United States
Securities and Exchange Commission
Washington, D.C. 20549-1004
Form 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended October 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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of October 2, 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.
PEN-TAB INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 2, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
a) Condensed Consolidated Balance Sheets as of October 2, 1999
and January 2, 1999 1
b) Condensed Consolidated Statements of Operations for the
quarters and nine months ended October 2, 1999
and October 3, 1998 2
c) Condensed Consolidated Statements of Cash Flows for the
nine months ended October 2, 1999 and October 3, 1998 3
d) Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
Pen-Tab Industries, Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
October 2, January 2,
1999 1999
------------- --------------
(Unaudited)
Assets
Currents assets:
Cash and cash equivalents $ -- $ 20
Accounts receivable, net of allowances of $11,846 and
$2,325, respectively 38,293 15,770
Inventories, net 45,086 41,801
Prepaid expenses and other current assets 1,780 611
Deferred income taxes 1,384 1,384
------------ -------------
Total Current Assets 86,543 59,586
Property, plant and equipment, net of accumulated
depreciation of $20,828 and $16,222, respectively 43,102 45,538
Debt issuance costs, net 3,658 4,339
Goodwill, net 73,027 72,480
------------ -------------
Total assets $206,330 $181,943
============ =============
Liabilities and stockholder's equity:
Current liabilities:
Accounts payable and bank overdraft $ 1,261 $ 5,804
Accrued expenses and other current liabilities 6,476 8,224
Due to Newell Co. -- 18,546
Accrued interest on subordinated notes 1,316 3,324
Current portion of long-term debt 38,798 5,810
------------ -------------
Total current liabilities 47,851 41,708
Long-term debt 134,081 119,339
Capitalized lease obligation 6,620 7,311
Deferred income taxes 4,532 3,068
Stockholder's equity 13,246 10,517
------------ -------------
Total liabilities and stockholder's equity $206,330 $181,943
============ =============
See accompanying notes to unaudited condensed consolidated interim financial statements
1
Pen-Tab Industries, Inc.
Condensed Consolidated Statements of Operations
Unaudited
(Dollars in Thousands)
Quarter Ended Nine Months Ended
--------------------------------- --------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Net sales $55,706 $43,299 $142,612 $98,739
Cost of goods sold 43,641 32,795 101,427 73,811
-------------- -------------- -------------- --------------
Gross profit 12,065 10,504 41,185 24,928
Expenses:
Selling, general and
administrative 8,743 6,983 22,650 16,005
Amortization of goodwill 464 142 1,401 142
Interest expense, net 4,244 2,900 12,512 7,161
-------------- -------------- --------------- --------------
Total expenses 13,451 10,025 36,563 23,308
-------------- -------------- -------------- --------------
Income (loss) before income (1,386) 479 4,622 1,620
taxes
Income tax provision (benefit) (676) 182 1,812 616
-------------- -------------- -------------- --------------
Net income (loss) $ (710) $ 297 $ 2,810 $ 1,004
============== ============== ============== ==============
See accompanying notes to unaudited condensed consolidated interim financial statements
2
Pen-Tab Industries, Inc.
Condensed Consolidated Statements of Cash flows
(Dollars in Thousands)
Nine Months Ended
-----------------------------------
October 2, October 3,
1999 1998
-------------- --------------
(Unaudited) (Unaudited)
Operating activities
Net income $ 2,810 $ 1,004
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 4,605 2,067
Amortization of goodwill 1,401 --
Amortization of debt issuance costs 681 487
Deferred income taxes 1,464 --
Provision for losses on accounts receivable 580 286
Changes in operating assets and liabilities:
Accounts receivable (23,103) 8,258
Inventories (3,285) (2,283)
Prepaid expenses and other current assets (1,169) (1,526)
Accounts payable and bank overdraft (4,543) (1,782)
Due to Newell Co. (18,546) 22,000
Accrued expenses and other current liabilities (1,748) 3,367
Accrued interest on subordinated notes (2,008) (2,135)
-------------- --------------
Net cash provided by (used in) operating activities (42,861) 29,743
Investing activities
Sale of minority interest in Vinylweld LLC -- 125
Purchase of equipment (2,169) (2,275)
Purchase of Stuart Hall - purchase price adjustment (1,948) (129,000)
-------------- --------------
Net cash used in investing activities (4,117) (131,150)
Financing activities
Proceeds from revolver borrowings 79,750 139,308
Repayments of revolver borrowings (28,250) (125,359)
Proceeds from long-term debt -- 35,000
Principal payments on long-term debt (3,475) (400)
Principal payments on capitalized lease obligations (986) --
Dividends to Pen-Tab Holdings (81) (18)
Equity Contribution from Pen-Tab Holdings -- 39,200
-------------- --------------
Net cash provided by financing activities 46,958 87,731
Decrease in cash and cash equivalents (20) (13,676)
Cash and cash equivalents at beginning of period 20 13,676
-------------- --------------
Cash and cash equivalents at end of period $ -- $ --
============== ==============
See accompanying notes to unaudited condensed consolidated interim financial statements
3
Pen-Tab Industries, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
October 2, 1999
(Dollars in thousands)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Pen-
Tab Industries, Inc. have been prepared in accordance with generally accepted
accounting principles applicable for interim financial information and with the
instructions to form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended October 2, 1999 are not necessarily indicative of
the results that may be expected for the year ended January 2, 2000. All
references to fiscal quarter refer to the 13 week periods ended October 2, 1999
and October 3, 1998. These financial statements should be read in conjunction
with the audited financial statements of Pen-Tab Industries, Inc. as of January
2, 1999 and January 3, 1998 and for each of the three years in the period ended
January 2, 1999, included in the Company's form 10-K (#333-24519) as filed with
the Securities and Exchange Commission.
2. Recently Issued Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), which requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and that those instruments
shall be measured at fair value. SFAS No. 133 also prescribes the accounting
treatment for changes in the fair value of derivatives which depends on the
intended use of the derivative and the resulting designation. Designations
include hedges of the exposure to changes in the fair value of a recognized
asset or liability, hedges of the exposure to variable cash flows of a
forecasted transaction, hedges of the exposure to foreign currency translations,
and derivatives not designated as hedging instruments. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. The Company expects
to adopt SFAS No. 133 in the first quarter of the year 2001. The financial
statement impact of adopting SFAS No. 133 has not yet been determined.
4
3. Inventories
Inventories consist of the following:
October 2, January 2,
1999 1999
-------------- --------------
Raw materials $19,806 $17,242
Work-in-process 875 715
Finished goods 24,405 23,844
LIFO reserve, net - -
-------------- --------------
$45,086 $41,801
============== ==============
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time. However,
Pen-Tab's current expectation is that its inventory levels will remain
consistent from year-end to year-end. Accordingly, interim LIFO calculations
are necessarily based on management's estimates of expected year-end inventory
levels and costs. Because these are subject to many forces beyond management's
control, interim results are subject to the final year-end LIFO inventory
valuation.
4. Long-Term Debt
Long-term debt consisted of the following:
October 2, January 2,
1999 1999
------------- -------------
Credit Facility:
Revolver $ 56,500 $ 5,000
Term Loan 32,000 34,250
Senior Subordinated Notes 75,000 75,000
Industrial development revenue bonds 6,700 7,100
Equipment notes payable 2,050 2,875
Capital lease obligations 7,249 8,235
------------- -------------
179,499 132,460
Less: current portion 38,798 5,810
------------- -------------
$140,701 $126,650
============= =============
In conjunction with the acquisition of Stuart Hall on August 20, 1998, the
Company repaid the outstanding obligations on a Credit Agreement with Bank of
America and entered into a new $135 million Credit Facility ("Credit Facility")
with Bank of America which expires on August 20, 2001. The Credit Facility
includes a $100 million revolver and a $35 million term loan. The $100 million
revolver portion of the Credit Facility
5
4. Long-Term Debt (continued)
provides for advances based upon a borrowing base comprised of specified
percentages of eligible accounts receivable and inventory. The interest rate per
annum applicable to the Credit Facility is the prime rate, as announced by the
Bank plus a sliding scale of 0.75% to 1.50% or at the Company's option, the
Eurodollar rate plus a sliding scale of 1.75% to 2.625%. The Company is required
to pay a commitment fee of 0.6% 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 January 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 Company was not in compliance with the fixed charge coverage ratio covenant
for the fiscal quarter ended October 2, 1999. The Company has obtained an
amendment and waiver to the Credit Facility waiving the Company's compliance
with the fixed charge coverage ratio covenant for the fiscal quarter ended
October 2, 1999.
The 10 7/8% Senior Subordinated Notes are due in 2007. The Indenture contains
certain covenants that, among other things, limits the ability of the Company to
incur additional indebtedness. During November 1997, the Company entered into a
swap agreement, which expires February, 2002, to swap its fixed rate of payment
on the $75,000 10 7/8% Senior Subordinated Notes for a floating rate payment.
The floating rate is based upon a basket of the LIBORS of three countries plus a
spread, and is capped at 12.5%. The interest rate resets every six months. The
Company can terminate the transaction at any time, at the then current fair
market value of the swap instrument.
5. Segment Information
The Company operates in two business segments consisting of school, home and
office products, and vinyl packaging products. The following table provides
certain financial data regarding these two segments.
School, Home Vinyl
And Office Packaging
Products Products Total
------------------- ---------------- ---------------
Nine months ended October 2, 1999
Net sales (external customers) $ 136,339 $ 6,273 $ 142,612
Operating earnings (loss) 17,489 (355) 17,134
Interest expense, net 12,512 -- 12,512
Identifiable assets 202,802 3,528 206,330
Depreciation and amortization 4,424 181 4,605
Capital expenditures 2,007 153 2,160
6
5. Segment Information(Continued) School, Home Vinyl
And Office Packaging
Products Products Total
------------------- ---------------- ---------------
Nine months ended October 3, 1998
Net sales (external customers) $ 91,711 $7,028 $ 98,739
Operating earnings (loss) 8,734 47 8,781
Interest expense, net 7,161 -- 7,161
Identifiable assets 197,204 4,141 201,345
Depreciation and amortization 1,933 134 2,067
Capital expenditures 1,932 343 2,275
For the purposes of the segment information provided above, operating earnings
are defined as net sales less related cost of goods sold, selling, general and
administration expenses and amortization of goodwill. Inter-segment sales are
immaterial.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the quarter ended October 2, 1999 increased by $12.4 million or
28.7% to $55.7 million from $43.3 million for the quarter ended October 3, 1998.
Net sales for the nine months ended October 2, 1999 increased by $43.9 million
or 44.4% to $142.6 million from $98.7 million for the nine months ended October
3, 1998. The increase in sales is primarily due to the acquisition of Stuart
Hall on August 20, 1998, and is partially offset by an approximate 10% decrease
in selling prices resulting from a decrease in the cost of paper. For the
School, Home and Office Products segment, which includes the Stuart Hall
operations, differentiated higher margin product sales increased by $37.2
million and core lower margin product sales increased by $7.5 million for the
nine months ended October 2, 1999 as compared to the nine months ended October
3, 1998. The Vinyl Packaging Products segment had sales declines of $0.8
million for both the quarter and nine month periods ended October 2, 1999 as
compared to prior periods.
Gross profit for the quarter ended October 2, 1999 increased $1.6 million or
15.2% to $12.1 million from $10.5 million for the quarter ended October 3, 1998.
Gross profit for the nine months ended October 2, 1999 increased $16.2 million
or 65.5% to $41.2 million from $24.9 million for the nine months ended October
3, 1998. The gross profit as a percentage of net trade sales for the quarter
ended October 2, 1999 was 21.7% compared to 24.3% for quarter ended October 3,
1998. The decrease in the gross profit percentage for the quarter is principally
attributable to mark-down allowances given to customers in order to promote sell
through of certain back to school seasonal products. The gross profit as a
percentage of net trade sales for the nine months ended October 2, 1999 was
28.9% compared to 25.2% for the nine months ended October 3, 1998. The increase
in gross profit margin is primarily due to a more favorable product mix in the
School, Home and Office segment as a result of the acquisition of Stuart Hall.
For the nine months ended October 2, 1999, differentiated higher margin product
sales represented approximately 51% of the School, Home and Office segment sales
as compared to approximately 36% for the nine months ended October 2, 1998. The
Vinyl Packaging Products segment experienced decreases in gross profit of $174
and $338 for the quarter and nine months ended October 2, 1999, respectively.
SG&A expenses for the quarter ended October 2, 1999 increased $1.7 million to
$8.7 million or 15.7% of net sales from $7.0 million or 16.1% of net sales for
the quarter ended October 3, 1998. SG&A expenses for the nine months ended
October 2, 1999 increased $6.7 million to $22.7 million or 15.9% of net sales
from $16.0 million or 16.2% of net sales for the nine months ended October 3,
1998. This increase is principally due to increases in salary and fringe
expenses associated with the acquisition of Stuart Hall.
Amortization of goodwill for the quarter ended October 2, 1999 increased by $0.3
million from the quarter ended October 3, 1998. Amortization of goodwill for
the nine months ended October 2, 1999 increased by $1.3 million from the nine
months ended October 3, 1998. The increase is due to the amortization of
goodwill associated with the acquisition of Stuart Hall, which occurred on
August 20, 1998.
8
RESULTS OF OPERATIONS (CONTINUED)
Interest Expense for the quarter ended October 2, 1999 increased by $1.3 million
to $4.2 million from $2.9 million for the quarter ended October 3, 1998.
Interest Expense for the nine months ended October 2, 1999 increased by $5.3
million to $12.5 million from $7.2 million for the nine months ended October 3,
1998. The increase is primarily due to the debt incurred in conjunction with the
acquisition of Stuart Hall on August 20, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended October 2, 1999
is $42.9 million as compared to net cash provided by operating activities of
$29.7 million for the nine months ended October 3, 1998. The increase in cash
used was due to increases in accounts receivable and a final working capital
purchase price adjustment of $19.9 million paid to Newell Co. during April, 1999
for the purchase of Stuart Hall.
Net cash used in investing activities for the nine months ended October 2, 1999
is $4.1 million as compared to net cash used in investing activities of $131.2
million for the nine months ended October 3, 1998. The cash used for the nine
months ended October 3, 1998 included the purchase price for the acquisition of
Stuart Hall.
Net cash provided by financing activities for the nine months ended October 2,
1999 is $47.0 million compared to net cash provided by financing activities of
$87.7 million for the nine months ended October 3, 1998. The decrease in cash
provided is due to a term loan and equity contribution in 1998 in conjunction
with the acquisition of Stuart Hall.
The Company was not in compliance with the fixed charge coverage ratio covenant
for the fiscal quarter ended October 2, 1999. The Company has obtained an
amendment and waiver to the Credit Facility waiving the Company's compliance
with the fixed charge coverage ratio covenant for the fiscal quarter ended
October 2, 1999.
YEAR 2000 COMPATABILITY
Until recently, computer programs were generally written using two digits rather
than four to define the applicable year. Accordingly, such programs may be
unable to distinguish between the year 1900 and the year 2000. This could
result in system failures or data corruption for the Company, its customers or
suppliers, which could cause disruptions of operations. The Company is
currently engaged in a company-wide effort to address the year 2000
compatibility issues. The project is focused on three main areas: information
technology (IT) systems; non-IT systems imbedded in equipment; and the company's
business relationships with third parties, such as suppliers, customers, and
service providers. The thrust of the project is to address those systems and
relationships which the Company judges to be material to their operations.
Based on the Company's
9
YEAR 2000 COMPATABILITY (CONTINUED)
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 and installed a new certified Year 2000
compliant software package to upgrade it's existing IT systems. 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
$0.2 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 November 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 November 30, 1999.
The Company currently is developing contingency plans. The Company anticipates
that its internal systems will be Year 2000 compliant by November 30, 1999.
The Year 2000 readiness of 3rd parties with which the Company has a material
relationship and their products and services are being assessed.
While the Company cannot warrant that all business systems of its business
partners, external agents, service providers, or government agencies will be
timely with year 2000 compliance, the Company expects no business interruptions
due to non-compliance by any particular entity. The Company believes that year
2000 issues will not materially affect future financial results or operating
performances.
SEASONALITY AND KNOWN TRENDS
The Company experiences seasonality in its business operations. During the
Company's second and third quarters, net sales are higher that the first and
fourth quarters due to sales of back-to-school products.
10
FORWARD-LOOKING STATEMENTS
Written reports and oral statements made from time to time by the Company
contain "forward-looking statements." Forward looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts and by their use of words such as "goals", "expects", "plans", "believes",
"estimates", "forecasts", "projects", "intends", and other words of similar
meaning. Such statements are likely to address the Company's earnings, return on
capital, capital expenditures, project implementation, production growth, sales
growth and expense reductions. They are based on management's then-current
information, assumptions, plans, expectations, estimates and projections about
their industry. However, such statements are not guarantees of future
performance, and actual results and outcomes may differ materially from what is
expressed depending on a variety of factors, many of which are outside of the
Company's control.
Among the factors that could cause actual outcomes or results to differ
materially from what is expressed in these forward-looking statements are
changes in the demand for, supply of, and market price of paper, changes in
economic conditions, changes in the availability and/or price of paper,
significant changes in rates of interest, inflation, or taxes, changes in Pen-
Tab's relationship with its employees and the potential adverse effects if labor
disputes or grievances were to occur, changes in accounting principles and
timely resolution of Year 2000 compatability issues by the Company and its
customers and suppliers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's market risk is impacted by changes in interest rates and certain
commodity prices, namely paper. The Company does not currently hold or issue
derivative instruments for trading or hedging purposes related to commodity
price fluctuations.
The Company's primary market risk is commodity price exposure. Based upon past
experience, the Company believes it can effectively pass through to its
customers commodity price fluctuations thus assisting the Company in mitigating
exposure related to commodity price fluctuations. In addition, the Company has
market risk related to interest rate exposure on its Credit Facility and swap
agreement. Interest rate swaps may be used to adjust interest rate exposure
when appropriate.
Based on the Company's overall commodity price and interest rate exposure at
October 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.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
Financial Data Schedule (filed only electronically with the SEC)
b.) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 1999.
12
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q for the quarter ended
October 2, 1999 to be signed on its behalf by the undersigned thereunto duly
authorized.
Pen-Tab Industries, Inc.
(Registrant)
Date By: /s/ William Leary
- ---- ---------------------
November 17, 1999 William Leary
Vice President, Chief Financial
and Administrative Officer
(principal financial officer and
accounting officer)
13