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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended January 2, 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this from 10-K. [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of April 1,
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.
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Pen-Tab Industries, Inc.
Form 10-K
For the Fiscal Year Ended January 2, 1999
Certain statements contained in this Annual Report are forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995). Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, risks associated with the
integration of businesses following an acquisition, competitors with broader
product lines and greater resources or the Company's inability to attract and
retain highly qualified management, technical, creative and sales and marketing
personnel. The Company disclaims any intent or obligation to update any
forward-looking statements.
Index
Part I. Page
----
Item 1. Business................................................... 1
Item 2. Properties................................................. 7
Item 3. Legal Proceedings.......................................... 7
Item 4. Submission of Matters to a Vote of Security Holders........ 7
Part II.
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matter........................................ 8
Item 6. Selected Financial Data.................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
Item 8. Financial Statements and Supplementary Data................ 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 15
Part III.
Item 10. Directors and Executive Officers of the Registrant......... 16
Item 11. Executive Compensation..................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 18
Item 13. Certain Relationships and Related Transactions............. 18
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 19
Signature............................................................... 22
Part I
Item 1. Business
General
Pen-Tab Industries, Inc. (together with its majority-owned subsidiaries, the
"Company") was incorporated in 1997 in the state of Delaware, the successor
corporation to a Virginia corporation of the same name. The Company is a
wholly-owned subsidiary of Pen-Tab Holdings, Inc. ("Holdings") a Virginia
corporation.
The Company is a leading U.S. manufacturer and marketer of school, home and
office supply products. The Company's core products include binders, pads,
filler paper, spiral and coilless notebooks, planners, envelopes, school
supplies and arts and crafts products in hundreds of configurations. In 1992,
the Company recognized a previously unfulfilled demand for higher quality,
upscale school and office-related products. The Company pioneered a line of
these differentiated higher price point, branded products to serve the school
and office product markets. The Company has developed strong consumer
recognition for its proprietary office styles and its upscale school styles
under the Pen-Tab(R), Pen-Tab Pro(R) and Expert(R) brand names. These
differentiated products provide both the Company and the retailer with higher
margins. The Company's August 1998 acquisition of Stuart Hall Company, Inc.
("Stuart Hall") has expanded the Company's product line into the market of
licensed products. The acquisition broadens the Company's product offerings by
adding licensed products to Pen-Tab's proprietary styles and brands. Stuart
Hall's license portfolio includes Looney Tunes, Coca-Cola(R) brand,
Nickelodeon(TM), Rugrats(R), MTV: Music Television(TM) and Disney's Winnie the
Pooh. The Company, through its Vinylweld L.L.C. Subsidiary, is also a leading
U.S. manufacturer of vinyl packaging products designed primarily for audio and
video cassette tapes. For fiscal 1998, core products represented an estimated
57.9% of revenue, differentiated products represented an estimated 34.6% of
revenue and Vinylweld represented an estimated 7.5% of revenue. For fiscal
1998, school-related products represented an estimated 60.9% of revenue,
office-related products represented an estimated 31.6% of revenue and Vinylweld
represented an estimated 7.5% of revenue.
The Company's move into differentiated products is primarily responsible for
the increases in sales and profitability. From 1994 to 1998, the Company's
sales have grown from $90.5 million to $124.1 million and EBITDA (as defined
herein) has grown from $8.9 million to $14.6 million. During the same period,
the Company's EBITDA margin increased from 9.8% to 11.7%. The Company's
strategy is to grow through continued internal design of new, differentiated
product lines and strategic acquisitions.
The Company has a long-standing customer base featuring mass merchandisers,
national discount stores, wholesale clubs, and office supply superstores in the
United States and Canada. The Company is headquartered in a state-of-the-art
282,000 sq. ft. facility in Front Royal, Virginia. The Company also maintains
manufacturing facilities in Chicago, Los Angeles, and Kansas City. The Company
has invested heavily in state-of-the-art automated production equipment to
provide a low cost manufacturing environment. As of January 2, 1999, the
Company employed approximately 900 people in its four facilities.
Competitive Strengths
The combination of the Company's products, customers and proven track record
distinguishes it as a leading manufacturer and marketer of school, home and
office products in North America. The Company attributes this success and it's
continued opportunities for growth and profitability to the following
competitive strengths:
Market leader in differentiated, branded school, home and office
products. The Company is a market leader in differentiated, branded school,
home and office products. The Company has pioneered a line of high-quality,
functionally superior, higher price point and margin, branded items to serve
the school and office products markets. Demand for proprietary differentiated
products has risen steadily since 1993 when the Company first introduced them
and the Company expects a significant portion of its future growth to come from
increased sales of differentiated products.
1
Licensed Products. Through the acquisition of Stuart Hall, Pen-Tab has
rounded out its differentiated product offering with a portfolio of licensed
products. This portfolio includes licenses with Looney Tunes, Coca-Cola(R)
brand, Nickelodeon(TM), Rugrats(R), MTV: Music Television(TM), X Games(TM),
Disney's Winnie the Pooh, Hallmark and Winners(R) Collection.
Partnering reduces inventory risk. The Company's creative department has
strong design capabilities and together with senior sales and marketing
personnel has been successful in developing these partnering relationships with
major customers. Senior sales management personally handle the Company's
largest accounts allowing the Company to design products in concert with its
major customers, tailoring high-quality, upscale products to meet a mutual
vision. The Company's differentiated school-related products are only mass-
produced once they have been pre-sponsored by a major customer.
Brand name recognition. Through the manufacturing of high-quality products
for over 60 years, the Company has developed strong brand recognition with
consumers, retailers and distributors. The Company focuses on building its
brand name by internally designing new, differentiated products and product
formats. This allows the Company to achieve higher margins than would be
achievable with core products. Several trademarks, sub-brands and proprietary
styles, including Pen-Tab(R), Pen-Tab Pro(R), Stuart Hall, Attitude(R), Tough
Tracks(R), Executive(R) and Expert(R), have been developed to service targeted
market sectors.
Modern, efficient and strategically located facilities. The Company has
invested in the latest advances in plant and capital equipment. Management has
expanded manufacturing capacity in advance of customer demand. The Company has
available unused manufacturing capacity to support an additional $50 million to
$60 million in sales of paper products with no significant additional capital
expenditures. Management believes the Company's heavy investment in
technologically advanced high-speed equipment provides it with one of the
lowest manufacturing cost environments in the school, home and office products
industry. Moreover, the company has large plants strategically located across
the United States (East Coast--Front Royal, VA; Midwest--Kansas City, MO; West
Coast--City of Industry, CA) to serve the largest national retailers and
distributors in the United States. Its locations offer additional expansion
capacity and ready access to road and rail transportation.
Long-standing customer base. The Company has cultivated long-term customer
relationships with well-capitalized, high-growth retailers and distributors in
the school, home and office products industry. Management has identified the
fastest growing distribution channels in the Company's marketplaces and has
focused its resources on the key accounts in those channels. The Company's
customers include the nation's largest discount stores and mass merchandisers,
wholesale clubs, office supply superstores, contract stationers and grocery and
drug store chains.
Leading edge information systems. The Company has recently invested in a new
state-of-the-art Enterprise Resource Planning software system to manage the
manufacturing, accounting, distribution, inventory, sales and billing systems.
The system integrates all of the Company's locations to provide timely
information for management. The Company conducts business using electronic data
interchange programs with most of its larger customers.
Experienced management team. Between them, Alan Hodes, Chief Executive
Officer of the Company, and Michael Greenberg, Executive Vice President of the
Company, have over 59 years with the Company. The Company has supplemented its
senior management ranks with a strong team of new sales, marketing, creative,
and finance professionals within the past five years.
Growth Strategy
Focus on rapidly growing customers. The Company serves many of the largest
and best-positioned customers in the school, home and office products industry
including mass merchandisers, warehouse clubs, national office products
superstores, national contract stationers and grocery and drug store chains.
Anticipating
2
further consolidation in the school, home and office products industry, the
Company expects that its national scope and broad product line will be
increasingly important in meeting the needs of its customers. The Company will
continue to target those customers driving consolidation in the school, home
and office products industry.
Continue to introduce differentiated products. Differentiated, higher value-
added products give the Company a greater selection to offer its customers and
improve product line profitability for both the Company and its customers. The
Company plans to continue to distinguish itself from other suppliers and
improve profitability through product innovation, differentiation and line
extensions. The Company will accomplish this by continued internal design of
new, differentiated product lines.
Focus on partnering relationships. The Company will continue to utilize and
expand the integrated efforts of the creative department and senior sales and
marketing personnel to develop and foster partnering relationships with major
customers. Partnering should allow the Company to continue designing products
in concert with its major customers while expanding production of upscale
products that meet a mutual vision.
Broaden product distribution. The Company's market presence and distribution
strength position it to sell new or acquired product lines across its
distribution channels, including mass merchandisers, national office products
superstores, national contract stationers, office product wholesalers and
grocery and drug store chains. In the future, the Company intends to strengthen
its position in the contract stationer market. The Company has a strong
relationship with B.T. Office Products International, Inc., one of the nation's
largest contract stationers.
Continued growth through acquisition. In addition to the growth the Company
expects to come from the development of new, differentiated products and
product lines and expanding sales of existing products and product lines, the
Company actively evaluates acquisition candidates. Future strategic
acquisitions may be undertaken to broaden the Company's product lines, expand
its manufacturing capacity, and strengthen its presence within the various
channels of distribution in the worldwide market.
Products and Services
The Company designs, manufactures and markets school, home and office-
related products, custom binders and other related packaging materials. The
Company's core products include binders, pads, filler paper, wirebound
notebooks, and envelopes. The Company manufactures over 500 variations of these
core products, based on differences in color, size, count, packaging and other
features.
Several years ago, management recognized a market need for well-designed,
high-quality, functionally superior school and office products. To serve this
need, the Company pioneered a new line of branded differentiated products with
value-added features. The Company's high-quality, fashion-forward school-
related designs and high quality, functionally superior, office-related
products have been very successful with major mass merchandisers and consumers.
Approximately 34 percent of the Company's 1998 sales are derived from
differentiated products, which have been developed over the last five years.
School-related products (60.9% of 1998 net sales). The Company produces
tablets, spiral and coilless notebooks, filler paper and binders for the school
market. The Company's high-technology production equipment is designed to
produce these products in mass quantity in virtually any configuration
according to the customer needs. The Company also designs, assembles and
markets nylon binders, planners, knapsacks and other school products. Products
are packaged in a variety of quantities, rulings, sizes and papers.
The Company is the recognized market leader for higher quality, upscale,
creatively designed school products largely for the teenage market. The
Company's marketing and design departments have carefully researched market
demands to develop a range of product offerings. The Company created a broad
line of innovative styles and designs to appeal to segmented markets of school-
age children through its Pen-Tab Pro(R), Tough Tracks(R), Pro Ball(R) and Pen-
Tab Online(R) product lines. Durable nylon covers and colorful designs have
3
been incorporated into core products to differentiate its line. The value-added
products sell at retail price points for up to $20. Whereas certain basic
school supplies often work as a loss leader for retailers, the Company's
differentiated products give a mass merchandiser a fashion-forward image and an
attractive profit margin.
Through the acquisition of Stuart Hall, the Company is now a leading
manufacturer and marketer of licensed school products. Stuart Hall's licensed
portfolio includes Looney Tunes, Coca-Cola(R) brand, Nickelodeon(TM),
Rugrats(R), MTV: Music Television(TM), X Games(TM) and Disney's Winnie the
Pooh. These licenses are proprietary to the Company in its category and allow
for higher margins than non-licensed products. The Company's many licenses
appeal to segmented markets of school age children.
Leveraging its creative capabilities and experience, the Company has created
a brand name for high quality, upscale school supplies. For example, Tough
Tracks(R) line incorporates a rugged, outdoors look which is targeted at
environmentally-conscious school children and utilizes textures, designs and
colors to appeal to the target market. The "Pro Series" is the Company's best
selling premium notebook line. Features of this line include pressboard covers,
inside pockets, coated double wire, extended tab dividers, and heavyweight 20
lb. paper.
The Company also produces a variety of paper products for use in creative
and artistic leisure activities, including construction paper, poster paper,
tracing paper and drawing pads. The Company sells these items both in
conventional packaging and in innovative combination packs and jumbo bonus
packs. The Company distinguishes its arts and crafts packages by including
special "kids activity ideas" to encourage creativity.
Sales of school-related products are seasonal and peak during spring and
summer. Orders for back-to-school products are generally placed during March
through April, and shipped May through August. The Company builds a substantial
inventory of finished back-to-school products before shipment. Certain
differentiated products that are manufactured overseas are only mass-produced
with firm customer commitments to limit inventory risk.
Management believes the growth opportunities for differentiated; creatively
designed school products remain largely untapped. The Company has numerous
exciting new products for the coming year, and management expects continued
growth from these items.
Office-related products (31.6% of 1998 net sales). The Company produces a
variety of similar products for the office, including pads and envelopes. Sales
of office products are not seasonal. New, differentiated products for the
office market have included double wire spiral pads with hard covers,
organizers and other high-quality, functionally superior products sold under
the Executive(R), Expert(R) and Platinum(R) brands.
The office products market represents significant growth potential for the
Company. Office products distribution is shifting to the Company's existing
core customer base of mass merchandisers wholesale clubs and office supply
superstores. In addition, the Company has recently established strong
relationships with several of the nation's largest contract stationers.
Management believes the same opportunity exists to develop innovative higher
quality products for the office supply market as in the school products market.
The Company's creative department has already created several high-quality,
functionally superior designs for planners and pads in the office supply
market.
Custom packaging products (7.5% of 1998 net sales). The Company, through its
subsidiary Vinylweld L.L.C. and under the trade name Vinylweld, is a supplier
of custom packaging products. Vinylweld's customer strategy is to find
innovative solutions to unique challenges in packaging and product applications
designed for the customer's product. The Company utilizes the technology of
vacuum forming and radio frequency sealing (often referred to as heat-sealing)
to produce customized packaging which is utilized by customers primarily for
audio and video cassette tapes. The Company also produces innovative packaging
for the growing market of computer compact disc cartridges. Vinylweld's working
capital needs are low because it operates in a made-to-order environment with
little need to maintain inventory.
4
The Company is a leading supplier of packaging products to the publishing
industry for its audio and video cassette packages, including foreign language
tutorials, self-help guides and motivational packages. Customers include
Berlitz, Simon & Schuster, Barron's, Nightingale-Conant, Excel
Telecommunications, Inc., American Marketing, Syquest and Internet, Inc. The
Company believes it is one of the industry leaders in the production of
packaging for cassette tapes sold through infomercials.
Sales, Distribution and Marketing
The Company markets its broad range of products to a wide variety of
customers through virtually every channel of distribution for school, home and
office products including the largest mass merchandisers, warehouse clubs,
office product superstores, major contract stationers and grocery and drug
store chains. The Company's aggregate net sales to two customers accounted for
approximately 16.9% and 13.3%, respectively of the Company's net sales for
fiscal 1998.
The largest retailers, wholesalers and contract stationers have been rapidly
expanding as industry channels are undergoing consolidation. Management has
identified the fastest growing distribution channels in their marketplaces and
has focused the resources of the Company to the key accounts in those channels.
Management selectively pruned its customer base over the past several years to
concentrate on strong growth-oriented companies, which purchase a more
profitable product mix.
The Company will continue to target those customers driving consolidation in
the office products industry and believes that it is strongly positioned to
meet the special requirements of these customers in the growing distribution
channels of the school, home and office products industry. Leading
merchandisers favor larger suppliers with national manufacturing capabilities,
such as the Company, that has implemented automated ordering, manufacturing and
distribution practices. These customers seek suppliers, such as the Company,
who are able to offer broad product lines, higher value-added innovative
products, national distribution capabilities, low costs and reliable service.
Furthermore, as these customers continue to grow and consolidate their supplier
bases, the Company's ability to meet their special requirements should be an
increasingly important competitive advantage.
Senior sales management personally handles the Company's largest accounts.
The Company also employs approximately 30 manufacturer representative agencies
with over 100 agents to market its products. The Company assists the
representative agencies in servicing these accounts. The Company's sales staff
is compensated by a base salary and a bonus based on performance. Manufacturer
representatives are compensated strictly based on commission.
Management starts its product plan by segmenting its customer base (e.g. for
the teen market, consumers with a focus on a sports, fashion, rugged or
"techie' image). Product designs are then evaluated through research, focus
groups and sample testing. Through over 60 years of customer presence, Pen-
Tab(R) and Stuart Hall have developed strong brand identity for quality
products. Its Pen-Tab Pro(R), Tough Tracks(R), Executive(R), Expert(R) and Pen-
Tab Paper Store(R) lines are also building customer loyalty in segmented
markets. The Company typically leads marketing efforts with its core
established product lines and leverages this stable business to increase sales
of its value-added differentiated products.
Vinylweld sells an extensive line of stock and custom audio/video software
packaging in many configurations and price ranges. Customers vary from
individual authors of programs to Fortune 500 companies. Sales may be made
direct to end-users or indirectly through a variety of channels including
distributors, duplicators, multi-level marketers and direct selling companies.
Vinylweld has a core group of accounts with major, long term, high volume
customers, which are personally handled by executive sales management
personnel. Additionally, the Company employs five field sales people.
New product development by Vinylweld's customers drives the need for
packaging. In particular, CD-ROM applications are expanding and the number of
CD packaging design requests and orders are rapidly
5
increasing. In addition, Vinylweld intends to aggressively and actively promote
its packaging technology into a number of predominately untapped markets.
Targets include packaging design firms, consumer product manufacturers,
equipment and instrumentation manufacturers, and a number of other packaging
motivated sectors.
Competition
The markets for the Company's products are highly competitive. The Company's
principal methods of competition are customer service, price, product
differentiation, quality and breadth of product line offerings. The markets in
which the Company operates have become increasingly characterized by a limited
number of large companies selling under recognized trade names. These larger
companies, including the Company, have the economies of scale, national
presence, management information systems and breadth of product line required
by the major customers. In addition to branded product lines, manufacturers
also produce private-label products, especially in the context of broader
supply relationships with office product superstores and contract stationers.
The school, home and office products industry is fragmented, ranging from
large national manufacturers to single-facility, regional manufacturers. A few
manufacturers, including the Company, have developed strong brand name
recognition for a number of product lines. Other national companies include
Mead and American Pad & Paper Company. In addition, the Company still competes
with a large number of smaller, regional companies, which have more limited
product lines.
Vinylweld's primary competition comes from six competing manufacturers that
represent approximately 60% of the market. These competitors are primarily
privately held organizations ranging in size from a reported $3 million to $20
million in annual sales. The product range differs slightly from company to
company with some companies producing more than just audio/video cassette and
software packaging. Competitors generally have additional product lines
including binders, plastic dividers and inserts, and a wide variety of
specialty and miscellaneous products. In most cases, however, these additional
product lines are product adjuncts and do not directly compete in the vinyl
packaging market. Most of the competitors have not aggressively pursued
packaging business outside the vertical niche of audio/video and software
packaging.
Intellectual Property
The Company seeks trademark protection for all of its product line trade
names. The Company presently holds several trademarks covering designs, symbols
and trade names used in connection with its products, including Pen-Tab(R),
Pen-Tab Pro(R), Executive(R), Expert(R) and Pen-Tab Paper Store(R).
Licensed Products
The Company is a party to numerous license agreements. These license
agreements permit the Company to use various licensed properties on its
products. The license agreements generally have terms of one to three years,
have minimum royalty requirements and a fixed percentage of the selling price
as a royalty due the licensor.
Employees
The Company had approximately 900 employees as of January 2, 1999.
Approximately 600 employees are represented by collective bargaining agreements
at the Missouri, Illinois and California facilities. In Missouri the employees
are represented by the United Paperworkers International Union AFL-C10, CLC
Local 765, whose contract expires August 8, 2000. In California, the employees
are represented by the Graphic Communications Union Local No. 388-M AFL-CIO,
whose contract expires October 31, 1999. In Illinois, the employees are
represented by the Warehouse, Mail Order, Office and Professional Employees
Local 743 Affiliated International Brotherhood, Teamsters AFL-CIO, whose
contract expires December 19, 2001. The
6
Company enjoys an amicable relationship with unionized labor. The following
table provides information on the Company's employees by operating function:
Employees Categorized by Function
Manufacturing...................................... 820
Sales, Marketing and Creative...................... 30
Administrative..................................... 40
Executive.......................................... 10
---
Total............................................ 900
===
As of January 2, 1999, the Company's manufacturing employees numbered 220 in
the Virginia facility, 200 in the California facility, 200 in the Chicago
facility and 200 in the Kansas City Facility.
Item 2. Properties
The following table summarizes the Company's facilities by location.
Company Facilities
------------------------------------------------------------------------------------
Approximate Owned/ Lease
Location Square Feet Leased Product Categories Expiration
-------- ----------- ------ ------------------ ----------
Front Royal, VA......... 282,000 Owned School, Office & Home N/A
Kansas City, MO......... 491,000 Leased School, Office & Home 2005
City of Industry, CA.... 250,000 Leased School, Office & Home 2002
Chicago, IL............. 210,000 Leased Primarily Vinyl and Packaging 2009
The Company's Front Royal, VA facility was financed with Industrial Revenue
Development Bonds and is pledged as collateral.
Item 3. Legal Proceedings
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material effect on
the financial condition or results of operations of the Company.
Environmental, Health and Safety Matters
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations,
among other things, impose limitations on the discharge of pollutants and
establish standards for management of waste. While there can be no assurance
that the Company is at all times in complete compliance with all such
requirements, the Company believes that any such noncompliance is unlikely to
have a material adverse effect on the Company. As is the case with
manufacturers in general, if a release or threat of release of hazardous
materials occurs on or from the Company's properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any properties owned or operated by the Company, the Company may be held liable
for response costs and damages to natural resources. There can be no assurance
that the amount of any such liability would not be material.
Item 4. Submission of Matters to a Vote of Security Holders.
None
7
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
None
Item 6. Selected Financial Data (Dollars in Thousands)
The financial statements of Pen-Tab Industries, Inc. for fiscal years 1995
and 1994 represent the combined historical financial statements of Pen-Tab
Industries, Inc., a New York corporation, and its affiliated company Pen-Tab
Industries of California, Inc., a Delaware corporation, which were controlled
under common ownership. Intercompany accounts and transactions have been
eliminated in combination. Effective July 1, 1996, the two companies were
merged into a new Virginia corporation, called Pen-Tab Industries, Inc., with
no change in ownership, and accordingly, the historical book values of the
companies' assets and liabilities were carried forward to the new company. In
connection with the merger, Pen-Tab Industries, Inc. recorded a charge to
retained earnings of $295 relating to the cancellation of treasury stock
previously held by the two companies, and eliminated the treasury stock and
related additional capital balances.
On February 4, 1997, Pen-Tab Industries, Inc., a Virginia corporation,
changed its name to Pen-Tab Holdings, Inc. On February 4, 1997 Holdings formed
a wholly owned subsidiary called Pen-Tab Industries, Inc., a Delaware
corporation. On February 4, 1997, the Company issued $75 million 10 7/8% Senior
Subordinated Notes due 2007 and Holdings effected a recapitalization pursuant
to which Holdings repurchased approximately 748 shares of Class A common stock
and 122 shares of Class B common stock from management shareholders for
approximately $47,858, converted an additional 20 shares of Class A common
stock and 358 shares of Class B common stock into redeemable preferred stock,
and sold 37 shares of Class A common stock, 3 shares of Class B common stock
and 125,875 shares of redeemable preferred stock to outside investors for
proceeds of approximately $15,010. Holdings' shareholders concurrently approved
an amendment to Holdings' articles of incorporation to increase the number of
authorized shares to 8,352,500, consisting of 6,000,000 shares of Class A
Common Stock, par value $.01 per share, 2,000,000 shares of Class B Common
Stock, par value $.01 per share, 2,000,000 shares of Class B Common Stock, par
value $.01 per share, and 352,500 shares of redeemable preferred stock.
Following completion of the above transaction, Holdings' shareholders approved
a stock split pursuant to which each share of Holdings' Class A Common Stock
and Class B Common Stock then outstanding was converted into 60,937.50 shares
of such common stock.
On February 3, 1998, net assets of $1,500 of the Company's Vinylweld
division were contributed to a newly formed Delaware limited liability company
called Vinylweld L.L.C. The Company sold 20% of Vinylweld L.L.C. to Vinylweld's
president for $125. The Financial statements of Pen-Tab Industries, Inc. for
fiscal year 1998 reflect the acquisition of Stuart Hall Company, Inc. and the
results of their operations from the acquisition on August 20, 1998, through
the fiscal year end of January 2, 1999.
Set forth below are selected historical financial data and other financial
data of the Company as of the dates and for the periods presented. The selected
historical financial data as of January 2, 1999, January 3, 1998, December 28,
1996, December 30, 1995, December 31, 1994 and for the fiscal years then ended
were derived from the Audited Financial Statements of the Company.
8
The information contained in this table and accompanying notes should be
read in conjunction with the "Management Discussion and Analysis of Financial
Condition and Results of Operations," the Audited Consolidated Financial
Statements and the accompanying notes and schedules thereto appearing
elsewhere.
Fiscal Year
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
Statement of Operations
Data
Net sales................. $124,082 $ 96,637 $106,869 $96,808 $90,472
Cost of goods sold........ 91,105 71,701 74,781 74,305 70,581
Gross profit.............. 32,977 24,936 32,088 22,503 19,891
Selling, general and
administrative expenses.. 22,030 16,838 16,528 13,204 13,346
Amortization of goodwill.. 578 -- -- -- --
Relocation and
reorganization expenses
(a)...................... -- 804 -- 1,906 --
Interest expense, net..... 11,413 8,194 2,346 2,883 2,410
Other (income) expense,
net...................... (28) -- (4) (55) (3)
Income (loss) before
income taxes............. (1,016) (900) 13,218 4,565 4,138
Income tax (benefit)
provision (b), (e)....... (335) 1,945 (191) (343) 825
Net income (loss)......... $ (681) $ (2,845) $ 13,409 $ 4,908 $ 3,313
Other Financial Data
Pro forma income tax
(benefit) provision (b).. $ -- $ (338) $ 4,956 $ 1,948 $ 1,783
Pro forma net income
(loss) (b)............... -- (562) 8,262 2,617 2,355
Net cash provided by (used
in)operating activities.. 43,426 (768) 13,356 10,926 5,576
Net cash (used in)
investing activities..... (134,632) (1,562) (890) (8,521) (1,331)
Net cash provided by (used
in) financing
activities............... 77,550 15,895 (13,191) (2,291) (4,163)
Adjusted EBITDA (c)....... 14,582 10,652 17,916 11,865 8,865
Adjusted EBITDA margin
(c)...................... 11.7% 11.0% 16.8% 12.3% 9.8%
Depreciation and
amortization............. 4,892 2,968 2,364 2,760 2,317
Capital expenditures...... $ 2,854 $ 1,562 $ 890 $ 9,322 $ 1,371
Ratio of earnings to fixed
charges (d).............. -- (d) -- (d) 5.8x 2.4x 2.4x
As of
--------------------------------------------------
Jan. 2 Jan. 3 Dec. 28 Dec. 30 Dec. 31
1999 1998 1996 1995 1994
-------- -------- -------- ------- -------
Balance Sheet Data
Total assets.............. $181,943 $ 63,792 $ 43,504 $43,805 $41,711
Long-term debt (including
current portion)......... 132,460 82,754 24,210 28,000 26,890
Stockholders' equity
(deficit)................ $ 10,517 $(28,005) $ 15,052 $11,044 $ 8,770
- --------
(a) During fiscal 1995, the Company relocated its headquarters and its east
coast manufacturing facilities from Glendale, New York to Front Royal,
Virginia. The non-recurring charges of $1,906 associated therewith are
reported as relocation expense in the statement of operations and retained
earnings. During fiscal 1997, the Company reorganized its sales and
marketing functions. The non-recurring charges of $804 for recruitment and
acquisition costs of new sales and marketing executives as well as the
severance costs of terminated sales employees are reported as
reorganization expenses in the statement of operations and retained
earnings.
(b) A portion of the Company was taxed as a "C" corporation under the Internal
Revenue Code during fiscal 1994, and accordingly was subject to federal and
state income taxes. For all fiscal years thereafter until the period ended
February 3, 1997, the entire company elected to be treated as an "S"
corporation for federal income tax purposes under which income, losses,
deductions and credits were allocated to and reported by the Company's
shareholders based on their respective ownership interests. Accordingly, no
provision for income taxes was required for such periods, except for state
income taxes.
(c) Adjusted EBITDA is defined as net income before interest, income taxes,
depreciation and amortization and certain non-recurring expenses (see (a)
above). Adjusted EBITDA is presented because it is a widely
9
accepted financial indicator of a company's ability to incur and service
debt. However, Adjusted EBITDA should not be considered in isolation as a
substitute for net income (loss) or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a
company's profitability or liquidity. In addition, this measure of Adjusted
EBITDA may not be comparable to similar measures reported by other
companies. Adjusted EBITDA amounts for fiscal 1997 has been adjusted for
reorganization expenses of $804, related to the recruitment and acquisition
costs of new sales and marketing executives as well as the severance costs
of terminated sales employees and fiscal 1995 has been adjusted for non-
depreciation relocation expenses of $1,657, related to the relocation of
the Company's headquarters and east coast manufacturing facilities from New
York to Virginia. Adjusted EBITDA margin is calculated as the ratio of
Adjusted EBITDA to net sales for the period. Funds depicted by Adjusted
EBITDA are not available for management's discretionary use due to
functional requirements to conserve funds primarily for capital replacement
and expansion, and debt service requirements.
(d) For purposes of the ratio of earnings to fixed charges, (i) earnings are
calculated as the Company's earnings before income taxes and fixed charges
and (ii) fixed charges include interest on all indebtedness, amortization
of deferred financing costs and one-third of operating lease expense.
Earnings before fixed charges for the year ended January 2, 1999 and
January 3, 1998 were insufficient to cover fixed charges by $1,016 and
$900, respectively.
Fiscal Year
----------------------------------------
1998 1997 1996 1995 1994
------- ------ ------- ------ ------
Income (loss) before income taxes... $(1,016) $ (900) $13,218 $4,565 $4,138
Add back Fixed Charges;
Interest Expense................... 11,413 8,194 2,346 2,883 2,410
Operating Lease Expense 1/3........ 531 400 400 375 540
------- ------ ------- ------ ------
Earnings before Fixed Charges....... 10,928 7,694 15,964 7,823 7,088
Fixed Charges....................... 11,944 8,594 2,746 3,258 2,950
Ratio of Earnings to Fixed Charges -- -- 5.8x 2.4x 2.4x
(e) During fiscal 1997, the Company recorded a cumulative deferred tax
liability of $2,316 upon termination of the Company's "S" corporation
status.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following discussion should be read in conjunction with the "Selected
Financial Data", the Audited Financial Statements and the accompanying notes
and schedules thereto appearing elsewhere herein.
Stuart Hall Acquisition. On August 20, 1998 Pen-Tab acquired all of the
capital stock of Stuart Hall Company, Inc., a wholly-owned subsidiary of
Newell Co. The net purchase price was approximately $131.9 million after post-
closing adjustments and expenses, of which $39.2 was generated by an equity
contribution from Pen-Tab Holdings, Inc., Pen-Tab's parent company and the
remainder was financed with drawings on a bank Credit Facility (as hereinafter
defined). Stuart Hall's results of operations since the acquisition date are
included in the Company's results of operations. The acquisition was accounted
for as a purchase.
Differentiated products. In 1992, the Company recognized a previously
unfulfilled demand for higher quality, functionally superior, upscale school
and office-related products. The Company pioneered a line of these higher
price point and margin, branded products to serve the school and office
products markets. A significant portion of the Company's increase in sales
since 1992 is due to the introduction of differentiated products.
Additionally, the Company's differentiated products and product lines result
in higher margins for the Company and its customers. Demand for differentiated
products has risen steadily since 1992 when the Company first introduced them
and the Company expects a significant portion of its future growth to come
from increased sales of differentiated products.
Seasonality. As a result of the seasonal nature of the back-to-school
sector of the business, the Company's inventory and associated working capital
borrowings typically increase throughout the calendar
10
year until the latter part of May and early June. At such time, the inventory
is shipped to customers, and converted into receivables. By the middle of
September, account collections occur and working capital borrowing is reduced.
Paper prices. Paper represents the largest component of the Company's cost
of goods sold. While paper prices are currently at approximately the same
levels as in 1993, certain commodity grades have shown considerable price
volatility during that period. The Company's pricing policies generally enable
it to set product prices consistently with the Company's cost of paper at the
time of shipment. The Company believes that it is able to price its products so
as to minimize the impact of price volatility on dollar margins. However,
significant and unusual price fluctuations occurred during 1995 and 1996 that
were not all passed on to customers. As a result of new product introductions,
a substantial portion of which have little or no paper content, the Company
offers a broader and more diverse product mix which is less susceptible to
paper price fluctuations.
Results of Operations
The following table sets forth the fiscal years 1994 through 1998, certain
income and expense items of the Company as a percentage of net sales.
Fiscal Year
---------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 73.4% 74.2% 70.0% 76.8% 78.0%
----- ----- ----- ----- -----
Gross profit............................... 26.6% 25.8% 30.0% 23.2% 22.0%
Selling, general, and administrative
expenses.................................. 17.8% 17.4% 15.5% 13.6% 22.0%
Amortization of goodwill................... 0.5% -- -- -- --
Relocation and reorganization expenses..... -- 0.8% -- 2.0% --
----- ----- ----- ----- -----
Income from operations..................... 8.3% 7.6% 14.5% 7.6% 7.2%
===== ===== ===== ===== =====
Fiscal 1998 Compared to Fiscal 1997
Net sales for the year ended January 2, 1999 increased by $27.4 million, or
28.4%, to $124.1 million from $96.6 million for the year ended January 3, 1998.
The Company's acquisition of Stuart Hall contributed $11.8 million or 12.2% of
the increase. For the Pen-Tab segment, which includes Stuart Hall,
differentiated product and core product sales increased by $10.7 million and
$16.0 million, respectively, for the year ended January 2, 1999 as compared to
the year ended January 3, 1998. The Vinylweld segment had sales increases of
$0.7 million.
Gross profit for the year ended January 2, 1999 increased by $8.0 million or
32.2% to $33.0 million from $24.9 million for the year ended January 3, 1998.
The gross profit percentage for year ended January 2, 1999 was 26.6% compared
to 25.8% for the year ended January 3, 1998. The 0.8% increase in the gross
profit percentage is principally related to (i) the growth in high margin
differentiated product sales which increased to 34.6% of net sales for the year
ended January 2, 1999 from 33.4% for the year ended January 3, 1998, and (ii)
sales volume increase in 1998 caused an increase in gross margin due to the
increased utilization of fixed factory overhead.
SG&A expenses for the year ended January 2, 1999 increased $5.2 million or
30.8% to $22.0 million from $16.8 million for the year ended January 3, 1998.
As a percentage of net sales, SG&A expenses increased to 17.8% for the year
ended January 2, 1999 from 17.4% for the year ended January 3, 1998. This
increase is principally the result of (i) shipping expenses (primarily freight
out) increased to 8.2% of net sales for the year ended January 2, 1999 from
6.8% of net sales for the year ended January 3, 1998. The increase was the
result of an increase in direct-to-store customers. Partially offset by (ii) a
reduction in 1998 of television and print advertising of $1.2 million or 1.0%.
11
Interest expense, net for the year ended January 3, 1999 increased $3.2
million to $11.4 million from $8.2 million for the year ended January 2, 1998.
The increase is principally due to the interest on the debt incurred to acquire
Stuart Hall on August 20, 1998.
Fiscal 1997 Compared to Fiscal 1996
Net sales for the year ended January 3, 1998 decreased by $10.3 million, or
9.6%, to $96.6 million from $106.9 million for the year ended December 28,
1996. For the Pen-Tab segment differentiated product and core product sales
decreased $0.2 million and $8.2 million, respectively, for the year ended
January 3, 1998 as compared to the year ended December 28, 1996. Pen-Tab
segment pounds / units shipped increased approximately 4.8% for the year ended
January 3, 1998 compared to the year ended December 28, 1996, however revenues
are down $8.4 million or 8.7%. This results from material (paper and paper
related products) price decreases passed on to the customer in lower unit
selling prices during and subsequent to the year ended December 28, 1996 and
from changes in product mix. The remaining $1.9 million decrease in net sales
was caused by sales volume decreases in the Vinylweld segment.
Gross profit for the year ended January 3, 1998 decreased by $7.2 million,
or 22.3% to $24.9 million from $32.1 million for the year ended December 28,
1996. The gross profit percentage for the year ended January 3, 1998 was 25.8%
compared to 30.0% for the year ended December 28, 1996. The decrease in gross
profit margin is principally related to (i) a LIFO adjustment increasing gross
profit for the year ended December 28, 1996 by $3.6 million or 3.4% due to
significant decreases in the cost of paper versus a LIFO adjustment increasing
gross profit for the year ended January 3, 1998 by $0.3 million or 0.3% (ii)
significant and unusual paper price fluctuations caused the Company to
experience inventory losses of $3.1 million or 2.9% in the year ended December
28, 1996 due to selling higher priced inventory at the then current lower
selling prices , (iii) sales price decreases in 1997 causing a decrease in
gross margin due to the fixed components of factory overhead being spread over
less sales dollars amounting to approximately 0.6% and (iv) lower margins on
core products due to competitive market pricing pressures.
SG&A expenses for the year ended January 3, 1998 increased $0.3 million, or
1.9% to $16.8 million from $16.5 million for the year ended December 28, 1996.
As a percentage of net sales, SG&A expenses increased to 17.4% for the year
ended January 3, 1998 from 15.5% for the year ended December 28, 1996. This
increase is the result of (i) selling expenses being a higher percentage of
sales in 1997, 7.5%, as compared to 6.2% in 1996, principally due to the
following: increases in sales and marketing salaries and related expenses of
$0.3 million, commission expense being 1.3% of sales in 1997 versus 1.1% of
sales in 1996, due to changes in product mix and account mix, advertising
expense being 2.8% of sales in 1997 compared to 2.7% of sales in 1996 and (ii)
shipping expenses (principally freight out) being a higher percentage of sales,
6.8% in 1997 versus 6.1% in 1996, due to lower product selling prices during
1997.
Interest expense, net for the year ended January 3, 1998 increased $6.1
million to $8.4 million from $2.3 million for the year ended December 28, 1996.
The increase is principally due to the interest expense on the $75 million of
senior subordinated notes issued during February 1997.
Income tax provision for the year ended January 3, 1998 increased $2.1
million to $1.9 million from $(0.2) million for the year ended December 28,
1996. This increase includes a tax charge of $2.3 million to record a
cumulative deferred tax liability upon the termination of the Company's "S"
corporation election offset by $0.6 million deferred tax asset for a federal
net operating loss. The Company was taxed as an "S" corporation for federal and
state taxation purposes during 1996.
Liquidity and Capital Resources
Net cash provided by operating activities for the year ended January 2, 1999
was $43.4 million as compared to net cash used of $0.8 million for the year
ended January 3, 1998. The increase was primarily attributable to the
acquisition of Stuart Hall. The account receivable of Stuart Hall at the date
of acquisition
12
was approximately $29 million, reflecting the seasonal back to school spike. By
year end the accounts receivable balance related to Stuart Hall was
approximately $5 million. In addition, an $18.5 million working capital
purchase price adjustment related to the purchase of Stuart Hall remains unpaid
at year end as it is in arbitration.
Net cash provided by financing activities for the year ended January 2, 1999
was $77.6 million as compared to net cash provided by financing activities of
$15.9 million for the year ended January 3, 1998. The increase is primarily
attributable to a $39.2 million equity contribution from Pen-Tab Holdings and
the proceeds of long-term debt used to acquire Stuart Hall.
Net cash used in operating activities for the year ended January 3, 1998 was
$0.8 million as compared to net cash provided by operating activities of $13.4
million for the year ended December 28, 1996. The decrease was primarily due to
lower income earned during 1997 and changes in the Company's working capital
accounts, principally inventory.
Net cash provided by financing activities for the year ended January 3, 1998
was $15.9 million as compared to net cash used in financing activities of $13.2
million for the year ended December 28, 1996. The increase consisted of $72.6
million relating to the net proceeds of the issuance of senior subordinated
notes, offset by an increase in dividend distributions of $30.8 million and a
$12.7 million reduction in long-term debt.
Capital expenditures in the fiscal years 1998, 1997 and 1996 were $2.9
million, $1.6 million, and $0.9 million, respectively. The Company expects that
capital expenditure requirements will be approximately $4.0 million for 1999.
The Company believes capital expenditure levels are sufficient to maintain
competitiveness and to provide sufficient manufacturing capacity. The Company
expects to fund capital expenditures primarily from cash generated from
operating activities.
In August 1998, in conjunction with the acquisition of Stuart Hall, the
Company entered into a new Credit Facility ("Credit Facility"). The information
below is a summary of the material terms thereof qualified by reference to the
complete text of the documents. The Credit Facility has two parts, a $100
million revolver and a $35 million term loan. Borrowings under the Credit
Facility are available to acquire the capital stock of Stuart Hall Company,
Inc., for working capital and general corporate purposes, including letters of
credit. The $35 million term loan was fully drawn on at August 20, 1998 in
conjunction with the acquisition of Stuart Hall. The Credit Facility is secured
by first priority liens on substantially all of the Company's assets. The
Credit Facility expires on August 20, 2001, unless extended. The interest rate
per annum applicable to the Credit Facility is the prime rate, as announced by
the Bank plus 1.0% or, at the Company's option, the Eurodollar rate plus 2.0%.
The Company is required to pay a commitment fee of 0.5% on the unused portion
of the $100 million revolver. The Credit Facility permits the Company to prepay
loans and to permanently reduce credit commitments or letters of credit, in
whole or in part, at any time in certain minimum amounts.
The availability of the Credit Facility is subject to various conditions
precedent. Advances are made under the revolver portion of the Credit Facility
up to an aggregate $100 million based on a borrowing base comprised of eligible
accounts receivable and inventory at the following advance rates: 85% of the
value of eligible accounts receivable, and 60% of the value of eligible
inventory. The Credit Facility and the Indenture impose certain restrictions on
the Company, including restrictions on its ability to incur indebtedness, pay
dividends, make investments, grant liens, sell its assets and engage in certain
other activities.
The Company's average working capital borrowings under its credit
agreements, in effect at the time, for the fiscal years 1998, 1997, and 1996
were $7.6 million, $2.5 million, and $24.9 million, respectively. The Company's
maximum working capital borrowings outstanding were $35.3 million, $10.9
million, and $39.4 million, respectively for the same fiscal years. At January
2, 1999 $5 million was outstanding on the revolver portion of the Credit
Facility.
13
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 of principal and interest on the Company's indebtedness, to
fund anticipated capital expenditures and working capital requirements. The
ability of the Company to meet its debt service obligations and reduce its
total debt will be dependent, however, upon the future performance of the
Company which, in turn, will be subject to general economic conditions and to
financial, business and other factors, including factors beyond the Company's
control. A portion of the debt of the Company bears interest at floating rates;
therefore, its financial condition is and will continue to be affected by
changes in prevailing interest rates.
During November 1997, the Company entered into a swap agreement, which
expires February, 2002, to swap its fixed rate of payment on the $75 million 10
7/8% Senior Subordinated Notes for a floating rate payment. The floating rate
is based upon a basket of LIBORS of three countries plus a spread, and is
capped at 12.5%. The interest rate resets every six months and the Company's
effective interest rate under the swap agreement at January 2, 1999 was 10.5%.
The Company can terminate the transaction at any time, at the then current fair
market value of the swap instrument. At January 2, 1999, the agreement could
have been terminated at a gain of $747,000.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended January 2, 1999.
Year 2000 compliance.
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 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.
14
The Company currently is developing contingency plans. The Company
anticipates that its internal systems will by 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.
Disclosures Regarding Accounting Standards Issued But Not Yet Adopted
The Financial Accounting Standards Board has issued various new statements
including Statements No. 133. Statement No. 133 (Accounting for Derivative
Instruments and Hedging Activities) is not effective until fiscal year 2000 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.
Item 7a. 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
January 2, 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.
Item 8. Financial Statements and Supplementary Data.
Financial Statements of Pen-Tab Industries, Inc.
Report of Ernst & Young LLP, Independent Auditors.................... F1
Consolidated Balance Sheets.......................................... F2
Consolidated Statements of Operations................................ F4
Consolidated Statements of Stockholder's Equity...................... F5
Consolidated Statements of Cash Flows................................ F6
Notes to Consolidated Financial Statements........................... F7
Financial Statements of Acquired Business--Stuart Hall Company, Inc.
Report of Arthur Andersen LLP, Independent Auditors.................. F24
Consolidated Balance Sheets as of December 31, 1997, 1996 and 1995... F25
Consolidated Statements of Income for the three years in the period
ending
December 31, 1997................................................... F26
Consolidated Statements of Stockholder's Equity for the three years
in the period ending December 31, 1997.............................. F27
Consolidated Statements of Cash Flows for the three years in the
period ending December 31, 1997..................................... F28
Notes to Consolidated Financial Statements........................... F29
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The Company has not filed a form 8-K reporting a change of independent
auditors or any disagreement with the independent auditors.
15
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the names, ages as of December 1998, and a
brief account of the business experience of each person who is a director or
executive officer of the Company.
Name Age Position
- ---- --- --------
Alan Hodes....................... 55 Chief Executive Officer and Director
Dan Gallo........................ 46 President
Michael Greenberg................ 58 Executive Vice President
William Leary.................... 39 Vice President, Chief Financial and Administrative Officer
Deborah Hodes.................... 46 Senior Vice President/Creative Director and Director
Thomas McWilliams................ 55 Director
David Howe....................... 34 Director
James Stevens.................... 62 Director
Alan Hodes joined Williamhouse-Regency in 1966. From 1972 to 1982, Mr. Hodes
served as Vice President of Williamhouse Regency and President of its Pen-Tab
division. Mr. Hodes and Michael Greenberg purchased Pen-Tab in 1982 from
Williamhouse-Regency. Mr. Hodes received his B.S. degree in Accounting from
Brooklyn College. He is married to Deborah Hodes.
Dan Gallo joined the Company on September 1, 1997. Mr. Gallo has over 20
years of experience in the Office Products Industry. He earned his Business
Administration and Marketing Degree at John Carroll University. Prior to
joining the Company, Mr. Gallo was employed as Vice President of Sales at
Sanford Corporation a division of Newell Co. where he worked for 19 years.
During the course of his employment with Sanford, Mr. Gallo held several sales
related positions including Regional Sales Manager, National Account Manager
and National Field Sales Manager for both the commercial and retail markets. He
is credited with pioneering Sanford into the retail marketplace where they
currently hold a leadership position.
Michael Greenberg has been Executive Vice President since 1971. Mr.
Greenberg was Vice President of Vinylweld, Inc. the predecessor of the
Company's packaging business, when it was acquired by the Company. He was
previously Manufacturing Manager for Mohawk Tablet Company. Mr. Greenberg
graduated from the University of Illinois with a B.S. degree in Industrial
Engineering.
William Leary has been Vice President, Chief Financial and Administrative
Officer of the Company since 1991. Mr. Leary is a certified public accountant.
He was previously employed by Ernst & Young, LLP as a Senior Manager in the
Audit practice. Mr. Leary earned a Bachelors of Business Administration degree
in Accounting in 1982 from Bernard M. Baruch College of the City University of
New York.
Deborah Hodes has been Senior Vice President/Creative Director of the
Company since 1992. Ms. Hodes experience in the fashion related industry
includes a position as Fashion Director for a chain of specialty department
stores and Assistant to a leading clothing and fragrance designer. Ms. Hodes'
education includes the New York School of Interior Design, Parsons School of
Design and Chamberlayne College. Ms. Hodes is married to Alan Hodes.
Thomas McWilliams has been affiliated with CVC since 1983 and presently
serves as managing director of CVC as well as a member of CVC's investment
committee. From 1978 until 1983, Mr. McWilliams served as an executive officer,
including as vice president, president and chief operating officer, of Shelter
Resources Corporation, a publicly held holding company with operating
subsidiaries in the manufactured housing industry. From 1967 until 1978, Mr.
McWilliams served in various corporate finance and management positions at
Citibank, N.A. Mr. McWilliams is currently a director of each of Chase Brass
Industries, Inc., Ergo Science Corporation and various privately owned
companies.
16
David Howe has been employed at CVC since 1993. Prior thereto, he worked at
Butler Capital, a private investment company. He serves on the Board of
Directors of Aetna Industries, Inc., Brake-Pro, Inc., Cable Systems
International, Inc., Copes-Vulcan, Inc., Sinter Metals, Inc., Milk Specialties
Company and American-Italian Pasta Company. He also represents Citicorp on the
Board of Del Monte Foods Company. He is a graduate of Harvard College and
Harvard Business School.
James Stevens is presently a financial consultant and serves a variety of
organizations as a corporate director or as a trustee. From 1987 through 1994,
Mr. Stevens was affiliated with Prudential Insurance Company of America,
serving as Executive Vice President. He was also Chairman and Chief Executive
Officer of the Prudential Asset Management Group (August 1993 through December
1994), the Senior Officer in charge of the Private Placement Group (October
1987 through August 1993) and a member of the Operating Council. Mr. Stevens is
a former Managing Director of Dillon, Read & Co. Inc., a former Executive Vice
President of Citicorp/Citibank and a former Chairman of CVC.
Item 11. Executive Compensation
Compensation of Directors
The Company will reimburse directors for any out-of-pocket expenses incurred
by them in connection with services provided in such capacity. In addition, the
Company may compensate directors for services provided in such capacity.
Compensation of Executive Officers
The following summarizes the principal components of compensation of the
Company's Chief Executive Officer and each officer whose compensation exceeded
$100,000 for fiscal 1998. The compensation set forth below fully reflects
compensation for work performed on behalf of the Company.
Summary Compensation Table
Annual
Compensation
---------------
Salary Bonus
Name and Principal Position Fiscal Year ($) ($)
--------------------------- ----------- ------- -------
Alan Hodes 1998 304,148 --
Chief Executive Officer 1997 300,000 --
1996 300,000 --
Dan Gallo 1998 220,000 50,000
President 1997 220,000 118,000
Michael Greenberg 1998 231,964 --
Executive Vice President 1997 228,800 --
1996 228,800 60,000
William Leary 1998 128,700 50,000
Vice President, Chief Financial and 1997 117,000 50,000
Administrative Officer 1996 110,000 95,000
Deborah Hodes 1998 113,300 50,000
Senior Vice President, Creative Director 1997 103,000 50,000
Employment Agreements
Currently, Pen-Tab Holdings, Inc. has employment agreements with Messrs.
Hodes and Greenberg. The employment agreements provides for (i) payment of a
base salary indexed to inflation, (ii) payment of bonuses of up to fifty
percent of base salary to be awarded at the discretion of the Company's Board
of Directors and
17
(iii) certain fringe benefits. Each employment agreement provides that the
executive may be terminated by the Company only with cause, and provides that
the executive will not compete with the Holdings or its subsidiaries during the
period of employment and for the three years thereafter. Each executive is
entitled to receive a severance payment in the event of a resignation caused by
the relocation of the office at which the executive is employed.
Pension Plan
The Company sponsors a 401(k) plan for all non-union employees meeting the
participation requirements. The Company matches the employee's contribution at
a rate of 50% on the employee's first 5% of wages.
The Company also contributes to union sponsored multi-employer defined
contribution pension plans.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
All of the Company's issued and outstanding capital stock is owned by
Holdings.
Item 13. Certain Relationships and Related Transactions
None.
18
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this form 10-K:
(1) Financial Statements
Pen-Tab Industries, Inc.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Acquired Business--Stuart Hall Company, Inc.
Report of Arthur Andersen LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1997, 1996 and
1995
Consolidated Statements of Income for the three years in the
period ending December 31, 1997
Consolidated Statements of Cash Flows for the three years in the
period ending December 31, 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
(3) Exhibits: the exhibits listed on the accompanying exhibit index are
filed as part of this form 10-K.
19
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
2.1 Recapitalization Agreement dated as of January 9, 1997 by and among
Citicorp Venture Capital, Ltd., Pen-Tab Industries, Inc., Alan Hodes
and Michael Greenberg.**
3.1 Certificate of Incorporation of Pen-Tab Industries, Inc.**
3.2 By-laws of Pen-Tab Industries, Inc.**
4.1 Indenture dated as of February 1, 1997 between Pen-Tab Industries,
Inc. and United States Trust Company of New York.**
4.2 First Supplemental Indenture, dated as of May 7, 1997, between Pen-Tab
Industries, Inc. and United States Trust Company of New York.**
10.1 Second Amended and Restated Loan and Security Agreement dated as of
February 4, 1997 among Pen-Tab Industries, Inc., Pen-Tab Holdings,
Inc. (formerly known as Pen-Tab Industries, Inc.) and Bank of America
Illinois.**
10.2 Form of Notice of Borrowing.**
10.3 Form of Amended and Restated Revolving Note.**
10.4 Amended and Restated Trademark Agreement dated as of February 4, 1997
among Pen-Tab Industries, Inc., Pen-Tab Holdings, Inc. and Bank of
America Illinois.**
10.5 Pledge Agreement dated as of February 4, 1997 made by Pen-Tab
Holdings, Inc. in favor of Bank of America Illinois.**
10.6 First Amendment to Second Amended and Restated Loan and Security
Agreement dated as of February 4, 1997.***
10.7 Second Amendment and Waiver to Second Amended and Restated Loan and
Security Agreement dated as of June 9, 1997.***
10.8 Third Amendment to Second Amended and Restated Loan and Security
Agreement dated as of February 23, 1998.***
10.11 Shareholders Agreement dated as of February 4, 1997 by and among Pen-
Tab Holdings, Inc., Citicorp Venture Capital, Ltd.., Alan Hodes,
Michael Greenberg and each other executive of Pen-Tab Holdings, Inc.
or its subsidiaries who acquires Class A Common Stock from the
Company.**
10.12 Registration Rights Agreement dated as of February 4, 1997 by and
among Pen-Tab Industries, Inc., Citicorp Venture Capital, Ltd., Alan
Hodes, Michael Greenberg.**
10.13 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc. and Alan Hodes.**
10.14 Pen-Tab Holdings, Inc. 1997 Stock Option Plan and Form of Agreement
Evidencing a Grant of a Nonqualified Stock Option under 1997 Stock
Option Plan.**
10.15 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc. and Michael Greenberg.**
10.16 First Amendment to Second Amended and Restated Loan and Security
Agreement, dated as of February 4, 1997 by and among Pen-Tab
Industries, Inc., Pen-Tab Holdings, Inc. (formerly known as Pen-Tab
Industries, Inc.) and Bank of America Illinois.**
20
Exhibit
No. Description
------- -----------
10.17 Stock Purchase Agreement between Newell Co. and Pen-Tab Holdings, Inc.
dated June 24, 1998.*
10.18 Secured Credit Agreement dated as of August 20, 1998 among Pen-Tab
Industries, Inc., Pen-Tab Holdings, Inc. and Bank of America National
Trust and Savings Association, as Agent and Letter of Credit Issuing
Bank, and The Other Financial Institutions Party Hereto.*
21.1 Subsidiaries of Pen-Tab Industries, Inc.*
25.1 Statement of Eligibility of Trustee on Form T-1.**
27.1 Financial Data Schedule.*
99 Pen-Tab Safe Harbor Statement.*
- --------
* Filed herewith.
** Incorporated by reference
*** To be filed by amendment
(b) Reports of form 8-K
The Company filed a Current Report on Form 8-K during the year ended
January 2, 1999 relating to the acquisition of Stuart Hall Company, Inc. on
August 20, 1998. The final Form 8-K was filed on December 11, 1998.**
21
Signature
Pursuant to the requirements of Section 13 on 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: April 1, 1999
Pen-Tab Industries, Inc.
(Registrant)
By: /s/ William Leary
-----------------------------------
William Leary
Vice President, Chief Financial and
Administrative Officer
(principal financial officer
and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following person on behalf of the Registrant and
in the capacity and on the date indicated.
Chief Executive Officer April 1, 1999
___________________________________________ and Director
Alan Hodes
Chief Financial Officer April 1, 1999
___________________________________________
William Leary
Senior Vice President April 1, 1999
___________________________________________ and Director
Deborah Hodes
Director April 1, 1999
___________________________________________
Thomas McWilliams
Director April 1, 1999
___________________________________________
David Howe
Director April 1, 1999
___________________________________________
James Stevens
22
Schedule II--Valuation and Qualifying Accounts Pen-Tab Industries, Inc.
Balance at Balance at
Beginning Bad Debts Charge-off End of
Description of period Expense Deductions period
----------- ---------- ----------- ------------ ----------
Allowance for doubtful accounts
for the years ended:
January 2, 1999................ $ 186 $ 286 $ (166) $ 306
January 3, 1998................ $ 76 $ 144 $ (34) $ 186
December 28, 1996.............. $ 75 $ 31 $ (30) $ 76
Balance at Balance at
Beginning Rebates and Charge-off End of
Description of period Credits Deductions period
----------- ---------- ----------- ------------ ----------
Reserve for volume rebates and
credits for the years ended:
January 2, 1999................ $ 217 $3,041 $(1,829) $1,429
January 3, 1998................ $1,299 -- $(1,082) $ 217
December 28, 1996.............. $ 527 $ 963 $ (191) $1,299
Balance at Balance at
Beginning End of
Description of period Additions Subtractions period
----------- ---------- ----------- ------------ ----------
Reserve for lower of cost or
market inventory adjustments
for the years ended:
January 2, 1999................ $ -- $2,036 $ -- $2,036
January 3, 1998................ $ -- $ -- $ -- $ --
December 28, 1996.............. $ -- $ -- $ -- $ --
23
Index to Financial Statements and Schedules
Page
----
Financial Statements of Pen-Tab Industries, Inc.
Report of Ernst & Young LLP, Independent Auditors........................ F-1
Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998.... F-2
Consolidated Statements of Operations for the three years in the period
ended January 2, 1999................................................... F-3
Consolidated Statements of Stockholder's Equity for the three years in
the period ended
January 2, 1999......................................................... F-4
Consolidated Statements of Cash Flows for the three years in the period
ended January 2, 1999................................................... F-5
Notes to Consolidated Financial Statements............................... F-6
The following consolidated financial statement schedule is included in item
14(d):
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
Financial Statements of Acquired Business--Stuart Hall Company, Inc.
Report of Arthur Andersen LLP, Independent Auditors...................... F-17
Consolidated Balance Sheets as of December 31, 1997, 1996 and 1995....... F-18
Consolidated Statements of Income for the three years in the period
ending December 31, 1997................................................ F-19
Consolidated Statements of Stockholder's Equity for the three years in
the period ending
December 31, 1997....................................................... F-20
Consolidated Statements of Cash Flows for the three years in the period
Ending December 31, 1997................................................ F-21
Notes to Consolidated Financial Statements............................... F-22
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Pen-Tab Industries, Inc.
We have audited the accompanying consolidated balance sheets of Pen-Tab
Industries, Inc. as of January 2, 1999 and January 3, 1998, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended January 2, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pen-Tab Industries, Inc. at January 2, 1999 and January 3, 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
March 26, 1999
Vienna, Virginia
F-1
PEN-TAB INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
January January 3,
2, 1999 1998
-------- ----------
Assets
Current assets:
Cash and cash equivalents............................... $ 20 $ 13,676
Accounts receivable (less allowances for discounts,
Credits and doubtful accounts of $2,325 & $1,375)...... 15,770 8,321
Inventories, net........................................ 41,801 21,787
Prepaid expenses and other current assets............... 611 993
Deferred income taxes................................... 1,384 --
-------- --------
Total current assets.................................. 59,586 44,777
Property, plant and equipment, at cost:
Land and buildings...................................... 16,206 6,944
Machinery and equipment................................. 42,746 1,490
Furniture and fixtures.................................. 1,332 170
Leasehold improvements.................................. 1,476 19,709
-------- --------
61,760 28,313
Less: accumulated depreciation and amortization........... 16,222 12,538
-------- --------
45,538 15,775
Intangibles:
Goodwill, net........................................... 72,480 374
Debt issuance costs, net................................ 4,339 2,866
-------- --------
Total assets.......................................... $181,943 $ 63,792
======== ========
Liabilities and stockholder's equity
Current liabilities:
Accounts payable........................................ $ 5,804 $ 2 ,671
Accrued expenses and other current liabilities.......... 8,224 1,023
Due to Newell Co........................................ 18,546 --
Accrued interest on subordinated notes.................. 3,324 3,330
Deferred income taxes................................... -- 140
Current portion of long-term debt....................... 4,886 400
Current portion of capitalized lease obligation......... 924 140
-------- --------
Total current liabilities............................. 41,708 7,704
Long-term debt............................................ 119,339 82,100
Capitalized lease obligation.............................. 7,311 114
Deferred income taxes..................................... 3,068 1,879
Stockholder's equity (deficit):
Common Stock $.01 par value, 1,000 shares Authorized;
100 shares issued at January 2, 1999 and January 3,
1998................................................... -- --
Additional capital...................................... 39,209 --
Retained deficit........................................ (28,692) (28,005)
-------- --------
Total stockholder's equity (deficit).................. 10,517 (28,005)
-------- --------
Total liabilities and stockholder's equity (deficit).. $181,943 $ 63,792
======== ========
See accompanying notes to consolidated financial statements
F-2
PEN-TAB INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Fiscal Year
---------------------------
1998 1997 1996
-------- ------- --------
Net sales.......................................... $124,082 $96,637 $106,869
Cost of goods sold................................. 91,105 71,701 74,781
-------- ------- --------
Gross profit....................................... 32,977 24,936 32,088
Expenses:
Selling, general and administrative.............. 22,030 16,838 16,528
Amortization of goodwill......................... 578 -- --
Other:
Interest income................................ (114) (228) --
Interest expense............................... 11,527 8,422 2,346
Reorganization expenses........................ -- 804 --
Other income--net.............................. (28) -- (4)
-------- ------- --------
Total expenses............................... 33,993 25,836 18,870
-------- ------- --------
Income (loss) before income taxes.................. (1,016) (900) 13,218
Income tax (benefit) provision..................... (335) 1,945 (191)
-------- ------- --------
Net income (loss).................................. $ (681) $(2,845) $ 13,409
======== ======= ========
Unaudited Pro Forma Data:
Historical income (loss) before income taxes....... $ -- $ (900) $ 13,218
Pro forma tax (benefit) provision.................. -- (338) 4,956
-------- ------- --------
Pro forma net income (loss)........................ $ -- $ (562) $ 8,262
======== ======= ========
See accompanying notes to consolidated financial statements.
F-3
PEN-TAB INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
Retained
Common Additional Treasury Earnings
Stock Capital Stock (Deficit) Total
------ ---------- -------- -------- -------
Balance December 30,
1995..................... $ -- $ 370 $ (665) $ 11,339 $11,044
Net income.............. -- -- -- 13,409 13,409
Dividends............... -- -- -- (9,401) (9,401)
Cancellation of treasury
stock.................. -- (370) 665 (295) --
------ ------- ------- -------- -------
Balance December 28,
1996..................... -- -- -- 15,052 15,502
Net loss................ -- -- -- (2,845) (2,845)
Dividends............... -- -- -- (40,212) (40,212)
------ ------- ------- -------- -------
Balance January 3, 1998... -- -- -- (28,005) (28,005)
Net loss................ -- -- -- (681) (681)
Dividends............... -- -- -- (6) (6)
Equity contributions.... -- 39,209 -- -- 39,209
------ ------- ------- -------- -------
Balance January 2, 1999... $ -- $39,209 $ -- $(28,692) $10,517
====== ======= ======= ======== =======
See accompanying notes to consolidated financial statements.
F-4
PEN-TAB INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Fiscal Year
-----------------------------
1998 1997 1996
--------- -------- --------
Operating activities
Net income (loss)................................ $ (681) $ (2,845) $ 13,409
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................. 3,607 2,554 2,352
Amortization of goodwill....................... 578 -- --
Amortization of debt issuance costs............ 707 414 12
Deferred income taxes.......................... (335) 1,975 (286)
Provision for losses on accounts receivable.... 286 144 31
Changes in operating assets and liabilities:
Accounts receivable.......................... 19,417 2,232 (1,559)
Inventories.................................. (2,386) (7,049) (78)
Prepaid expenses, other current assets and
other assets................................ 461 (507) (292)
Accounts payable............................. 388 (103) 1,026
Due to Newell Co............................. 18,546 -- --
Accrued expenses and other liabilities....... 2,844 (913) (1,259)
Accrued interest on subordinated notes....... (6) 3,330 --
--------- -------- --------
Net cash provided by (used in) operating
activities...................................... 43,426 (768) 13,356
Investing activities
Sale of minority interest in Vinylweld LLC....... 125 -- --
Purchase of property, plant and equipment........ (2,854) (1,562) (890)
Purchase of Stuart Hall, net of cash acquired.... (131,903) -- --
--------- -------- --------
Net cash used in investing activities............ (134,632) (1,562) (890)
Financing activities
Proceeds from revolver borrowings................ 145,058 18,688 20,586
Repayments of revolver borrowings................ (140,058) (35,144) (24,376)
Proceeds from long-term debt..................... 35,000 -- --
Principal payments on long-term debt............. (1,150) -- --
Principal payments on capitalized lease
obligations..................................... (503) -- --
Proceeds from issuance of senior subordinated
notes........................................... -- 72,563 --
Dividends........................................ (6) (40,212) (9,401)
Equity contribution from Holdings................ 39,209 -- --
--------- -------- --------
Net cash provided by (used in) financing
activities...................................... 77,550 15,895 (13,191)
(Decrease) increase in cash and cash
equivalents..................................... (13,656) 13,565 (725)
Cash and cash equivalents at beginning of year... 13,676 111 836
--------- -------- --------
Cash and cash equivalents at end of year......... $ 20 $ 13,676 $ 111
========= ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest....................................... $ 10,028 $ 5,109 $ 2,346
========= ======== ========
Income taxes................................... $ -- $ 512 $ 123
========= ======== ========
Non-cash transaction:
Services purchased related to the debt offering
and paid for
by a reduction of proceeds received........... $ -- $ 2,437 $ --
========= ======== ========
See accompanying notes to consolidated financial statements.
F-5
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Recapitalization, Basis of Presentation of Financial Statements and
Description of Business
On July 1, 1996, Pen-Tab Industries, Inc., a New York corporation, and its
affiliated company Pen-Tab Industries of California, Inc., a Delaware
corporation, which were controlled under common ownership, were merged into a
new Virginia corporation called Pen-Tab Industries, Inc. There was no change in
ownership and accordingly, the historical book values of the companies' assets
and liabilities were carried forward to the new company. In connection with the
merger, Pen-Tab Industries, Inc. recorded a charge to retained earnings of $295
relating to the cancellation of treasury stock previously held by the two
companies, and eliminated the treasury stock and related additional capital
balances.
On February 4, 1997, Pen-Tab Industries, Inc., a Virginia corporation,
changed its name to Pen-Tab Holdings, Inc. ("Holdings"). On February 4, 1997
Holdings formed a wholly owned subsidiary called Pen-Tab Industries, Inc. (the
"Company"), a Delaware corporation. On February 4, 1997, the Company issued $75
million 10 7/8% Senior Subordinated Notes due 2007 and Holdings effected a
recapitalization pursuant to which Holdings repurchased approximately 748
shares of Class A common stock and 122 shares of Class B common stock from
management shareholders for approximately $47,858, converted an additional 20
shares of Class A common stock and 358 shares of Class B common stock into
redeemable preferred stock, and sold 37 shares of Class A common stock, 3
shares of Class B common stock and 125,875 shares of redeemable preferred stock
to outside investors for proceeds of approximately $15,010. Holdings'
shareholders concurrently approved an amendment to Holdings' articles of
incorporation to increase the number of authorized shares to 8,352,500,
consisting of 6,000,000 shares of Class A Common Stock, par value $.01 per
share, 2,000,000 shares of Class B Common Stock, par value $.01 per share, and
352,500 shares of redeemable preferred stock. Following completion of the above
transactions, Holdings' shareholders approved a stock split pursuant to which
each share of Holdings' Class A Common Stock and Class B Common Stock then
outstanding was converted into 60,937.50 shares of such common stock.
On February 3, 1998, net assets of $1,500 of the Company's Vinylweld
division were contributed to a newly formed Delaware limited liability company
called Vinylweld L.L.C. The Company sold 20% of Vinylweld L.L.C. to Vinylweld's
president for $125. At January 2, 1999 the minority interest related to
Vinylweld was in a negative equity position, hence the net loss related to
Vinylweld's operations were not allocated to the minority interest.
On August 20, 1998, the Company acquired all of the capital stock of Stuart
Hall Company, Inc. ("Stuart Hall"). See Note 3 for details.
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.
2. Summary of Significant Accounting Policies
Method of Accounting
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles. The 1996 and 1998 fiscal years refer to the fifty-two week periods
ended December 28, 1996 and January 2, 1999, respectively, and the 1997 fiscal
year refers to the fifty-three week period ended January 3, 1998.
F-6
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Principles of consolidation
The consolidated financial statements include the accounts of the company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Revenue Recognition
Sales are recognized upon product shipment (FOB shipping point). All risks
and rewards of ownership pass to the customer upon shipment. Damaged or
defective products may be returned to the Company for replacement or credit.
The Company may offer certain volume rebates, co-op advertising and other
discounts and allowances. The effects of these discounts and allowances are
estimated and recorded at the time of shipment. Volume rebates are estimated
and recorded based on sales activity.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market and are valued using
the last-in, first-out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
on the straight-line method over the estimated useful lives of the related
assets. Leasehold improvements and assets held under capital leases are
amortized by the straight-line method over the shorter of the estimated useful
lives or the lease term. The principal estimated useful lives are: buildings 15
to 40 years; machinery and equipment 3 to 10 years; furniture and fixtures 3 to
5 years; leasehold improvements and assets held under capital leases 3 to 10
years.
Impairment of Long-Lived Assets
Each year, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." The
Company made no adjustments to the carrying values of the assets during the
years ended January 2, 1999 and January 3, 1998.
Goodwill
The excess of the purchase cost over the fair value of assets acquired is
being amortized over 40 years. The Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted future
cash flows over the remaining useful life to determine whether goodwill is
recoverable. The Company believes that no material impairment of goodwill
existed at January 2, 1999. The related accumulated amortization expense at
January 2, 1999 and January 3, 1998 was $578 and zero, respectively.
F-7
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Amortization of Debt Issue Costs
Debt issue costs are stated at cost and amortized to interest expense.
Amortization of debt issue costs is computed on the effective interest method
over the maturity of the applicable debt, which range from three years for the
Credit Facility, ten years for the Senior Subordinated Notes and twenty years
for the Industrial Development Revenue Bonds. The Company complies with
Statements of Financial Standards (FAS 121) "Accounting for the Impairment of
Long-Lived Assets" as related to its debt issue costs and other intangibles.
The related accumulated amortization expense at January 2, 1999 and January 3,
1998 was $1,140 and $433, respectively.
Advertising Costs
The Company expenses the costs of advertising as incurred. Such costs
amounted to approximately $1,596, $2,658, and $2,934 for fiscal 1998, 1997, and
1996, respectively.
Income Taxes
The Company accounts for income taxes and the related assets and liabilities
in accordance with FAS 109, "Accounting for Income Taxes". Provisions for
income taxes are based upon earnings reported for financial statement purposes
and may differ from amounts currently payable or receivable because certain
amounts are recognized for financial reporting purposes in different periods
than they are for income tax purposes. Deferred income taxes result from
temporary differences between the financial statement amounts of assets and
liabilities and their respective tax bases. Also see Note 8.
Fair Value of Financial Instruments
The Company considers the recorded value of its cash, cash equivalents,
accounts receivable and accounts payable to approximate the fair value of the
respective assets and liabilities at January 2, 1999 and January 3, 1998.
The fair value of the $75 million Senior Subordinated Notes based on a
quoted market price is 84% of the face value or $63 million at January 2, 1999.
The fair value of the swap agreement at January 2, 1999 was $747. The fair
value was determined based upon prevailing interest rates at January 2, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Derivative Financial Instruments
The Company utilizes derivative financial instruments principally to hedge
interest rates through an interest rate swap agreement. The Company actively
evaluates the credit worthiness of the financial institutions that are
counterparts to derivative financial instruments, and it does not expect any
counterparts to fail to meet their obligation. Premiums paid on the interest
swap agreement are amortized as interest expense over the term of the
agreement. Amounts received or paid under the swap agreement are recorded as a
reduction of or increase in interest expense, respectively.
F-8
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Risk and Uncertainties
The Company is potentially subjected to concentrations of credit risk with
trade accounts receivable. Because the Company has a large and diverse customer
base, there was no material concentration of credit risk related to trade
accounts receivable at January 2, 1999.
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.
During 1998, the Company adopted Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income", which had no effect since the
Company had no components of comprehensive income.
Reclassification
Certain amounts included in prior years' financial statements have been
reclassified to conform to the current year format.
3. Acquisition of Stuart Hall
On August 20, 1998, Pen-Tab acquired all of the outstanding stock of Stuart
Hall, a wholly-owned subsidiary of Newell Co. for $107 million in cash, subject
to adjustment based on the closing date balance sheet. Such adjustment is
estimated to be approximately $17.9 million (See Note 13). The purchase price
of the acquisition was funded by an equity contribution of $39.2 million from
Holdings and with borrowings under the Company's Credit Facility (see Note 7--
Long-Term Debt). The transaction was accounted for using the purchase method.
The purchase price was allocated to the assets and liabilities acquired based
on their estimated fair values. In conjunction with the acquisition, the
Company recorded goodwill of approximately $73 million. The operations of
Stuart Hall are included in the consolidated financial statements of the
Company beginning August 20, 1998 (date of acquisition).
The following unaudited pro forma results of operations assumes that the
acquisition of Stuart Hall had occurred at the beginning of fiscal 1998 and
1997, respectively. These pro forma results give effect to certain adjustments,
including depreciation of property, plant and equipment, amortization of
goodwill and interest expense resulting from the acquisition and related
financing. The pro forma results have been prepared for comparative purposes
only and do not purport to indicate the results of operations that would
actually have occurred had the combination been in effect on the date indicated
or which may occur in the future.
For the Year Ended
------------------------- ---
Jan. 2, 1999 Jan. 3, 1998
------------ ------------
Pro forma net sales unaudited................ $193,175 $187,570
======== ========
Pro forma net income unaudited............... $ 5,098 $ 3,367
======== ========
F-9
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
4. Unaudited Pro Forma Data
As described further in Note 8, the Company was taxed as an "S" corporation
during fiscal 1996. Upon completion of the recapitalization described in Note
1, Pen-Tab Industries, Inc. terminated its "S" corporation status. The pro
forma related statement of income and retained earnings for fiscal 1997 and
1996 reflect adjustments to the Company's income tax provision, as if the
Company had been taxed as a "C" corporation for the respective periods.
5. Inventories
Inventories consist of the following:
January 2, 1999 January 3, 1998
--------------- ---------------
Raw materials................................... $17,242 $ 8,993
Work-in-process................................. 715 372
Finished goods.................................. 23,844 13,129
LIFO reserve, net............................... -- (707)
------- -------
$41,801 $21,787
======= =======
Due to the decline in certain commodity grade paper prices, the inventory at
January 2, 1999 has been written down by approximately $2,036 to reflect the
inventory at the lower of cost or market.
For purposes of comparability, had LIFO inventories been reported at values
approximating current cost, as would have resulted from using the FIFO method,
and if no other assumptions were made as to changes in income, income before
taxes would have been lower in 1998, 1997 and 1996 by approximately $707, $257
and $3,620, respectively. The Company reports its inventory under the LIFO
method in order to better match its income and expenses. There were no
liquidations of LIFO inventories for the fiscal year ended January 2, 1999.
6. Dividends
Dividends for fiscal years 1998, 1997 and 1996 of $6, $40,212 and $9,401,
respectively, were paid to the stockholders' of the Company. The dividends for
the fiscal year 1997 included $5,695 paid to the stockholders' of the Company
in the period to February 3, 1997 and $34,517 paid by the Company to Holdings.
7. Long-Term Debt
Long-term debt consisted of the following:
January
2, January 3,
1999 1998
--------- ----------
Credit Facility:
Revolver............................................ $ 5,000 $ --
Term Loan........................................... 34,250 --
Senior Subordinated Notes............................. 75,000 75,000
Industrial development revenue bonds.................. 7,100 7,500
Equipment notes payable............................... 2,875 --
Capital lease obligations (see Note 9)................ 8,235 254
--------- -------
132,460 82,754
Less: current portion................................. 5,810 540
--------- -------
$ 126,650 $82,214
========= =======
F-10
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The Company had a Credit Agreement with Bank of America ("The Credit
Agreement") which provided for advances based upon a borrowing base comprised
of specified percentages of eligible accounts receivable, inventory, and
property, plant and equipment, up to an aggregate maximum of $35,000. The
interest rate per annum applicable to the Credit Agreement was the prime rate,
as announced by the Bank plus a margin from 0.0% to 0.7% or at the Company's
option, the Eurodollar rate plus a margin from 1.0% to 2.2% (based on the
Company's ratio of EBITDA minus capital expenditure to interest expense). Under
the terms of the Credit Agreement, the Company was required to maintain certain
financial ratios relating to cash flow and working capital, reduce the
principal balance of any loans outstanding to zero for a period of sixty days
beginning September 30 of each fiscal year and restrict the amount of dividends
that can be paid during the year. Except as noted below, all assets of the
Company were pledged as collateral for balances owing under this Credit
Agreement. The weighted average borrowing rate was 7.5%, 7.5% and 6.9% for
fiscal year 1998, 1997 and 1996, respectively.
In conjunction with the acquisition of Stuart Hall on August 20, 1998, the
Company repaid the outstanding obligations on the Credit Agreement 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 $35 million term loan has
aggregate maturities as follows: 1999 $3,500; 2000 $5,500; 2001 $25,250. The
Company paid $750 of principal during 1998. 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. 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
weighted average borrowing rate was 7.5% for fiscal year 1998.
The 10 7/8% Senior Subordinated Notes are due in 2007. The Indenture
contains certain covenants that, among other things, limits the ability of the
Company to incur additional indebtedness. During November 1997, the Company
entered into a swap agreement, which expires February, 2002, to swap its fixed
rate of payment on the $75,000 10 7/8% Senior Subordinated Notes for a floating
rate payment. The floating rate is based upon a basket of the LIBORS of three
countries plus a spread, and is capped at 12.5%. The interest rate resets every
six months and at January 2, 1999, the Company's effective interest rate under
the swap agreement was 10.5%. The Company can terminate the transaction at any
time, 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 (4.05%
as of January 2, 1999 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 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.
F-11
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
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: 1999 $986; 2000 $986; 2001 $903.
8. Income Taxes
The Company elected to be treated as an "S" corporation for federal income
tax purposes for 1996 under which income, losses, deductions and credits were
allocated to and reported by the company's stockholders based on their
respective ownership interests. Accordingly, no provision for income taxes was
required for 1996, except for certain state income taxes. Effective February 4,
1997, in conjunction with the Recapitalization described in Note 1, the Company
terminated its "S" corporation election.
The significant components of these amounts as shown on the Balance Sheet
are as follows:
1998 1997
------- ------
Current
Deferred Tax Assets
Allowance for bad debts................................... $ 110 $ 68
Inventory capitalization.................................. 186 95
Unused net operating loss................................. 314 232
LIFO reserve.............................................. 774 --
------- ------
1,384 395
Deferred Tax Liability
LIFO reserve.............................................. -- 535
------- ------
Net Current Deferred Tax (Asset) Liability.................. $(1,384) $ 140
======= ======
Non-current
Deferred Tax Liability
Property, plant and equipment............................. $ 1,897 $1,879
Goodwill.................................................. 1,171 --
------- ------
Net Non-Current Deferred Tax Liability...................... $ 3,068 $1,879
======= ======
Total Net Deferred Tax Liability............................ $ 1,684 $2,019
======= ======
The components of income tax (benefit) provision from continuing operations
are:
1998 1997 1996
----- ------ -----
Current
Federal............................................. $ -- $ -- $ 95
State............................................... -- (30) --
----- ------ -----
-- (30) 95
Deferred
Federal............................................. (304) 1,691 --
State............................................... (31) 284 (286)
----- ------ -----
(335) 1,975 (286)
----- ------ -----
Income tax (benefit) provision........................ $(335) $1,945 $(191)
===== ====== =====
F-12
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The differences between the (benefit) provision for income taxes and income
taxes computed at the statutory U.S. federal income tax rates are explained as
follows:
1998 1997 1996
----- ------ -------
Income tax (benefit) provision computed at the
statutory U.S. federal income tax rates.......... $(345) $ (306) $ 4,494
State income taxes, net of federal benefit........ (40) (36) 99
Change in entity status........................... -- 2,343 --
(Income) loss taxed at shareholders level......... -- 108 (4,494)
Other, including permanent differences............ 50 (164) (290)
----- ------ -------
(Benefit) provision for income taxes.............. $(335) $1,945 $ (191)
===== ====== =======
No valuation allowance has been recorded as of January 2, 1999 related to
the deferred tax assets. The Company believes it is more likely than not that
the Company's deferred tax assets will be realized. The Company has available
for federal income tax purposes a $826 net operating loss, which expires
substantially in 2012.
During fiscal 1997, the Company was taxed as an "S" corporation for the
period ended February 3, 1997 and as a "C" corporation for the period
thereafter. The Company recorded a cumulative deferred tax liability of $2,343
upon termination of the Company's "S" corporation election.
9. Leases and Commitments
The Company leases certain office, manufacturing and warehouse facilities in
California and Chicago under operating leases which expire in May 2002 and
December 2009, respectively. The Company also leases certain office,
manufacturing and warehouse facilities in Kansas City under long term capital
leases that expire in December 2005, and are included in property, plant and
equipment as buildings. The assets held under capital leases are as follows:
1998 1997
------ ----
Buildings.................................................... $8,783 $--
Less: Accumulated amortization............................... 304 --
------ ----
Total...................................................... $8,479 $--
====== ====
Future minimum lease payments under non-cancelable operating and capital
leases are as follows, as of January 2, 1999:
Fiscal year Operating Capital
----------- --------- -------
1999................................................... $1,464 $ 1,726
2000................................................... 1,466 1,582
2001................................................... 1,375 1,582
2002................................................... 726 1,582
2003................................................... 633 1,582
Thereafter............................................. 1,454 3,438
------ -------
Total.................................................. $7,118 $11,492
======
Imputed interest....................................... (3,257)
-------
Present value.......................................... $ 8,235
=======
F-13
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Rent expense was approximately $1,353, $1,197 and $1,148 in fiscal 1998,
1997 and 1996, respectively. Amortization of the capital lease assets are
included in depreciation expense.
At January 2, 1999 and January 3, 1998, the Company had standby letters of
credit outstanding in the amounts of $197 and $457 issued by a bank on behalf
of Pen-Tab in connection with a license contract and a worker's compensation
insurance program, respectively. See also Note 7.
10. Reorganization Expenses
During fiscal 1997, the Company reorganized its sales and marketing
functions. The non-recurring charges of $804 for recruitment and acquisition
costs of new sales and marketing executives as well as the severance costs of
terminated sales employees are reported as reorganization expenses in the
statements of income and retained earnings.
11. Concentration of Risk
During fiscal 1998, 1997 and 1996 the Company had two customers each in
excess of 10% of revenues as follows:
1998 1997 1996
---- ---- ----
Customer A............................................... 16.9% 21.7% 22.3%
Customer B............................................... 13.3% 17.4% 15.8%
---- ---- ----
Total.................................................. 30.2% 39.1% 38.1%
==== ==== ====
Employees covered under collective bargaining agreements represent
approximately 67% of the Company's work force. Collective bargaining agreements
covering approximately 22% of the Company's work force have expiration dates
within one year.
12. Defined Contribution Plan
The Company sponsors a 401(k) plan in which nonunion full-time employees
meeting certain age and employment requirements are eligible for participation.
Participating employees can contribute between 2% and 15% of their annual
compensation. The Company matches employee contributions at a rate of 50% of
the employee's annual contributions up to 2.5% of the employee's annual
compensation. Total expense under the plan amounted to $220, $136 and $42 in
fiscal 1998, 1997 and 1996, respectively.
The Company also contributes to union sponsored multi-employer defined
contribution pension plans. All union employees meeting certain employment
requirements are covered. Total expense under the union sponsored plans
amounted to $87, $24, and $21 in fiscal 1998, 1997 and 1996, respectively.
13. Contingencies
As described in Note 3, the Company's acquisition of Stuart Hall is subject
to a purchase price adjustment based on the closing date balance sheet. The
Company and the seller, Newell Co., are disputing the closing date balance
sheet amounts. The Company has recorded a liability at January 2, 1999 of $17.9
million, representing the amount which the Company believes is owed to Newell
Co. Newell Co. believes the amount due them is $24.8 million, $6.9 million
higher than what the Company has recorded. The matter will likely
F-14
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
proceed to formal arbitration. The Company believes that it has meritorious
defenses to its position and intends to vigorously defend its position. Any
difference will be accounted for as an adjustment to goodwill and reflected in
the amortization going forward. The Company can not estimate at this time the
amount of additional liability to be incurred if any, but does not believe that
this matter will have a material adverse effect upon the Company's financial
position or results of operations.
14. Segment Information
As described in Note 1, the Company operates in two business segments
consisting of school, home and office products, and vinyl packaging products.
The following table provides certain financial data regarding these two
segments.
School,
Home
And Vinyl
Office Packaging
Products Products Total
-------- --------- --------
1998
Net sales..................................... $114,791 $ 9,291 $124,082
Operating earnings (loss)..................... 10,517 (148) 10,369
Interest expense, net......................... 11,413 -- 11,413
Identifiable assets........................... 178,608 3,335 181,943
Depreciation and amortization................. 4,692 200 4,892
Capital expenditures.......................... 2,175 679 2,854
1997
Net sales..................................... $ 88,014 $ 8,623 $ 96,637
Operating earnings............................ 6,905 389 7,294
Interest expense, net......................... 8,194 -- 8,194
Identifiable assets........................... 61,578 2,214 63,792
Depreciation and amortization................. 2,770 198 2,968
Capital expenditures.......................... 1,498 64 1,562
1998
Net sales..................................... $ 96,402 $10,467 $106,869
Operating earnings............................ 13,981 1,579 15,560
Interest expense, net......................... 2,346 -- 2,346
Identifiable assets........................... 40,981 2,523 43,504
Depreciation and amortization................. 2,146 218 2,364
Capital expenditures.......................... 794 96 890
For the purposes of the segment information provided, in accordance with
Statement of Financial Accounting Standard No. 131, "Disclosures about segments
of an Enterprise and Related Information", operating earnings are defined as
net sales less related cost of goods sold, selling, general and administration
expenses, amortization of goodwill and reorganization expenses. Inter-segment
sales are immaterial.
F-15
STUART HALL COMPANY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As of December 31, 1997, 1996 and 1995
F-16
ARTHUR ANDERSEN LLP [ARTHUR ANDERSEN COMPANY LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Stuart Hall Company, Inc.:
We have audited the accompanying consolidated balance sheets of Stuart Hall
Company, Inc. (a Missouri corporation and wholly owned subsidiary of Newell
Co.) as of December 31, 1997, 1996 and 1995, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Stuart Hall
Company, Inc. as of December 31, 1997, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
May 22, 1998.
F-17
STUART HALL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of December 31, 1997, 1996 and 1995
1997 1996 1995
-------- -------- --------
ASSETS
CURRENT ASSETS:
Cash............................................. $ 1 $ 1 $ 1
Accounts receivable, net......................... 8,775 7,855 8,417
Receivable from parent........................... 37 -- --
Inventories, net................................. 20,056 18,179 29,352
Deferred income taxes............................ 3,980 3,340 3,348
Prepaid expenses and other....................... 2,018 2,095 1,146
-------- -------- --------
Total current assets........................... 34,867 31,470 42,264
OTHER ASSETS..................................... 45 52 61
PROPERTY, PLANT AND EQUIPMENT, NET............... 24,310 26,152 29,363
TRADE NAMES AND GOODWILL, NET.................... 49,287 50,714 52,309
Total assets................................... $108,509 $108,388 $123,997
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 2,124 $ 2,111 $ 2,217
Accrued compensation............................. 754 919 1,401
Other accrued liabilities........................ 3,213 2,676 3,636
Taxes payable to parent.......................... 3,095 4,046 5,131
Other payable to parent.......................... -- 1,649 18,822
Current portion of long-term debt................ 986 986 986
Current portion of capitalized obligation........ 914 848 787
-------- -------- --------
TOTAL CURRENT LIABILITIES........................ 11,086 13,235 32,980
LONG-TERM DEBT................................... 2,875 3,861 4,847
CAPITALIZED LEASE OBLIGATION..................... 9,303 10,217 11,065
DEFERRED INCOME TAXES............................ 2,440 2,143 1,688
STOCKHOLDER'S EQUITY:
Common Stock--1,000 authorized and outstanding
shares
at $.01 par value............................... 1 1 1
Additional paid in capital....................... 75,576 75,576 75,576
Retained earnings................................ 7,246 3,358 (2,157)
Cumulative translation adjustment................ (18) (3) (3)
-------- -------- --------
Total stockholder's equity....................... 82,805 78,932 73,417
-------- -------- --------
Total liabilities and stockholder's equity....... $108,509 $108,388 $123,997
======== ======== ========
The accompanying notes are an integral part of these balance sheets.
F-18
STUART HALL COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------- ------- -------
NET SALES.............................................. $87,183 $85,653 $98,222
COST OF PRODUCTS SOLD.................................. 65,732 60,029 68,386
------- ------- -------
Gross income......................................... 21,451 25,624 29,836
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 11,922 12,550 12,686
------- ------- -------
Operating income..................................... 9,529 13,074 17,150
NONOPERATING EXPENSE:
Interest expense..................................... 1,252 1,330 1,503
Other, net........................................... 1,206 1,941 2,038
------- ------- -------
Income before income taxes........................... 7,071 9,803 13,609
INCOME TAXES........................................... 3,183 4,288 5,645
------- ------- -------
Net income........................................... $ 3,888 $ 5,515 $ 7,964
======= ======= =======
The accompanying notes are an integral part of these statements.
F-19
STUART HALL COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands)
For the Years Ended December 31, 1997, 1996 and 1995
Additional Cumulative
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment Total
------ ---------- -------- ----------- -------
BALANCE, December 31, 1994.... $ 1 $75,576 $(10,121) $ (1) $65,455
Net income.................. -- -- 7,964 -- 7,964
Foreign currency
translation................ -- -- -- (2) (2)
---- ------- -------- ---- -------
BALANCE, December 31, 1995.... 1 75,576 (2,157) (3) 73,417
Net income.................. -- -- 5,515 -- 5,515
Foreign currency
translation................ -- -- -- -- --
---- ------- -------- ---- -------
BALANCE, December 31, 1996.... 1 75,576 3,358 (3) 78,932
Net income.................. -- -- 3,888 -- 3,888
Foreign currency
translation................ -- -- -- (15) (15)
---- ------- -------- ---- -------
BALANCE, December 31, 1997.... $ 1 $75,576 $ 7,246 $(18) $82,805
==== ======= ======== ==== =======
The accompanying notes are an integral part of these statements.
F-20
STUART HALL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------- -------- -------
OPERATING ACTIVITIES:
Net income...................................... $ 3,888 $ 5,515 $ 7,96?
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization................. 4,833 5,016 4,048
Deferred income taxes......................... (343) 463 1,216
Loss on sale of equipment..................... 16 43 102
Changes in current accounts--
Accounts receivable........................... (920) 562 (553)
Receivable from/payable to parent, net........ (2,637) (18,258) (7,973)
Inventories................................... (1,877) 11,173 3,806
Prepaid expenses and other.................... 77 (949) (285)
Accounts payable.............................. 13 (106) (299)
Accrued expenses and other.................... 357 (1,277) (4,387)
------- -------- -------
Net cash provided by operating activities... 3,407 2,182 3,639
------- -------- -------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment.. (1,693) (1,039) (3,748)
Proceeds from disposals of property, plant and
equipment...................................... 120 630 1,834
------- -------- -------
Net cash used in investing activities....... (1,573) (409) (1,914)
------- -------- -------
FINANCING ACTIVITIES:
Payments of long-term debt...................... (986) (986) (986)
Settlement of capital lease obligation.......... (848) (787) (739)
------- -------- -------
Net cash used in financing activities....... (1,834) (l,773) (1,725)
------- -------- -------
Net change in cash.......................... -- -- --
CASH, beginning of year........................... 1 1 1
------- -------- -------
CASH, end of year................................. $ 1 $ l $ 1
------- -------- -------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for--
Income taxes.................................. $ 4,478 $ 4,908 $ 3,480
Interest...................................... 1,055 1,205 1,351
The accompanying notes are an integral part of these statements.
F-21
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 AND 1995
(1) Description of the Business
Stuart Hall Company, Inc. ("Stuart Hall" or the "Company"), a wholly owned
subsidiary of Newell Co. ("Newell"), is a leading manufacturer and personal
marketer of school, office and personal communication paper products.
In 1992, all of the outstanding common stock of Stuart Hall was acquired by
Newell. The transaction was accounted for as a purchase business combination.
The excess cost over identifiable assets was recorded as goodwill on the
Company's books.
(2) Significant Accounting Policies
Principles of consolidation
The consolidated results of the Company include the accounts of its Canadian
affiliate. All intercompany accounts between the Company and its affiliate are
eliminated in consolidation
Use of estimates
The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenue and expenses and related disclosures.
Revenue recognition
Sales of merchandise are recognized upon shipment to customers.
Allowances for doubtful accounts
Allowances for doubtful accounts totaled $149,000, $165,000 and $170,000 at
December 31, 1997, 1996 and 1995, respectively.
Inventories
Inventories are stated at the lower of cost or market value. Cost of certain
domestic inventories was determined by the "last in, first out" ("LIFO")
method. If the "first in, first out" ("FIFO") inventory valuation method had
been used exclusively, inventories would have increased by $3,746,000,
$5,954,000 and $8,374,000 at December 31, 1997, 1996, and 1995, respectively.
The components of inventories at December 31, net of the LIFO reserve, were
as follows:
1997 1996 1995
----------- ----------- -----------
Materials and supplies.............. $ 7,040,000 $ 7,065,000 $ 9,078,000
Work in process..................... 1,083,000 203,000 577,000
Finished products................... 11,933,000 10,911,000 19,697,000
----------- ----------- -----------
$20,056,000 $18,179,000 $29,352,000
=========== =========== ===========
Inventory reserves at December 31, totaled $2,729,000 in 1997, $2,453,000 in
1996, and $3,340,000 in 1995.
F-22
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Property, plant and equipment
Property, plant and equipment at December 31 consisted of the following:
1997 1996 1995
------------ ------------ ------------
Land............................. $ -- $ -- $ --
Buildings and improvements....... 16,721,000 16,651,000 16,541,000
Machinery and equipment.......... 27,189,000 28,622,000 29,875,000
Furniture and fixtures........... 1,843,000 1,842,000 1,144,000
Construction in process.......... 1,369,000 250,000 862,000
Accumulated depreciation......... (22,812,000) (21,213,000) (19,059,000)
------------ ------------ ------------
$ 24,310,000 $ 26,152,000 $ 29,363,000
============ ============ ============
Replacements and improvements are capitalized. Expenditures for maintenance
and repairs are charged to expense. The components of depreciation are provided
by annual charges to income calculated to amortize on the straightline basis,
the cost of the depreciable assets over their depreciable lives. Estimated
useful lives determined by the Company are as follows:
Buildings and improvements....... 20-40 years
Machinery and equipment.......... 5-12 years
Trade names and goodwill
The cost of trade names and goodwill are amortized over 40 years on a
straight-line basis. Total accumulated amortization of trade names and goodwill
was $7,755,000, $6,330,000 and $4,900,000 at December 31, 1997, 1996 and 1995,
respectively.
The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. If factors indicate that goodwill should be evaluated for possible
impairment, the Company would use an estimate of the undiscounted net cash flow
over the remaining life of the goodwill in measuring whether the goodwill is
recoverable.
Accrued liabilities
Other accrued liabilities at December 31 included the following:
1997 1996 1995
---------- ---------- ----------
Customer accruals....................... $1,273,000 $ 857,000 $ 766,000
Workers compensation accrual............ 577,000 377,000 636,000
Other accruals.......................... 1,363,000 1,442,000 2,234,000
---------- ---------- ----------
$3,213,000 $2,676,000 $3,636,000
========== ========== ==========
Customer accruals are promotional allowances and rebates given to customers
in exchange for their selling efforts. Workers' compensation is estimated based
upon historical claim experience.
F-23
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Foreign currency translation
The balance sheet accounts of the Company's Canadian affiliate are
maintained in Canadian dollars. These accounts are translated into U.S. dollars
at the rates of exchange in effect at fiscal yearend. Income and expense
accounts are translated at the average rates of exchange in effect during the
year. The related translation adjustment is made directly to a separate
component of stockholder's equity.
Accounting principles adopted
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The adoption of this statement in 1996 was not
material to the consolidated financial statements.
(3) Long-Term Debt
The Company has a series of privately placed notes with CIT Group/Equipment
Financing Inc. The notes bear interest at various fixed amounts and mature at
various dates through 2001. Following is a summary of debt outstanding at
December 31, 1997, 1996 and 1995:
1997 1996 1995
---------- ---------- ----------
9.77% note, issued December 28, 1990,
maturing
December 28, 2000........................... $ 251,000 $ 335,000 $ 418,000
9.61% note, issued February 4, 1991, maturing
February 4, 2001............................ 1,993,000 2,491,000 2,989,000
9.80% note, issued March 28, 1991, maturing
March 28, 2001.............................. 827,000 1,033,000 1,240,000
9.67% note, issued May 29, 1991, maturing May
29, 2001.................................... 620,000 775,000 930,000
10.85% note, issued July 24, 1991, maturing
July 24, 2001............................... 116,000 145,000 174,000
8.95% note, issued December 27, 1991,
maturing
December 27, 2001........................... 54,000 68,000 82,000
---------- ---------- ----------
3,861,000 4,847,000 5,833,001
Less--Current portion........................ 986,000 986,000 986,000
---------- ---------- ----------
$2,875,000 $3,861,000 $4,847,000
========== ========== ==========
The notes are subject to various financial and non-financial covenants with
which the Company is in compliance at December 31, 1997.
The aggregate maturities of long-term debt outstanding at December 31, 1997,
are as follows:
Minimum
Year Payments
---- ---------
1998.................................... $ 986,000
1999.................................... 986,000
2000.................................... 986,000
2001.................................... 903,000
2002.................................... --
Thereafter.............................. --
---------
$3,861,00
=========
F-24
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
(4) Leases
The Company leases certain facilities under long-term capitalizable leases,
which are included in property, plant and equipment as buildings.
1997 1996 1995
----------- ----------- -----------
Buildings............................. $13,720,000 $13,720,000 $13,720,000
Less--Accumulated amortization........ 4,330,000 3,418,000 2,507,000
----------- ----------- -----------
Total............................... $ 9,390,000 $10,302,000 $11,213,000
=========== =========== ===========
Future minimum lease payments for assets under capital leases at December 31
are as follows:
1998.......................................................... $ 1,649,000
1999.......................................................... 1,649,000
2000.......................................................... 1,649,000
2001.......................................................... 1,649,000
2002.......................................................... 1,649,000
Thereafter.................................................... 5,615,000
-----------
$13,860,000
===========
Total minimum lease payments.................................. $13,860,000
Less--Amount representing interest............................ 3,643,000
-----------
Present value of minimum lease payment........................ 10,217,000
Less--Current maturities...................................... 914,000
-----------
Long-term obligation.......................................... $ 9,303,000
===========
At December 31, the Company has minimum rental payments through the year
2003 under noncancellable operating leases as follows:
Minimum
Year Payments
---- --------
1998..................................... $228,000
1999..................................... 195,000
2000..................................... 156,000
2001..................................... 122,000
2002..................................... 122,000
Thereafter............................... 31,000
--------
$854,000
========
Total rental expense for all operating leases was approximately $543,000,
512,000 and $567,000 in 1997, 1996 and 1995.
(5) Retirement Plans
Salaried and hourly employees that meet certain requirements are eligible to
participate in the Newell Pension Plan for Salaried and Clerical Employees. The
pension plan is administered by Newell. Factory hourly employees that meet
certain requirements are eligible to participate in the Paper Industry Union
Management
F-25
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Pension Fund, a multiemployer plan. The plan is administered by a joint Board
of Trustees consisting of four Union representatives and four employer
representatives from participating companies. Newell pays the Company's portion
of the plans' costs and funding requirements. The Company reimburses Newell for
these costs. Total expense under these plans was $291,000, $188,000 and
$245,000 for 1997, 1996, and 1995.
The employees of the Company are also eligible to participate in the Newell
Co. LongTerm Savings and Investment Plan. The Company matches a portion of the
employees' contribution. Profit sharing expense was $89,000, $87,000 and
$87,000 for 1997, 1996 and 1995.
(6) Income Taxes
The Company accounts for income taxes as prescribed by SFAS No. 109,
"Accounting for Income Taxes." For U.S. income tax purposes, the Company's
income is included in Newell Co.'s consolidated Federal income tax return. As a
result, the Company records Federal taxes as an intercompany transaction with
Newell.
The provision for income taxes for the years ended December 31 consists of
the following (computed on the basis of the Company as a standalone entity for
U.S. Federal income tax purposes):
1997 1996 1995
---------- ---------- ----------
Current
Federal................................ $3,264,000 $3,540,000 $4,037,000
State.................................. 262,000 285,000 392,000
---------- ---------- ----------
3,526,000 3,825,000 4,429,000
Deferred................................. (343,000) 463,000 1,216,000
---------- ---------- ----------
Total................................ $3,183,000 $4,288,000 $5,645,000
========== ========== ==========
The components of the net deferred tax assets at December 31 are as follows:
1997 1996 1995
---------- ---------- ----------
Deferred tax assets--
Accruals, not currently deductible for
tax purposes........................... $ 539,000 $ 556,000 $ 509,000
Inventory reserves...................... 787,000 409,000 1,390,000
Repair parts and supplies............... 1,046,000 955,000 837,000
Other................................... 1,585,000 1,362,000 736,000
---------- ---------- ----------
3,957,000 3,282,000 3,472,000
Deferred tax liabilities--
Accelerated depreciation................ 2,417,000 2,085,000 1,812,000
---------- ---------- ----------
2,417,000 2,085,000 1,812,000
---------- ---------- ----------
Net deferred tax asset (liability).... $1,540,000 $1,197,000 $1,660,000
========== ========== ==========
F-26
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
The net deferred tax asset is classified in the consolidated balance sheets
at December 31 as follows:
1997 1996 1995
---------- ----------- -----------
Current net transferred income tax
asset................................ $3,980,000 $ 3,340,000 $ 3,348,000
Noncurrent deferred income tax
liability............................ (2,440,000) (2,143,000) (1,688,000)
---------- ----------- -----------
$1,540,000 $ 1,197,000 $ 1,660,000
========== =========== ===========
A reconciliation of the U.S. statutory tax provision to the effective income
tax provision for the years ended December 31 is as follows:
1997 1996 1995
---------- ----------- -----------
Statutory Federal income tax.......... $2,404,000 $ 3,333,000 $ 4,627,000
Add (deduct) effect of--
State income taxes, net of federal
income
tax effect......................... 282,000 372,000 499,000
Nondeductible trade goodwill........ 532,000 533,000 545,000
Other................................. (35,000) 50,000 (26,000)
---------- ----------- -----------
Effective rate...................... $3,183,000 $ 4,288,000 $ 5,645,000
========== =========== ===========
(7) Other Nonoperating Expense
Total other nonoperating expense consists of the following expense (income)
items for the years ended December 31:
1997 1996 1995
---------- ----------- -----------
Trade names and goodwill
amortization......................... $1,427,000 $ 1,430,000 $ 1,460,000
Management bonuses.................... 426,000 702,000 539,000
Intercompany profit................... (153,000) (37,000) (64,000)
Loss on sale of machinery............. 16,000 43,000 102,000
Insurance proceeds.................... (550,000) -- --
Other................................. (1,000) (197,000) 1,000
---------- ----------- -----------
$1,206,000 $ 1,941,000 $ 2,038,000
========== =========== ===========
(8) Significant Customer
Sales to one customer accounted or 31.3%, 32.3% and 38.3% of net sales in
1997, 1996 and 1995. At December 31, 1997, 1996 and 1995, receivables from this
customer accounted for 25.1%, 14.7% and 24.3% of the Company's net trade
accounts receivable, respectively.
(9) Transactions with Newell Co.
Newell Co. provides centralized services to the Company including treasury
management, cash management, receivables processing, payables processing,
computer information services and payroll processing. Newell Co. allocated
$500,000 for these services to the Company annually. The management of Newell
Co. believes the allocations are reasonable, but they are not necessarily
indicative of the costs that would have been incurred had Stuart Hall been a
Standalone company.
F-27