<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File Number 333-48821
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.)
1950 North Ruby Street, Melrose Park, Illinois 60160
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (708) 344-9100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] NO
Number of shares of Series A Common Stock, $0.001 par value per share (the
"Series A Common Stock") and Series B Common Stock, $0.001 par value per share
(the "Series B Common Stock" and, together with the Series A Common Stock, the
"Common Stock") outstanding as of the close of business on November 5, 1999:
<TABLE>
<CAPTION>
Class Number of Shares Outstanding
- -------------------------------------------------- ----------------------------
<S> <C>
Series A Common Stock 165,817
Series B Common Stock 4,500
</TABLE>
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Unaudited Condensed Consolidated Statements of Income for the Three Months Ended
September 30, 1998 and 1999............................................................... 3
Unaudited Condensed Consolidated Statements of Income for the Nine Months Ended
September 30, 1998 and 1999............................................................... 4
Unaudited Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999........................................................................ 5
Unaudited Condensed Consolidated Statement of Shareholders' Equity for the Nine Months
Ended September 30, 1999.................................................................. 6
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1999............................................................... 7
Notes to Unaudited Condensed Consolidated Financial Statements.............................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 22
PART II--OTHER INFORMATION........................................................................................ 23
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
IMPAC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net sales..................................................................... $53,958 $83,604
Cost of goods sold............................................................ 39,831 58,158
------- -------
Gross profit.................................................................. 14,127 25,446
Selling, general and administrative expenses.................................. 7,623 15,176
------- -------
Operating income.............................................................. 6,504 10,270
Other income (expense):
Interest income......................................................... 88 53
Interest expense........................................................ (3,672) (5,756)
Other expense........................................................... (192) --
Loss on sale of fixed assets............................................ (45) (19)
------- -------
Income before income taxes.................................................... 2,683 4,548
Income taxes.................................................................. (1,239) (1,987)
------- -------
Net income.................................................................... $ 1,444 $ 2,561
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
IMPAC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net sales..................................................................... $105,493 $213,877
Cost of goods sold............................................................ 80,565 151,619
-------- --------
Gross profit.................................................................. 24,928 62,258
Selling, general and administrative expenses.................................. 16,705 43,727
-------- --------
Operating income.............................................................. 8,223 18,531
Other income (expense):
Interest income.......................................................... 160 111
Interest expense......................................................... (7,826) (17,095)
Other expense............................................................ (192) --
Loss on sale of fixed assets............................................. (170) (159)
-------- --------
Income before income taxes and extraordinary item............................. 195 1,388
Income taxes.................................................................. (357) (1,238)
-------- --------
Income (loss) before extraordinary item....................................... (162) 150
Extraordinary charge for early retirement of debt, (552) --
net of tax benefit of $368................................................ -------- --------
Net income (loss)............................................................. $ (714) $ 150
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
IMPAC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1998 1999
------ ---------------- ----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash............................................................................... $ 4,239 $ 3,700
Trade accounts receivable, net of allowances of $1,517 in 1998 and $1,942 in 1999.. 44,361 56,307
Other receivables.................................................................. 4,278 4,339
Inventories........................................................................ 23,982 25,002
Deferred income taxes.............................................................. 3,160 3,316
Prepaids and other current assets.................................................. 1,650 2,179
-------- --------
Total current assets............................................................ 81,670 94,843
Long-term assets:
Property, plant and equipment, net................................................. 107,669 115,023
Goodwill, net...................................................................... 163,623 160,306
Deferred financing costs, net...................................................... 10,449 10,246
Restricted cash.................................................................... 426 252
Other assets....................................................................... 2,498 2,767
-------- --------
Total assets.................................................................... $366,335 $383,437
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Bank overdraft..................................................................... $ 4,804 $ 6,035
Current maturities of long-term debt............................................... 5,487 8,149
Trade payables..................................................................... 20,289 24,488
Accrued expenses................................................................... 23,800 23,780
-------- --------
Total current liabilities....................................................... 54,380 62,452
-------- --------
Long-term debt....................................................................... 235,072 247,539
Deferred income taxes................................................................ 10,477 10,048
Other noncurrent liabilities......................................................... 823 819
-------- --------
Total liabilities............................................................... 300,752 320,858
-------- --------
Mandatorily redeemable preferred stock............................................... -- 16,619
-------- --------
Shareholders' equity:
Common stock, series A, $.001 par value; 1,000,000 shares authorized,
191,746 and 161,920 shares issued and outstanding at December 31, 1998 and
September 30, 1999, respectively................................................. 0 0
Common stock, series B, $.001 par value; 50,000 shares authorized, 4,500 shares
issued and outstanding at December 31, 1998 and September 30, 1999............... 0 0
Paid in capital.................................................................... 98,625 79,785
Warrants outstanding............................................................... -- 4,207
Carryover basis adjustment......................................................... (37,143) (37,143)
Accumulated other comprehensive income............................................. (681) (3,837)
Retained earnings.................................................................. 4,782 2,948
-------- --------
Total shareholders' equity...................................................... 65,583 45,960
-------- --------
Total liabilities & shareholders' equity........................................ $366,335 $383,437
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
IMPAC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine Months ended September 30, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------------ Carryover Other
Number of Paid-in Warrants Basis Comprehensive Retained
Shares Amount Capital Outstanding Adjustment Income Earnings Total
---------- ------ --------- ----------- ----------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998........................... 196,246 $ -- $ 98,625 $ -- $(37,143) $ (681) $ 4,782 $ 65,583
Issuance of stock warrants...... -- -- -- 4,207 -- -- -- 4,207
Issuance of common stock........ 1,887 -- 956 956
Repurchase of common stock...... (31,713) -- (19,796) -- -- -- -- (19,796)
Accretion of mandatorily
redeemable preferred stock..... -- -- -- -- -- -- (1,984) (1,984)
Foreign currency translation
adjustment..................... -- -- -- -- -- (3,156) -- (3,156)
Net income...................... -- -- -- -- -- -- 150 150
------- ------ -------- ------- -------- ------- ------- --------
Balance at September 30,
1999........................... 166,420 $ -- $ 79,785 $ 4,207 $(37,143) $(3,837) $ 2,948 $ 45,960
======= ====== ======== ======= ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
IMPAC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ (714) $ 150
Adjustments to reconcile net income (loss) to net cash provided by
operating activities--
Extraordinary charge for early retirement of debt......................... 552 --
Depreciation and amortization............................................. 5,348 14,105
Amortization of goodwill.................................................. 698 3,043
Loss on sale of fixed assets.............................................. 170 159
Deferred income taxes..................................................... (472) (585)
Changes in assets and liabilities--
Trade accounts receivable, net.......................................... (13,977) (11,946)
Inventories............................................................. (2,681) (1,020)
Trade payables and bank overdraft....................................... 5,386 5,430
Other assets and liabilities............................................ 5,761 (1,253)
--------- --------
Net cash provided by operating activities............................ 71 8,083
--------- --------
Cash flows from investing activities:
Capital expenditures........................................................ (7,966) (22,640)
Acquisition of AGI Incorporated, net of cash acquired....................... (64,163) --
Acquisition of Tinsley Robor plc, net of cash acquired...................... (161,194) --
--------- --------
Net cash used for investing activities............................... (233,323) (22,640)
--------- --------
Cash flows from financing activities:
Net change in borrowings under revolving credit line........................ 9,600 20,180
Repayment of long-term debt................................................. (29,850) (1,098)
Proceeds from issuance of long term debt.................................... 101,000 --
Proceeds from senior subordinated notes..................................... 100,000 --
Increase (decrease) in capital leases....................................... 536 (3,732)
Decrease in restricted cash................................................. 204 174
Proceeds from issuance of common stock...................................... 63,175 956
Repurchase of common stock.................................................. -- (19,796)
Proceeds from issuance of preferred stock and stock warrants................ -- 18,842
Change in deferred financing costs.......................................... (9,504) (994)
--------- --------
Net cash provided by financing activities............................ 235,161 14,532
--------- --------
Effect of exchange rate differences on cash................................... 316 (514)
--------- --------
Increase (decrease) in cash................................................... 2,225 (539)
Cash, beginning of period..................................................... 194 4,239
--------- --------
Cash, end of period........................................................... $ 2,419 $ 3,700
========= ========
Supplemental Cash Flow Information:
Interest paid............................................................... $ 6,617 $ 18,093
Income taxes paid........................................................... (13) 2,061
</TABLE>
The accompanying notes are an integral part of these financial statements
7
<PAGE>
IMPAC GROUP, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
Note 1--Basis of Presentation
The interim unaudited condensed consolidated financial statements presented
herein include the accounts of IMPAC Group, Inc. ("IMPAC") and all of its
domestic and foreign wholly-owned subsidiaries (together, the "Company"). All
intercompany transactions have been eliminated in consolidation.
These interim condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements are presented on a basis consistent with audited financial statements
and contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position, results of operations and
the changes in cash flows at September 30, 1999 and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the audited financial statements as of and for the year ended
December 31, 1998 in the Company's Form 10-K as filed with the SEC.
Note 2--Acquisitions
Acquisition of AGI Incorporated--
On March 12, 1998, KFI Holding Corporation ("KFI"), the parent company of
Klearfold, Inc. ("Klearfold"), acquired all of the common stock of AGI
Incorporated ("AGI") for $69.0 million including $54.6 million of cash and $14.4
million of newly issued common stock, plus acquisition costs. Concurrently, KFI
funded the retirement of $8.3 million of indebtedness outstanding under AGI's
credit facility immediately prior to the transaction. The acquisition was funded
by the proceeds from the issuance of $100.0 million of 101/8% Senior
Subordinated Notes due 2008 ("Senior Subordinated Notes") and $4.6 million of
new common stock. Upon consummation of this acquisition, KFI changed its name to
"IMPAC Group, Inc."
Acquisition of Tinsley Robor plc--
On September 11, 1998, the Company acquired the common stock of Tinsley
Robor plc (subsequently renamed IMPAC Europe Limited and referred to hereinafter
as "Tinsley") for $137.7 million plus acquisition costs. Concurrently, the
Company funded the retirement of $18.5 million of indebtedness outstanding under
Tinsley's credit agreements immediately prior to the transaction. The
acquisition was funded through additional borrowings of $93.7 million under the
Company's Amended and Restated Multicurrency Credit Facility dated as of July 7,
1998 (the "Credit Facility"), $58.6 million in proceeds from the sale of common
stock to the Company's existing stockholders or their affiliates and the
issuance, in aggregate, of $8.5 million of five year promissory notes to former
Tinsley shareholders.
Acquisition of Music Print B.V.--
On November 24, 1998, the Company purchased the outstanding capital stock
of Music Print B.V. (''Music Print''), a Netherlands limited liability company,
for approximately $5.3 million plus acquisition costs. Concurrently, the Company
retired approximately $0.2 million of outstanding indebtedness of Music Print
and purchased the facility in which Music Print operates for $1.3 million. The
acquisition was funded through additional revolver borrowings under the Credit
Facility.
8
<PAGE>
IMPAC GROUP, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Pro Forma for Acquisitions--
The acquisitions of AGI, Tinsley and Music Print have been accounted for as
purchases and, accordingly, their operating results have been included in the
Company's consolidated financial statements from the dates of acquisition. The
following unaudited pro forma information for the three and nine months ended
September 30, 1998 presents certain operating data calculated to reflect the
acquisitions of AGI and Tinsley and the additional borrowings incurred to fund
those acquisitions as if they occurred as of January 1, 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
------- ------- -------- --------
(Pro forma) (As reported) (Pro forma) (As reported)
Net sales.................. $72,814 $83,604 $192,429 $213,877
Net income (loss).......... (92) 2,561 (4,995) 150
</TABLE>
This pro forma data does not purport to represent what actual operating
results would have been had the acquisitions been consummated on the dates
indicated or what such results will be for any future period.
Note 3--Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
----------- ------------
<S> <C> <C>
Raw materials............................... $ 9,597 $ 9,782
Work in process and finished goods.......... 14,385 15,220
------- -------
$23,982 $25,002
======= =======
</TABLE>
Note 4--Equity
Preferred Stock Issuance and Common Stock Repurchase--
On January 12, 1999, IMPAC issued 20,000 shares of Series A Mandatorily
Redeemable Preferred Stock (the "Preferred Stock") with a face value of $20.0
million together with detachable, ten-year warrants (the "Warrants") to purchase
6,913 shares of Series A Common Stock at an exercise price of $0.01 per share,
for net proceeds of $18.8 million. IMPAC used the net proceeds from the sale of
Preferred Stock to acquire 30,088 shares of outstanding Series A Common Stock.
The Preferred Stock accrues dividends on a cumulative basis at 14% per annum for
years 1-5, 15% per annum for year 6, and either 14% or 15% per annum for years
7-10 depending on whether the dividends are paid in cash or with additional
Preferred Stock, respectively. During the first six years after issuance,
dividends on the Preferred Stock are payable solely by issuing additional shares
of Preferred Stock. The Preferred Stock accrues dividends at 24% per annum if
certain events occur, including an event of non-compliance as defined and
certain significant changes in the ownership of IMPAC. IMPAC is required to
redeem all outstanding shares of Preferred Stock on December 31, 2008 at face
value plus all accrued and unpaid dividends. IMPAC may redeem some or all
outstanding shares of Preferred Stock at an earlier date, provided, however,
that a premium of up to 10% be paid. The Preferred Stock is not redeemable at
the option of the holders of Preferred Stock. The Preferred Stock contains
covenants, among others, limiting additional indebtedness, restricted payments,
guaranties, advances to affiliates, mergers, asset sales and dispositions. The
Preferred Stock ranks senior to all classes of common stock with respect to
dividend distributions and distributions upon the liquidation or dissolution of
IMPAC.
Upon issuance of the Preferred Stock, the Warrants were valued at $4.2
million and the shares of Preferred Stock were valued at $14.6 million. The
difference between the carrying value and the face value of the Preferred Stock,
along with dividends accrued, is being accreted using the effective interest
rate method over the period the Preferred Stock is outstanding, and is recorded
directly to retained earnings.
9
<PAGE>
IMPAC GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options--
In connection with the acquisition of Tinsley, the Company offered former
Tinsley optionholders the opportunity to either exercise their existing options
in Tinsley for cash or to convert their options into options of the Company.
Pursuant to this offer, on February 27, 1999, the Company granted options to
purchase approximately 3,457 shares of Series B Common Stock of the Company at a
weighted average exercise price of $303. Additionally, on March 31, 1999 and
April 29, 1999, the Company granted options to purchase approximately 8,900 and
8,299 shares, respectively, of Series A Common Stock of the Company at an
exercise price of $513, the estimated fair market value at that date, to certain
key employees. The options to purchase Series A Common Stock vest over a four-
year period.
Other Common Stock Transactions--
On June 11, 1999, the Company purchased approximately 73 shares of Series A
common stock from a former employee for $37. On July 30, 1999, IMPAC issued
approximately 1,887 shares of Series A Common Stock to certain key employees and
directors of the Company for net proceeds of $956. IMPAC used the net proceeds
to acquire approximately 1,552 shares of outstanding Series A Common Stock.
Note 5--Comprehensive Income
Prior to the acquisition of Tinsley, the Company had no amounts to report
as other comprehensive income pursuant to Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The Company's
comprehensive income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss)............................... $1,444 $2,561 $ (714) $ 150
Foreign currency translation adjustment......... 2,531 6,739 2,531 (3,156)
------ ------ ------ -------
Comprehensive income (loss)..................... $3,975 $9,300 $1,817 $(3,006)
====== ====== ====== =======
</TABLE>
Note 6--Segment Information
The Company operates in one business segment, providing specialty packaging
for various consumer products markets. During the third quarter of 1998, the
Company expanded its specialty packaging operations geographically to include
the United Kingdom and Europe. The following table presents sales and other
financial information for each geographic region as of and for the nine months
ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Operating Identifiable Operating Identifiable
Geographic Regions Sales Income Assets Sales Income Assets
- ---------------------------------- ---------- --------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
United States................... $ 98,927 $7,610 $150,189 $124,362 $13,614 $158,375
U.K. and Europe................. 6,566 807 207,441 89,534 7,592 215,119
-------- ------ -------- -------- ------- --------
Total geographic segments....... 105,493 8,417 357,630 213,896 21,206 373,494
Elimination of sales............ -- -- -- (19) -- --
Unallocated corporate expense... -- (194) -- -- (2,675) --
Corporate assets................ -- -- 10,086 -- -- 9,943
-------- ------ -------- -------- ------- --------
Consolidated totals............. $105,493 $8,223 $367,716 $213,877 $18,531 $383,437
======== ====== ======== ======== ======= ========
</TABLE>
Note 7--Guarantors and Financial Information
The following unaudited condensed consolidating financial information is
presented for purposes of complying with the reporting requirements of the
subsidiaries of IMPAC that have guaranteed IMPAC's obligations with
10
<PAGE>
IMPAC GROUP, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respect to the Senior Subordinated Notes (the "Subsidiary Guarantors"). The
Subsidiary Guarantors are directly or indirectly wholly owned subsidiaries of
IMPAC and have fully and unconditionally guaranteed the Senior Subordinated
Notes on a joint and several basis. During the first quarter of 1999, certain
foreign subsidiaries of the Company that were formed or acquired in connection
with the acquisition of Tinsley provided full and unconditional guarantees on
the Senior Subordinated Notes and are included in the unaudited condensed
consolidating financial information below as Subsidiary Guarantors. The Company,
at its discretion, controls the receipt of dividends or other payments from its
domestic and foreign subsidiaries subject in the case of certain foreign
subsidiaries to limitations that may be imposed under the laws of the applicable
jurisdictions of organization. These limitations are not considered to be
material to the Company as a whole. Separate financial statements and other
disclosures with respect to the Subsidiary Guarantors are not presented because
the Company believes that such financial statements and other information would
not provide additional information that is material to investors. The unaudited
condensed consolidating financial information presents unaudited condensed
consolidating financial statements as of September 30, 1999 and for the nine
months ended September 30, 1999 of:
(a) IMPAC on a parent company only basis ("IMPAC Parent"), carrying its
investments in subsidiaries under the equity method;
(b) the Subsidiary Guarantors, which include IMPAC's domestic subsidiaries
AGI Incorporated, Klearfold, Inc., KF-International, Inc., and KF-Delaware,
Inc. and IMPAC's foreign subsidiaries IMPAC Europe Holdings Limited,
Levelprompt Limited, IMPAC Europe Limited, James Upton Limited, Tinsley Robor
Labels Limited, Tinsley Robor Sales Limited, Sonicon Limited, Tophurst
Properties Limited and Printing Resources Limited, carrying its investments in
subsidiaries under the equity method;
(c) the subsidiaries of IMPAC that have not guaranteed IMPAC's obligations
with respect to the Senior Subordinated Notes, which include IMPAC's foreign
subsidiaries Van de Steeg Packaging B.V., James Upton Holding B.V.,
James Upton B.V., James Upton GmbH and Music Print B.V. (together, the
"Non-Guarantor Subsidiaries");
(d) elimination entries necessary to consolidate IMPAC Parent and its
subsidiaries, and
(e) IMPAC on a consolidated basis ("IMPAC Consolidated").
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Non-
IMPAC Subsidiary Guarantor IMPAC
Parent Guarantors Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ -- $174,350 $40,620 $(1,093) $213,877
Cost of goods sold................................... -- 122,613 30,099 (1,093) 151,619
------- -------- ------- ------- --------
Gross profit......................................... -- 51,737 10,521 -- 62,258
Selling, general and administrative expenses......... 2,675 34,977 6,075 -- 43,727
------- -------- ------- ------- --------
Operating income (loss).............................. (2,675) 16,760 4,446 -- 18,531
Equity earnings in subsidiaries...................... 3,097 2,469 -- (5,566) --
Interest expense, net................................ (2,225) (14,045) (873) -- (17,143)
------- -------- ------- ------- --------
Income (loss) before income taxes.................... (1,803) 5,184 3,573 (5,566) 1,388
Income (taxes) benefit............................... 1,953 (2,087) (1,104) -- (1,238)
------- -------- ------- ------- --------
Net income (loss).................................... $ 150 $ 3,097 $ 2,469 $(5,566) $ 150
======= ======== ======= ======= ========
</TABLE>
11
<PAGE>
IMPAC GROUP, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Non-
IMPAC Subsidiary Guarantor IMPAC
Parent Guarantors Subsidiaries Eliminations Consolidated
------------ ------------ ------------ -------------- ------------
Current assets:
<S> <C> <C> <C> <C> <C>
Cash....................................... $ -- $ 554 $ 3,146 $ -- $ 3,700
Trade accounts receivable, net............. -- 48,230 8,077 -- 56,307
Intercompany receivables................... 26,104 41,218 5,835 (73,157) --
Inventories................................ -- 22,825 2,177 -- 25,002
Other current assets....................... 118 9,018 698 -- 9,834
-------- -------- ------- --------- --------
Total current assets.................... 26,222 121,845 19,933 (73,157) 94,843
-------- -------- ------- --------- --------
Property, plant and equipment, net......... -- 88,818 26,205 -- 115,023
Goodwill, net.............................. -- 139,420 20,886 -- 160,306
Intercompany receivables................... 167,811 17,142 -- (184,953) --
Investment in subsidiaries................. 82,492 43,524 -- (126,016) --
Other assets............................... 9,827 2,538 900 -- 13,265
-------- -------- ------- --------- --------
Total assets............................ $286,352 $413,287 $67,924 $(384,126) $383,437
======== ======== ======= ========= ========
Current liabilities:
Current maturities of long-term debt....... $ 3,825 $ 3,218 $ 1,106 $ -- $ 8,149
Trade payables and bank overdraft.......... 185 24,724 5,614 -- 30,523
Intercompany payables...................... -- 38,644 34,513 (73,157) --
Accrued expenses........................... 283 19,394 4,103 -- 23,780
-------- -------- ------- --------- --------
Total current liabilities............... 4,293 85,980 45,336 (73,157) 62,452
-------- -------- ------- --------- --------
Long-term debt............................... 219,480 25,621 2,438 -- 247,539
Other noncurrent liabilities................. -- 10,867 -- -- 10,867
Intercompany debt............................ -- 170,455 14,497 (184,952) --
-------- -------- ------- --------- --------
Total liabilities.......................... 223,773 292,923 62,271 (258,109) 320,858
-------- -------- ------- --------- --------
Mandatorily redeemable preferred stock....... 16,619 -- -- -- 16,619
-------- -------- ------- --------- --------
Total shareholders' equity................... 45,960 120,364 5,653 (126,017) 45,960
-------- -------- ------- --------- --------
Total liabilities and shareholders' equity... $286,352 $413,287 $67,924 $(384,126) $383,437
======== ======== ======= ========= ========
</TABLE>
12
<PAGE>
IMPAC GROUP, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Non-
IMPAC Subsidiary Guarantor IMPAC
Parent Guarantors Subsidiaries Eliminations Consolidated
------------- ------------- ------------- -------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net cash provided by (used for) operating
activities.................................... $ (3,820) $ 3,958 $ 7,945 $ -- $ 8,083
-------- -------- ------- -------------- --------
Cash flows from investing activities:
Capital expenditures........................... -- (14,003) (8,637) -- (22,640)
-------- -------- ------- -------------- --------
Cash flows from financing activities:
Net change in borrowings under revolving
credit line.................................. 20,180 -- -- -- 20,180
Repurchase of common stock..................... (19,819) -- -- -- (19,819)
Proceeds from issuance of preferred stock
and stock warrants........................... 18,842 -- -- -- 18,842
Loans and advances (to) from related
parties...................................... (14,681) 13,937 744 -- --
Other financing activities..................... (300) (3,231) (1,140) -- (4,671)
-------- -------- ------- -------------- --------
Net cash provided by financing activities...... 4,222 10,706 (396) -- 14,532
-------- -------- ------- -------------- --------
Effect of exchange rate differences on
cash............................................ (721) (1,494) 1,701 (514)
-------- -------- ------- -------------- --------
Increase (decrease) in cash...................... (319) (833) 613 -- (539)
Cash, beginning of period........................ 319 1,387 2,533 -- 4,239
-------- -------- ------- -------------- --------
Cash, end of period.............................. $ -- $ 554 $ 3,146 $ -- $ 3,700
======== ======== ======= ============== ========
</TABLE>
Note 8 - Subsequent Event
On November 2, 1999, the Company acquired all of the common stock of
Thamesdown Colour Limited ("Thamesdown"), a U.K. based printer, for
approximately $10.8 million plus acquisition costs. The acquisition was
initially funded through $8.4 million of additional revolver borrowings under
the Credit Facility and the issuance of $2.4 million of Series A Common Stock to
the former Thamesdown shareholders. The Company also assumed approximately $3.0
million of capital leases. Thamesdown provides high-end commercial printing
services specializing in the production of promotional materials.
13
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
On March 12, 1998, KFI Holding Corporation ("KFI"), the parent company of
Klearfold, Inc. ("Klearfold"), completed both its acquisition of AGI
Incorporated ("AGI") and also the issuance of the Company's 10 1/8% Senior
Subordinated Notes due 2008 ("Senior Subordinated Notes"). Upon consummation of
these transactions KFI changed its corporate name to IMPAC Group, Inc.
("IMPAC"). On September 11, 1998, IMPAC acquired substantially all of the
outstanding capital stock of Tinsley Robor plc ("Tinsley"). IMPAC funded the
acquisition of Tinsley through borrowings under the Amended and Restated
Multicurrency Credit Facility dated as of July 7, 1998 (the "Credit Facility"),
proceeds from the sale of common stock to IMPAC's existing stockholders or their
affiliates and the issuance of five year promissory notes to former Tinsley
shareholders. References below to the "Company" mean IMPAC Group, Inc. and its
consolidated subsidiaries.
As a result of these transactions, the Company's historical consolidated
financial statements for the three and nine months ended September 30, 1999 and
1998 are not comparable due to the inclusion in the consolidated financial
statements of AGI's and Tinsley's assets, liabilities and operating results from
the dates of acquisition. Management believes that the pro forma results of
operations for the three and nine months ended September 30, 1998, which assume
that the acquisitions of AGI and Tinsley and the borrowings incurred to fund
those acquisitions occurred as of January 1, 1998, present a more meaningful
basis from which to compare the Company's historical operating results for the
three and nine months ended September 30, 1999. As such, the discussion and
analysis of the historical results of operations and financial position for the
three and nine months ended September 30, 1999 and 1998 are supplemented with
the discussion and analysis of the results of operations and financial position
for the historical three and nine months ended September 30, 1999 compared to
the pro forma three and nine months ended September 30, 1998.
IMPAC is a holding company with no material assets or operations other than
its investments in its direct and indirect wholly owned subsidiaries. All of the
Company's domestic subsidiaries and certain foreign subsidiaries of the Company
have guaranteed the Senior Subordinated Notes on a full, unconditional, joint
and several basis, subject to the subordination provisions in the related
Indenture (the "Subsidiary Guarantors"). Separate financial statements and other
disclosures of the Subsidiary Guarantors have not been presented in this Form
10-Q because the Company believes that such financial statements and other
information would not provide additional information that is material to
investors. However, the condensed consolidating financial information of IMPAC,
the Subsidiary Guarantors and the subsidiaries of IMPAC that have not provided
guarantees on the Senior Subordinated Notes have been presented in Note 7 of the
Unaudited Condensed Consolidated Financial Statements for purposes of complying
with the reporting requirements.
Overview
The Company is an international designer, manufacturer and marketer of high-
end, value-added specialty packaging for various consumer products markets
including entertainment, cosmetics and personal care. The Company offers
innovative specialty packaging solutions for customers that seek to
differentiate their products in the consumer marketplace. In addition, the
Company utilizes a broad range of paper, paperboard and transparent rigid
plastic materials for its products.
Pro Forma Results of Operations
Historical Three Months Ended September 30, 1999 Compared to Pro Forma Three
Months Ended September 30, 1998
The following table sets forth certain unaudited income statement data
(expressed as a percentage of net sales) for the pro forma three months ended
14
<PAGE>
September 30, 1998 (the "1998 period") and the historical three months ended
September 30, 1999 (the "1999 period"). The unaudited income statement data
for the three months ended September 30, 1998 are presented on a pro forma basis
as if the acquisition of Tinsley and the borrowings incurred to fund that
acquisition occurred as of January 1, 1998.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1998 1999
----------- ------------
Income Statement Data: (Pro forma) (Historical)
<S> <C> <C>
Net sales....................................................... 100.0% 100.0%
Cost of goods sold.............................................. 73.9% 69.6%
----- -----
Gross profit.................................................... 26.1% 30.4%
Selling, general and administrative expenses.................... 17.2% 18.2%
----- -----
Operating income................................................ 8.9% 12.2%
Interest expense, net........................................... 7.4% 6.8%
Other expense................................................... 0.5% 0.0%
----- -----
Income before income taxes...................................... 1.0% 5.4%
Income taxes.................................................... 0.9% 2.3%
----- -----
Net income...................................................... 0.1% 3.1%
===== =====
</TABLE>
Net Sales for the 1999 period were $83.6 million compared to $72.8 million for
the 1998 period, an increase of 14.8%. This increase was due to a $7.1 million
increase in entertainment packaging, a $2.9 million increase in cosmetics
packaging, and a $0.8 million increase in other consumer products packaging.
The entertainment packaging increase was due primarily to an increase in music
packaging sales resulting from improved market penetration relating to the
start-up of the Company's Grover, North Carolina facility in April 1998 and the
acquisition of Music Print in November 1998, as well as strong growth in the
sales of multimedia packaging to the Company's U.K. and European customers,
partially offset by decreased volume in special video packaging sales. The
increase in cosmetics packaging relates primarily to increased volume to the
Company's existing customers resulting from improved sales and marketing
efforts.
Gross Profit for the 1999 period was $25.4 million compared to $19.0 million
for the 1998 period, an increase of 33.7%. The increase in gross profit was due
to the sales increase noted above and an increase in gross margin. The increase
in gross margin from 26.1% to 30.4% results from improved capacity utilization,
particularly at the Company's Grover, North Carolina facility, which was in a
start-up phase in 1998, and at its Salzbury, Austrian operation, and process
improvements at the Company's U.S. plastic packaging operations and its
Birmingham, U.K. facility.
Selling, General and Administrative Expenses for the 1999 period were $15.2
million compared to $12.5 million for the 1998 period, an increase of 21.0%.
SG&A as a percentage of sales increased from 17.2% to 18.2%. The increase in
SG&A as a percentage of sales was due primarily to increased costs associated
with the Company's integration to a new enterprise resource planning ("ERP")
system and increases in anticipated payouts under various compensation programs
tied to sales and profitability.
Operating Income was $10.3 million for the 1999 period and $6.5 million for
the 1998 period due to the factors discussed above.
Net Interest Expense for the 1999 period was $5.7 million compared to $5.4
million for the 1998 period, an increase of 5.9%. The increase is due primarily
to an increase in revolver borrowings under the Credit Facility.
Income Taxes for the 1999 period were $2.0 million compared to $0.6 million
for the 1998 period. The Company's effective tax rates for the periods exceeded
the U.S. federal statutory rate primarily due to the effect of non-deductible
goodwill amortization of approximately $1.0 million in each period.
15
<PAGE>
Net Income for the 1999 period was $2.6 million compared to $0.1 million for
the 1998 period due to the factors discussed above.
Historical Nine Months Ended September 30, 1999 Compared to Pro forma Nine
Months Ended September 30, 1998
The following table sets forth certain unaudited income statement data
(expressed as a percentage of net sales) for the pro forma nine months ended
September 30, 1998 (the "1998 period") and the historical nine months ended
September 30, 1999 (the "1999 period"). The unaudited income statement data for
the nine months ended September 30, 1998 are presented on a pro forma basis as
if the acquisitions of AGI and Tinsley and the borrowings incurred to fund those
acquisitions occurred as of January 1, 1998.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1999
------------ ------------
Income Statement Data: (Pro forma) (Historical)
<S> <C> <C>
Net sales....................................................... 100.0% 100.0%
Cost of goods sold.............................................. 74.1% 70.9%
----- -----
Gross profit.................................................... 25.9% 29.1%
Selling, general and administrative expenses.................... 19.9% 20.4%
----- -----
Operating income................................................ 6.0% 8.7%
Interest expense, net........................................... 8.4% 7.9%
Other expense................................................... 0.2% 0.1%
----- -----
Income (loss) before income taxes............................... (2.6%) 0.7%
Income taxes (benefit).......................................... (0.4%) 0.6%
----- -----
Net income (loss)............................................... (2.2%) 0.1%
===== =====
</TABLE>
Net Sales for the 1999 period were $213.9 million compared to $192.4 million
for the 1998 period, an increase of 11.1%. This increase was due to a $15.2
million increase in entertainment packaging and an $8.0 million increase in
cosmetics packaging, partially offset by a $1.7 million decrease in other
consumer products packaging. The entertainment packaging increase was due
primarily to an increase in music packaging sales resulting from improved market
penetration relating to the start-up of the Company's Grover, North Carolina
facility in April 1998 and the acquisition of Music Print in November 1998, as
well as strong growth in the sales of multimedia packaging to the Company's U.K.
and European customers. The increase in cosmetics packaging relates primarily
to increased volume to the Company's existing customers resulting from improved
sales and marketing efforts. The decrease in other consumer products packaging
resulted primarily from lower volume in sales of label applications to the
Company's U.K. customers.
Gross Profit for the 1999 period was $62.3 million compared to $49.8 million
for the 1998 period, an increase of 25.1%. The increase in gross profit was due
to the sales increase noted above and an increase in gross margin. The increase
in gross margin from 25.9% to 29.1% relates predominantly to the realization of
improved efficiencies as a result of the Company's Grover, North Carolina
facility being fully operational in 1999 as compared to its start-up phase in
1998.
Selling, General and Administrative Expenses for the 1999 period were $43.7
million compared to $38.2 million for the 1998 period, an increase of 14.5%.
SG&A as a percentage of sales increased from 19.8% to 20.4%. The increase in
SG&A as a percentage of sales was due primarily to increased costs associated
with the Company's integration to the new ERP system and increases in
anticipated payouts under various compensation programs tied to sales and
profitability.
Operating Income was $18.5 million for the 1999 period and $11.6 million for
the 1998 period due to the factors discussed above.
16
<PAGE>
Net Interest Expense for the 1999 period was $17.0 million compared to $16.2
million for the 1998 period, an increase of 5.2%. The increase is due primarily
to an increase in revolver borrowings under the Credit Facility.
Income Taxes for the 1999 period were $1.2 million compared to a tax benefit
of $0.7 million for the 1998 period. The Company's effective tax rate for the
1999 period exceeded the U.S. federal statutory rate primarily due to the effect
of non-deductible goodwill amortization of approximately $3.0 million. The
Company's effective rate of tax benefit for the 1998 period was less than the
U.S. federal statutory rate primarily due to the effect of non-deductible
goodwill amortization of approximately $3.0 million.
Net Income for the 1999 period was $0.2 million compared to a net loss of
$4.2 million for the 1998 period due to the factors discussed above. The pro
forma net loss for the 1998 period does not include an extraordinary charge of
$0.6 million, net of tax, related to the early extinguishment of debt.
Historical Results of Operations
Historical Three Months Ended September 30, 1999 Compared to Historical Three
Months Ended September 30, 1998
The results of operations for the three months ended September 30, 1998 (the
"1998 period") include the results of Tinsley from September 12, 1998. The
results of operations for the three months ended September 30, 1999 (the "1999
period") include the results of Tinsley for the entire period. The Company's
growth in net sales, gross profit and operating income during the 1999 period as
compared to the 1998 period relates primarily to the effect of the Tinsley
acquisition. Net interest expense increased from $3.6 million in the 1998 period
to $5.7 million in the 1999 period primarily due to the additional borrowings
incurred to fund the acquisition of Tinsley. Income taxes for the 1999 period
were $2.0 million compared to $1.2 million for the 1998 period. The Company's
effective tax rates for the periods exceeded the U.S. federal statutory rate
primarily due to the effect of non-deductible goodwill amortization of
approximately $1.0 million and $0.4 million in 1999 and 1998, respectively. Net
income for the 1999 period was $2.6 million compared to $1.4 million during the
1998 period due to the factors discussed above.
Historical Nine Months Ended September 30, 1999 Compared to Historical Nine
Months Ended September 30, 1998
The results of operations for the nine months ended September 30, 1998 (the
"1998 period") include the results of AGI from March 13, 1998 and the results of
Tinsley from September 12, 1998. The results of operations for the nine months
ended September 30, 1999 (the "1999 period") include the results of AGI and
Tinsley for the entire period. The Company's growth in net sales, gross profit
and operating income during the 1999 period as compared to the 1998 period
relates primarily to the effect of these acquisitions. Net interest expense
increased from $7.7 million in the 1998 period to $17.0 million in the 1999
period primarily due to the additional borrowings incurred to fund the
acquisitions of AGI and Tinsley. Income taxes for the 1999 period were $1.2
million compared to $0.4 million for the 1998 period. The Company's effective
tax rates for the periods exceeded the U.S. federal statutory rate primarily due
to the effect of non-deductible goodwill amortization of approximately $3.0
million and $0.7 million in 1999 and 1998, respectively. Net income for the 1999
period was $0.2 million compared to a net loss of $0.7 million during the 1998
period due to the factors discussed above. The net loss for the 1998 period
includes an extraordinary charge of $0.6 million, net of tax, related to the
early extinguishment of debt.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended September
30, 1999 (the "1999 period") was $8.1 million compared to $0.1 million for the
nine months ended September 30, 1998 (the "1998 period"). Income from operations
before non-cash charges increased to $16.9 million from $5.6 million primarily
due to the acquisitions of AGI and Tinsley. In the 1999 period, income from
operations before non-cash charges of $16.9 million, proceeds of $18.8 million
from the issuance of preferred stock referred to below, the issuance of $1.0
million of Series A Common Stock and $20.2 million of revolver borrowings were
used to fund the repurchase of Series A
17
<PAGE>
Common Stock, $22.6 million of capital expenditures, an $8.8 million increase in
working capital requirements, a $3.7 million decrease in capital leases, the
repayment of $1.1 million of bank borrowings and $1.0 million of debt issuance
costs. In the 1998 period, income from operations before non-cash changes of
$5.6 million, the issuance of the Senior Subordinated Notes and Series A Common
Stock, the issuance of $110.6 million of borrowings under the Credit Facility
and a $0.5 million increase in capital leases were used to fund the acquisitions
of AGI and Tinsley, the repayment of $29.9 million of bank borrowings, $9.5
million of debt issuance costs, a $5.5 million increase in working capital
requirements and $8.0 million of capital expenditures.
The Company's primary cash requirements historically have related to capital
expenditures, working capital and debt service. The Company has historically
funded these requirements through internally generated cash flow, borrowings
under bank credit arrangements and the issuance of industrial revenue bonds. The
Company currently expects to spend approximately $30.0 million on capital
expenditures in 1999. The Company expects to fund its capital expenditures and
other working capital requirements in 1999 through internally generated cash
flow and borrowings under the Credit Facility.
On January 12, 1999, IMPAC issued 20,000 shares of Series A Mandatorily
Redeemable Preferred Stock (the "Preferred Stock") with a face value of $20.0
million together with Warrants to purchase 6,913 shares of Series A Common Stock
at an exercise price of $0.01 per share, for net proceeds of $18.8 million.
IMPAC used the net proceeds from the sale of Preferred Stock to acquire 30,088
shares of outstanding Series A Common Stock. The Preferred Stock accrues
dividends on a cumulative basis at 14% per annum for years 1-5, 15% per annum
for year 6, and either 14% or 15% per annum for years 7-10 depending on whether
the dividends are paid in cash or with additional Preferred Stock, respectively.
During the first six years after issuance, dividends on the Preferred Stock are
payable solely by issuing additional shares of Preferred Stock. The Preferred
Stock accrues dividends at 24% per annum if certain events occur, including an
event of non-compliance as defined and certain significant changes in the
ownership of IMPAC. IMPAC is required to redeem all outstanding shares of
Preferred Stock on December 31, 2008 at face value plus all accrued and unpaid
dividends. IMPAC may redeem some or all outstanding shares of Preferred Stock at
an earlier date, provided, however, that a premium of up to 10% be paid. The
Preferred Stock is not redeemable at the option of the holders of Preferred
Stock. The Preferred Stock contains covenants, among others, limiting additional
indebtedness, restricted payments, guaranties, advances to affiliates, mergers,
asset sales and dispositions. The Preferred Stock ranks senior to all classes of
Common Stock with respect to dividend distributions and distributions upon the
liquidation or dissolution of IMPAC.
On November 2, 1999, the Company acquired all of the common stock of
Thamesdown Colour Limited ("Thamesdown"), a U.K. based printer, for
approximately $10.8 million plus acquisition costs. The acquisition was
initially funded through $8.4 million of additional revolver borrowings under
the Credit Facility and the issuance of $2.4 million of Series A Common Stock to
the former Thamesdown shareholders. The Company also assumed approximately $3.0
million of capital leases.
IMPAC is a holding company with no operations of its own. The Company's
ability to make required interest payments on the Senior Subordinated Notes
depends upon its ability to receive funds from its domestic and foreign
subsidiaries. The Company, at its discretion, controls the receipt of dividends
or other payments from its domestic and foreign subsidiaries, subject in the
case of certain foreign subsidiaries to limitations that may be imposed under
the laws of the applicable jurisdictions of organization. These limitations are
not considered to be material to the Company as a whole. There are no
contractual restrictions, under the Credit Facility or otherwise, upon the
ability of the Subsidiary Guarantors to make distributions or pay dividends,
directly or indirectly, to IMPAC.
Since its acquisition of Tinsley, the Company is exposed to currency exchange
rate risk with respect to its net assets, transactions and the related net
income denominated in U.K. Pounds Sterling, Dutch Guilders, Irish Punts,
Austrian Shillings and the Euro. Business activities in various currencies
expose the Company to the risk that the eventual net dollar cash inflows
resulting from transactions with foreign customers and suppliers denominated in
foreign currencies may be adversely affected by changes in currency exchange
rates.
18
<PAGE>
Adoption of New Accounting Standard
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
is effective for fiscal years beginning after June 15, 2000. Due to the recent
release and complexity of this new standard, an assessment of the impact it will
have on the financial position or results of operations has not been completed.
Year 2000 Issues
The information provided below constitutes "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act and is
subject to the terms thereof. The following description of the Company's
remediation process is meant for information purposes and not as a form of
covenant, warranty, representation or guarantee of any kind. In addition, many
of the Company's year 2000-related efforts are dependent upon third parties that
are effectively beyond the Company's control.
General
As many computer systems and other equipment with embedded chips or processors
use only two digits to represent the year, they may be unable to accurately
process certain data during or after the year 2000. This is commonly known as
the year 2000 ("Y2K") issue. The Y2K issue can arise at any point in an entity's
supply, manufacturing, processing, distribution and financial chains.
IMPAC and its wholly owned domestic subsidiaries, AGI and Klearfold, are
undertaking an initiative entitled IMPAC 2000 (the "Domestic Project"). The
Domestic Project is intended to change the entire business systems
infrastructure. The Domestic Project is divided into 4 major areas: (i)
Infrastructure Systems, (ii) Applications Software, (iii) Manufacturing
Equipment, and (iv) External Stakeholders. At the present time, the
Infrastructure Systems portion of the project is believed to be complete as it
pertains to Y2K readiness. This includes personal computers, local and wide area
networks and telephony. In addition, desktop environments have been standardized
and all such applications are now believed to be Y2K compliant. At present, AGI
and Klearfold operate different Applications Software, both of which the Company
believes are Y2K compliant. These systems will eventually be harmonized with the
implementation of the ORACLE ERP system. The Company has retained an outside
consultant to assist in the integration of the business and systems processes
into an ORACLE ERP solution. With respect to AGI, this implementation is
approximately 85 percent complete with full implementation expected during the
first half of the year 2000. The implementation of ORACLE at Klearfold will take
place after the year 2000. With respect to the Manufacturing Equipment portion
of the project, a comprehensive review of Manufacturing Equipment has been
completed and the Company believes that substantially all significant equipment
is Y2K compliant. With respect to its External Stakeholders, the Company has
received assurances from its significant vendors and customers confirming Y2K
readiness.
The Company believes that Tinsley has substantially addressed the Y2K issue,
with Tinsley's information technology ("IT") being in compliance with Y2K.
Tinsley implemented the SAGE accounting application for its UK subsidiaries in
the second half of 1998. Tinsley's non-UK subsidiaries operate stand-alone
accounting systems which the Company believes are Y2K compliant. In this
regard, a new Y2K compliant accounting system was installed in the Austrian
subsidiary during the third quarter of 1999. In addition, the Company installed
a Y2K compliant patch in its IMPRINT management information system, the testing
of which is currently being finalized. With regard to non-IT issues, Tinsley has
contacted vendors who have provided assurances that the relevant systems are in
compliance.
Costs
The total cost associated with required modifications to business systems is
not expected to be material to the financial position of the Company. The
estimated cost of the Domestic Project, excluding the costs of the ORACLE
19
<PAGE>
implementation at Klearfold, is $10.5 million, of which $3.3 million was spent
through December 31, 1998 and $5.4 million was spent during the first three
quarters of 1999. The residual amount of $1.8 million is to be spent during the
fourth quarter of 1999 and the year 2000. The Company will fund the Domestic
Project, along with its other capital expenditures, with internally generated
cash flows along with borrowings under the Credit Facility, as necessary.
Risks
The failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failures could materially and adversely affect the results of operations,
liquidity and financial condition of the Company. Due to the general uncertainty
inherent with regards to Y2K issues, resulting in part from the uncertainty of
the Y2K readiness of third-party suppliers and customers, the Company is unable
to predict what consequences any Y2K failures would have on its results of
operations, liquidity or financial condition or on the most reasonably likely
worst case scenario. The domestic and foreign projects will continue to
significantly reduce the level of uncertainty about the Y2K problem and, in
particular, about the Y2K compliance and readiness of its material suppliers.
The Company believes that, with the implementation of the new business systems
and completion of the projects listed above as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
Euro
The European Community introduced a common European monetary unit, called the
Euro, effective January 1, 1999. The UK, where Tinsley is headquartered, has
opted not to adopt the Euro. However, certain subsidiary operations are in
countries such as The Netherlands, the Republic of Ireland and Austria, which
participated in its introduction. The new SAGE system implemented at Tinsley is
capable of handling multicurrency transactions, with the Euro being a currency
in its portfolio. The Company does not believe that the introduction of the Euro
will have a material adverse effect on the results of its operations. See
Liquidity and Capital Resources for further discussion of currency and exchange
rate issues.
Cautionary Note
This Form 10-Q may contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, but not limited to
statements regarding: the redemption by the Company of the Preferred Stock; the
funding of and the projected amount of capital expenditures in 1999; the
development by the Company of a currency hedging program; the impact of the new
FASB statement; the Company's projects with respect to Y2K issues and the
possibility of interruptions caused therefrom; expectations regarding the
Company's Y2K compliance; the effect of the introduction of the Euro; the
Company's ability to incur substantial additional indebtedness; and, certain
other statements identified or qualified by words such as "likely", "will",
"suggests", "may", "would", "could", "should", "expects", "anticipates",
"estimates", "plans", "projects", "believes", or similar expressions (and
variants of such words or expressions). Investors are cautioned that forward-
looking statements are inherently uncertain. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties, including,
without limitation, those described below:
. In connection with the consummation of the acquisitions of AGI and
Tinsley, the Company incurred a significant amount of indebtedness and,
as a result, the Company is highly leveraged. Subject to certain
covenants, the Company is permitted to incur substantial additional
indebtedness in the future.
. 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 Senior Subordinated 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.
20
<PAGE>
. The Senior Subordinated Notes and the related subsidiary guarantees (the
"Subsidiary Guarantees") are subordinated in right of payment to all
current and future senior debt of the Company and the Subsidiary
Guarantors. The Senior Subordinated Notes indenture (the "Indenture")
permits the incurrence of substantial additional indebtedness, including
senior debt, by the Company and its subsidiaries in the future.
. IMPAC has no operations of its own and derives substantially all of its
revenue from its subsidiaries. Holders of indebtedness and trade
creditors of subsidiaries of IMPAC 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 IMPAC.
. Several of IMPAC's foreign subsidiaries are not required to deliver a
guarantee with respect to the Senior Subordinated Notes. Additionally,
IMPAC is allowed under the Indenture to acquire or create additional
foreign subsidiaries that may not be required to deliver a guarantee with
respect to the Senior Subordinated Notes.
. Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, the Senior Subordinated
Notes or the Subsidiary Guarantees, could be voided, or claims in respect
of the Senior Subordinated Notes or the Subsidiary Guarantees could be
subordinated to all other debts of IMPAC or any Subsidiary Guarantor. In
addition, the payment of interest and principal by IMPAC or any
Subsidiary Guarantor pursuant to the Senior Subordinated 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 IMPAC or any Subsidiary
Guarantor.
. Upon a change of control, as defined in the Indenture, the Company will
be required to offer to repurchase all outstanding Senior Subordinated
Notes at 101% of the principal amount thereof plus accrued and unpaid
interest and liquidated damages, if any, to the date of repurchase.
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 Senior Subordinated Notes tendered or that restrictions in
the Credit Facility will allow the Company to make such required
repurchases. Furthermore, upon certain ownership changes, the dividend
rate on the Preferred Stock will increase to 24%.
. Prior to March 1998, the Company had no prior history as a combined
entity and its operations had not previously been managed on a combined
basis. Prior to the combination of AGI and Klearfold in March, 1998 and
the acquisition of Tinsley in September, 1998, AGI, Klearfold and Tinsley
were operated as separate entities. The 1998 historical and pro forma
financial information presented in this Form 10-Q may not necessarily be
indicative of the results that would have been attained had the Company
operated on a combined basis.
. A substantial portion of the Company's business is now conducted in
international markets. Risks inherent in foreign operations, such as
fluctuations in foreign currency exchange rates and changes in social,
political and economic conditions, could materially adversely affect the
Company's business.
. 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. In addition to
technical and new product changes that could affect demand for the
Company's products in traditional distribution channels, demand for the
Company's products could also be materially affected by change in retail
distribution channels, such as the anticipated growth in electronic
commerce distribution channels in which products are sold directly to
customers over the Internet. The Company's success will depend, in part,
upon its continued ability to manufacture products that meet changing
customer needs and industry-wide shifts, 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.
21
<PAGE>
. 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.
. The Company acquired Music Print in November, 1998, and Thamesdown in
November, 1999, and it may continue to pursue selective acquisitions
within the specialty packaging and printing industry. In the event that
such acquisitions have occurred or 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.
. Many of the Company's products are sold in highly competitive markets in
the United States, the U.K. and Europe. 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.
. 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. In addition to the effects of
regulation, the Company's business may also be affected by environmental
concerns of consumers with respect to packaging.
. The Company's majority stockholder or its affiliates and certain members
of senior management own substantially all of the outstanding voting
stock of IMPAC, which is the sole stockholder of AGI, Klearfold and
Tinsley 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, Klearfold and Tinsley.
. The Company's ability to successfully address its Y2K issues will depend
on the availability of resources, the Company's ability to discover and
correct those potential Y2K problems which could have a serious impact on
specific Company facilities and the ability of vendors to bring their
computer systems and other equipment into Y2K compliance.
Risk factors, cautionary statements and other conditions that could cause
actual results to be adversely affected are contained in the Company's filings
with the Securities and Exchange Commission, including the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 (the "1998 Annual
Report") and the foregoing discussion should be read in conjunction with the
Cautionary Note section of Management's Discussion and Analysis of Financial
Condition and Results of Operations of the 1998 Annual Report.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk exposures
since December 31, 1998.
22
<PAGE>
PART II--OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 30, 1999, IMPAC Group, Inc. (the "Company") issued to certain of
its employee and directors, for an aggregate consideration of approximately
$956,000, an aggregate of approximately 1,887 shares of Series A Common Stock,
par value $0.001 per share (the "Series A Common Stock"). The Company used the
net proceeds from the sale of Series A Common Stock to acquire approximately
1,552 shares of outstanding Series A Common Stock. The issuances of such Series
A Common Stock were made by the Company in reliance on the exemption from
registration provided under Section 4(2) and Regulation S (with respect to the
foreign employees) and Rule 505 under Regulation D (with respect to the U.S.
employees) under the Securities Act of 1933, as amended. See Note 4 of the
Unaudited Condensed Consolidated Financial Statements
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 1999, the Company's stockholders consented, in lieu of a
meeting, to the Company's issuance and sale of certain shares of its Series A
Common Stock to certain of its employees and directors. Such stockholder action
was consented to by the affirmative votes of the holders of approximately
166,085 shares of the Company's Series A Common Stock.
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -------------------------------------------------------------------------------------------------
<C> <S>
3.3 Second Amended and Restated By-laws of the Company.*
3.5 Fourth Amended and Restated Certificate of Incorporation of the Company.*
27.1 Financial Data Schedule.
</TABLE>
___________
* Incorporated by reference to the same numbered exhibit to the Registrant's
Form 10-K filed by the
Registrant for the fiscal year ending December 31, 1998.
(b) Reports on Form 8-K
None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
IMPAC Group, Inc.
By: /s/ David C. Underwood
-------------------------------------
David C. Underwood
Chief Financial Officer
Date: November 12, 1999
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,700
<SECURITIES> 0
<RECEIVABLES> 62,588
<ALLOWANCES> 1,942
<INVENTORY> 25,002
<CURRENT-ASSETS> 94,843
<PP&E> 215,216
<DEPRECIATION> 100,193
<TOTAL-ASSETS> 383,437
<CURRENT-LIABILITIES> 62,452
<BONDS> 255,688
16,619
0
<COMMON> 0
<OTHER-SE> 45,960
<TOTAL-LIABILITY-AND-EQUITY> 383,437
<SALES> 213,877
<TOTAL-REVENUES> 213,877
<CGS> 151,619
<TOTAL-COSTS> 151,619
<OTHER-EXPENSES> 43,727
<LOSS-PROVISION> 425
<INTEREST-EXPENSE> 17,095
<INCOME-PRETAX> 1,388
<INCOME-TAX> 1,238
<INCOME-CONTINUING> 150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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