<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 333-13727
----------------
PRINTPACK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Georgia 58-0673779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
4335 Wendell Drive, S.W., Atlanta, Georgia 30336
(Address of principal executive offices) (Zip Code)
(404) 691-5830
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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. Yes X No____
---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Total number of shares of outstanding stock (net of shares held in
treasury) as of February 4, 1999:
Common stock, no par value.................... 4,218,560
<PAGE> 2
PRINTPACK, INC.
INDEX
PART I. FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Item 1. Financial Statements
Balance Sheets at December 26, 1998 and June 27, 1998
Statements of Operations for the 26 weeks ended December 26, 1998 and
December 27, 1997
Statements of Operations for the 13 weeks ended December 26, 1998 and
December 27, 1997
Statements of Cash Flows for the 26 weeks ended December 26, 1998 and
December 27, 1997
Notes to Unaudited Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II. OTHER INFORMATION:
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 27 Financial Data Schedule
1
<PAGE> 3
PART 1. FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Printpack, Inc. ("Printpack" or the "Company") makes
oral and written statements that may constitute "forward-looking statements"
(rather than historical facts) as defined in the Private Securities Litigation
Reform Act of 1995 (the "Act") or by the SEC in its rules, regulations and
releases. The Company desires to take advantage of the "safe harbor" provisions
in the Act for forward-looking statements made from time to time, including, but
not limited to, the forward-looking statements made in this Report on Form 10-Q
(the "Report"), as well as those made in other filings with the SEC.
Forward-looking statements contained in this Report are based on management's
current plans and expectations and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. In the preparation of this Report,
where such forward-looking statements appear, the Company has sought to
accompany such statements with meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statements. Such factors include, but are
not limited to: the level of consumer spending for consumer nondurable goods
that use packaging made by the Company; fluctuations in raw material prices;
possible environmental matters; competition; recent net losses resulting from
the acquisition of JR Flexible (as defined herein), slowed growth in end user
markets and pricing pressures; the Company's ability to complete the
implementation of its Year 2000 program on a timely basis; the ability of the
Company's suppliers, vendors, customers and other third parties on which the
Company relies to be Year 2000 ready; changes in economic conditions generally,
both domestic and international; and possible implementation of future cost
saving measures which could require the Company to take charges against
earnings, including cash and non-cash charges. The preceding list of risks and
uncertainties, however, is not intended to be exhaustive, and should be read in
conjunction with other cautionary statements made herein and in the Company's
other publicly filed reports and its Form S-1 Registration Statement (File No.
333-13727), and all amendments thereto (the "Registration Statement"),
including, but not limited to, the "Risk Factors" set forth in the Registration
Statement.
The Company does not have, and expressly disclaims, any obligation to
release publicly any updates or any changes in the Company's expectations or any
changes in events, conditions or circumstances on which any forward-looking
statement is based.
2
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS
PRINTPACK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 27,
1998 1998
---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 989 $ 415
Trade accounts receivable, less allowance for doubtful accounts of $559 68,498 70,759
Inventories 88,817 80,992
Prepaid expenses and other current assets 14,343 19,349
Net assets held for sale 1,354 4,944
Deferred income taxes 3,737 816
-------- --------
Total current assets 177,738 177,275
Property, plant and equipment, net 344,820 353,888
Goodwill, less accumulated amortization of $19,638 and $17,727 48,431 50,342
Other assets 24,834 26,819
Deferred income taxes 305 112
-------- --------
$596,128 $608,436
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 72,446 $ 72,960
Accrued salaries, wages, benefits and bonuses 12,186 16,227
Current maturities of long-term debt 28,000 24,000
Short-term borrowings under lines of credit 6,451 3,445
-------- --------
Total current liabilities 119,083 116,632
Long-term debt 258,000 264,000
Subordinated long-term debt 210,305 210,305
Other long-term liabilities 22,656 23,448
-------- --------
Total liabilities 610,044 614,385
-------- --------
Shareholders' equity (deficit)
Common stock, no par value, 15,000,000 shares authorized, 4,218,560
shares issued and outstanding 1,011 1,011
Additional paid-in capital 6,687 6,687
Accumulated deficit (21,614) (13,647)
-------- --------
Total shareholders' deficit (13,916) (5,949)
-------- --------
Commitments and contingencies -- --
-------- --------
$596,128 $608,436
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
PRINTPACK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
26 WEEKS 26 WEEKS
ENDED ENDED
DECEMBER 26, DECEMBER 27,
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net sales $404,568 $407,175
Cost of goods sold 350,561 355,703
-------- --------
Gross margin 54,007 51,472
Selling, administrative and research and development expenses 37,747 36,578
Amortization of goodwill 1,911 2,373
-------- --------
Income from operations 14,349 12,521
Other (income) expense
Interest expense 25,163 25,786
Other, net (22) (156)
-------- --------
Loss before benefit for income taxes (10,792) (13,109)
Benefit for income taxes (2,825) (4,657)
-------- --------
Net loss and comprehensive loss $ (7,967) $ (8,452)
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
PRINTPACK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
DECEMBER 26, DECEMBER 27,
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net sales $ 198,520 $ 198,009
Cost of goods sold 171,054 169,767
--------- ---------
Gross margin 27,466 28,242
Selling, administrative and research and development expenses 18,657 18,059
Amortization of goodwill 953 1,187
--------- ---------
Income from operations 7,856 8,996
Other expense
Interest expense 12,466 12,996
Other, net 449 423
--------- ---------
Loss before benefit for income taxes (5,059) (4,423)
Benefit for income taxes (1,270) (1,651)
--------- ---------
Net loss and comprehensive loss $ (3,789) $ (2,772)
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
PRINTPACK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
26 WEEKS 26 WEEKS
ENDED ENDED
DECEMBER 26, DECEMBER 27,
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Operating activities
Net loss $ (7,967) $ (8,452)
Depreciation and amortization 27,628 25,124
Other (6,717) 16,531
-------- --------
Net cash provided by operating activities 12,944 33,203
-------- --------
Investing activities
Purchases of property, plant and equipment (17,313) (24,123)
Proceeds from sale of property, plant and equipment 3,937 1,416
-------- --------
Net cash used in investing activities (13,376) (22,707)
-------- --------
Financing activities
Principal payments on long-term debt (12,000) (8,000)
Net borrowings (repayments) under revolving credit facility 5,000 (5,000)
Net borrowings (repayments) under receivable
securitization facility 5,000 (4,000)
Net borrowings on lines of credit 3,006 6,169
-------- --------
Net cash provided by (used in) financing activities 1,006 (10,831)
-------- --------
Increase (decrease) in cash and cash equivalents 574 (335)
Cash and cash equivalents, beginning of period 415 1,140
-------- --------
Cash and cash equivalents, end of period $ 989 $ 805
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 8
PRINTPACK, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 26, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Printpack,
Inc. ("Printpack" or the "Company") have been prepared by Company management and
are presented on a basis in accordance with the accounting policies stated in
the June 27, 1998 and June 28, 1997 financial statements and should be read in
conjunction with the Notes to Financial Statements appearing therein. In the
opinion of Printpack management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such financial
statements have been included in the accompanying interim financial statements.
The results of operations for the 13 week and 26 week periods ended December 26,
1998 are not necessarily indicative of the results to be expected for the full
fiscal year.
2. NET ASSETS HELD FOR SALE
In connection with the acquisition of certain operations from James
River Corporation of Virginia's Flexible Packaging Business as of August 22,
1996, the Company elected to close the San Leandro and Dayton plants acquired in
the transaction. During the quarter ended September 26, 1998, the Company sold
the San Leandro facility for approximately $3.6 million, net of selling
expenses. The net assets of the remaining facility are recorded as Net Assets
Held for Sale in the Company's balance sheets. The Company expects that these
assets will be sold within the next twelve months and has therefore classified
these items as current assets.
Accruals related to the closure of this plant represent Company
management's best estimate of the anticipated costs to be incurred.
3. INCOME TAXES
Printpack's effective income tax rate for the 26 weeks ended December
26, 1998 and December 27, 1997 was 26% and 36%, respectively. The decrease in
the effective tax rate was primarily due to the establishment of a valuation
allowance for a portion of the deferred tax assets related to taxable loss
carryforwards in various state and foreign jurisdictions.
7
<PAGE> 9
PRINTPACK, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories are stated at the lower of cost or current market value.
Cost is determined using the last-in, first-out (LIFO) method.
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 27,
1998 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 30,669 $31,755
Work-in-process 11,994 10,972
Finished goods 61,392 54,755
-------- -------
104,055 97,482
Reduction to state inventories at last-in, first-out cost (LIFO) 15,238 16,490
-------- -------
$ 88,817 $80,992
======== =======
</TABLE>
5. CONTINGENCIES
Printpack is subject to legal proceedings and other claims which arise
in the ordinary course of business. In the opinion of management, the outcome of
these actions will not materially affect the financial position, results of
operations or cash flows of the Company.
6. DEBT
On August 22, 1996, the Company created a wholly owned, bankruptcy
remote, special purpose subsidiary, Flexible Funding Corp. ("Flexible Funding"),
for the sole purpose of facilitating financing transactions for the Company. The
Company contributed approximately $100,000 of trade receivables in exchange for
the equity in Flexible Funding. Subsequently, Flexible Funding entered into a
revolving line of credit facility with a bank (the "Facility"). The Facility
allows Flexible Funding to draw a maximum of $50 million on the established line
of credit through August 20, 2001, on a revolving basis, through note agreements
bearing interest at a negotiated rate. The line of credit is collateralized by
100% of the trade receivables of Flexible Funding. At December 26, 1998 and June
27, 1998, the Company had $47 million and $42 million, respectively, of notes
outstanding under the Facility, collateralized by approximately $69 million and
$71 million, respectively, in trade receivables.
8
<PAGE> 10
PRINTPACK, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the results of operations of
Printpack for the 26 weeks and for the 13 weeks ended December 26, 1998 is
compared to the same time periods in fiscal 1998. The discussion and analysis of
Printpack's financial condition compares its condition at December 26, 1998 to
June 27, 1998.
This Item contains certain forward-looking statements that reflect the
Company's assessment of a number of risks and uncertainties. The Company's
actual results could differ materially from the results anticipated in such
forward-looking statements as a result of certain factors set forth in this
Report. Where such forward-looking statements appear, the Company has sought to
accompany such statements with meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statements. An additional statement made
pursuant to the Private Securities Litigation Reform Act of 1995 and summarizing
certain of the principal risks and uncertainties inherent in the Company's
business is included in Part I of this Report under the caption "'Safe Harbor'
Statement Under the Private Securities Litigation Reform Act of 1995."
RESULTS OF OPERATIONS
Twenty-six weeks ended December 26, 1998 compared to December 27, 1997
Net Sales. Net sales decreased $2.6 million or 0.6% to $404.6 million
in the fiscal 1999 period from $407.2 million in the fiscal 1998 period,
primarily due to price changes to customers which were partially offset by
higher sales volume.
Gross Margin. Cost of goods sold decreased $5.1 million or 1.4% to
$350.6 million in the fiscal 1999 period from $355.7 million in the fiscal 1998
period. Cost of goods sold decreased to 86.7% of net sales in the fiscal 1999
period from 87.4% in the fiscal 1998 period, primarily due to lower
manufacturing costs in the Greensburg, Indiana plant which experienced unusually
higher costs as a result of a strike during the first quarter of fiscal 1998.
Gross margin, consequently, increased $2.5 million or 4.9% to $54.0 million in
the fiscal 1999 period from $51.5 million in the fiscal 1998 period. These cost
improvements, coupled with the volume increases referred to above, more than
offset the effect of the price decreases referred to above.
Operating Expenses. Selling, administrative and research and
development expenses increased $1.2 million or 3.2% to $37.7 million in the
fiscal 1999 period from $36.6 million in the fiscal 1998 period. Selling,
administrative and research and development expenses as a percentage of net
sales increased to 9.3% in the fiscal 1999 period from 9.0% in the fiscal 1998
period, due to additional personnel and related costs, combined with lower sales
revenue.
Operating Income. Income from operations increased $1.8 million or
14.6% to $14.3 million in the fiscal 1999 period compared to $12.5 million in
the fiscal 1998 period. The increase was due to higher gross margins, partially
offset by higher selling, administrative and research and development expenses
as described above.
Other Income and Expense. Interest expense decreased $0.6 million or
2.4% to $25.2 million in the fiscal 1999 period from $25.8 million in the fiscal
1998 period primarily due to decreased borrowings resulting from scheduled debt
amortization payments.
Employees. At December 26, 1998, the Company had approximately 3,600
employees, of which
9
<PAGE> 11
approximately 1,000 at five manufacturing facilities are covered by collective
bargaining agreements. The Company considers relations with its employees to be
generally good.
Thirteen weeks ended December 26, 1998 compared to December 27, 1997
Net Sales. Net sales increased $0.5 million or 0.3% to $198.5 million
in the second quarter of fiscal 1999 from $198.0 million in the second quarter
of fiscal 1998, primarily due to higher sales volume which was partially offset
by price changes to customers.
Gross Margin. Cost of goods sold increased $1.3 million or 0.8% to
$171.1 million in the second quarter of fiscal 1999 from $169.8 million in the
second quarter of fiscal 1998. Cost of goods sold increased to 86.2% of net
sales in the second quarter of fiscal 1999 from 85.7% in the second quarter of
fiscal 1998. Gross margin, consequently, decreased $.8 million or 2.8% to $27.5
million in the second quarter of fiscal 1999 from $28.2 million in the second
quarter of fiscal 1998.
Operating Expenses. Selling, administrative and research and
development expenses increased $0.6 million or 3.3% to $18.7 million in the
second quarter of fiscal 1999 from $18.1 million in the second quarter of fiscal
1998. Selling, administrative and research and development expenses as a
percentage of net sales increased to 9.4% in the second quarter of fiscal 1999
from 9.1% in the second quarter of fiscal 1998, due to additional personnel and
related costs.
Operating Income. Income from operations decreased $1.1 million or
12.7% to $7.9 million in the second quarter of fiscal 1999 compared to $9.0
million in the second quarter of fiscal 1998. The decrease was due to lower
gross margins and higher selling, administrative and research and development
expenses as described above.
Other Income and Expense. Interest expense decreased $0.5 million or
4.1% to $12.5 million in the second quarter of fiscal 1999 from $13.0 million in
the second quarter of fiscal 1998 primarily due to decreased borrowings
resulting from scheduled debt amortization payments.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $12.9 million in the
first 26 weeks of fiscal 1999 compared to $33.2 million in the corresponding
period of fiscal 1998. After adding back depreciation and amortization to the
net loss, the Company's operations provided $19.7 million in cash in the first
26 weeks of fiscal 1999 compared to $16.7 million in the corresponding period of
fiscal 1998. The Company used $6.7 million in cash, primarily for working
capital increases, in the fiscal 1999 period, compared to $16.5 million provided
in the corresponding period of fiscal 1998. Depreciation and amortization for
the 26 weeks ended December 26, 1998 were $27.6 million compared to $25.1
million for the 26 weeks ended December 27, 1997.
Capital expenditures were $17.3 million in the first 26 weeks of fiscal
1999 compared to $24.1 million in the corresponding period of fiscal 1998.
Management estimates its maintenance capital expenditures for fiscal 1999 will
be approximately $15 million and total capital expenditures will range from
$30-40 million. The Company expects that its capital expenditures in subsequent
years will be comparable.
Financing activities in the first 26 weeks of fiscal 1999 and 1998 were
negligible. Total outstanding debt at December 26, 1998 of approximately $502.8
million included $192.5 million of floating rate and $310.3 million of fixed
rate obligations. At December 26, 1998 the Company had approximately $105
million available for borrowings under its credit agreements.
The JR Flexible acquisition and associated financings consummated in
the first quarter of fiscal 1997 changed the Company's financial condition by
adding substantial indebtedness. During fiscal 1999, management continued to
integrate the acquired operations into the Company's existing business. The
Company experienced net losses because of the JR Flexible acquisition and the
integration of the operations. As a result, shareholders' equity declined from a
deficit of $5.9 million as of June 27, 1998 to a
10
<PAGE> 12
deficit of $13.9 million as of December 26, 1998.
The Company's primary liquidity needs are for capital expenditures,
debt service and working capital. The Company's primary sources of liquidity
have been cash flows from operations and borrowings under bank credit
facilities. The Company has used borrowings under the bank credit facilities to
meet seasonal fluctuations in working capital requirements, which generally peak
during January through March when sales volumes generally are lowest.
Based upon current levels of operations, continued improvements in the
acquired JR Flexible operations and continued cost saving measures, the Company
believes that cash flow from operations, borrowings under the credit agreement,
sales of accounts receivable under its receivables securitization facility and
other sources of liquidity, will be adequate to meet the Company's anticipated
requirements for working capital, capital expenditures, interest payments and
scheduled principal payments for at least the next 12 months. There can be no
assurance, however, that the Company's business will continue to generate cash
flows from operations at or above current levels or that anticipated
improvements in operations and cost savings will be realized.
YEAR 2000
Many computer programs use only two digits to identify a year in a date
field within the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results, or fail by or at the Year 2000.
These Year 2000 related issues are of particular importance to the
Company. The Company depends upon its information technology ("IT") and non-IT
systems (collectively the "Internal Systems") to conduct and manage the
Company's business. The Company depends on its IT systems for administrative
functions such as accounting, e-mail and telephone systems as well as in the day
to day management of business functions such as production scheduling and order
handling. Non-IT systems would include computer systems used to run
manufacturing equipment as well as technology embedded in the manufacturing
equipment itself. Year 2000 related issues may also adversely affect the
operations and financial performance of one or more of the Company's customers
or suppliers. The failure of the Company's Internal Systems, or of the Company's
customers or suppliers, to be Year 2000 ready could have a material adverse
effect on the Company's results of operations, financial position and cash
flows. Other than utilities, the third parties on which the Company relies most
heavily are its suppliers of raw materials, equipment and services and its
customers. While the Company obtains its resources from a number of vendors and
sells its products to a number of customers for a wide variety of applications,
if a sufficient number of these vendors or customers experience Year 2000
problems that prevent or substantially impair their ability to continue to
transact business with the Company as they currently do, the Company would be
required to find alternative sources of these resources or customers for its
products. The inability to find or a delay in finding such alternatives could
have a material adverse effect on the Company's business, results of operations
or financial condition.
The Company recognizes the significance of the Year 2000 problem and is
executing a program to achieve Year 2000 readiness. The Company's Year 2000
program is supported by a Year 2000 Oversight Committee. The Oversight Committee
was established to lead the readiness efforts for the Company and manage the
overall progress of the project and is comprised of management and executive
level employees representing all departments and disciplines of the Company.
The Year 2000 program's purpose is to identify, evaluate and resolve
potential Year 2000 issues related to the Company's Internal Systems and
external relationships. The program includes the following key phases:
1. Identification of systems and applications that must be
modified;
2. Evaluation of alternatives (modification, replacement or
discontinuance); and
3. System conversion and implementation which include timely
milestones and appropriate testing
11
<PAGE> 13
to ensure that the systems and applications are ready for the
Year 2000.
The program also includes:
1. Projects to ensure that external customers, vendors and
services are also Year 2000 ready;
2. The development of alternatives where necessary;
3. Interoperability testing with key organizations in the
financial services industry;
4. Contingency planning in case the Company or any of its
customers or suppliers are not Year 2000 ready on a timely
basis.
The Company's goal is to have its Internal Systems ready for the Year
2000 by July 1, 1999. This goal allows for six months of internal testing prior
to the Year 2000. The Company's Year 2000 program is under way, and the Company
expects to achieve its goal. IT systems are in the system conversion and
implementation phase, which is expected to be completed during the fourth
quarter of fiscal 1999. Non-IT systems are in the phase of identifying the
systems that must be modified or replaced. This phase is expected to be
completed during the third quarter of fiscal 1999. Evaluation of alternatives
and the implementation phase for non-IT systems is expected to be completed by
the end of the fourth quarter of fiscal 1999. The Company also is currently in
the process of developing a contingency plan related to both its Internal
Systems and external relationships and expects to have a basic plan in place by
the end of fiscal 1999. Management considers contingency planning to be an
ongoing project and will continue to assess and revise the Company's contingency
plans up to and beyond December 31, 1999 as necessary.
The Company is currently using internal resources to address its Year
2000 issues. The majority of the Company's IT systems use packaged applications
and have been updated or are in the process of being updated through support
agreements with the manufacturers of such software. The additional systems not
supported by vendors have been or will be modified internally or replaced in
order to be Year 2000 compliant. Costs associated with the Year 2000 program are
being expensed as incurred. Funding for the program is being provided through
the Company's normal budget with no additional funding allocated to the
Company's Information Systems department due to the Year 2000 issues. To date,
the costs associated with the Company's Year 2000 program have not been
material. Although the Company is unable at this time to estimate the future
costs associated with its Year 2000 program, the Company does not believe that
the amount to be spent will be material to the Company's results of operations,
liquidity or capital resources. However, if the Company is required to hire and
retain further computer programmers and other systems professionals to address
its Year 2000 issues, or finds it necessary to replace certain of its other
Internal Systems, it could experience increased overall costs at least through
the year 2000 at rates above general inflation.
The Company has identified its key suppliers of proprietary materials
and services, equipment, utilities and transportation services, has contacted
each of these suppliers regarding their plans for dealing with Year 2000 issues
and received initial responses from substantially all of them. The Company is in
the process of following up with suppliers who have not yet responded and
discussing the plans of those that have responded. The Company intends to begin
verifying the state of readiness of these suppliers in early 1999. The Company
has also begun inquiring of its major customers as to their preparations for the
Year 2000 and any anticipated changes in their purchases from the Company
related to this issue.
The Company has also been in contact with organizations in the
financial services industry who provide services to the Company. The Company is
currently and will continue to assess whether the services provided by these
organizations will be Year 2000 ready. The Company plans to participate in
interoperability testing with such organizations to ensure such services will be
Year 2000 ready.
Although the Company is not aware of any material operational or
financial Year 2000 related issues, the Company cannot make any assurances that
its Internal Systems will be Year 2000 ready on schedule, that the costs of its
Year 2000 program will not become material or that the Company's contingency
plans, when established, will be adequate. Further, the Company is currently
unable to anticipate accurately the
12
<PAGE> 14
magnitude, if any, of the Year 2000 related effect which may arise from the
Company's customers and suppliers. If any such risks (either with respect to the
Company or its customers or suppliers) materialize, the Company could experience
material adverse consequences to its business which would likely have material
adverse effects on the Company's results of operations, financial position and
cash flows.
The Company designates the information contained herein regarding the
Company's Year 2000 program as "Year 2000 Readiness Disclosures" made pursuant
to the Year 2000 Information and Readiness Disclosure Act. The estimates and
conclusions related to the Company's Year 2000 program contain forward-looking
statements and are based on management's best estimates of future events. Risks
to completing the Year 2000 program include the availability of resources, the
Company's ability to discover and correct the potential Year 2000 sensitive
problems which could have a serious impact on specific systems, equipment or
facilities, and the ability of suppliers and vendors and other third parties to
bring their systems into Year 2000 compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion should be read in conjunction with the Notes
to Unaudited Financial Statements contained herein, as well as the Notes to
Financial Statements contained in the Company's Form 10-K for the fiscal year
ended June 27, 1998.
This Item contains certain forward-looking statements that reflect the
Company's assessment of a number of risks and uncertainties. The Company's
actual results could differ materially from the results anticipated in such
forward-looking statements as a result of certain factors set forth in this
Report. Where such forward-looking statements appear, the Company has sought to
accompany such statements with meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statements. An additional statement made
pursuant to the Private Securities Litigation Reform Act of 1995 and summarizing
certain of the principal risks and uncertainties inherent in the Company's
business is included in Part I of this Report under the caption "'Safe Harbor'
Statement Under the Private Securities Litigation Reform Act of 1995."
INTEREST RATE RISK
With respect to its credit facilities entered into for other than
trading purposes, the Company is subject to market risk exposure related to
changes in interest rates. The Company is the obligor on the following variable
interest rate long-term debt instruments: (i) $134,000,000 (at December 26,
1998) secured senior notes to banks payable in quarterly installments of
$6,000,000 each in fiscal 1999, $8,000,000 each in fiscal 2000, $10,000,000 each
in fiscal 2001 and $12,500,000 each in fiscal 2002 (final installment due June
30, 2002), with an interest rate tied to LIBOR and payable quarterly; (ii) a
$105,000,000 revolving credit facility with banks due in August 2002 with an
interest rate tied to LIBOR and payable quarterly (at December 26, 1998,
$5,000,000 was outstanding under this facility) and an interest rate on a
subfacility tied to the Federal Funds rate (approximately $6,451,000 outstanding
at December 26, 1998); and (iii) $47,000,000 (at December 26, 1998) outstanding
under an accounts receivable securitization facility with a bank due in August
2002, with an interest rate tied to LIBOR and payable quarterly. The Company has
also guaranteed the debt of Orflex Ltd., a joint venture with the OR Group,
which totaled approximately $3,400,000 at December 26, 1998. This debt is
subject to repayment requirements through a final maturity date of January 2005.
The interest rate on such debt is tied to LIBOR. While changes in LIBOR and the
Federal Funds rate would affect the cost of these funds in the future, the
Company does not consider its current exposure to changes in such rates to be
material, and the Company believes that the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's financial
position, results of operations or cash flows would not be material. The
carrying amounts of the Company's variable rate long-term debt approximate their
fair values.
At December 26, 1998, the Company's fixed interest rate long-term debt
instruments included: (i) $200,000,000 in 10.625% unsecured senior subordinated
notes payable in August 2006 with interest payable semi-annually; (ii)
$100,000,000 in 9.875% unsecured senior notes payable in August 2004 with
interest
13
<PAGE> 15
payable semi-annually; and (iii) $10,305,000 in 11% unsecured subordinated notes
payable in an installment of $3,422,000 in May 2005 and the remaining principal
payable in May 2014 with interest payable annually. There is no material market
risk related to the Company's fixed interest rate long-term debt.
FOREIGN CURRENCY RISK
The Company's revenue derived from international operations is not
material and, therefore, the risk related to foreign currency exchange rates is
not material.
INVESTMENT PORTFOLIO
The Company does not use financial instruments for trading purposes.
The Company invests its excess cash in short-term, highly liquid investments
consisting primarily of overnight repurchase agreements. The market risk on such
investments is minimal.
Pursuant to a note arrangement which became effective in fiscal 1996,
the Company has extended certain working capital loans to Orflex Ltd., a joint
venture formed during fiscal 1995 between the Company and the OR Group. Such
loans, which bear interest at the rate of LIBOR plus 2%, are payable upon demand
by the Company. Advances related to such loans, including accrued interest,
totaled approximately $5,400,000 at December 26, 1998. While changes in LIBOR
would affect the funds received by the Company from such loans in the future,
the Company believes that the effect, if any, of reasonably possible near-term
changes in such interest rate on the Company's financial position, results of
operations or cash flows would not be material.
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's subsidiary operating in
Mexico have historically been measured using the dollar as the functional
currency due to Mexico's economy being considered highly inflationary. Gains and
losses arising from remeasuring these financial statements from the local
currency to the functional currency are included in historical net income.
As of December 27, 1998, Mexico's economy ceased being considered
highly inflationary and the Mexican Peso became the functional currency of the
financial statements of the Company's Mexican subsidiary. Accordingly, gains and
losses arising from translating these financial statements from the functional
currency to the reporting currency will be included in equity on the
consolidated balance sheets and as a component of other comprehensive income on
the consolidated statement of operations. Management does not believe this
change will have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (Filed Electronically)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRINTPACK, INC.
Dated: February 4, 1999 By: /s/ R. Michael Hembree
-----------------------------------------
R. Michael Hembree
Vice President-Finance
(Principal Financial Officer and a duly
authorized officer)
16
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule (Filed Electronically)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF PRINTPACK, INC. FOR THE SIX MONTHS ENDED DECEMBER 26, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> DEC-26-1998
<CASH> 989,000
<SECURITIES> 0
<RECEIVABLES> 69,057,000
<ALLOWANCES> 559,000
<INVENTORY> 88,817,000
<CURRENT-ASSETS> 177,738,000
<PP&E> 608,794,000
<DEPRECIATION> 263,974,000
<TOTAL-ASSETS> 596,128,000
<CURRENT-LIABILITIES> 119,083,000
<BONDS> 444,305,000
0
0
<COMMON> 1,011,000
<OTHER-SE> (14,927,000)
<TOTAL-LIABILITY-AND-EQUITY> 596,128,000
<SALES> 404,568,000
<TOTAL-REVENUES> 404,568,000
<CGS> 350,561,000
<TOTAL-COSTS> 350,561,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 472,000
<INTEREST-EXPENSE> 25,163,000
<INCOME-PRETAX> (10,792,000)
<INCOME-TAX> 2,825,000
<INCOME-CONTINUING> (7,967,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,967,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
