for August 1997
and November 1997 on the original subordinated
debt, interest of 12.5%. 508,334
Other 3,138,604
-----------
7
Jotan Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Long-Term Debt (continued)
36,949,653
Less current maturities ( 9,523,766)
-----------
$27,425,887
===========
On April 14, 1998, the Company and Southland entered into a Fifth Amendment to
its Credit Agreement with the Banks (the "Fifth Amendment") whereby the Banks
waived the events of default for nonpayment and agreed to defer delinquent
interest payments and other scheduled interest payments through July 31, 1998,
by execution of interest deferral notes. Scheduled principal payments also were
deferred until March 1999. However, the Company agreed that all principal and
interest under loans from the Banks will be due on February 28, 2001. The
Company agreed to give the Banks tighter controls and liens on cash collateral,
and the Banks agreed to relax certain financial covenants, although the
miscellaneous debt restriction was reduced to $100,000. One of the new terms was
that all collections on customer receivables would be used to pay down the
revolving line of credit through a lockbox arrangement. As a result, the amount
outstanding under the revolving line of credit of $7,576,491 at June 30, 1998
has been classified as a current liability. As a result of the Fifth Amendment,
the Company's working capital line of credit with the Banks remains available to
meet the Company's requirements.
As a condition to the Fifth Amendment, the Banks required Rice Capital Partners
II L.P. ("Rice"), a related party by management of Rice being on the Board of
Directors, to loan the Company an additional $1,250,000. In exchange for this
loan which was obtained in April 1998, the Company issued to Rice its 12.5%
priority senior subordinated notes (the "Priority Notes"). Interest payments
under the Priority Notes are payable with PIK notes until the Bank's debt is
repaid. The Priority Notes are junior to the Bank's debt but senior to the
subordinated notes previously issued to Rice and Fairview (the "1997 Senior
Subordinated Notes"). In order to induce Rice to purchase the Priority Notes,
the Company also agreed to issue to Rice immediately exercisable warrants for
the purchase (at a nominal exercise price) of 42,377,173 shares of the Company's
common stock. The Company also agreed to issue to Rice similar warrants to
purchase 8,475,638 shares of the Company's common stock as additional
consideration for Rice's purchase of $250,000 of Series B Preferred Stock in
January, 1998. The total number of shares of common stock provided under these
warrants is subject to reduction after receipt of a fairness opinion from an
independent financial advisor.
On June 2, 1998, the Company and Southland entered into a Sixth Amendment to its
Credit Agreement with the Banks (the "Sixth Amendment") whereby certain
modifications were made to the definition of "eligible accounts" in Section 1.1
of the Credit Agreement. In addition, the bank account structure was clearly
defined.
Long-term debt due matures as follows:
1999 $10,436,411
2000 3,095,846
2001 13,631,168
2002 1,670
2003 -
Thereafter 10,758,334
------------
37,923,429
Less discounts ( 973,776)
------------
$36,949,653
============
8
Jotan, Inc.
II. Management's Discussion and Analysis of Financial Condition and Results of
Operations
On March 4, 1997, the Company completed the acquisition of 100% of the stock of
Southland Holding Company and its subsidiaries, now known as Southland Container
Packaging Corp. ("Southland"). On June 23, 1997, the Company completed the
acquisition of the assets of Cove Container Corporation ("Cove"). As a result of
these acquisitions, the Company's financial statements for the quarter ended
June 30, 1997 and the quarter ended June 30, 1998 are not comparable in many
respects.
To facilitate a meaningful comparison of the Company's operating performance,
the following discussion and analysis is presented on a traditional basis.
Included in the following discussion are comparisons of EBITDA (earnings before
interest, taxes, depreciation, and amortization and other extraordinary and
non-recurring charges). The Company believes EBITDA is helpful in understanding
cash flow generated from operations that is available for taxes, debt service
and capital expenditures. In addition, EBITDA, as redefined in the senior loan
documents to exclude certain extraordinary and non-recurring charges,
facilitates the monitoring of covenants related to certain long-term debt.
EBITDA should not be considered by investors as an alternative to net earnings
as an indicator of the Company's operating performance or to cash flows as a
measure of its overall liquidity.
Jotan, Inc. and its consolidated subsidiaries reported a net loss of $2.1
million for the quarter ended June 30, 1998, compared to a net loss of $1.2
million for the same period in 1997. EBITDA for the quarter ended June 30, 1998
was a loss of $80 thousand compared to $906 thousand profit for the same period
in 1997. For the first six months of 1998, the Company reported an operating
loss of $958 thousand compared to a loss of $204 thousand for the same period in
1997. EBITDA for the six months ended June 30, 1998 was $46 thousand compared to
$1,062 thousand for the same period in 1997.
Quarter to quarter, the reduction in EBITDA was due to the reorganization of the
West Coast operations. This included the closure of three facilities and
retention of new management.
Second Quarter First Six Months
1998 1997 1998 1997
($000's)
Operating Income/(Loss) (627) ( 31) (958) (204)
Amortization 148 793 340 1,066
Depreciation 168 143 331 200
Other Non-recurring 231 - 333 -
----- ----- ----- ------
EBITDA (80) 906 46 1,062
Net sales for the second quarter of 1998 decreased to $17.4 million from $18.9
million for the second quarter of 1997. Year to date, net sales increased from
$25.8 million in 1997 to $33.2 million in 1998. The year to date increase in net
sales was primarily related to post acquisition revenue generated by the
Southland and Cove operations which is only partially included in 1997 results.
Gross profit was $4.5 million for the second quarter of 1998 compared to $5.3
million the same period in 1997. Year to date, gross profit increased from $7.4
million in 1997 to $9.2 million in 1998. Margins declined from 28.7% to 27.7%
for the first six months. The year to date increase in gross profit was
primarily related to post acquisition revenue generated by the Southland and
Cove operations which is only partially included in 1997 results.
Operating expenses increased to $4.9 million for the second quarter of 1998 from
$4.6 million for the same period in 1997 and from $6.5 million to $9.8 million
for the six months ending June 30, 1998. The major factor contributing to these
increases was the inclusion of Southland operating expenses in the post
acquisition period.
9
Jotan, Inc.
II. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Amortizations of goodwill and non-compete agreements were $148 thousand and $793
thousand for the second quarters of 1998 and 1997, respectively. Year to date
amortization totaled $340 thousand and $1,066 thousand for 1998 and 1997,
respectively. Post acquisition amortization expense was significantly reduced by
the year-end 1997 write-off of Southland related goodwill.
Interest expense for the second quarters of 1998 and 1997 amounted to $1.1
million and $1.0 million respectively. Year to date, interest expense increased
from $1.3 million in 1997 to $2.2 million in 1998. The major factor contributing
to these increases was the impact of increased borrowings related to the
Southland acquisition.
III. Liquidity and Capital Resources
On April 14, 1998, the Company and Southland entered into a Fifth Amendment to
its Credit Agreement with the Banks (the "Fifth Amendment") whereby the Banks
waived the events of default for nonpayment and agreed to defer delinquent
interest payments and other scheduled interest payments through July 31, 1998,
by execution of interest deferral notes. Scheduled principal payments also were
deferred until March 1999. However, the Company agreed that all principal and
interest under loans from the Banks will be due on February 28, 2001. The
Company agreed to give the Banks tighter controls and liens on cash collateral,
and the Banks agreed to relax certain financial covenants, although the
miscellaneous debt restriction was reduced to $100,000. One of the new terms was
that all collections on customer receivables would be used to pay down the
revolving line of credit through a lockbox arrangement. As a result, the amount
outstanding under the revolving line of credit of $7,576,491 at June 30, 1998
has been classified as a current liability. As a result of the Fifth Amendment,
the Company's working capital line of credit with the Banks remains available to
meet the Company's requirements.
As a condition to the Fifth Amendment, the Banks required Rice Capital Partners
II L.P. ("Rice"), a related party by management of Rice being on the Board of
Directors, to loan the Company an additional $1,250,000. In exchange for this
loan which was obtained in April 1998, the Company issued to Rice its 12.5%
priority senior subordinated notes (the "Priority Notes"). Interest payments
under the Priority Notes are payable with PIK notes until the Bank's debt is
repaid. The Priority Notes are junior to the Bank's debt but senior to the
subordinated notes previously issued to Rice and Fairview (the "1997 Senior
Subordinated Notes"). In order to induce Rice to purchase the Priority Notes,
the Company also agreed to issue to Rice immediately exercisable warrants for
the purchase (at a nominal exercise price) of 42,377,173 shares of the Company's
common stock. The Company also agreed to issue to Rice similar warrants to
purchase 8,475,638 shares of the Company's common stock as additional
consideration for Rice's purchase of $250,000 of Series B Preferred Stock in
January, 1998.
On June 2, 1998, the Company and Southland entered into a Sixth Amendment to its
Credit Agreement with the Banks (the "Sixth Amendment") whereby certain
modifications were made to the definition of "Eligible Accounts" in Section 1.1
of the Credit Agreement. In addition, the bank account structure was clearly
defined.
Negotiations were held with certain key vendors to hold in abeyance amounts due
while a repayment plan was implemented and bank negotiations were completed. A
plan has been developed and implemented, with the approval of the creditors
involved, to accomplish the repayment of past due amounts while providing for
the uninterrupted supply of materials for the business.
10
Jotan, Inc.
Part II -- Other Information
Item 5--Other Information
The deadline for submission of shareholder proposals
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934,
as amended ("Rule 14a-8"), for inclusion in the Company's proxy
statement for its 1999 Annual Meeting of Shareholders is February
22, 1999. After May 8, 1999, notice to the Company of a
shareholder proposal submited otherwise than pursuant to Rule
14a-8 will be considered untimely; and the persons named in
proxies solicited by the Company's Board of Directors for its
1999 Annual Meeting of Shareholders may exercise discretionary
voting power with respect to any such proposal as to which the
Company does not receive timely notice.
Item 6--Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
Sixth Amendment to Credit Agreement dated as of June 2, 1998.
Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K Current Report, Item 5, Other Events, filed May 4, 1998.
11
Jotan, Inc.
Exhibit 11 Statement Re: Computation of Per Share Earnings
Three months ended June 30 Six months ended June 30
1998 1997 1998 1997
Basic and Diluted:
Average shares
outstanding 18,995,951 5,696,611 12,383,020 5,687,964
=========== =========== =========== ===========
Net income (loss) $(1,772,445) $(1,011,714) $(3,154,304) $(1,495,171)
Amount attributable to
preferred stock 300,217 220,625 672,194 320,834
----------- ----------- ----------- -----------
Net income (loss)
attributable to common
shareholders $(2,072,662) $(1,232,339) $(3,826,498) $(1,816,005)
=========== =========== =========== ===========
Per share amount basic
and diluted $ (.11) $ (.22) $ (.31) $ (.32)
=========== =========== =========== ===========
12
Jotan, Inc.
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.
Jotan, Inc.
By: /s/ Raleigh Minor
______________________________
Raleigh Minor, President
and Chief Executive Officer
By: /s/ Edward Lipscomb
________________________________
Edward Lipscomb, Vice President
and Chief Financial Officer
August 13, 1998
13