<PAGE>
As filed with the Securities and Exchange Commission on March 27, 1998
Registration No. [333-_____]-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________________________
IMPAC GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
23-2923682
(I.R.S. Employer Identification No.)
2657
(Primary Standard Industrial
Classification Code Number)
_______________________________________________
1950 North Ruby Street
Melrose Park, Illinois 60160
(708) 344-9100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------------
David C. Underwood
Chief Financial Officer
IMPAC Group, Inc.
1950 North Ruby Street
Melrose Park, Illinois 60160
(708) 344-9100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------------
with a copy to:
John R. Utzschneider, Esq.
Bingham Dana LLP
150 Federal Street
Boston, MA 02110
(617) 951-8852
Facsimile No. (617) 951-8736
- --------------------------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================
Proposed Proposed Maximum
Amount Maximum Aggregate
Title of Each Class of to be Offering Price Offering Amount of
Securities to be Registered Registered Per Share Price Registration Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 1/8 % Senior
Notes due 2008, Series B
of IMPAC Group, Inc.
(the "New Notes")......... $100,000,000 100% $100,000,000 $29,500.00(1)
- -------------------------------------------------------------------------------------------------
(1) Based on the book value of the securities as of the most recent practicable date in accordance with
Rule 457(f)(2) under the Securities Act of 1933, as amended.
</TABLE>
----------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH ___, 1998
PROSPECTUS
OFFER TO EXCHANGE UP TO $100,000,000 OF 101/8%
SENIOR NOTES DUE 2008, SERIES B OF
IMPAC GROUP, INC., WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL
OF ITS OUTSTANDING 101/8% SENIOR NOTES DUE 2008
IMPAC GROUP, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON _______________, 1998, UNLESS EXTENDED
_______________
IMPAC Group, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
letter of transmittal (the "Letter of Transmittal," and together with this
Prospectus, the "Exchange Offer"), to exchange up to an aggregate amount of
$100,000,000 of the Company's 10 1/8% Senior Subordinated Notes Due 2008, Series
B (the "New Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement of
which this Prospectus is a part, which New Notes shall be guaranteed (the "New
Guarantees") by the Guarantors (as defined herein) and all future Restricted
Subsidiaries of the Company or any of the Guarantors for a like principal amount
of the Company's outstanding 10 1/8% Senior Subordinated Notes due 2008 (the
"Existing Notes"), of which $100,000,000 in aggregate principal amount is
outstanding as of the date hereof, which Existing Notes have been guaranteed by
the Guarantors (the "Existing Guarantees" and, together with the New Guarantees,
the "Guarantees"). The terms of the New Notes and the New Guarantees are
identical in all material respects to the terms of the Existing Notes and the
Existing Guarantees, except for certain transfer restrictions and registration
rights relating to the Existing Notes. The New Notes will be issued pursuant to,
and entitled to the benefits of, the Indenture, dated as of March 12, 1998,
between the Company, the Guarantors and State Street Bank and Trust Company, as
trustee, governing the Existing Notes. The New Notes and the Existing Notes are
hereinafter sometimes collectively referred to as the "Notes".
The Notes will be general, unsecured obligations of the Company, will
rank pari passu with all senior subordinated debt of the Company and will be
senior in right of payment to all existing and future subordinated debt of the
Company, if any. The Notes will be guaranteed by each of the Company's current
and future Restricted Subsidiaries. The claims of the holders of Notes will be
subordinated to Senior Debt (as defined herein). As of December 31, 1997 giving
pro forma effect to the Transactions (as defined herein), approximately $11.6
million of IRB Financings (as defined herein) would have been outstanding, fully
secured by approximately $12.6
<PAGE>
million of letters of credit issued under the Company's New Credit Facility (as
defined herein) and which would have constituted all of the Company's Senior
Debt. See ''The Combination'', ''Capitalization'' and ''Description of Other
Indebtedness''.
The Company will accept for exchange any and all Existing Notes that are
validly tendered on or prior to 5:00 p.m., New York City time, on the date the
Exchange Offer expires, which will be ___________, 1998, unless the Exchange
Offer is extended (the "Expiration Date"). Tenders of Existing Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the business
day prior to the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of Existing Notes being tendered for exchange. However,
the Exchange Offer is subject to certain conditions which may be waived by the
Company and to the terms and provisions of the Notes Registration Rights
Agreement (as defined herein). See "Exchange Offer". The Company has agreed to
pay the expenses of the Exchange Offer.
Holders of Existing Notes whose notes are not tendered and accepted in
the Exchange Offer will continue to hold such Existing Notes. Following
consummation of the Exchange Offer, the holders of Existing Notes will continue
to be subject to the existing restrictions upon transfer thereof and, except as
provided herein, the Company and the Guarantors will have no further obligation
to such holders to provide for the registration under the Securities Act of the
Existing Notes held by them or the Existing Guarantees.
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY HOLDERS OF EXISTING NOTES AND
PROSPECTIVE PURCHASERS OF NEW NOTES.
_______________
The Company will not receive any proceeds from this Exchange Offer and no
underwriter is being utilized in connection with this Exchange Offer.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE
_______________
The date of this Prospectus is _________ ___, 1998.
<PAGE>
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS
PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT
ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX, BUSINESS,
FINANCIAL AND RELATED ASPECTS OF AN EXCHANGE FOR NEW NOTES OR ANY PURCHASE OF
THE NOTES. NEITHER THE COMPANY NOR THE INITIAL PURCHASERS ARE MAKING ANY
REPRESENTATION TO ANY OFFEREE OR PURCHASER OF THE NOTES REGARDING THE LEGALITY
OF AN INVESTMENT THEREIN BY SUCH OFFEREE OR PURCHASER UNDER APPROPRIATE LEGAL
INVESTMENT OR SIMILAR LAWS. IN MAKING AN INVESTMENT DECISION REGARDING THE
EXCHANGE NOTES OFFERED HEREBY, PROSPECTIVE INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE EXCHANGE OFFER, INCLUDING THE
MERITS AND RISKS INVOLVED. THE EXCHANGE OFFER IS BEING MADE ON THE BASIS OF THIS
PROSPECTUS. ANY DECISION TO EXCHANGE NOTES IN THE EXCHANGE OFFER MUST BE BASED
ON THE INFORMATION CONTAINED HEREIN. EACH PROSPECTIVE PURCHASER OF THE EXCHANGE
NOTES MUST COMPLY WITH ALL APPLICABLE LAWS AND REGULATIONS IN FORCE IN ANY
JURISDICTION IN WHICH IT PURCHASES, OFFERS OR SELLS THE EXCHANGE NOTES OR
POSSESSES OR DISTRIBUTES THIS PROSPECTUS AND MUST OBTAIN ANY CONSENT, APPROVAL
OR PERMISSION REQUIRED BY IT FOR THE PURCHASE, OFFER OR SALE BY IT OF THE
EXCHANGE NOTES UNDER THE LAWS AND REGULATIONS IN FORCE IN ANY JURISDICTION TO
WHICH IT IS SUBJECT OR IN WHICH IT MAKES SUCH PURCHASES, OFFERS OR SALES, AND
NEITHER THE COMPANY NOR THE INITIAL PURCHASERS SHALL HAVE ANY RESPONSIBILITY
THEREFOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE NOTES TO ANY PERSON IN ANY JURISDICTION WHERE IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
UPON REQUEST OF THE INITIAL PURCHASERS OR THE COMPANY, PROSPECTIVE
INVESTORS MAY OBTAIN SUCH ADDITIONAL INFORMATION AS THEY MAY REASONABLY
REQUEST IN CONNECTION WITH THE DECISION TO PURCHASE ANY OF THE NOTES.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE
HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT
A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT ANY EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE
HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATION OF, OR RECOMMENDED OR
GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE,
OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY
REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
THE INITIAL PURCHASERS WHO PARTICIPATED IN THE OFFERING OF THE EXISTING NOTES
MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE
PRICE OF THE NOTES. SPECIFICALLY, THE INITIAL PURCHASERS MAY BID FOR AND
PURCHASE INITIAL NOTES AND EXCHANGE NOTES IN THE OPEN MARKET.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial data,
including the financial statements and notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise stated in this Prospectus, references to (a)
''AGI'' shall mean AGI Incorporated, an Illinois corporation which, after the
Combination, became a wholly owned subsidiary of KFI Holding Corporation, a
Delaware corporation (''KFI Holding''), which changed its corporate name upon
consummation of the Transactions to ''IMPAC Group, Inc.'' (''IMPAC''); (b)
''Klearfold'' shall mean Klearfold, Inc., a Pennsylvania corporation and a
wholly owned subsidiary of IMPAC Holding, and Klearfold's subsidiaries; and (c)
the ''Company'' shall mean IMPAC and its consolidated subsidiaries, including
AGI and Klearfold,. All references to a fiscal year refer to the 12 months ended
December 31 of the year referenced.
The Company
IMPAC is a leading designer, manufacturer and marketer of high-end,
value-added specialty packaging for various consumer products markets including
entertainment, cosmetics and personal care. Through its creative design work,
specialized manufacturing techniques and diverse printing capabilities, the
Company offers innovative specialty packaging solutions for customers that seek
to differentiate their products in the consumer marketplace. In addition, unlike
most of its competitors, the Company utilizes a broad range of paper, paperboard
and transparent rigid plastic materials for its products. As a result, the
Company believes that it is well-positioned to supply the growing demand for
distinctive consumer product packaging resulting from increased competition and
consolidation in the retail marketplace. For the twelve months ended December
31, 1997, the Company had pro forma net sales and EBITDA (as defined) of $160.8
million and $24.5 million, respectively.
The Company has built strong relationships with marketing-driven
customers in diverse industries, including Avon Products and Revlon in the
cosmetics industry, EMI (including the Capitol and Virgin Records labels),
PolyGram (including the Mercury and Motown labels) and 20th Century Fox Home
Entertainment in the entertainment industry, and Procter & Gamble and Colgate in
the personal care industry. In the entertainment industry, examples of the
Company's products include printed paper inserts for standard compact disc
(''CD'') packaging as well as specialty paperboard-based CD packaging and
specialty packaging for home videos and digital versatile discs (''DVD''). In
the cosmetics and personal care industries, the Company offers products such as
paperboard folding cartons, transparent rigid plastic toothbrush packages and
windowed boxes made of paperboard and transparent rigid plastic for face creams,
lipsticks and other skin care products.
IMPAC was formed through the combination of AGI and Klearfold.
Management believes the packaging industry has not historically had a
participant that offers manufacturers of consumer products the broad range of
unique and innovative specialty packaging solutions that are available from the
Company. The combination of AGI and Klearfold allows management to build upon
the strengths of each company. For example, AGI's creative capabilities and fast
turnaround times, which are continually refined by the intensive demands of the
entertainment industry, complement Klearfold's innovative packaging technology
and product development expertise. In addition, while AGI and Klearfold each
have a well-established customer base, the Company believes there are
significant cross-selling opportunities.
<PAGE>
Consumer Products Packaging Industry Overview
Recent trends in the consumer products industry suggest a migration
towards high-quality specialty packaging. Management believes that as the retail
sales environment continues to consolidate, the demand for innovative, value-
added packaging will increase. Products that have historically been sold through
distinct retail distribution channels, such as cosmetics, CDs and sell-through
videos, are currently being distributed through a wider variety of outlets. As a
result, competition for the consumer's attention has increased the importance of
visually attractive packaging. Additionally, many of these products sell at
premium price points and distinctive packaging is an important element in
enhancing the perceived value of the product to the customer. Moreover, the
emergence of self-select retail outlets, such as Wal-Mart, K-Mart and Rite-Aid,
and the decline in the use of dedicated sales assistants, have heightened the
demand for specialty packaging that (i) attracts the consumer to the product,
(ii) allows the retailer to maximize shelf space by displaying the product in a
variety of formats (i.e., stacked, hanging or shelved), and (iii) distinguishes
products not only from competitors within the same market segment, but also from
other types of products.
Company Strengths
The Company has achieved a leadership position in the high-end, value-
added specialty packaging market. Management believes that the Company will
further develop this leadership position by capitalizing on the following
competitive strengths:
Leading Market Positions and Strong Customer Relationships. In the
entertainment industry, the Company has established a leading market position
through strong relationships with PolyGram Group Distribution, Inc.
(''PolyGram''), EMI Records Group North America (''EMI''), Universal Studios,
Inc. (''Universal''), BMG Music (''BMG'') and Sony Music Entertainment
(''Sony''), the five largest music distributors that outsource their packaging
needs. The Company has contracts to supply standard CD packaging inserts to
Universal, PolyGram and BMG. In the cosmetics and personal care industries, the
Company is a leading supplier of high-end, value-added specialty packaging
products to a number of leading companies including Avon, Chesebrough-Pond's_,
Cosmair, Mary Kay and Revlon. The Company is the primary supplier of its
products to a number of its customers with respect to certain product lines,
such as Revlon's specialty windowed boxes for its Colorstay_ line of cosmetics
and Procter & Gamble's Crest(R) toothbrushes.
Provider of Creative Packaging Solutions. Utilizing its strong design
capabilities, the Company seeks to proactively provide its customers with
creative packaging solutions. Aided by a number of proprietary products as well
as design and manufacturing expertise with a variety of materials, including
paper, paperboard and transparent rigid plastic, the Company often provides
customers with several distinct packaging alternatives for any single job.
Management believes that it is the only company that manufactures this broad
line of specialty packaging solutions and provides strong design services, which
it believes represent a unique competitive advantage.
Established Reputation for Product Innovation. The Company's structural
design capabilities and culture of innovation enable it to develop creative
packaging solutions in response to specific customer needs. By integrating its
design, sales and manufacturing groups, the Company has become an important
member of many of its customers' product development teams. Examples of
innovative packaging solutions offered by the Company include the DIGIPAK(R), a
paperboard-based CD package, and Duofold(R), a patented folding carton that
integrates paperboard and transparent rigid plastic film, each of which have
become leading products in their market niches. Many of the Company's
entertainment packaging solutions have resulted in Grammy award nominations for
creative design for the Company's customers, including CD packages for Pearl
Jam's Vitalogy album
<PAGE>
and Frank Zappa's Civilization Phaze III album. In addition, through its
participation in the Diginet, an international network of leading specialty
packaging companies, the Company has worldwide access to new design concepts,
manufacturing techniques and marketing information principally relating to the
specialty music packaging industry.
Strong Manufacturing Capabilities. The Company has invested
significantly to modernize its facilities and equipment. Since 1995, the Company
has placed into service $22.1 million of new printing capacity such that over
50% of the Company's current printing capacity is less than three years old. The
Company utilizes its modern machinery to lower turnaround time while reducing
staffing requirements and maintaining ''just-in-time'' manufacturing
capabilities. The Company was also one of the first packaging manufacturers to
use web production technology with rigid plastic (i.e., using rolls of plastic
versus separate plastic sheets). This technology has increased production speeds
and lowered material costs for its products utilizing rigid plastic. The Company
intends to maintain this level of commitment by continuing to develop innovative
manufacturing processes and investing in modern manufacturing equipment.
Proven Management Team with Significant Equity Ownership. The Company
has assembled a strong management team with an average of 25 years of experience
in the packaging industry. Management's proven track record is demonstrated by
the strong financial performance of the combined Company. Since 1993, the
Company's net sales and EBITDA (as defined) have grown at compound annual rates
of 9.8% and 15.3%, respectively. Senior management is heavily invested in the
Combination. Their ownership of approximately 55% of the outstanding Common
Stock of the Company will be coupled with a management equity incentive plan
that is based primarily upon the future operating performance of the Company.
Post-Combination Strategy
The Company intends to enhance its market position and maximize
profitability and cash flow by implementing the following business strategies:
Capitalize on Cross-Selling Opportunities. The Company believes that it
will create significant additional revenue opportunities with existing customers
by marketing its expanded array of high-end packaging solutions. The Company
believes that this strategy will have its most powerful impact initially in the
cosmetics industry, where currently Revlon represents the only customer with
significant purchases from both AGI and Klearfold. Further, as a result of AGI's
long-standing relationships with customers in the entertainment industry, the
Company believes that it will be able to realize additional revenue
opportunities by successfully offering an enhanced line of products based on
Klearfold's proprietary rigid plastic technology.
Further Integrate with Key Customers. Historically, the Company has
enjoyed cooperative integrated relationships with its key customers. The
Combination broadens the Company's product line and increases its creative
design capabilities, which the Company believes will allow it to further
integrate with its customers. This ability to integrate with customers' product
design operations is important as the general trend in the industry is to limit
the number of outside suppliers. In an effort to enhance its service and
turnaround time, the Company built a facility in Jacksonville, Illinois in 1995
and is currently building a facility in Grover, North Carolina, which is
expected to be completed in the second quarter of 1998, in each case in close
proximity to several of its major music customers.
Pursue New Market Opportunities. The Company intends to expand into
related product lines that serve new markets, which will provide an opportunity
for additional revenue growth. As a result of the Combination, the Company's
creative design team has an enhanced capability to develop
<PAGE>
new packaging products based on the most suitable type of materials or
combinations. The Company believes that its innovative product development
experience positions it to capture additional customers in new and existing
markets.
Increase Operating Efficiencies. The Company believes that combining the
operations of AGI and Klearfold presents opportunities to effectively capitalize
on economies of scale in the areas of manufacturing, transportation, general and
administrative functions and management information systems. A portion of AGI's
and Klearfold's printing capacity is interchangeable, allowing work to be
processed wherever capacity is available during times of peak demand. The
Company expects that this interchangeability will allow it to increase its
utilization rate without creating bottlenecks or otherwise compromising service.
The Company will utilize the most efficient practices currently used in the
facilities of AGI and Klearfold to enhance manufacturing capabilities and
improve cost structures.
Pursue Strategic Acquisitions. The Company may pursue strategic
acquisitions within the specialty packaging industry. The Company believes that
significant opportunities exist to acquire distinctive businesses that would
enable the Company to further broaden its product offerings as well as to expand
its operations both domestically and internationally. The Company currently has
no agreements or commitments with respect to any acquisitions.
The Transactions
The Combination
In February 1998, KFI Holding, its stockholders, and certain
stockholders and holders of stock appreciation rights of AGI entered into an
Investment Agreement (the "Investment Agreement"), under which (i) the
stockholders of KFI Holding agreed to contribute to KFI Holding the entire
outstanding capital stock of KFI Holding and a warrant to purchase KFI Holding
capital stock and to invest approximately $4.6 million in cash, and (ii) certain
stockholders and holders of stock appreciation rights of AGI agreed to
contribute to KFI Holding shares of AGI common stock and to invest the proceeds
of their stock appreciation rights, totaling an aggregate of $14.4 million. In
exchange for these contributions and cash investments, KFI Holding agreed to
issue to the contributing or investing parties shares of its common stock (the
"Common Stock") and upon consummation of such issuance, KFI Holding was
renamed IMPAC Group, Inc.
At the same time, KFI Holding, its wholly-owned subsidiary AGI
Acquisition Corp., AGI and certain stockholders of AGI and KFI Holding entered
into an Agreement and Plan of Merger (the "Agreement and Plan of Merger"),
under which AGI Acquisition Corp. merged on March 12, 1998 with and in to AGI,
with AGI as the surviving corporation. In this merger, the shares of AGI not
contributed to the Company under the Investment Agreement, a stock option and
certain stock appreciation rights were converted into a right to receive cash in
the aggregate amount of approximately $30.5 million, net of fees. In addition,
immediately prior to the closing of the Combination the stockholders of AGI
received a dividend in the aggregate amount of approximately $22.5 million. See
"Management" and "Certain Relationships and Related Transactions".
Klearfold and AGI are wholly-owned subsidiaries of IMPAC. The
combination of AGI with KFI Holding and its subsidiaries pursuant to the
Agreement and Plan of Merger, and related transactions, are referred to together
in this Prospectus as "the Combination". The Combination, a new credit
facility providing for $40.0 million in revolving credit borrowings and $13.0
million in letters of credit (the "New Credit Facility"), the offering of the
Existing Notes (the "Offering") and the application of the proceeds therefrom
are collectively referred to as the "Transactions".
<PAGE>
The senior management of the Company together own approximately 55% of the
Company's Common Stock. An affiliate of Heritage Partners, Inc. ("Heritage")
owns approximately 40% of the Company's Common Stock, with the remaining 5% held
by certain former stockholders of AGI. Heritage is a Boston-based private
investment company with $530 million in capital under management, specializing
in the acquisition and equity-based recapitalization of private, family owned
businesses. See "The Combination".
The Financing
The Combination was effected through the establishment of the New Credit
Facility, the issuance of the Existing Notes and the equity contributions
described in the Investment Agreement. This Offering was conditioned on the
concurrent closing of the Transactions. The following table illustrates the
sources and uses of funds in connection with the Transactions. See "The
Combination" and "Unaudited Pro Forma Combined Financial Data".
<TABLE>
<CAPTION>
(in millions)
Sources of Funds
<S> <C>
New Credit Facility(1)............................................ $ 0.0
101/8% Senior Subordinated Notes.................................. 100.0
Equity contributions:
AGI management equity investment............................ 14.4
KFI Holding management equity investment(2)................. 6.0
Heritage equity investment(3)............................... 13.6
----------
Total sources of funds................................ $ 134.0
==========
Uses of Funds
Purchase AGI equity(4)............................................ $ 69.2
Contributed KFI Holding equity.................................... 15.0
Retirement of Klearfold indebtedness(5)........................... 29.8
Retirement of AGI indebtedness(6)................................. 14.7
Cash for working capital.......................................... 0.3
Fees and expenses................................................. 5.0
----------
Total uses of funds................................... $ 134.0
==========
</TABLE>
- ---------------
(1) The New Credit Facility provides for up to $40.0 million of revolving
credit borrowings and up to $13.0 million of letters of credit, and
matures in 2003. As of the date of the closing of the Transactions,
letters of credit in the aggregate amount of approximately $12.6 million
were outstanding under the New Credit Facility and $40.0 million of
revolving credit borrowings were available to the Company.
(2) Represents $1.2 million in cash and $4.8 million in contributed stock of
KFI Holding (the value ascribed to the equity of KFI Holding taking into
account (i) the repayment of approximately $29.8 million of Klearfold
indebtedness and (ii) approximately $4.0 million of the Klearfold IRBs (as
defined herein) remaining outstanding after the Transactions).
(3) Represents $3.4 million in cash and $10.2 million in contributed stock of
KFI Holding (the value ascribed to the equity of KFI Holding taking into
account (i) the repayment of approximately $29.8 million of Klearfold
indebtedness and (ii) approximately $4.0 million of the Klearfold IRBs
remaining outstanding after the Transactions).
(4) Represents the acquisition by the Company of all of the outstanding common
stock of AGI and settlement of certain stock appreciation rights, for
$54.8 million of cash, including a dividend of approximately $22.5 million
paid to AGI stockholders immediately prior to the Combination, and $14.4
million (the ascribed value) of Common Stock of the Company issued to AGI
management. Approximately $7.6 million of the AGI IRBs (as defined herein)
remain outstanding after the Transactions. See "Management" and "Certain
Relationships and Related Transactions".
<PAGE>
(5) Reflects the total funded indebtedness of Klearfold, other than the
Klearfold IRBs, that were outstanding immediately prior to the
Combination.
(6) Reflects the total funded indebtedness of AGI, other than the AGI IRBs,
that were outstanding immediately prior to the Combination.
<PAGE>
The Exchange Offer
Securities Offered........... Up to $100,000,000 aggregate principal amount
of 10 1/8% Senior Subordinated Notes due
2008, Series B of the Company (the "New
Notes"), together with guarantees hereof by
each of the Guarantors (the "New
Guarantees"), in exchange for up to
$100,000,000 aggregate principal amount of
outstanding 10 1/8% Senior Subordinated Notes
due 2008 of the Company (together with a
guarantee thereof by each of the Guarantors,
referred to hereinafter as the "Existing
Guarantees," and together with the New
Guarantees, the "Guarantees"). The terms of
the New Notes and the New Guarantees and
those of the Existing Notes and the Existing
Guarantees are identical in all material
respects, except for certain transfer
restrictions relating to the Existing Notes.
See "Description of Notes" and "Comparison
of New Notes with Existing Notes".
Registration Rights Agreement The Existing Notes were issued on March 12,
1998 to Goldman, Sachs & Co. and Donaldson,
Lufkin & Jenrette Securities Corporation (the
"Initial Purchasers"). The Initial Purchasers
resold the Existing Notes to certain
qualified institutional buyers in reliance
on, and subject to the restrictions imposed
pursuant to, Rule 144A and Regulation S under
the Securities Act. In connection therewith,
the Company, the Holding Company and the
Initial Purchasers entered into the
Registration Rights Agreement, dated as of
March 12, 1998 (the "Registration Rights
Agreement"), providing, among other things,
for the Exchange Offer. See "The Exchange
Offer".
<PAGE>
Resale of New Notes.......... Based on interpretations by the Staff of the
Commission as set forth in no-action letters
issued to third parties, the Company believes
that the New Notes issued pursuant to the
Exchange Offer may be offered for resale,
resold or otherwise transferred by any holder
thereof (other than any such holder that is a
broker-dealer or an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that (i)
neither the Company nor any Guarantor has
entered into any arrangement or understanding
with any person to distribute the New Notes to
be received in the Exchange Offer, (ii) to the
best of the Company's information and belief,
each Holder participating in the Exchange Offer
is acquiring the New Notes in its ordinary
course of business, and (iii) to the best of
the Company's information and belief, each
Holder participating in the Exchange Offer has
no arrangement or understanding with any person
to participate in the distribution of the New
Notes received in the Exchange Offer. By
tendering Existing Notes in exchange for New
Notes, each holder will represent to the
Company that; (i) it is not such an affiliate
of the Company or the Guarantors, (ii) it is
not engaged in, and does not intend to engage
in, and has no arrangement or understanding
with any person to participate in, a
distribution of the Existing Notes to be issued
in the Exchange Offer, and (iii) any New Notes
to be received by it will be acquired in the
ordinary course of business. If a holder of
Existing Notes is unable to make the foregoing
representations, such holder may not rely on
the applicable interpretations of the Staff of
the Commission as set forth in such no-action
letters, and must comply with the registration
and prospectus delivery requirement of the
Securities Act in connection with any secondary
resale transaction.
<PAGE>
Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer
in exchange for Existing Notes, where such
Existing Notes were acquired by such broker-
dealer as a result of market-making activities
or other activities, must acknowledge that it
will deliver a prospectus meeting the
requirements of the Securities Act and that it
has not entered into any arrangement or
understanding with the Company or an affiliate
of the Company to distribute the New Notes in
connection with any resale of such New Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning
of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to
time, may be used by a broker-dealer in
connection with resales of New Notes where
such Existing Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities. The
Company has agreed that, starting on the
Expiration Date, and ending on the close of
business 180 days after the Expiration Date,
it will make this Prospectus available to any
participating broker dealer for use in
connection with any such resale. See "Plan of
Distribution".
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify
for sale or register the New Notes prior to
offering or selling such New Notes in such
jurisdictions. The Company has agreed,
pursuant to the Registration Rights Agreement
and subject to certain specified limitations
therein, to cause all necessary filings in
connection with the registration and
qualification of the New Notes to be made
under the "Blue Sky" laws of such
jurisdictions as are necessary to permit the
Exchange Offer to be consummated.
The Exchange Offer........... The New Notes are being offered in exchange
for a like principal amount of Existing Notes.
Existing Notes may be exchanged only in
existing multiples of $1,000. The issuance of
the New Notes is intended to satisfy
obligations of the Company under the
Registration Rights Agreement. For a
description of the procedures for tendering,
see "Exchange Offer -- Procedures for
Tendering Existing Notes".
Expiration Date; Withdrawal.. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on ____________, 1998, or
such later date and time to which it may be
extended in the sole discretion of the Company
(the "Expiration Date"). The tender of
Existing Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to any time
prior to 5:00 p.m., New York City time, on the
business day prior to the Expiration Date. Any
Existing Notes not accepted for exchange for
any reason will be returned without expense to
the tendering holders thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer. See
"Exchange Offer --Expiration Date; Extensions;
Termination; Amendments; and Withdrawal
Rights".
<PAGE>
Conditions to Exchange Offer. The Exchange Offer is subject to certain
conditions. See "Exchange Offer -- Certain
Conditions to the Exchange Offer".
Procedures for Tendering Existing
Notes........................ Each holder of Existing Notes wishing to
accept the Exchange Offer must complete, sign
and date a Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Existing Notes and any other required
documents, to the Exchange Agent (as defined)
at the address set forth herein. See "Exchange
Offer --Procedures for Tendering Existing
Notes".
Use of Proceeds.............. There will be no proceeds to the Company
from the exchange of Notes pursuant to the
Exchange Offer.
Certain Federal Income Tax
Consideration................ The exchange pursuant to the Exchange Offer
should not be a taxable event to the holder
for federal income tax purposes, and the
holder should not recognize any taxable gain
or loss as a result of such exchange. See
"Certain Federal Income Tax Considerations".
Untendered Existing Notes.... Upon consummation of the Exchange Offer, the
holders of Existing Notes, if any, will have
no further rights under the Registration
Rights Agreement, except as provided herein.
Holders of Existing Notes whose Existing Notes
are not tendered or are tendered but not
accepted in the Exchange Offer will continue
to hold such Existing Notes and will be
entitled to all the rights and preferences and
subject to the limitations applicable thereto.
Following consummation of the Exchange Offer,
the holders of Existing Notes will continue to
be subject to the existing restrictions upon
transfer thereof and, except as provided
herein, the Company will have no further
obligation to such holders to provide for the
registration under the Securities Act of the
Existing Notes held by them. To the extent
that Existing Notes are tendered and accepted
in the Exchange Offer, the trading market for
untendered and tendered by unaccepted Existing
Notes could be adversely affected.
Exchange Agent............... State Street Bank and Trust Company is serving
as the Exchange Agent in connection with the
Exchange Offer.
Terms of the Notes
Except as otherwise indicated, the following description relates both to the
Existing Notes issued pursuant to the Offering and to the New Notes to be issued
in exchange for Existing Notes in connection with the Exchange Offer. The New
Notes will be obligations of the Company evidencing the same indebtedness as the
Existing Notes, and will be entitled to the benefits of the same Indenture. The
form and terms of the New Notes are the same as the form and terms of the
Existing Notes, except that the New Notes have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof. For a more complete description of the Notes see
<PAGE>
"Description of Notes". Throughout this Prospectus, references to the "Notes"
refer to the New Notes and the Existing Notes collectively.
Issuer....................... IMPAC Group, Inc.
Securities Offered........... $100.0 million in aggregate principal amount of
101/8% Senior Subordinated Notes due March 15,
2008, Series B.
Maturity Date................ March 15, 2008
Guarantees................... The Company's payment obligations under the
Notes are jointly and severally guaranteed on a
senior subordinated basis (the "Subsidiary
Guarantees ") by each of the Company's current
and future Restricted Subsidiaries. All of the
Company's Subsidiaries are Restricted
Subsidiaries. The Subsidiary Guarantees are
subordinated to all Senior Debt of the
Guarantors. See "Description of Notes--
Subsidiary Guarantees".
Interest on the Notes........ The Existing Notes accrue interest at a rate of
101/8% per annum from the Issue Date. The New
Notes will accrue interest at a rate of 101/8%
per annum from the Issue Date or from the most
recent date to which interest had been paid on
the Existing Notes.
Interest Payment Dates....... March 15 and September 15 of each year,
commencing September 15, 1998.
Optional Redemption.......... Except as described below, the Notes are not
redeemable at the Company's option prior to
March 15, 2003. From and after March 15, 2003,
the Notes will be subject to redemption at the
option of the Company, in whole or in part, at
the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption.
In addition, prior to March 15, 2001, up to an
aggregate of $35.0 million in aggregate
principal amount of Notes will be redeemable at
the option of the Company from the net proceeds
of Public Equity Offerings by the Company, at a
price of 110.125% of the principal amount of
the Notes, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
redemption; provided that at least $65.0
million in aggregate principal amount of Notes
remains outstanding immediately after each such
redemption; and provided, further, that the
notice of any such redemption shall be mailed
within 60 days of the receipt by the Company of
proceeds from the public offering.
Change of Control............ In the event of a Change of Control, Holders of
the Notes will have the right to require the
Company to repurchase their Notes, in whole or
in part, at a price equal to 101% of the
aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, to the date of repurchase.
<PAGE>
Ranking...................... The Notes constitute general, unsecured
obligations of the Company, are subordinated in
right of payment to all Senior Debt of the
Company, rank pari passu with all senior
subordinated debt of the Company and are senior
in right of payment to all existing and future
subordinated debt of the Company, if any. The
claims of the Holders of the Notes are
subordinated to Senior Debt. As of December 31,
1997, on a pro forma basis after giving effect
to the Transactions, approximately $11.6
million of IRB Financings would have been
outstanding, fully secured by approximately
$12.6 million of letters of credit issued under
the New Credit Facility and which constitute
all of the Company's Senior Debt. See
"Description of Notes--Subordination" and
"Description of Other Indebtedness ".
Restrictive Covenants........ The Indenture governing the Notes (the
"Indenture ") contains certain covenants that,
among other things, limits the ability of the
Company and its Subsidiaries to incur
additional Indebtedness (as defined herein) and
issue Disqualified Stock (as defined herein),
pay dividends or distributions or make
investments or make certain other Restricted
Payments (as defined herein), enter into
certain transactions with affiliates, dispose
of certain assets, incur liens securing pari
passu and subordinated indebtedness and engage
in mergers and consolidations. See "Description
of Notes".
Use of Proceeds.............. The gross proceeds of $100.0 million from the
Offering along with the proceeds of equity
investments made by Heritage and members of
management were used to fund the Combination,
repay certain existing Indebtedness, pay
certain fees and expenses in connection with
the Transactions, and for general corporate
purposes. See "Use of Proceeds". No proceeds
will be received by the Company and the
Guarantors from the Exchange Offer.
Comparison of New Notes with Existing Notes
Freely Transferable.......... Generally, the New Notes will be freely
transferable under the Securities Act by holders
thereof other than any holder that is either an
affiliate of the Company or a broker-dealer that
purchased the Notes from the Company to resell
pursuant to Rule 144A, Regulation S or any other
available exemption. The New Notes otherwise
will be substantially identical in all material
respects (including interest rate and maturity)
to the Existing Notes. See "Exchange Offer".
<PAGE>
Registration Rights.......... The holders of Existing Notes currently are
entitled to certain registration rights pursuant
to the Registration Rights Agreement (the
"Registration Rights Agreement"), dated as of
March 12, 1998, among the Company, the
Guarantors and the Initial Purchasers. However,
upon consummation of the Exchange Offer, subject
to certain exceptions, holders of Existing Notes
who do not exchange their Existing Notes for New
Notes in the Exchange Offer will no longer be
entitled to registration rights and will not be
able to offer or sell their Existing Notes,
unless such Existing Notes are subsequently
registered under the Securities Act (which,
subject to certain limited exceptions, the
Company will have no obligation to do), except
pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws. See "Risk
Factors -- Adverse Consequences of Potential
Failure to Adhere to Exchange Offer Procedures".
Absence of a Public Market
for the New Notes............ The New Notes are new securities and there is
currently no established market for the New
Notes. Accordingly, there can be no assurance as
to the development or liquidity of any market
for the New Notes. The Company does not intend
to apply for listing on a securities exchange of
the New Notes.
For more complete information regarding the Existing Notes and the New Notes,
including the definitions of certain capitalized terms used above, see
"Description of Notes".
Risk Factors
Holders of Existing Notes and prospective purchasers of New Notes should
consider carefully the information set forth under the caption "Risk Factors",
and all other information set forth in this Prospectus, in connection with the
Exchange Offer.
<PAGE>
Summary Supplemental Combined Financial and Other Data--IMPAC Group, Inc.
The following table sets forth certain summary supplemental combined
financial and other data of the Company for the five years ended December 31,
1997 and as of December 31, 1997. The summary supplemental combined financial
and other data for the four years ended December 31, 1996 are derived from the
historical audited financial statements of KFI Holding and AGI, and their
separate financial information has been combined for historical presentation.
This combined presentation, although not in accordance with generally accepted
accounting principles, has been provided for comparison purposes. See "Summary
Historical Financial and Other Data--AGI Incorporated" and "Summary Historical
Financial and Other Data--KFI Holding Corporation". The summary unaudited pro
forma combined data as of and for the year ended December 31, 1997 have been
derived from the Unaudited Pro Forma Combined Financial Data included elsewhere
in this Prospectus. The Unaudited Pro Forma Combined Financial Data do not
purport to represent what the Company's financial position or results of
operations would actually have been had the Transactions in fact occurred on the
assumed date or to project the Company's financial position or results of
operations for any future date or period. The information contained in the
following table should also be read in conjunction with "Capitalization",
"Unaudited Pro Forma Combined Financial Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
AGI/KFI Holding Combined
----------------------------------------------------------------
Pro Forma
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(dollars in thousands)
Income Statement Data
<S> <C> <C> <C> <C> <C>
Net sales........................................... $ 110,663 $ 122,470 $ 148,677 $ 147,052 $ 160,774
Cost of goods sold.................................. 83,445 93,715 111,198 107,954 116,076
--------- --------- --------- --------- ---------
Gross profit.................................. 27,218 28,755 37,479 39,098 44,698
Selling, general and administrative expenses........ 17,577 19,613 23,316 23,488 28,554
Stock-based compensation expense(1)................. -- -- -- 171 --
PTP royalty and commission (income)(2).............. (176) (200) (377) (731) (33)
--------- --------- --------- --------- ---------
Operating income.............................. $ 9,817 $ 9,342 $ 14,540 $ 16,170 16,177
========= ========= ========= ========= =========
Interest expense, net............................... (11,424)
Gain (loss) on sale of fixed assets................. 139
---------
Income before income taxes.......................... 4,892
Income taxes........................................ (2,552)
----------
Net income.......................................... $ 2,340
==========
Other Data
EBITDA (as defined)(3).............................. $ 13,886 $ 13,911 $ 19,902 $ 22,166 $ 24,536
EBITDA margin....................................... 12.5% 11.4% 13.4% 15.1% 15.3%
Depreciation and amortization....................... $ 4,245 $ 4,769 $ 5,739 $ 6,556 $ 8,392
Capital expenditures................................ 6,171 12,756 11,186 8,915 10,171
Ratio of EBITDA to cash interest expense(4)......... 2.3x
Ratio of total debt to EBITDA....................... 4.6
Balance Sheet Data (at period end)
Total assets........................................ $ 144,946
Long-term debt, including current portion........... 111,640
Stockholders' equity................................ 4,456
</TABLE>
- ----------------
<PAGE>
(1) Stock-based compensation, a non-cash item in 1996 and 1997, relates to
stock appreciation rights held by certain executives of AGI.
(2) Klearfold received commissions and royalties on certain sales made by PTP
Industries, Inc. ( "PTP "). Klearfold owned 51% of PTP prior to the sale
of this subsidiary on April 19, 1996. PTP ceased operations in 1997.
(3) EBITDA is defined as income from continuing operations before deducting
interest expense, income taxes, depreciation and amortization and
excludes, to the extent applicable for the relevant period, (i) gain
(loss) on sale of fixed assets, (ii) stock-based compensation expense, and
(iii) PTP royalty and commission income. EBITDA is not a substitute for
operating income, net earnings and cash flow from operating activities as
determined in accordance with generally accepted accounting principles as
a measure of profitability or liquidity. EBITDA is presented as additional
information because management believes it to be a useful indicator of the
Company's ability to service and/or incur indebtedness.
(4) For purposes of this computation, cash interest expense of $10,891
consists of pro forma interest expenses before amortization of deferred
financing costs.
<PAGE>
Summary Historical Financial and Other Data--AGI Incorporated
The summary financial data of AGI set forth below as of and for the four
years ended December 31, 1996 have been derived from the financial statements of
AGI which have been audited by Arthur Andersen LLP, independent public
accountants. The summary financial data of AGI set forth below as of and for the
year ended December 31, 1997 have been derived from the financial statements of
AGI which have been audited by Price Waterhouse LLP, independent public
accountants. The audited financial statements of AGI as of December 31, 1996 and
1997 and for the three years ended December 31, 1997 are included elsewhere
herein. The information contained in the following table should also be read in
conjunction with "Capitalization", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION> Year Ended December 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(dollars in thousands)
Income Statement Data
<S> <C> <C> <C> <C> <C>
Net sales............................................... $72,354 $74,756 $97,463 $92,834 $108,281
Cost of goods sold...................................... 55,259 58,492 74,441 67,860 76,459
--------- --------- --------- --------- ---------
Gross profit...................................... 17,095 16,264 23,022 24,974 31,822
Selling, general and administrative expenses............ 11,456 12,584 15,374 15,894 19,444
Stock-based compensation expense(1)..................... -- -- -- 171 2,326
Operating income.................................. 5,639 3,680 7,648 8,909 10,052
Interest expense, net................................... (913) (807) (1,365) (1,370) (1,242)
Gain (loss) on sale of fixed assets..................... -- 658 45 (204) 139
--------- --------- --------- --------- ---------
Income before income taxes.............................. 4,726 3,531 6,328 7,335 8,949
Income taxes............................................ (141) (71) (23) (234) (231)
--------- --------- --------- --------- ---------
Net income.............................................. $ 4,585 $ 3,460 $ 6,305 $ 7,101 $ 8,718
========= ========= ========= ========= =========
Other Data
EBITDA (as defined)(2).................................. $ 8,261 $ 6,928 $11,613 $13,667 $ 17,140
EBITDA margin........................................... 11.4% 9.3% 11.9% 14.7% 15.8%
Depreciation and amortization........................... $ 2,622 $ 3,248 $ 3,965 $ 4,587 $ 4,762
Capital expenditures.................................... 5,430 9,776 9,792 7,644 6,027
Balance Sheet Data (at period end)
Total assets............................................ $37,506 $44,550 $54,418 $56,928 $ 58,919
Long-term debt, including current portion............... 13,183 16,084 18,242 18,241 16,040
Stockholders' equity.................................... 11,718 13,284 17,276 20,911 24,756
</TABLE>
(1) Stock-based compensation, a non-cash item in 1996 and 1997, relates to
stock appreciation rights held by certain executives of AGI.
(2) EBITDA is defined as income from continuing operations before deducting
interest expense, income taxes, depreciation and amortization and
excludes, to the extent applicable for the relevant period, (i) gain
(loss) on sale of fixed assets, (ii) stock-based compensation expense, and
(iii) PTP royalty and commission income. EBITDA is not a substitute for
operating income, net earnings and cash flow from operating activities as
determined in accordance with generally accepted accounting principles as
a measure of profitability or liquidity. EBITDA is presented as additional
information because management believes it to be a useful indicator of the
Company's ability to service and/or incur indebtedness.
<PAGE>
Summary Historical Financial and Other Data--KFI Holding Corporation
The summary consolidated financial data of KFI Holding set forth below as
of and for the five years ended December 31, 1997 have been derived from the
financial statements of KFI Holding which have been audited by KPMG Peat Marwick
LLP, independent public accountants. The audited consolidated financial
statements of KFI Holding as of December 31, 1996 and 1997 and for the three
years ended December 31, 1997 are included elsewhere herein. The information
contained in the following table should also be read in conjunction with
"Capitalization", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(dollars in thousands)
Income Statement Data
<S> <C> <C> <C> <C> <C>
Net sales............................................... $38,309 $47,714 $51,214 $54,218 $52,493
Cost of goods sold...................................... 28,186 35,223 36,757 40,094 39,322
--------- --------- --------- --------- ---------
Gross profit...................................... 10,123 12,491 14,457 14,124 13,171
Selling, general and administrative expenses............ 6,121 7,029 7,942 7,594 7,589
PTP royalty and commission (income)(1).................. (176) (200) (377) (731) (33)
--------- --------- --------- --------- ---------
Operating income.................................. 4,178 5,662 6,892 7,261 5,615
Interest expense, net................................... (1,013) (1,020) (1,197) (2,324) (3,469)
--------- --------- --------- --------- ---------
Income from continuing operations before
income taxes......................................... 3,165 4,642 5,695 4,937 2,146
Income taxes............................................ (1,159) (1,616) (2,417) (2,003) (754)
--------- --------- --------- --------- ---------
Income from continuing operations....................... $ 2,006 $ 3,026 $ 3,278 $ 2,934 $ 1,392
========= ========= ========= ========= =========
Other Data
EBITDA (as defined)(2).................................. $ 5,625 $ 6,983 $ 8,289 $ 8,499 $ 7,396
EBITDA margin........................................... 14.7% 14.6% 16.2% 15.7% 14.1%
Depreciation and amortization........................... $ 1,623 $ 1,521 $ 1,774 $ 1,969 $ 1,814
Capital expenditures.................................... 741 2,980 1,394 1,271 4,144
Balance Sheet Data(3) (at period end)
Total assets............................................ $27,430 $33,602 $38,025 $27,275 $28,247
Long-term debt, including current portion............... 7,828 9,120 6,623 30,950 33,850
Stockholders' equity (deficit).......................... 6,255 8,807 11,511 (15,279) (13,887)
</TABLE>
- -----------
(1) Klearfold received commissions and royalties on certain sales made by PTP.
Klearfold owned 51% of PTP prior to the sale of this subsidiary on April
19, 1996. PTP ceased operations in 1997.
(2) EBITDA is defined as income from continuing operations before deducting
interest expense, income taxes, depreciation and amortization and
excludes, to the extent applicable for the relevant period, (i) gain
(loss) on sale of fixed assets, (ii) stock-based compensation expense, and
(iii) PTP royalty and commission income. EBITDA is not a substitute for
operating income, net earnings and cash flow from operating activities as
determined in accordance with generally accepted accounting principles as
a measure of profitability or liquidity. EBITDA is presented as additional
information because management believes it to be a useful indicator of the
Company's ability to service and/or incur indebtedness.
(3) Balance sheet data includes amounts related to PTP at December 31, 1993,
1994 and 1995 prior to the sale of PTP on April 19, 1996.
<PAGE>
RISK FACTORS
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act.
Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially from the
Company's forward-looking statements are set forth below and elsewhere in this
Prospectus. All forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth below. See "Special Note Regarding
Forward-Looking Statements".
Leverage
In connection with the consummation of the Transactions, the Company
incurred a significant amount of indebtedness and, as a result, the Company is
highly leveraged. On December 31, 1997, after giving pro forma effect to the
Transactions, the Company would have had total funded indebtedness of
approximately $111.6 million (of which $100.0 million would have consisted of
the Notes and the balance of approximately $11.6 million would have consisted of
obligations under the IRB Financings (secured by letters of credit with an
aggregate face amount of approximately $12.6 million issued under the New Credit
Facility)) and stockholders' equity of approximately $4.5 million. Also, after
giving pro forma effect to the Transactions, the Company's ratio of earnings to
fixed charges would have been 1.4x for the year ended December 31, 1997. The
Company is permitted to incur substantial additional indebtedness in the future.
See "Capitalization", "Unaudited Pro Forma Combined Financial Data" and
"Description of Notes".
The Company's ability to make scheduled payments of principal of, or to
pay the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures and
any acquisitions will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the current
level of operations and anticipated cost savings and revenue growth, management
believes that cash flow from operations and available cash, together with
available borrowings under the New Credit Facility, will be adequate to meet the
Company's future liquidity needs for at least the next several years. The
Company may, however, need to refinance all or a portion of the principal of the
Notes on or prior to maturity. There can be no assurance that the Company's
business will generate sufficient cash flow from operations, that anticipated
revenue growth and operating improvements will be realized or that future
borrowings will be available under the New Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-IMPAC Group, Inc. Pro
Forma Liquidity and Capital Resources".
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to: (i) making
it more difficult for the Company to satisfy its obligations with respect to the
Notes, (ii) increasing the Company's vulnerability to general adverse economic
and industry conditions, (iii) limiting the Company's ability to obtain
additional financing to fund future working capital, capital expenditures,
acquisitions and other general corporate requirements, (iv) requiring the
dedication of a substantial portion of the Company's cash flow from operations
to the payment of principal of, and interest on, its indebtedness, thereby
reducing the availability of such cash flow to fund working capital, capital
expenditures, research and development or other general corporate purposes, (v)
limiting the Company's flexibility in planning for, or reacting to, changes in
its business and the specialty packaging industry, and (vi) placing the Company
at a competitive disadvantage with respect to less leveraged competitors. In
addition, the Indenture and the New Credit Facility contain financial and other
restrictive covenants that limit the ability of the Company to, among other
things, borrow additional funds. Failure by the Company to comply with such
covenants could result in an event of default which, if not cured or waived,
could have a material adverse effect on the Company. In addition, the
<PAGE>
degree to which the Company is leveraged could prevent it from repurchasing all
of the Notes tendered to it upon the occurrence of a Change of Control. See
"Description of Notes--Repurchase at the Option of Holders--Change of Control"
and "Description of Other Indebtedness--New Credit Facility".
Ranking
The Notes and the Subsidiary Guarantees are subordinated in right of
payment to all current and future Senior Debt of the Company and the Guarantors.
However, the Indenture provides that the Company will not, and will not permit
any of the Guarantors to, incur or otherwise become liable for any indebtedness
that is subordinate or junior in right of payment to any Senior Debt and senior
in any respect in right of payment to the Notes or any of the Subsidiary
Guarantees. Upon any distribution to creditors of the Company or a Guarantor in
a liquidation or dissolution of the Company or a Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or a Guarantor or its property, the holders of Senior Debt will be
entitled to be paid in full before any payment may be made with respect to the
Notes. In addition, the subordination provisions of the Indenture provide that
payments with respect to the Notes will be blocked in the event of a payment
default on Senior Debt and may be blocked for up to 179 days each year in the
event of certain non-payment defaults on Senior Debt. In the event of a
bankruptcy, liquidation or reorganization of the Company or a Guarantor, holders
of the Notes will participate ratably with all holders of subordinated
indebtedness of the Company or such Guarantor that is deemed to be of the same
class as the Notes, and potentially with all other general creditors of the
Company, based upon the respective amounts owed to each holder or creditor, in
the remaining assets of the Company. In any of the foregoing events, there can
be no assurance that there would be sufficient assets to pay amounts due on the
Notes. As a result, holders of Notes may receive less, ratably, than the holders
of Senior Debt. As of December 31, 1997, on a pro forma basis after giving
effect to the Transactions, approximately $11.6 million of IRB Financings (as
defined herein) would have been outstanding, fully secured by approximately
$12.6 million of letters of credit issued under the New Credit Facility and
which would have constituted all of the Company's Senior Debt, and approximately
$40.0 million would have been available for additional borrowing under the New
Credit Facility. The Indenture permits the incurrence of substantial additional
indebtedness, including Senior Debt, by the Company and its subsidiaries in the
future. See "Description of Other Indebtedness--New Credit Facility".
Holding Company Structure
The Company has no operations of its own and derives substantially all of
its revenue from its subsidiaries. Holders of indebtedness of, and trade
creditors of, subsidiaries of the Company would generally be entitled to payment
of their claims from the assets of the affected subsidiaries before such assets
were made available for distribution to the Company. As of December 31, 1997, on
a pro forma as adjusted basis after giving effect to the Transactions,
approximately $11.6 million of IRB Financings (as defined herein) would have
been outstanding, fully secured by approximately $12.6 million of letters of
credit issued under the New Credit Facility and which would have constituted all
of the Company's Senior Debt, and approximately $40.0 million would have been
available for additional borrowing under the New Credit Facility. The Indenture
permits the incurrence of substantial additional indebtedness by the Company and
its subsidiaries and permits significant investments by the Company in its
subsidiaries. In the event of a bankruptcy, liquidation or reorganization of a
subsidiary, holders of any of such subsidiary's indebtedness will have a claim
to the assets of the subsidiaries that is prior to the Company's interest in
those assets.
<PAGE>
Business Integration Risk
The Company has no prior history as a combined entity and its operations
have not previously been managed on a combined basis. Prior to the Transactions,
AGI and Klearfold were operated as separate entities. The Company's future
operations and earnings are largely dependent upon management's ability to
successfully execute the Company's strategy of offering the combined product
line of AGI and Klearfold to the Company's customers. This requires substantial
attention from the Company's management team which, to date, has not operated on
a combined basis. In addition, management is required to apply its business
strategy to an entity which is significantly larger than the entity it
previously managed. Additionally, the need to focus management's attention on
integration of the businesses and implementation of the Company's
post-Combination strategy may limit the Company's ability to successfully pursue
other opportunities related to its business for the foreseeable future. The
historical financial statements and pro forma financial statements presented in
this Prospectus may not necessarily be indicative of the results that would have
been attained had the Company operated on a combined basis.
Effects of Industry Shifts
The Company's packaging products are almost entirely targeted to consumer
products companies. Sales of consumer products are subject to changing tastes
and technologies that cannot be predicted. Moreover, the adoption by various
consumer products industries of new forms of packaging or industry shifts in the
manner in which certain products, such as music, are delivered to consumers may
in the future have a material adverse effect on the Company. For example, the
Company experienced significant, although temporary, declines in revenues as the
CD displaced the LP and as the CD industry abandoned the long-box. Although the
Company has in the past successfully adapted to industry changes, no assurances
can be made that the Company will be able to do so in the future without
substantial loss of revenues, or at all, or that in the future the medium for
delivery of products such as music, including delivery through the Internet,
will not result in lower demand for the Company's products or cause the
Company's products to become less competitive or obsolete.
Variability of Quarterly Results
A significant portion of the Company's business is attributable to special
projects relating to particular hit movie or music releases. The existence and
timing of such major releases may cause the Company's quarterly and annual
revenues to vary significantly. For example, during the first fiscal quarter of
1997, AGI generated record first quarter revenues, partly as a result of special
projects that will not contribute to revenues in the first quarter of 1998. As a
result, the Company expects to report a significant decline in sales and EBITDA
in the first quarter of 1998 compared to the first quarter of 1997.
Technological Change; Manufacturing Process Developments
The markets for the Company's products may be affected by technological
change and new product introductions. The Company's success will depend, in
part, upon its continued ability to manufacture products that meet changing
customer needs, successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis and enhance and
expand its existing product offerings. Current competitors or new market
entrants may develop new products with features that could adversely affect the
competitive position of the Company's
<PAGE>
products. The Company has invested and continues to invest substantial resources
in the development of new products and improved manufacturing processes;
however, there can be no assurance that the Company's new product or process
development efforts will be successful or that the emergence of new
technologies, industry standards or customer requirements will not render the
Company's technology, equipment or processes obsolete or uncompetitive. Any
failure or delay in accomplishing these goals could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, to the extent that the Company determines that new manufacturing
equipment or processes are required to remain competitive, the acquisition and
implementation of these technologies, equipment and processes are likely to
require significant capital investment by the Company.
Risks Related to Potential Future Acquisitions
The Company may in the future pursue selective acquisitions within the
specialty packaging industry, although the Company currently has no agreement or
commitment with respect to any acquisition. Future acquisitions by the Company
could result in the incurrence of debt and contingent liabilities and an
increase in amortization expenses related to goodwill and other intangible
assets, which could have a material adverse effect upon the Company's business,
financial condition and results of operations. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operation,
technologies, services and products of the acquired companies and the diversion
of management's attention from other business concerns. In the event that any
such acquisition were to occur, there can be no assurance that the Company's
business, financial condition and results of operations would not be materially
adversely affected.
Competition
Most of the Company's products are sold in highly competitive markets in
the United States. The Company competes with a significant number of companies
of varying sizes on the basis of quality, service and price and the ability to
supply products to customers in a timely manner. The Company believes that its
primary competitors are Ivy Hill Corporation, Queens Group, Inc. and Shorewood
Packaging Corporation, some of which are larger than the Company and may have
substantially greater financial resources. Competitive pressures or other
factors could cause the Company to lose existing business or opportunities to
generate new business or could result in significant price erosion, all of which
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition".
Environmental Matters and Governmental Regulations
The past and present operations of the Company and the past and present
ownership and operations of real property by the Company are subject to
extensive and changing federal, state and local environmental laws and
regulations pertaining to the discharge of materials into the environment, the
handling and disposition of wastes, the recycling, composition and recycled
content of packaging, or otherwise relating to the protection of the
environment. These laws include, but are not limited to, the Comprehensive
Environmental Response Compensation and Liability Act, the Water Pollution
Control Act, the Clean Air Act and the Resource Conservation and Recovery Act,
as those laws have been amended and supplemented, the regulations promulgated
thereunder, and any applicable state analogs. The Company's operations are also
governed by laws and regulations relating to employee health and safety.
Governmental authorities have the power to enforce compliance with their
regulations, and violations may result in the payment of fines or the entry of
injunctions or both. The Company believes that it is in material compliance with
such applicable
<PAGE>
laws and regulations and that its current environmental controls are adequate to
address existing regulatory requirements. In addition to the effects of
regulation, the Company's business may also be affected by environmental
concerns of consumers with respect to packaging. For example, in the early
1990's the music industry voluntarily stopped using "long-box" packaging for CDs
in response to these concerns. Future environmental concerns could have a
material effect on the demand for the Company's packaging. See "Effects of
Industry Shifts".
As is the case with other companies engaged in similar businesses, the
Company could incur costs relating to environmental compliance, including
remediation costs related to historical hazardous materials handling and
disposal practices at certain facilities. In the past the Company has undertaken
remedial activities to address on-site soil contamination caused by historic
operations. None of these cleanups has resulted in any material liability. It is
possible that future developments (for example, new regulations or stricter
regulatory requirements) could result in the Company incurring material costs to
comply with applicable environmental laws and regulations. In addition, the
Company has not undertaken an independent investigation of all of its
facilities; accordingly, there can be no assurance that in the future conditions
requiring remediation will not be identified.
Contracts
The Company has entered into supply contracts with three key customers.
These contracts represented approximately 11% of the Company's business in
fiscal 1997. The supply contracts are generally terminable for any material
breach or events of insolvency. While the Company has no reason to believe
otherwise, there can be no assurance that these contracts will be renewed. The
loss of any of these contracts could materially adversely affect the Company.
Controlling Stockholders
Heritage and certain members of senior management or their affiliates own
substantially all of the outstanding voting stock of IMPAC, which is the sole
stockholder of AGI and Klearfold and, by virtue of such ownership, have the
power to control all matters submitted to stockholders of IMPAC and to elect all
directors of IMPAC and its subsidiaries, including AGI and Klearfold. In
addition, Heritage and certain members of senior management have the right,
under certain circumstances, to sell their stock back to IMPAC (subject to
certain restrictions under the Indenture and the New Credit Facility) which
could result in further concentration of ownership. Lastly, pursuant to the
Stockholder Agreement (as defined herein), Heritage has the right to elect a
majority of IMPAC's board of directors in the event the Company does not meet
certain levels of financial performance, with testing of these targets to
commence after June 30, 1999, and under certain other circumstances. See
"Principal Stockholders", "Management" and "Certain Relationships and Related
Transactions".
Fraudulent Transfer Statutes
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the
Company, or any Guarantor, at the time it incurred the indebtedness evidenced by
the Notes or the Subsidiary Guarantees, (i) (a) was or is insolvent or rendered
insolvent by reason of such incurrence or (b) was or is engaged in a business or
transactions for which the assets remaining with the Company or any Guarantor
constituted unreasonably small capital or (c) intended or intends to incur, or
believed or believes that it would incur debts beyond its ability to pay such
debts as they mature, and (ii) received or receives less than reasonably
equivalent value or fair consideration for the incurrence of such indebtedness,
then the Notes or the Subsidiary Guarantees, could be voided, or claims in
respect of the Notes or the
<PAGE>
Subsidiary Guarantees could be subordinated to all other debts of the Company or
any Guarantor. In addition, the payment of interest and principal by the Company
or any Guarantor pursuant to the Notes could be voided and required to be
returned to the person making such payment, or to a fund for the benefit of the
creditors of the Company or any Guarantor.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or any Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the saleable value of all of its assets at a fair valuation or if
the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company and the Guarantors believe that, after giving
effect to the indebtedness incurred in connection with the Transactions, neither
the Company nor any Guarantor will be insolvent, will have unreasonably small
capital for the business in which it is engaged or will incur debts beyond its
ability to pay such debts as they mature. There can be no assurance, however, as
to what standard a court would apply in making such determinations or that a
court would agree with the Company's and the Guarantors' conclusions in this
regard.
Possible Inability to Fund a Change of Control Offer
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. Under the terms of the Stockholder Agreement, Heritage has the right
to cause a sale of the Company under certain circumstances, which would
constitute a Change of Control. See "Management" and "Certain Relationships and
Related Transactions". However, there can be no assurance that sufficient funds
will be available at the time of any Change of Control to make any required
repurchases of Notes tendered or that restrictions in the New Credit Facility
will allow the Company to make such required repurchases. Notwithstanding these
provisions, the Company could enter into certain transactions, including certain
recapitalizations, that would not constitute a Change of Control but would
increase the amount of debt outstanding at such time. See "Description of
Notes--Repurchase at the Option of Holders".
Risk of Adverse Consequences of Potential Failure to Adhere to Exchange Offer
Procedures
Issuance of the New Notes in exchange for the Existing Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Existing Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. All questions as to the validity,
form, eligibility (including time of receipt) and acceptance of the Existing
Notes tendered for exchange will be determined by the Company in its sole
discretion, which determination will be final and binding on all parties.
Holders of the Existing Notes desiring to tender such Existing Notes in exchange
for New Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities with
respect to the tenders of the Existing Notes for exchange. Existing Notes that
are not tender or are tendered but not accepted will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof and, except as provided herein, the Company
will have no further obligations to provide for the registration under the
Securities Act of such Existing Notes. To the extent that Existing Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Existing Notes could be adversely affected. See
"Exchange Offer."
Absence of a Public Market
There can be no assurance regarding the future development of a market for
any of the Notes, or the ability of holders of any of the Notes to sell their
Notes, or the price at which such holders may be able to sell such Notes. If
such a market were to develop, the Notes could trade at prices that may be lower
than the initial offering price depending on many factors, including prevailing
interest rates, the Company's operating results and the market for similar
securities. The Initial Purchasers have advised the Company that they currently
intend to make a market in the Notes. The Initial Purchasers are not obliged to
do so, however, and any market-making activity with respect to the Notes may be
discontinued at any time without notice. Therefore, there can be no assurance as
to the liquidity of any trading market for the Notes, or that an active public
market for the New Notes will develop. In addition, such market-making activity
will be subject to the limitations imposed by the Securities Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and may be
limited during the Exchange Offer. The Company does not intend to apply for
listing or quotation of the New Notes on any securities exchange or stock
market; however, the Existing Notes are eligible for trading in the PORTAL
market of the National Association of Securities Dealers, Inc.
To the extent that Existing Notes are tendered and accepted in the
Exchange Offer, the trading market for the remaining untendered or tendered but
not accepted Existing Notes could be adversely affected. Because the Company
anticipates that most holders of the Existing Notes will elect to
<PAGE>
exchange such Existing Notes for New Notes due to the absence of restrictions on
the resale of New Notes under the Securities Act, the Company anticipates that
the liquidity of the market for any Existing Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
<PAGE>
THE COMBINATION
In February 1998, KFI Holding, its stockholders, and certain stockholders
and holders of stock appreciation rights of AGI entered into an Investment
Agreement (the "Investment Agreement"), under which (i) the stockholders of KFI
Holding agreed to contribute to KFI Holding the entire outstanding capital stock
of KFI Holding and a warrant to purchase KFI Holding capital stock and to invest
approximately $4.6 million in cash, and (ii) certain stockholders and holders of
stock appreciation rights of AGI agreed to contribute to KFI Holding shares of
AGI common stock and to invest the proceeds of their stock appreciation rights,
totaling an aggregate of $14.4 million. In exchange for these contributions and
cash investments, KFI Holding agreed to issue to the contributing or investing
parties shares of its common stock (the "Common Stock") and upon consummation of
such issuance, KFI Holding was renamed IMPAC Group, Inc.
At the same time, KFI Holding, its wholly-owned subsidiary AGI Acquisition
Corp., AGI and certain stockholders of AGI and KFI Holding entered into an
Agreement and Plan of Merger (the "Agreement and Plan of Merger"), under which
AGI Acquisition Corp. merged on March 12, 1998 with and into AGI, with AGI as
the surviving corporation. In this merger, the shares of AGI not contributed to
the Company under the Investment Agreement, a stock option and certain stock
appreciation rights were converted into a right to receive cash in the aggregate
amount of approximately $30.5 million, net of fees. In addition, immediately
prior to the closing of the Combination the stockholders of AGI received a
dividend in the aggregate amount of approximately $22.5 million. See
"Management" and "Certain Relationships and Related Transactions".
Klearfold and AGI are wholly-owned subsidiaries of IMPAC. The combination
of AGI with KFI Holding and its subsidiaries pursuant to the Agreement and Plan
of Merger, and related transactions, are referred to together in this Prospectus
as "the Combination". The Combination, a new credit facility providing for $40.0
million in revolving credit borrowings and $13.0 million in letters of credit
(the "New Credit Facility"), the Offering and the application of the proceeds
therefrom are collectively referred to as the "Transactions".
The senior management of the Company together own approximately 55% of the
Company's Common Stock. An affiliate of Heritage Partners, Inc. ("Heritage")
owns approximately 40% of the Company's Common Stock, with the remaining 5% held
by certain former stockholders of AGI. Heritage is a Boston-based private
investment company with $530 million in capital under management, specializing
in the acquisition and equity-based recapitalization of private, family owned
businesses. See "Beneficial Ownership" and "Certain Relationships and Related
Transactions".
<PAGE>
USE OF PROCEEDS
No proceeds will be received by the Company and the Guarantors from the
Exchange Offer. The net proceeds of the sale of the Existing Notes were
approximately $97.0 million, after deducting discounts and commissions and
expenses related to the sale of the Existing Notes. The Company used the net
proceeds of the sale of the Existing Notes to consummate the Combination, repay
certain existing indebtedness, pay certain fees and expenses in connection with
the Transactions and for general corporate purposes.
The following table summarizes the sources and uses of funds for the sale
of the Existing Notes:
(in millions)
Sources of Funds
New Credit Facility(1)..................................... $ 0.0
101/8% Senior Subordinated Notes........................ 100.0
Equity contributions:
AGI management equity investment..................... 14.4
KFI Holding management equity investment(2).......... 6.0
Heritage equity investment(3)........................ 13.6
----
Total sources of funds.......................... $ 134.0
===========
Uses of Funds
Purchase of AGI equity(4).................................. $ 69.2
Contributed KFI Holding equity............................. 15.0
Retirement of Klearfold indebtedness(5).................... 29.8
Retirement of AGI indebtedness(6).......................... 14.7
Cash for working capital................................... 0.3
Fees and expenses.......................................... 5.0
---------
Total uses of funds........................... $ 134.0
===========
- -------------
(1) The New Credit Facility provides for up to $40.0 million of revolving
credit borrowings and up to $13.0 million of letters of credit, and
matures in 2003. As of the date of the closing of the Transaction, letters
of credit in the aggregate amount of approximately $12.6 million were
outstanding under the New Credit Facility and $40.0 million of revolving
credit borrowings were available to the Company.
(2) Represents $1.2 million in cash and $4.8 million in contributed stock of
KFI Holding (the value ascribed to the equity of KFI Holding taking into
account (i) the repayment of approximately $29.8 million of Klearfold
indebtedness and (ii) approximately $4.0 million of the Klearfold IRBs
remaining outstanding after the Transactions).
(3) Represents $3.4 million in cash and $10.2 million in contributed stock of
KFI Holding (the value ascribed to the equity of KFI Holding taking into
account (i) the repayment of approximately $29.8 million of Klearfold
indebtedness and (ii) approximately $4.0 million of the Klearfold IRBs
remaining outstanding after the Transactions).
(4) Represents the acquisition by the Company of all of the outstanding common
stock of AGI and settlement of certain stock appreciation rights for $54.8
million of cash, including a dividend of approximately $22.5 million paid
to AGI stockholders immediately prior to the Combination, and $14.4
million (the ascribed value) of common stock of the Company issued to
AGI's management. Approximately $7.6 million of the AGI IRBs remain
outstanding after the Transactions. See "Management" and "Certain
Relationships and Related Transactions".
(5) Reflects the total funded indebtedness of Klearfold, other than the
Klearfold IRBs, that were outstanding immediately prior to the
Combination. All of such indebtedness was owed under the Revolving Credit
and Term Loan Agreement (the "Revolving Credit and Term Loan Agreement"),
dated as of June 7, 1996, with
<PAGE>
BankBoston, N.A. and National Westminster Bank Plc., as co-agents,
providing for two term loans aggregating $31.0 million in principal amount
(the "Term Loans") and revolving credit loans of up to $12 million,
including letters of credit (the "Revolving Loan"). Term Loan A ($21.0
million) matures by June 30, 2002. Term Loan B ($10.0 million) matures by
June 30, 2003. Term Loans bear interest at the bank's base rate plus
applicable margins. The effective rates at December 31, 1997 were 8.5% and
9.0% for Term Loans A and B, respectively. As of December 31, 1997, no
borrowings were outstanding and $4.0 million of letters of credit are
outstanding under the Revolving Loan. The effective interest rate on the
Revolving Loans at December 31, 1997 was 9.75% per annum and letters of
credit bear fees equal to 3.0% per annum. This Revolving Credit and Term
Loan Agreement was terminated and refinanced concurrently with the
Transactions.
(6) Reflects the total funded indebtedness of AGI, other than the AGI IRBs
that were outstanding immediately prior to the Combination.
<PAGE>
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of December 31, 1997. This table should be read in conjunction with the
related "Unaudited Pro Forma Combined Financial Data" and the financial
statements and the related notes thereto included elsewhere in this Prospectus.
Pro Forma as of
---------------
December 31, 1997
-----------------
(in millions)
New Credit Facility(1)....................... $ 0.0
IRB Financings(2)............................ 11.6
10 1/8 % Senior Subordinated Notes........... 100.0
-----------
Total debt......................................... 111.6
Total stockholders' equity......................... 4.5
-----------
Total capitalization............................... $ 116.1
===========
- -----------------
(1) The New Credit Facility provides for up to $40.0 million of revolving
credit borrowings and up to $13.0 million of letters of credit, and
matures in 2003. Management estimates that as of the date of the closing
of the Transactions, letters of credit in the aggregate amount of
approximately $12.6 million were outstanding under the New Credit Facility
and $40.0 million of revolving credit borrowings were available to the
Company.
(2) Consists of the IRB Financings incurred by AGI and Klearfold. The IRB
Financings are fully secured by approximately $12.6 million of letters of
credit issued under the New Credit Facility. See "Description of Other
Indebtedness".
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following Unaudited Pro Forma Combined Financial Data of IMPAC are
based on the historical financial statements of AGI and the historical
consolidated financial statements of KFI Holding included elsewhere in this
Prospectus, adjusted to give effect to the pro forma adjustments described in
the notes thereto. The Unaudited Pro Forma Combined Statement of Income gives
effect to the Offering and the Combination as though these transactions had
occurred on January 1, 1997. The Unaudited Pro Forma Combined Balance Sheet
gives effect to the Offering and the Combination as though these transactions
had occurred on December 31, 1997.
The pro forma adjustments are based upon available data and certain
assumptions that Company management believes are reasonable. The Unaudited Pro
Forma Combined Financial Data are not necessarily indicative of the Company's
financial position or results of operations that might have occurred had the
aforementioned transactions been completed as of the dates indicated above and
do not purport to represent what the Company's financial position or results of
operations might be for any future period or date. The Unaudited Pro Forma
Combined Financial Data should be read in conjunction with the financial
statements and the related notes and the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<PAGE>
IMPAC GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
KFI OFFERING COMBINATION
--------- AGI SUBTOTAL --------------- --------------- PRO FORMA
HOLDING ------- --------- ADJUSTMENTS ADJUSTMENTS ----------
--------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash............................................. $ 194 $ 1,029 $ 1,223 $ 70,000(1) $ (63,420)(1) $ 6,774
(1,029)(8)
Accounts receivable.............................. 5,986 15,921 21,907 -- -- 21,907
Other receivables................................ (46) 831 785 -- -- 785
Inventories...................................... 6,957 6,407 13,364 -- 1,000 (8) 14,364
Prepaid expenses................................. 510 803 1,313 -- -- 1,313
Deferred income taxes............................ 661 -- 661 -- (400)(8) 261
Other current assets............................. 595 -- 595 -- -- 595
-------- ------- -------- ----------- ---------- --------
Total current assets.......................... 14,857 24,991 39,848 70,000 (63,849) 45,999
Property, plant and equipment, net................. 11,100 32,785 43,885 -- 3,279 (8) 47,164
Deferred financing costs........................... 1,024 -- 1,024 3,722 (2) -- 4,746
Restricted cash.................................... 625 625 625
Intangible assets.................................. -- -- -- -- 44,628 (8) 44,628
Other non-current assets........................... 641 1,143 1,784 -- -- 1,784
-------- ------- -------- ----------- ---------- --------
Total assets.................................. $ 28,247 $58,919 $ 87,166 $ 73,722 $ (15,942) $144,946
======== ======= ======== =========== ========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt................ $ 33,850 $ 1,980 $ 35,830 $ (29,850)(3) $ (1,980)(8) $ --
(4,000)(4)
Accounts payable and accrued
expenses....................................... 6,919 18,067 24,986 (371)(5) (2,497)(8) 22,118
Other current liabilities........................ -- 56 56 -- -- 56
-------- ------- -------- ----------- ---------- --------
Total current liabilities..................... 40,769 20,103 60,872 (34,221) (4,477) 22,174
Long-term debt................................... -- 6,420 6,420 100,000 (3) (6,420)(8) 100,000
Industrial revenue bonds......................... -- 7,640 7,640 4,000 (4) 11,640
Deferred income taxes............................ 1,307 -- 1,307 -- 5,311 (8) 6,618
Other long-term liabilities...................... 58 -- 58 -- -- 58
-------- ------- -------- ----------- ---------- --------
Total liabilities............................. 42,134 34,163 76,297 69,779 (5,586) 140,490
-------- ------- -------- ----------- ---------- --------
Stockholders' Equity (Deficit):
Common stock, voting, $.001 par
value............................................ -- -- -- -- -- --
Common stock, non-voting, $.001 par
value............................................ -- -- -- -- -- --
Common stock, voting, $1 par value............... -- 910 910 -- (910)(9) --
Preferred stock, non-voting, $.001 par
value ........................................ -- -- -- -- -- --
Additional paid-in capital....................... 20,000 565 20,565 4,500 (6) 14,400 (8) 38,900
(565)(9)
Notes receivable................................. (35) -- (35) -- -- (35)
Carryover basis adjustment....................... (37,142) -- (37,142) -- -- (37,142)
Retained earnings................................ 3,290 23,281 26,571 (557)(7) (23,281)(9) 2,733
-------- ------- -------- ----------- ---------- --------
-- -- -- -- -- --
Total stockholders' equity
(deficit)................................... (13,887) 24,756 10,869 3,943 (10,356) 4,456
-------- ------- -------- ----------- ---------- --------
Total liabilities and stockholders'
equity (deficit)............................ $ 28,247 $58,919 $ 87,166 $ 73,722 $ (15,942) $144,946
======== ======= ======== =========== ========== ========
</TABLE>
<PAGE>
IMPAC GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(1) Reflects adjustments to cash assuming consummation of the Offering
and the Combination as of December 31, 1997, computed as follows:
<TABLE>
<CAPTION>
Offering Combination Total
--------- ------------ -------------
Sources of funds:
<S> <C> <C> <C>
Issuance of the Notes........................................................ $100,000 $ ___ $100,000
Issuance of common stock..................................................... 4,600 ___ 4,600
Total sources............................................................. 104,600 ___ 104,600
-------- -------- --------
Uses of funds:
Purchase of AGI equity....................................................... ___ (54,770) (54,770)(a)
Retirement of AGI indebtedness............................................... ___ (8,400) (8,400)
Repayment of Klearfold indebtedness.......................................... (29,850) ___ (29,850)
Estimated fees and expenses.................................................. (4,750) (250) (5,000)
Total uses................................................................ (34,600) (63,420) (98,020)
----------------
Net adjustment to cash.................................................... $ 70,000 $(63,420) $ 6,580(b)
==========================================
</TABLE>
(a) Includes a dividend of approximately $22.5 million paid to AGI shareholders
immediately prior to the Combination.
(b) Funding requirements immediately prior to the Combination are approximately
$6.3 million more than pro forma requirements as of December 31, 1998 due
to an increase in assets.
(2) Adjustments to deferred financing costs:
<TABLE>
<CAPTION>
<S> <C>
Financing transactions........................ $4,650
Write-off of existing financing costs......... (928)
------
Net adjustment to deferred financing costs.. $3,722
======
</TABLE>
(3) Reflects the issuance of the Notes in connection with the Offering
and the repayment of all of Klearfold's indebtedness under the Revolving
Credit and Term Loan Agreement.
<TABLE>
<CAPTION>
Long-term debt:
<S> <C>
Issuance of the Notes.. $100,000
========
Current debt:
</TABLE>
Repayment of Klearfold indebtedness $(29,850)
========
(4) Adjustment to reclassify the Klearfold IRBs from current to long-
term, in connection with the Transactions.
(5) Adjustment to record the tax benefit for the write-off of existing
financing costs at an estimated effective tax rate of 40%.
(6) Adjustments to additional paid-in capital to record the issuance
of Common Stock and transaction fees associated with the issuance of Common
Stock:
<TABLE>
<CAPTION>
<S> <C>
Issuance of Common Stock....................................... $4,600
Transaction fees associated with the issuance of Common Stock.. (100)
------
</TABLE>
Net adjustment to additional paid-in capital $4,500
======
<PAGE>
IMPAC GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET - (CONTINUED)
(DOLLARS IN THOUSANDS)
Additionally, the preferred stock of KFI Holding was exchanged for Common Stock
of KFI Holding.
(7) Adjustments to record the write-off existing financing costs, net
of tax.
(8) Reflects management's preliminary allocation of purchase price for
the AGI acquisition in accordance with the purchase method of accounting.
<TABLE>
<CAPTION>
Purchase price:
<S> <C>
Cash, including payment of dividend to AGI Shareholders.. $54,770
Retirement of AGI indebtedness........................... 8,400
Issuance of Common Stock................................. 14,400
Estimated fees and expenses.............................. 250
-------
Total purchase price.................................. $77,820
=======
</TABLE>
<TABLE>
<CAPTION>
AGI
---------- Adjustments Pro Forma
Historical --------------- ----------
----------
<S> <C> <C> <C>
Cash $ 1,029 $ (1,029)(a) $ ___
Accounts receivable............................................................ 15,921 ___ 15,921
Other receivables.............................................................. 831 ___ 831
Inventories.................................................................... 6,407 1,000 (b) 7,407
Deferred income taxes.......................................................... ___ (400)(c) (400)
Other current assets........................................................... 803 ___ 803
------- ----------- --------
Total current assets......................................................... 24,991 (429) 24,562
Property, plant and equipment.................................................. 32,785 3,279 (d) 36,064
Other noncurrent assets........................................................ 1,143 ___ 1,143
Intangible assets.............................................................. ___ 44,628 (e) 44,628
------- ----------- --------
Total assets................................................................. 58,919 47,478 106,397
------- ------- --------
Current portion of long-term debt $ 1,980 $ (1,980)(f) $ ___
Accounts payable and accrued expenses 18,067 (2,497)(g) 15,570
Other current liabilities 56 ___ 56
------- ----------- --------
Total current liabilities 20,103 (4,477) 15,626
Long-term debt................................................................. 6,420 (6,420)(f) ___
Industrial revenue bonds....................................................... 7,640 ___ 7,640
Deferred income taxes.......................................................... ___ 5,311 (c) 5,311
------- ----------- --------
Total liabilities 34,163 (5,586) 28,577
------- ------- --------
Net assets required $24,756 $53,064 $ 77,820
======= ======= ========
</TABLE>
(a) To reflect the elimination of AGI cash not acquired as part of the
Combination.
(b) To reflect increase in inventories to estimated fair value based on
preliminary purchase price allocation. This write-up will result in a non-
recurring charge to the Company in the year subsequent to the acquisition
of AGI.
(c) To reflect deferred tax assets and liabilities based on preliminary
purchase price allocation and the change in AGI's income tax status.
(d) To reflect increase in property, plant and equipment to estimated fair
value based on preliminary purchase price allocation.
(e) To reflect excess purchase price over the fair value of net assets acquired
based on preliminary purchase price allocation.
(f) To reflect the reduction in current and long-term debt repaid in connection
with the Combination.
(g) To reflect the reduction in accounts payable and accrued expenses related
to accrued compensation not assumed by the Company in the Combination.
<PAGE>
IMPAC GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET - (CONTINUED)
(DOLLARS IN THOUSANDS)
(9) To record the elimination of AGI's historical common stock,
additional paid-in capital and retained earnings accounts in connection with the
Combination.
<PAGE>
IMPAC GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
KFI OFFERING COMBINATION
-------- AGI SUBTOTAL --------------- --------------- PRO FORMA
HOLDING --------- --------- ADJUSTMENTS ADJUSTMENTS ----------
-------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................. $52,493 $108,281 $160,774 $ -- $ -- $160,774
Cost of goods sold ........................ 39,322 76,459 115,781 -- 295 (3) 116,076
------- -------- -------- ----------- --------- --------
Gross profit ............................ 13,171 31,822 44,993 -- (295) 44,698
Selling, general and administrative
expenses ................................. 7,589 19,444 27,033 -- 1,521 (3) 28,554
Stock-based compensation
expense .................................. 2,326 2,326 (2,326)(4) --
PTP royalty and commission
(income) ................................. (33) -- (33) -- -- (33)
Operating income ........................ 5,615 10,052 15,667 -- 510 16,177
Interest expense, net ..................... (3,469) (1,242) (4,711) (6,713)(1) -- (11,424)
Gain (loss) on sale of fixed
assets ................................... 139 139 -- -- 139
------- -------- -------- ----------- --------- --------
Income before income taxes ................ 2,146 8,949 11,095 (6,713) 510 4,892
Income taxes .............................. (754) (231) (985) (767)(2) (800)(2) (2,552)
------- -------- -------- ----------- --------- --------
Net income ................................ $ 1,392 $ 8,718 $ 10,110 $ (7,480) $ (290) $ 2,340
======= ======== ======== =========== ========= ========
Other data:
EBITDA (as defined)(5) .................... $ 24,536
Cash interest expense(6) .................. 10,891
Depreciation and amortization ............. 8,392
Capital expenditures ...................... 10,171
Ratio of EBITDA to cash interest............ 2.3x
expense .
Ratio of total debt to EBITDA ............. 4.6
Ratio of earnings to fixed
charges(7) ............................... 1.4
</TABLE>
<PAGE>
IMPAC GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
(1) The increase in pro forma interest expense as a result of the Offering is
as follows:
<TABLE>
<CAPTION>
Year Ended
---------------------
DECEMBER 31, 1997
---------------------
<S> <C>
Interest on new borrowings:
Interest expense on the Notes at an interest rate of 10.125% .................................... $10,125
Commitment fee of 0.5% on unused availability under the New
Credit Facility ............................................................................... 200
Interest expense on outstanding Letters of Credit under the New
Credit Facility at an assumed rate of 1.625% .................................................. 205
Amortization of deferred financing cost incurred in connection with
the Offering .................................................................................. 518
-------
Total interest from debt requirements of the Offering ........................................ $11,048
Elimination of historical interest expense ......................................................... (4,335)
-------
Net increase in interest expense ................................................................ $ 6,713
=======
</TABLE>
(2) Represents the income tax adjustment required to result in a pro forma
income tax provision based upon (i) pro forma pre-tax income plus non deductible
amortization of intangibles; and (ii) an estimated effective tax rate of 40%.
(3) Reflects adjustments to record amortization of the excess of the purchase
price of the AGI common stock over the fair value of the net assets acquired
("Excess Purchase Price") after the preliminary allocation of the purchase
price to the estimated fair value of AGI's assets and liabilities acquired and
to record depreciation of Excess Purchase Price allocated to property, plant and
equipment. The amortization of the allocation of the Excess Purchase Price to
inventory is not reflected in the Unaudited Pro Forma Combined Statement of
Income as it is non-recurring in nature. (See Note 8 to the Unaudited Pro Forma
Combined Balance Sheet.)
<TABLE>
<CAPTION>
SELLING,
Cost of -------------------
-------- GENERAL AND
GOODS -------------------
-------- ADMINISTRATIVE
SOLD -------------------
-------- EXPENSES
-------------------
<S> <C> <C>
Amortization of intangible assets ............................. $ -- $1,488
Depreciation of property, plant and equipment ................. 295 33
---- ------
Total adjustment ........................................... $295 $1,521
==== ======
===============================
</TABLE>
(4) In connection with the Combination, certain AGI executives signed
employment agreements which specify such executives' compensation through the
term of the agreements. This adjustment reflects the difference between the
historical compensation expense recorded for these executives and the
contractual amounts reflected in the employment agreements.
(5) EBITDA is defined as income from continuing operations before deducting
interest expense, income taxes, depreciation and amortization and excludes, to
the extent applicable, (i) gain (loss) on sale of fixed assets, (ii) stock-based
compensation expense, and (iii) PTP royalty and commission income. EBITDA is not
a substitute for operating income, net earnings and cash flow from operating
activities as determined in accordance with generally accepted accounting
principles as a measure of profitability or liquidity. EBITDA is presented as
additional
<PAGE>
information because management believes it to be a useful indicator
of the Company's ability to service and/or incur indebtedness.
(6) For purposes of this computation, cash interest expense consists of pro
forma interest expense before the amortization of deferred financing costs.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
are defined as income before income taxes, plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (including amortization of
deferred financing costs) and a portion of operating lease rental expense that
is representative of the interest factor.
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA--AGI INCORPORATED
The selected financial data of AGI set forth below as of and for the four
years ended December 31, 1996 have been derived from the financial statements of
AGI which have been audited by Arthur Andersen LLP, independent public
accountants. The selected financial data of AGI set forth below as of and for
the year ended December 31, 1997 have been derived from the financial statements
of AGI which have been audited by Price Waterhouse LLP, independent public
accountants. The audited financial statements of AGI as of December 31, 1996 and
1997 and for the three years ended December 31, 1997 are included elsewhere
herein. The information contained in the following table should also be read in
conjunction with "Capitalization", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Income Statement Data
Net sales ............................................ $72,354 $74,756 $97,463 $92,834 $108,281
Cost of goods sold ................................... 55,259 58,492 74,441 67,860 76,459
------- ------- ------- ------- --------
Gross profit ....................................... 17,095 16,264 23,022 24,974 31,822
Selling, general and administrative expenses ......... 11,456 12,584 15,374 15,894 19,444
Stock-based compensation expense(1) .................. -- -- -- 171 2,326
------- ------- ------- ------- --------
Operating income ................................... 5,639 3,680 7,648 8,909 10,052
Interest expense, net ................................ (913) (807) (1,365) (1,370) (1,242)
Gain (loss) on sale of fixed assets .................. -- 658 45 (204) 139
------- ------- ------- ------- --------
Income before income taxes ........................... 4,726 3,531 6,328 7,335 8,949
Income taxes ......................................... (141) (71) (23) (234) (231)
------- ------- ------- ------- --------
Net income ........................................... $ 4,585 $ 3,460 $ 6,305 $ 7,101 $ 8,718
======= ======= ======= ======= ========
OTHER DATA
EBITDA (as defined)(2) ............................... $ 8,261 $ 6,928 $11,613 $13,667 $ 17,140
EBITDA margin ........................................ 11.4% 9.3% 11.9% 14.7% 15.8%
Depreciation and amortization ........................ $ 2,622 $ 3,248 $ 3,965 $ 4,587 $ 4,762
Capital expenditures ................................. 5,430 9,776 9,792 7,644 6,027
Ratio of earnings to fixed charges(3) ................ 4.9x 3.5x 3.7x 4.2x 5.1x
BALANCE SHEET DATA (AT PERIOD END)
Total assets ......................................... $37,506 $44,550 $54,418 $56,928 $ 58,919
Long-term debt, including current portion ............ 13,183 16,084 18,242 18,241 16,040
Stockholders' equity ................................. 11,718 13,284 17,276 20,911 24,756
</TABLE>
______________
(1) Stock-based compensation, a non-cash item in 1996 and 1997, relates to stock
appreciation rights held by certain executives of AGI.
(2) EBITDA is defined as income from continuing operations before deducting
interest expense, income taxes, depreciation and amortization and excludes,
to the extent applicable for the relevant period, (i) gain (loss) on sale of
fixed assets, (ii) stock-based compensation expense, and (iii) PTP royalty
and commission income. EBITDA is not a substitute for operating income, net
earnings and cash flow from operating activities as determined in accordance
with generally accepted accounting principles as a measure of profitability
or liquidity. EBITDA is presented as additional information because
management believes it to be a useful indicator of the Company's ability to
service and/or incur indebtedness.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
are defined as income before income taxes, plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (including amortization of
deferred financing costs) and a portion of operating lease rental expense
that is representative of the interest factor.
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA--KFI HOLDING
CORPORATION
The selected consolidated financial data of KFI Holding set forth below as of
and for the five years ended December 31, 1997 have been derived from the
financial statements of KFI Holding which have been audited by KPMG Peat Marwick
LLP, independent public accountants. The audited consolidated financial
statements of KFI Holding as of December 31, 1996 and 1997 and for the three
years ended December 31, 1997 are included elsewhere herein. The information
contained in the following table should also be read in conjunction with
"Capitalization", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Income Statement Data
Net sales ........................................... $38,309 $47,714 $51,214 $ 54,218 $ 52,493
Cost of goods sold .................................. 28,186 35,223 36,757 40,094 39,322
------- ------- ------- -------- --------
Gross profit ...................................... 10,123 12,491 14,457 14,124 13,171
Selling, general and administrative expenses ........ 6,121 7,029 7,942 7,594 7,589
PTP royalty and commission income(1) ................ (176) (200) (377) (731) (33)
------- ------- ------- -------- --------
Operating income .................................. 4,178 5,662 6,892 7,261 5,615
Interest expense, net ............................... (1,013) (1,020) (1,197) (2,324) (3,469)
Income from continuing operations before
income taxes ....................................... 3,165 4,642 5,695 4,937 2,146
Income taxes ........................................ (1,159) (1,616) (2,417) (2,003) (754)
Income from continuing operations ................... $ 2,006 $ 3,026 $ 3,278 $ 2,934 $ 1,392
======= ======= ======= ======== ========
OTHER DATA
EBITDA (as defined)(2) .............................. $ 5,625 $ 6,983 $ 8,289 $ 8,499 $ 7,396
EBITDA margin ....................................... 14.7% 14.6% 16.2% 15.7% 14.1%
Depreciation and amortization ....................... $ 1,623 $ 1,521 $ 1,774 $ 1,969 $ 1,814
Capital expenditures ................................ 741 2,980 1,394 1,271 4,144
Ratio of earnings to fixed charges(3) ............... 3.4x 4.2x 4.2x 2.7x 1.5x
BALANCE SHEET DATA(4) (AT PERIOD END)
Total assets ........................................ $27,430 $33,602 $38,025 $ 27,275 $ 28,247
Long-term debt, including current portion ........... 7,828 9,120 6,623 30,950 33,850
Stockholders' equity (deficit) ...................... 6,255 8,807 11,511 (15,279) (13,887)
</TABLE>
______________
(1) Klearfold received commissions and royalties on certain sales made by PTP.
Klearfold owned 51% of PTP prior to the sale of this subsidiary on April 19,
1996. PTP ceased operations in 1997.
(2) EBITDA is defined as income from continuing operations before deducting
interest expense, income taxes, depreciation and amortization and excludes,
to the extent applicable for the relevant period, (i) gain (loss) on sale of
fixed assets, (ii) stock-based compensation expense, and (iii) PTP royalty
and commission income. EBITDA is not a substitute for operating income, net
earnings and cash flow from operating activities as determined in accordance
with generally accepted accounting principles as a measure of profitability
or liquidity. EBITDA is presented as additional information because
management believes it to be a useful indicator of the Company's ability to
service and/or incur indebtedness.
(3) For purposes of computing this ratio of earnings to fixed charges, earnings
are defined as income before income taxes, plus fixed charges. Fixed charges
consist of interest expense
<PAGE>
on all indebtedness (including amortization of deferred financing costs) and
a portion of operating lease rental expense that is representative of the
interest factor.
(4) Balance sheet data includes amounts related to PTP at December 31, 1993,
1994 and 1995 prior to the sale of PTP on April 19, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except as otherwise indicated, the following discussion and analysis of
results of operations and financial condition of AGI and Klearfold covers
periods before the closing of the Transactions. Accordingly, the discussion and
analysis of such periods does not reflect the significant impact that the
Transactions will have on the Company. See "Unaudited Pro Forma Combined
Financial Data." In addition, the following discussion and analysis is based
upon and should be read in conjunction with "Selected Historical Financial
Information and Other Data--AGI Incorporated" and "Selected Historical
Financial Information and Other Data--KFI Holding Corporation" and the
financial statements of AGI and the consolidated financial statements of KFI
Holding, including the notes thereto, included elsewhere in this Prospectus.
AGI INCORPORATED
RESULTS OF OPERATIONS
Overview
AGI Incorporated is a leading supplier of high quality, value-added packaging
solutions to the entertainment, cosmetics, personal care and other consumer
products markets. Since its founding in 1968 as Album Graphics, Inc., AGI has
evolved from a designer and manufacturer of quality LP record jackets to a
provider of a wide range of printed packaging, high-end specialty packaging,
creative design services and production services. The marketing strategies of
AGI's customers rely on high quality, innovative packaging that enhances the
consumer's perception of product value and encourages impulse purchases. AGI has
established a strong reputation for developing creative designs and utilizing
innovative manufacturing techniques to provide its customers with extremely high
quality products with short turnaround times.
The following discussion should be read in conjunction with the audited
financial statements and related notes thereto of AGI included elsewhere in this
Prospectus. The following table sets forth for the periods indicated certain
historical income statement data, derived from AGI's income statements,
expressed as a percentage of net sales.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1995 1996 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Income Statement Data:
Net sales .................................................................. 100.0% 100.0% 100.0%
Cost of goods sold ......................................................... 76.4% 73.1% 70.6%
----- ----- -----
Gross profit ............................................................... 23.6% 26.9% 29.4%
Selling, general and administrative expenses ............................... 15.8% 17.1% 18.0%
Stock-based compensation expense ........................................... 0.0% 0.2% 2.1%
----- ----- -----
Operating income ........................................................... 7.8% 9.6% 9.3%
Interest expense, net ...................................................... (1.4)% (1.5)% (1.1)%
Gain (loss) on sale of fixed assets ........................................ 0.0% (0.2)% 0.1%
----- ----- -----
Income before income taxes ................................................. 6.4% 7.9% 8.3%
Income taxes ............................................................... (0.0)% (0.3)% (0.2)%
----- ----- -----
Net income ................................................................. 6.4% 7.6% 8.1%
===== ===== =====
</TABLE>
1997 COMPARED TO 1996
Net Sales for 1997 were $108.3 million compared to $92.8 million for 1996, an
increase of 16.6%. Of this increase, approximately $18.8 million was due largely
to additional sales to AGI's entertainment customers. AGI experienced strong
sales of specialty video packaging resulting in an increase of $15.2 million in
that category related primarily to the successful releases by AGI's existing
customers of several popular titles. In addition, approximately $3.6 million of
the increase in entertainment sales was due to additional volume of standard and
specialty CD packaging. These increases were partially offset by a $5.5 million
decrease in sales of CD-ROM packaging.
Gross Profit for 1997 was $31.8 million compared to $25.0 million for 1996, an
increase of 27.4%. The improvement in gross margin from 26.9% to 29.4% was due
to an increase in sales of higher value-added packaging products to the
entertainment industry, as discussed above. Gross margin also benefited from the
increased absorption rate of fixed costs at the higher overall sales volume and
improved operating efficiencies at AGI's Melrose Park facility as a result of
shifting the focus of this facility to the manufacturing of packaging products
for the cosmetics industry.
Selling, General and Administrative Expenses for 1997 were $19.4 million
compared to $15.9 million for 1996, an increase of 22.3%. The increase in
selling, general and administrative expenses as a percentage of sales from 17.1%
to 18.0% was due primarily to a $1.7 million increase in payouts under various
compensation programs tied to AGI's sales and profitability.
Stock-Based Compensation Expense for 1997 was $2.3 million compared to $0.2
million in 1996. This amount relates to stock appreciation rights held by
certain executives of AGI. The increase in expense, which was a non-cash item in
1997 and 1996, related to increases in AGI's equity value and vesting of certain
awards during 1997.
Operating Income for 1997 was $10.1 million compared to $8.9 million for 1996,
an increase of 12.8%.
Net Interest Expense for 1997 was $1.2 million compared to $1.4 million for
1996, a decrease of 9.3%. This decrease was due largely to lower average debt
levels resulting from an increase in cash provided by operating activities.
<PAGE>
Income Taxes were $0.2 million for each of 1997 and 1996. During the 1997 and
1996 periods, AGI was treated as an S corporation for Federal income tax
purposes and, accordingly, the related Federal tax liabilities were the
obligations of its individual shareholders.
Net Income for 1997 was $8.7 million compared to $7.1 million for 1996 an
increase of 22.8%.
1996 COMPARED TO 1995
Net Sales for 1996 were $92.8 million compared to $97.5 million for 1995, a
decrease of 4.7%. Of this decrease, approximately $8.9 million was due to year
to year variation in the performance of AGI's customers' video titles and a
general decline in CD-ROM based products offset partially by a $4.7 million
increase in sales of standard CD packaging. The increased volume of standard CD
packaging related to additional market share resulting primarily from new
customer relationships.
Gross Profit for 1996 was $25.0 million compared to $23.0 million for 1995, an
increase of 8.5%. The improvement in gross margin from 23.6% to 26.9% resulted
largely from improved margins on standard CD packaging realized at AGI's
Jacksonville facility, which completed its first full year of operations in
1996.
Selling, General and Administrative Expenses for 1996 were $15.9 million
compared to $15.4 million for 1995, an increase of 3.4%. Of the resulting
increase in selling, general and administrative expenses as a percentage of
sales from 15.8% to 17.1%, approximately $1.0 million was due to increased
administrative costs related to the first full year of operations at both the
Jacksonville and Franklin Park facilities along with the impact of lower overall
1996 sales.
Stock-Based Compensation Expense for 1996 of $0.2 million related to stock
appreciation rights awarded to certain executives of AGI. The increase in
expense, which was a non-cash item in 1996, related primarily to vesting of
certain awards during 1996.
Operating Income for 1996 was $8.9 million compared to $7.6 million for 1995,
an increase of 16.5%.
Net Interest Expense was $1.4 million for 1996 and 1995 due to consistent
levels of debt in each of the periods.
Income Taxes for 1996 were $0.2 million and less than $0.1 million in 1995.
During the 1996 and 1995 periods, AGI was treated as an S corporation for
Federal income tax purposes and, accordingly, the related Federal tax
liabilities were the obligations of its individual shareholders.
Net Income for 1996 was $7.1 million compared to $6.3 million for 1995, an
increase of 12.6%.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
AGI's primary cash requirements historically have related to capital
expenditures, working capital and distributions to shareholders to fund the
portion of their tax liabilities related to their distributive share of AGI's S
Corporation taxable income. AGI has funded these requirements
<PAGE>
through internally generated cash flow, borrowings under its bank credit
facility and the issuance of industrial revenue bonds.
Net cash provided by operating activities for 1997 was $14.7 million compared
to $9.9 million for 1996. Income from operations before non-cash charges
increased to $13.3 million from $11.9 million due to increased income from
operations. In 1997, income from operations before non-cash charges and a $1.3
million decrease in working capital requirements were used to fund $5.6 million
of net capital expenditures, $4.9 million of distributions to shareholders, a
net decrease of $2.2 million in outstanding borrowings under AGI's bank credit
facility and a decrease of $0.9 million in installment notes. In 1996, income
from operations before non-cash charges, along with increased net borrowings
under AGI's bank credit facility of $1.1 million, were used to fund $2.0 million
of working capital requirements, $6.8 million of net capital expenditures, $3.5
million of distributions to shareholders and a decrease of $0.7 million in
installment notes.
Net cash provided by operating activities for 1996 was $9.9 million compared
to $8.2 million for 1995. Income from operations before non-cash charges
increased to $11.9 million from $10.2 million due to increased income from
operations. In 1996, income from operations before non-cash charges, along with
increased net borrowings under AGI's bank credit facility of $1.1 million, were
used to fund $2.0 million of working capital requirements, $6.8 million of net
capital expenditures, distributions to shareholders of $3.5 million and a
decrease of $0.7 million in installment notes. In 1995, income from operations
before non-cash charges, $6.6 million of industrial revenue bond proceeds and a
$1.7 million increase in installment notes were used to fund $5.4 million of net
payments under AGI's bank credit facility, $8.8 million of net capital
expenditures, distributions to shareholders of $2.2 million, $2.0 million of
working capital requirements and a repurchase of common stock of $0.1 million.
AGI's prior bank credit facility, with Bank of America, Illinois, provided for
a term note and revolving line of credit which bore interest, at AGI's election,
at prime or the London International Bank Offer 30, 60 or 90-day Rate plus
2.25%. AGI had historically negotiated amendments to this facility, when
necessary, to reflect changes in its capital expenditure and working capital
requirements. AGI also had $7.6 million of industrial revenue bonds outstanding
which were issued to partially fund the capital expenditures related to the
construction and equipping of its Jacksonville facility in 1995. The variable
rate bonds mature on February 1, 2026 and remain outstanding after the
Transactions. AGI's bank credit facility was terminated and refinanced
concurrently with the Transactions.
KFI HOLDING CORPORATION
RESULTS OF OPERATIONS
Overview
KFI Holding, through its wholly-owned subsidiary Klearfold, is a leading
supplier of visual packaging solutions to the cosmetics, personal care, food and
beverage, and other consumer products markets. High quality, innovative
packaging that attractively displays the enclosed product, enhances the
consumer's perception of product value and encourages impulse purchases is an
important element of the marketing strategies of Klearfold's customers.
Klearfold has a strong reputation for developing creative packaging designs with
superior structural integrity. Klearfold believes it is a leader in quality,
service and innovation of creative, visual, value-added packaging.
<PAGE>
On June 7, 1996, a merger between Klearfold and KFI/Heritage Acquisition
Corporation, a wholly owned subsidiary of KFI Holding was consummated. KFI
Holding and KFI/Heritage Acquisition Corporation were formed to accomplish the
acquisition of all of the capital stock of Klearfold by certain affiliates of
Heritage together with existing Klearfold shareholders and key management
members.
The following discussion should be read in conjunction with the audited
financial statements and related notes thereto of KFI Holding included elsewhere
in this Prospectus. The following table sets forth for the periods indicated
certain historical income statement data, derived from KFI Holding's income
statements, expressed as a percentage of net sales.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1995 1996 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Income Statement Data:
Net sales ............................................................... 100.0% 100.0% 100.0%
Cost of goods sold ...................................................... 71.8% 73.9% 74.9%
----- ----- -----
Gross profit ............................................................ 28.2% 26.1% 25.1%
Selling, general and administrative expenses ............................ 15.5% 14.0% 14.5%
PTP royalty and commission income ....................................... (0.7)% (1.3)% (0.1)%
----- ----- -----
Operating income ........................................................ 13.4% 13.4% 10.7%
Interest expense, net ................................................... (2.3)% (4.3)% (6.6)%
----- ----- -----
Income from continuing operations before income taxes ................... 11.1% 9.1% 4.1%
Income taxes ............................................................ (4.7)% (3.7)% (1.4)%
----- ----- -----
Income from continuing operations ....................................... 6.4% 5.4% 2.7%
===== ===== =====
</TABLE>
1997 COMPARED TO 1996
Net Sales for 1997 were $52.5 million compared to $54.2 million for 1996, a
decrease of 3.2%. This decrease was due to a decrease in sales in the cosmetics
market of approximately $4.3 million. This decrease in cosmetics sales was due
primarily to a decision by Klearfold's largest customer for cosmetics packaging
to begin to manufacture certain of its packaging internally. In 1998, Klearfold
expects this customer to continue to purchase higher value-added packaging from
Klearfold while completing its transition to internal production of certain
packaging, which may further impact Klearfold's sales during 1998. The decrease
in sales to this customer was partially offset by an approximately $2.6 million
increase in sales of windowed packaging to other cosmetics customers. The
increased sales to other consumer products markets was due largely to increased
demand for Klearfold's visual packaging, particularly with customers in the
personal care and undergarment markets.
Gross Profit for 1997 was $13.2 million compared to $14.1 million for 1996, a
decrease of 6.7%. The decrease in gross margin from 26.1% to 25.1% was due
primarily to additional expenses experienced in the fourth quarter of 1997
associated with the installation and start-up of a new printing press and a less
favorable absorption rate of fixed costs at the lower sales volume. Klearfold
expects to incur additional expenses in connection with the installation and
start-up of this press, particularly in the first quarter of 1998, and expects
this press to be on line in the first half of 1998. Gross profit in 1997 also
reflects the effect of the termination of a packaging purchase arrangement for
which Klearfold received $0.8 million as compensation for manufacturing costs
incurred.
Selling, General and Administrative Expenses for both 1997 and 1996 were $7.6
million. Selling, general and administrative expenses as a percentage of net
sales were 14.5% in 1997 compared to 14.0% in 1996.
<PAGE>
PTP Royalty and Commission Income for 1997 were $33,000 compared to $0.7
million for 1996, a decrease of 95.5%. The decrease was due to PTP closing
operations in February.
Operating Income for 1997 was $5.6 million compared to $7.3 million for 1996,
a decrease of 22.7%.
Net Interest Expense for 1997 was $3.5 million compared to $2.3 million for
1996, an increase of 49.3%. The increase was due to higher average debt levels
in 1997 due to the June 1996 recapitalization and the associated debt which
includes $58,000 of interest expense with respect to the Klearfold IRBs.
Income Taxes for 1997 were $0.8 million compared to $2.0 million for 1996
reflecting an effective tax rate of approximately 35% and 41%, for 1997 and
1996, respectively, which includes the effect of reduced state income taxes.
Income from Continuing Operations for 1997 was $1.4 million compared to $2.9
million for 1996.
1996 COMPARED TO 1995
Net Sales for 1996 were $54.2 million compared to $51.2 million for 1995, an
increase of 5.9%. This increase was due primarily to a $6.2 million increase in
sales to the cosmetics market partially offset by a $3.0 million decrease in
sales to other consumer products markets. The increase in cosmetics sales was
largely due to improved market penetration. The decreased sales to other
consumer products markets was due primarily to the year-to-year change in one
significant food and beverage customer's promotional program, along with
decreased demand due to a one-time inventory reduction effort by a significant
apparel customer.
Gross Profit for 1996 was $14.1 million compared to $14.5 million for 1995, a
decrease of 2.3%. The resulting decrease in gross margin was from 28.2% to
26.1%. In 1995, large manufacturing efficiency savings were realized in the
production of packaging for the cosmetics market. To generate increased 1996
cosmetics sales, a portion of the savings were passed through to certain
cosmetic customers, impacting 1996 gross profit by $0.5 million. In addition in
1996, the Virginia manufacturing facility was expanded to meet increased
production levels, adding fixed costs of $0.8 million.
Selling, General and Administration Expenses for 1996 were $7.6 million
compared to $7.9 million in 1995, a decrease of 4.4%. Selling, general and
administrative expenses as a percentage of sales were 14.0% in 1996 compared to
15.5% in 1995.
PTP Royalty and Commission Income for 1996 were $0.7 million compared to $0.4
million for 1995, an increase of 93.9%. This increase is due to higher PTP sales
levels in 1996, which generated royalties and commissions.
Operating Income for 1996 was $7.3 million compared to $6.9 million for 1995,
an increase of 5.4%.
Net Interest Expense for 1996 was $2.3 million compared to $1.2 million for
1995, an increase of 94.2%. The increase was due to higher average debt levels
due to the June, 1996 recapitalization and the associated debt.
<PAGE>
Income Taxes for 1996 were $2.0 million compared to $2.4 million for 1995, a
decrease of 17.1%, reflecting an effective tax rate of approximately 41% and 42%
for 1996 and 1995, respectively.
Income from Continuing Operations for 1996 was $2.9 million compared to $3.3
million for 1995.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
Klearfold's primary cash requirements historically have related to capital
expenditures, working capital and debt service. Klearfold has funded these
requirements through internally generated cash flow, borrowings under its bank
credit facilities and the issuance of industrial revenue bonds.
Net cash provided by operating activities for 1997 was $6.2 million compared
to $4.2 million for 1996. Income from continuing operations before non-cash
charges/income decreased to $2.6 million from $5.2 million due to decreased
income from operations. In 1997, income from operations before non-cash charges,
$3.3 million of proceeds from the issuance of industrial revenue bonds net of
$0.2 million of deferred financing costs and $3.6 million generated from
decreased working capital requirements were used to fund $4.1 million of capital
expenditures and $5.1 million net payments under Klearfold's bank credit
facility. In 1996, income from operations before non-cash charges, the $1.9
million proceeds of the sale of PTP, the $34.2 million proceeds of Klearfold's
bank credit facility and the issuance of $1.0 million of common stock and $19.0
million of preferred stock as part of Klearfold's recapitalization were used to
fund $0.7 million of working capital requirements, $1.3 million of capital
expenditures, $49.7 million to repurchase common stock, the retirement of $8.1
million of existing pre-recapitalization debt and $1.2 million of deferred
financing costs.
Net cash provided by operating activities for 1996 was $4.2 million compared
to $3.8 million for 1995. Income from continuing operations before non-cash
charges/income was $5.2 million for each of 1996 and 1995. In 1996, income from
operations before non-cash charges, the $1.9 million proceeds of the sale of
PTP, the $34.2 million proceeds of Klearfold's bank credit facility and the
issuance of $1.0 million of common stock and $19.0 million of preferred stock as
part of Klearfold's recapitalization were used to fund $0.7 million of working
capital requirements, $1.3 million of capital expenditures, $49.7 million to
repurchase common stock, the retirement of $8.1 million of existing pre-
recapitalization debt and $1.2 million of deferred financing costs. In 1995,
income from operations before non-cash charges was used to fund $1.3 million of
working capital requirements, $1.4 million of capital expenditures, a $0.5
million dividend to shareholders and net borrowings under Klearfold's bank
credit facility of $1.9 million.
Klearfold's prior bank credit facility (with a bank group consisting of
BankBoston N.A., National Westminster Bank PLC and Mellon Bank) provided for
term loans and a revolving line of credit bearing interest, at Klearfold's
option, at prime plus 1.75% or the London International Bank Offer 30, 60, 90 or
180-day Rate plus 3.0% or 3.5%. Klearfold also has $4.0 million aggregate
principal amount of industrial revenue bonds outstanding, which were issued to
fund the purchase of a printing press in its Warrington, Pennsylvania plant in
1997. The variable rate bonds mature on August 1, 2007 and remain outstanding.
The bank credit facility was refinanced as part of the Transactions.
During 1997 KFI Holding and the bank group for its revolving credit line and
term loans amended the related loan agreement to enable KFI Holding to maintain
compliance with its loan
<PAGE>
covenants through December 31, 1997. Prior to the consummation of the
Transactions, KFI Holding had projected, however, that it would have been in
default on certain financial loan covenants when next calculated as of February
28, 1998. Therefore, all amounts due under the term loans have been classified
as current liabilities. Management of KFI Holding did not seek to further amend
or restructure the loan agreement to maintain compliance with such covenants due
to the planned Transactions.
IMPAC GROUP, INC.
Pro Forma Liquidity and Capital Resources
Interest payments on the Notes and any borrowings under the New Credit
Facility will represent significant liquidity requirements for the Company. Any
future borrowings under the New Credit Facility will bear interest at floating
rates and will require interest payments on varying dates depending on the
interest rate option selected by the Company. See "Description of Other
Indebtedness--New Credit Facility".
The Company's remaining liquidity demands will be primarily for capital
expenditures and working capital needs. The Company expects to spend
approximately $14.5 million on capital projects in 1998, with approximately $1.9
million of that amount representing maintenance-related capital expenditures.
The Company currently expects its fiscal 1999 capital expenditures to be
similar. The New Credit Facility imposes restrictions on the Company's
investments.
The Company's primary sources of liquidity are cash flows from operations and
borrowings under the New Credit Facility. See "Description of Other
Indebtedness--New Credit Facility". Immediately after consummation of the
Transactions, the Offering and the closing of the New Credit Facility, $40.0
million were available to be drawn by the Company under the New Credit Facility.
In addition, management estimates that upon consummation of the Transactions,
the Company had outstanding approximately $12.6 million in standby letters of
credit, securing its obligations with respect to $11.6 million aggregate
principal amount of IRB Financings. See "Description of Other Indebtedness--New
Credit Facility".
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures and
any acquisitions will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the current
level of operations and anticipated cost savings and revenue growth, management
believes that cash flow from operations and available cash, together with
available borrowings under the New Credit Facility, are adequate to meet the
Company's future liquidity needs for at least the next several years. The
Company may, however, need to refinance all or a portion of the principal of the
Notes on or prior to maturity. There can be no assurance that the Company's
business will generate sufficient cash flow from operations, that anticipated
revenue growth and operating improvements will be realized or that future
borrowings will be available under the New Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all. See "Risk Factors".
<PAGE>
YEAR 2000 ISSUES
The Company has conducted a review of its computer systems to identify those
areas that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Company presently believes, with
modification to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems and is not anticipated to
be material to its financial position or results of operations in any given
year.
<PAGE>
BUSINESS
The Company
IMPAC is a leading designer, manufacturer and marketer of high-end, value-
added specialty packaging for various consumer products markets including
entertainment, cosmetics and personal care. Through its creative design work,
specialized manufacturing techniques and diverse printing capabilities, the
Company offers innovative specialty packaging solutions for customers that seek
to differentiate their products in the consumer marketplace. In addition, unlike
most of its competitors, the Company utilizes a broad range of paper, paperboard
and transparent rigid plastic materials for its products. As a result, the
Company believes that it is well-positioned to supply the growing demand for
distinctive consumer product packaging resulting from increased competition and
consolidation in the retail marketplace. For the twelve months ended December
31, 1997, the Company had pro forma net sales and EBITDA (as defined) of $160.8
million and $24.5 million, respectively.
The Company has built strong relationships with marketing-driven customers in
diverse industries, including Avon Products and Revlon in the cosmetics
industry, EMI (including the Capitol and Virgin Records labels), PolyGram
(including the Mercury and Motown labels) and 20th Century Fox Home
Entertainment in the entertainment industry, and Procter & Gamble and Colgate in
the personal care industry. In the entertainment industry, examples of the
Company's products include printed paper inserts for standard compact disc
("CD") packaging as well as specialty paperboard-based CD packaging and
specialty packaging for home videos and digital versatile discs ("DVD"). In
the cosmetics and personal care industries, the Company offers products such as
paperboard folding cartons, transparent rigid plastic toothbrush packages and
windowed boxes made of paperboard and transparent rigid plastic for face creams,
lipsticks and other skin care products.
IMPAC was formed through the combination of AGI and Klearfold. Management
believes the packaging industry has not historically had a participant that
offers manufacturers of consumer products the broad range of unique and
innovative specialty packaging solutions that are available from the Company.
The combination of AGI and Klearfold allows management to build upon the
strengths of each company. For example, AGI's creative capabilities and fast
turnaround times, which are continually refined by the intensive demands of the
entertainment industry, complement Klearfold's innovative packaging technology
and product development expertise. In addition, while AGI and Klearfold each
have a well-established customer base, the Company believes there are
significant cross-selling opportunities.
COMPANY HISTORY
AGI, founded in 1968 as Album Graphics, Inc., established its position in the
packaging business as a specialized commercial print broker engaged in the
design and manufacture of high quality LP record jackets for the music industry.
As the LP format was replaced by the CD and cassette tape in the early 1980s,
AGI adapted quickly and solidified its position as a leading supplier of CD
packaging. AGI also diversified into other markets, such as the premium
cosmetics packaging business, by applying the successful techniques developed in
building its position in the entertainment industry. In 1987, a group led by
Richard Block effected a recapitalization of AGI, whereby Mr. Block became the
principal shareholder and president. Since the recapitalization, AGI has
implemented a long-term investment strategy designed to enhance its product
offerings and service capabilities and broaden its markets served to include
home video as well as the emerging DVD market.
<PAGE>
Klearfold was founded in 1977 by Melvin B. Herrin. Klearfold's original
product was its all-plastic transparent folding carton, followed in the early
1980s with the introduction of its proprietary line of specialty windowed
folding cartons ("Duofold"), which combine rigid plastic film with paperboard.
Initially, both types of products were predominately used by customers for the
packaging of promotional items. In the early 1990s, management began a strategic
initiative to broaden Klearfold's customer base by reducing product cost through
capital investment and process improvement, thereby making Klearfold's packaging
solutions more accessible to its customers for their core product lines. In
1996, Klearfold became privately held after ten years of trading publicly on the
London Stock Exchange through a recapitalization whereby Heritage acquired
approximately 54% of KFI Holding, which had been established as a holding
company of Klearfold. Melvin Herrin and Scott Herrin, the chairman and president
of Klearfold, respectively, along with certain key members of management
retained ownership of approximately 46% of KFI Holding.
CONSUMER PRODUCTS PACKAGING INDUSTRY OVERVIEW
Recent trends in the consumer products industry suggest a migration towards
high-quality specialty packaging. Management believes that as the retail sales
environment continues to consolidate, the demand for innovative, value-added
packaging will increase. Products that have historically been sold through
distinct retail distribution channels, such as cosmetics, CDs and sell-through
videos, are currently being distributed through a wider variety of outlets. As a
result, competition for the consumer's attention has increased the importance of
visually attractive packaging. Additionally, many of these products sell at
premium price points and distinctive packaging is an important element in
enhancing the perceived value of the product to the customer. Moreover, the
emergence of self-select retail outlets, such as Wal-Mart, K-Mart and Rite-Aid,
and the decline in the use of dedicated sales assistants, have heightened the
demand for specialty packaging that (i) attracts the consumer to the product,
(ii) allows the retailer to maximize shelf space by displaying the product in a
variety of formats (i.e., stacked, hanging or shelved), and (iii) distinguishes
products not only from competitors within the same market segment, but also from
other types of products.
COMPANY STRENGTHS
The Company has achieved a leadership position in the high-end, value-added
specialty packaging market. Management believes that the Company will further
develop this leadership position by capitalizing on the following competitive
strengths:
Leading Market Positions and Strong Customer Relationships. In the
entertainment industry, the Company has established a leading market position
through strong relationships with PolyGram Group Distribution, Inc.
("PolyGram"), EMI Records Group North America ("EMI"), Universal Studios,
Inc. ("Universal"), BMG Music ("BMG") and Sony Music Entertainment
("Sony"), the five largest music distributors that outsource their packaging
needs. The Company has contracts to supply standard CD packaging inserts to
Universal, PolyGram and BMG. In the cosmetics and personal care industries, the
Company is a leading supplier of high-end, value-added specialty packaging
products to a number of leading companies including Avon, Chesebrough-Pond's(R),
Cosmair, Mary Kay and Revlon. The Company is the primary supplier of its
products to a number of its customers with respect to certain product lines,
such as Revlon's specialty windowed boxes for its Colorstay(R) line of cosmetics
and Procter & Gamble's Crest(R) toothbrushes.
<PAGE>
Provider of Creative Packaging Solutions. Utilizing its strong design
capabilities, the Company seeks to proactively provide its customers with
creative packaging solutions. Aided by a number of proprietary products as well
as design and manufacturing expertise with a variety of materials, including
paper, paperboard and transparent rigid plastic, the Company often provides
customers with several distinct packaging alternatives for any single job.
Management believes that it is the only company that manufactures this broad
line of specialty packaging solutions and provides strong design services, which
it believes represent a unique competitive advantage.
Established Reputation for Product Innovation. The Company's structural
design capabilities and culture of innovation enable it to develop creative
packaging solutions in response to specific customer needs. By integrating its
design, sales and manufacturing groups, the Company has become an important
member of many of its customers' product development teams. Examples of
innovative packaging solutions offered by the Company include the DIGIPAK(R), a
paperboard-based CD package, and Duofold(R), a patented folding carton that
integrates paperboard and transparent rigid plastic film, each of which have
become leading products in their market niches. Many of the Company's
entertainment packaging solutions have resulted in Grammy award nominations for
creative design for the Company's customers, including CD packages for Pearl
Jam's Vitalogy album and Frank Zappa's Civilization Phaze III album. In
addition, through its participation in the Diginet, an international network of
leading specialty packaging companies, the Company has worldwide access to new
design concepts, manufacturing techniques and marketing information principally
relating to the specialty music packaging industry.
Strong Manufacturing Capabilities. The Company has invested significantly to
modernize its facilities and equipment. Since 1995, the Company has placed into
service $22.1 million of new printing capacity such that over 50% of the
Company's current printing capacity is less than three years old. The Company
utilizes its modern machinery to lower turnaround time while reducing staffing
requirements and maintaining "just-in-time" manufacturing capabilities. The
Company was also one of the first packaging manufacturers to use web production
technology with rigid plastic (i.e., using rolls of plastic versus separate
plastic sheets). This technology has increased production speeds and lowered
material costs for its products utilizing rigid plastic. The Company intends to
maintain this level of commitment by continuing to develop innovative
manufacturing processes and investing in modern manufacturing equipment.
Proven Management Team with Significant Equity Ownership. The Company has
assembled a strong management team with an average of 25 years of experience in
the packaging industry. Management's proven track record is demonstrated by the
strong financial performance of the combined Company. Since 1993, the Company's
net sales and EBITDA (as defined) have grown at compound annual rates of 9.8%
and 15.3%, respectively. Senior management is heavily invested in the
Combination. Their ownership of approximately 55% of the outstanding Common
Stock of the Company will be coupled with a management equity incentive plan
that is based primarily upon the future operating performance of the Company.
POST-COMBINATION STRATEGY
The Company intends to enhance its market position and maximize profitability
and cash flow by implementing the following business strategies:
Capitalize on Cross-Selling Opportunities. The Company believes that it will
create significant additional revenue opportunities with existing customers by
marketing its expanded array of high-end packaging solutions. The Company
believes that this strategy will have its most powerful impact initially in the
cosmetics industry, where currently Revlon represents the
<PAGE>
only customer with significant purchases from both AGI and Klearfold. Further,
as a result of AGI's long-standing relationships with customers in the
entertainment industry, the Company believes that it will be able to realize
additional revenue opportunities by successfully offering an enhanced line of
products based on Klearfold's proprietary rigid plastic technology.
Further Integrate with Key Customers. Historically, the Company has enjoyed
cooperative integrated relationships with its key customers. The Combination
broadens the Company's product line and increases its creative design
capabilities, which the Company believes will allow it to further integrate with
its customers. This ability to integrate with customers' product design
operations is important as the general trend in the industry is to limit the
number of outside suppliers. In an effort to enhance its service and turnaround
time, the Company built a facility in Jacksonville, Illinois in 1995 and is
currently building a facility in Grover, North Carolina, which is expected to be
completed in the second quarter of 1998, in each case in close proximity to
several of its major music customers.
Pursue New Market Opportunities. The Company intends to expand into related
product lines that serve new markets, which will provide an opportunity for
additional revenue growth. As a result of the Combination, the Company's
creative design team has an enhanced capability to develop new packaging
products based on the most suitable type of materials or combinations. The
Company believes that its innovative product development experience positions it
to capture additional customers in new and existing markets.
Increase Operating Efficiencies. The Company believes that combining the
operations of AGI and Klearfold presents opportunities to effectively capitalize
on economies of scale in the areas of manufacturing, transportation, general and
administrative functions and management information systems. A portion of AGI's
and Klearfold's printing capacity is interchangeable, allowing work to be
processed wherever capacity is available during times of peak demand. The
Company expects that this interchangeability will allow it to increase its
utilization rate without creating bottlenecks or otherwise compromising service.
The Company will utilize the most efficient practices currently used in the
facilities of AGI and Klearfold to enhance manufacturing capabilities and
improve cost structures.
Pursue Strategic Acquisitions. The Company may pursue strategic acquisitions
within the specialty packaging industry. The Company believes that significant
opportunities exist to acquire distinctive businesses that would enable the
Company to further broaden its product offerings as well as to expand its
operations both domestically and internationally. The Company currently has no
agreements or commitments with respect to any acquisitions.
PRODUCTS
The Company designs, manufactures and markets high-end specialty packaging for
a variety of applications in the consumer products industry. The Company
believes it offers its customers one of the most extensive product lines in the
specialty packaging industry. Principal product areas include (i) standard music
packaging, (ii) specialty music packaging, (iii) specialty video packaging, (iv)
paperboard folding cartons, (v) plastic folding cartons, (vi) specialty windowed
folding cartons, and (vii) rigid paperboard set-up boxes. The following table
details the proprietary products sold by the Company:
<PAGE>
<TABLE>
<CAPTION>
Product Description Sample Applications
------- ----------- -------------------
<S> <C> <C>
DIGIPAK(R) A paperboard-based package that can fold Music releases by leading artists such as
open in a variety of ways and hold single or Pearl Jam, Eric Clapton, The Beatles,
multiple CDs as well as DVDs. Indigo Girls, George Michael, David Bowie,
Soundgarden and Blind Melon.
Digilite/TM/ A lighter version of the DIGIPAK Music releases by leading artists such as
typically utilized for packaging CD singles. Kenny G, Carly Simon and Duran Duran.
DIGI-BOKS(R) A rigid one-piece paperboard set-up box used Multi-CD boxed releases by The Police and
in a wide variety of applications licensed Crosby Stills & Nash and multi-product
through the Diginet. cosmetics packages including Ralph
Lauren(R) and Polo Sport(R).
Klearfold(R) Plastic folding cartons produced from Procter & Gamble's Crest(R) toothbrush line,
transparent rigid plastic, offering maximum Jockey(R) International, Inc. brand underwear
visibility for the consumer product at the retail and Totes(R) umbrellas.
level.
Duofold(R) Durable, windowed boxes made from Chesebrough-Pond's(R) skin care products
paperboard and scored rigid film. Because the and Revlon's Colorstay(R) lipsticks and
Company's rigid film can wrap around any edge, mascara.
Duofold cartons allow far more visibility than
conventional windowed cartons.
KlearPOP/TM/ Plastic folding cartons which utilize Klearfold BIC(R) writing instruments, Andes(R) candies
transparent packaging to provide multi-unit and other products frequently sold at
dispensers and displays that can be hung or impulse purchase locations.
placed on shelves.
KlearForm/TM/ An alternative type of plastic folding carton Small consumer products such as pocket
which combines thermoformed plastic parts with knives and personal care products.
printed film. The result is a striking package that
holds the packaged product securely.
Hologravure/TM/ Licensed three-dimensional printing technology Point-of-sale posters, computer mouse
that provides a cost-effective means of adding pads and packaging for CDs and candy.
three-dimensional visual effects to standard
transparent plastic materials.
</TABLE>
Set forth below is a description of the categories of products sold by the
Company utilizing the proprietary products described above as well as various
other products.
Standard Music Packaging. The Company's standard music packaging products
for CDs and cassette tapes include paper inlay cards, folders and booklets for
CD jewel boxes and insert cards for cassette tape boxes, as well as the
Company's patented DIGIPAK and Digilite products. The Company provides standard
CD and cassette packaging components to a wide variety of customers in the
recorded music industry and also provides standard CD packaging to customers in
the CD-ROM multimedia industry. These products are manufactured in a variety of
size configurations and process printing color combinations. Examples of the
Company's recent standard music packaging include the CD inserts for Elton
John's Candle in the Wind 1997, Spice Girls' Spice and Garth Brooks' Sevens.
Specialty Music Packaging. The Company's creative staff often works in close
collaboration with music customers to create and develop ideas for unique or
unusual custom packaging. These packages are designed to be highly distinctive
and often incorporate a variety
<PAGE>
of materials and advanced manufacturing processes into a single package. The
Company's patented DIGIPAK and Digilite and its licensed DIGIBOKS have provided
the recorded music industry with the flexibility to create innovative and
interesting CD packaging. Specialty music packages have been used for music
releases by The Smashing Pumpkins, Pearl Jam, Pink Floyd, Janet Jackson and the
Rolling Stones.
Specialty Video Packaging. In the home video market, the Company provides
paperboard packaging for major event titles and multi-title collections combined
for re-release principally directed to the sell-through market. The Company
manufactures specialty video packaging utilizing any combination of its
innovative manufacturing processes and its well-developed network of specialized
outside suppliers. Recent creative specialty video packages have included the
Star Wars and Die Hard multi-title video collections as well as the Men in Black
release.
Paperboard Folding Cartons. Premium paperboard folding cartons are
manufactured using a variety of production and design techniques including
special prints and coatings, foil stamping, laminates and other special
materials which help customers achieve product differentiation and add to the
perceived value of the product. Premium paperboard folding cartons are used to
package a wide variety of products for the Company's cosmetics and personal care
customers and are frequently included in packaging solutions for CD-ROM
multimedia industry customers.
Plastic Folding Cartons. The Company is a leading manufacturer of plastic
folding cartons under the Klearfold, KlearPOP and KlearForm brand names. The
vast majority of such cartons are produced from transparent rigid plastic film,
offering maximum visibility of the product packaged in the carton. Like more
conventional folding cartons produced from paperboard, Klearfold cartons ship
and store in flat form, minimizing storage space. The Company's patented Soft
Crease feature enables Klearfold cartons to be used easily and effectively in
manual or automatic filling of its cartons on its customers' packaging lines. In
addition, the Company's manufacturing process produces a Smooth Edge feature,
which minimizes sharp edges along the perimeter of the cartons and provides
safer handling than most competitive products.
The Company is a leading printer of the plastic film used in the manufacture
of its products, offering a variety of printing processes to enhance the
package's appearance. Klearfold cartons are also manufactured from tinted,
opaque, or embossed plastic film, increasing the options available to customers.
The Company believes that few, if any, of its competitors possess the range of
printing options that the Company has in its manufacturing facilities. The trend
toward value-added packaging in the personal care industry has resulted in the
increased use of Klearfold, KlearForm and KlearPOP packaging for products
including Procter & Gamble's Crest(R) toothbrush lines, writing instruments and
candy.
Specialty Windowed Folding Cartons. The Company has created its line of
Duofold cartons in order to offer many of the benefits of its fully transparent
cartons, in combination with the advantages of additional graphics capabilities
and rigidity offered by incorporating paperboard into the package. In addition,
by substituting less expensive paperboard for plastic in a portion of the
carton, Duofold is more cost efficient than all-plastic cartons. Unlike the
typical thin film in windowed cartons, the rigid film used in Duofold cartons
resists tearing and puncturing and contributes to the stability of the carton.
Additionally, the Duofold manufacturing process allows the transparent rigid
plastic film to wrap around any edge of the carton without compromising
structural strength. Duofold cartons are available in a wide variety of
structures that can be stacked, racked or hung in virtually any configuration
without sacrificing visual impact or display density. Also, as with Klearfold
transparent cartons, Duofold cartons are shipped flat, can be easily set up
manually or automatically, and can be enhanced using a wide variety of
processes, including printing directly on the transparent film portion of
<PAGE>
the package. Examples of products utilizing Duofold cartons include Chesebrough-
Pond's(R) Skin Cream and Revlon's Colorstay(R) lipsticks and mascara.
Rigid Paperboard Set-Up Boxes. The Company's licensed DIGIBOKS product and
the Company's two-piece rigid setup boxes are used to provide creative packaging
solutions for special music releases, special promotions and cosmetics boxed
sets which include multiple products. Most notably, these products have been
used to package multi-CD boxed releases by The Police and Crosby Stills & Nash
and to package Ralph Lauren Safari(R) and Polo Sport(R) multi-product sets.
MARKETS AND CUSTOMERS
The Company's markets are divided into three principal categories: (i)
entertainment, (ii) cosmetics, and (iii) other consumer products. The following
chart illustrates the Company's combined historical sales in each of these
markets for each of the last three fiscal years:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
Market 1995 1996 1997
- ------ -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Entertainment ................ $ 69.5 46.7% $ 64.9 44.1% $ 78.9 49.0%
Cosmetics .................... 39.2 26.4 46.9 31.9 44.5 27.7
Other Consumer Products ...... 40.0 26.9 35.3 24.0 37.4 23.3
------ ----- ------ ----- ------ -----
Total ...................... $148.7 100.0% $147.1 100.0% $160.8 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
ENTERTAINMENT INDUSTRY
Music. In recent years, the strong economy, widening demographic base of
music consumers and the popularity of the CD have propelled music industry sales
to record levels. From 1991 to 1996, industry sources estimate that CD sales
grew at a compound annual growth rate of over 18%. The packaging market for CDs
is currently comprised of standard jewel box packaging and specialty packaging.
The jewel box, a clear plastic container which holds a single CD, contains a
printed insert or booklet that serves as its cover and may provide additional
information such as song titles or lyrics. Management estimates that the jewel
box, the industry standard for CD distribution, currently represents over 90% of
the U.S. market. However, the Company believes the jewel box provides limited
options for enhanced product differentiation at the retail level. This factor,
combined with the emergence of retail superstores and the desire of certain
artists to differentiate their releases, has created demand for other types of
CD packaging.
Over the last several years, alternative or specialty CD packaging has grown
as artists and recording studios seek to differentiate their products,
particularly for higher priced items such as boxed sets or anthologies. In
addition, the demand for specialty CD packaging has grown in response to
perceived disadvantages of the jewel box format, such as uniformity and
breakage. Management estimates that approximately 10% of industry CD sales are
in the specialty package format and that this proportion is growing. Certain
artists, such as Pearl Jam, Pink Floyd, Janet Jackson, Bonnie Raitt, Sting and
the Rolling Stones, often request that specialty packaging be used for a
particular release. These industry dynamics create a substantial opportunity for
high quality, value-added packaging sales as premium packaging attracts the
consumer's attention and provides greater perceived value.
The recorded music industry is currently dominated by Time-Warner, PolyGram,
EMI, Universal, BMG and Sony, all of which, with the exception of Time-Warner,
fulfill their
<PAGE>
packaging requirements through third party suppliers. Typically, these companies
enter into contracts for a portion of their packaging requirements with a
limited number of providers of CD packaging and related components. Contracts
are utilized in order to assure the availability of sufficient manufacturing
capacity on extremely short notice, because a hit CD can require rapid printing
of a large number of units. In recent years, the supplier/customer relationship
has increasingly evolved into a just-in-time production model, thereby placing
additional emphasis on integrated product design and manufacturing. Short cycle
times have become a critical service element for the major record companies, as
just-in-time delivery eliminates the need to carry large packaging inventory
without incurring production delays.
Home Video. The home video market includes both the rental and sell-through
sectors. The rental sector generally utilizes low-end, commodity packaging. The
sell-through sector consists of three principal segments: (i) titles that
generally produced average theatrical results, are not heavily promoted and
utilize low-end packaging, (ii) event titles that generally produced strong
theatrical results, are heavily promoted and utilize value-added packaging (such
as the Men in Black release), and (iii) multi-title collections combined for re-
release (such as the Star Wars and Die Hard trilogies), are also heavily
promoted and utilize specialty packaging. Market analysts estimate that the home
video sell-through market grew at a 15.2% compound annual growth rate during the
period 1991-1996, greatly exceeding the overall growth in video sales during
this period.
Management believes the growing necessity to differentiate sell-through event
titles has increased the need for specialty packaging. For example, growth in
multi-tape sets and anthologies has fueled demand for value-added specialty
packaging, because the packaging expense is often small relative to the high
price points of the product. Furthermore, with the proliferation of theatrical
releases threatening the prospects for box office success, management believes
that the demand for specialty packaging will increase as the movie studios place
heightened emphasis on revenue potential available through the video markets.
Finally, specialty packaging is also deemed important for the growing direct to
video market as these movies do not benefit from the same investment in
promotional spending as theatrical releases.
Digital Versatile Discs (DVD). The introduction of DVDs, which is expected
to capture a significant percentage of the current market for VHS tapes,
represents a meaningful growth opportunity for the home video market. Much as
the CD expanded the market for recorded music in the mid-1980s, the DVD format
has the potential to expand the home video market in coming years as consumers
take advantage of its superior technical features relative to videocassettes,
such as improved picture and sound quality. In order to gain market acceptance
for the premium price of DVDs, and to minimize the well-publicized impact of
cheaper duplication expenses, the Company believes that the major movie studios
are likely to provide added value to the consumer in the form of higher quality
packaging. Therefore, the DVD market is expected to offer significant
opportunities for packaging companies focused on this new product. See "Risk
Factors--Effects of Industry Shifts".
COSMETICS
The skin care, makeup and fragrance industries are characterized by vigorous
competition on a worldwide scale. In order to maintain market share, companies
in the cosmetics industry must continually develop innovative new brands and
products, promote a compelling brand image and maintain a high degree of
consumer awareness. Because a premium is often charged for their products,
cosmetics companies often utilize specialty packaging to promote higher price
points and to serve as a powerful marketing tool at the point of purchase.
Cosmetics packages are generally based on premium paperboard box technology or a
paperboard and plastic windowed
<PAGE>
folding carton. These packages often utilize value-added enhancements, such as
special coatings, embossing, foil stamping and laminates to improve the
package's appearance.
The high-end of the cosmetics industry is dominated by companies such as Avon
Products, Cosmair, Estee Lauder, Mary Kay and Revlon. These companies have
historically marketed their products either through high-end retail outlets
including department stores and boutiques or through direct, personalized
selling. Each of these two channels has historically relied upon sales
assistants, such as a counter person in a retail outlet or a knowledgeable
direct salesperson. Recently, however, cosmetics sales have begun to take
advantage of the sales potential increasingly offered by self-select retail
outlets such as Wal-Mart and K-Mart. This change in distribution from assisted
sales to self-select has caused cosmetics companies to place even greater
emphasis on packaging in order to attract the consumer to the product with
minimal sales assistance.
ADDITIONAL CONSUMER PRODUCTS MARKETS
Similar to the entertainment and cosmetics markets, the Company's customers in
other consumer product markets are facing competitive pressures at the retail
level and are increasingly utilizing high-end, specialty packaging to market
their products at the point of purchase. The Company sells its products to
leading consumer products manufacturers in a wide range of industries including
personal care, liquor, fine candies, undergarments and pharmaceuticals. Some of
the Company's key customers in these markets include Totes/ (R)/ and Jockey(R)
International, Inc.
Management believes that the liquor and the pharmaceutical markets, in
particular, are experiencing strong trends toward the increased usage of high-
end, specialty packaging. Major liquor companies are combating flat sales by
aggressively introducing new products and encouraging consumers to switch from
generic to premium brands in part through specialty packaging. Pharmaceutical
manufacturers are focusing their efforts on providing consumers with over-the-
counter products that were previously prescription items. Management believes
that pharmaceutical companies will increasingly utilize high-end, specialty
packaging in order to differentiate their products and, moreover, to promote
higher price points for their products.
SALES AND MARKETING
Customer relationships in the specialty packaging industry are generally
developed and maintained over extended periods. These relationships develop
because of the high degree of coordination necessary between packaging suppliers
and their customers to ensure that packaging conforms precisely to the needs of
the customer. The integration of product design and manufacturing along with
inventory management and distribution systems provide the Company with a
competitive advantage in maintaining and expanding business with established
customers. This integrated marketing, design and manufacturing operation also
represents an important source of new business opportunities through the
modification of existing packaging and the development of new applications. The
Company has approximately 25 sales professionals each offering the combined
product lines of AGI and Klearfold allowing for broader product offerings and
creating opportunities for significant cross-selling to existing customers.
The Company has entered into supply contracts with three key customers. These
contracts represented approximately 11% of the Company's business in fiscal
1997. The supply contracts are typically terminable for any material breach or
events of insolvency. While the Company has
<PAGE>
no reason to believe otherwise, there can be no assurance that these contracts
will be renewed. See "Risk Factors--Contracts". In fiscal 1997, a single
customer of the Company accounted for 11.6% of net sales.
THE DIGINET
The Company has licensed the use of its DIGIPAK technology to members of the
Diginet, a worldwide network of packaging and design companies located in Japan,
the United Kingdom, the Netherlands, Australia, Canada and Italy. The Diginet
provides the Company with a competitive advantage relative to its domestic
competitors as it offers the Company some of the benefits of a large
international organization. The Company regularly meets with these partners to
discuss new design advances, manufacturing techniques and trade and marketing
information. In addition, members of the Diginet share industry, marketing and
product reports and samples of new products with each other on a quarterly
basis. This cross-border cooperation provides the Company with research and
development cost savings as well as new business leads. Recently, in conjunction
with other Diginet members, the Company participated in the worldwide release of
Pearl Jam's Vitalogy, which was made possible by the coordinated effort of the
Diginet members. Similarly, the Diginet is also expected to give the Company an
advantage as the DVD market emerges. The Company's licenses to the other Diginet
members are generally for a period of three years and are exclusive with respect
to the licensed territory.
COMPETITION
The Company's business is highly competitive. Major competitive factors
include product quality, service and price. In addition, as more of the
Company's customers adopt "just-in-time" inventory systems, delivery lead time
has taken on increasing importance. Because a significant amount of the
Company's products are shipped by trucks or common carrier, the proximity of the
manufacturing facility to the customer's plant can significantly affect the
price of products. The Company believes that its manufacturing facilities are
well-positioned to serve national markets. Foreign competition has not been an
important factor to date, which the Company believes is due primarily to the
speed to market and flexibility required to adequately service its customers.
The Company believes that some of its primary competitors are Ivy Hill
Corporation, Queens Group, Inc. and Shorewood Packaging Corporation, some of
which are larger than the Company and may have substantially greater financial
resources.
TECHNOLOGY, PRODUCT DEVELOPMENT AND PATENTS
The Company produces high-quality, value-added, specialized packaging products
through the development of creative designs and innovative manufacturing
techniques. The Company's technical and product development centers that support
the Company's marketing efforts are staffed with 17 full-time personnel as of
December 31, 1997 and feature extensive in-house design, engineering, tooling,
prototype production, graphics and processing capabilities. The Company's in-
house design and production engineers work closely with existing and potential
customers in the preliminary stages of product design and development, in many
instances producing real-time prototypes. The Company believes that its in-house
design, engineering and graphics capabilities, which utilize CAD/CAM technology,
are among the more extensive and sophisticated in the industry and enhance the
Company's ability to better integrate its creative design capabilities with its
customers' conceptual design process.
<PAGE>
The Company has patented some of its key technology and processes. However,
the Company believes that the design, innovation and quality of its products and
its relationships with its customers are substantially more important to the
maintenance and growth of its business than its patents. Accordingly, the
Company does not believe that its business is dependent to any material extent
upon any single patent or group of patents. Certain of the Company's patents are
expiring in the next few years.
MANUFACTURING AND SUPPLIES
Since 1995, the Company has placed into service $22.1 million of new printing
capacity such that over 50% of the Company's current printing capacity is less
than three years old. The Company intends to continue this level of commitment
by investing in equipment. The Company utilizes its modern machinery to lower
turnaround time while reducing staffing requirements and maintaining "just-in-
time" manufacturing.
The Company, like its competitors, is subject to rigorous quality control
standards imposed by its customers. The Company has implemented a comprehensive
quality assurance program, which includes computer-aided testing of parts for
size, color and strength. Using advanced measurement technology, the Company is
able to satisfy and exceed the most demanding customer requirements. Statistical
quality control methods are also used to promote total customer satisfaction.
The Company believes that it is generally able to pass raw material price
increases on to its customers, given the customized and high-end nature of its
packaging and the relatively low proportion of packaging cost in relation to the
cost of the end-product. In addition, the Company's customer contracts for
longer production runs generally include provisions for raw material cost
escalation.
ENVIRONMENTAL MATTERS AND GOVERNMENTAL REGULATIONS
The past and present operations of the Company and the past and present
ownership and operations of real property by the Company are subject to
extensive and changing federal, state and local environmental laws and
regulations pertaining to the discharge of materials into the environment, the
handling and disposition of wastes, the recycling, composition and recycled
content of packaging, or otherwise relating to the protection of the
environment. These laws include, but are not limited to, the Comprehensive
Environmental Response Compensation and Liability Act, the Water Pollution
Control Act, the Clean Air Act and the Resource Conservation and Recovery Act,
as those laws have been amended and supplemented, the regulations promulgated
thereunder, and any applicable state analogs. The Company's operations are also
governed by laws and regulations relating to employee health and safety.
Governmental authorities have the power to enforce compliance with their
regulations, and violations may result in the payment of fines or the entry of
injunctions or both. The Company believes that it is in material compliance with
such applicable laws and regulations and that its current environmental controls
are adequate to address existing regulatory requirements.
As is the case with other companies engaged in similar businesses, the Company
could incur costs relating to environmental compliance, including remediation
costs related to historical hazardous materials handling and disposal practices
at certain facilities. In the past the Company has undertaken remedial
activities to address on-site soil contamination caused by historic operations.
None of these cleanups has resulted in any material liability. It is possible
that future developments (e.g., new regulations or stricter regulatory
requirements) could result in the
<PAGE>
Company incurring material costs to comply with applicable environmental laws
and regulations. In addition, the Company has not undertaken an independent
investigation of all of its facilities; accordingly, there can be no assurance
that in the future conditions requiring remediation will not be identified.
EMPLOYEES
As of December 31, 1997, the Company had 947 employees, of which 810 were
engaged in production or product support, 17 in research, development and
engineering, 55 in marketing and sales and 65 in corporate management and
administration. The 175 member hourly work force at the Company's Warrington,
Pennsylvania facility is represented by the United Paperworkers International
Union under a collective bargaining agreement which expires on November 30,
2002. The Company believes that its relations with employees are good, and it
has not experienced any strikes or work stoppages.
PROPERTIES
The Company's operations are conducted through 11 facilities (one of which is
currently under construction) in six states, within the United States. The
Company's principal executive offices are located in Melrose Park, Illinois and
are leased by the Company. The leases for the Warrington, Pennsylvania and
Louisa, Virginia facilities provide the Company with an option to renew for an
additional five year period. The Company's 22,000 square foot office space in
its Melrose Park, Illinois facility underwent a major renovation in 1993. The
Company's facilities are designed to provide for efficient manufacturing,
material handling and storage of its products and no facility is materially
underutilized. The Company believes that substantially all of its property and
equipment is in good condition and that it has sufficient capacity to meet its
current manufacturing and distribution requirements.
The Company provides its multi-media customers with complete turnkey
fulfillment solutions, which often includes the purchase of materials as well as
assembly, warehousing and distribution of finished product, from its Franklin
Park, Illinois facility. The Company's long-range plans for this operation are
currently under review by management. See--"Certain Relationships and Related
Transactions".
The following table provides certain information regarding the Company's
operating facilities.
<TABLE>
<CAPTION>
BUILDING
FACILITY --------
- -------- OWNERSHIP SQ. FEET Function Lease Expiration
--------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Franklin Park, IL Leased 40,650 Fulfillment Center/Office September 30, 2000
Horsham, PA Leased 3,000 Corporate office December 31, 1998
Jacksonville, IL Owned 76,000 Manufacturing/Office N/A
Los Angeles, CA Leased 3,000 Sales August 31, 1999
Louisa, VA Leased 77,500 Manufacturing December 31, 2005
Melrose Park, IL Leased 256,629 Manufacturing/Office September 30, 2002
Melrose Park, IL Leased 40,650 Warehouse March 31, 1999
New York, NY Leased 5,000 Sales July 31, 1998
Warrington, PA Leased 100,000 Manufacturing December 31, 2005
Warrington, PA Leased 86,000 Warehouse/Manufacturing December 31, 1999
Grover, NC
(under construction) Owned 51,400 Manufacturing N/A
</TABLE>
<PAGE>
LEGAL PROCEEDINGS
The Company is a party to various legal actions arising in the ordinary course
of its business. The Company believes that the resolution of these legal actions
will not have a material adverse effect on the Company's financial position or
results of operation.
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of IMPAC, AGI and Klearfold are as
follows:
<TABLE>
<CAPTION>
NAME Age Position(s)
- ---- --- -----------
<S> <C> <C>
Melvin B. Herrin ............... 63 Director and Chairman
Richard H. Block ............... 57 Director and Chief Executive Officer
H. Scott Herrin ................ 41 Director, President of Klearfold and
Executive Vice President of the Company
Michel Reichert ................ 47 Director
Michael F. Gilligan ............ 42 Director
David C. Underwood ............. 38 Chief Financial Officer
James H. Oppenheimer ........... 55 Executive Vice President--Sales
Richard L. Oppenheimer ......... 49 Executive Vice President--Sales
Dean J. Henkel ................. 45 Executive Vice President--Manufacturing of AGI
Incorporated
</TABLE>
Mr. Melvin B. Herrin founded Klearfold and has been Chairman of Klearfold
since its incorporation in 1977 and a Director of KFI Holding since 1996. Mr.
Herrin graduated from Temple University. Mr. Herrin is the father of Scott
Herrin.
Mr. Richard H. Block has served as the President and Chief Executive Officer
of AGI since October 1987. He began his career at AGI in 1970 as a salesman; he
was subsequently promoted to Sales Manager and Executive Vice President. Prior
to 1970, he served as a Sales Manager for Westvaco Corporation in New York and
Chicago. Mr. Block graduated from Alfred University.
Mr. H. Scott Herrin has been a Director of Klearfold since 1981 and a Director
of KFI Holding since 1996. Mr. Herrin graduated from Amherst College and has a
law degree from Harvard Law School. Mr. Herrin is the son of Melvin Herrin.
Mr. Michel Reichert has been a Director of KFI Holding and Klearfold since
1996. Since 1994, Mr. Reichert has been a Managing General Partner of Heritage
Partners, Inc. a Boston-based private investment company. Prior to 1994, Mr.
Reichert was a Managing Director of BancBoston Capital Inc., a private equity
investment firm. Mr. Reichert graduated from the University of Bourges, France.
Mr. Michael F. Gilligan has been a Director of KFI Holding since 1996. Since
1994, Mr. Gilligan has been a General Partner of Heritage Partners, Inc., a
Boston-based private investment company. Prior to 1994, Mr. Gilligan was a
Director of BancBoston Capital Inc., a private equity investment firm. Mr.
Gilligan graduated from Boston College.
Mr. James H. Oppenheimer is responsible for sales, marketing and
administration for the packaging and multimedia markets, as well as the Franklin
Park fulfillment center. Mr. Oppenheimer joined AGI in 1983 as the East Coast
Sales Manager, and subsequently served as Vice President of East Coast Sales.
Prior to joining the AGI, he served as Executive Vice President of Sales for the
Walter Frank Organization, a packaging company specializing in cosmetics. Mr.
Oppenheimer graduated from the University of Illinois, Champaign-Urbana. Mr.
Oppenheimer is the brother of Richard Oppenheimer.
Mr. Richard L. Oppenheimer is responsible for sales, marketing and
administration for the music and video markets. Mr. Oppenheimer joined AGI in
1977 as Chicago Sales
<PAGE>
Representative, and subsequently served in positions including California Sales
Representatives for Music, Sales Manager for Packaging and Vice President of
West Coast Sales. Prior to joining the AGI, he spent six years selling custom
injection molding designs, specializing in the cosmetics industry. Mr.
Oppenheimer graduated from Southern Illinois University. Mr. Oppenheimer is the
brother of James Oppenheimer.
Mr. David C. Underwood has been with AGI since 1990 and has been responsible
for AGI's finance, information technologies and human resources functions. Prior
to joining AGI, Mr. Underwood was a manager in the audit and financial
consulting division of Arthur Andersen & Company's Chicago office. Mr. Underwood
graduated from the University of Wisconsin and is a Certified Public Accountant.
Dean J. Henkel is responsible for the manufacturing operations at AGI's
Melrose Park and Jacksonville plants. Mr. Henkel has worked at AGI since 1975 in
a number of positions, including as a machine operator, finishing
superintendent, plant superintendent and plant manager in AGI's Melrose Park
facility and most recently as Executive Vice President--Manufacturing. He
graduated from Illinois Benedictine College.
STOCKHOLDER AGREEMENT
On March 12, 1998, IMPAC and its stockholders entered into a stockholders'
agreement (the "Stockholder Agreement"). The Stockholder Agreement provides
that IMPAC's board of directors (the "Board") will in most circumstances
consist of seven members to be elected as follows: (i) two individuals
designated by the holders of a majority of the shares of the Common Stock to be
purchased by Heritage (the "Heritage Holders"); (ii) two individuals
designated by the holders of a majority of the shares of Common Stock to be
purchased by or on behalf of Melvin Herrin and Scott Herrin (the "Klearfold
Holders"); and (iii) three individuals designated as follows: (A) if Richard
Block is both chief executive officer of IMPAC and continues to hold at least
75% of his shares of Common Stock, Richard Block and two individuals designated
by Richard Block; (B) if Richard Block is both chief executive officer of IMPAC
and continues to hold at least 50% but less than 75% of his shares of Common
Stock, Richard Block, one individual designated by Richard Block, and one
individual designated by the holders of a majority of the shares of the Common
Stock held by the holders of the Common Stock then employed by IMPAC and who had
been employed by AGI prior to the Combination (the "AGI Holders"); (C) if
Richard Block is both chief executive officer of IMPAC and continues to hold
less than 50% of his shares of Common Stock held by him after the closing of the
Combination, Richard Block and two individuals designated by the AGI Holders;
(D) if Richard Block is not chief executive officer of IMPAC and continues to
hold more than 50% of his shares of Common Stock, one individual designated by
Richard Block and two individuals designated by the AGI Holders; and (E) if
Richard Block is not chief executive officer of IMPAC and continues to hold less
than 50% of his shares of Common Stock, three individuals designated by the AGI
Holders.
In the event that IMPAC fails to achieve certain operating earnings targets
(testing will commence after September 30, 1999), IMPAC fails at any time after
June 7, 2002 to appoint a sale committee under the control of the directors
designated by the Heritage Holders when required to do so in accordance with the
Stockholder Agreement, or certain events of default occur under the Notes or
under the New Credit Facility, then the Board will consist of: (A) four
individuals designated by the Heritage Holders; (B) two individuals designated
by the AGI Holders; and (C) one individual designated by the Klearfold Holders.
<PAGE>
Board vacancies will be filled by a designee of the individual or group who
originally designated the vacating director. Each individual or group entitled
to designate a director will also be entitled to direct the removal of such
director and designate a replacement director.
Executive officers of IMPAC will be appointed by the Board upon the
President's recommendations, subject to the provisions of such officers'
respective employment agreements.
At any time after June 7, 2002 the Heritage Holders will have the right to
request IMPAC to repurchase the shares of Common Stock held by them at a
repurchase price based on fair market value. In such event, IMPAC will have the
right to elect to (i) repurchase the shares held by the Heritage Holders, (ii)
defer such repurchase, and use commercially reasonable efforts to complete
within 180 days a sale of the Company or an initial public offering of IMPAC's
Common Stock or (iii) elect neither (i) nor (ii), in which case (or in the case
of a failure to complete either (i) or (ii)) the Heritage Holders will have the
right to create a sale committee of the Board, to be comprised of two Heritage
appointees, which shall have the right to cause a sale of the Company over the
subsequent two years. In the event such a sale does not occur within such
period, the Heritage Holders shall thereafter have the right to re-exercise
their right to cause IMPAC to repurchase shares of Common Stock.
The Stockholder Agreement also contains each of a (i) registration rights
provisions, which will provide certain demand registration rights, to become
effective upon the earlier to occur of June 7, 2002 and six months following the
consummation of an initial public offering of IMPAC's Common Stock, and certain
piggyback registration rights, (ii) transfer restrictions, (iii) piggy-back and
co-sale rights, (iv) rights of first refusal with respect to certain transfers
of Common Stock, (v) rights of first refusal with respect to certain proposed
sales of the Company and (vi) certain pre-emptive rights with respect to certain
equity issuances.
EMPLOYMENT, NON-COMPETITION AND STOCK REPURCHASE AGREEMENTS
At the closing of the Combination, IMPAC entered into Employment, Non-
Competition and Stock Repurchase Agreements with each of Richard H. Block,
Melvin B. Herrin, H. Scott Herrin, David C. Underwood, James H. Oppenheimer,
Richard L. Oppenheimer and Dean J. Henkel, as well as with certain other
employees who are officers of one or more of its Subsidiaries, but will not be
officers of IMPAC.
Each employment agreement with one of the employees named above provides a
term of employment through June 2001, specifies a base salary and a package of
benefits and provides for participation in IMPAC's Bonus Plan (as defined
below). Each such employment agreement (except as noted below) gives such
individual (or his estate) the right to offer his or her shares back to IMPAC in
the event of death, disability, retirement, upon his termination of his
employment for good reason, or upon termination of his employment by IMPAC
without cause, and, except in the instance of retirement or, if insurance
proceeds are not available to complete the repurchase, death or disability,
IMPAC shall be required to complete such repurchase, in each case at fair market
value calculated in accordance with such employment agreements. Each of Melvin
Herrin's and Scott Herrin's employment agreement will give such individual's
estate the right, following the death of both Melvin Herrin and Scott Herrin, to
offer such estate's shares of Common Stock back to IMPAC. In the event that a
repurchase offer following an employee's death, disability or retirement is
rejected by IMPAC, and the offered shares are not repurchased by those of the
employee's fellow managers who may also have rights to repurchase the employee's
shares, then such shares will become freely transferable. Any repurchase is
subject to compliance with the terms of the New Credit Facility and the
Indenture, and if IMPAC
<PAGE>
is unable to complete a purchase in compliance with such terms, the purchase may
be delayed until compliance is possible.
The employment agreements provide base salaries for the year ending December
31, 1998, as follows: Richard H. Block--$350,000; Melvin B. Herrin--$325,000; H.
Scott Herrin--$325,000; David C. Underwood--$225,000; James H. Oppenheimer--
$325,000; Richard L. Oppenheimer--$325,000; and Dean J. Henkel--$225,000. Such
base salaries are subject to cost of living adjustments for each year
thereafter.
Each of the employment agreements also provides for severance pay upon
termination by IMPAC without cause or by the employee for good reason. IMPAC
must pay the employee his base salary as in effect prior to any such
termination, together with benefits and a variable compensation element
calculated with reference to IMPAC's payments under the Bonus Plan, until the
later of (i) the end of the term of the employment contract, or (ii) if so
elected by IMPAC, the first anniversary of termination, provided that the period
during which severance pay is payable may be extended for up to one additional
year by notice to the employee from IMPAC. If the employee is terminated by
IMPAC without cause, or the employee terminates his employment for good reason,
at any time after the end of the term of the employment agreement, IMPAC may by
written notice to the employee elect to pay the employee his base salary as in
effect prior to any such termination, together with benefits and a variable
compensation element calculated with reference to IMPAC's payments under the
Bonus Plan, for a period of one year from the date of termination, provided that
such period may be extended for up to one additional year by notice to the
employee from IMPAC. No severance is payable in the event of a termination of
employment as a result of death, disability or retirement, or a termination by
the employee without good reason or by IMPAC with cause.
Each of the employment agreements with the employees named above also contains
non-competition covenants pursuant to which the employee is prohibited, during
the term of his employment and for a "Restricted Period" thereafter, from
competing with the Company in any place where the Company now or during the
employee's employment does business, and, subject to certain exceptions, from
soliciting or encouraging any employee, contractor, customer, vendor or supplier
of the Company to terminate or materially reduce its relationship with the
Company. The applicable "Restricted Period" will, with certain exceptions, be
that period following the employee's termination during which severance pay is
being paid to the employee, and if no severance pay is payable, the "Restricted
Period" shall be the longer of (i) one year from the date of termination, and
(ii) two years from the date of the Closing. In addition, the "Restricted
Period" shall be extended by any period in which the employee is in breach of
his non-competition and non-solicitation obligations.
Each of the employment agreements also provides that IMPAC and certain "co-
managers", taken together (in the case of Richard H. Block, David C. Underwood,
James H. Oppenheimer, Richard L. Oppenheimer and Dean J. Henkel, the "co-
managers" include each such person (other than himself), as well as Dennis L.
McGuin, Mary Frances Griffin and Jacqueline M. Barry) have the right to
repurchase the employee's shares of IMPAC's Common Stock following termination
of the employee's employment, as well as providing the rights described above
for the employee to require the repurchase of his stock. The Company will obtain
insurance policies on the life of each of Richard H. Block, David C. Underwood,
James H. Oppenheimer, Richard L. Oppenheimer and Dean J. Henkel, and on the life
of the survivor of Melvin Herrin and Scott Herrin in order to assist in the
financing of its obligations to repurchase their stock. IMPAC will finance any
stock repurchase, first, out of cash if and to the extent available under the
terms of the New Credit Facility and the Indenture and if IMPAC is unable to
complete a purchase at any time because no cash is then available under such
terms, the purchase may be delayed until cash becomes available to permit IMPAC
to complete the purchase in compliance with such terms.
<PAGE>
BONUS PLAN
The Company intends to adopt a cash bonus plan that will provide for annual
cash bonuses based on achievement of Company and individual performance
objectives.
DIRECTOR COMPENSATION
Directors of the Company do not receive compensation from the Company for
their service in such capacities.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by Klearfold
and AGI for services rendered during fiscal 1997 to their seven most highly-
compensated executive officers (determined on a combined basis).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation for Fiscal 1997
-----------------------------------
<S> <C> <C> <C>
ALL OTHER
---------
COMPENSATION
SALARY BONUS (2)
Name and Principal Position(1) ------------- ----------- ------------
- ------------------------------
Melvin B. Herrin ........................................... $297,429 $ -- $ 6,708
Chairman of Klearfold
Richard H. Block ........................................... $224,124 $420,244 $30,434
President and Chief Executive Officer of AGI
H. Scott Herrin ............................................ $312,426 $ -- $ 9,685
President of Klearfold
James H. Oppenheimer ....................................... $143,774 $406,293 $14,671
Vice President of Sales of AGI
Richard L. Oppenheimer ..................................... $140,000 $365,153 $59,421
Vice President of Entertainment Sales of AGI
Dean J. Henkel ............................................. $126,000 $347,083 $12,643
Vice President of Manufacturing of AGI
David C. Underwood ......................................... $126,000 $347,083 $11,671
Vice President of Finance of AGI
</TABLE>
_____________
(1) Position held before the Combination.
(2) Reflects automobile allowances paid to each executive and housing allowances
paid to Richard Block and Richard Oppenheimer.
MANAGEMENT EQUITY INCENTIVE PLAN
The Company intends to adopt one or more management equity incentive plans to
attract, retain and incentivize its management and employees. These plans may
include a stock option
<PAGE>
plan to make stock options available to employees, directors and consultants.
Stock options granted may be qualified or non-qualified. The Company expects
that vesting of stock options may be subject to certain conditions, including
achievement of Company and individual performance objectives. In addition, these
plans may include a restricted stock plan providing for the grant of restricted
stock that would be subject to vesting based on the achievement of operating and
financial goals. In connection with a restricted stock plan, the Company may
decide to adopt a separate class of voting common stock with terms reflecting
the management incentive plan.
<PAGE>
BENEFICIAL OWNERSHIP
The following table sets forth, after giving effect to the Combination,
certain information regarding ownership of the Common Stock of IMPAC by (i) each
director of IMPAC, (ii) each of the executive officers of IMPAC named in the
"Summary Compensation Table", (iii) each of the directors and executive
officers of IMPAC as a group, and (iv) each person who beneficially owns more
than 5% of the outstanding shares of IMPAC's Common Stock.
<TABLE>
<CAPTION>
NAME Number of Shares Percent of Class(1)
- ---- ---------------- -------------------
<S>................................................................<C> <C>
Heritage Partners Fund I Investment Corporation .................. 40,000 40.0%
c/o Heritage Partners, Inc.
30 Rowes Wharf
Boston, MA 02110
Michel Reichert(2) ............................................... 40,000 40.0%
c/o Heritage Partners, Inc.
30 Rowes Wharf
Boston, MA 02110
Michael Gilligan(3) .............................................. 40,000 40.0%
c/o Heritage Partners, Inc.
30 Rowes Wharf
Boston, MA 02110
Richard H. Block ................................................. 18,100 18.1%
c/o AGI Incorporated
1950 North Ruby St.
Melrose Park, IL 60160
H. Scott Herrin, Arthur S. Keyser and Matthew H. Kamens, ......... 7,958 8.0%
as Trustees under an Irrevocable Deed of Trust dated August 12,
1992 f/b/o H. Scott Herrin
c/o Klearfold, Inc.
364 Valley Road
Warrington, PA 18976
H. Scott Herrin(4) ............................................... 7,958 8.0%
James H. Oppenheimer ............................................. 6,227 6.2%
Melvin B. Herrin ................................................. 4,964 5.0%
Richard L. Oppenheimer ........................................... 4,440 4.4%
Arthur S. Keyser and Matthew H. Kamens, as Trustees under ........ 3,916 4.0%
an Indenture of Trust of Melvin B. Herrin dated June 4, 1996
c/o Klearfold, Inc.
364 Valley Road
Warrington, PA 18976
Dean J. Henkel ................................................... 3,782 3.8%
David C. Underwood ............................................... 3,072 3.1%
All Directors and executive officers as a group (9 persons) ...... 92,459 92.5%
</TABLE>
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security.
(2) The shares shown as beneficially owned by Mr. Reichert represent 40,000
shares owned of record by Heritage. Mr. Reichert through one or more
intermediaries may be deemed to control the voting and disposition of the
securities owned by Heritage, and accordingly may be deemed to have shared
voting and investment power with respect to all shares held by Heritage.
However, Mr. Reichert disclaims beneficial ownership of the securities held
by Heritage.
<PAGE>
(3) The shares shown as beneficially owned by Mr. Gilligan represent 40,000
shares owned of record by Heritage. Mr. Gilligan through one or more
intermediaries may be deemed to control the voting and disposition of the
securities owned by Heritage, and accordingly may be deemed to have shared
voting and investment power with respect to all shares held by Heritage.
However, Mr. Gilligan disclaims beneficial ownership of the securities held
by Heritage.
(4) Includes 7,958 shares held by H. Scott Herrin, Arthur S. Keyser and Matthew
H. Kamens, as Trustees under an Irrevocable Deed of Trust dated August 12,
1992 f/b/o H. Scott Herrin, and over which H. Scott Herrin shares investment
and voting control.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investment Agreement and Related Transactions
Investment Agreement
In February 1998, KFI Holding, its stockholders and certain stockholders and
holders of stock appreciation rights of AGI entered into an Investment
Agreement, pursuant to which (i) the existing stockholders of KFI Holding (the
"Klearfold Contributing Parties") agreed to contribute to KFI Holding the
entire outstanding capital stock of KFI Holding and a warrant to purchase KFI
Holding capital stock and to invest approximately $4.6 million in cash, and (ii)
certain stockholders and holders of stock appreciation rights of AGI (the "AGI
Contributing Parties") agreed to contribute to KFI Holding shares of common
stock and to invest the proceeds of their stock appreciation rights, totaling an
aggregate of $14.4 million. In exchange for these contributions and cash
investments, KFI Holding will issue to each contributing or investing party
shares of KFI Holding's common stock.
In addition, immediately prior to completion of the Transactions certain
employees of KFI Holding surrendered to KFI Holding shares of its outstanding
capital stock in exchange for the cancellation of certain promissory notes
representing approximately $35,000 in unpaid purchase price for such shares.
Such employees and certain other employees of KFI Holding will receive options
to purchase shares of IMPAC's Common Stock.
Pursuant to the Investment Agreement, each member of management investing in
KFI Holding entered into an Employment, Non-Competition and Stock Repurchase
Agreement and each recipient of stock options as described above entered into an
Agreement relating to Employment and Stock Ownership. See "Management--
Employment, Non-Competition and Stock Repurchase Agreements".
Pursuant to the Investment Agreement, each of the contributing or investing
parties made representations and warranties to KFI Holding as to their title to
the shares being contributed and as to their authority to enter into the
Investment Agreement and the related transactions, and KFI Holding made
customary representations and warranties to the contributing or investing
parties. From and after the closing of the Combination, Heritage and Messrs.
Herrin and their affiliates (the "KFI Indemnitors") will indemnify the AGI
Contributing Parties for any breach by the Company of its representations,
warranties and covenants in the Investment Agreement ("Holding Indemnified
Claims").
The aggregate amount payable by the KFI Indemnitors with respect to all claims
for indemnification after the closing of the Combination will not exceed
approximately $2.3 million, except with respect to claims arising from breaches
of representations as to KFI Holding's equity capitalization, authority to
consummate the Combination, taxes and brokers, as to which indemnification will
be limited to the value to the KFI Indemnitors of their investment in KFI
Holding pursuant to the Investment Agreement, immediately after the Combination
(the "Share Value").
Each of the contributing or investing parties will indemnify KFI Holding for
breach of such party's representations and warranties in the Investment
Agreement, up to such party's Share Value.
Pursuant to the Investment Agreement KFI Holding will agree to comply with a
number of operating covenants that will survive the completion of the
Transactions, including the
<PAGE>
maintenance of corporate existence and insurance, compliance with applicable
laws and contracts and the provision of financial information and similar
matters.
AGI Dividend
Prior to the consummation of the Combination the AGI stockholders received a
dividend in the form of promissory notes aggregating approximately $22.5
million, which is approximately the amount of AGI's undistributed accumulated S
corporation earnings. These notes were paid in full concurrently with the
consummation of the Combination.
Agreement and Plan of Merger
In February 1998, KFI Holding, its wholly-owned subsidiary AGI Acquisition
Corp., AGI and certain stockholders of AGI (the "Principal AGI Stockholders")
and certain stockholders of KFI Holding entered into an Agreement and Plan of
Merger under which AGI Acquisition Corp. agreed to merge with and into AGI, with
AGI as the surviving corporation. In this merger, the shares of AGI not
contributed to KFI Holding under the Investment Agreement, together with certain
outstanding stock appreciation rights of AGI and an outstanding option for the
purchase of AGI's common stock, were converted into a right to receive cash in
the aggregate amount of $30.5 million, net of fees. Of this amount,
approximately $813,000 was placed in escrow to secure certain indemnification
obligations described below.
The payment of the foregoing cash consideration was funded from the proceeds
of the Offering and the cash investments made pursuant to the Investment
Agreement.
In the Agreement and Plan of Merger, AGI and the Principal AGI Stockholders
made customary representations and warranties to KFI Holding, the existing
stockholders of KFI Holding, and AGI Acquisition Corp., and KFI Holding,
Klearfold and AGI Acquisition Corp. made customary representations and
warranties to AGI. From and after the closing of the Combination, AGI's
stockholders, stock appreciation right holders and option holders participating
in the merger ("AGI Indemnitors") will indemnify the Company for any breach of
certain representations, warranties and covenants in the Agreement and Plan of
Merger. From and after the closing of the Combination, the KFI Indemnitors will
indemnify the former AGI investors for any breaches of certain representations,
warranties and covenants in the Agreement and Plan of Merger.
The aggregate amount payable by the AGI Indemnitors with respect to all claims
for indemnification after the closing of the Combination will not exceed $3.5
million, except with respect to claims arising from breaches of representations
as to equity capitalization, authority to consummate the Transaction, taxes and
brokers, as to which indemnification will be limited to the combined after-tax
value to the indemnifying party of its proceeds from the merger and related
transactions. The aggregate amount payable by the KFI Indemnitors with respect
to all claims for indemnification after the closing of the Combination will not
exceed approximately $2.3 million, except with respect to claims arising from
breaches of representations as to equity capitalization, authority to consummate
the Transactions, taxes and brokers, and certain other specified claims, as to
which indemnification will be limited to the KFI Indemnitors' Share Value.
<PAGE>
Charter
At the time of the closing of the Transactions, IMPAC amended its Certificate
of Incorporation to provide for one class of common stock, par value $.001 per
share ("Common Stock"). The holders of Common Stock have one vote per share.
However, in connection with the adoption of a restricted stock incentive plan
IMPAC may adopt a separate class of voting common stock with terms reflecting
the management incentive plan.
Payments to Management Shareholders
In connection with the Combination and certain related transactions, members
of management of IMPAC and AGI received an aggregate of approximately $18.3
million in cash payments for the repurchase of equity and cancellation of stock
appreciation rights, net of amounts reinvested in the Company, including
approximately $16.9 million paid to Mr. Richard Block, the Chief Executive
Officer of the Company.
PRE-ACQUISITION TRANSACTIONS
The Company's manufacturing facility in Warrington, Pennsylvania is leased
directly from Melvin B. Herrin for an annual rent of approximately $336,000, and
the Louisa, Virginia facility is also leased directly from Mr. Herrin through an
entity controlled by Mr. Herrin for an annual rent of approximately $273,000.
The leases expired on December 31, 1995 and, pursuant to option clauses, were
renewed effective January 1, 1996. The leases contain escalation clauses based
on the producer price index increase and expire on December 31, 2005 with an
option to renew for a further five year period. The Company believes the terms
of these leases to be at fair market value.
The Company's Melrose Park, Illinois facility is leased to the Company by a
partnership which includes the founder of AGI and Richard Block for an annual
rent of approximately $475,000. The term of the lease expires on September 30,
2002. AGI has options to extend the lease for several additional five year
terms. The Company believes that the terms of these leases were at fair market
value at the time entered into by the Company.
For fiscal 1997, the Company paid approximately $114,000 to Freya Block
Design, Inc. for consulting services. Freya Block Design, Inc. is a corporation
wholly-owned by Freya Block, the wife of Richard Block.
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
New Credit Facility
The Company entered into a credit facility with Bank of America, National
Trust and Savings Association ("Bank of America") that provides for up to
$40.0 million of revolving credit borrowings by IMPAC and up to $13.0 million in
letters of credit by Klearfold and AGI (the "New Credit Facility"). The New
Credit Facility has a five-year maturity. Bank of America issued up to $13.0
million of letter of credit accommodations to provide credit enhancement to
outstanding AGI and Klearfold municipal variable rate demand bonds. The New
Credit Facility ranks senior to the Notes and the Company's obligations under
the New Credit Facility are guaranteed by each of the Company's existing and
future subsidiaries on a senior basis and secured by substantially all of the
assets of the Company and its subsidiaries. Interest on the Company's loan
balance will be payable quarterly at Bank of America's base rate (plus an
applicable margin), with IBOR (plus an applicable margin) options on customary
terms. The applicable margins for base rate loans will range between 0.50% and
1.25% based upon the Company's ratio of Funded Debt to EBITDA and the applicable
margin for IBOR loans will range between 1.50% and 2.25% based upon the
Company's ratio of Funded Debt to EBITDA. The Company paid and expects to pay
customary fees in connection with the execution of the New Credit Facility, with
respect to any unused portion of the revolving loan commitment and with respect
to the maintenance of the letter of credit accommodations. In addition to
customary covenants, the New Credit Facility imposes substantial limitations on
the Company's ability to incur additional indebtedness, incur liens, pay
dividends, make other restricted payments, issue guaranties, make advances to
affiliates and dispose of assets. The New Credit Facility constitutes Senior
Debt for purposes of the Notes and the Indenture. The Company expects to use the
proceeds from borrowings under the New Credit Facility to provide for working
capital and other general corporate purposes.
IRB FINANCINGS
Both AGI and Klearfold have entered into certain industrial revenue bond
financing arrangements (the "IRB Financings"), as described below. The IRB
Financings remain outstanding and the Company's obligations thereunder are fully
secured by letters of credit issued under the New Credit Facility.
Bucks County Industrial Development Authority. Pursuant to a loan agreement
(the "Bucks Loan Agreement") between the Bucks County Industrial Development
Authority ("Bucks County") and Klearfold, Klearfold borrowed $4.0 million from
Bucks County to finance certain costs of the acquisition and installation of an
offset printing press and related equipment for its facility in Warrington,
Pennsylvania. In connection with the loan, Bucks County issued $4.0 million
aggregate principal amount of Bucks County Industrial Development Authority
Variable Rate Demand Revenue Bonds, Series 1997 (Klearfold, Inc. Project) (the
"Klearfold IRBs"). The Klearfold IRBs mature on August 1, 2007 and accrued
interest at 4.35% per annum as of December 31, 1997.
City of Jacksonville, Illinois. Pursuant to a loan agreement (the
"Jacksonville Loan Agreement") between the City of Jacksonville, Illinois
("Jacksonville") and AGI, AGI borrowed $7.6 million from Jacksonville to
finance certain costs of the acquisition of land, and construction and equipping
of AGI's manufacturing facility in Jacksonville, Illinois in 1995. In connection
with the loan, Jacksonville issued $7.6 million aggregate principal amount of
City of Jacksonville, Illinois Multi-Mode Industrial Project Revenue Bonds,
Series 1995 (AGI
<PAGE>
Incorporated Project) (the "AGI IRBs"). The AGI IRBs mature on February 1,
2026 and accrued interest at 4.2% per annum as of December 31, 1997.
<PAGE>
EXCHANGE OFFER
General
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $100.0 million
aggregate principal amount of New Notes for a like aggregate principal amount of
Existing Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Existing Notes; the total
aggregate principal amount of Existing Notes and New Notes will in no event
exceed $100.0 million.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request of the Company.
PURPOSE OF THE EXCHANGE OFFER
On March 12, 1998, the Company issued $100.0 million aggregate principal
amount of Existing Notes. The issuance of the Existing Notes was not registered
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act.
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on the Closing Date. Pursuant to the Registration
Rights Agreement, the Company and the Guarantors agree to use commercially
reasonable efforts to file with the Commission the Exchange Offer Registration
Statement on the appropriate form under the Securities Act with respect to the
Exchange Notes. Upon the effectiveness of the Exchange Offer Registration
Statement, the Company and the Guarantors will offer notes of the Company which
will have terms substantially identical in all material respects to the Notes,
including the Existing Guarantees (the "Exchange Notes") (except that the
Exchange Notes will not contain terms with respect to transfer restrictions). If
(i) the Company and the Guarantors are not required to file the Exchange Offer
Registration Statement or to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any Holder
of Transfer Restricted Securities notifies the Company within 20 days after the
Exchange Offer has been consummated (A) that it is prohibited by applicable law
or Commission policy from participating in the Exchange Offer or (B) that it may
not resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not appropriate or available for such resales by
such Holder, or (C) that such Holder is a broker-dealer and holds Notes acquired
directly from the Company or one of its affiliates, then the Company and the
Guarantors will use commercially reasonable efforts to file a shelf registration
statement pursuant to Rule 415 under the Securities Act, which may be an
amendment to the Existing Offer Registration Statement (in either event, the
"Shelf Registration Statement") on or prior to the earliest to occur of (1) the
60th day after the date on which the Company determines that it is not required
to file the Exchange Offer Registration Statement or (2) the 60th day after the
date on which the Company receives notice from a Holder of Transfer Restricted
Securities as contemplated by clause (ii) above (such earliest date being the
"Shelf Filing Deadline"), which Shelf Registration Statement shall provide for
resales of all Transfer Restricted Securities the Holders of which shall provide
certain information to the Company. The Company and the Guarantors will use
commercially reasonable efforts to cause such Shelf Registration Statement to be
declared effective by the Commission on or before the 135th day after the
obligation to file the Shelf Registration Statement arises. For purposes of the
foregoing, "Transfer Restricted Securities" means each Note until the earliest
of (i) the date on which such Note is exchanged in the Exchange Offer and the
Note for which it is exchanged is entitled to be resold to the public by the
Holder thereof without complying with the prospectus delivery requirements of
the Securities Act, (ii) the date on which such Note has been disposed of in
accordance with a Shelf Registration Statement, or (iii) the date on which such
Note is permitted to be distributed to the public pursuant to Rule 144 under the
Securities Act or by a broker-dealer pursuant to the "Plan of Distribution"
contemplated by the Exchange Offer Registration Statement (including delivery of
a copy of this prospectus).
The Registration Rights Agreement provides that unless the Exchange Offer
shall not be permissable under applicable law or Commission policy (i) the
Company and the Guarantors shall cause to be filed an Exchange Offer
Registration Statement with the Commission as soon as practicable after the
Closing Date, but in no event later than 90 days after the Closing Date, (ii)
the Company and the Guarantors shall use commercially reasonable efforts to
cause the Exchange Offer Registration Statement to become effective at the
earliest possible time, but in no event later than 150 days after the Closing
Date, (iii) in connection with the foregoing, file (A) all pre-effective
amendments to such Registration Statement as may be necessary in order to cause
such Registration Statement to become effective, (B) if applicable, a post-
effective amendment to such Registration Statement pursuant to Rule 430A under
the Securities Act and (C) cause all necessary filings in connection with the
registration and qualification of the Exchange Notes to be made under the Blue
Sky laws of such jurisdictions as are necessary to permit the Exchange Offer to
be consummated, and (iv) upon the effectiveness of such Registration Statement,
commence the Exchange Offer. The Company will be entitled to suspend the use of
a prospectus under the Exchange Offer Registration Statement or any Shelf
Registration Statement for certain limited periods under certain prescribed
<PAGE>
circumstances. If (a) any of the Registration Statements required by the
Registration Rights Agreement is not filed with the Commission on or prior to
the date specified for such filing; (b) any of such Registration Statements has
not been declared effective by the Commission on or prior to the date specified
for such effectiveness (the "Effectiveness Target Date"); (c) an Exchange Offer
Registration Statement becomes effective but the Company and the Guarantors fail
to consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement; or (d)
subject to certain exceptions, the Shelf Registration Statement or the Exchange
Offer Registration Statement is filed and is declared effective but thereafter
ceases to be effective or fails to be usable for its intended purpose prior to
the expiration of the time period specified in the Registration Rights Agreement
without being succeeded immediately by a post-effective amendment to such
Registration Statement that cures such failure and that is itself declared
effective immediately (each such event referred to in clauses (a) through (d)
above, a "Registration Default," and each period during which a Registration
Default has occurred and is Continuing, a "Registration Default Period"), the
Company and Guarantors jointly and severally agree that the liquidated damages
("Liquidated Damages"), in addition to the base interest that would otherwise
accrue on the Transfer Restricted Securities, shall accrue at a per annum rate
of 0.25% of the aggregate principal amount of such Transfer Restricted
Securities for the first 90 days of the Registration Default Period, increasing
by 0.25% per annum every 90 days up to a maximum of 1.0% per annum until such
Registration Default has been cured. All accrued Liquidated Damages will be paid
by the Company to the Record Holders by wire transfer of immediately available
funds or by federal funds check on each Damages Payment Date at the office or
agency of the Company maintained for such purpose in the Borough of Manhattan,
The City of New York. Following the cure of all Registration Defaults relating
to any particular Transfer Restricted Securities, the accrual of Liquidated
Damages with respect to such Transfer Restricted Securities will cease
immediately.
Holders of such Notes will be required to make certain representations to
the Company and the Guarantors (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required to
deliver information to be used in connection with the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have their Notes included in the Shelf Registration Statement and
benefit from the provisions regarding Liquidated Damages set forth above.
<PAGE>
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 P.M., New York City time, on ,
1998, unless the Company, in its sole discretion, has extended the period of
time (as described below) for which the Exchange Offer is open (such date, as it
may be extended, is referred to herein as the "Expiration Date"). The
Expiration Date will be at least 30 days after the commencement of the Exchange
Offer (or longer if required by applicable law). The Company expressly reserves
the right, at any time or from time to time, to extend the period of time during
which the Exchange Offer is open, and thereby delay acceptance for exchange of
any Existing Notes by giving oral notice (confirmed in writing) or written
notice to the Exchange Agent (as defined herein) and by giving written notice of
such extension to the holders thereof or by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release through the Dow Jones News Service, in each case, no later than
9:00 A.M. New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time. During any such
extension, all Existing Notes previously tendered will remain subject to the
Exchange Offer.
In addition, the Company expressly reserves the right to terminate or amend
the Exchange Offer and not to accept for exchange any Existing Notes not
theretofore accepted for exchange upon the occurrence of any of the events
specified below under "-- Certain Conditions to the Exchange Offer." If any such
termination or amendment occurs, the Company will notify the Exchange Agent and
will either issue a press release or give oral or written notice to the holders
of the Existing Notes as promptly as practicable.
PROCEDURES FOR TENDERING EXISTING NOTES
The tender to the Company of Existing Notes by a holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Existing Notes may tender the same by (i) properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Existing Notes being tendered, if any, and any
required signature guarantees, to the Exchange Agent at its address set forth
below on or prior to 5:00 p.m., New York City time, on the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF EXISTING NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, OR AN OVERNIGHT OR HAND DELIVERY SERVICE, BE
USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY.
NO EXISTING NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Existing Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered holder of the
Existing Notes who has not completed the box entitled "Special
<PAGE>
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution (as defined
herein). In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a participant in a recognized signature guaranty medallion program
(each an "Eligible Institution"). If Existing Notes are registered in the name
of a person other than a signer of the Letter of Transmittal, the Existing Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Existing Notes at the book-
entry transfer facility, The Depository Trust Company, for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of Existing Notes by causing such
book-entry transfer facility to transfer such Existing Notes into the Exchange
Agent's account with respect to the Existing Notes in accordance with the book-
entry transfer facility's procedures for such transfer. Although delivery of
Existing Notes may be effected through book-entry transfer in the Exchange
Agent's account at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and other required documents
must in each case be transmitted to and received or confirmed by the Exchange
Agent at its address set forth below on or prior to the Expiration Date, or, if
the guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Existing Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address or facsimile number set forth below on or prior to the Expiration
Date a letter, telegram or facsimile from an Eligible Institution setting forth
the name and address of the tendering holder, the name in which the Existing
Notes are registered and, if possible the certificate number or numbers of the
Certificate or certificates representing the Existing Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within three
business days after the Expiration Date the Existing Notes in proper form for
transfer (or a confirmation of book-entry transfer of such Existing Notes into
the Exchange Agent's account at the book-entry transfer facility), will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Existing Notes being tendered by the above-described method are deposited with
the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Company may, at its option, reject the tender. Copies of a
Notice of Guaranteed Delivery which may be used by an Eligible Institution for
the purposes described in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Existing Notes (or a confirmation of book-entry transfer of
such Existing Notes into the Exchange Agent's account at the book-entry transfer
facility) is received by the Exchange Agent, or (ii) a Notice of Guaranteed
Delivery or letter, telegram or facsimile to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of New
Notes in exchange for Existing Notes tendered pursuant to a Notice of Guaranteed
Delivery or letter, telegram or facsimile to similar effect (as provided above)
by an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Existing Notes.
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Existing Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination will be
final and binding on all parties. The Company reserves the right to reject any
and all tenders of any particular Existing Notes not properly tendered or reject
any particular shares of Existing Notes the acceptance of which might, in the
judgment of the Company or its counsel, be unlawful. The Company also reserves
the absolute right to waive any defects or irregularities or condition of the
Exchange Offer as to any particular Existing Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Existing Notes in the Exchange Offer). The interpretation of
the terms and conditions of the Exchange Offer (including the Letter of
Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Existing Notes for exchange must be cured within such
time as the Company shall determine. Neither the Company nor any other person
shall be under any duty to give notification of defects or irregularities with
respect to tenders of Existing Notes for exchange, nor shall any of them incur
any liability for failure to give such notification.
If the Letter of Transmittal or any Existing Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted.
By tendering, each holder that is not a broker-dealer or is a broker-dealer
but is not receiving New Notes for its own account will represent to the Company
that, among other things, the New Notes acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of such holder's business, that such
holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes and that such holder is not an "affiliate" of the
Company as defined in Rule 405 under the Securities Act or, if it is an
affiliate, such holder will comply with the registration and prospectus delivery
requirements of the Securities Act, to the extent applicable. Each broker-dealer
that is receiving New Notes for its own account in exchange for Existing Notes
that were acquired as a result of market-making or other trading activities will
represent to the Company that it will deliver a prospectus in connection with
any resale of such Existing Notes.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Existing Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth under "-- Certain Conditions
to the Exchange Offer," to terminate the Exchange Offer and (b) to the extent
permitted by applicable law, purchase Existing Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers may differ from the terms of the Exchange Offer.
<PAGE>
WITHDRAWAL RIGHTS
Tenders of Existing Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the business day prior to the Expiration Date. For a
withdrawal to be effective, a written notice of withdrawal sent by letter,
telegram or facsimile must be received by the Exchange Agent at any time prior
to 5:00 p.m., New York City time, on the business day prior to the Expiration
Date at its address or facsimile number set forth below. Any such notice of
withdrawal must (i) specify the name of the person having tendered the Existing
Notes to be withdrawn (the "Depositor"), (ii) identify the Existing Notes to be
withdrawn (including the certificate number of numbers of the certificate or
certificates representing such Existing Notes and the aggregate principal amount
of such Existing Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Existing Notes
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to permit the Transfer Agent with respect to
the Existing Notes to register the transfer of such Existing Notes into the name
of the person withdrawing the tender and (iv) specify the name in which any such
Existing Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company in its
sole discretion, which determination will be final and binding on all parties.
Any Existing Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no New Notes will be issued with respect
thereto unless the Existing Notes so withdrawn are validly retendered. Any
Existing Notes which have been tendered but which are withdrawn will be returned
to the holder thereof without cost to such holder as soon as practicable after
such withdrawal. Properly withdrawn Existing Notes may be retendered by
following one of the procedures described above under "-- Procedures for
Tendering Existing Notes" at any time prior to the Expiration Date.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Existing Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Exchange Offer. See "-- Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Company will be deemed to have accepted
properly tendered Existing Notes for exchange when the Company has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of the New Notes in exchange for Existing Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Company of such Existing Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Existing Notes
are not accepted for exchange for any reason set forth in the terms and
conditions of the Exchange Offer, such unaccepted Existing Notes will be
returned without expense to the tendering holder thereof as promptly as
practicable after the rejection of such tender or the expiration or termination
of the Exchange Offer.
UNTENDERED EXISTING NOTES
Holders of Existing Notes whose Existing Notes are not tendered or are
tendered but not accepted in the Exchange Offer will continue to hold such
Existing Notes and will be entitled to all the rights and preferences and
subject to the limitations applicable thereto. Following consummation of the
Exchange Offer, the holders of Existing Notes will continue to be subject to the
existing restrictions upon transfer thereof and, except as provided herein, the
Company will have no further obligation to such holders to provide for the
registration under the Securities Act of the Existing Notes held by them. To the
extent that Existing Notes are tendered and
<PAGE>
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Existing Notes could be adversely affected.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or issue New Notes in exchange for, any
Existing Notes, and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Existing Notes for exchange, any of the following
events shall occur:
(A) an injunction, order or decree shall have been issued by any court or
governmental agency that would prohibit, prevent or otherwise materially impair
the ability of the Company to proceed with the Exchange Offer; or
(B) there shall occur a change in the current interpretation of the staff
of the Commission which current interpretation permits the New Notes issued
pursuant to the Exchange Offer in exchange for the Existing Notes to be offered
for resale, resold and otherwise transferred by holders thereof (other than (i)
a broker-dealer who purchases such New Notes directly from the Company to
resell pursuant to Rule 144A, Regulation S or any other available exemption
under the Securities Act or (ii) a person that is an affiliate of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of New Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Existing Notes and return
any Existing Notes that have been tendered to the holders thereof, (ii) extend
the Exchange Offer and retain all Existing Notes tendered prior to the
Expiration Date, subject to the rights of such holders of tendered shares of
Existing Notes to withdraw their tendered Existing Notes, or (iii) waive such
termination event with respect to the Exchange Offer and accept all properly
tendered Existing Notes that have not been withdrawn. If such waiver constitutes
a material change in the Exchange Offer, the Company will disclose such change
by means of a supplement to this Prospectus that will be distributed to each
registered holder of Existing Notes, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered holders of the
Existing Notes, if the Exchange Offer would otherwise expire during such period.
In addition, the Company will not accept for exchange any Existing Notes
tendered, and no New Notes will be issued in exchange for any such Existing
Notes, if at any time any stop order shall be threatened by the Commission or in
effect with respect to the Registration Statement.
The Exchange Offer is not conditioned on any minimum principal amount of
Existing Notes being tendered for exchange.
<PAGE>
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions regarding Exchange Offer procedures and
requests for additional copies of this Prospectus or the Letter of Transmittal
should be directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Delivery:
State Street Bank and Trust Company State Street Bank and Trust Company
Two International Place Two International Place
Corporate Trust Department, 4th Floor Corporate Trust Department, 4th Floor
Boston, MA 02110 Boston, MA 02110
Attention: Kellie Mullen Attention: Kellie Mullen
Re: IMPAC Group, Inc. Re: IMPAC Group, Inc.
By Facsimile:
(617) 664-5290
Confirm by Telephone:
(617) 664-5587
</TABLE>
State Street Bank and Trust Company is also the Transfer Agent for the
Existing Notes and New Notes.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptance of the Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The cash expenses to be incurred by the Company in
connection with the Exchange Offer will be paid by the Company.
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations
should not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Existing Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Existing Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Existing Notes not tendered or accepted for exchange
are to be delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the Existing Notes tendered, or if
tendered Existing Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of New Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is
<PAGE>
not submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holders.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. Expenses incurred in connection
with the issuance of the New Notes will be amortized by the Company over the
term of the New Notes under generally accepted accounting principles.
<PAGE>
PLAN OF DISTRIBUTION
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Existing Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than (i) a broker-dealer who
purchases such New Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
that is an affiliate of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery requirements of the Securities Act provided that New Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. Any holder of Existing Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Notes could not rely on
such interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Thus, any New Notes acquired by such
holders will not be freely transferable except in compliance with the Securities
Act.
Each broker-dealer that receives New Notes for its own account in exchange for
Existing Notes acquired as a result of market-making or other trading activities
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. For a period of 180 days after the Expiration Date, this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of such New Notes. During such
180-day period, the Company will use its reasonable best efforts to make this
Prospectus available to any broker-dealer for use in connection with such
resale, provided that such broker-dealer indicates in the Letter of Transmittal
that it is a broker-dealer.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through broker-dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any person that participates in the distribution of such New
Notes may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any such resale of New Notes and any commissions or
concessions received by any such broker-dealers may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that a
broker-dealer, by acknowledging that it will deliver and by delivering a
prospectus, will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The Company will indemnify the holders of the New Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
<PAGE>
DESCRIPTION OF NOTES
General
Except as otherwise indicated, the following description relates both to the
Existing Notes issued in the Offering and the New Notes, together with the New
Guarantees, to be issued in exchange for the Existing Notes in the Exchange
Offer. The form and terms of the New Notes are the same as the form and terms
of the Existing Notes, except that the New Notes have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof. The New Notes will be obligations of the Company evidencing the same
indebtedness as the Existing Notes. The Existing Notes were issued, and the New
Notes offered hereby will be issued, pursuant to an Indenture (the "Indenture")
between the Company, the Guarantors and State Street Bank and Trust Company, as
trustee (the "Trustee"), in a private transaction that is not subject to the
registration requirements of the Securities Act. The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
the material provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. Copies of the Indenture and
Registration Rights Agreement are available as set forth below under "--
Additional Information". The definitions of certain terms used in the following
summary are set forth below under "--Certain Definitions". For purposes of this
summary, the term "Company" refers only to IMPAC Group, Inc. and not to any of
its Subsidiaries.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to the prior payment in full in cash of all
current and future Senior Debt including borrowings under the New Credit
Facility and the IRB Financings. As of December 31, 1997, on a pro forma basis
giving effect to the Transactions, the Company and its Subsidiaries would have
had an aggregate of approximately $11.6 million of funded Senior Debt (secured
by letters of credit with an aggregate face amount of approximately $12.6
million issued under the New Credit Facility) and, through its Subsidiaries,
would have had additional liabilities (including trade payables) aggregating
approximately $28.9 million. The Indenture permits the incurrence of additional
Senior Debt in the future.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount of $100.0 million and will
mature on March 15, 2008. Interest on the Notes accrues at the rate of 10 1/8%
per annum and will be payable semi-annually in arrears on March 15 and September
15, commencing on September 15, 1998, to Holders of record on the immediately
preceding March 1 and September 1 (each a "Record Date"). Interest on the
Notes accrues from the most recent date to which interest has been paid or, if
no interest has been paid, from the date of original issuance. Interest is
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest and Liquidated Damages on the Notes is
payable at the office or agency of the Company maintained for such purpose or,
at the option of the Company, payment of interest and Liquidated Damages may be
made by check mailed to the Holders of the Notes at their respective addresses
set forth in the register of Holders of Notes; provided that all payments of
principal, premium, interest and Liquidated Damages with respect to Notes the
Holders of which have given wire transfer instructions to the Company prior to
the Record Date are required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders
<PAGE>
thereof. Until otherwise designated by the Company, the Company's office or
agency for payment is the office of the Trustee maintained for such purpose. The
Notes will be issued in denominations of $1,000 and integral multiples thereof.
<PAGE>
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed (the "Subsidiary Guarantees") by the Guarantors. All of the
Company's Subsidiaries are Restricted Subsidiaries and Guarantors. The
Subsidiary Guarantee of each Guarantor are unsecured and subordinated to the
prior payment in full in cash of all Senior Debt of such Guarantor, which on a
pro forma basis giving effect to the Transactions would include approximately
$11.6 million of IRB Financings outstanding as of December 31, 1997 (which would
be secured by letters of credit with an aggregate face amount of approximately
$12.6 million issued under the New Credit Facility), and the amounts for which
the Guarantors are liable under the guarantees issued from time to time with
respect to Senior Debt including guarantees of all obligations under the New
Credit Facility. The Obligations of each Guarantor under its Subsidiary
Guarantee are limited so as not to constitute a fraudulent conveyance under
applicable law. See, however, "Risk Factors--Fraudulent Transfer Statutes".
The Indenture provides that no Guarantor may consolidate with or merge with or
into (whether or not such Guarantor is the surviving Person), another
corporation, Person or other entity whether or not affiliated with such
Guarantor unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture, in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture and the Registration Rights Agreement;
(ii) immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) except in the case of a merger of a Guarantor with or
into another Guarantor or a merger of a Guarantor with or into the Company, the
Company would be permitted by virtue of the Company's pro forma Fixed Charge
Coverage Ratio, immediately after giving effect to such transaction, to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the covenant described below under the caption "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock".
The Indenture provides that in the event of a sale or other disposition of all
of the assets of any Guarantor (other than to the Company or another Guarantor),
by way of merger, consolidation or otherwise, or a sale or other disposition of
all of the Capital Stock of any Guarantor (other than to the Company or another
Guarantor), then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the Capital Stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee and any
such acquiring corporation will not be required to assume any obligations of
such Guarantor under the applicable Subsidiary Guarantee; provided that such
sale or other disposition complies with all applicable provisions of the
Indenture including, without limitation, the covenant described below under the
caption "--Repurchase at the Option of Holders--Asset Sales". See "--
Repurchase at the Option of Holders--Asset Sales".
SUBORDINATION
The payment of principal of, premium, if any, interest and all other amounts
or obligations due under or on the Notes is subordinated in right of payment, as
set forth in the Indenture, to the prior payment in full in cash of all Senior
Debt, whether outstanding on the date of the Indenture or thereafter incurred.
<PAGE>
Upon any distribution to creditors of the Company or any Guarantor in a
liquidation or dissolution of the Company or any Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshaling of the Company's or any Guarantor's assets and liabilities, the
holders of Senior Debt will be entitled to receive payment in full in cash of
all Obligations due in respect of such Senior Debt (including interest after the
commencement of any such proceeding at the rate specified in the applicable
Senior Debt whether or not allowed as a claim in any such proceeding) before the
Holders of Notes will be entitled to receive any payment with respect to the
Notes, and until all Obligations with respect to Senior Debt are paid in full in
cash, any distribution to which the Holders of Notes would be entitled shall be
made to the holders of Senior Debt (except that Holders of Notes may receive and
retain Permitted Junior Securities and payments made from the trust described
under "--Legal Defeasance and Covenant Defeasance").
The Company and the Guarantors also may not make any payment upon or in
respect of the Notes or the Subsidiary Guarantees (except in Permitted Junior
Securities or from the trust described under "--Legal Defeasance and Covenant
Defeasance") if (i) a default in the payment of the principal of, premium, if
any, or interest on Senior Debt occurs and is continuing or (ii) any other
default occurs and is continuing with respect to Designated Senior Debt that
currently, or with the passage of time or giving of notice, permits holders of
the Designated Senior Debt as to which such default relates to accelerate its
maturity and, in the case of any such default described in this clause (ii), the
Trustee receives a notice of such default of the type referred to in this clause
(ii) (a "Payment Blockage Notice") from the Company or the holders of any
Designated Senior Debt. Payments on the Notes may and shall be resumed (a) in
the case of a payment default, upon the date on which such default is cured or
waived in writing by the holders of the applicable Senior Debt and (b) in case
of a nonpayment default, the earlier of the date on which such nonpayment
default is cured or waived in writing by the holders of Designated Senior Debt
or 179 days after the date on which the applicable Payment Blockage Notice is
received by the Trustee, unless the maturity of any Designated Senior Debt has
been accelerated. No new period of payment blockage may be commenced under
clause (ii) above unless and until (i) 360 days have elapsed since the initial
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal of, premium, if any, and interest on the Notes
that have come due have been paid in full in cash. No nonpayment default that
existed and was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived in writing or cured
for a period of not less than 90 days. In the event that the Company or any
Guarantor makes any payment to the Trustee or any Holder of any Note prohibited
by the foregoing, such payment will be required to be held in trust for and paid
over to the holders of Senior Debt (or the representative thereof). The Trustee
and the Holders of the Notes will agree not to challenge or contest the
enforceability or validity of the New Credit Facility or any obligation, Lien or
encumbrance thereunder.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of a
liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company and the Guarantors including creditors who are holders
of Senior Debt. On a pro forma basis, after giving effect to the Transactions,
the principal amount of funded Senior Debt outstanding at December 31, 1997
would have been approximately $11.6 million (which would have been secured by
letters of credit with an aggregate face amount of approximately $12.6 million
under the New Credit Facility). The Indenture limits, subject to certain
financial tests, the amount of additional Indebtedness, including Senior Debt,
that the Company and its Subsidiaries can incur. See "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock".
<PAGE>
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to March 15,
2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on March 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
- --- ----------
<S> <C>
2003 ............................................................................................. 105.062%
2004 ............................................................................................. 103.375
2005 ............................................................................................. 101.687
2006 and thereafter .............................................................................. 100.000
</TABLE>
Notwithstanding the foregoing, at any time prior to March 15, 2001, the
Company may on any one or more occasions redeem up to $35.0 million in aggregate
principal amount of Notes at a redemption price of 110.125% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the redemption date, with the net cash proceeds of Public Equity
Offerings by the Company; provided that at least $65.0 million in aggregate
principal amount of Notes remain outstanding immediately after the occurrence of
such redemption (excluding Notes held by the Company and its Subsidiaries); and
provided, further, that such redemption shall occur within 60 days of the date
of the closing of such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
<PAGE>
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within fifteen Business Days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes on the date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent lawful,
(1) accept for payment all Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (2) deposit with the Paying Agent an amount
equal to the Change of Control Payment in respect of all Notes or portions
thereof so tendered and (3) deliver or cause to be delivered to the Trustee the
Notes so accepted together with an Officers' Certificate stating the aggregate
principal amount of Notes or portions thereof being repurchased by the Company.
The Paying Agent will promptly mail to each Holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unrepurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 90 days following a Change of Control, the Company will either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Notes
required by this covenant. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The New Credit Facility currently prohibits the Company from purchasing any
Notes and also provides that certain change of control events including, without
limitation, a Change of Control, with respect to the Company would constitute a
default thereunder. Any future credit agreements or other agreements relating to
Senior Debt to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Notes, the Company could seek the
consent of its lenders to the purchase of Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such a consent or repay such borrowings, the Company will remain prohibited from
purchasing Notes. In such case, the Company's failure to
<PAGE>
purchase tendered Notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under the New Credit Facility. In
such circumstances, the subordination provisions in the Indenture restrict
payments to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of "Change of Control" includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Subsidiaries taken as a whole.
Although there is case law interpreting the phrase "substantially all", there
is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash;
provided that the amount of (x) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or the Subsidiary Guarantees) that
are assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Company or such Restricted Subsidiary from
further liability and (y) in the case of any Asset Sale constituting the
transfer (by merger or otherwise) of all of the Capital Stock of a Restricted
Subsidiary, any liabilities (as shown on such Restricted Subsidiary's most
recent balance sheet) of such Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
the Subsidiary Guarantees) that will remain outstanding after such transfer and
will not be a liability of the Company or any other Restricted Subsidiary of the
Company following such transfer and (z) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are contemporaneously (subject to ordinary settlement periods)
converted by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received), shall be deemed to be cash for purposes of this
provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the
Company may apply such Net Proceeds, at its option, (a) to repay Senior Debt, or
(b) to the acquisition of a majority of the assets of, or a majority of the
Voting Stock of, another business, the making of a capital expenditure or the
acquisition of other long-term assets, in each case, in, or used or useful in,
the same or a similar line of business as the Company or one of its Subsidiaries
was engaged in on the date of the Indenture or any reasonable extension or
expansion thereof. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce revolving credit borrowings or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess
Proceeds". When the
<PAGE>
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be
required to make an offer to all Holders of Notes and all holders of other pari
passu Indebtedness containing provisions similar to those set forth in the
Indenture with respect to offers to purchase or redeem with the proceeds of
sales of assets (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes and such other pari passu Indebtedness that may be purchased out
of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture and such other Indebtedness. To the extent
that any Excess Proceeds remain after consummation of an Asset Sale Offer, the
Company may use such Excess Proceeds for any purpose not otherwise prohibited by
the Indenture. If the aggregate principal amount of Notes and such other
Indebtedness tendered into such Asset Sale Offer surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and
such other Indebtedness to be purchased on a pro rata basis. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company or any of its Restricted Subsidiaries) or to the direct or indirect
holders of the Company's or any of its Restricted Subsidiaries' Equity Interests
in their capacity as such (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or to the
Company or a Restricted Subsidiary of the Company); (ii) purchase, redeem or
otherwise acquire or retire for value (including, without limitation, in
connection with any merger or consolidation involving the Company) any Equity
Interests of the Company or any direct or indirect parent of the Company; (iii)
make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated to
the Notes, except a payment of interest or principal at Stated Maturity; or (iv)
make any Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
below under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv) and (vi) of the next succeeding paragraph), is less
than the sum, without duplication, of (i) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period)
<PAGE>
from the beginning of the first fiscal quarter commencing after the date of
the Indenture to the end of the Company's most recently ended fiscal quarter
for which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds received by the Company since the date of the Indenture as a
contribution to its common equity capital or from the issue or sale of Equity
Interests of the Company (other than Disqualified Stock) or from the issue or
sale of Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of the
Company), plus (iii) to the extent that any Restricted Investment that was
made after the date of the Indenture is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (A) the cash return of capital with respect
to such Restricted Investment (less the cost of disposition, if any) and (B)
the initial amount of such Restricted Investment, plus (iv) $1.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness that is subordinated to the Notes or Equity
Interests of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of,
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of Indebtedness that is
subordinated to the Notes with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend (in cash or
otherwise) by a Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Subsidiary of the Company held by any member of the Company's (or any of its
Subsidiaries') management pursuant to any management equity subscription
agreement, stock option agreement or employment agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $2.5 million in any twelve-month period and no
Default or Event of Default shall have occurred and be continuing immediately
after such transaction; or (vi) the repurchase, redemption or other acquisition
or retirement for value of any Equity Interests of the Company or any Subsidiary
of the Company held by any member of the Company's (or any of its Subsidiaries')
management pursuant to any management equity subscription agreement, stock
option agreement or employment agreement, provided that the purchase price is
paid with the proceeds to the Company of key man life insurance or disability
insurance policies purchased by the Company specifically to finance any such
repurchase, redemption or other acquisition.
The Board of Directors of the Company may designate any Restricted Subsidiary
(other than Klearfold, Inc. or AGI Incorporated) to be an Unrestricted
Subsidiary if such designation would not cause a Default. For purposes of making
such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
clause (c) of the first paragraph of this covenant. All such outstanding
investments will be deemed to constitute Investments in an amount equal to the
greatest of (x) the net book value of such Investments at the time of such
designation, (y) the fair market value of such Investments at the time of such
designation and (z) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such Restricted
Payment would be permitted at
<PAGE>
such time and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $5.0 million. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments"
were computed, together with a copy of any opinion or appraisal required by the
Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness and letters of credit
(with letters of credit being deemed to have a principal amount equal to the
stated amount thereof) and other obligations under Credit Facilities in an
aggregate principal amount that does not exceed at any one time $40.0 million
less the aggregate amount of all Net Proceeds of Asset Sales applied to repay
Indebtedness under a Credit Facility pursuant to the covenant described above
under the caption "--Asset Sales" (other than temporary paydowns pending
final application of such Net Proceeds);
(ii) the incurrence by the Company and the Guarantors of the Existing
Indebtedness and letters of credit (including reimbursement obligations with
respect thereto) supporting Existing Indebtedness whether such letters of
credit are incurred under the New Credit Facility or otherwise;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes;
(iv) the incurrence by the Company or any of the Guarantors of Indebtedness
represented by Capital Lease Obligations, mortgage financings or purchase
money obligations, in each case incurred for the purpose of financing all or
any part of the purchase
<PAGE>
price or cost of construction or improvement of property, plant or equipment
used in the business of the Company or such Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to this
clause (iv), not to exceed $5.0 million at any time outstanding;
(v) the incurrence by the Company or any of the Guarantors of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the Indenture to be incurred under the
first paragraph hereof or clauses (ii) or (iv) of this paragraph;
(vi) the incurrence by the Company or any of the Guarantors of
intercompany Indebtedness between or among the Company and any Guarantor;
provided, however, that (i) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior payment
in full in cash of all Obligations with respect to the Notes and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Subsidiary
thereof and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Guarantor thereof shall be deemed,
in each case, to constitute an incurrence of such Indebtedness by the Company
or such Guarantor, as the case may be, that was not permitted by this clause
(vi);
(vii) the incurrence by the Company or any of the Guarantors of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risk with respect to any floating rate Indebtedness that is permitted by
the terms of this Indenture to be outstanding;
(viii) the guarantee by the Company or any of its Subsidiaries or any of
the Guarantors of Indebtedness of the Company or another Guarantor that was
permitted to be incurred by another provision of this covenant;
(ix) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company that was not permitted by this clause (ix), and the issuance of
preferred stock by Unrestricted Subsidiaries; and
(x) the incurrence by the Company or any of the Guarantors of additional
Indebtedness in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (x), not to exceed $5.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (x) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant. Accrual of interest, accretion or amortization of
original issue discount, the payment of interest on any Indebtedness in the form
of additional Indebtedness with the same terms, and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Stock for purposes of this covenant; provided, in each
such case, that the amount thereof is included in Fixed Charges of the Company
as accrued (to the extent not already included in Fixed Charges).
<PAGE>
Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, securing Indebtedness or trade payables, except for Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any Indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries. However, the
foregoing restrictions will not apply to encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of the
Indenture, (b) the New Credit Facility as in effect as of the date of the
Indenture, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are not materially more restrictive,
taken as a whole, with respect to such dividend and other payment restrictions
than those contained in the New Credit Facility as in effect on the date of the
Indenture as determined in good faith by the Company's Board of Directors, (c)
the Indenture and the Notes, (d) applicable law, (e) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) customary non-assignment provisions in leases and other
contracts, (g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, (h) any agreement for the sale of a
Subsidiary or a substantial portion of such Subsidiary's assets that restricts
distributions by that Subsidiary pending its sale, (i) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are not materially more
restrictive, taken as a whole, than those contained in the agreements governing
the Indebtedness being refinanced as determined in good faith by the Company's
Board of Directors, (j) secured Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the caption "-
- -Liens" that limits the right of the debtor to dispose of the assets securing
such Indebtedness, (k) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements and other similar
agreements entered into in the ordinary course of business and (l) restrictions
on cash or other deposits or net worth imposed by customers under contracts
entered into in the ordinary course of business.
<PAGE>
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) except in the case of a
merger or consolidation of the Company with or into a Wholly Owned Restricted
Subsidiary of the Company, the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under the
Registration Rights Agreement, the Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger or consolidation of the Company with or into
a Wholly Owned Restricted Subsidiary of the Company, the Company or the entity
or Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock".
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following items shall not be deemed
to be Affiliate Transactions: (i) any employment agreement entered into by the
Company or any of its Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Subsidiary, (ii)
transactions between or among the Company and/or its Subsidiaries, (iii) payment
of reasonable directors fees to Persons who are
<PAGE>
not otherwise Affiliates of the Company, (iv) Restricted Payments that are
permitted by the provisions of the Indenture described above under the caption
"--Restricted Payments" and (v) Existing Affiliate Transactions.
Senior Subordinated Debt
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes, and (ii) no Guarantor will incur,
create, issue, assume, guarantee or otherwise become liable for any Indebtedness
that is subordinate or junior in right of payment to Senior Debt of such
Guarantor and senior in any respect in right of payment to the Subsidiary
Guarantees.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Subsidiary after the date of the
Indenture, then such newly acquired or created Subsidiary shall become a
Guarantor and execute a Supplemental Indenture and deliver an Opinion of
Counsel, in accordance with the terms of the Indenture; provided, that all
Subsidiaries that have properly been designated as Unrestricted Subsidiaries in
accordance with the Indenture (i) shall not be subject to the requirements of
this covenant and (ii) shall be released from all Obligations under any
Subsidiary Guarantee, in each case for so long as they continue to constitute
Unrestricted Subsidiaries.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case within the time periods specified in
the Commission's rules and regulations. In addition, following the consummation
of the exchange offer contemplated by the Registration Rights Agreement, whether
or not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability within the time periods specified in the Commission's rules and
regulations (unless the Commission will not accept such a filing) and make such
information available to securities analysts and
<PAGE>
prospective investors upon request. In addition, the Company and the Guarantors
have agreed that, for so long as any Notes remain outstanding, they will furnish
to the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act. Any materials required to be furnished to Holders of
Notes by this covenant shall discuss, in reasonable detail, either on the face
of the financial statements included therein or in the footnotes thereto and in
any Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of the Company and
its Restricted Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of the Company.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company or
any of its Subsidiaries for 30 days after notice to comply with the provisions
described under the captions "--Change of Control", "--Asset Sales",
"--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; (iv) failure by the Company or any of its Subsidiaries for 60
days after notice to comply with any of its other agreements in the Indenture or
the Notes; (v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or
is created after the date of the Indenture, which default results in the
acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness the maturity of which has been so
accelerated, aggregates $5.0 million or more (other than Existing Indebtedness
to the extent it is secured by or paid by the drawing against a letter of credit
permitted to be issued under the Indenture); (vi) failure by the Company or any
of its Restricted Subsidiaries to pay final judgments aggregating in excess of
$5.0 million, which judgments are not paid, discharged or stayed for a period of
60 days; (vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries; and (viii) except as permitted
by the Indenture, any Subsidiary Guarantee shall be held in any judicial
proceeding to be unenforceable or invalid in any material respect or shall cease
for any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations under
its Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Subsidiary or any group
of Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to
<PAGE>
redeem the Notes pursuant to the optional redemption provisions of the
Indenture, an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the Notes. If an
Event of Default occurs prior to March 15, 2003 by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding the prohibition on redemption of the Notes prior to March
15, 2003, then the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company, as
such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or the Registration Rights Agreement or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of Notes by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages on
the outstanding Notes on the Stated Maturity or on the applicable redemption
date, as the case
<PAGE>
may be, and the Company must specify whether the Notes are being defeased to
maturity or to a particular redemption date; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound, including, without limitation, the New Credit Facility;
(vi) the Company must have delivered to the Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture. The
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
Holder to pay any taxes and fees required by law or permitted by the Indenture.
The Company is not required to transfer or exchange any Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or the
Notes may be amended or supplemented with the consent of the Holders of at least
a majority in principal amount of the Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes
<PAGE>
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption "--
Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes, the
Company and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes
in addition to or in place of certificated Notes, to provide for the assumption
of the Company's obligations to Holders of Notes in the case of a merger or
consolidation or sale of all or substantially all of the Company's assets, to
make any change that would provide any additional rights or benefits to the
Holders of Notes or that does not adversely affect the legal rights under the
Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
<PAGE>
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to IMPAC Group, Inc.,
1950 North Ruby Street, Melrose Park, Illinois 60160, Attention: Chief Financial
Officer.
BOOK-ENTRY, DELIVERY AND FORM
The Existing Notes were offered and sold to qualified institutional buyers in
reliance on Rule 144A ("Rule 144A Notes"). Notes were also offered and sold in
offshore transactions in reliance on Regulation S ("Regulation S Notes"). Except
as set forth below, Notes are issued in registered, global form in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof.
Notes are issued at the closing of the Offering (the "Closing") only against
payment in immediately available funds.
Rule 144A Notes initially will be represented by one or more Notes in
registered, global form without interest coupons (collectively, the "Rule 144A
Global Notes"). Regulation S Notes initially will be represented by one or more
Notes in registered, global form without interest coupons (collectively, the
"Regulation S Global Notes" and, together with the Rule 144A Global Notes, the
"Global Notes"). The Global Notes are deposited with the Trustee as custodian
for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below. Through
and including the 40th day after the later of the commencement of the Offering
and the Closing (such period through and including such 40th day, the
"Restricted Period"), beneficial interests in the Regulation S Global Notes
may be held only through the Euroclear System ("Euroclear") and Cedel, S.A.
("Cedel") (as indirect participants in DTC), unless transferred to a person
that takes delivery through a Rule 144A Global Note in accordance with the
certification requirements described below. Beneficial interests in the Rule
144A Global Notes may not be exchanged for beneficial interests in the
Regulation S Global Notes at any time except in the limited circumstances
described below. See "--Exchanges between Regulation S Notes and Rule 144A
Notes".
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for Notes
in certificated form except in the limited circumstances described below. See
"--Exchange of Book-Entry Notes for Certificated Notes". Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes are entitled to receive physical delivery of Certificated Notes (as
defined below).
Rule 144A Notes (including beneficial interests in the Rule 144A Global Notes)
are subject to certain restrictions on transfer and bear a restrictive legend as
described under "Notice to Investors". Regulation S Notes also bear the legend
as described under "Notice to Investors". In addition, transfers of beneficial
interests in the Global Notes are subject to the applicable rules and procedures
of DTC and its direct or indirect participants (including, if applicable, those
of Euroclear and Cedel), which may change from time to time.
Initially, the Trustee acts as Paying Agent and Registrar. The Notes may be
presented for registration of transfer and exchange at the offices of the
Registrar.
<PAGE>
Depository Procedures
The following description of the operations and procedures of DTC, Euroclear
and Cedel are provided solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them from time to time. The Company takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the
records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes and (ii) ownership of such interests in the Global
Notes will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
Investors in the Rule 144A Global Notes may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and Cedel) which are Participants in
such system. Investors in the Regulation S Global Notes must initially hold
their interests therein through Euroclear or Cedel, if they are participants in
such systems, or indirectly through organizations that are participants in such
systems. After the expiration of the Restricted Period (but not earlier),
investors may also hold interests in the Regulation S Global Notes through
Participants in the DTC system other than Euroclear and Cedel. Euroclear and
Cedel will hold interests in the Regulation S Global Notes on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective depositories, which are Morgan Guaranty Trust
Company of New York, Brussels office, as operator of Euroclear, and Citibank,
N.A., as operator of Cedel. All interests in a Global Note, including those held
through Euroclear or Cedel, may be subject to the procedures and requirements of
DTC. Those interests held through Euroclear or Cedel may also be subject to the
procedures and requirements of such systems. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Note to such persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Note to pledge such interests to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate evidencing
such interests.
<PAGE>
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Notes or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the Notes (including principal and interest), is
to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interest in the relevant security as shown on the
records of DTC unless DTC has reason to believe it will not receive payment on
such payment date. Payments by the Participants and the Indirect Participants to
the beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee or
the Company. Neither the Company nor the Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants, interest in
the Global Notes are expected to be eligible to trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will,
therefore, settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its Participants. See "--Same Day Settlement
and Payment".
Subject to the transfer restrictions set forth under "Notice to Investors",
transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same day funds, and transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the Notes
described herein, cross-market transfers between the Participants in DTC, on the
one hand, and Euroclear or Cedel participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel, as the case may be, by its respective depositary; however, such cross-
market transactions will require delivery of instructions to Euroclear or Cedel,
as the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by delivering
or receiving interests in the relevant Global Note in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear
<PAGE>
participants and Cedel participants may not deliver instructions directly to the
depositories for Euroclear or Cedel.
DTC has advised the Company that it will take any action permitted to be taken
by a Holder of Notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the Notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Notes, DTC reserves the right to exchange the
Global Notes for legended Notes in certificated form, and to distribute such
Notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Regulation S Global Notes and in the
Rule 144A Global Notes among Participants in DTC, Euroclear and Cedel, they are
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee nor any of their respective agents will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive Notes in registered certificated
form ("Certificated Notes") if (i) DTC (x) notifies the Company that it is
unwilling or unable to continue as depositary for the Global Notes and the
Company thereupon fails to appoint a successor depositary or (y) has ceased to
be a clearing agency registered under the Exchange Act, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the Certificated Notes or (iii) there shall have occurred and be continuing an
Event of Default with respect to the Notes. In addition, subject to certain
limitations, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to the
Trustee by or on behalf of DTC in accordance with the Indenture. In all cases,
Certificated Notes delivered in exchange for any Global Note or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures) and will bear the applicable restrictive legend
referred to in "Notice to Investors", unless the Company determines otherwise
in compliance with applicable law.
Transfer of Notes Held through DTC
The Trustee and DTC have confirmed that the Offers are eligible for the DTC
Automated Tender Offer Program ("ATOP"). DTC has authorized DTC participants
that hold Notes on behalf of beneficial owners of Notes through DTC to tender
their Notes as if they were Holders. To effect a tender, DTC participants
should transmit their acceptance to DTC through ATOP by causing DTC to transfer
Notes to the Trustee for such Notes in accordance with ATOP's procedures for
transfer. DTC will then send an Agent's Message (as defined below) to the
Trustee. Delivery of tendered Notes by a DTC participant must be made to the
Trustee pursuant to the procedure for book-entry transfer set forth below or the
tendering DTC participant must comply with the guaranteed delivery procedures
set forth below.
Except as provided below, unless the Notes being tendered are deposited with
the Trustee for such Notes prior to 5:00 p.m., New York City time, on the
Surrender Date (accompanied by a properly completed and duly executed Letter of
Transmittal or a properly transmitted Agent's Message relating to such Notes),
the Company may, at its option, treat such tender as defective for purposes of
the right to receive the applicable Purchase Price. Payment
<PAGE>
for the Notes will be made only against deposit, or transfer through the ATOP
procedures, of the tendered Notes and delivery of all other required documents.
Book-Entry Delivery Procedures
The Trustee has established or will establish within two Business Days (as
defined below) after the date of this Offer to Purchase an account at DTC under
the ATOP program with respect to the Senior Notes or the Discount Notes, as the
case may be, for purposes of the Offer in respect of such Notes, and any
financial institution that is a participant in DTC may make book-entry delivery
of Senior Notes or Discount Notes, as the case may be, by causing DTC to
transfer such Notes to the DTC for such Notes in accordance with DTC's
procedures for such transfer. A "Business Day" includes any day which is not a
Saturday, Sunday or federal holiday. However, although delivery of Notes may be
effected through book-entry transfer to the Trustee through DTC, an Agent's
Message in connection with a book-entry transfer or, if the Letter of
Transmittal Procedure is utilized, the applicable Letter of Transmittal (or
facsimile thereof) with any required signature guarantees, the certificates
representing the Notes and any other documents required by the applicable Letter
of Transmittal, must, in any case, be transmitted to and received by the Trustee
at its address set forth on the final page of this Offer to Purchase prior to
5:00 p.m., New York City time, on the Surrender Date, or, to be validly tendered
prior to 5:00 p.m., New York City time, on the Surrender Date, the guaranteed
delivery procedures described below must be complied with. Delivery of
documents to DTC does not constitute delivery to the Trustee. The confirmation
of a book-entry transfer to the Trustee through DTC via DTC's ATOP procedures as
described above in referred to herein as "Book-Entry Confirmation."
The term "Agents Message" means a message transmitted by DTC to, and received
by, the Trustee and forming a part of the Book-Entry Confirmation, which states
that DTC has received an express acknowledgment from each participant in DTC
tendering the Notes that such participant has received the applicable Letter of
Transmittal and agrees to be bound by the terms of such Letter of Transmittal
and that the Company may enforce such agreement against such participants.
Exchange of Certificated Notes for Book-Entry Notes
Prior to the consummation of the Exchange Offer, Notes issued in certificated
form may not be exchanged for beneficial interests in any Global Note unless the
transferor first delivers to the Trustee a written certificate (in the form
provided in the Indenture) to the effect that such transfer will comply with the
appropriate transfer restrictions applicable to such Notes. See "Notice to
Investors".
Exchanges Between Regulation S Notes and Rule 144A Notes
Prior to the expiration of the Restricted Period, beneficial interests in the
Regulation S Global Note may be exchanged for beneficial interests in the Rule
144A Global Note only if such exchange occurs in connection with a transfer of
the Notes pursuant to Rule 144A and the transferor first delivers to the Trustee
a written certificate (in the form provided in the Indenture) to the effect that
the Notes are being transferred to a person who the transferor reasonably
believes to be a qualified institutional buyer within the meaning of Rule 144A,
purchasing for its own account or the account of a qualified institutional buyer
in a transaction meeting the requirements of Rule 144A and in accordance with
all applicable securities laws of the states of the United States and other
jurisdictions.
<PAGE>
Beneficial interest in a Rule 144A Global Note may be transferred to a person
who takes delivery in the form of an interest in the Regulation S Global Note,
whether before or after the expiration of the Restricted Period, only if the
transferor first delivers to the Trustee a written certificate (in the form
provided in the Indenture) to the effect that such transfer is being made in
accordance with Rule 903 or 904 of Regulation S or Rule 144 (if available) and
that, if such transfer occurs prior to the expiration of the Restricted Period,
the interest transferred will be held immediately thereafter through Euroclear
or Cedel.
Transfers involving an exchange of a beneficial interest in the Regulation S
Global Note for a beneficial interest in a Rule 144A Global Note or vice versa
will be effected in DTC by means of an instruction originated by the Trustee
through the DTC Deposit/Withdraw at Custodian system. Accordingly, in connection
with any such transfer, appropriate adjustments will be made to reflect a
decrease in the principal amount of the Regulation S Global Note and a
corresponding increase in the principal amount of the Rule 144A Global Note or
vice versa, as applicable. Any beneficial interest in one of the Global Notes
that is transferred to a person who takes delivery in the form of an interest in
the other Global Note will, upon transfer, cease to be an interest in such
Global Note and will become an interest in the other Global Note and,
accordingly, will thereafter be subject to all transfer restrictions and other
procedures applicable to beneficial interest in such other Global Note for so
long as it remains such an interest. The policies and practices of DTC may
prohibit transfers of beneficial interests in the Regulation S Global Note prior
to the expiration of the Restricted Period.
Same Day Settlement and Payment
The Indenture requires that principal, premium, if any, and interest and
Liquidated Damages on the Notes are payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest and Liquidated Damages may be
made by check mailed to the Holders of the Notes at their respective addresses
set forth in the register of Holders of Notes; provided that all payments of
principal, premium, interest and Liquidated Damages with respect to Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. The Notes represented by the Global
Notes are expected to be eligible to trade in the PORTAL market and to trade in
the DTC's Same-Day Funds Settlement System, and any permitted secondary market
trading activity in such Notes will, therefore, be required by the DTC to be
settled in immediately available funds. The Company expects that secondary
trading in any certificated Notes will also be settled in immediately available
funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear and Cedel) immediately following the
settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or Cedel as a result of sales of interests in a Global Note by or
through a Euroclear or Cedel participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
<PAGE>
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person but in any event excluding the agent and
lenders under the New Credit Facility. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as used with respect to
any Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the provisions
of the Indenture described above under the caption "--Change of Control"
and/or the provisions described above under the caption "--Merger,
Consolidation, or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following items shall not be deemed
to be Asset Sales: (i) a transfer of assets by the Company to a Restricted
Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Restricted Subsidiary to
the Company or to another Restricted Subsidiary, and (iii) a Restricted Payment
that is permitted by the covenant described above under the caption "--
Restricted Payments".
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank
<PAGE>
deposits, in each case with any lender party to the New Credit Facility or with
any domestic commercial bank having capital and surplus in excess of $500
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within six months after the date of acquisition and (vi) money market
funds at least 95% of the assets of which constitute Cash Equivalents of the
kinds described in clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than one or more Principals or Related Parties of one or
more Principals or a Management Group, (ii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), other than one or more Principals and
their Related Parties or a Management Group, becomes the "beneficial owner"
(as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of the
Company (measured by voting power rather than number of shares), (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above)
other than a Management Group becomes the "beneficial owner" (as defined
above), directly or indirectly, of 35% or more of the Voting Stock of the
Company (measured by voting power rather than number of shares) and the
Principals and their Related Parties in the aggregate "beneficially own" (as
defined above) less than 35% of the Voting Stock of the Company (measured by
voting power rather than number of shares) or (iv) the first day on which a
majority of the members of the Board of Directors of the Company are not
Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance costs
and original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations), to the
extent that any such expense was deducted in computing such Consolidated Net
Income, plus (iv) depreciation, amortization (including amortization of goodwill
and other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any such
non-cash expense to the extent that it represents an accrual of or reserve for
cash expenses in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Restricted Subsidiaries
for such period to the extent that such depreciation, amortization and other
non-cash expenses were deducted in computing such Consolidated Net Income, minus
(v) non-cash items increasing such Consolidated Net Income for such period, in
<PAGE>
each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash expenses of, a
Restricted Subsidiary of the referent Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent that a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior governmental approval (that
has not been obtained), and without direct or indirect restriction pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Guarantor, (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded, (v)
the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company or one of its Restricted Subsidiaries, and (vi) the
Net Income of any Restricted Subsidiary shall be calculated after deducting
preferred stock dividends payable by such Restricted Subsidiary to Persons other
than the Company and its other Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) effected subsequent to the date of the Indenture in the book
value of any asset owned by such Person or a consolidated Subsidiary of such
Person, (y) all investments as of such date in unconsolidated Subsidiaries and
in Persons that are not Subsidiaries (except, in each case, Permitted
Investments), and (z) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in accordance
with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture, (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election or (iii) was elected to such Board of Directors pursuant
to a designation made pursuant to the Stockholder Agreement, provided that at
such time the Principals, any
<PAGE>
Management Group and their Related Parties own more than 50% of the Voting Stock
of the Company.
"Credit Facilities" means, with respect to the Company and its Restricted
Subsidiaries, one or more debt facilities (including, without limitation, the
New Credit Facility) or commercial paper facilities with banks, insurance
companies, commercial finance companies or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit or
Hedging Obligations, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
New Credit Facility (ii) any other Senior Debt permitted under the Indenture the
principal amount of which is $10.0 million or more and that has been designated
by the Company as "Designated Senior Debt"; provided, however, that so long as
the New Credit Facility remains in effect, lenders holding a majority in
aggregate amount of the loan commitments thereunder shall have consented, in
writing, to such designation of additional Indebtedness as Designated Senior
Debt.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the Holder thereof,
in whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such repurchase
or redemption complies with the covenant described above under the caption "--
Certain Covenants--Restricted Payments".
"Employment Agreement" means any of the employment agreements, dated the
date of the Indenture between the Company and Richard Block, Melvin Herrin, H.
Scott Herrin, David Underwood, James Oppenheimer, Richard Oppenheimer or Dean
Henkel.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Affiliate Transactions" means any transaction contemplated by any
of (i) the Stockholder Agreement, (ii) the Employment Agreements, (iii) the
Agreement and Plan of Merger, dated as of February 19, 1998, among the Company,
AGI Acquisition Corp., AGI Incorporated and certain individuals named therein,
(iv) the Investment Agreement, dated as of February 19, 1998, among the Company,
the Principals and certain other individuals named therein, (v) the lease of the
Company's Warrington, Pennsylvania facility, dated as of June 7, 1996, between
Klearfold, Inc. and Melvin B. Herrin, (vi) the lease of the Company's Louisa,
Virginia facility, dated as of June 7, 1996, between Klearfold, Inc. and Dena
Corp. and (vii) the lease of the Company's Melrose Park, Illinois facility,
dated as of May 29, 1985, between AGI
<PAGE>
and Chicago Title and Trust Company, as lessor and trustee to Ruby North
Partnership, L.P., a real estate trust, in each case as in effect on the Date of
the Indenture.
"Existing Indebtedness" means up to $11.6 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries (other
than Indebtedness under the New Credit Facility) in existence on the date of the
Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest of such Person and its Restricted Subsidiaries that was capitalized
during such period, and (iii) any interest expense on Indebtedness of another
Person that is guaranteed by such Person or one of its Restricted Subsidiaries
or secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the
product of (a) all dividend payments, whether or not in cash, on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests of the
Company (other than Disqualified Stock) or to the Company or a Restricted
Subsidiary of the Company, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person and its Restricted Subsidiaries for such
period. In the event that the referrent Person or any of its Restricted
Subsidiaries incurs, assumes, guarantees or redeems or prepays any Indebtedness
(other than revolving credit borrowings) or issues or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation
Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect to such incurrence, assumption, Guarantee, redemption or prepayment
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public
<PAGE>
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as have been
approved by a significant segment of the accounting profession, which are in
effect.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Guarantors" means each of (i) AGI Incorporated, Klearfold, Inc., KF-
International, Inc. and KF-Delaware, Inc. and (ii) any other subsidiary that
executes a Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency changes.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any Indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--Restricted
Payments".
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
<PAGE>
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Group" means a group consisting of Richard Block and his Related
Parties and any other Person that is a member of the Company's management as of
the date of the Indenture and each of their Related Parties; provided that
Richard Block, together with his Related Parties, owns at least 25% of the
Voting Stock of the Company.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
"Net Proceeds" means the aggregate cash proceeds received directly or
indirectly by the Company or any of its Restricted Subsidiaries in respect of
any Asset Sale (including, without limitation, any cash received upon the sale
or other disposition of any non-cash consideration received in any Asset Sale),
net of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), amounts required to be
applied to the repayment of Indebtedness (other than Indebtedness under the New
Credit Facility) secured by a Lien on the asset or assets that were the subject
of such Asset Sale and any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP.
"New Credit Facility" means that certain Credit Agreement, dated as of the
date of the Indenture, by and among the Company and its Subsidiaries and Bank of
America National Trust and Savings Association, as agent and lender, and the
other lenders named therein, providing for up to $40.0 million of revolving
credit borrowings and $13.0 million of letters of credit, including any related
notes, Guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Non-Recourse Debt" means Indebtedness: (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise) or (c) constitutes the lender; (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than the Notes being
offered hereby) of the Company or any of its Restricted Subsidiaries to declare
a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
<PAGE>
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company that is a Guarantor; (b) any Investment in
Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary
of the Company in a Person, if as a result of such Investment (i) such Person
becomes a Restricted Subsidiary of the Company and a Guarantor or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Restricted Subsidiary of the Company that is a Guarantor; (d) any
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales"; (e) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company; (f) Hedging
Obligations; and (g) other Investments in any Person having an aggregate fair
market value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (g) that are at the time
outstanding, not to exceed $1.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or any
Guarantor or debt securities that are unsecured and subordinated to all Senior
Debt (and any debt securities issued in exchange for Senior Debt) to at least
the same extent as, or to a greater extent than, the Notes are subordinated to
Senior Debt pursuant to the Indenture (without limiting the forgoing, such
Permitted Junior Securities shall have no required principal payments or equity
redemption requirements until after the final maturity of all Senior Debt).
"Permitted Liens" means (i) Liens on assets of the Company, any of its
Restricted Subsidiaries or any of the Guarantors securing Senior Debt that was
permitted by the terms of the Indenture to be incurred; (ii) Liens in favor of
the Company; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property or assets existing at the time of acquisition
thereof or the acquisition of a Person owning such property or assets by the
Company or any Restricted Subsidiary of the Company, provided that such Liens
were in existence prior to the contemplation of such acquisition; (v) Liens to
secure the performance of statutory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the ordinary
course of business; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the covenant
entitled "--Incurrence of Indebtedness and Issuance of Preferred Stock"
covering only the assets acquired or financed with such Indebtedness; (vii)
Liens existing on the date of the Indenture; (viii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (ix)
Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its
<PAGE>
Restricted Subsidiaries (other than intercompany Indebtedness); provided that:
(i) the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness is subordinated in right of payment to the Notes on terms at least
as favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Principals" means Heritage Partners, Inc., Heritage Fund I Investment
Corporation, Melvin B. Herrin, Richard Block and H. Scott Herrin.
"Related Party" with respect to any Principal or member of a Management
Group means (A) any controlling stockholder, 80% (or more) owned Subsidiary, or
spouse or ex-spouse or immediate family member (in the case of an individual) of
such Principal or member of a Management Group or (B) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding an 80% or more controlling interest of which
consist of such Principal or Member of a Management Group and/or such other
Persons referred to in the immediately preceding clause (A) or (C) any
investment fund, whether a limited partnership, limited liability corporation or
corporation, managed and controlled by Heritage Partners Management Co., Inc.
d/b/a Heritage Partners, Inc.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, with respect to any Person, each Subsidiary
of such Person that is not an Unrestricted Subsidiary.
"Senior Debt" means (i) all principal, premium, interest, fees, expenses and
other obligations or liabilities of any kind together with available undrawn
amounts under letters of credit issued or guaranteed under the New Credit
Facility (including, without limitation, post-petition interest whether or not
allowed as a claim in any bankruptcy, reorganization, insolvency, receivership
or similar proceeding) with respect to Indebtedness outstanding under Credit
Facilities and all Hedging Obligations with respect thereto, (ii) any other
Indebtedness permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Notes and (iii) all Obligations with respect to the foregoing.
Senior Debt will not include (w) any liability for federal, state, local or
other taxes owed or owing by the Company, (x) any Indebtedness of the Company to
any of its Subsidiaries or other Affiliates excluding, any Indebtedness owed to
any Affiliate that was incurred prior to such Person becoming an Affiliate in
connection with the acquisition by the Company or any Subsidiary of a business
or Person from such Affiliate, (y) any trade payables or (z) any Indebtedness
that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
<PAGE>
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Stockholder Agreement" means the Stockholder Agreement, dated as of the
date of the Indenture, among the Company and its stockholders, as in effect on
the date of the Indenture, and as thereafter amended from time to time; provided
for purposes of the definition of "Continuing Director" that no such amendment
alters the provision relating to the designation and election of members of the
Company's Board of Directors.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution,
but only to the extent that such Subsidiary: (i) has no Indebtedness other than
Non-Recourse Debt; (ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (iii) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (A) to
subscribe for additional Equity Interests or (B) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; (iv) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries; and (v) has at least one director on its board of
directors that is not a director or executive officer of the Company or any of
its Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation compiled with the foregoing conditions and was
permitted by the covenant described above under the caption "Certain Covenants-
- -Restricted Payments". If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Indebtedness
is not permitted to be incurred as of such date under the covenant described
under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock", the Company shall be in default of such covenant). The
Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of
<PAGE>
Preferred Stock", calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned" means, when used with respect to any Subsidiary or Restricted
Subsidiary of a Person, a Subsidiary (or Restricted Subsidiary, as appropriate)
of such Person all of the outstanding Capital Stock or other ownership interests
of which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries (or Wholly Owned
Restricted Subsidiaries, as appropriate) of such Person and one or more
Wholly Owned Subsidiaries (or Wholly Owned Restricted Subsidiaries, as
appropriate) of such Person.
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain of the anticipated federal income tax
consequences of an exchange of the Existing Notes for New Notes and of the
purchase at original issue, ownership, and disposition of the New Notes is based
upon the provisions of the Internal Revenue Code of l986, as amended (the
"Code"), the final, temporary, and proposed regulations promulgated thereunder,
and administrative rulings and judicial decisions now in effect, all of which
are subject to change (possibly with retroactive effect) or different
interpretations. This summary does not purport to deal with all aspects of
federal income taxation that may be relevant to a particular investor, nor any
tax consequences arising under the laws of any state, locality, or foreign
jurisdiction, and it is not intended to be applicable to all categories of
investors, some of which, such as dealers in securities, banks, insurance
companies, tax-exempt organizations, foreign persons, persons that hold New
Notes as part of a straddle or conversion transactions, persons that purchase
the New Notes from other Holders at a discount or a premium or holders subject
to the alternative minimum tax, may be subject to special rules. In addition,
the summary is limited to persons that will hold the New Notes as "capital
assets" (generally, property held for investment) within the meaning of Section
1221 of the Code. ALL INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS
REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE
EXCHANGE AND THE OWNERSHIP AND DISPOSITION OF NEW NOTES.
TAXATION OF HOLDERS ON EXCHANGE
Subject to the limitation set forth above, an exchange of Existing Notes for
New Notes should not be a taxable event to holders of Existing Notes, and
holders should not recognize any taxable gain or loss as a result of such an
exchange. Accordingly, a holder would have the same adjusted basis and holding
period in the New Notes as it had in the Existing Notes immediately before the
exchange. Further, the tax consequences of ownership and disposition of any New
Notes should be the same as the tax consequences of ownership and disposition of
Existing Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
A U.S. Holder is any holder who or which is (i) a citizen or resident of the
United States; (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States; (iii) an estate the income
of which is subject to United States Federal income taxation regardless of its
source; (iv) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust; (v) a former citizen or resident of the United States whose income and
gain on the Notes will be subject to United States Federal income taxation; or
(vi) a person otherwise included within the definition of United States person
under the Code and the regulations thereunder.
Taxation of Stated Interest. In general, a U.S. Holder of the Notes will be
required to include interest received thereon in taxable income as ordinary
income at the time it accrues or is received, in accordance with the holder's
regular method of accounting for federal income tax purposes.
Effect of Optional Redemption and Repurchase. Under certain circumstances
the Company may be entitled to redeem a portion of the Notes. In addition, under
certain circumstances, each holder of Notes will have the right to require the
Company to repurchase all or any part of such holder's Notes. Treasury
Regulations contain special rules for determining the yield to maturity
<PAGE>
and maturity on a debt instrument in the event the debt instrument provides for
a contingency that could result in the acceleration or deferral of one or more
payments. The Company does not believe that these rules should apply to either
the Company's right to redeem Notes or to the holders' rights to require the
Company to repurchase Notes. Therefore, the Company has no present intention of
treating such redemption and repurchase provisions of the Notes as affecting the
computation of the yield to maturity or maturity date of the Notes.
Sale or other Taxable Disposition of the Notes. The sale, exchange,
redemption, retirement or other taxable disposition of a Note will result in the
recognition of gain or loss to a U.S. Holder in an amount equal to the
difference between (a) the amount of cash and fair market value of property
received in exchange therefor (except to the extent attributable to the payment
of accrued but unpaid stated interest) and (b) the holder's adjusted tax basis
in such Note.
A holder's tax basis in a Note purchased by such holder will be equal to the
price paid for the Note, less any principal payments received by such holder.
Any gain or loss on the sale or other taxable disposition of a Note generally
will be capital gain or loss and will be long-term capital gain or loss if the
Note had been held for more than one year and otherwise will be short-term
capital gain or loss. Long-term capital gain realized by an individual U.S.
Holder is generally subject to a maximum tax rate of 28% in respect of property
held for more than one year and to a maximum rate of 20% in respect of property
held in excess of 18 months. Payments on such sale or other taxable disposition
for accrued interest not previously included in income will be treated as
ordinary interest income.
If Liquidated Damages are paid, although not free from doubt, such payment
should be taxable to a U.S. Holder as ordinary income at the time it accrues or
is received in accordance with such holder's regular method of accounting. It is
possible, however, that the IRS may take a different position, in which case the
timing and amount of income inclusion may be different. A U.S. Holder will not
recognize any gain or loss on the exchange of Notes for Exchange Notes pursuant
to the exchange offer.
Backup Withholding. The backup withholding rules require a payor to deduct
and withhold a tax if (i) the payee fails to furnish a taxpayer identification
number ("TIN") in the prescribed manner, (ii) the IRS notifies the payor that
the TIN furnished by the payee is incorrect, (iii) the payee has failed to
report properly the receipt of "reportable payments" and the IRS has notified
the payor that withholding is required, or (iv) the payee fails to certify under
the penalty of perjury that such payee is not subject to backup withholding. If
any one of the events discussed above occurs with respect to a holder of Notes,
the Company, its paying agent or other withholding agent will be required to
withhold a tax equal to 31% of any "reportable payment" made in connection
with the Notes of such holder. A "reportable payment" includes, among other
things, payments of principal, premium, if any, and interest on a Note. Any
amount withheld from a payment to a holder under the backup withholding rules
will be allowed as a refund or credit against such holder's federal income tax,
provided that the required information is furnished to the IRS. Certain holders
(including, among others, corporations and certain tax-exempt organizations) are
not subject to backup withholding.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
This section discusses special rules applicable to a Non-U.S. Holder of Notes.
This summary does not address the tax consequences to stockholders, partners or
beneficiaries in a Non-U.S. Holder. For purposes hereof, a "Non-U.S. Holder"
is any person who is neither (i) a U.S. Holder nor (ii) a person whose income
with respect to a Note is subject to U.S. federal income tax on a
<PAGE>
net basis because such income is effectively connected with the conduct of a
U.S. trade or business.
Interest. Payments of interest to a Non-U.S. Holder that do not qualify for
the portfolio interest exception discussed below will be subject to withholding
of U.S. federal income tax at a rate of 30% unless a U.S. income tax treaty
applies to reduce the rate of withholding. To claim a treaty reduced rate, the
Non-U.S. Holder must provide a properly executed Form 1001.
Interest that is paid to a Non-U.S. Holder on a Note will not be subject to
U.S. income or withholding tax if the interest qualifies as "portfolio
interest". Generally, interest on the Notes that is paid by the Company will
qualify as portfolio interest if (i) the Non-U.S. Holder does not own, actually
or constructively, 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote; (ii) the Non-U.S. Holder is not a
controlled foreign corporation that is related to the Company actually or
constructively through stock ownership for U.S. federal income tax purposes;
(iii) the Non-U.S. Holder is not a bank receiving interest on a loan entered
into in the ordinary course of business; and (iv) either (x) the beneficial
owner of the Note provides the Company or its paying agent a properly executed
certification on IRS Form W-8 (or a suitable substitute form) signed under
penalties of perjury that the beneficial owner is not a "U.S. person" for U.S.
federal income tax purposes and that provides the beneficial owner's name and
address, or (y) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
business (a "financial institution") holds the Note and certifies to the
Company or its agent under penalties of perjury that the IRS Form W-8 (or a
suitable substitute) has been received by it from the beneficial owner of the
Note or from a financial institution acting for the beneficial owner and
furnishes the Company or its agent a copy thereof.
Sale, Exchange or Retirement of Notes. Any gain realized by a Non-U.S.
Holder on the sale, exchange or retirement of the Notes, will generally not be
subject to U.S. federal income tax or withholding unless (i) the Non-U.S. Holder
is an individual who was present in the U.S. for 183 days or more in the taxable
year of the disposition and meets certain other requirements; or (ii) the Non-
U.S. Holder is subject to tax pursuant to certain provisions of the Code
applicable to certain individuals who renounce their U.S. citizenship or
terminate long-term U.S. residency. If a Non-U.S. Holder falls under (ii) above,
the holder will be taxed on the net gain derived from the sale under the
graduated U.S. federal income tax rates that are applicable to U.S. citizens and
resident aliens, and may be subject to withholding under certain circumstances.
If a Non-U.S. Holder falls under (i) above, the holder generally will be subject
to U.S. federal income tax at a rate of 30% on the gain derived from the sale
(or reduced treaty rate) and may be subject to withholding in certain
circumstances. Such gains may also be subject to U.S. Federal income tax if the
Non-U.S. Holder has a present or former status as a personal holding company, a
foreign personal holding company with respect to the United States, a controlled
foreign corporation, a passive foreign investment company, or a foreign private
foundation or foreign tax exempt entity for United States tax purposes, or a
corporation which accumulates earnings to avoid United States federal income
tax.
U.S. Information Reporting and Backup Withholding Tax. Back-up withholding
and information reporting generally will not apply to a Note issued in
registered form that is beneficially owned by a Non-U.S. Holder if the
certification of Non-U.S. Holder status is furnished to the Company or its agent
as described above in "Certain Federal Income Tax Consequences to Non-U.S.
Holders--Interest," provided that the payor does not have actual knowledge that
the holder is a U.S. person. The Company may be required to report annually to
the IRS and to each Non-U.S. Holder the amount of interest paid to, and any tax
withheld from, such Non-U.S. Holder.
<PAGE>
If payments of principal and interest are made to the beneficial owner of a
Note by or through the foreign office of a custodian, nominee or other agent of
such beneficial owner, or if the proceeds of the sale of Note are paid to the
beneficial owner of a Note through a foreign office of a "broker" (as defined in
the pertinent Regulations), the proceeds will not be subject to backup
withholding (absent actual knowledge that the payee is a U.S. person).
Information reporting (but not backup withholding) will apply, however, to a
payment by a foreign office of a custodian, nominee, agent or broker that is (i)
a U.S. person, (ii) a controlled foreign corporation for U.S. federal income tax
purposes, or (iii) derives 50% or more of its gross income from the conduct of a
U.S. trade or business for a specified three-year period, unless the broker has
in its records documentary evidence that the holder is a Non-U.S. Holder, has no
actual knowledge to the contrary, and certain other conditions are met, or
unless the holder otherwise establishes an exemption. Payment through the U.S.
office of a custodian, nominee, agent or broker is subject to both backup
withholding at a rate of 31% and information reporting, unless the holder
certifies that it is a Non-U.S. Holder under penalties of perjury or otherwise
establishes an exemption.
Any amount withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a credit against, or refund of, such holder's
U.S. federal income tax liability, provided that certain information is provided
by the holder to the IRS.
Recently finalized Treasury regulations (the "Withholding Regulations") will
change the methods for satisfying the certification requirements discussed
above. The Withholding Regulations also will require, in the case of Notes held
by a foreign partnership, that (a) this certification generally be provided by
the partners rather than the foreign partnership and (b) the partnership provide
certain information, including a United States employer identification number. A
look-through rule would apply in the case of tiered partnerships. The
Withholding Regulations are generally effective for payments made after December
31, 1998, subject to certain transition rules. NON-UNITED STATES HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW
WITHHOLDING REGULATIONS.
<PAGE>
INTELLECTUAL PROPERTY
DIGI-BOKS(R), DIGIPAK(R), Klearfold(R) and Duofold(R) are registered
trademarks of the Company and Digilite/TM/, KlearPOP/TM/, Klearform/TM/ and
Hologravure/TM/ are trademarks of the Company. Chesebrough-Pond's(R) is a
registered trademark of Chesebrough-Pond's, Inc. BIC(R) is a registered
trademark of BIC Corporation. Andes(R) is a registered trademark of Jacobs
Suchard S.A.; Jacobs Suchard AG; and Jacobs Suchard Ltd. Totes(R) is a
registered trademark of 'Totes', Incorporated. Safari(R) is a registered
trademark of Polo Ralph Lauren, L.P. Polo Sport(R) is a registered trademark of
PRL USA Holdings, Inc. Crest(R) is a registered trademark of Procter & Gamble.
Colorstay(R) is a registered trademark of Revlon. Jockey(R) is a registered
trademark of Jockey International, Inc. Ralph Lauren(R) is a registered
trademark of The Ralph Lauren Trust of 9/21/76 and The Polo/Lauren Company.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Bingham Dana LLP, Boston, Massachusetts.
AVAILABLE INFORMATION
The Company has agreed that whether or not required by the rules and
regulations of the Commission so long as any Notes are outstanding, the Company
shall deliver to each holder of the Notes (i) all annual and quarterly financial
statements substantially equivalent to financial statements that would have been
included in a filing with the Commission on Forms 10-Q and 10-K, if the Company
were required to file such Forms, including, with respect to annual information
only, a report thereon by the Company's certified independent public accountants
as such would be required in such reports to the Commission, and, in each case,
together with a management's discussion and analysis of financial condition and
results of operations which would be so required and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such Forms. In addition, following the
consummation of the Exchange Offer contemplated by the Registration Rights
Agreement, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
Once the Registration Statement has been declared effective by the Commission,
the Company and the Holding Company will become subject to the informational
requirements of the Exchange Act and in accordance therewith will be required to
file reports and other information with the Commission. When filed, the
Registration Statement and the exhibits thereto, as well as such reports and
other information to be filed by the Company and the Holding Company with the
Commission, may be inspected, without charge, at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, as well as the regional offices of the Commission at the Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such
documents can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
In addition, the Company and the Holding
<PAGE>
Company will be required to file electronic versions of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site,
located at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
EXPERTS
The consolidated financial statements of KFI Holding as of December 31, 1996
and 1997 and for each of the years in the three-year period ended December 31,
1997 have been included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The financial statements of AGI as of and
for the four years ended December 31, 1996 have been audited by Arthur Andersen
LLP, independent public accountants. The financial statements of AGI as of and
for the year ended December 31, 1997 have been audited by Price Waterhouse LLP,
independent accountants. The consolidated financial statements for AGI as of
December 31, 1996 and 1997 and for each of the years in the three year period
ended December 31, 1997 together with the respective reports of independent
accountants are included elsewhere herein in reliance upon the authority of said
firms as experts in accounting and auditing.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain statements that may be considered "forward-
looking." Such forward-looking statements include, among other things,
management's expectations about consumer products industry trends including,
without limitation, industry revenue and profit growth rates, industry migration
toward high quality specialty packaging, consolidation of retail sales
companies, increased demand for innovative, value-added packaging, content
distribution moving toward a disk-based format, the emergence of the DVD market
and the opportunities therefrom and shifts in distribution channels toward self-
select outlets. Forward-looking statements are also made concerning the
Company's expectations regarding the growth of the music industry and CD sales,
growth of the home video sell-through market, synergies resulting from the
Combination, reductions in the Company's manufacturing, transportation, general
and administrative and management information costs, expansion of the Company's
product lines, expansion of relationships with existing customers, increased
operating efficiencies as a result of the Combination, the success of its
acquisition strategy, the continued acceptance of the DIGIPAK, the advantage of
the Diginet in the emerging DVD market, the maintenance of relationships with
existing customers, the Company's ability to pass raw material price increases
on to its customers and the Company's ability to generate cash flow or make
borrowings sufficient to pay interest and principal on the Notes, the Company's
ability to anticipate and respond to technological change in manufacturing
processes, the Company's ability to create additional revenue opportunities, the
Company's ability to meet changing customer needs, the Company's initial
marketing impact in the cosmetics industry, the Company's ability to develop new
packaging products, the Company's ability to capture additional customers in new
and existing markets, the Company's acquisition strategy, the costs and time
frame associated with the installation of the new printing press, the liquidity
demands of the Company, the amount of future capital expenditures, the Company's
ability to meet its liquidity needs, the resolution of Year 2000 issues, the
ability of the Company's manufacturing facilities to serve national markets.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements of the Company expressed or implied by such forward-looking
statements. Prospective investors in the Notes offered hereby are cautioned that
although the Company believes that the assumptions on which
<PAGE>
the forward-looking statements contained herein are based are reasonable, any of
those assumptions could prove to be inaccurate and, as a result, the forward-
looking statements based on those assumptions also could be materially
incorrect. The uncertainties in this regarding include, but are not limited to,
those identified in the section of this Prospectus entitled "Risk Factors". In
light of these and other uncertainties, the inclusion of a forward-looking
statement herein should not be regarded as a representation by the Company that
the Company's plans and objectives will be achieved and prospective investors in
the Notes should not place undue reliance on such forward-looking statements.
The Company disclaims any obligation to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
AGI Incorporated
Report of Independent Accountants ......................................................................... F-2
Report of Independent Public Accountants .................................................................. F-3
Balance Sheets as of December 31, 1996 and 1997 ........................................................... F-4
Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 ................................. F-5
Statements of Shareholders' Equity for the Years Ended December 31, 1995,
1996 and 1997 .......................................................................................... F-6
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 ............................. F-7
Notes to the Financial Statements ......................................................................... F-8
KFI Holding Corporation and Subsidiaries
Independent Auditors' Report .............................................................................. F-15
Consolidated Balance Sheets as of December 31, 1996 and 1997 .............................................. F-16
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and
1997 ................................................................................................... F-17
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1995, 1996 and 1997 ....................................................................... F-18
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 ................................................................................................... F-19
Notes to Consolidated Financial Statements ................................................................ F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of AGI Incorporated
We have audited the accompanying balance sheet of AGI Incorporated as of
December 31, 1997, and the related statements of income, shareholders' equity
and cash flows for the year then ended. 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 audit. The financial
statements of AGI Incorporated for the years ended December 31, 1996 and 1995
were audited by other independent accountants whose reports dated February 25,
1997 and March 1, 1996, respectively, expressed unqualified opinions on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of AGI Incorporated at December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Price Waterhouse LLP
Chicago, Illinois
February 9, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
AGI Incorporated:
We have audited the accompanying balance sheet of AGI Incorporated (an
Illinois corporation) as of December 31, 1996, and the related statements of
income, shareholders' equity and cash flows for the years ended December 31,
1996 and 1995. 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 financial position of AGI Incorporated as of December
31, 1996, and the results of its operations and its cash flows for the years
ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Milwaukee, Wisconsin
February 25, 1997.
F-3
<PAGE>
AGI INCORPORATED
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT FOR COMMON STOCK DATA)
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash ............................................................................... $ 17 $ 1,029
Trade accounts receivable--
Net of reserves of $513 and $388 in 1996 and 1997, respectively ..................... 15,189 15,921
Other receivables ...................................................................... 752 831
Inventories (Notes 2 and 3) ............................................................ 7,540 6,407
Prepaid expenses ....................................................................... 452 803
------- -------
Total current assets ..................................................................... 23,950 24,991
------- -------
Long-term assets:
Property, plant and equipment, net (Notes 2 and 4) ..................................... 31,788 32,785
Other assets ........................................................................... 1,190 1,143
------- -------
Total assets ............................................................................ $56,928 $58,919
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft ......................................................................... $ 2,493 $ --
Current maturities of long-term debt (Note 8) .......................................... 2,407 1,980
Accounts payable and accrued liabilities (Note 5) ...................................... 14,105 18,067
Installment note payable ............................................................... 1,007 56
------- -------
Total current liabilities ................................................................ 20,012 20,103
------- -------
Long-term debt, less current maturities (Note 8) ......................................... 15,834 14,060
Other long-term liabilities .............................................................. 171 --
Shareholders' equity:
Common stock, par value $1 per share; authorized 1,500,000 shares;
909,714 issued and outstanding in both 1997 and 1996 (Notes 11
and 12) .............................................................................. 910 910
Paid-in capital ........................................................................ 565 565
Retained earnings ...................................................................... 19,436 23,281
------- -------
Total shareholders' equity ............................................................... 20,911 24,756
------- -------
Total liabilities and shareholders' equity ............................................... $56,928 $58,919
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
AGI INCORPORATED
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net sales.............................................. $97,463 $92,834 $108,281
Cost of goods sold..................................... 74,441 67,860 76,459
------- ------- --------
Gross profit........................................... 23,022 24,974 31,822
------- ------- --------
Selling, general and administrative expenses........... 15,374 15,894 19,444
Stock-based compensation expense (Note 12)............. -- 171 2,326
------- ------- --------
Operating income....................................... 7,648 8,909 10,052
Other income (expense):
Interest income...................................... 135 36 31
Interest expense (Note 8)............................ (1,500) (1,406) (1,273)
Gain (loss) on sale of fixed assets.................. 45 (204) 139
------- ------- --------
Income before income taxes............................. 6,328 7,335 8,949
State income taxes (Note 6)............................ (23) (234) (231)
------- ------- --------
Net income............................................. $ 6,305 $ 7,101 $ 8,718
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
AGI INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common PAID-IN RETAINED SUBSCRIPTIONS
------------ ---------- ------------- ------------------ TOTAL
STOCK CAPITAL EARNINGS RECEIVABLE -------------
------------ ---------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994....................... $916 $592 $11,787 $(11) $13,284
---- ---- ------- ----------------- -------
Net income for the year.......................... -- -- 6,305 -- 6,305
Distributions to shareholders.................... -- -- (2,144) -- (2,144)
Payments received for subscribed stock........... -- -- -- 11 11
Repurchase of common stock....................... (6) (27) (147) -- (180)
---- ---- ------- ----------------- -------
Balance, December 31, 1995....................... 910 565 15,801 -- 17,276
Net income for the year.......................... -- -- 7,101 -- 7,101
Distributions to shareholders.................... -- -- (3,466) -- (3,466)
---- ---- ------- ----------------- -------
Balance, December 31, 1996....................... 910 565 19,436 -- 20,911
Net income for the year.......................... -- -- 8,718 -- 8,718
Distributions to shareholders.................... -- -- (4,873) -- (4,873)
---- ---- ------- ----------------- -------
Balance, December 31, 1997....................... $910 $565 $23,281 $ -- $24,756
==== ==== ======= ================= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
AGI INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, BRACKETS DENOTE CASH DECREASES)
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 6,305 $ 7,101 $ 8,718
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization ............................................. 3,965 4,587 4,762
Loss (gain) on sale of fixed assets ....................................... (45) 204 (139)
Changes in assets and liabilities--
Trade accounts receivable, net ......................................... (3,811) 605 (732)
Inventories ............................................................ 492 (1,661) 1,133
Accounts payable and accrued liabilities ............................... 1,981 (124) 2,558
Bank overdrafts ........................................................ (419) (1,316) (2,493)
Other, net ............................................................. (224) 506 849
------- ------- -------
Net cash provided by operating activities ........................... 8,244 9,902 14,656
------- ------- -------
Cash flows from investing activities:
Capital expenditures ......................................................... (9,792) (7,644) (6,027)
Proceeds from sale of fixed assets ........................................... 981 822 408
------- ------- -------
Net cash used in investing activities .................................. (8,811) (6,822) (5,619)
------- ------- -------
Cash flows from financing activities:
Net change in borrowings under revolving line-of
credit agreement ........................................................... (4,000) (3,000) --
Proceeds from issuance of industrial revenue bonds ........................... 7,640 -- --
Payments on long-term debt ................................................... (1,421) (1,494) (2,201)
Proceeds from term note ...................................................... -- 4,536 --
Payments received on subscriptions receivable ................................ 11 -- --
Bond funds held in trust ..................................................... (1,069) 1,069 --
Distributions to shareholders ................................................ (2,144) (3,467) (4,873)
Repurchase of common stock ................................................... (180) -- --
Proceeds from installment note ............................................... 1,735 -- --
Payment of installment note .................................................. -- (728) (951)
------- ------- -------
Net cash provided by (used in) financing activities .................... 572 (3,084) (8,025)
------- ------- -------
Increase (decrease) in cash .................................................... 5 (4) 1,012
Cash, beginning of year ........................................................ 16 21 17
------- ------- -------
Cash, end of year................................................................ $ 21 $ 17 $ 1,029
======= ======= =======
Supplemental disclosures:
Cash payments for--
Interest, net of capitalization ........................................... $ 1,589 $ 1,475 $ 1,304
State income taxes ........................................................ 62 103 69
The accompanying notes are an integral part of these statements.
</TABLE>
F-7
<PAGE>
AGI INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
Note 1--Business Description
AGI Incorporated (the "Company") is engaged in the manufacturing of high-
quality printed packaging products for customers primarily in the entertainment,
cosmetics, multimedia and tobacco industries.
Sales to a significant customer amounted to 11% of total sales in 1995. Sales
to two significant customers amounted to 21% and 28% of total sales in 1996 and
1997, respectively.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Net revenues are recognized upon shipment to a customer pursuant to specific
purchase orders.
Cash equivalents
The Company defines cash equivalents as highly liquid short-term investments
with an original maturity of three months or less when purchased. The carrying
amount of short-term investments approximates fair value because of the short
maturity of these investments.
Inventories
Inventories are stated at the lower of cost or market and include the
appropriate elements of material, labor and manufacturing overhead costs. Cost
is determined using the last-in, first-out ("LIFO") method for the paper
component of inventory and the first-in, first-out ("FIFO") method for all
other components of inventory.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated over their
estimated useful lives using the straight-line method (3 to 10 years for
machinery and equipment and 10 to 19 years for buildings and leasehold
improvements).
The Company capitalized interest expense incurred of $155, $73 and $16 in
1995, 1996 and 1997, respectively, during the construction and installation of
certain facilities and equipment.
Depreciation expense included in the statements of income was $3,965, $4,587
and $4,762 for the years ended December 31, 1995, 1996 and 1997, respectively.
F-8
<PAGE>
AGI INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Bond issuance costs
Costs associated with the issuance of Multi-Mode Industrial Project Revenue
Bonds have been capitalized and are included in Other Assets. These costs are
being amortized over the term of the bonds.
Employee stock awards
The Company accounts for employee stock awards in accordance with the
provisions of APB No. 25, "Accounting for Stock Issued to Employees," and
related interpretations (APB No. 25). There were no differences between applying
APB No. 25 and the accounting that would have resulted had the Company applied
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
Fair value of financial instruments
Management believes that the fair value of all financial instruments
approximates their carrying value.
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 reported amounts and related disclosures. Actual results could differ
from these estimates.
NOTE 3--INVENTORIES
Inventories at December 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Raw materials .................................... $1,426 $1,748
Work in process and finished goods ............... 6,114 4,659
------ ------
$7,540 $6,407
====== ======
</TABLE>
F-9
<PAGE>
AGI INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Inventories accounted for under the LIFO method at December 31, 1995, 1996 and
1997 were $2,179, $3,109 and $2,748, respectively. Under the FIFO method of
accounting, such inventories would have been $463, $377 and $249 higher than
those reported at December 31, 1995, 1996 and 1997, respectively. During 1997,
LIFO inventory quantities were reduced resulting in a partial liquidation of
inventory at LIFO costs, the effect of which increased net income by $128.
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net at December 31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
1996 1997
------------------ -----------------
<S> <C> <C>
Land.............................................. $ 67 $ 218
Building and leasehold improvements............... 10,331 10,981
Machinery and equipment........................... 47,345 50,965
Construction in progress.......................... 145 1,306
-------- --------
57,888 63,470
Less--Accumulated depreciation.................... (26,100) (30,685)
-------- --------
Net property, plant and equipment................. $ 31,788 $ 32,785
======== ========
</TABLE>
Note 5--Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1996 1997
----------- ---------------
<S> <C> <C>
Trade accounts payable .......................... $ 5,048 $ 3,606
Rebates payable ................................. 3,112 4,039
Employee compensation and withholdings .......... 4,391 8,562
Other ........................................... 1,554 1,860
------- -------
$14,105 $18,067
======= =======
</TABLE>
Note 6--Income Taxes
No provision has been made for amounts representing current or deferred
Federal tax liabilities as the Company is treated as an S-Corporation.
Accordingly, any such tax liabilities are the obligation of the individual
shareholders.
The Company is a tax-paying entity in the states of Illinois, California and
New York. The provision for these taxes is included in the accompanying
statements of income.
F-10
<PAGE>
AGI INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan covering substantially all
employees. The Company contribution is discretionary and is determined each year
by the Company's Board of Directors. The Company recorded a provision for this
plan of $450, $622 and $738 for 1995, 1996 and 1997, respectively.
The Company also sponsors a retirement savings plan in which all employees may
voluntarily elect to participate. Under this plan, the Company matches a portion
of the amounts contributed by employees. The Company recorded expense related to
this plan of $131, $212 and $211 in 1995, 1996 and 1997, respectively.
NOTE 8--LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1997, consisted of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
City of Jacksonville, Illinois Multi-Mode Industrial Project Revenue
Bonds, variable interest, due on February 1, 2026. ............................... $ 7,640 $ 7,640
Bank term note, interest at prime or LIBOR plus 2.25%, due in
quarterly installments of $358,000 through March 2001 with the
remaining balance due June 2001. ................................................. 9,284 7,852
Subordinated notes payable to two current and one former
shareholder(s), interest at prime not to exceed 10% over the life of
the notes, 8.5% at December 31, 1997, due in annual installments
through 1998. .................................................................... 1,302 548
Capitalized lease obligations, 6.2% to 7.9%, due in varying
----------- --
installments through September 1997 .............................................. 15 -------
-------
18,241 16,040
Less--Current portion .............................................................. 2,407 1,980
------- -------
Total long-term debt ............................................................ $15,834 $14,060
======= =======
</TABLE>
Future maturities of long-term debt including line-of-credit borrowings as of
December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998................................................................................ $ 1,980
1999 .............................................................................. 1,432
2000 .............................................................................. 1,432
2001 .............................................................................. 3,556
2002 .............................................................................. --
Thereafter ........................................................................ 7,640
-------
$16,040
=======
</TABLE>
F-11
<PAGE>
AGI INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The Company has a credit agreement with Bank of America, Illinois, dated
November 22, 1993, for a bank term note and line of credit (the "Credit
Facility"). The agreement was amended on July 30, 1996, increasing the term
note to $10,000. The available line of credit is the lower of $11,000 or the
borrowing base, which is a percentage of eligible accounts receivable and
inventories, reduced by amounts outstanding under certain letters of credit.
Borrowings under the Credit Facility may, at the Company's election, bear
interest at prime or the London International Bank Offer Rate (30, 60 or 90-day)
plus 2.25%. At December 31, 1997, the interest rate on all borrowings were at
LIBOR rates ranging from 8.125% to 8.15625%. The line of credit agreement
extends through October 1998. The Company pays a commitment fee of /1//2 of 1%
per annum on the amount of available credit over the amount outstanding, plus
any outstanding letters of credit available at December 31, 1997.
On January 19, 1995, the City of Jacksonville, Illinois issued an aggregate
principal amount of $7,640 of Multi-Mode Industrial Project Revenue Bonds. The
Bonds were issued to fund a loan, under a loan agreement, dated January 1, 1995,
between the City of Jacksonville and the Company to finance the cost of
acquiring land and constructing and equipping the Company's manufacturing
facility in Jacksonville, Illinois, which became operational during the second
quarter of 1995. The variable rate bonds mature on February 1, 2026. Interest
rates on the bonds ranged from 3.4741% to 4.3938% during 1997. The interest rate
at December 31, 1997 was 4.2%. The bonds are secured by an irrevocable letter of
credit issued by Bank of America, Illinois, under an agreement with the Company.
The debt agreements have certain restrictions which, among other things,
require that the Company maintain a specified amount of tangible net worth, as
defined. The Company was in compliance with the debt agreements at December 31,
1997 and 1996. The agreements with Bank of America, Illinois, are collateralized
by substantially all of the assets of the Company.
NOTE 9--LEASES
The Company leases a significant portion of its real estate, including the
Melrose Park and Franklin Park facilities and various sales offices under
operating leases which expire over the next four years. The lease for the
Melrose Park facility is with a related party as described in Note 10.
Minimum future rental commitments under noncancellable operating leases having
initial or remaining terms in excess of one year as of December 31, 1997, are as
follows:
F-12
<PAGE>
AGI INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C>
1998............................... $ 2,594
1999............................... 2,266
2000............................... 2,051
2001............................... 1,577
2002............................... 1,350
Thereafter......................... 297
-------
Total minimum payments ........... $10,135
=======
</TABLE>
Rental expense was $1,814, $2,230 and $2,556 for 1995, 1996 and 1997,
respectively.
NOTE 10--RELATED PARTY TRANSACTIONS
The Company leases its primary operating location under an operating lease
which expires in September 2002. The Company has the option to renew the lease
for up to an additional five years. The lessor is a partnership that includes
certain executives of the Company. The Company has paid a deposit to the
partnership of approximately $340 which is reflected in the accompanying balance
sheets as part of Other Assets. Rents under this lease amounted to approximately
$475 in 1997, 1996 and 1995.
In connection with a recapitalization in 1987, the Company signed notes with
two current shareholders to finance a portion of the purchase price of the
reacquired stock. These notes are subordinated to the term loan, line of credit
and the revenue bonds and bear interest at the prime rate, not to exceed 10%
over the life of the notes.
NOTE 11--SHAREHOLDERS' AGREEMENT
Under the terms of the shareholders' agreement, the Company may be required to
repurchase at fair value, as determined by the Board of Directors, any
shareholder's common stock upon death, disability or, in the case of management
employees, resignation from the Company.
NOTE 12--EQUITY INCENTIVE PLAN
The Company sponsors an equity incentive plan that allows the Board of
Directors to grant key employees stock awards up to an aggregate amount of
100,000 shares in the form of stock options and stock appreciation rights
(SARs). The terms of the awards may not exceed 12 years and vesting generally
occurs ratably over a four year period with acceleration of vesting in the event
of a change in control of the Company.
There were grants of SARs in 1995 and 1996, all of which had 10 year terms.
All benefits for the SARs will be paid in cash. There have been no grants of
options. Details relating to the SAR units for the three years ended December
31, 1997 are as follows:
F-13
<PAGE>
AGI INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
---------- ---------- ----------
AVERAGE AVERAGE AVERAGE
Rights ---------- RIGHTS ---------- RIGHTS ----------
--------- EXERCISE -------- EXERCISE ------- EXERCISE
---------- ---------- ----------
PRICE PRICE PRICE
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ...... -- -- 16,000 $30.16 95,454 $29.98
Granted ............................... 16,000 $30.16 79,454 29.94 -- --
------ ------ ------ ------ ------
Outstanding at end of year ............ 16,000 $30.16 95,454 $29.98 95,454 $29.98
====== ====== ====== ====== ====== ======
Vested at end of year ................. 694 29,808 65,223
====== ====== ======
</TABLE>
The expense recorded associated with the SARs was $171 and $2,326 in 1996 and
1997, respectively. The expense in 1995 was not significant.
NOTE 13--RECENT DEVELOPMENTS
The Company plans to merge with AGI Acquisition Corp., a subsidiary of KFI
Holding Corporation ("KFI Holding"), in the first quarter of 1998. Klearfold,
Inc., a wholly-owned subsidiary of KFI Holding, is a manufacturer of high
quality clear packaging for various consumer products. Under the terms of the
merger, the stockholders of KFI Holding agreed to contribute the entire
outstanding capital stock of KFI Holding and a warrant to purchase KFI Holding
capital stock and to invest approximately $4.6 million in cash; and certain
stockholders and holders of stock appreciation rights of AGI agreed to
contribute to KFI Holding shares of common stock and to invest the proceeds of
their stock appreciation rights, totalling an aggregate of $14.4 million. In
exchange for these contributions and cash investments, KFI Holding agreed to
issue to the contributing or investing parties shares of its common stock.
Concurrently with the transactions, KFI Holding will change its name to IMPAC
Group, Inc. AGI and Klearfold will be wholly-owned subsidiaries of IMPAC Group,
Inc.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
KFI Holding Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of KFI Holding
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements 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 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 financial position of KFI Holding
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 6, 1998
F-15
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash ................................................................................... $ 6 $ 194
Trade receivables, less allowances of $226 in 1996 and $560 in 1997 .................... 8,185 5,986
Receivable from PTP Industries, Inc. ................................................... 37 (46)
Inventories (note 6) ................................................................... 7,033 6,957
Prepaid expenses ....................................................................... 768 401
Prepaid income taxes ................................................................... -- 109
Deferred income taxes (note 13) ........................................................ 385 661
Other assets ........................................................................... 909 595
-------- --------
Total current assets ..................................................................... 17,323 14,857
Long-term assets:
Property, plant, and equipment, net (note 7) ............................................. 8,568 11,100
Deferred financing costs, net ............................................................ 1,066 1,024
Restricted cash (note 11) ................................................................ -- 625
Other assets ............................................................................. 318 641
-------- --------
Total assets ............................................................................. $ 27,275 $ 28,247
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Borrowings under line of credit agreement (notes 3 and 10) ............................. $ 3,996 $ --
Current installments of long-term debt (notes 3 and 11) ................................ 1,100 33,850
Trade accounts payable ................................................................. 4,049 5,098
Income taxes payable (note 13) ......................................................... 52 --
Accrued expenses ....................................................................... 1,777 1,821
-------- --------
Total current liabilities ................................................................ 10,974 40,769
Long-term debt, excluding current installments (notes 3 and 11) .......................... 29,850 --
Deferred compensation (note 16) .......................................................... 104 58
Deferred income taxes (note 13) .......................................................... 1,626 1,307
-------- --------
Total liabilities ........................................................................ 42,554 42,134
-------- --------
Commitments and contingencies (note 14)
Stockholders' deficit (note 3):
Common stock, voting, $.001 par value; authorized 135,813 shares,
90,500 shares issued and outstanding ................................................. -- --
Common stock, nonvoting, $.001 par value; authorized, issued and
outstanding 9,500 shares ............................................................. -- --
Preferred stock, nonvoting $.001 par value; authorized, issued, and
outstanding 100,000 shares ........................................................... -- --
Additional paid-in-capital ............................................................. 20,000 20,000
Notes receivable ....................................................................... (35) (35)
Carryover basis adjustment ............................................................. (37,142) (37,142)
Retained earnings ...................................................................... 1,898 3,290
-------- --------
Total stockholders' deficit .............................................................. (15,279) (13,887)
-------- --------
Total liabilities and stockholders' deficit .............................................. $ 27,275 $ 28,247
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .......................................................... $51,214 $54,218 $52,493
Cost of goods sold ................................................. 36,757 40,094 39,322
------- ------- -------
Gross profit ....................................................... 14,457 14,124 13,171
------- ------- -------
Selling, general and administrative expenses ....................... 7,942 7,594 7,589
PTP royalty and commission (income) ................................ (377) (731) (33)
------- ------- -------
Operating income ................................................... 6,892 7,261 5,615
Interest expense, net .............................................. (1,197) (2,324) (3,469)
------- ------- -------
Income from continuing operations before income taxes .............. 5,695 4,937 2,146
Income taxes (note 13) ............................................. (2,417) (2,003) (754)
------- ------- -------
Income from continuing operations .................................. 3,278 2,934 1,392
------- ------- -------
Discontinued operations (note 4):
Loss from operations of PTP Industries, Inc. (net of
applicable income tax benefit of $192) ......................... (34) -- --
Gain on disposal of PTP Industries, Inc. (less applicable
income taxes of $140) .......................................... -- 35 --
------- ------- -------
Net income ......................................................... $ 3,244 $ 2,969 $ 1,392
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION> CARRYOVER
-----------
PAID-IN NOTES BASIS RETAINED
--------- ----------- ----------- ---------
Common stock PREFERRED STOCK CAPITAL RECEIVABLE ADJUSTMENT EARNINGS TOTAL
--------------------- ----------------- --------- ----------- ----------- --------- ---------
Number of NUMBER OF
------------ ---------
SHARES AMOUNT SHARES AMOUNT
------------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... 13,500,000 $ 135 -- $ -- $ 3,983 $ -- $ -- $ 4,689 $ 8,807
Net income.............. -- -- -- -- -- -- -- 3,244 3,244
Dividends............... -- -- -- -- -- -- -- (540) (540)
----------- ----- ------- ------ ------- ---- -------- ------- --------
Balance at December
31, 1995............... 13,500,000 135 -- -- 3,983 -- -- 7,393 11,511
Net income from
January 1, 1996 to
June 7, 1996........... -- -- -- -- -- -- -- 1,071 1,071
Redemption of
common stock........... (13,500,000) (135) -- -- (3,983) -- (37,142) (8,464) (49,724)
Sale of common
stock.................. 100,000 -- -- -- 1,000 -- -- -- 1,000
Issuance of notes
receivable............. -- -- -- -- -- (35) -- -- (35)
Sale of preferred
stock.................. -- -- 100,000 -- 19,000 -- -- -- 19,000
Net income from June
8, 1996 to
December 31,
1996................... -- -- -- -- -- -- -- 1,898 1,898
----------- ----- ------- ------ ------- ---- -------- ------- --------
Balance at December
31, 1996............... 100,000 -- 100,000 -- 20,000 (35) (37,142) 1,898 (15,279)
Net income.............. -- -- -- -- -- -- -- 1,392 1,392
----------- ----- ------- ------ ------- ---- -------- ------- --------
Balance at December
31, 1997............... 100,000 $ -- 100,000 $ -- $20,000 $(35) $(37,142) $ 3,290 $(13,887)
=========== ===== ======= ====== ======= ==== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................................ $ 3,244 $ 2,969 $ 1,392
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ...................................................... 1,774 1,969 1,814
Deferred income taxes .............................................................. 133 253 (595)
Net cash (used in) provided by discontinued operations ................................ 34 (250) --
Changes in assets and liabilities:
(Increase) decrease in trade receivables ........................................... (195) (423) 2,199
(Increase) decrease in receivable from PTP Industries, Inc. ....................... (81) 118 83
(Increase) decrease in inventories ................................................. (1,108) 1,014 76
(Increase) decrease in prepaid expenses ............................................ (135) 266 367
(Increase) decrease in prepaid income taxes ........................................ (202) 152 (109)
Increase in other assets ........................................................... (448) (117) (9)
Increase (decrease) in trade accounts payable ...................................... 1,216 (2,079) 1,049
Increase (decrease) in payable to PTP Industries, Inc. ............................. 90 (316) --
Increase (decrease) in income taxes payable ........................................ -- 52 (52)
Increase (decrease) in accrued expenses ............................................ (473) 495 44
Increase (decrease) in deferred compensation ....................................... -- 104 (46)
------- -------- -------
Net cash provided by operating activities ............................................... 3,849 4,207 6,213
------- -------- -------
Cash flows from investing activities:
Capital expenditures .................................................................. (1,394) (1,271) (4,144)
Proceeds from sale of investment in PTP Industries, Inc. .............................. -- 1,860 --
------- -------- -------
Net cash provided by (used in) investing activities ..................................... (1,394) 589 (4,144)
-------- -------- -------
Cash flows from financing activities:
Increase in deferred financing costs .................................................. (4) (1,171) (160)
Net borrowings under line of credit agreements ........................................ 301 833 (3,996)
Proceeds from issuance of bonds ....................................................... -- -- 4,000
Increase in restricted cash ........................................................... -- -- (625)
Proceeds from issuance of credit facilities ........................................... -- 34,200 --
Proceeds from issuance of common stock ................................................ -- 1,000 --
Proceeds from issuance of preferred stock ............................................. -- 19,000 --
Payments to acquire stock of previous shareholders .................................... -- (49,724) --
Principal payments on long-term debt .................................................. (2,215) (8,942) (1,100)
Dividends paid ........................................................................ (540) -- --
------- -------- -------
Net cash used in financing activities ................................................... (2,458) (4,804) (1,881)
Net increase (decrease) in cash ......................................................... (3) (8) 188
Cash at beginning of year ............................................................... 17 14 6
------- -------- -------
Cash at end of year ..................................................................... $ 14 $ 6 $ 194
======= ======== =======
Supplemental disclosures of cash flows information:
Interest paid ......................................................................... $ 1,148 $ 2,147 $ 3,474
======= ======== =======
Income taxes paid ..................................................................... $ 2,428 $ 1,630 $ 1,479
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
(1) Basis of Presentation
The accompanying consolidated financial statements include the financial
statements of KFI, Klearfold, Inc., KFI International Inc., and KFI Delaware,
Inc. (referred to collectively as Klearfold or the Company). All balances and
transactions among these parties have been eliminated in the accompanying
financial statements.
(2) DESCRIPTION OF BUSINESS AND BUSINESS CONCENTRATIONS
The Company manufactures innovative display packaging using folding cartons
that are produced either in part or entirely of rigid film. Customers are
located primarily throughout the United States and are comprised of users in the
cosmetics, pharmaceutical, and other consumer products industries. Sales to two
customers accounted for approximately 27% and 23% of the Company's net sales for
the years ended December 31, 1996 and 1997. Sales to one customer accounted for
approximately 14% of the Company's net sales for the year ended December 31,
1995.
(3) LEVERAGED RECAPITALIZATION
On June 7, 1996, a merger between Klearfold and KFI/Heritage Acquisition
Corporation (Acquisition), a wholly-owned subsidiary of KFI, was consummated.
KFI and Acquisition were formed for the purpose of acquiring all the capital
stock of Klearfold by certain affiliates of Heritage Partners Management Company
(Heritage) together with certain existing Klearfold shareholders and key members
of Klearfold management (Management Investors) in a leveraged transaction.
The Management Investors have maintained the majority voting interest in KFI
and no change in control as described in Emerging Issue Task Force Issue 88-16
occurred as a result of the merger. Therefore, the merger has been accounted for
as a leveraged recapitalization with the accounting basis of Klearfold's assets
and liabilities being carried over after the merger. The difference between the
accounting basis of Klearfold's assets and liabilities and their fair values is
$34,831, which has been recorded in stockholders' deficit as a carryover basis
adjustment. Management Investors own 50.3% and 46.5% of the outstanding voting
common stock and total outstanding common stock, respectively. Heritage owns
49.7% and 53.5% of the outstanding voting common stock and total outstanding
common stock, respectively. Management Investors and Heritage own 23.7% and
76.3% of the outstanding preferred stock.
F-20
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Of the funds required to effect the recapitalization, $20,000 was provided in
the form of common and preferred stock by Heritage ($15,035) and Management
Investors ($4,965). Certain Management Investors borrowed $35 in the form of
notes receivable to the Company to acquire common stock. The notes receivable
have been recorded as a reduction to stockholders' deficit on the Company's
balance sheet. The balance of the funding was provided under the $43,000 Senior
Secured Credit Facilities (Facilities) through a bank syndication. The
Facilities consist of (1) $12,000 six-year Revolving Credit, with availability
subject to a borrowing base of accounts receivable and inventory (note 10); and
(2) $21,000 six-year Term Loan A and $10,000 seven-year Term Loan B (note 11).
The total source of funds obtained for the recapitalization as of June 7, 1996
was $54,900, of which $20,000 was received from the issuance of capital stock,
$34,200 from the Facilities, and $700 from Company cash on hand. The total use
of these funds was as follows: $45,203 to pay a substantial portion of the
purchase price to acquire all of the outstanding stock of Klearfold's previous
shareholders, $7,763 to repay existing bank loans, and $1,934 to pay merger and
financing costs, which consisted primarily of financial and legal fees. An
additional $3,652 of funds was required subsequent to June 7, 1996 to pay the
remaining costs in connection with the recapitalization. The remaining funds to
be paid consisted of $2,116 to Klearfold's previous shareholders and $1,536 for
remaining merger and financing costs relating to the recapitalization. At
December 31, 1997, previous shareholders are due $153.
Total merger and financing costs relating to the recapitalization were $3,470,
of which $2,341 was recorded as a carryover basis adjustment and $1,129 was
recorded as deferred financing costs.
The preferred stock provided by Heritage and Management Investors have no
fixed repayment date and will be redeemed only upon liquidation of Heritage's
common stock investment. The preferred stock carries a 10% dividend rate, to be
accrued during the first three years following closing, and thereafter, to be
paid from available earnings. Dividends not paid will accumulate. The aggregate
amount of arrearages in cumulative preferred dividends is $2,777 at December 31,
1997.
Heritage has warrants attached to its preferred stock that entitle the holder
to an additional 14.5% of economic value of the Company if certain valuation
parameters are not achieved upon disposition of all or a portion of Heritage's
interest in the Company.
(4) DISCONTINUED OPERATIONS
On April 19, 1996, the Company sold its 51% interest in its thermoform
packaging operations--PTP Industries, Inc. (PTP). Accordingly, PTP is accounted
for as discontinued operations in the accompanying consolidated financial
statements. There are no net assets of PTP recorded on the balance sheet at
December 31, 1997 and December 31, 1996. Proceeds from the sale of PTP were
$1,860 and a gain of $35 (net of taxes of $140) was recognized in 1996.
F-21
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Sales
Sales, which arise primarily within the United States, represent the net
invoiced value of goods supplied to customers. Sales are generally recognized
when goods are shipped to customers. In certain instances, sales are recognized
prior to shipment if the goods are completed and held by the Company at the
request of the customer.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost.
Machinery and equipment depreciation is calculated on the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized straight-line over the shorter of the lease term or estimated useful
life of the related asset. Equipment under construction is not depreciated until
placed in full-time production. The useful lives of property and equipment are
summarized as follows:
<TABLE>
<S> <C>
Leasehold improvements .............................................. 5-10 years
Machinery and equipment ............................................. 10 years
Furniture and fixtures .............................................. 6-10 years
</TABLE>
Deferred Financing Costs
The Company incurred various financing costs relating to the Facilities as
previously described in the notes to the consolidated financial statements. The
Company is amortizing these deferred costs over seven years, which represents
the life of the Facilities agreement.
The premium paid for the purchased interest rate cap agreement is amortized to
interest expense over the term of the cap. The unamortized premium is included
in deferred financing costs in the consolidated balance sheet. Amounts
receivable under the cap agreement are accrued as a component of interest
expense.
F-22
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
recording of reported amounts of revenues and expenses and the disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
Fair Values of Financial Instruments
The carrying value of the Company's financial instruments consisting of cash,
trade receivables, trade payables, borrowings under line of credit agreement,
and long-term debt are estimated to approximate fair value due to the short-term
maturity of cash, trade receivables, and trade payables, and due to the line of
credit and long-term debt agreements having a variable interest rate.
(6) INVENTORIES
Components of inventories at December 31, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Raw materials ................................................ $3,138 $3,658
Work in process .............................................. 1,233 1,530
Finished goods ............................................... 2,662 1,769
------ ------
$7,033 $6,957
====== ======
</TABLE>
F-23
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
------------ -----------------
<S> <C> <C>
Machinery and equipment............................... $ 20,026 $ 24,244
Furniture and fixtures................................ 1,826 2,034
Leasehold improvements................................ 1,841 1,916
Construction in progress.............................. 532 176
-------- --------
24,225 28,370
Less accumulated depreciation and amortization........ (15,657) (17,270)
$ 8,568 $ 11,100
======== ========
</TABLE>
(8) LEASES
The Company has several noncancelable operating leases, primarily for
buildings and equipment that expire over the next 6 years. Future minimum lease
payments under noncancelable operating leases as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
1998 ......................................................... $1,925
1999 ......................................................... 1,599
2000 ......................................................... 1,107
2001 ......................................................... 701
2002 ......................................................... 625
Thereafter ................................................... 1,719
------
Total minimum lease payments .................................. $7,676
======
</TABLE>
Total rent expense for the years ended December 31, 1995, 1996 and 1997 was
$1,732, $1,995 and $2,034, respectively.
(9) PENSION AND EMPLOYEES SAVINGS PLAN
The Company is required, on behalf of union-registered employees, to
contribute to a union-managed multi-employer pension plan. If the Company
completely or partially withdraws from the pension plan, the Company may be
required to pay its share of the pension plan's unfunded vested liability. There
was no unfunded vested liability at December 31, 1997. The cost incurred for the
union pension plan was $113, $118 and $121 in 1995, 1996 and 1997, respectively.
The Company operates an employees savings plan for the benefit of all non-
union employees upon retirement, disability, death, or departure from the
companies. The Company is not required to fund a minimum level of benefits for
such employees' and employer contributions are at the discretion of the Company.
The cost incurred for the savings plan in 1995, 1996 and 1997 was $27, $24 and
$28, respectively.
F-24
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) LINE OF CREDIT
The Company has a six-year revolving bank line of credit agreement that is
subject to a maximum amount of $12,000 ($0 outstanding at December 31, 1997).
Borrowings under the line bear interest at LIBOR plus applicable margin, or bank
base rate plus applicable margin (9.75% at December 31, 1997). Maximum
borrowings under the line are limited to the sum of 85% of the Company's
eligible accounts receivable plus 50% of eligible inventory. As a result, the
maximum borrowings under the line of credit were limited to $4,590 at December
31, 1997. A commitment fee is payable at the end of each quarter, equal to 0.5%
per annum on the average daily amount of the unborrowed portion of the revolving
credit agreement.
(11) LONG-TERM DEBT
Outstanding long-term debt consists of the following
<TABLE>
<CAPTION>
1996 1997
----------- ----------------
<S> <C> <C>
Secured term loan A ........................................ $21,000 $ 20,000
Secured term loan B ........................................ 9,950 9,850
Industrial Development Demand Revenue Bonds ................ -- 4,000
------- --------
30,950 33,850
Less current installments .................................. (1,100) (33,850)
------- --------
$29,850 $ --
======= ========
</TABLE>
Term Loan A matures by June 30, 2002. Term Loan B matures by June 30, 2003.
Term Loans A and B bear interest at the bank's base rate plus applicable
margins. The effective rate at December 31, 1997 was 8.5% and 9.0% for Term
Loans A and B, respectively. The effect of a .25% increase in interest rates
would increase interest expense on the term loans by approximately $77 in 1997.
In connection with the term loans, the Company entered into an interest cap
agreement with the same bank, effective December 1996, for a notional amount of
$20,000, with a cap rate of 7.68% per annum. The cost of the agreement, which
expires in June 1998, was $42. In exchange, the Bank will reimburse the Company
interest costs in excess of 7.68% plus the Bank's applicable margins. The fair
value of the interest rate cap agreement approximated its carrying value at
December 31, 1997.
On August 1, 1997, the Bucks County Industrial Development Authority issued
$4,000 of Variable Rate Demand Revenue Bonds. The Company borrowed the proceeds
of the issuance from the Authority. The principal balance is due in full on
August 1, 2007. Interest accrues on the bonds at 4.35% . The Company is required
to maintain a letter of credit supporting the outstanding balance of the bonds.
The outstanding letter of credit balance as of December 31, 1997 is $4,064. The
fee charged for the letter of credit is 3% of the outstanding balance. The Bond
Trust Indenture Agreement requires the Company to use the proceeds for the
acquisition and installation of an offset printing press and related equipment.
All proceeds not used immediately for these costs are to be kept in a restricted
cash account. The balance of restricted cash at December 31, 1997 is $625.
F-25
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate scheduled annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Term TERM
------------- -----------
LOAN A LOAN B BONDS TOTAL
------------- ----------- -------- ----------
<S> <C> <C> <C> <C>
1998 ............................................. $ 3,000 $ 100 $ -- $ 3,100
1999 ............................................. 4,500 100 -- 4,600
2000 ............................................. 5,000 100 -- 5,100
2001 ............................................. 5,000 1,550 -- 6,550
2002 ............................................. 2,500 4,750 -- 7,250
Thereafter ....................................... -- 3,250 4,000 7,250
------- ------ ------ -------
Total long-term debt ............................. 20,000 9,850 4,000 33,850
Less current installments ........................ 20,000 9,850 4,000 33,850
------- ------ ------ -------
Long-term debt, excluding current installments ... $ -- $ -- $ -- $ --
============= =========== ====== =======
</TABLE>
The Company's line of credit and term loan agreements include various
financial covenants with which the Company must comply. These covenants
generally restrict the amount of capital expenditures and dividend
distributions, and require the Company to meet minimum requirements for
earnings, leverage, and fixed charge coverage. All borrowings under the line of
credit and the term loans are secured by substantially all of the Company's
assets.
During 1997 the Company and the bank group for the credit line and term loans
amended the related loan agreement to enable the Company to maintain compliance
with its loan covenants through December 31, 1997. The Company projects,
however, that it will be in default on certain financial loan covenants (related
to earnings before income taxes, depreciation and amortization) when next
calculated as of February 28, 1998. Therefore, all amounts due under the term
loans have been classified as current. Additionally, the industrial revenue
bonds are supported by a letter of credit issued by the bank group which is
subject to the same financial loan covenants as the line of credit and term
loan. Therefore, the industrial revenue bonds have also been classified as
current. Management of the Company has not sought to further amend or
restructure the loan agreement to maintain compliance with such covenants due to
the planned merger discussed in note 16 and related senior note financing.
Management's plan should the Company not consummate the merger and related
financing is to commence negotiations with the bank group to amend or
restructure the loan agreement. Management believes that it would be able to
reach mutually agreeable terms with the bank lending group to allow repayment of
the debt on a long-term basis.
(12) CUSTOMER TERMINATION OF PURCHASE ARRANGEMENT
During 1997, a customer terminated its packaging purchase arrangement with the
Company. As a result of this termination the Company received $840 as
compensation for manufacturing costs incurred. This credit was recorded as a
reduction of cost of goods sold.
F-26
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) INCOME TAXES
Income tax expense attributable to income from continuing operations for the
years ended December 31, 1995, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Current tax expense:
U.S. federal ............................................... $1,962 $1,616 $1,292
U.S. state and local ....................................... 322 134 57
------ ------ ------
2,284 1,750 1,349
------ ------ ------
Deferred tax expense:
U.S. federal ............................................... 113 215 (504)
U.S. state and local ....................................... 20 38 (91)
------ ------ ------
133 253 (595)
------ ------ ------
Total income tax expense ...................................... $2,417 $2,003 $ 754
====== ====== ======
</TABLE>
Total income tax expense for the years ended December 31, 1995, 1996 and 1997
differed from the amount computed by applying the U.S. Federal income tax rate
of 34 percent to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense ............................... $1,936 $1,679 $ 730
State income taxes, net of federal benefit .................... 225 113 --
Other, net .................................................... 256 211 24
------ ------ -----
Total income tax expense ...................................... $2,417 $2,003 $ 754
====== ====== =====
</TABLE>
The tax effects of temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise to
significant portions of the net deferred tax liability were as follows at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- ---------------
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable ........................................... $ 101 $ 212
Inventories ................................................... 235 362
Other ......................................................... 49 87
------- -------
Total gross deferred tax assets .................................. 385 661
------- -------
Gross deferred tax liabilities:
Property, plant and equipment ................................. (1,428) (1,245)
Prepaid expenses .............................................. (198) (62)
------- -------
Total gross deferred tax liabilities ............................. (1,626) (1,307)
------- -------
Net deferred tax liability ....................................... $(1,241) $ (646)
======= =======
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain employee-
shareholders which expire at the end of the year 2000. The aggregate commitment
for future salaries, excluding bonuses, under these employment agreements at
December 31, 1997 is approximately $1,926.
F-27
<PAGE>
KFI HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) RELATED PARTY TRANSACTIONS
The Company leases manufacturing and warehouse premises in Warrington,
Pennsylvania, from Melvin B. Herrin for $336 annually and is adjustable for
inflation beginning in 2001. Melvin B. Herrin is Chairman of the Board of
Directors and CEO of the Company. The Company leases manufacturing and warehouse
premises in Louisa, Virginia, from Dena Corporation, a company wholly-owned by
Melvin B. Herrin, for $273 annually and is adjustable for inflation beginning in
2001. Both leases expire in 2005 and may be extended for an additional five
years at the option of the Company.
Arthur S. Keyser, a director of the Company, is a senior managing partner in
the firm of Kleinbard, Bell & Brecker, which received professional fees of $346,
$120 and $83 in 1995, 1996 and 1997, respectively, for legal advice provided in
the normal course of business.
Certain key members of management signed $5 promissory notes with the Company
in exchange for their common stock shares. These promissory notes which total
$35 are interest-free and have no stated maturity date.
(16) STOCK OPTION PLANS
Stock options which were granted in the past to members of executive
management have been terminated as of June 7, 1996. The value of the options to
be paid was $243 as of June 7, 1996. As of December 31, 1997, $58 was the
remaining obligation and has been recorded as deferred compensation. Deferred
compensation is payable in five equal installments beginning in June 1997, only
if the individual is working for the Company at the time the installment becomes
payable. The value of the options recorded in accrued expenses is payable upon
demand.
(17) SUBSEQUENT EVENTS
The Company, in the first quarter of 1998, plans to enter into a merger with
AGI Incorporated (AGI) whereby the shareholders of the Company will make a
contribution of equity which, along with the proceeds from a contemporaneous
offering of senior subordinated notes, will be used to acquire shares of AGI and
repay amounts outstanding under the secured term loans described in note 11.
F-28
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL _______, 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
____________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary........................... [__]
Risk Factors................................. [__]
The Combination.............................. [__]
Use of Proceeds.............................. [__]
Capitalization............................... [__]
Unaudited Pro Forma Combined Financial
Data........................................ [__]
Selected Historical Financial Information
and Other Data-AGI Incorporated............. [__]
Selected Historical Financial Information
and Other Data-KFI Holding
Corporation................................. [__]
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. [__]
Business..................................... [__]
Management................................... [__]
Principal Stockholders....................... [__]
Certain Relationships and Related
Transactions................................ [__]
Description of Other Indebtedness............ [__]
Exchange Offer...............................
Description of Notes......................... [__]
Certain Federal Income Tax
Consequences................................ [__]
Intellectual Property........................ [__]
Legal Matters................................ [__]
Available Information........................ [__]
Independent Public Accountants............... [__]
Special Note Regarding Forward-Looking
Statements.................................. [__]
Index to Consolidated Financial Statements... [__]
</TABLE>
IMPAC Group, Inc.
OFFER TO EXCHANGE UP TO $100,000,000 OF 10 1/8% SENIOR
SUBORDINATED NOTES DUE 2008, SERIES B WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
10 1/8% SENIOR SUBORDINATED NOTES DUE
2008, OF WHICH $100,000,000 IN
PRINCIPAL AMOUNT IS
OUTSTANDING ON THE
DATE HEREOF
____________
PROSPECTUS
____________
MARCH __, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") grants a
Delaware corporation the power to indemnify any director, officer, employee or
other agent if such person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. No
indemnification may be provided, however, for any person with respect to any
matter as to which he shall have been adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his action was in the best
interest of the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
With respect to indemnification of directors, Article 6 of the Amended and
Restated Certificate of Incorporation of the Company, a copy of which is filed
as Exhibit 3.1, provides as follows:
"The Company shall indemnify, and upon request shall advance expenses to,
in the manner and to the full extent permitted by law, any person (or the estate
of any person) who was or is a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding, whether or not
by or in the right of the Company, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, partner or trustee of another company,
partnership, joint venture, trust or other enterprise. The Company may, to the
fullest extent permitted by law, purchase and maintain insurance on behalf of
any such person against any liability which may be asserted against him or her,
whether or not the Company would have the power to indemnify him or her against
such liability pursuant to this Article 6. To the fullest extent permitted by
law, the indemnification and advances provided for herein shall include expenses
(including attorney's fees), judgments, fines and amounts paid in settlement.
The indemnification provided herein shall not be deemed to limit the right of
the Company to indemnify any other person for any such expenses to the full
extent permitted by law, nor shall it be deemed exclusive of any other rights to
which any person seeking indemnification from the Company may be entitled under
any agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
A director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to the
Company or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law, or (d) for any transaction
from which the director derived an improper personal benefit."
With respect to indemnification, Article VII of each of the Amended and
Restated By-laws of the Company, a copy of which is filed as Exhibit 3.2,
provides as follows:
"Section 7.1. Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of being or having been a director or
----------
officer of the Corporation or serving or having served at the request of the
Corporation as a director, trustee, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (an "Indemnitee"),
----------
whether the basis of such proceeding is alleged action or failure to act in an
official capacity as a director, trustee, officer, employee or agent or in any
other capacity while serving as a director, trustee, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior
II-1
<PAGE>
thereto) (as used in this Article 7, the "Delaware Law"), against all expense,
------------
liability and loss (including attorneys' fees, judgements, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such Indemnitee in connection therewith and such indemnification
shall continue as to an Indemnitee who has ceased to be a director, trustee,
officer, employee or agent and shall inure to the benefit of the Indemnitee's
heirs, executors and administrators; provided, however, that, except as provided
in (S)7.2 hereof with respect to Proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a Proceeding (or part thereof) initiated by such Indemnitee only
if such Proceeding (or part thereof) was authorized by the Board of Directors.
The right to indemnification conferred in this Article 7 shall be a contract
right and shall include the right to be paid by the Corporation the expenses
(including attorneys' fees) incurred in defending any such Proceeding in advance
of its final disposition (an "Advancement of Expenses"); provided, however,
----------- -- --------
that, if the Delaware Law so requires, an Advancement of Expenses incurred by an
Indemnitee shall be made only upon delivery to the Corporation of an
undertaking (an "Undertaking"), by or on behalf of such Indemnitee, to repay all
-----------
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (a "Final Adjudication")
----- ------------
that such Indemnitee is not entitled to be indemnified for such expenses under
this Article 7 or otherwise.
Section 7.2. Right of Indemnitee to Bring Suit. If a claim under
(S)7.1 hereof is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an Advancement of Expenses, in which case the applicable period shall
be twenty days, the Indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the Indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the Indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the Indemnitee to
enforce a right to an Advancement of Expenses) it shall be a defense that, and
(ii) in any suit by the Corporation to recover an Advancement of Expenses
pursuant to the terms of an Undertaking the Corporation shall be entitled to
recover such expenses upon a Final Adjudication that, the Indemnitee has not met
the applicable standard of conduct set forth in the Delaware Law. Neither the
failure of the Corporation (including the Board of Directors, its independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the Delaware Law, nor an actual determination by the
Corporation (including the Board of Directors, its independent legal counsel, or
its stockholders) that the Indemnitee has not met such applicable standard of
conduct, shall create a presumption that the Indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification or to an Advancement of Expenses hereunder,
or by the Corporation to recover an Advancement of Expenses pursuant to the
terms of an Undertaking, the burden of proving that the Indemnitee is not
entitled to be indemnified, or to such Advancement of Expenses, under this
Article 7 or otherwise shall be on the Corporation.
Section 7.3. Non-Exclusivity of Rights. The rights to indemnification
and to the Advancement of Expenses conferred in this Article 7 shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the Certificate of Incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 7.4. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under this Article 7 or under the Delaware Law.
Section 7.5. Indemnification of Employees and Agents of the
Corporation. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification, and to the Advancement
of Expenses, to any employee or agent of the Corporation to the fullest extent
of the provisions of this Article 7 with respect to the indemnification and
Advancement of Expenses of directors and officers of the Corporation."
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a list of exhibits filed as a part of this
Registration Statement:
II-2
<PAGE>
EXHIBIT
- -------
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated February 19, 1998, between Holding, AGI
Acquisition Corporation, Heritage, Klearfold, AGI, certain stockholders of AGI,
and certain stockholders of Holding*
2.2 Investment Agreement, dated February 19, 1998, between KFI Holding Corporation
("Holding"), Heritage Fund I Investment Corporation ("Heritage"), certain
stockholders of Holding, certain stockholders of AGI and certain other persons.*
3.1 Amended and Restated Certificate of Incorporation of IMPAC Group, Inc. (the
"Company").*
3.2 Amended and Restated By-laws of the Company.*
4.1 Indenture, dated as of March 12, 1998, by and among the Company, AGI
Incorporated ("AGI"), Klearfold, Inc. ("Klearfold"), KF - Delaware, Inc.
("KFD"), KF - International, Inc. ("International" and, collectively, with AGI,
Klearfold, KFD and International, the "Guarantors") and State Street Bank and
Trust Company, as Trustee.*
4.2 Form of the Company's 10 1/8% Senior Notes due 2008.*
4.3 Registration Rights Agreement, dated as of March 12, 1998, by and among the
Company, the Guarantors, Goldman, Sachs & Co. ("Goldman") and Donaldson, Lufkin,
and Jenrette Securities Corporation ("DLJ").*
5.1 Opinion of Bingham Dana LLP, as to legality of securities being registered.*
10.1 Purchase Agreement, dated as of March 5, 1998, by and among Holding, Goldman and
DLJ.*
10.2 Escrow Agreement, dated March 12, 1998, between AGI, Holding, the Escrow Agent
and the Escrowed Stockholder Representative.*
10.3 Stockholder Agreement, dated as of March 12, 1998, between Holding, certain
Holding stockholders, certain stockholders of AGI and certain other persons.*
10.4 Labor Agreement between Klearfold and United Paperworker's International Union
Local 286, effective December 1, 1994, as extended by amendment through November
30, 2002.*
10.5 Credit Agreement, dated as of March 12, 1998, between Bank of America NT & SA
("BofA") and the Company.*
10.6 Form of the Company's $40,000,000 Revolving Note, dated as of March 12, 1998.*
10.7 Company Security Agreement, dated as of March 12, 1998 between the Company and
BofA.*
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.8 Borrowers Security Agreement, dated as of March 12, 1998 between AGI, Klearfold
and BofA.*
10.9 Klearfold Subsidiaries Security Agreement, dated as of March 12, 1998 between
KFD and International (the "Klearfold Subsidiaries") and BofA.*
10.10 Company Pledge Agreement, dated as of March 12, 1998 between the Company and
BofA.*
10.11 Borrowers Pledge Agreement, dated as of March 12, 1998 between AGI, Klearfold
and BofA.*
10.12 Klearfold Subsidiaries Pledge Agreement, dated as of March 12, 1998 between the
Klearfold Subsidiaries and BofA.*
10.13 Company Guaranty, dated as of March 12, 1998, between the Company and BofA.*
10.14 Borrowers Guaranty, dated as of March 12, 1998 between AGI, Klearfold and BofA.*
10.15 Klearfold Subsidiaries Guaranty, dated as of March 12, 1998 between the
Klearfold Subsidiaries and BofA.*
10.16 Company Patent Assignment dated as of March 12, 1998 between the Company and
BofA.*
10.17 Borrowers Patent Assignment, dated as of March 12, 1998 between AGI, Klearfold
and BofA.*
10.18 Subsidiary Patent Assignment, dated as of March 12, 1998 between the Klearfold
Subsidiaries and BofA.*
10.19 Company Trademark Assignment, dated as of March 12, 1998 between the Company and
BofA.*
10.20 Borrowers Trademark Assignment, dated as of March 12, 1998 between AGI,
Klearfold and BofA.*
10.21 Klearfold Subsidiaries Trademark Assignment, dated as of March 12, 1998 between
the Klearfold Subsidiaries and BofA.*
10.22 Company Copyright Assignment, dated as of March 12, 1998 between the Company and
BofA.*
10.23 Borrowers Copyright Assignment, dated as of March 12, 1998 between AGI,
Klearfold and BofA.*
10.24 Klearfold Subsidiaries Copyright Assignment, dated as of March 12, 1998 between
the Klearfold Subsidiaries and BofA.*
10.25 the L/C Loan Note.*
10.26 the AGI Letter of Credit.*
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.27 the Back-Up Klearfold Letter of Credit.*
10.28 the Mellon Bank, N.A. Letter of Credit.*
10.29 Second Amendment to Lease dated September 30, 1994 between Norman Levin and
Evelyn F. Levin and Klearfold (Warrington, Pennsylvania).*
10.30 Lease Agreement, dated as of June 7, 1996, between Dena Corp. and Klearfold
(Louisa, Virginia).*
10.31 Lease Agreement, dated as of June 7, 1996, between Melvin B. Herrin and
Klearfold (Warrington, Pennsylvania).*
10.32 Lease dated May 29, 1985 by and between Chicago Title and Trust Company as
Trustee under Trust Agreement dated February 1, 1977, and known as Trust No.
1069185 and AGI re 256,629 sq. ft. at 1950 N. Ruby Street.*
10.33 Amendment to Lease dated as of October 1, 1987 by and between Chicago Title and
Trust Company, as Trustee under a Trust Agreement dated February 1, 1977, and
known as Trust No. 1069185 and AGI re 256,629 sq. ft. at 1950 Ruby Street.*
10.34 Second Amendment to Lease dated as of April 30, 1992, by and between Chicago
Title and Trust Company as Trustee under a Trust Agreement dated February 1,
1977 and known as Trust No. 1069185 and AGI re 256,629 sq. ft. at 1950 Ruby
Street.*
10.35 Third Amendment to Lease dated July 2, 1997 by and between Chicago Title and
Trust Company as Trustee under Trust Agreement dated February 1, 1997 and known
as Trust No. 1069185 and AGI re 256,629 sq. ft. at 1950 N. Ruby Street.*
10.36 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and David Underwood.*
10.37 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and James Oppenheimer.*
10.38 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and Richard Oppenheimer.*
10.39 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and Dean Henkel.*
10.40 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and H. Scott Herrin.*
10.41 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and Melvin Herrin.*
10.42 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and Richard Block.*
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
21.1 List of Subsidiaries.*
23.1 Consent of Bingham Dana LLP, counsel to the Company (included in Exhibit 5.1).*
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Price Waterhouse LLP.
24.1 Power of Attorney (included in signature page to Registration Statement).
25.1 Statement re: Eligibility of Trustee.
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agency Agreement among the Exchange Agent, the Holding Company
and the Company.*
99.4 Form of Letter Regarding Eligibility for use of Form S-4.
</TABLE>
_____________________
* To be filed by amendment
(b) The following is a list of schedules filed as a part of this
Registration Statement:
Schedule II Valuation and Qualifying Accounts and Reserves for the Years
Ended December 31, 1995, 1996 and 1997.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
Regulation SK Item 512(a)
-------------------------
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total
II-6
<PAGE>
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S)2304.424(b) of this
chapter) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Regulation SK Item 512(h)
-------------------------
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of the Registrant's
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by the
Registrant is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Form S-4 Item 22(c)
-------------------
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it went effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Melrose Park, State of
Illinois, on this 27th day of March, 1998.
IMPAC GROUP, INC.
By: /s/ David C. Underwood
________________________
David C. Underwood
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Richard Block and
David C. Underwood, and each of them severally, acting alone and without the
other, his true and lawful attorney-in-fact with the authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments (including without limitation post-effective amendments)
to this Registration Statement necessary or advisable to enable the Registrant
to comply with the Securities Act of 1933, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof, which amendments may make such other changes in this
Registration Statement as the aforesaid attorney-in-fact executing the same
deems appropriate.
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on behalf of IMPAC Group, Inc. by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Melvin B. Herrin Chairman and Director of IMPAC March 27, 1998
- ------------------------------------------ Group, Inc.
Melvin B. Herrin
/s/ Richard Block Chief Executive Officer and March 27, 1998
- ------------------------------------------ Director of IMPAC Group, Inc.
Richard Block (principal executive officer)
/s/ H. Scott Herrin Director of IMPAC Group, Inc. March 27, 1998
- ------------------------------------------
H. Scott Herrin
/s/ Michel Reichert Director of IMPAC Group, Inc. March 27, 1998
- ------------------------------------------
Michel Reichert
/s/ Michael Gilligan Director of IMPAC Group, Inc. March 27, 1998
- ------------------------------------------
Michael Gilligan
Director of IMPAC Group, Inc. March __, 1998
- ------------------------------------------
Zenas Block
Director of IMPAC Group, Inc. March __, 1998
- ------------------------------------------
David Horowitz
/s/ David C. Underwood Chief Financial Officer of IMPAC March 27, 1998
- ------------------------------------------ Group, Inc. (principal financial
David C. Underwood and accounting officer)
</TABLE>
II-9
<PAGE>
Schedule II
Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 1995, 1996 and 1997
(In thousands)
Balance at Balance at
Beginning Charged to Other End
of Year Expense Changes(1) of Year
-------------------------------------------------------
Klearfold
- ---------
Allowance for Doubtful
Accounts
1995 $150 $37 ($40) $147
1996 $147 $44 ($91) $100
1997 $100 ($3) $43 $140
Credit Memo Reserve
1995 $655 $416 ($665) $406
1996 $406 $463 ($703) $166
1997 $166 $454 ($200) $420
(1) Net accounts (written-off)/recovered to the Allowance for Doubtful Accounts;
Credit memos issued against the Credit Memo Reserve
S-1
<PAGE>
EXHIBIT
- -------
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated February 19, 1998, between Holding, AGI
Acquisition Corporation, Heritage, Klearfold, AGI, certain stockholders of AGI,
and certain stockholders of Holding*
2.2 Investment Agreement, dated February 19, 1998, between KFI Holding Corporation
("Holding"), Heritage Fund I Investment Corporation ("Heritage"), certain
stockholders of Holding, certain stockholders of AGI and certain other persons.*
3.1 Amended and Restated Certificate of Incorporation of IMPAC Group, Inc. (the
"Company").*
3.2 Amended and Restated By-laws of the Company.*
4.1 Indenture, dated as of March 12, 1998, by and among the Company, AGI
Incorporated ("AGI"), Klearfold, Inc. ("Klearfold"), KF - Delaware, Inc.
("KFD"), KF - International, Inc. ("International" and, collectively, with AGI,
Klearfold, KFD and International, the "Guarantors") and State Street Bank and
Trust Company, as Trustee.*
4.2 Form of the Company's 10 1/8% Senior Notes due 2008.*
4.3 Registration Rights Agreement, dated as of March 12, 1998, by and among the
Company, the Guarantors, Goldman, Sachs & Co. ("Goldman") and Donaldson, Lufkin,
and Jenrette Securities Corporation ("DLJ").*
5.1 Opinion of Bingham Dana LLP, as to legality of securities being registered.*
10.1 Purchase Agreement, dated as of March 5, 1998, by and among Holding, Goldman and
DLJ.*
10.2 Escrow Agreement, dated March 12, 1998, between AGI, Holding, the Escrow Agent
and the Escrowed Stockholder Representative.*
10.3 Stockholder Agreement, dated as of March 12, 1998, between Holding, certain
Holding stockholders, certain stockholders of AGI and certain other persons.*
10.4 Labor Agreement between Klearfold and United Paperworker's International Union
Local 286, effective December 1, 1994, as extended by amendment through November
30, 2002.*
10.5 Credit Agreement, dated as of March 12, 1998, between Bank of America NT & SA
("BofA") and the Company.*
10.6 Form of the Company's $40,000,000 Revolving Note, dated as of March 12, 1998.*
10.7 Company Security Agreement, dated as of March 12, 1998 between the Company and
BofA.*
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.8 Borrowers Security Agreement, dated as of March 12, 1998 between AGI, Klearfold
and BofA.*
10.9 Klearfold Subsidiaries Security Agreement, dated as of March 12, 1998 between
KFD and International (the "Klearfold Subsidiaries") and BofA.*
10.10 Company Pledge Agreement, dated as of March 12, 1998 between the Company and
BofA.*
10.11 Borrowers Pledge Agreement, dated as of March 12, 1998 between AGI, Klearfold
and BofA.*
10.12 Klearfold Subsidiaries Pledge Agreement, dated as of March 12, 1998 between the
Klearfold Subsidiaries and BofA.*
10.13 Company Guaranty, dated as of March 12, 1998, between the Company and BofA.*
10.14 Borrowers Guaranty, dated as of March 12, 1998 between AGI, Klearfold and BofA.*
10.15 Klearfold Subsidiaries Guaranty, dated as of March 12, 1998 between the
Klearfold Subsidiaries and BofA.*
10.16 Company Patent Assignment dated as of March 12, 1998 between the Company and
BofA.*
10.17 Borrowers Patent Assignment, dated as of March 12, 1998 between AGI, Klearfold
and BofA.*
10.18 Subsidiary Patent Assignment, dated as of March 12, 1998 between the Klearfold
Subsidiaries and BofA.*
10.19 Company Trademark Assignment, dated as of March 12, 1998 between the Company and
BofA.*
10.20 Borrowers Trademark Assignment, dated as of March 12, 1998 between AGI,
Klearfold and BofA.*
10.21 Klearfold Subsidiaries Trademark Assignment, dated as of March 12, 1998 between
the Klearfold Subsidiaries and BofA.*
10.22 Company Copyright Assignment, dated as of March 12, 1998 between the Company and
BofA.*
10.23 Borrowers Copyright Assignment, dated as of March 12, 1998 between AGI,
Klearfold and BofA.*
10.24 Klearfold Subsidiaries Copyright Assignment, dated as of March 12, 1998 between
the Klearfold Subsidiaries and BofA.*
10.25 the L/C Loan Note.*
10.26 the AGI Letter of Credit.*
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.27 the Back-Up Klearfold Letter of Credit.*
10.28 the Mellon Bank, N.A. Letter of Credit.*
10.29 Second Amendment to Lease dated September 30, 1994 between Norman Levin and
Evelyn F. Levin and Klearfold (Warrington, Pennsylvania).*
10.30 Lease Agreement, dated as of June 7, 1996, between Dena Corp. and Klearfold
(Louisa, Virginia).*
10.31 Lease Agreement, dated as of June 7, 1996, between Melvin B. Herrin and
Klearfold (Warrington, Pennsylvania).*
10.32 Lease dated May 29, 1985 by and between Chicago Title and Trust Company as
Trustee under Trust Agreement dated February 1, 1977, and known as Trust No.
1069185 and AGI re 256,629 sq. ft. at 1950 N. Ruby Street.*
10.33 Amendment to Lease dated as of October 1, 1987 by and between Chicago Title and
Trust Company, as Trustee under a Trust Agreement dated February 1, 1977, and
known as Trust No. 1069185 and AGI re 256,629 sq. ft. at 1950 Ruby Street.*
10.34 Second Amendment to Lease dated as of April 30, 1992, by and between Chicago
Title and Trust Company as Trustee under a Trust Agreement dated February 1,
1977 and known as Trust No. 1069185 and AGI re 256,629 sq. ft. at 1950 Ruby
Street.*
10.35 Third Amendment to Lease dated July 2, 1997 by and between Chicago Title and
Trust Company as Trustee under Trust Agreement dated February 1, 1997 and known
as Trust No. 1069185 and AGI re 256,629 sq. ft. at 1950 N. Ruby Street.*
10.36 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and David Underwood.*
10.37 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and James Oppenheimer.*
10.38 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and Richard Oppenheimer.*
10.39 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and Dean Henkel.*
10.40 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and H. Scott Herrin.*
10.41 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and Melvin Herrin.*
10.42 Employment, Non-Competition and Stock Repurchase Agreement, dated as of March
12, 1998, by and between the Company and Richard Block.*
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
21.1 List of Subsidiaries.*
23.1 Consent of Bingham Dana LLP, counsel to the Company (included in Exhibit 5.1).*
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Price Waterhouse LLP.
24.1 Power of Attorney (included in signature page to Registration Statement).
25.1 Statement re: Eligibility of Trustee.
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agency Agreement among the Exchange Agent, the Holding Company
and the Company.*
99.4 Form of Letter Regarding Eligibility for use of Form S-4.
</TABLE>
_____________________
* To be filed by amendment
(b) The following is a list of schedules filed as a part of this
Registration Statement:
Schedule II Valuation and Qualifying Accounts and Reserves for the Years
Ended December 31, 1995, 1996 and 1997.
<PAGE>
EXHIBIT 12.1
Klearfold
Computation of Ratio of Earnings of Fixed Charges
(in thousands)
<TABLE>
<CAPTION>
1933 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before taxes $ 3,165 $ 4,642 $ 5,695 $ 4,937 $ 2,146
----------------------------------------------------------------------
Fixed Charges:
Interest expense 1,013 1,020 1,197 2,324 3,469
Appropriate portion (1/3) of rentals 329 418 577 665 678
----------------------------------------------------------------------
Total fixed charges 1,342 1,438 1,774 2,989 4,147
----------------------------------------------------------------------
Income from continuing operations
before taxes plus fixed charges $ 4,507 $ 6,080 $ 7,469 $ 7,926 $ 6,293
======================================================================
Ratio of earnings to fixed charges
and capitalized interest 3.4 4.2 4.2 2.7 1.5
======================================================================
</TABLE>
<PAGE>
EXHIBIT 12.1
IMPAC Group, Inc.
Computation of Pro Forma Ratio of Earnings to Fixed Charges for 1997 after
Adjustment for issuance of Senior Subordinated Notes (in thousands)
Income from continuing operations
before taxes $4,892
--------------
Fixed Charges:
Interest Expense 11,424
Appropriate portion (1/3) of rentals 1,530
--------------
Total fixed charges 12.954
--------------
Income before taxes plus
fixed charges $17,846
==============
Capitalized Interest 16
Total fixed charges 12,954
--------------
Total fixed charges and
capitalized interest $12,970
==============
Ratio of earnings of fixed charges
and capitalized interest 1.4
==============
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and all references to our Firm) included in or made a part of this Registration
Statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
March 26, 1998
<PAGE>
EXHIBIT 23.3
REPORT AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
KFI Holding Corporation:
The audits referred to in our report dated February 6, 1998, included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 1997, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 27, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Impac Group, Inc. of our report dated
February 9, 1998 relating to the financial statements of AGI Incorporated which
appears in such Prospectus. We also consent to the reference to us under the
headings "Summary Historical Financial and Other Data--AGI Incorporated" and
"Selected Historical Financial Information and Other Data--AGI Incorporated" in
such Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Summary Historical Financial and Other Data" or the
"Selected Historical Financial Information and Other Data".
Price Waterhouse LLP
Chicago, Illinois
March 26, 1998
<PAGE>
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
_________
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2)
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
IMPAC GROUP, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 23-2923682
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1950 NORTH RUBY STREET
MELROSE PARK, ILLINOIS 60160
(Address of principal executive offices) (Zip Code)
10 1/8% SENIOR SUBORDINATED NOTES DUE 2008
(Title of indenture securities)
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervisory authority to
which it is subject.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington,
D.C., Federal Deposit Insurance Corporation, Washington, D.C.
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with Obligor.
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
The obligor is not an affiliate of the trustee or of its parent,
State street Corporation.
(See note on page 2.)
Item 3. through item 15. Not applicable.
item 16. List of Exhibits.
List below all exhibits filed as part of this statement of eligibility.
1. A copy of the articles of association of the trustee as now in
effect.
A copy of the Articles of Association of the trustee, as now
in effect, is on file with the Securities and Exchange
Commission as Exhibit 1 to Amendment No. 1 to the Statement
of Eligibility and Qualification of Trustee (Form T-1) filed
with the Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference thereto.
2. A copy of the certificate of authority of the trustee to commence
business, if not contained in the articles of association.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the
trustee to commence business was necessary or issued is on
file with the Securities and Exchange Commission as Exhibit 2
to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the
Registration Statement of Morse Shoe, Inc. (File No. 22-
17940) and is incorporated herein by reference thereto.
3. A copy of the authorization of the trustee to exercise corporate
trust powers, if such authorization is not contained in the documents specified
in paragraph (1) or (2), above.
A copy of the authorization of the trustee to exercise
corporate trust powers is on file with the Securities and
Exchange Commission as Exhibit 3 to Amendment No. 1 to the
Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Morse Shoe,
Inc. (File No. 22-17940) and is incorporated herein by
reference thereto.
4. A copy of the existing by-laws of the trustee, or instruments
corresponding thereto.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibit 4
to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Eastern
Edison Company (File No. 33-37823) and is incorporated herein
by reference thereto.
1
<PAGE>
5. A copy of each indenture referred to in item 4. if the obligor is in
default.
Not applicable.
6. The consents of United States institutional trustees required by
Section 321(b) of the Act.
The consent of the trustee required by Section 321(b) of the Act is
annexed hereto as Exhibit 6 and made a part hereof.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining authority.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority is annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended,
the trustee, State Street Bank and Trust Company, a corporation organized and
existing under the laws of The Commonwealth of Massachusetts, has duly caused
this statement of eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Boston and The Commonwealth of
Massachusetts, on the 26TH DAY OF MARCH, 1998.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Arthur J. Macdonald
__________________________________
NAME Arthur J. Macdonald
TITLE Assistant Vice President
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by IMPAC GROUP,
INC. of its 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008, we hereby consent that
reports of examination by Federal, State, Territorial or District authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Arthur J. Macdonald
----------------------------
NAME Arthur J. Macdonald
TITLE Assistant Vice President
Dated: March 26, 1998
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking institution
organized and operating under the banking laws of this commonwealth and a member
of the Federal Reserve System, at the close of business December 31, 1997,
-----------------
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act and in accordance
with a call made by the Commissioner of Banks under General Laws, Chapter 172,
Section 22(a).
<TABLE>
<CAPTION>
Thousands of
ASSETS Dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin...................... 2,220,829
Interest-bearing balances............................................... 10,076,045
Securities................................................................... 10,373,821
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary..................................... 5,124,310
Loans and lease financing receivables:
Loans and leases, net of unearned income ............ 6,270,348
Allowance for loan and lease losses..................... 82,820
Allocated transfer risk reserve......................................... 0
Loans and leases, net of unearned income and allowances................. 6,187,528
Assets held in trading accounts.............................................. 1, 241,555
Premises and fixed assets.................................................... 410,029
Other real estate owned...................................................... 100
Investments in unconsolidated subsidiaries................................... 38,831
Customers' liability to this bank on acceptances outstanding................. 44,962
Intangible assets............................................................ 224,049
Other assets................................................................. 1,507,650
----------
Total assets................................................................. 37,449,709
==========
LIABILITIES
Deposits:
In domestic offices..................................................... 10,115,205
Noninterest-bearing.................................... 7,739,136
Interest-bearing...................................... 2,376,069
In foreign offices and Edge subsidiary.................................. 14,791,134
Noninterest-bearing.................................... 71,889
Interest-bearing.......................................14,719,245
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary..................................... 7,603,920
Demand notes issued to the U.S. Treasury and Trading Liabilities............. 194,059
Trading liabilities.......................................................... 1,036,905
Other borrowed money......................................................... 459,252
Subordinated notes and debentures............................................ 0
Bank's liability on acceptances executed and outstanding..................... 44,962
Other liabilities............................................................ 972,782
Total liabilities............................................................ 35,218,219
----------
EQUITY CAPITAL
Perpetual preferred stock and related
surplus...................................................................... 0
Common stock................................................................. 29,931
Surplus...................................................................... 444,620
Undivided profits and capital reserves/Net unrealized holding gains (losses). 1,763,076
Cumulative foreign currency translation adjustments.......................... (6,137)
Total equity capital......................................................... 2,231,490
----------
Total liabilities and equity capital......................................... 37,449,709
----------
</TABLE>
4
<PAGE>
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Truman S. Casner
5
<PAGE>
5. A copy of each indenture referred to in item 4. if the obligor is in
default.
Not applicable.
6. The consents of United States Institutional trustees required by
Section 321(b) of the Act.
The consent of the trustee required by Section 321(b) of the Act
is annexed hereto as Exhibit 6 and made a part hereof.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority.
A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its supervising
or examining authority is annexed hereto as Exhibit 7 and made a
part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter of the
obligor, the trustee has relied upon the information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer to Item 2. of this statement will be amended, if necessary, to
reflect any facts which differ from those stated and which would have been
required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation duly
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the 26TH DAY OF MARCH, 1998.
STATE STREET BANK AND TRUST COMPANY
By /s/ Arthur J. Macdonald
--------------------------
NAME Arthur J. MacDonald
TITLE Assistant Vice President
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by IMPAC Group,
Inc. of its 10 1/8% Senior Subordinated Notes due 2008, we hereby consent that
reports of examination by Federal, State, Territorial or District authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ ARTHUR J. MACDONALD
---------------------------
NAME Arthur J. MacDonald
TITLE Assistant Vice President
Dated: March 26, 1998
3
<PAGE>
EXHIBIT 99.4
IMPAC GROUP, INC.
1950 NORTH RUBY STREET
MELROSE PARK, IL 60160
March 27, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Form S-4 Registration Statement relating to the offer to exchange
up to $100,000,000 of 10 1/8% Senior Subordinated Notes
(the "Exchange Notes") due 2008, Series B of IMPAC Group, Inc.,
which have been registered under the Securities Act of 1933,
as amended, for any and all of its outstanding 10 1/8% Senior
Subordinated Notes due 2008
Dear Sir or Madam:
In connection with our above-captioned Registration Statement, IMPAC Group,
Inc. hereby represents that:
1. It is registering the Exchange Notes exchange offer registered thereby
in reliance on the Staff's position set forth in Exxon Capital Holding Corp.,
---------------------------
SEC No-Action Letter (April 13, 1989), Morgan Stanley & Co., Inc., SEC No-Action
--------------------------
Letter (June 2, 1993) and Sherman & Sterling, SEC No-Action Letter (July 2,
------------------
1993).
2. It has not entered into any arrangement or understanding with any
person to distribute the Exchange Notes to be received in the exchange offer
and, to the best of its information and belief, each person participating in
the exchange offer is acquiring the Exchange Notes in its ordinary course of
business and has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes to be received in the exchange offer;
3. It will make each person participating in the exchange offer aware that
is such person is participating in the exchange offer for the purpose of
distributing the Exchange Notes to be acquired in the exchange offer, such
person (i) cannot rely on the staff position enunciated in Exxon Capital or
-------------
interpretive letters to similar effect and (ii) must comply with registration
and prospectus delivery requirements of the Securities Act of 1933 in connection
with a secondary resale transaction.
4. It acknowledges that such a secondary resale transaction by such person
participating in the exchange offer for the purpose of distributing the
Exchange Notes should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 of
Regulation S-K; and
<PAGE>
5. The preliminary prospectus included in the above-referenced
registration statement contains and the final prospectus included therein will
contain disclosures making persons participating in the exchange offer aware of
the limitations and obligations applicable to broker-dealers who participate in
the exchange offer.
Very truly yours,
IMPAC GROUP, INC.
By: /s/ David C. Underwood
---------------------------------
David C. Underwood
Chief Financial Officer
