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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED JUNE 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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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 Identification No.)
incorporation)
</TABLE>
4335 WENDELL DRIVE, S.W.
ATLANTA, GEORGIA 30336
(Address of principal executive offices)
(404) 691-5830
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is no established trading market for the Common Stock of the
Registrant. All shares of Common Stock are held by affiliates of the registrant
at June 26, 1999.
The number of shares of the registrant's Common Stock outstanding at
September 10, 1999 was 4,218,560.
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"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-K
(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. Readers of this Report are
encouraged to read these cautionary statements carefully. For a discussion of
specific factors affecting the Company's business and prospects, see "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors."
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.
PART I
ITEM 1. BUSINESS
GENERAL
Printpack, Inc., a Georgia corporation ("Printpack" or the "Company") is
one of the largest domestic manufacturers and converters of flexible packaging
products with revenues of $845.6 million for the fiscal year ended June 26,
1999. The Company supplies packaging products to leading food and consumer
products companies which make salted snacks, cookies/crackers and confectionery,
bakery, cereal, meats, tissue and towels. The Company has long standing
relationships with nationally recognized, brand name food and consumer products
companies such as Frito-Lay, Fort James, Kellogg, Keebler, General Mills,
Hershey, Mars, Nabisco, Nestle, and Quaker Oats. Based on industry data and the
Company's estimates, management believes that the Company has leading market
shares in several end use categories of flexible packaging including salted
snack foods, cookies/crackers and confectionery products.
Founded in 1956, the Company is a private company headquartered in Atlanta,
Georgia, and is owned and managed by the founding family, together with several
long-term members of management. The Company currently operates 16 primary
manufacturing facilities in 12 states and Mexico. The Company's products include
a wide variety of high value-added flexible packaging products, including: (i)
laminates made of various layers of plastic film, aluminum foil, metallized
films and paper with specialized coatings; (ii) cast and blown monolayer films;
and (iii) co-extruded films.
In August 1996, the Company acquired the Flexible Packaging Group of James
River Corporation of Virginia ("JR Flexible" or the "Acquisition"). JR Flexible
was a leading supplier of flexible packaging for various end uses, including
bakery, cookies/crackers, cereal, ream wrap, tissue/towel overwrap, coffee
serving packs and dentifrice.
INDUSTRY
Flexible packaging products are thin, pliable bags, pouches, labels or
wraps for food and other consumer goods and related containers, which are
generally produced from single web and multi-web laminates of various types of
plastic, paper, film and foil. Flexible packaging products are manufactured to
provide a broad range of protection for packaged goods while also providing
packaging that is cost-effective, space-saving,
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lightweight, tamper evident, convenient and disposable. Over the last several
years, end users of flexible packaging have increasingly sought better and
cheaper packaging alternatives to meet changing demographics and customer needs.
Growing food categories such as low-fat and non-fat foods require more
sophisticated packaging structures to improve freshness, shelf life and
resealability. Packaging must have specific barrier characteristics against
light, moisture, gas (primarily oxygen) and aroma consistent with the type of
food packaged. In addition, packaging and changes in packaging graphics, often
for short-term promotions, increasingly are used to attract customers and
differentiate products at the point of sale. Major end users in the food and
other consumer product industries are generally reducing the number of suppliers
which places an emphasis on cultivating strong customer relationships.
Management believes that the growth of the flexible packaging industry has
been and will continue to be driven by the following:
- the shift from rigid containers (paperboard, glass and plastic) to lower
cost and lighter weight flexible packaging;
- changing demographic trends which have increased the demand for more
convenient forms of packaging, such as single servings and packaging that
extends product shelf life;
- the growth in several major end use market segments;
- the growth of low-fat and non-fat foods which require more complex
packaging barriers;
- concerns over waste and resource reduction; and
- increasing demand for specialized packaging with enhanced barrier
properties and distinctive graphics.
BUSINESS STRATEGY
Printpack focuses its sales and marketing efforts, technical development
initiatives, and manufacturing capabilities on targeted end use markets for
flexible packaging, with the goals of achieving critical mass and leading market
shares. Printpack has achieved strong positions in these markets by (i) making
customer service its first priority, (ii) achieving economies of scale and
manufacturing efficiencies to remain a low cost producer, (iii) investing in
state-of-the-art equipment, and technological and production innovation, and
(iv) providing high value-added flexible packaging structures and enhanced
graphics. By focusing its equipment and facilities on specific market segments
and product structures, the Company has been able to provide high quality
products and service and realize production efficiencies. The Company leverages
its strong customer relationships, market leadership and economies of scale to
earn additional business from existing customers and to attract new customers.
Printpack has developed mutually beneficial relationships with large food and
consumer product companies and has benefited from the expanding market shares of
such customers.
Customer Service
Over the last several years, flexible packaging customers have been
reducing the number of their flexible packaging suppliers. Customers have sought
to focus their relationships with suppliers that provide high quality products,
superior service and the ability to offer a broad range of flexible packaging
products at competitive costs. The Company is dedicated to working with
customers to provide products that meet their particular needs, and that can be
manufactured efficiently and cost effectively. Management believes that these
efforts have enabled the Company to build and maintain long-term customer
relationships, many of which have existed for over 20 years.
Printpack's product lines also meet a wide spectrum of flexible packaging
end uses, each of which has its own manufacturing and technical complexities.
The Company is able to offer individual market expertise and product focus, as
well as a broad range of flexible packaging alternatives for each end user.
Field service representatives, who are knowledgeable in both the Company's
products and its customers' equipment and processes, are often at customer sites
to assist in the use of Company products. Customer service is enhanced in
various other ways as well.
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Economies of Scale and Low Cost Structure
The Company has focused its sales, marketing and technical efforts as well
as its operating assets on specific end users and product markets where it
believes it can achieve economies of scale and be a low cost producer. By
dedicating manufacturing plants to a limited number of products, Printpack is
able to effectively allocate the production of various product structures within
its manufacturing network to realize longer runs, improved quality, greater
product structure expertise and lower costs. This allows Printpack to better
plan production runs, shorten cycle times, reduce set-up costs and realize lower
labor costs.
Printpack is one of the largest domestic purchasers of certain key
materials used for flexible packaging manufacturing (such as extrusion grade
resin, oriented polypropylene and other types of packaging film, paper and foil)
and leverages its purchasing power to achieve cost savings and to promote
technical development support from its suppliers.
Technological Innovation
Throughout the development of the flexible packaging industry from simple
surface printed cellophane wrappers to high quality, multi-layer, printed,
laminated and co-extruded plastic packaging, Printpack has been focused
exclusively on flexible packaging and has anticipated end user demands through
continuing product and process innovation. New and more complex product
structures demand manufacturing processes that can produce high quality
packaging which can be changed to meet end user marketing programs, yet are
cost-effective. Printpack's manufacturing and technical resources give it
significant advantages in this area. The Company also works with equipment
manufacturers to design and build specific new processing capabilities.
In maintaining its position in technology, Printpack has invested in new
techniques such as laser engraving, photo polymer and other pre-press processes,
and innovative and improved processes for coating, laminating and metallizing.
These new techniques have significantly reduced the length of the product change
cycle as well as the amount of waste produced. With the addition of JR Flexible,
the Company acquired additional strength in flexible packaging process
technology, including technology related to the co-extrusion of films.
High Value-Added Products
Printpack believes that demand and innovation in the flexible packaging
industry are driven primarily by the larger packaged foods and consumer products
companies. Such users continually seek higher quality, lighter weight packaging
with more complex barrier properties (especially to accommodate low-fat and non-
fat products) and distinctive graphics. Flexible packaging must be compatible
with such customers' packaging machinery and production lines, and also must
maintain product integrity during shipment, extend a product's freshness and
shelf life and improve resealability consistent with each packaged product's
needs. To accomplish these objectives, flexible packaging must have specific
barrier characteristics to protect against light, moisture, gas (primarily
oxygen) and aroma consistent with the type of food packaged. In addition,
marketing and promotional displays increasingly require high quality, multicolor
printing and packaging. The Company's flexographic and rotogravure processes
allow it to produce high definition graphics with photographic quality images on
flexible substrates. From Printpack's laser-etched printing plates and cylinders
that produce high quality products to a new process that makes it economically
attractive to add holographic images to customers' packages, the Company is able
to accommodate its customers' desires for advanced graphics capabilities. The
Company has sought to utilize its technological, manufacturing and cost
advantages to achieve strong positions in high value-added packaging product
structures. Printpack is also one of the few flexible packaging manufacturers
that produce high value-added metallized films in-house, thereby capturing time
and cost advantages.
CUSTOMERS
Printpack provides its customers with a variety of flexible packaging
materials with a primary focus on packaging products for salted snack foods,
cookies/crackers, confectionery, cereal, beverages, diapers,
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tissue/towel, rice, meats and bakery end users. Frito-Lay, the largest U.S.
salted snack food company, is Printpack's largest customer and accounted for
approximately 15% of the Company's fiscal 1999 annual revenues. Frito-Lay is the
Company's only customer that accounted for more than 10% of Printpack's fiscal
1999 sales. Printpack has historically enjoyed close relationships with its
customers, cultivated over many years by emphasizing value-added services in
packaging design and engineering, consistency of service, reliability, and
competitive costs. There can be no assurance, however, that the Company will be
able to maintain such relationships, and the loss of one or more major
customers, or a material reduction in the sales to such customers would have a
material adverse effect on the Company's results of operations, EBITDA and cash
flow and on its ability to service its indebtedness. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- The company's operating performance is dependent upon a limited
number of customers."
MARKETS
In fiscal 1999, the primary end use markets for Printpack's products were
salted snacks, cookies/crackers and confectionery, bakery, cereal, meats,
tissue/towel, copy paper, diapers and beverage industries.
SALES, MARKETING AND DISTRIBUTION
Sales associates primarily work out of sales offices located primarily
throughout the U.S. All Printpack sales force personnel and customer service
representatives undergo extensive training programs before assuming account
responsibilities. Printpack's management believes that it is critical to the
Company's success for its sales and marketing associates to have in-depth
knowledge of the various characteristics and properties of a wide range of the
Company's packaging structures.
The Company's technical service representatives visit customer locations
routinely to ensure that Printpack's packaging materials are running efficiently
on each customer's equipment. These customer service representatives are on call
24 hours a day. In order to accommodate a variety of customer preferences, the
Company distributes its products principally through customers' transportation
networks and third party carriers, although the Company does operate a small
fleet of trucks and trailers.
MANUFACTURING PROCESS
Printpack manufactures a wide variety of high value-added flexible
packaging products, including laminates made of various layers of plastic film,
aluminum foil, metallized films, paper and specialized coatings, as well as cast
and blown monolayer and co-extruded films. The flexible packaging produced by
Printpack uses a range of raw materials, all of which are available from
multiple suppliers. These raw materials consist primarily of plastic resin,
film, paper, foil and ink which typically represent 50-60% of the sales price of
the final products. Flexible packaging manufacturers typically are able to pass
increases in raw material costs on to their customers, although the pass-through
generally lags several months. Significant and abrupt increases in raw material
prices, particularly those on low-density and linear low-density polyethylene
and on polypropylene, could have adverse short-term effects on the Company's
margins. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Risk Factors -- A decline in the supply of raw
materials may increase the Company's operating costs -- The Company may not be
able to increase prices in response to increased operating costs."
EMPLOYEES
At June 26, 1999, the Company had approximately 3,600 employees.
Approximately 1,000 of these employees at five of the Company's facilities are
covered by eight collective bargaining agreements. The Company considers
relations with its employees to be generally good. During the quarter ended
March 27, 1999, the Company completed the negotiation of a collective bargaining
agreement with the union representing the Rhinelander, Wisconsin plant.
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PATENTS AND TRADEMARKS
Printpack has a number of trademarks registered in the U.S. and several
foreign countries, including the Company's principal mark, Printpack. Printpack
also has a number of patents and pending patent applications in the U.S. and in
several other countries. The Company has transferred all its intellectual
property to Printpack Illinois, Inc. ("Printpack Illinois"), a subsidiary of
Printpack, Inc. Printpack Illinois has licensed such properties to the Company
and its affiliates. Although Printpack's management considers all such
intellectual property to be valuable assets, management believes that the loss
or expiration of any patents or trademarks, other than the Printpack trademark,
would not have a material adverse effect on the Company's operations.
SEASONALITY
Certain of the end uses for certain of the Company's products are seasonal.
Demand in many snack food and soft drink markets is generally higher in the
spring and summer. As a result, the Company's sales and profits are generally
higher in the Company's fourth quarter (ending the last Saturday in June) than
in any other quarter during its fiscal year. 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.
COMPETITION
The flexible packaging industry includes several hundred competitors. Based
on management estimates, the Company believes that it is one of the largest of
these manufacturers in the flexible packaging industry. Other sales leaders in
this industry include American National Can (a division of Pechiney), American
Packaging, Bemis, Bryce, Cryovac (a division of Sealed Air Corporation),
Huntsman Packaging, Lawson Mardon Packaging (a division of Alusuisse Lonza
Group) and Reynolds Packaging (a division of Reynolds Metals), many of which are
well capitalized and maintain a strong market presence in the various markets in
which Printpack competes. Various of these competitors are substantially larger,
more diversified and have greater financial, personnel and marketing resources
than the Company, and therefore may have certain competitive advantages
vis-a-vis Printpack. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors -- The Company may be unable
to repay its indebtedness if it does not successfully compete within its
industry."
ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION
The past and present operations of the Company, including its ownership and
operation of real properties, are subject to extensive and changing federal,
state and local laws and regulations pertaining to the discharge of materials
into the environment, the handling and disposition of wastes or otherwise
relating to the protection of the environment. Printpack management believes
that Printpack generally is in material compliance with applicable environmental
laws and regulations.
The Company cannot assure, however, that it will not in the future incur
any additional liability under environmental statutes and regulations with
respect to contamination of sites formerly or currently owned or operated by the
Company (including contamination caused by prior owners and operators of such
sites), and/or the off-site disposal of hazardous substances. The Company has
been designated by the U.S. Environmental Protection Agency ("EPA") and/or other
responsible state agencies as a potentially responsible party ("PRP") at various
waste disposal or waste recycling sites that are the subject of separate
investigations or proceedings concerning alleged soil and/or groundwater
contamination and for which no settlement of the Company's liability has been
agreed upon. The Company is participating with other PRPs at all such sites, and
anticipates that its share of cleanup costs will be determined pursuant to
remedial agreements entered into in the normal course of negotiations with the
EPA or other governmental authorities.
The Company has accrued liabilities for all sites, including sites in which
governmental agencies have designated the Company as a PRP, where it is probable
that a loss will be incurred and the minimum cost or amount of loss can be
reasonably estimated. Currently, amounts accrued in the financial statements for
individual sites and in the aggregate are not material. However, because of the
uncertainties associated with
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environmental assessment and remediation activities, future expense to remediate
the currently identified sites, and sites that could be identified in the future
for cleanup, could be higher than the liability currently accrued.
The Company, like all flexible packaging manufacturers which use plastic,
is subject, in certain jurisdictions, to laws and regulations designed to reduce
solid wastes by requiring, among other things, plastics to be degradable in
landfills, minimum levels of recycled content, various recycling requirements,
disposal fees and limits on the use of plastic products. In addition, various
consumer and special interest groups have lobbied from time to time for the
implementation of additional environmental protection measures. The Company does
not believe that the legislation promulgated to date and currently pending
initiatives will have a material adverse effect on its business. There can be no
assurance that any future legislation or regulatory efforts will not have a
material adverse effect on the Company or its financial condition, results of
operations or cash flows.
The United States Food and Drug Administration ("FDA") regulates the
material content of direct-contact food containers and packages, including
certain containers manufactured by the Company. The Company uses approved resins
and other raw materials in the direct-contact aspect of food product packaging.
Company management believes that the Company is in material compliance with all
such applicable FDA regulations. See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Risk Factors -- Potential
exposure to environmental liabilities -- The Company may be liable for penalties
under a variety of environmental laws, even if the Company did not cause any
environmental problems."
ITEM 2. PROPERTIES
Printpack operates in a number of locations in the U.S. and one location in
Mexico. At the end of fiscal 1999, the Company's primary locations, all of which
are in modern condition and are owned by the Company, except for leased plants
located in Orange, Texas and Williamsburg, Virginia, were as follows: Atlanta,
Georgia; Elgin, Illinois; Fredericksburg, Virginia; Grand Prairie, Texas;
Hendersonville, North Carolina; Prescott, Arizona; Rhinelander, Wisconsin; Villa
Rica, Georgia; Greensburg, Indiana; Jackson, Tennessee; New Castle, Delaware;
Orange, Texas; Shreveport, Louisiana; St. Louis, Missouri; Williamsburg,
Virginia and Queretaro, Mexico. The Elgin, Illinois plant is owned and operated
by a subsidiary, Printpack Illinois, for the benefit of the Company.
Printpack also operates sales and marketing offices in various locations
throughout the U.S. and one sales office in Mexico. The majority of these sales
offices are leased while some are located at certain manufacturing facilities.
ITEM 3. LEGAL PROCEEDINGS
Except for routine litigation incidental to the business of the Company,
there are no pending legal proceedings to which the Company or any of its
subsidiaries is a party or to which any of their property is subject. The
Company has been designated by the EPA and/or other responsible state agencies
as a PRP (as previously defined) at various waste disposal or waste recycling
sites that are the subject of separate investigations or proceedings concerning
alleged soil and/or groundwater contamination and for which no settlement of the
Company's liability has been agreed upon. The Company is participating with
other PRPs at all such sites, and anticipates that its share of cleanup costs
will be determined pursuant to remedial agreements entered into in the normal
course of negotiations with the EPA or other governmental authorities. The
Company believes that the outcome of the proceedings to which it is currently a
party will not have a material adverse effect upon Printpack's financial
condition, results of operations or cash flows. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Potential exposure to environmental liabilities -- The Company may be
liable for penalties under a variety of environmental laws, even if the Company
did not cause any environmental problems."
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the 1999 fiscal year ended June 26, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Common Stock of the
Company, all of the shares of which were held of record by three holders as of
September 10, 1999. Except as described below, the Company has not sold any
securities in the last three fiscal years.
To facilitate the Acquisition and its financing, the Company was
reorganized into a holding company structure at the beginning of fiscal 1997.
Holders of shares of the Company's common stock exchanged their shares of
Company common stock together with shares of common stock in the Company's
affiliate, Printpack Enterprises, Inc. ("Enterprises") for an aggregate of
4,098,915 shares of Printpack Holdings, Inc. ("Holdings") in transactions exempt
from registration under various exemptions, including Section 4(2).
The Company is currently restricted from paying dividends by the Indenture,
dated August 22, 1996, between the Company and State Street Bank (successor to
Fleet National Bank), as Trustee relating to the 9 7/8% Senior Notes due August
2004, the Indenture, dated August 22, 1996, between the Company and State Street
Bank (successor to Fleet National Bank), as Trustee relating to the 10 5/8%
Senior Subordinated Notes due August 2006 and the Amended and Restated Credit
Agreement, dated as of May 21, 1999, by and among the Company, the lenders
thereto and First National Bank of Chicago, as Contractual Representative. The
Company paid no dividends during the fiscal years ended June 26, 1999 and June
27, 1998.
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data of Printpack set forth below has
been derived from the Company's audited financial statements as of and for the
fiscal years ended June 26, 1999, June 27, 1998, June 28, 1997, June 29, 1996,
and June 24, 1995. The following selected financial data should be read in
conjunction with the Company's Financial Statements and related notes thereto
included elsewhere in this Report and in Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in Item 7 below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE(1)
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1999 1998 1997 1996 1995
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................................... $845,587 $831,689 $782,443 $442,931 $454,645
Income from operations...................... 46,695 44,959 30,833 27,020 28,751
Income (loss) before cumulative effect of a
change in accounting principle and
extraordinary item........................ (2,376) (9,491) (14,561) 13,236 17,165
Cumulative effect of change in accounting
principle(2).............................. -- -- -- -- (341)
Extraordinary item-loss on early
extinguishment of debt.................... -- -- (1,631) -- --
Net income (loss)........................... (2,376) (9,491) (16,192) 13,236 16,824
BALANCE SHEET DATA:
Total assets................................ 591,363 608,436 650,510 231,269 230,385
Short-term debt............................. 5,496 3,445 3,831 5,504 --
Long-term debt.............................. 484,305 498,305 538,384 151,634 122,609
Shareholders' equity (deficit).............. (8,779) (5,949) 3,542 13,460 32,305
OTHER FINANCIAL DATA:
Dividends paid to parent.................... -- -- -- 32,081 26,506
Ratio of earnings to fixed charges(3)....... 0.9x 0.8x 0.6x 2.2x 2.6x
</TABLE>
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(1) The Company's fiscal year ends on the last Saturday of June.
(2) The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits" ("SFAS 112") as of the beginning of fiscal 1995. SFAS 112
recognizes the future cost of providing employment benefits on an accrual
basis over the active service life of the employee.
(3) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include operating income (loss)
before income taxes, extraordinary items and cumulative effect of an
accounting change plus fixed charges. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and discount
or premium relating to any indebtedness, whether expensed or capitalized and
the portion of rental expense that is representative of the interest factor
in these rentals. In fiscal 1999, 1998 and 1997, earnings were insufficient
to cover fixed charges by approximately $3,341,000, $11,251,000 and
$17,860,000, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains certain forward-looking statements based on
current expectations which involve risks and uncertainties. Actual results and
the timing of certain events could differ materially from the forward-looking
statements as a result of a number of factors. For a discussion of the risk
factors that could cause actual results to differ materially from the
forward-looking statements, see "Risk Factors" below.
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RESULTS OF OPERATIONS
General
Printpack, Inc. (the "Company") is one of the largest domestic
manufacturers and converters of flexible packaging products with revenues of
$845.6 million for the fiscal year ended June 26, 1999. The Company supplies
packaging products to leading food and consumer products companies which make
salted snacks, cookies/crackers and confectionery, bakery, cereal, meats, tissue
and towels. The Company has longstanding relationships with nationally
recognized, brand name food and consumer products companies such as Frito-Lay,
Fort James, Kellogg, Keebler, General Mills, Hershey, Mars, Nabisco, Nestle, and
Quaker Oats.
Founded in 1956, the Company is a private company headquartered in Atlanta,
Georgia, and is owned and managed by the founding family, together with several
long-term members of management. The Company currently operates 16 primary
manufacturing facilities in 12 states and Mexico. The Company's products include
a wide variety of high value-added flexible packaging products, including: (i)
laminates made of various layers of plastic film, aluminum foil, metallized
films, and paper with specialized coatings; (ii) cast and blown monolayer films;
and (iii) co-extruded films.
In August 1996, the Company acquired the flexible packaging group of James
River Corporation of Virginia ("JR Flexible" or the "Acquisition"). JR Flexible
was a leading supplier of flexible packaging for various end uses, including
bakery, cookies/crackers, cereal, ream wrap, tissue/towel overwrap, coffee
serving packs and dentifrice.
As a result of the additional assets obtained in the acquisition of JR
Flexible on August 22, 1996, the Company recorded expenses that are in excess of
its historical levels, as well as reserves for cost reduction measures and other
adjustments to its balance sheet. In addition, the results of operations of the
Company in fiscal 1999, 1998 and 1997, as compared with historical results, were
significantly affected by the substantial increase in the Company's outstanding
indebtedness in connection with the financing of the JR Flexible acquisition,
including interest charges on the Company's indebtedness. The Company's credit
agreements include various affirmative, negative and financial covenants with
which it must comply, including but not limited to, the maintenance of certain
financial ratios, and limitations on the incurrence of additional indebtedness
and the payment of dividends.
Over the last several years, a number of the Company's larger customers
have consolidated their purchasing of flexible packaging materials with a
smaller number of suppliers. More recently, and particularly in the last
twenty-four months, certain of the Company's customers have sought to reduce
their packaging costs by seeking price reductions from their suppliers. The
Company's customers regularly seek competitive bids for flexible packaging
materials and in some cases the Company has reduced its prices to respond to
competitive price pressure. In order to counteract the impact of this pricing
pressure on operating margins, the Company has sought to reduce its costs
through productivity improvements and other internal cost control initiatives.
The Company expects that it will continue to experience competitive pricing
pressure and intends to continue to focus on productivity improvements in order
to protect operating margins.
Fiscal Year 1999 Compared to Fiscal Year 1998
Net Sales
Net sales increased $13.9 million (1.7%) to $845.6 million in fiscal 1999
from $831.7 million in fiscal 1998, primarily due to higher sales volumes which
were partially offset by price reductions implemented in response to competitive
pressures.
Gross Margin
Gross margin in fiscal 1999 increased $1.4 million (1.1%) to $122.6 million
from $121.3 million in fiscal 1998. Gross margin as a percentage of net sales in
fiscal 1999 decreased to 14.5% compared to 14.6% in fiscal 1998. The decrease in
gross margin percentage is primarily attributable to lower average selling
prices in fiscal 1999. In addition, gross margins in fiscal 1998 were negatively
impacted by the effects of a strike at the
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Greensburg, Indiana facility. The strike by the employees at the Greensburg
facility began in the last week of June 1997 and lasted until September 12,
1997.
Operating Expenses
Operating expenses in fiscal 1999 decreased $0.4 million (0.5%) to $75.9
million from $76.3 million in fiscal 1998. The change in operating expenses as a
percentage of sales from 1998 to 1999 was negligible. The decrease in operating
expense dollars is primarily attributable to a reduction in the amortization of
goodwill in fiscal 1999 as compared to fiscal 1998. This reduction in
amortization expense is due to the reduction of goodwill that occurred in the
fourth quarter of fiscal 1998 as a result of a $12.0 million payment received
from Fort James Corporation in settlement of claims made by the Company related
to the Acquisition.
Operating Income
Income from operations in fiscal 1999 increased $1.7 million (3.9%) from
$45.0 million in fiscal 1998 to $46.7 million in fiscal 1999, primarily as a
result of the increase in net sales, the reduction in amortization of goodwill
and other changes described above.
Other Expense
Interest expense in fiscal 1999 decreased by $2.4 million (4.5%) from $52.2
million in fiscal 1998 to $49.9 million in fiscal 1999. The decrease in interest
expense for fiscal 1999 as compared to fiscal 1998 is primarily due to
reductions in debt although the decline in effective interest rates also
contributed to the decline in interest expense.
During fiscal 1998, the Company recorded a pre-tax charge of $2.0 million
to adjust the carrying value of net assets held for sale to their estimated fair
market value.
As a result of the foregoing, loss before benefit for income taxes
decreased from $10.1 million in fiscal 1998 to $3.8 million in fiscal 1999. The
net benefit for income taxes increased from $0.6 million in fiscal 1998 to $1.4
million in fiscal 1999 primarily as a result of 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 in fiscal 1998. The
corresponding result was a reduction in the benefit for income taxes in fiscal
1998.
Net loss declined from $9.5 million in fiscal 1998 to $2.4 million in
fiscal 1999 primarily as a result of the increase in net sales and other changes
described above.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net Sales
Net sales increased $49.2 million (6.3%) to $831.7 million in fiscal 1998
from $782.4 million in fiscal 1997. The primary reason for the increase is the
additional revenue from the acquired operations of JR Flexible for fifty-two
weeks in fiscal 1998 as compared to forty-four weeks of the fiscal year since
the date of the Acquisition in fiscal 1997. Sales volume growth, other than from
the Acquisition, was customary. Price changes to customers during the period
were insignificant.
Gross Margin
Gross margin in fiscal 1998 increased $18.8 million (18.3%) to $121.3
million from $102.5 million in fiscal 1997. Gross margin as a percentage of net
sales in fiscal 1998 increased to 14.6% compared to 13.1% in fiscal 1997. The
increase in gross margin percentage was primarily attributable to the continued
integration of the operations acquired from JR Flexible into the existing
operations of the Company. The acquired operations historically generated lower
gross margins than did the existing Printpack business due to higher
manufacturing costs. Additionally, the fiscal 1997 margins were negatively
impacted by the effect of allocating part of the Acquisition purchase price to
profit on finished goods inventory. The Company has not historically
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purchased a material amount of finished goods for resale and does not expect to
do so to any material extent in the future and, therefore, considers this
negative effect a non-recurring charge.
Gross margin in fiscal 1997 was also negatively impacted by the move of
equipment and manufacturing operations from the Villa Rica, Georgia films plant
to Grand Prairie, Texas. Inefficiencies resulting from the difficulties
encountered in the move were approximately $10.0 million, and the gross margin
percentage would have been approximately 1.3% higher without these costs.
Gross margins in fiscal 1998 were negatively impacted by the effects of a
strike at the Greensburg, Indiana facility. The strike by the employees at the
Greensburg facility began in the last week of June 1997 and lasted until
September 12, 1997.
Operating Expenses
Operating expenses in fiscal 1998 increased $4.7 million (6.6%) to $76.3
million from $71.6 million in fiscal 1997. The change in operating expenses as a
percentage of sales from 1997 to 1998 was negligible. The increase in operating
expense dollars is attributable to additional selling, administrative and
research and development expenses resulting from the Acquisition and to
increased amortization of goodwill, also resulting from the Acquisition. These
additional expenses were incurred for fifty-two weeks in fiscal 1998 as compared
to only forty-four weeks in fiscal 1997.
Operating Income
Income from operations in fiscal 1998 increased $14.2 million (46.1%) from
$30.8 million in fiscal 1997 to $45.0 million in fiscal 1998, primarily as a
result of the increase in net sales and the other changes described above.
Other Expense
Interest expense in fiscal 1998 increased by $5.6 million (12.0%) from
$46.6 million in fiscal 1997 to $52.2 million in fiscal 1998. The increase is
primarily due to borrowings incurred in connection with the Acquisition on
August 22, 1996 (borrowings were in place for only forty-four of the fifty-two
weeks ended June 28, 1997).
During fiscal 1998, the Company recorded a pre-tax charge of $2.0 million
to adjust the carrying value of net assets held for sale to their estimated fair
market value.
As a result of the foregoing, loss before benefit for income taxes
decreased from $16.7 million in fiscal 1997 to $10.1 million in fiscal 1998. The
net benefit for income taxes decreased from $2.1 million in fiscal 1997 to $0.6
million in fiscal 1998 primarily as a result of 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.
Loss before extraordinary item declined from $14.6 million in fiscal 1997
to $9.5 million in fiscal 1998 primarily as a result of the increase in net
sales and the other changes described above.
The extraordinary item in fiscal 1997 of $1.6 million is due to the
prepayment of the Company's then existing debt at the closing of the
Acquisition. The extraordinary loss is comprised of a $2.6 million prepayment
penalty less a $1.0 million income tax benefit. No such extraordinary items
occurred during fiscal 1998.
RESEARCH AND DEVELOPMENT
The Company expenses its research and development costs as incurred. Such
expenditures were $10.2 million, $9.0 million and $8.1 million in fiscal 1999,
1998 and 1997, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
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 and 1998, 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' deficit increased from
$5.9 million as of June 27, 1998 to $8.8 million as of June 26, 1999.
Cash and cash equivalents increased $1.2 million to $1.6 million at June
26, 1999 as compared to approximately $0.4 million at June 27, 1998. The
increase was primarily due to a buildup of cash at the Company's Mexican
subsidiary in anticipation of payment for certain capital expenditures in the
first quarter of fiscal 2000. Cash flows from operations were $44.2 million in
fiscal 1999, $29.3 million (39.9%) less than in the previous fiscal year. This
decrease reflected a number of items, primarily increases in working capital.
In fiscal 1999, cash flows used in investing activities decreased 35.8% to
$29.4 million, excluding a $12.0 million payment received in fiscal 1998 from
Fort James Corporation (formerly James River Corporation of Virginia) in
settlement of claims made by Printpack related to the Acquisition, the proceeds
of which were used to reduce the amount of goodwill recorded by the Company in
the Acquisition. Capital expenditures of $33.9 million in fiscal 1999 and $48.0
million in fiscal 1998 continued to be principally for new property, plant and
equipment. The decrease in capital expenditures was primarily due to the
construction of the new plant in Queretaro, Mexico, during fiscal 1998. At the
same time, proceeds from the disposition of property and equipment increased
from $2.2 million to $4.4 million primarily as a result of the disposal of the
San Leandro, California and Dayton, Ohio facilities acquired in the Acquisition
and subsequently closed.
Cash used in financing activities in fiscal 1999 was $14.1 million,
compared to cash used in financing activities of $40.5 million in fiscal 1998.
The reduction in the cash used in financing activities is primarily a result of
the reduction in cash used to pay down debt caused by increases in working
capital. The Company also paid approximately $1.2 million in fiscal 1999 to
amend and restate its credit agreement. The indentures and credit agreement
entered into in fiscal 1997 restrict future contributions to Holdings' and
Enterprises' European Operations.
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. The credit facilities consist of a term
loan in the amount of $128.0 million, a $60.0 million revolving credit facility,
a $10.0 million line of credit and a $50.0 million receivables securitization
facility.
The Company's current ratio improved from 1.52 in fiscal 1998 to 1.72 in
fiscal 1999. The higher ratio in fiscal 1999 was primarily a result of decreases
in current maturities of long-term debt ($14.2 million) and increases in
accounts receivable and inventory ($6.7 million and $3.0 million, respectively).
On June 26, 1999, Printpack had approximately $66.9 million available under its
credit facilities.
The Company believes that its primary liquidity needs will consist of
capital expenditures, debt service and working capital. Estimated annual capital
expenditures for the Company are expected to be approximately $25.0 to $30.0
million. Approximately $15.0 million per year is expected to be used for
replacements and other capital expenditures, with the balance expected to be
used for productivity improvements and to meet the specific needs of the
Company's customers.
Based upon current levels of operations, continued improvements in the
acquired 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.
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EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's operations.
Increases in raw material costs to Printpack typically lag movements in the
markets for such materials. Thus, in a period of rising prices, the effects of
such increases are delayed several months and Printpack's ability to pass these
price increases to its customers also is subject to similar lags.
ACCOUNTS RECEIVABLE
Accounts receivable are generally collected in approximately 30 days.
Printpack has historically experienced minimal chargeoffs (less than $1 million
per year or less than 0.1% of sales), reflective of the high quality of the
Company's respective customer base.
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 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;
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3. 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 the end September 1999. The Company's original goal was to have all its
Internal Systems completed by July 1, 1999. This goal allowed for six months of
internal testing prior to the Year 2000. The Company's Year 2000 program is
substantially complete. IT systems are in the system conversion and
implementation phase, which is expected to be completed during the first quarter
of fiscal 2000. As of the end of fiscal 1999, all critical business systems were
believed to be Year 2000 compliant. Critical business systems include those
systems necessary to conduct business with the Company's customers and vendors
as well as the Company's financial and human resources systems. Several
supporting systems were programmed as of the end of fiscal 1999 but were not in
general use. These systems are scheduled to be placed in production during the
first quarter of fiscal 2000.
The Company continues to monitor information from hardware and software
vendors to determine that current versions of software are in use. Major
components of computer hardware are compliant with the exception of one
minicomputer and some miscellaneous hardware which are scheduled for replacement
in the first quarter of fiscal 2000. In addition, there are several
non-compliant personal computer workstations, and personnel responsible for
these items have been provided with instructions necessary to upgrade or replace
these systems as necessary.
Identification of non-IT systems and applications that must be modified or
replaced was completed as of June 26, 1999. Non-IT systems are currently in the
conversion and implementation phase. Each plant has been notified of its
equipment that requires an upgrade. Approximately 50% of the non-compliant
equipment is personal computer based, and remediation will be performed along
with other personal computers. Plant upgrades should be completed and tested
prior to the end of the first quarter of fiscal 2000 for all non-IT systems and
applications that have been identified as non-compliant. To date, the Company
has encountered no major problems of non-compliance in its manufacturing
facilities.
The Company also is currently in the process of developing a contingency
plan related to both its Internal Systems and external relationships. 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. As of the end of fiscal 1999, contingency plans had been
developed to address critical issues based on the customer order cycle and the
Company's business processes. Additionally, the Company is formalizing its
employee vacation plans, staffing plans and emergency contact lists for late
1999 and early 2000. The Company has also retained consultants and
representatives of key software vendors to have them available during that time.
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 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 continues
to follow-up
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with suppliers that responded "non-compliant" in any area to discuss their state
of readiness for the Year 2000 and their plans for continued supply of materials
and services to the Company. The Company is requesting reverification during the
first quarter of fiscal 2000. The Company does not foresee any significant non-
compliance issues with its vendors.
One area of supply for which the Company has no alternative is the supply
of utilities. No utility supplier has notified the Company that such supplier is
not Year 2000 compliant; however the Company is developing contingency plans in
the event that it experiences short-term disruption of utility service at any of
its facilities.
The Company is working closely with its freight vendors to ensure that it
can continue to deliver material to its customers during the Year 2000 critical
period. The Company plans to obtain contractual agreements with each freight
vendor to ensure their commitment to the Company's requirements. Additionally,
the Company plans to have a Printpack truck at each location to provide for
emergency transportation for material supply and delivery.
The Company is also 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. Of the responses received to date, no
issues have been identified by the Company related to anticipated changes in
purchases by customers which would have a material adverse effect on the
Company's financial position, results of operations or cash flows. However, the
Company's sales associates have been requested to work closely with customers to
plan for any changes in demand.
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 testing with such
organizations to determine whether such services will be Year 2000 ready. The
majority of the Company's exchange of data with the financial services industry
is with one entity.
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
will be adequate. Further, the Company is currently unable to anticipate
accurately the magnitude, if any, of the Year 2000 related effect which may
arise from the Company's customers and suppliers, including utilities. 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. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Impact of Year 2000 issue -- The Company may suffer disruptions to
its business that would adversely affect its financial condition and results of
operations and may suffer significant costs to make its systems 'Year 2000'
compliant."
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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires companies to record
derivatives as assets or liabilities and measure those instruments at fair
value. Gains or losses resulting from changes in the values of those derivatives
will be recorded either in current earnings or as a component of comprehensive
income. SFAS No. 133 will be effective in fiscal 2001. Management believes that
this Statement will not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
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RISK FACTORS
This Report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act including,
in particular, the statements about the Company's plans, strategies, and
prospects. Although Management believes that the Company's plans, intentions and
expectations reflected in or suggested by such forward-looking statements are
reasonable, Management can give no assurance that such plans, intentions or
expectations will be achieved. These cautionary statements, however, are not
intended to be exhaustive, and should be read in conjunction with other
cautionary statements made herein and in the Company's publicly filed reports.
Important factors that could cause actual results to differ materially from the
forward-looking statements the Company makes in this Report are set forth below
and elsewhere in this Report. All forward-looking statements attributable to the
Company or persons acting on our behalf are expressly qualified in their
entirety by the following cautionary statements.
LEVERAGE AND DEBT SERVICE -- THE COMPANY'S SUBSTANTIAL INDEBTEDNESS COULD
ADVERSELY AFFECT THE FINANCIAL HEALTH OF THE COMPANY AND PREVENT IT FROM
FULFILLING ITS OBLIGATIONS.
The Company has a significant amount of debt. As of June 26, 1999, the
Company had approximately $489.8 million of indebtedness. The Company also had
approximately $66.9 million of additional borrowing availability under its
credit facilities. Stockholders' deficit at June 26, 1999 was approximately $8.8
million.
For the fiscal years ended June 26, 1999, June 27, 1998 and June 28, 1997,
earnings were insufficient to cover fixed charges by approximately $3,341,000,
$11,251,000 and $17,860,000, respectively.
The amount of debt the Company owes could have important consequences. For
example, it could:
- make it more difficult for the Company to satisfy its obligations with
respect to indebtedness;
- increase the Company's vulnerability to general adverse economic and
industry conditions;
- limit the Company's ability to fund future working capital, capital
expenditures, research and development costs and other general corporate
requirements;
- require the Company to dedicate a substantial portion of its cash flow
from operations to payments on its indebtedness, thereby reducing the
availability of its cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
- limit the Company's flexibility in planning for, or reacting to, changes
in its business and the industry in which it operates;
- place the Company at a competitive disadvantage compared to its
competitors that have less debt; and
- limit, along with the financial and other restrictive covenants in its
indebtedness, among other things, the Company's ability to borrow
additional funds. And, failing to comply with those covenants could
result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company.
ADDITIONAL BORROWINGS AVAILABLE -- DESPITE CURRENT INDEBTEDNESS LEVELS, THE
COMPANY AND ITS SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT.
THIS COULD FURTHER EXACERBATE THE RISKS DESCRIBED ABOVE.
The Company and its subsidiaries may be able to incur substantial
additional indebtedness in the future. The terms of the indentures for the
Company's 9 7/8% Senior Notes due 2004 and the 10 5/8% Senior Subordinated Notes
due 2006 (together, the "Notes") do not fully prohibit the Company or its
subsidiaries from doing so. As of June 26, 1999, the indentures for the Notes
would permit additional borrowing of up to $66.9 million. If new debt is added
to the Company's and its subsidiaries' current debt levels, the related risks
could intensify.
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THE COMPANY'S INDEBTEDNESS PREVENTS IT FROM ENGAGING IN CERTAIN ACTIVITIES.
The Company's credit facilities and the indentures for its Notes each
contain a number of significant covenants. These covenants limit or restrict the
Company's ability to:
- incur additional debt;
- repay other debt;
- make certain investments or acquisitions;
- dispose of assets;
- pay distributions;
- repurchase or redeem ownership interests;
- engage in mergers or consolidations; and
- engage in certain transactions with subsidiaries and affiliates and
otherwise restrict corporate activities.
These limitations and restrictions may adversely affect the Company's
ability to finance its future operations or capital needs or engage in other
business activities that may be in its best interests. In addition, the
Company's credit facilities also require it to comply with certain financial
ratios and the Company's ability to comply with these financial ratios may be
affected by events beyond its control. If the Company breaches any of the
covenants in its credit facilities, the indentures for its Notes or in any new
credit facility the Company enters into, or if the Company is unable to comply
with the financial ratios, the Company may default under the credit facilities,
the indentures for the Notes or any new credit facility. If the Company defaults
under the credit facilities, the lenders can declare all borrowings outstanding,
including accrued interest and other fees, due and payable. If the Company uses
all of its available cash to repay borrowings under the credit facilities, the
Company may not be able to make payments on the Notes. If the Company is unable
to repay the borrowings when due, the lenders under the Company's credit
facilities could proceed against the collateral, which consists of substantially
all of the Company's assets. If the lenders accelerate the repayment of
indebtedness under the credit facilities or the Notes, the Company may not have
sufficient assets to repay all of the indebtedness.
ABILITY TO SERVICE DEBT -- TO SERVICE ITS INDEBTEDNESS, THE COMPANY WILL REQUIRE
A SIGNIFICANT AMOUNT OF CASH. THE COMPANY'S ABILITY TO GENERATE CASH DEPENDS ON
MANY FACTORS BEYOND ITS CONTROL.
The Company's ability to make payments on and to refinance its indebtedness
and to fund planned capital expenditures and research and development efforts
will depend on its ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond the Company's control.
Based upon current levels of operations, continued improvements in acquired
operations and continued cost saving measures, the Company believes that cash
flow from operations, borrowings under the credit facilities, sales of accounts
receivable under its accounts receivable 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.
Management cannot assure you that the Company will generate sufficient cash
flow from operations to enable it to repay its indebtedness or to fund its other
liquidity needs. If the Company cannot generate sufficient cash flow from
operations in the future, the Company may need to refinance all or a portion of
its indebtedness on or before maturity. Management cannot assure you that the
Company will be able to refinance any of its indebtedness, including the credit
facilities and the Notes, on commercially reasonable terms or at all.
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THE COMPANY'S OPERATING PERFORMANCE IS DEPENDENT UPON A LIMITED NUMBER OF
CUSTOMERS.
The Company is dependent upon a limited number of large customers with
substantial purchasing power for a majority of its sales, many of which are
reducing their number of suppliers. Frito-Lay accounted for approximately 15% of
its total sales in fiscal 1999. The end user market for flexible packaging has
been consolidating with the larger end users gaining market share and realizing
the highest growth rates. This has also resulted in increased cost pressures
from these large end users. Other end users have exited the market. In addition,
the Company's future business, financial condition and results of operations
will depend to a significant extent upon the commercial success of its major
customers and their continued willingness to purchase the Company's products.
Any significant downturn in the business of the Company's major customers could
cause them to reduce or discontinue their purchases from the Company. This could
have a material adverse effect on the Company's business, financial condition
and results of operations. As is customary in the industry, the Company annually
establishes volume estimates with most of its customers, but generally has no
long-term contracts with them, and substantially all such relationships can be
terminated on short notice by such customers.
NET LOSSES -- THE COMPANY HAS INCURRED NET LOSSES OVER THE LAST THREE FISCAL
YEARS AND THERE CAN BE NO ASSURANCE THAT SUCH NET LOSSES WILL NOT CONTINUE.
The Company has incurred net losses (before extraordinary items) of $2.4
million in fiscal 1999, $9.5 million in fiscal 1998 and $14.6 million in fiscal
1997. The Company believes that these net losses are the result of financing
costs incurred in connection with the acquisition of JR Flexible, slowed growth
in end user markets over the last two fiscal years and continuing price pressure
from the Company's competitors and significant customers. Although the Company
does not anticipate that these net losses will continue indefinitely, there can
be no assurance that these net losses will not increase in the future or that
the Company will achieve profitability.
COMPETITION -- THE COMPANY MAY BE UNABLE TO REPAY ITS INDEBTEDNESS IF IT DOES
NOT SUCCESSFULLY COMPETE WITHIN ITS INDUSTRY.
The Company operates in a highly competitive industry and competes against
a number of companies, including divisions of larger companies, some of which
have significantly greater financial, personnel, technological and marketing
resources than the Company. The Company believes that its ability to compete
depends on product performance, short lead-time and timely delivery, competitive
pricing, superior customer service and support and continued certification under
customer quality requirements and assurance programs. The Company competes on
the basis of price, service, quality and innovation in product structures and
graphics. The Company has experienced significant pricing pressure over the last
twenty-four months as many of its competitors reduce prices in attempts to
acquire market share. In addition to several hundred smaller competitors, the
Company faces strong competition from various large flexible packaging
companies, including Bemis, American National Can (a division of Pechiney),
American Packaging, Bryce, Reynolds Packaging (a division of Reynolds Metals),
Cryovac (a division of Sealed Air Corporation), Huntsman Packaging and Lawson
Mardon Packaging (a division of Alusuisse Lonza Group), some of which have
significantly greater financial, personnel and technological and marketing
resources than the Company. Although the Company has broad product lines and is
continually developing its product structures, from time to time customers may
determine to use alternative product structures not offered by the Company, with
a corresponding reduction in existing and potential revenues from these
customers.
RESTRUCTURING -- THE COMPANY OFTEN CONSIDERS COST SAVING MEASURES TO ENHANCE ITS
PERFORMANCE, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Company has in the past taken cost saving measures to enhance its
performance, financial condition and results of operations, including plant
closings, reductions in capital expenditures and other cost saving measures.
Such restructuring measures have required the Company in the past to take
charges against earnings. Management has no definitive plans to undertake any
such cost saving measures at this time, but there can be no assurance that such
cost saving measures will not be taken in the future. If such cost saving
19
<PAGE> 21
measures are taken in the future, the Company may be required to take charges
against earnings, including cash and non-cash charges, which could adversely
affect its business, financial condition or results of operations.
EFFECTIVE SUBORDINATION -- SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS ARE PLEDGED
TO SECURE THE REVOLVING CREDIT FACILITY AND CERTAIN OF THE COMPANY'S OPERATIONS
ARE CONDUCTED THROUGH SUBSIDIARIES.
Substantially all of the Company's assets and the real and personal
property the Company uses in its business operations secure the Company's
obligations under its credit facilities. If the Company defaults on any payments
required under any secured indebtedness, the secured lenders could declare all
amounts outstanding, together with accrued and unpaid interest, immediately due
and payable. If the Company is unable to repay amounts due, the lenders could
proceed against the collateral. If the lenders proceed against any of the
collateral, the Company may not have sufficient assets remaining to pay its
noteholders. Moreover, if the Company becomes bankrupt or similarly reorganizes,
the Company will not be able to use its assets to pay the noteholders until the
Company pays all of its secured indebtedness. Since a portion of the Company's
operations are conducted through subsidiaries, the creditors of those
subsidiaries will have prior claims to the assets of those subsidiaries. As a
result, the Notes effectively rank junior to the liabilities of the Company's
subsidiaries, including trade payables. As of June 26, 1999, the Company had
$174 million of secured debt under its credit facilities.
FINANCING CHANGE OF CONTROL OFFER -- THE COMPANY MAY NOT HAVE THE ABILITY TO
RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
the Company will be required to offer to repurchase all outstanding Notes.
However, it is possible that the Company will not have sufficient funds at the
time of the change of control to make the required repurchase of the Notes or
that restrictions in the Company's credit facilities or any new credit facility
the Company may enter into will not allow such repurchases.
A DECLINE IN THE SUPPLY OF RAW MATERIALS MAY INCREASE THE COMPANY'S OPERATING
COSTS -- THE COMPANY MAY NOT BE ABLE TO INCREASE PRICES IN RESPONSE TO INCREASED
OPERATING COSTS.
The Company uses large quantities of various raw materials, including
resins and films in the manufacture of its products. The Company has
historically been able to pass along increases in the costs of resins and other
raw materials to its customers. However, large, abrupt increases in the price of
raw materials could harm the Company's operating margins. Such adverse effects
historically have been only temporary. There is no assurance that a significant
increase in resin or other raw material prices, or a cancellation of one or more
favorable resin supply contracts, would not have an adverse effect on the
Company's business, results of operations and debt service capabilities.
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES -- THE COMPANY MAY BE LIABLE FOR
PENALTIES UNDER A VARIETY OF ENVIRONMENTAL LAWS, EVEN IF THE COMPANY DID NOT
CAUSE ANY ENVIRONMENTAL PROBLEMS.
Various federal, state and local environmental laws govern the use of the
Company's facilities. Such laws govern: (1) discharges to air and water, (2) the
handling and disposal of solid and hazardous substances and wastes and (3) the
remediation of contamination associated with releases of hazardous substances at
the Company's facilities and offsite disposal locations. Laws relating to
workplace safety and worker health also govern the Company's operations. These
laws establish formaldehyde, asbestos and noise standards and regulate the use
of hazardous chemicals in the workplace. Management has taken, and will continue
to take, steps to comply with these laws and requirements. Management believes,
based upon currently available information, that complying with environmental
and health and safety laws and requirements will not require material capital
expenditures in the foreseeable future. However, management cannot assure you
that complying with the foregoing environmental or health and safety laws and
requirements will not adversely affect the Company's business, financial
condition and results of operations. Moreover, Management cannot assure you that
future laws, ordinances or regulations will not give rise to additional
compliance or remediation
20
<PAGE> 22
costs which could have a material adverse effect on the Company's business,
financial condition and results of operations.
SEASONALITY -- THE COMPANY'S SALES AND PROFITS ARE GENERALLY SEASONAL.
Certain of the end uses for certain of the Company's products are seasonal.
Demand in many snack food and soft drink markets is generally higher in the
spring and summer. As a result, the Company's sales and profits are generally
higher in the Company's fourth quarter (ending the last Saturday in June) than
in any other quarter during its fiscal year.
THE COMPANY'S OPERATING PERFORMANCE IS DEPENDENT UPON GOOD RELATIONS WITH ITS
OFFICERS AND EMPLOYEES -- THE COMPANY MAY BE ADVERSELY AFFECTED IF IT CANNOT
RETAIN ITS EXISTING OFFICERS AND EMPLOYEES OR FIND SIMILARLY SKILLED
REPLACEMENTS.
The Company is dependent upon the abilities and experience of its executive
officers, key employees and workforce in general. Although the Company considers
its relationship with its employees to be generally good, and labor contracts
were recently renegotiated in a majority of the Company's covered facilities, a
strike by employees at the Greensburg facility began in the last week of June
1997 and lasted until September 12, 1997. During the quarter ended September 26,
1998, the Company entered into a new three-year collective bargaining agreement
with the union representing the Greensburg employees. In addition, the Company
completed the negotiation of a collective bargaining agreement with the union
representing the Rhinelander, Wisconsin plant during the quarter ended March 27,
1999. If the Company loses any of its executive officers or key employees and is
unable to hire similarly skilled persons or if the Company's relationship with
its workforce in general deteriorates, the Company's business, financial
condition and results of operations may be adversely affected.
THE COMPANY MAY HAVE CONFLICTS OF INTEREST WITH ITS CONTROLLING EQUITY
HOLDER -- THE COMPANY IS CONTROLLED BY THE LOVE FAMILY, WHOSE INTERESTS MAY NOT
BE ALIGNED WITH NOTEHOLDERS.
Printpack Enterprises, Inc. owns approximately 100% of the Company and
Printpack Holdings, Inc. owns approximately 97% of Printpack Enterprises, Inc.
The principal shareholders of Printpack Holdings, Inc. include several members
of the family of J. Erskine Love, Jr., the Company's founder, and a limited
partnership which is controlled by the Love family. As a result, the Love family
has the power to elect all of the Company's directors and appoint new
management. Consequently, the Love family has the ability to control the
Company's policies and operations. Circumstances may occur in which the
interests of the Love family could be in conflict with the interests of the
holders of the Notes.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- THE COMPANY DOES BUSINESS IN
MEXICO AND THERE ARE CERTAIN RISKS INHERENT IN DOING BUSINESS IN MEXICO AND ON
AN INTERNATIONAL LEVEL IN GENERAL.
The Company has a plant in Queretaro, Mexico and may in the future expand
into additional international markets. There are certain risks inherent in doing
business in Mexico and on an international level in general. Such risks include:
- unexpected changes in or delays resulting from regulatory requirements,
tariffs, customs, duties and other trade barriers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and problems in collecting accounts receivable;
- political instability, expropriation, nationalization, war, insurrection
and other political risks;
- fluctuations in currency exchange rates and foreign exchange controls
which restrict or prohibit repatriation of funds;
- technology export and import restrictions or prohibitions;
21
<PAGE> 23
- delays from customs brokers or government agencies;
- seasonal reductions in business activity; and
- potentially adverse tax consequences.
Any of these factors could have an adverse effect on the Company's future
international operations in Mexico and elsewhere if it chooses to expand and,
consequently, on its business, financial condition and results of operations.
IMPACT OF YEAR 2000 ISSUE -- THE COMPANY MAY SUFFER DISRUPTIONS TO ITS
BUSINESS THAT WOULD ADVERSELY AFFECT ITS FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND MAY SUFFER SIGNIFICANT COSTS TO MAKE ITS SYSTEMS "YEAR 2000"
COMPLIANT.
As is true of most companies, the Year 2000 problem creates a risk for the
Company. Some computer programs and systems include a programming code in which
calendar year data is abbreviated to only two digits rather than four. As a
result, computer programs and systems may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions in operations. The problems associated with
this design decision are commonly referred to as the "Year 2000 problem" or "Y2K
problem." If systems do not correctly recognize date information when the year
changes to 2000, there could be an adverse impact on the Company's operations.
The risk exists primarily in two areas:
- systems used to run the Company's business; and
- systems used by the Company's service providers, customers and suppliers.
A disruption in the operation of parties with whom the Company interacts
could materially and adversely affect the Company's business, financial
condition and results of operations.
The Company's Year 2000 program includes the review of all of its
information technology ("IT") and non-IT systems used to conduct and manage the
Company's business. A description of the program is included under the heading
"Year 2000" above.
While the Company believes that it has implemented a comprehensive plan to
address the Year 2000 problem and anticipates completing compliance activities
in a timely manner, it cannot be certain that these Year 2000 compliance efforts
will be successful. Furthermore, the financial impact of making required system
changes is not fully known at this time.
The failure of the Company's internal information technology and other
internal systems, or the systems 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 condition 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion should be read in conjunction with the Notes to
Financial Statements for the fiscal years ended June 26, 1999, June 27, 1998 and
June 28, 1997, as well as the notes thereto.
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
22
<PAGE> 24
interest rate long-term debt instruments: (i) $128,000,000 (at June 26, 1999)
secured senior notes to banks payable in quarterly installments of $2,442,000
each through the second quarter of fiscal 2004 and a final payment of
$84,040,000 during the third quarter of fiscal 2004 (final installment due March
2004), with an interest rate tied to LIBOR and payable quarterly; (ii) a
$60,000,000 revolving credit facility with banks due in December 2003 with an
interest rate tied to LIBOR and payable quarterly (at June 26, 1999, nothing was
outstanding under this facility), (iii) a $10,000,000 line of credit with an
interest rate tied to the Federal Funds rate (approximately $5,496,000
outstanding at June 26, 1999); and (iv) $46,000,000 (at June 26, 1999)
outstanding under an accounts receivable securitization facility with a bank due
in December 2003, 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 $2,600,000 at June 26, 1999. 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 June 26, 1999, 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 payable semi-annually; and (iii) $10,305,000 in 11% unsecured
subordinated notes to shareholders 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 2.75%, are payable upon
demand by the Company. Advances related to such loans, including accrued
interest, totaled approximately $5,400,000 at June 26, 1999. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule in Part IV, Item
14(a)1 and 2 of this Report are incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages, positions and offices held (as the
date hereof) and a brief account of the business experience for each executive
officer and director of Printpack.
<TABLE>
<CAPTION>
AGE
NAME (AS OF JUNE 26, 1999) POSITION
- ---- --------------------- --------
<S> <C> <C>
Dennis M. Love....................... 43 President, Chief Executive Officer
and Director(1)
James J. Greco....................... 56 Vice President and General Manager
James E. Love, III................... 42 Vice President, General Manager and
Director(1)
Nicklas D. Stucky.................... 53 Vice President, Human Resources
R. Michael Hembree................... 50 Vice President, Finance and
Administration
Neil Williams........................ 63 Secretary and Director (2)
Terrence P. Harper................... 41 Vice President, Technology and
Support
Dellmer B. Seitter, III.............. 34 Treasurer and Assistant Secretary
Gay M. Love.......................... 70 Director(1)
Hugh M. Chapman...................... 66 Director(2)
Daniel K. Frierson................... 57 Director(3)
Roy Richards, Jr..................... 39 Director(3)
Timothy C. Tuff...................... 52 Director(2)
C. Keith Love........................ 38 Plant Manager, Hendersonville, N.C.
Plant, and Director(1)
William J. Love...................... 37 Director(1)
William E. Lewis..................... 55 Vice President and General Manager
John N. Stigler...................... 51 Vice President and General Manager
Michael A. Fisher.................... 52 Vice President and General Manager
</TABLE>
- ---------------
(1) Dennis M. Love, James E. Love, III, William J. Love and C. Keith Love are
all the children of Gay M. Love, who is the controlling shareholder of the
Company.
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Dennis M. Love -- President, Chief Executive Officer and Director. Mr.
Love became President and Chief Executive Officer of Printpack and a member of
its Board of Directors in February 1987. Mr. Love has been involved with the
Company since 1978, holding various positions in sales and marketing. Mr. Love
also serves as a director of SunTrust Bank, Atlanta, SunTrust Banks of Georgia
and Caraustar Industries, Inc.
James J. Greco -- Vice President and General Manager. Mr. Greco has been
Vice President and General Manager since April 1991. In such capacity, he was
responsible for serving the Company's largest customer from April 1991 through
April 1999. Prior to holding these positions, Mr. Greco served as Director of
Sales for 10 years and has held various other sales positions since he joined
the Company in 1971. Mr. Greco also served as a director of the Company from
July 1996 until January 1998.
James E. Love, III -- Vice President, General Manager and Director. Mr.
Love became Vice President and General Manager in May 1999. In such capacity, he
is responsible for serving the Company's largest
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<PAGE> 26
customer. Prior to holding this position, Mr. Love served as Vice President,
Corporate Development from June 1996 through April 1999 and Director of
Strategic Planning from July 1992 through May 1996. Mr. Love became a member of
the Board of Directors in February 1987. Prior to joining Printpack, Mr. Love
worked in the Corporate Finance Department of The Robinson-Humphrey Company,
Inc., an investment banking firm, from 1983 to 1992.
Nicklas D. Stucky -- Vice President, Human Resources. Mr. Stucky became
Vice President of Human Resources in 1982. Prior to that time, he served as
Director of Personnel from 1978 to 1982 and has held various other human
resources positions since he joined Printpack in 1973.
R. Michael Hembree -- Vice President, Finance and Administration. Mr.
Hembree joined the Company as Controller in 1980 and has served in his present
position since 1982. Mr. Hembree also served as a director of the Company from
July 1996 until January 1998.
Neil Williams -- Secretary and Director. Mr. Williams has served as
Secretary of the Company and a member of its Board of Directors since 1977. Mr.
Williams is also a partner at the law firm of Alston & Bird LLP (Managing
Partner from 1984 until 1996), counsel to the Company, and serves as a director
of National Data Corporation, whose common stock is registered under the
Exchange Act and Trustee of the Duke Endowment.
Terrence P. Harper -- Vice President, Corporate Technology and
Support. Mr. Harper assumed his present position in May 1999. Prior to that
time, Mr. Harper served as a General Manager from 1997 to 1999. From 1995 to
1997, Mr. Harper was Operations Planning Manager and held various other
positions with the Company since joining it in 1989 in connection with the
Company's acquisition of Daniels Packaging.
Dellmer B. Seitter -- Treasurer and Assistant Secretary. In November 1998,
Mr. Seitter became Treasurer and Assistant Secretary after previously serving as
the Company's Assistant Treasurer and Tax Manager since 1996. Prior to joining
the Company, Mr. Seitter was employed at Price Waterhouse LLP from 1991 to 1996,
most recently as Tax Manager.
Gay M. Love -- Director. Ms. Love is the widow of the Company's founder,
and her primary occupation is Chairman of the Board of Enterprises. She was
first elected a director of the Company in July 1996, but has been a director
and Chairman of Enterprises since 1989.
Hugh M. Chapman -- Director. Mr. Chapman retired from NationsBank South of
Atlanta, Georgia, a division of NationsBank Corporation of Charlotte, North
Carolina, on June 30, 1997. Previously, he served as Chairman of NationsBank
South for more than 5 years. Mr. Chapman was first elected as a director of the
Company during fiscal 1998. He also serves as a director of Scana Corporation,
West Point-Stevens and The Williams Companies.
Daniel K. Frierson -- Director. Mr. Frierson has served as Chief Executive
Officer of The Dixie Group, Inc., a public company in the textile manufacturing
business, since 1979 and has served as Chairman of the Board of such company
since 1987. Mr. Frierson was first elected as a director of the Company during
fiscal 1998. He also serves as a director of the Dixie Group, Inc., SunTrust
Bank of Chattanooga, N.A. and Astec Inc.
Roy Richards, Jr. -- Director. Mr. Richards has served as Chairman of the
Board of Directors and Chief Executive Officer of Southwire Company since
October 1988. Southwire is a privately owned company and is the largest producer
of electrical wire and cable in North America.
Timothy C. Tuff -- Director. Mr. Tuff is President and CEO of John H.
Harland Company, which offers a wide range of products and services to financial
institutions, including checks, database marketing and loan automation software.
Mr. Tuff has served in this position since December 1998. Prior to holding this
position, Mr. Tuff served as President and CEO of Boral Industries, Inc., which
produces building and construction materials, from September 1993. He also
serves as a director of John H. Harland Company.
C. Keith Love -- Plant Manager, Hendersonville, N.C. Plant, and
Director. Mr. Love has been a director since March 1987, and assumed his
current position in February 1996. He formerly served as a Shift
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<PAGE> 27
Coordinator from September 1991 to February 1996 and as a Systems Coordinator
from May 1987 to September 1991.
William J. Love -- Director. Mr. Love has served as Director of Sales for
Printpack Europe since January 1999 and has been a director of Printpack since
March 1987. Prior to holding his current position, Mr. Love was a Senior
Accounts Manager for the Company from May 1994 through December 1998. From July
1992 to April 1994, he served as a Sales Representative for the Company and for
the two years prior to becoming a Sales Representative, Mr. Love attended The
Fuqua School of Business at Duke University, where he received his M.B.A. in
1992.
William E. Lewis -- Vice President and General Manager. Mr. Lewis was
appointed to this position in May 1996. Previously, he served as a General
Manager from April 1991 to May 1996 and Director of Sales, Marketing and
Technical Support from September 1993 to May 1996. Prior to joining Printpack in
connection with the Company's acquisition of Daniels Packaging in 1989, Mr.
Lewis served as Daniels' National Sales Manager.
John N. Stigler -- Vice President and General Manager. Mr. Stigler was
appointed to this position in June 1994. He joined Printpack in 1976 as a Sales
Representative and has held various positions, including Sales Manager, Director
of Midwest Sales and General Manager.
Michael A. Fisher -- Vice President and General Manager. Mr. Fisher was
appointed to this position in October 1993. Previously, Mr. Fisher served as the
Company's Director of Development from March 1993 to October 1993, its Director
of Business Support from August 1992 to March 1993 and Managing Director,
European Operations from August 1989 to August 1992.
26
<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION
Executive Officer Compensation
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities during fiscal years 1999, 1998, and 1997, for the Company's Chief
Executive Officer and the Company's four most highly compensated executive
officers other than the Chief Executive Officer whose total salary and bonus for
the fiscal year ended June 26, 1999, exceeded $100,000 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY BONUS(1) LTIP PAYOUTS(2) COMPENSATION(3)
- ------------------------------ -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Mr. Dennis M. Love.................... 1999 $377,680 $122,441 $ -- $5,097
President and Chief Executive 1998 317,950 165,736 202,372 4,794
Officer 1997 299,850 157,153 -- 5,481
Mr. John N. Stigler................... 1999 144,785 65,991 -- 5,116
Vice President and General Manager 1998 136,250 80,555 -- 5,004
1997 132,555 39,988 118,359 5,045
Mr. James E. Love, III................ 1999 207,645 47,400 -- 4,092
Vice President and General Manager 1998 142,740 61,141 -- 3,892
1997 132,820 51,016 -- 4,171
Mr. James J. Greco.................... 1999 205,895 81,628 70,280 5,000
Vice President and General Manager 1998 199,955 117,391 60,693 5,155
1997 185,530 132,797 24,208 5,283
Mr. R. Michael Hembree................ 1999 172,280 50,465 105,261 4,998
Vice President, Finance and 1998 156,590 65,301 9,599 5,471
Administration 1997 147,690 61,924 -- 3,106
</TABLE>
- ---------------
(1) Consists of cash bonuses paid under the Economic Value Added Plan portion of
the Company's Incentive Compensation Plan (the "Incentive Plan"). Under the
Incentive Plan, the Company establishes performance improvements over the
prior year's results. These performance improvements are calculated and
measured with respect to economic value added ("EVA") standards, and
participants earn bonuses based on realization of EVA improvements.
Annually, participants' bonuses are paid 75% in cash and 25% in performance
shares.
(2) Consists of cash payments paid to the named executive officers pursuant to
the Company's Performance Share Plan as more fully described below.
(3) Consists of Company contributions to the officer's account under the
Company's Savings and Profit Sharing Plan. The Company's Savings and Profit
Sharing Plan is a defined contribution employee benefit plan qualified under
section 401(k) of the Internal Revenue Code of 1986, as amended. Under this
plan, the Company matches 50% of the contributions up to the 6% contribution
level, made by each qualified participant and may contribute other fixed
amounts for the benefit of each qualified participant based upon a formula
derived from years of service and base compensation.
27
<PAGE> 29
LONG-TERM INCENTIVE PLAN AWARDS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
PERFORMANCE OR
NUMBER OF SHARES, OTHER PERIOD
UNITS OR UNTIL MATURATION
NAME OTHER RIGHTS(1) OR PAYOUT
- ---- ----------------- ----------------
<S> <C> <C>
Mr. Dennis M. Love.......................................... 872.82 March 2004
Mr. John N. Stigler......................................... 470.42 March 2004
Mr. James E. Love, III...................................... 337.90 March 2004
Mr. James J. Greco.......................................... 581.89 March 2004
Mr. R. Michael Hembree...................................... 359.75 March 2004
</TABLE>
- ---------------
(1) Represents units of phantom stock (performance shares) granted in fiscal
year 1999 pursuant to the Performance Share Plan portion of the Incentive
Plan. Each year, 25% of the bonus, if any, is required to be invested in
phantom stock (performance shares). The value of these shares is based on a
formula which uses a multiple of EBITDA and debt to calculate an estimate of
the market value of the Company. The value of the shares rises or falls as
the overall calculated market value of the Company rises or falls. These
performance shares are eligible for redemption after four years and may be
exercised for cash at any time thereafter. There is no guarantee that the
value of these performance shares will have appreciated at their redemption.
No shares of Company stock are actually issued pursuant to the Performance
Share Plan. Historically, bonuses including performance shares have been
accrued during each fiscal year, but not awarded until the subsequent fiscal
year.
Director Compensation
Members of the Board who are not employees of the Company received a
quarterly retainer of $4,000 each and $2,500 each per meeting attended during
the fiscal year ended June 26, 1999.
INCENTIVE AND DEFERRED COMPENSATION
Incentive Compensation Plan
The Company maintains a non-qualified, long-term incentive compensation
plan for its employees (the "Incentive Plan") which is designed to align the
short and long-term interests of its employees with its shareholders' interests.
Under the Incentive Plan, the Company establishes performance improvements over
the prior year's results. These performance improvements are calculated and
measured with respect to economic value added ("EVA") standards and are
established on a Company-wide basis.
The Incentive Plan includes two tiers of incentive-based compensation
linked to the Company's EVA. Although participation in the Incentive Plan is
generally limited to managers within the Company, the final determination of an
employee's eligibility to participate in the plan is made in the sole discretion
of a committee which consists of the Company's President and the Vice-Presidents
of Finance and Administration, and of Human Resources. Each year a participant's
bonus, if any, ("EVA Bonus") is allocated from a bonus pool composed of two
parts, a base award and an improvement award. The base award is calculated using
the previous year's EVA and the individual participant's base salary. The
improvement award is based on the improvement of the EVA from the previous year.
The first tier consists of 75% of the EVA Bonus which is paid in cash to the
participants as a short-term incentive.
The second tier of the plan (the "Performance Share Plan") is a phantom
stock plan, which acts as a long-term incentive. Twenty-five percent of each
participant's EVA Bonus, if any, is reserved by the Company and invested in
phantom stock called "performance shares", the value of which rises or falls
based on a formula which uses a multiple of EBITDA and debt to estimate the
market value of the Company. There is no guarantee that these performance shares
will have appreciated in value when they become payable. These performance
shares are eligible for redemption after four years and may be exercised by a
participant at any time thereafter. The maximum number of performance shares
available under the Performance Share Plan is equivalent to 15% of the Company's
outstanding common stock. The percent of the EVA Bonus that must be
28
<PAGE> 30
invested in performance shares may be reduced pro rata if the 15% limit would be
exceeded because of the full investment. The Company may call outstanding
performance shares from participants as it deems advisable.
Deferred Compensation Agreements
The Company's founder agreed to pay Neil Williams or his beneficiary
$40,000 per year in deferred compensation beginning at age 65. Mr. Williams, who
has served as the Company's Secretary and as a director since 1977, was the
Company's only outside director who was not a salaried employee or a principal
shareholder until fiscal 1998.
The Company also maintains Family Security Agreements with certain of its
key employees (the "Family Security Agreements"). These agreements provide that
certain disability and death benefits will be paid to such employees or their
family members. In the case of the employee's death, his or her spouse will
receive annually for the rest of such spouse's life, 50% of the employee's total
cash compensation, including bonuses, for the last full year of employment. In
the event of the employee's disability while an employee of Printpack, Printpack
shall pay the employee $40,000 annually for the employee's life. The agreements
also provide certain other benefits to children of the employees who are under
the age of 23. If the employee voluntarily terminates his employment (except
upon retirement), engages in an activity which the Company's board of directors
deems harmful to the Company or the employee ceases to provide advice to the
Company when reasonably requested, all benefits under the Family Security
Agreement will be forfeited. If Printpack terminates the employee's employment,
there is a vesting schedule ranging from 50% at five years of employment to 100%
at more than 10 years. All payments to be made under a Family Security Agreement
are indexed to the All Urban Consumers' Cost of Living Index published by the
U.S. Government. The Company currently has Family Security Agreements with
Dennis M. Love, R. Michael Hembree, Nicklas D. Stucky and Thomas J. Dunn, Jr.,
all of whom are fully vested.
The Company believes that it has substantially funded these benefits
through insurance policies previously purchased.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company was reorganized effective June 29, 1996 to facilitate the
Acquisition and its financing. Previously, the Company was owned and operated
together with Enterprises, a Georgia corporation that had elected to be taxed as
a Subchapter S corporation under the Internal Revenue Code of 1986, as amended.
Printpack and Enterprises were affiliated by common ownership and management.
Following the Company's 1996 fiscal year, Printpack and Enterprises were
reorganized into a holding company structure (the "Reorganization"). Holdings, a
new Delaware corporation, was formed, and Enterprises contributed substantially
all its assets and liabilities to Printpack.
Enterprises owns approximately 100% of the Company and Holdings owns
approximately 97% of Enterprises. The principal shareholders of Holdings as of
this date included several members of the family of J. Erskine Love, Jr., the
Company's founder, and a limited partnership which is controlled by the Love
family. Certain of the principal shareholders of Holdings serve on the boards of
directors of the Company, Enterprises and Holdings and are involved in the
management of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's decision to discontinue its election under
Subchapter S in February 1994, the Company distributed to its shareholders the
balance of its aggregate accumulated adjustments accounts, which represented
amounts previously taxed to the Company's shareholders. Subsequent to this
distribution, these shareholders restored this cash to the Company in 1995 by
purchasing approximately $10.4 million aggregate principal amount of
subordinated notes from the Company (the "Shareholder Notes"). All of the
shareholders of Holdings who are also directors and officers of the Company are
holders of the Shareholder Notes.
29
<PAGE> 31
In 1996, Printpack Enterprises, Inc. made distributions to its shareholders
in amounts required to pay estimated income tax attributable to its shareholders
and arising out of its then status as a Subchapter S corporation. Subsequently,
in connection with their corporate reorganization, Printpack Enterprises, Inc.
contributed substantially all of its assets to Printpack. Following the
reorganization, Printpack determined that the actual income tax attributable to
the former shareholders of Printpack Enterprises, Inc. was less than initially
estimated. As a result, these shareholders were required to repay approximately
$4.5 million of such dividends to Printpack (as successor to the assets of
Printpack Enterprises, Inc.). Some of these shareholders are also officers and
directors of the Company. These distributions and the subsequent repayment
obligations were shared pro rata by all of the shareholders. As of June 26,
1999, all but approximately $184,000 had been repaid, of which approximately
$65,000 was owed by Dennis M. Love and approximately $119,000 was owed by Gay M.
Love. These amounts are payable on demand and bear no interest. During fiscal
1999, the highest amount outstanding during the year from Gay M. Love was
approximately $1,769,000 and from Dennis M. Love was approximately $65,000.
During fiscal 1999, the Company advanced approximately $949,000 to
Holdings. These advances have been reflected as an increase in shareholder
deficit in the consolidated balance sheet of the Company. The Company advanced
an additional $949,000 to Holdings in July 1999. All amounts under these
advances are still outstanding, are payable on demand and bear no interest.
During fiscal 1999 and fiscal 1998, the Company sold equipment and
inventory to an affiliated entity owned by Holdings and Enterprises totaling
approximately $2,061,000 and $503,000, respectively. As of June 26, 1999 and
June 27, 1998, the Company had approximately $2,564,000 and $503,000,
respectively recorded as a receivable from the affiliate related to these sales.
Pursuant to an employment agreement between the Company and its founder, J.
Erskine Love, Jr. dated June 23, 1983, the Company agreed to make certain death
benefit payments to Mr. Love's wife, Gay M. Love. These payments, which began at
Mr. Love's death in 1987 and will continue for the rest of Ms. Love's life,
equaled $471,204 in fiscal 1999 and are adjusted each year based upon the
Consumer Price Index. See "Item 11 -- Incentive and Deferred Compensation" for a
description of other deferred compensation arrangements with Mr. Williams.
Dennis M. Love currently serves as a director of SunTrust Bank, Atlanta and
SunTrust Banks of Georgia (collectively, "SunTrust"). SunTrust is a participant
in the Company's term loan secured bank facility and in its revolving credit
facility. SunTrust is the lender on the Company's $10 million swing line
facility used to fund daily cash flow fluctuations and cash management needs.
These facilities were negotiated at arms-length with SunTrust prior to Mr. Love
becoming a SunTrust director, and it is believed that such loans were made in
the ordinary course, on substantially the same terms, including interest rates
and collateral as comparable transactions with other persons and did not involve
more than the normal risk of collectibility or present other unfavorable
features. See Note 6 to Financial Statements.
Mr. Williams is a partner at the law firm of Alston & Bird LLP, counsel to
the Company.
30
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of Printpack, Inc., incorporated by
reference into Item 8, are attached hereto beginning on page F-1:
Report of Independent Accountants
Balance Sheets as of June 26, 1999 and June 27, 1998
Statements of Operations and Comprehensive Income for the Three Years
Ended June 26, 1999
Statements of Cash Flows for the Three Years Ended June 26, 1999
Statement of Changes in Shareholders' Equity (Deficit) for the Three
Years Ended June 26, 1999
Notes to Financial Statements
2. Financial Statement Schedules. The following financial statement
schedule of Printpack, Inc. is attached hereto:
Schedule VIII -- Valuation and Qualifying Accounts
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended June 28, 1997
Allowance for Doubtful Accounts.............. $ 286 $ 566 $ -- $ 852
====== ====== ===== ======
Allowance for Deferred Tax Assets............ $ -- $ -- $ -- $ --
====== ====== ===== ======
Year ended June 27, 1998
Allowance for Doubtful Accounts.............. $ 852 $ 38 $(331) $ 559
====== ====== ===== ======
Allowance for Deferred Tax Assets............ $ -- $2,950 $ -- $2,950
====== ====== ===== ======
Year ended June 26, 1999
Allowance for Doubtful Accounts.............. $ 559 $ 514 $(187) $ 886
====== ====== ===== ======
Allowance for Deferred Tax Assets............ $2,950 $ 168 $ -- $3,118
====== ====== ===== ======
</TABLE>
The notes to the financial statements are an integral part of this schedule.
31
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholders of Printpack, Inc.
Our audits of the consolidated financial statements referred to in our
report dated September 1, 1999 of this Annual Report on Form 10-K also included
an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
September 1, 1999
32
<PAGE> 34
All other schedules have been omitted, as they are not required under the
related instructions or are inapplicable, or because the information required is
included in the consolidated financial statements.
3. Exhibits
Unless indicated below, the exhibits are incorporated by reference herein
from the Company's Registration Statement on Form S-1 (File No. 333-13727) filed
with the Securities and Exchange Commission. Copies of such exhibits will be
furnished to any requesting stockholder of the Company upon request to
Secretary, Printpack Inc., 4335 Wendell Drive, S.W., Atlanta, Georgia 30336.
There is a charge of $.50 per page to cover expenses for copying and mailing.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
2.1 -- Asset Purchase Agreement, dated as of April 10, 1996, by and
between James River Corporation of Virginia and Printpack,
Inc., as amended
2.2 -- Reorganization Agreement dated as of July 1, 1996 by and
among Printpack Holdings, Inc., Printpack, Inc., Printpack
Enterprises, Inc. and Printpack Illinois, Inc.
3.1 -- Restated Articles of Incorporation of Printpack, Inc.
3.2 -- Bylaws of Printpack, Inc.
4.1 -- Indenture, dated August 22, 1996, between Printpack, Inc.
and State Street Bank (successor to Fleet National Bank), as
Trustee relating to the 9 7/8% Senior Notes due 2004.
4.2 -- Indenture, dated August 22, 1996, between Printpack, Inc.
and State Street Bank (successor to Fleet National Bank), as
Trustee relating to the 10 5/8% Senior Subordinated Notes
due 2006.
+10.1 -- Amended and Restated Credit Agreement, dated as of May 21,
1999, by and among Printpack, Inc., the Institutions from
time to time thereto, as lenders, and The First National
Bank of Chicago, as Agent
10.2 -- Note Purchase Agreement, dated as of March 13, 1995 by and
among Printpack, Inc. and certain shareholders of Printpack,
Inc., as amended
10.3 -- Printpack, Inc. Savings and Profit Sharing Plan, as amended
10.4 -- Printpack, Inc. Incentive Compensation Plan
10.5 -- Guarantee dated as of January 5, 1995 made by Printpack,
Inc. in favor of PNC Bank, Ohio, National Association, as
amended
10.6 -- Registration Rights Agreement dated as of August 22, 1996 by
and between Printpack, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation
10.7 -- Receivables Sale Agreement dated as of August 22, 1996 by
and between Printpack, Inc. and Flexible Funding Corp.
10.8 -- Receivables Purchase Agreement dated as of August 22, 1996
by and among Flexible Funding Corp. as Seller, Falcon Asset
Securitization Corporation and the financial institutions
party hereto as Investors and The First National Bank of
Chicago, as Agent
++10.8(a) -- Waiver and Amendment of Receivables Purchase Agreement dated
as of September 21, 1998, by and among Flexible Funding
Corp., as Seller, Falcon Asset Securitization Corporation
and The First National Bank of Chicago, individually and as
agent
+++10.8(b) -- Amendment of Receivables Purchase Agreement dated as of May
21, 1999, by and among Flexible Funding Corp., as Seller,
Falcon Asset Securitization Corporation and The First
National Bank of Chicago, individually and as agent
10.9 -- Intercreditor Agreement, dated August 22, 1996, by and
between The First National Bank of Chicago, as Contractual
Representative and The First National Bank of Chicago, as
Agent
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
*12 -- Computation of Ratio of Earnings to Fixed Charges
*21 -- List of Subsidiaries
*27 -- Financial Data Schedule. (For SEC purposes only.)
99.1 -- Contribution Agreement dated as of January 5, 1995 by and
between Printpack, Inc. and Orflex Ltd.
99.2 -- Lease dated September 11, 1980 by and between Gulf Oil
Corporation and Crown Zellerbach Corporation relating to the
Orange, Texas Plant (the rights and obligations of the
lessee under the foregoing Lease have been assigned
ultimately to Printpack, Inc.)
99.3 -- Ground Lease dated September 11, 1980 by and between Gulf
Oil Corporation and Crown Zellerbach Corporation relating to
the Orange, Texas Plant (the rights and obligations of the
lessee under the foregoing Lease have been assigned
ultimately to Printpack, Inc.)
99.4 -- Ground Lease Agreement dated January 1, 1981 by and between
Gulf Oil Corporation and Crown Zellerbach Corporation
relating to the Orange, Texas Plant (the rights and
obligations of the lessee under the foregoing Lease have
been assigned ultimately to Printpack, Inc.)
99.5 -- Ground Lease dated September 9, 1985 by and between Chevron
Chemical Company and Crown Zellerbach Corporation relating
to the Orange, Texas Plant (the rights and obligations of
the lessee under the foregoing Lease have been assigned
ultimately to Printpack, Inc.)
99.6 -- Lease dated July 25, 1990 by and between The Lawson Group,
LTD. and Shell Oil Company relating to the Williamsburg,
Virginia plant (the rights and obligations of the lessee
under the foregoing Lease have been assigned ultimately to
Printpack, Inc.)
99.7 -- Note Purchase Agreement dated, August 15, 1996, by and
between Printpack, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation relating to the 9 7/8% Senior Notes
due 2004 and the 10 5/8% Senior Subordinated Notes due 2006.
99.8 -- Deferred Income Agreement dated December 17, 1984 with
Edward Hilbert, Jr.
99.9 -- Deferred Income Agreement dated December 17, 1984 with
Robert B. Paxton
99.10 -- Deferred Income Agreement dated July 10, 1996 with Neil
Williams
99.11 -- Family Security Agreement dated April 4, 1986 with Dennis M.
Love
99.12 -- Family Security Agreement dated February 24, 1986 with R.
Michael Hembree
99.13 -- Family Security Agreement dated February 24, 1986 with
Thomas J. Dunn, Jr.
99.14 -- Family Security Agreement dated February 24, 1986 with
Nicklas D. Stucky
99.15 -- Amended and Restated Employment Agreement dated June 23,
1983 with J. Erskine Love, Jr.
**99.16 -- Lease Amendment dated May 20, 1998 by and between GF
Associates and Printpack, Inc. relating to the Williamsburg,
Virginia plant (Amendment to the lease by and between The
Lawson Group, LTD. and Shell Oil Company noted as exhibit
99.6 above originally filed on the Company's Registration
Statement on Form S-1 (File No. 333-13727) filed with the
Securities and Exchange Commission)
</TABLE>
- ---------------
* Items filed herewith.
** Exhibit is incorporated by reference herein to the exhibit of the same
number in the Company's Form 10-K for the fiscal year ended June 27, 1998.
+ Exhibit is incorporated by reference herein to exhibit 99.1 in the Company's
Form 8-K, dated June 10, 1999.
34
<PAGE> 36
++ Exhibit is incorporated by reference herein to exhibit 99.2 in the Company's
Form 8-K, dated June 10, 1999.
+++ Exhibit is incorporated by reference herein to exhibit 99.3 in the Company's
Form 8-K, dated June 10, 1999.
(b) Reports on Form 8-K
On June 10, 1999, the Company filed a Current Report on Form 8-K report to
announce that the Company amended and restated its Credit Agreement and
Receivables Purchase Agreement.
35
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on September 22, 1999.
PRINTPACK, INC.
By: /s/ DENNIS M. LOVE
------------------------------------
Dennis M. Love
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on
the signature page to this Report constitutes and appoints Dennis M. Love and R.
Michael Hembree and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this report, and to file the same, with
all exhibits hereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and grants unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
grants or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange of 1934, this report has been signed by the following persons in the
capacities indicated on September 22, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ DENNIS M. LOVE President and Chief Executive Officer and
- --------------------------------------------------- Director (Principal Executive Officer)
Dennis M. Love
/s/ R. MICHAEL HEMBREE Vice President, Finance and Administration
- --------------------------------------------------- (Principal Financial and Accounting Officer)
R. Michael Hembree
/s/ C. KEITH LOVE Director
- ---------------------------------------------------
C. Keith Love
Director
- ---------------------------------------------------
Gay M. Love
/s/ JAMES E. LOVE, III Director
- ---------------------------------------------------
James E. Love, III
Director
- ---------------------------------------------------
William J. Love
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ HUGH M. CHAPMAN Director
- ---------------------------------------------------
Hugh M. Chapman
/s/ DANIEL K. FRIERSON Director
- ---------------------------------------------------
Daniel K. Frierson
/s/ ROY RICHARDS, JR. Director
- ---------------------------------------------------
Roy Richards, Jr.
/s/ TIMOTHY C. TUFF Director
- ---------------------------------------------------
Timothy C. Tuff
/s/ NEIL WILLIAMS Director
- ---------------------------------------------------
Neil Williams
</TABLE>
37
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Printpack, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income, of
changes in shareholders' equity (deficit) and of cash flows present fairly, in
all material respects, the financial position of Printpack, Inc. (the "Company")
and its subsidiaries at June 26, 1999 and June 27, 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 26, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
September 1, 1999
F-1
<PAGE> 40
PRINTPACK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 26, JUNE 27,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,565 $ 415
Trade accounts receivable, less allowance for doubtful
accounts of $886 and $559.............................. 77,491 70,759
Inventories............................................... 84,000 80,992
Prepaid expenses and other current assets................. 17,499 19,349
Net assets held for sale.................................. 700 4,944
Deferred income taxes..................................... 284 816
-------- --------
Total current assets.............................. 181,539 177,275
Property, plant and equipment, net.......................... 335,455 353,888
Goodwill, less accumulated amortization of $21,559 and
$17,727................................................... 46,510 50,342
Other assets................................................ 25,234 26,819
Deferred income taxes....................................... 2,625 112
-------- --------
$591,363 $608,436
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses..................... $ 75,984 $ 72,960
Accrued salaries, wages, benefits and bonuses............. 14,503 16,227
Current maturities of long-term debt...................... 9,769 24,000
Short-term borrowings under line of credit................ 5,496 3,445
-------- --------
Total current liabilities......................... 105,752 116,632
Long-term debt.............................................. 264,231 264,000
Subordinated long-term debt................................. 210,305 210,305
Other long-term liabilities................................. 19,854 23,448
-------- --------
Total liabilities................................. 600,142 614,385
-------- --------
Shareholders' deficit
Common stock, no par value, 5,000,000 shares authorized,
4,218,560 shares issued and outstanding................ 1,011 1,011
Additional paid-in capital................................ 6,687 6,687
Accumulated deficit....................................... (16,023) (13,647)
Receivable from parent.................................... (949) --
Accumulated other comprehensive income.................... 495 --
-------- --------
Total shareholders' deficit....................... (8,779) (5,949)
-------- --------
Commitments and contingencies............................... -- --
-------- --------
$591,363 $608,436
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 41
PRINTPACK, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 26, JUNE 27, JUNE 28,
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $ 845,587 $ 831,689 $ 782,443
Cost of goods sold.......................................... 722,950 710,416 672,669
Write-off of margin on acquired inventory................... -- -- 7,296
--------- --------- ---------
Gross margin................................................ 122,637 121,273 102,478
Selling, administrative and research and development
expenses.................................................. 72,110 71,652 67,680
Amortization of goodwill.................................... 3,832 4,662 3,965
--------- --------- ---------
Income from operations...................................... 46,695 44,959 30,833
Other expense
Interest expense.......................................... 49,857 52,221 46,600
Other, net................................................ 635 2,830 890
--------- --------- ---------
Loss before benefit for income taxes........................ (3,797) (10,092) (16,657)
--------- --------- ---------
Provision (benefit) for income taxes
Current................................................... 560 501 (4,861)
Deferred.................................................. (1,981) (1,102) 2,765
--------- --------- ---------
(1,421) (601) (2,096)
--------- --------- ---------
Loss before extraordinary item.............................. (2,376) (9,491) (14,561)
Extraordinary item -- loss on early extinguishment of debt
(net of income tax benefit of $999)....................... -- -- (1,631)
--------- --------- ---------
Net loss.................................................... (2,376) (9,491) (16,192)
--------- --------- ---------
Other comprehensive income, net of tax:
Foreign currency translation adjustment (net of income tax
expense of $193)....................................... 302 -- --
--------- --------- ---------
Comprehensive loss.......................................... $ (2,074) $ (9,491) $ (16,192)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 42
PRINTPACK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 26, JUNE 27, JUNE 28,
1999 1998 1997
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net loss.................................................. $ (2,376) $ (9,491) $ (16,192)
-------- --------- ----------
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation........................................... 51,656 48,557 47,605
Amortization of goodwill............................... 3,832 4,662 3,965
Amortization of prepaid financing costs................ 3,106 3,219 2,496
Write-off of margin on acquired inventory.............. -- -- 7,296
Loss on sale of property, plant and equipment.......... 635 179 711
Amortization of deferred gain.......................... (54) (646) (646)
Undistributed (income) loss from equity investment..... (87) 377 741
Deferred income taxes.................................. (1,981) (1,102) 2,765
Postretirement and postemployment benefits............. (419) (500) 401
Incentive compensation................................. (2,660) (1,921) (744)
Other.................................................. 644 507 (133)
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable........... (6,732) 5,316 (7,280)
(Increase) decrease in inventories................... (3,008) 9,082 1,579
Decrease in prepaid expenses and other assets........ 858 1,927 142
Increase in accounts payable and accrued expenses.... 1,388 17,169 8,345
Increase (decrease) in accrued severance costs....... 468 (1,139) (10,309)
Decrease in accrued restructuring costs.............. (555) (1,750) (5,564)
Increase (decrease) in other long-term liabilities... (500) (905) 1,993
-------- --------- ----------
Total adjustments................................. 46,591 83,032 53,363
-------- --------- ----------
Net cash provided by operating activities......... 44,215 73,541 37,171
-------- --------- ----------
Investing activities
Purchases of property, plant and equipment................ (33,862) (48,013) (25,042)
Proceeds from sale of property, plant and equipment....... 4,436 2,212 3,595
Payment for purchase of JR Flexible, net of cash
received............................................... -- -- (369,775)
Proceeds received from Fort James......................... -- 12,000 --
Other..................................................... -- -- (4,771)
-------- --------- ----------
Net cash used in investing activities............. (29,426) (33,801) (395,993)
-------- --------- ----------
Financing activities
Principal payments on long-term debt...................... (18,000) (16,079) (149,250)
Proceeds from issuance of long-term debt.................. -- -- 270,000
Proceeds from issuance of subordinated debt............... -- -- 200,000
Net proceeds (repayments) from borrowings on line of
credit, revolving credit and receivable securitization
facilities............................................. 6,051 (24,386) 64,327
Cost of interest rate lock agreement...................... -- -- (7,380)
Debt prepayment premiums and debt issuance costs.......... (1,236) -- (17,977)
Payment for receivable from parent........................ (949) -- --
-------- --------- ----------
Net cash provided by (used in) financing activities.... (14,134) (40,465) 359,720
-------- --------- ----------
Effect of exchange rate changes on cash and cash
equivalents............................................... 495 -- --
-------- --------- ----------
Increase (decrease) in cash and cash equivalents............ 1,150 (725) 898
Cash and cash equivalents, beginning of year................ 415 1,140 242
-------- --------- ----------
Cash and cash equivalents, end of year...................... $ 1,565 $ 415 $ 1,140
======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 43
PRINTPACK, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CUMULATIVE
RETAINED FOREIGN
ADDITIONAL EARNINGS CURRENCY TOTAL
COMMON PAID-IN (ACCUMULATED RECEIVABLE TRANSLATION EQUITY
STOCK CAPITAL DEFICIT) FROM PARENT ADJUSTMENT (DEFICIT)
------ ---------- ------------ ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance as of June 29, 1996...... $1,011 $ 413 $ 12,036 $ -- $ -- $ 13,460
Net loss....................... -- -- (16,192) -- -- (16,192)
Shareholder contributions...... -- 6,274 -- -- -- 6,274
------ ------ -------- ----- ---- --------
Balance as of June 28, 1997...... 1,011 6,687 (4,156) -- -- 3,542
Net loss....................... -- -- (9,491) -- -- (9,491)
------ ------ -------- ----- ---- --------
Balance as of June 27, 1998...... 1,011 6,687 (13,647) -- -- (5,949)
Net loss....................... -- -- (2,376) -- -- (2,376)
Receivable from parent......... -- -- -- (949) -- (949)
Foreign currency translation
adjustment.................. -- -- -- -- 495 495
------ ------ -------- ----- ---- --------
Balance as of June 26, 1999...... $1,011 $6,687 $(16,023) $(949) $495 $ (8,779)
====== ====== ======== ===== ==== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 44
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Printpack, Inc. ("Printpack" or "the Company") manufactures flexible
packaging material primarily for the food and other consumer goods industries
throughout North America. Printpack acquired (the "Acquisition") the Flexible
Packaging Group of James River Corporation of Virginia ("JR Flexible") (See Note
2) on August 22, 1996, and the accompanying consolidated financial statements
include the results of operations of the former JR Flexible since that date. The
transaction was accounted for using the purchase method in accordance with
generally accepted accounting principles.
Printpack's parent company, Printpack Enterprises, Inc. ("Enterprises"),
until June 29, 1996, conducted a portion of Printpack's operations. In July
1996, as part of and to facilitate the financing of the Acquisition, Printpack
and Enterprises were reorganized (the "Reorganization"). In the Reorganization,
Printpack Holdings, Inc. ("Holdings") was formed and acquired approximately 97%
of the outstanding common stock of Enterprises, which in turn acquired
approximately 100% of the outstanding common stock of Printpack. Holdings and
Enterprises are non-operating holding companies that also control flexible
packaging operations conducted through separately chartered United Kingdom
affiliates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements present the operating results and
financial position of Printpack and its majority owned subsidiaries. Significant
intercompany balances and transactions have been eliminated. Investments in
unconsolidated affiliates which are at least 20% owned are accounted for using
the equity method and are stated at cost plus the Company's share of
undistributed earnings or losses.
FISCAL YEAR
The Company's fiscal year ends on the last Saturday in June. The Company's
fiscal years ended June 26, 1999, June 27, 1998 and June 28, 1997 included 52
weeks.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist principally of highly liquid, short-term
investments with original maturities of three months or less and are recorded at
cost, which approximates market value.
INVENTORIES
Inventories are stated at the lower of cost or current market value. Cost
is determined using the last-in, first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization, which is provided using the straight-line method
over the estimated useful lives of the assets ranging from five to thirty years.
Major renewals and improvements are capitalized, while maintenance and repairs
are expensed when incurred. The cost and accumulated depreciation of property,
plant and equipment sold or retired are relieved from the accounts, and
resulting gains or losses are reflected in income.
INCOME TAXES
The Company has historically been included in the consolidated Federal
income tax return of Holdings. Income taxes reflected in the accompanying
consolidated statements of operations and comprehensive income represent the
Company's share of the consolidated tax provision which approximates the tax
effect that would have been recognized had a separate income tax return been
filed. Deferred tax assets and liabilities are
F-6
<PAGE> 45
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured by applying enacted tax rates and laws
to taxable years in which such differences are expected to reverse.
INTANGIBLE ASSETS
Intangible assets resulting from business acquisitions consist of the
excess of the acquisition cost over the fair value of the net identifiable
assets of businesses acquired (goodwill). Goodwill is amortized on a straight-
line basis over 15 to 20 years. Other intangible assets are amortized on a
straight-line basis over their estimated useful lives. The recoverability of
goodwill is periodically evaluated to determine whether current events or
circumstances warrant adjustment to the carrying value. As of June 26, 1999 and
June 27, 1998, management believes that goodwill has not been impaired.
REVENUE
Revenue is recognized at the time of shipment. Sales to one customer
approximated 15%, 14% and 15% of net sales during fiscal 1999, 1998 and 1997,
respectively.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," as of the first quarter of
fiscal 1999. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. However, it has no impact on the
Company's net income or shareholders' deficit.
Accumulated other comprehensive income presented on the accompanying
consolidated balance sheet as of June 26, 1999 consists of accumulated gains and
losses arising from translating the financial statements of the Company's
subsidiary operating in Mexico from the functional currency to the reporting
currency.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company extends credit to its customers based on an evaluation of the
customer's financial condition, generally without requiring collateral. Exposure
to losses on receivables is primarily dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for such losses.
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 are included in equity on the June 26, 1999
consolidated balance sheet and as a component of other comprehensive income on
the consolidated statement of operations and comprehensive income for the period
then ended.
F-7
<PAGE> 46
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS
The Company periodically uses foreign exchange derivative instruments or
spot purchases to hedge its known liabilities in foreign currencies to reduce
the impact of foreign currency gains and losses in its financial results. It is
the Company's policy not to enter into derivative transactions for speculative
purposes. Gains and losses on foreign exchange derivative instruments, which
qualify as accounting hedges, are deferred and recognized when the underlying
foreign exchange exposure is realized. To qualify for hedge accounting, the
contracts must meet defined correlation and effectiveness criteria, be
designated as hedges and result in cash flows and financial statement effects
that substantially offset those of the position being hedged. Gains and losses
on foreign exchange derivative instruments that do not qualify as hedges for
accounting purposes are recognized currently based on the change in the market
value of the derivative instrument. During fiscal 1999, the Company entered into
a foreign currency contract which expires July 15, 1999. This contract requires
the Company to exchange U.S. Dollars for Deutsche Marks totaling $2,345,353,
which contract approximates fair value as of June 26, 1999. There were no gains
or losses recognized in the year ended June 26, 1999. The Company did not
utilize foreign exchange derivative instruments in fiscal 1998.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs when incurred.
Research and development costs expensed during the years ended June 26, 1999,
June 27, 1998 and June 28, 1997 were approximately $10,185,000, $8,994,000 and
$8,133,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) This Statement requires
companies to record derivatives as assets or liabilities and measure those
instruments at fair value. Gains or losses resulting from changes in the values
of those derivatives will be recorded either in current earnings or as a
component of comprehensive income. SFAS No. 133 will be effective in fiscal
2001. Management believes that this Statement will not have a significant impact
on the Company's consolidated financial position, results of operations or cash
flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. ACQUISITION
In fiscal 1996, the Company entered into an agreement with James River
Corporation of Virginia to purchase certain assets and assume certain
liabilities of JR Flexible, which also manufactured flexible packaging material
primarily for food industries in North America. The agreement was consummated on
August 22, 1996 for a purchase price of approximately $370 million. This
Acquisition and the repayment of the majority of the Company's outstanding debt
was financed by the issuance of $100,000,000 of Senior Notes, $200,000,000 of
Senior Subordinated Notes, a new term loan of $170,000,000 and a draw of
$53,700,000 on a $155,000,000 new revolving credit facility. At the closing of
these transactions on August 22, 1996, the
F-8
<PAGE> 47
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
revolving credit facility was reduced permanently to $105,000,000 by the
Receivables Securitization Facility of up to $50,000,000. Proceeds of
$23,000,000 from the initial borrowings under this Facility collateralized by
receivables were received by the Company on August 22, 1996. As described in
Note 6 below, the revolving credit facility was subsequently reduced to its
present level of $60,000,000 as part of the restructuring of covenants and
repayment terms of debt due to banks.
In connection with the Acquisition, the Company closed two of the acquired
plants in San Leandro, California and Dayton, Ohio. The net assets of these
facilities are recorded as Net Assets Held for Sale in the accompanying
consolidated balance sheet as of June 27, 1998. During the fourth quarter of
fiscal 1998, the Company recorded a pre-tax charge amounting to $2,032,000 to
adjust the carrying value of net assets held for sale to their estimated fair
market value. During fiscal 1999, both of the closed facilities were sold.
Pro forma results, as if the Acquisition occurred on June 29, 1996, are as
follows:
<TABLE>
<CAPTION>
52 WEEKS
ENDED
JUNE 28, 1997
(UNAUDITED)
---------------
(IN THOUSANDS)
<S> <C>
Net sales................................................... $845,384
Loss before extraordinary item.............................. (10,624)
Net loss.................................................... (12,255)
</TABLE>
The pro forma presentation is not necessarily indicative of either the
results of operations that would have occurred had the Acquisition taken place
at the beginning of the period or of future results of the Company.
Concurrent with the Acquisition and new financing, the Company prepaid its
then existing debt and, consequently, recorded an extraordinary loss of
$1,631,000 related to the early retirement of debt. The extraordinary loss was
comprised of a $2,630,000 prepayment penalty, net of a $999,000 income tax
benefit. On June 28, 1996, the Company entered into an amended interest rate
lock agreement with a bank to manage its interest rate exposure on anticipated
borrowings to be incurred in connection with the Acquisition described above.
This amended agreement, which terminated on August 19, 1996, designated the
Company and the bank as fixed and floating rate payers, respectively, on a
notional principal amount of $300 million. As a result of subsequent declines in
interest rates, the Company, on August 19, 1996 paid approximately $7.4 million
on the settlement of this agreement, which cost was deferred and is being
amortized to interest expense over the life of the Senior Notes and the Senior
Subordinated Notes. Such cost is included in Other Assets on the accompanying
consolidated balance sheets.
On May 21, 1998, the Company entered into an agreement with Fort James
Corporation (formerly named James River Corporation of Virginia) whereby Fort
James Corporation remitted $12,000,000 to the Company in settlement of claims
made by Printpack related to the Acquisition. These proceeds were used to reduce
the amount of goodwill recorded by the Company in the Acquisition.
F-9
<PAGE> 48
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $30,264 $31,755
Work-in-process............................................. 10,360 10,972
Finished goods.............................................. 59,323 54,755
------- -------
99,947 97,482
Reduction to state inventories at last-in, first-out cost
(LIFO).................................................... 15,947 16,490
------- -------
$84,000 $80,992
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 8,873 $ 8,691
Buildings................................................... 108,988 99,419
Machinery and equipment..................................... 485,789 444,226
Leasehold improvements...................................... 6,740 5,824
Construction in progress.................................... 13,708 39,004
--------- ---------
624,098 597,164
Less accumulated depreciation and amortization.............. (288,643) (243,276)
--------- ---------
$ 335,455 $ 353,888
========= =========
</TABLE>
5. INVESTMENT IN JOINT VENTURE
During fiscal 1995, the Company entered into an agreement with the OR
Group, to form a joint venture, Orflex Ltd. ("Orflex"), an Ohio limited
liability partnership. Under the terms of the joint venture agreement, the
Company contributed its Cincinnati plant to the joint venture. For its
contribution, the Company received a 49% limited partnership interest in the
joint venture and $5,300,000 in cash. The Orflex transaction was accounted for
as a sale of assets to the extent of third-party ownership in the joint venture
during fiscal 1995. As a result, the Company recorded a deferred gain of
approximately $3,885,000, which is being recognized under the installment
method. The Company recognized approximately $54,000 of this deferred gain
during fiscal 1999 and approximately $646,000 in fiscal 1998 and 1997.
As part of the joint venture agreement, the Company has guaranteed the debt
of the joint venture, which totaled approximately $2,600,000 at June 26, 1999
and $3,800,000 at June 27, 1998. This debt is subject to repayment requirements
through a final maturity date of January 2005.
Pursuant to a note arrangement which became effective during fiscal 1996,
the Company has extended certain working capital loans to Orflex. Such loans,
which bear interest at the rate of LIBOR plus 2.75%, are payable upon demand by
the Company. The Company believes the likelihood of loss as a result of the
advances and debt guarantee as described above is remote based upon the present
and forecasted financial condition of Orflex.
The Company purchases for resale to its customers certain finished goods
inventories from Orflex. During 1999, 1998 and 1997, purchases from Orflex
totaled approximately $789,000, $1,423,000 and $1,672,000, respectively.
F-10
<PAGE> 49
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
10.625% unsecured senior subordinated notes payable in
August 2006; interest payable semi-annually............... $200,000 $200,000
9.875% unsecured senior notes payable in August 2004;
interest payable semi-annually............................ 100,000 100,000
Variable rate secured senior notes to banks due March 2004;
interest payable quarterly; secured by substantially all
of the Company's assets................................... 128,000 146,000
Revolving credit facility with banks due in December 2003;
interest payable quarterly at variable rates; secured by
substantially all of the Company's assets................. -- --
Accounts receivable securitization facility with a bank due
in December 2003; interest payable quarterly at variable
rates..................................................... 46,000 42,000
11% unsecured subordinated notes payable to the Printpack
Holdings, Inc.'s shareholders payable in an installment of
$3,422,000 in May 2005 and the remaining principal payable
in May 2014; interest payable annually.................... 10,305 10,305
-------- --------
484,305 498,305
Less current portion........................................ (9,769) (24,000)
-------- --------
$474,536 $474,305
======== ========
</TABLE>
Aggregate principal maturities of long-term debt are as follows (in
thousands):
<TABLE>
<S> <C>
2000........................................................ $ 9,769
2001........................................................ 9,769
2002........................................................ 9,769
2003........................................................ 9,769
2004........................................................ 134,924
2005 and thereafter......................................... 310,305
--------
$484,305
========
</TABLE>
Certain agreements related to debt outstanding to banks as of June 26, 1999
and June 27, 1998 require that the Company, among other things, restrict the
payment of dividends, the redemption of stock and the incurrence of additional
debt; restrict investments; and limit the amount of pledged assets and advances
and loans to employees. As of June 26, 1999 and June 27, 1998, the Company was
in compliance with all such covenants.
On May 21, 1999, the Company amended its variable rate secured senior note
agreements to banks providing for extended repayment terms and restructured
covenants. The Company incurred approximately $1,200,000 in debt restructuring
costs, which costs were deferred and are being amortized to interest expense
over the remaining life of the variable rate secured senior notes.
At June 26, 1999 and June 27, 1998, the Company had a line of credit with a
bank providing for borrowings of up to $10,000,000 bearing interest at the lower
of the bank's prime rate or a negotiated rate. Current borrowings under this
line were $5,496,000 and $3,445,000 at June 26, 1999 and June 27, 1998,
respectively.
F-11
<PAGE> 50
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's available borrowings under its revolving credit facility were
$60,000,000 and $105,000,000 at June 26, 1999 and June 27, 1998, respectively.
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 December 2003, 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 June 26, 1999 and June 27,
1998, the Company had $46,000,000 and $42,000,000, respectively, of notes
outstanding under the Facility, collateralized by approximately $76 million and
$70 million, respectively, in trade receivables.
Total cash paid for interest, net of amounts capitalized, was approximately
$45,619,000, $46,903,000 and $31,511,000 during fiscal 1999, 1998 and 1997,
respectively.
7. DEFERRED COMPENSATION
Pursuant to the terms of a deferred compensation agreement, the Company is
obligated to pay the former chief executive's beneficiary certain monthly
amounts over the remainder of the beneficiary's life. At June 26, 1999 and June
27, 1998, approximately $3,445,000 and $3,767,000, respectively, has been
accrued under this agreement. Interest expense on this obligation approximated
$368,000, $381,000 and $395,000 during fiscal 1999, 1998 and 1997, respectively.
The Company is obligated under deferred compensation agreements to make
monthly payments in varying amounts to certain former officers and directors
through June 2013. At June 26, 1999 and June 27, 1998, the Company had accrued
approximately $823,000 and $897,000, respectively, relating to these agreements.
For fiscal 1999, 1998, and 1997, interest expense related to these agreements
approximated $96,000, $81,000 and $63,000, respectively.
Future minimum annual payments required by deferred compensation agreements
are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 668
2001........................................................ 614
2002........................................................ 630
2003........................................................ 647
2004........................................................ 659
2005 and thereafter......................................... 4,156
-------
Total minimum payments............................ 7,374
Less amounts representing interest at 8% to 12%............. (3,106)
-------
$ 4,268
=======
</TABLE>
F-12
<PAGE> 51
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses:
Trade accounts payable...................................... $42,269 $43,306
Accrued interest............................................ 13,148 13,272
Other items................................................. 20,567 16,382
------- -------
$75,984 $72,960
======= =======
</TABLE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
NOTE RECEIVABLE
The carrying amount for the note receivable approximates its fair value
based upon the approximate interest rates at which similar loans would be made.
LONG-TERM DEBT AND SUBORDINATED DEBT
The carrying amounts of floating rate long-term debt approximate their fair
values. The fair value of fixed rate long-term debt is estimated using quoted
market prices where applicable and using a discounted cash-flow analysis based
upon the incremental borrowing rates currently available to the Company for
loans not sold in the public market.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 1,565 $ 1,565 $ 415 $ 415
Note receivable........................... 4,107 4,107 4,500 4,500
Long-term debt............................ (274,000) (269,650) (288,000) (295,750)
Subordinated debt......................... (210,305) (209,273) (210,305) (231,840)
</TABLE>
The Company does not use financial instruments for trading purposes.
10. EMPLOYEE BENEFITS
The Company maintains a qualified savings and profit sharing plan for
participating eligible employees ("associates") that provides for annual
contributions based upon associates' savings and the Company's net income. Plan
expense approximated $2,956,000, $2,781,000 and $2,326,000 in fiscal 1999, 1998
and 1997, respectively.
The Company maintains two incentive compensation plans. Under the terms of
both plans, incentive compensation is computed and allocated to individuals
based upon economic value added, as defined within the plan agreements.
Approximately $6,660,000, $7,939,000 and $8,314,000 has been recorded as expense
during fiscal 1999, 1998 and 1997, respectively. Approximately $6,312,000 and
$8,450,000 has been reflected as a liability at June 26, 1999 and June 27, 1998
for bonuses payable to all Company associates.
F-13
<PAGE> 52
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The plans also have a performance share feature (the "Performance Share
Plan"). Under the terms of the plans, salaried associates are divided into
tiers. Tier I is comprised of key associates who are required to defer
twenty-five percent of their annual cash bonus into a performance share, the
value of which is based upon a formula as defined in the plan agreement. These
shares must be held at least four years before they are eligible for redemption
but may be held until the associate retires. Tier II is comprised of the
remaining salaried associates. During fiscal 1999, the Performance Share Plan
was extended to Tier II associates who are required to defer ten percent of
their annual cash bonus into a performance share and have the option to defer an
additional fifteen percent of their annual cash bonus into a performance share,
the value of which is based on the same formula as that of Tier I associates.
These shares must be held at least four years before they are eligible for
redemption and must be redeemed at the end of ten years. Approximately
$4,498,000 and $6,667,000 has been reflected as a liability at June 26, 1999 and
June 27, 1998, respectively. Approximately $170,000, $552,000 and $260,000 has
been recorded as expense relative to the Performance Share Plan during fiscal
1999, 1998 and 1997, respectively.
11. POSTRETIREMENT BENEFITS
Effective June 28, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions
and Other Postretirement Benefits" (FAS 132) that revise disclosure requirements
of Statement of Financial Accounting Standards No. 87, Employers' Accounting for
Pensions ("FAS 87"), Statement of Financial Accounting Standards No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions. FAS 132 does not change the recognition or measurement of
pension or postretirement benefit obligations or expenses, but standardizes
disclosure requirements for pensions and other postretirement benefits,
eliminates certain disclosures and requires some additional information.
The Company provides group health and life insurance benefits to certain
retired associates retiring prior to December 31, 1996. Under the terms of this
plan, the Company reimburses qualified retired associates varying percentages of
health care costs and premium costs of life insurance depending upon a retired
associate's length of service, with a minimum of 10 years required for plan
eligibility. Net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost on projected benefit obligation............... $374 $429 $180
Actuarial (gain)/loss....................................... 102 85 --
==== ==== ====
Net cost............................................. $476 $514 $180
==== ==== ====
Effect of 1% increase in the trend rates
Accumulated postretirement benefit obligation
increase.............................................. $373 $309 $215
==== ==== ====
Interest cost increase................................. $ 29 $ 25 $ 17
==== ==== ====
</TABLE>
F-14
<PAGE> 53
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The postretirement plan's (other than pensions) change in benefit
obligations, funded status and amounts recognized in the Company's consolidated
balance sheets are as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year....................... $3,718 $3,046
Interest cost............................................... 374 429
Actuarial (gain)/loss....................................... (385) 595
Benefits paid............................................... (352) (352)
------ ------
Benefit obligation, end of year............................. $3,355 $3,718
====== ======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
FUNDED STATUS OF THE PLAN:
Benefit obligation.......................................... $3,355 $3,718
Unrecognized actuarial loss................................. (736) (866)
------ ------
Net amount recognized............................. $2,619 $2,852
====== ======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS:
Accrued benefit liability................................... $2,619 $2,852
------ ------
Net amount recognized............................. $2,619 $2,852
====== ======
</TABLE>
The assumed health care cost trend rate and the ultimate rate, achieved
July 1, 1999, used in measuring the accumulated postretirement benefit
obligation was 5.00%. The discount rate used to measure the accumulated
postretirement benefit obligation was 7.75% for fiscal 1999, 7.00% for fiscal
1998 and 8.00% for fiscal 1997.
12. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision (benefit)
Federal................................................. $ -- $ -- $(4,756)
State................................................... 200 240 (105)
Foreign................................................. 360 261 --
Deferred tax provision (benefit)
Federal................................................. (1,794) (1,519) 3,195
State................................................... (187) 417 (430)
------- ------- -------
$(1,421) $ (601) $(2,096)
======= ======= =======
</TABLE>
F-15
<PAGE> 54
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The differences between total tax benefit and the amount determined by
applying the federal statutory tax rate to loss before income taxes result from
the following:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Tax benefit at federal statutory rate....................... (35.0)% (35.0)% (35.0)%
Impact of termination of S corporation election............. -- -- 20.6
State income taxes, net of federal income tax benefit....... (5.1) (3.1) (2.7)
Valuation allowance......................................... -- 13.7 --
Foreign taxes............................................... 6.3 1.9 --
Foreign valuation allowance................................. (6.6) 15.5 --
Other....................................................... 3.0 1.0 1.0
----- ----- -----
(37.4)% (6.0)% (16.1)%
===== ===== =====
</TABLE>
The decrease in the effective tax rate for fiscal 1999 as compared to
fiscal 1998 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. The increase in the effective tax rate
for fiscal 1998 as compared to fiscal 1997 was primarily due to the change in
tax status for the operations formerly conducted by Printpack Enterprises, Inc.,
which, effective June 30, 1996, elected to change its Subchapter S tax election
to be taxed as a Subchapter C corporation. The charge as a result of the change
in tax status was approximately $4.0 million and was reflected in the results of
operations for the year ended June 28, 1997.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 696 $ 218
Accrued incentive compensation............................ 2,667 3,540
Deferred income........................................... 602 750
Accrued postretirement and postemployment benefits........ 1,475 1,112
Accrued separation expenses............................... 193 --
Deferred compensation..................................... 1,798 1,899
Other accrued liabilities................................. 2,913 3,963
Carryforward of net operating loss and tax credits........ 25,476 19,263
Other..................................................... 264 325
------- -------
Total deferred tax assets......................... 36,084 31,070
Valuation allowance............................... (3,118) (2,950)
------- -------
Net deferred tax assets........................... 32,966 28,120
Deferred tax liabilities:
Excess of book over tax basis of property, plant and
equipment.............................................. 22,403 19,453
Excess of book over tax basis of intangible assets........ 5,180 5,603
Voluntary Employee Benefit Association contribution....... 1,309 1,083
Other..................................................... 1,165 1,053
------- -------
Total deferred tax liabilities.................... 30,057 27,192
------- -------
Net deferred tax asset............................ $ 2,909 $ 928
======= =======
</TABLE>
F-16
<PAGE> 55
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance for deferred tax assets at June 26, 1999 and June
27, 1998 was approximately $3,118,000 and $2,950,000, respectively. The net
change in the total valuation allowance for the years ended June 26, 1999 and
June 27, 1998 was an increase of $168,000 and $2,950,000, respectively. The
Company's net operating loss carryforwards expire in years 2012, 2013 and 2019.
The Company paid no income taxes during the years ended June 26, 1999, June
27, 1998 and June 28, 1997.
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain office facilities and transportation equipment
under non-cancelable operating leases expiring on various dates through fiscal
2017. Future minimum annual rentals required by these operating leases are as
follows:
<TABLE>
<CAPTION>
MINIMUM
ANNUAL RENTALS
--------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 1,235
2001........................................................ 1,118
2002........................................................ 905
2003........................................................ 625
2004........................................................ 616
2005 and thereafter......................................... 7,155
-------
$11,654
=======
</TABLE>
Rental expense approximated $4,105,000, $3,788,000 and $3,707,000 during
fiscal 1999, 1998 and 1997, respectively.
At June 26, 1999 and June 27, 1998, commitments relating to future
acquisitions of property, plant and equipment approximated $12,517,000 and
$20,947,000, respectively.
The Company 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 or results of
operations of the Company.
The Company has been designated by the U.S. Environmental Protection Agency
("EPA") and/or other responsible state agencies as a potentially responsible
party ("PRP") at various waste disposal or waste recycling sites that are the
subject of separate investigations or proceedings concerning alleged soil and/or
groundwater contamination and for which no settlement of the Company's liability
has been agreed upon. The Company is participating with other PRPs at all such
sites, and anticipates that its share of cleanup costs will be determined
pursuant to remedial agreements entered into in the normal course of
negotiations with the EPA or other governmental authorities.
The Company has accrued liabilities for all sites, including sites in which
governmental agencies have designated the Company as a PRP, where it is probable
that a loss will be incurred and the minimum cost or amount of loss can be
reasonably estimated. Currently, amounts accrued in the financial statements for
individual sites and in the aggregate are not material. However, because of the
uncertainties associated with environmental assessment and remediation
activities, future expense to remediate the currently identified sites, and
sites that could be identified in the future for cleanup, could be higher than
the liability currently accrued.
F-17
<PAGE> 56
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. RESTRUCTURING CHARGES
During fiscal 1997, the Company recorded severance charges of approximately
$8,810,000 for announced reductions in work force of approximately 300 employees
resulting from the acquisition of JR Flexible. The Company made severance
payments of approximately $925,000 and $13,571,000 during fiscal 1998 and 1997,
respectively. Payments made during fiscal 1997 consist of accruals made in
fiscal 1997 and prior years.
15. RELATED PARTY TRANSACTIONS
During fiscal 1999, the Company advanced approximately $949,000 to
Holdings. These advances are recorded as "Receivable from parent" in the equity
section of the accompanying consolidated balance sheet. In addition, the Company
advanced an additional $949,000 to Holdings in July 1999.
During fiscal 1999 and 1998, the Company sold inventory and equipment in
the amount of approximately $2,061,000 and $503,000, respectively, to an
affiliated entity. As of June 26, 1999, and June 27, 1998, the receivable
associated with these transactions totaled approximately $2,564,000 and
$503,000, respectively, and is recorded under the caption Prepaid Expenses and
Other Current Assets in the accompanying consolidated balance sheets.
16. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131")as of the beginning of
fiscal 1999. SFAS No. 131 established standards for reporting information about
operating segments in financial statements. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing
performance.
The Company's reportable segments are strategic business units that offer
similar products with similar economic characteristics, production processes,
customers and distribution methods. All products fall within the category of
flexible packaging. Accordingly, the reporting segments have been aggregated
into one operating segment.
The accounting policies of the reporting segments are the same as those
described in the summary of significant accounting policies except that the
disaggregated financial results are prepared using a management approach, which
is consistent with the basis and manner in which the Company's management
internally disaggregates financial information for the purposes of assisting in
making internal operating decisions. The Company evaluates performance based on
stand alone reporting segment operating income and generally accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices.
Foreign operations in fiscal 1999, 1998 and 1997 were conducted in one
foreign country and are not considered material to the Company's consolidated
financial statements.
F-18
<PAGE> 57
EXHIBIT INDEX
Unless indicated below, the exhibits are incorporated by reference herein
from the Company's Registration Statement on Form S-1 (File No. 333-13727) filed
with the Securities and Exchange Commission. Copies of such exhibits will be
furnished to any requesting stockholder of the Company upon request to
Secretary, Printpack Inc., 4335 Wendell Drive, S.W., Atlanta, Georgia 30336.
There is a charge of $.50 per page to cover expenses for copying and mailing.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- -----------------------
<C> <S> <C>
2.1 -- Asset Purchase Agreement, dated as of April 10, 1996, by and
between James River Corporation of Virginia and Printpack,
Inc., as amended
2.2 -- Reorganization Agreement dated as of July 1, 1996 by and
among Printpack Holdings, Inc., Printpack, Inc., Printpack
Enterprises, Inc. and Printpack Illinois, Inc.
3.1 -- Restated Articles of Incorporation of Printpack, Inc.
3.2 -- Bylaws of Printpack, Inc.
4.1 -- Indenture, dated August 22, 1996, between Printpack, Inc.
and State Street Bank (successor to Fleet National Bank), as
Trustee relating to the 9 7/8% Senior Notes due 2004.
4.2 -- Indenture, dated August 22, 1996, between Printpack, Inc.
and State Street Bank (successor to Fleet National Bank), as
Trustee relating to the 10 5/8% Senior Subordinated Notes
due 2006.
+10.1 -- Amended and Restated Credit Agreement, dated as of May 21,
1999, by and among Printpack, Inc., the Institutions from
time to time parties thereto as lenders, and The First
National Bank of Chicago, as Agent
10.2 -- Note Purchase Agreement, dated as of March 13, 1995 by and
among Printpack, Inc. and certain shareholders of Printpack,
Inc., as amended
10.3 -- Printpack, Inc. Savings and Profit Sharing Plan, as amended
10.4 -- Printpack, Inc. Incentive Compensation Plan
10.5 -- Guarantee dated as of January 5, 1995 made by Printpack,
Inc. in favor of PNC Bank, Ohio, National Association, as
amended
10.6 -- Registration Rights Agreement dated as of August 22, 1996 by
and between Printpack, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation
10.7 -- Receivables Sale Agreement dated as of August 22, 1996 by
and between Printpack, Inc. and Flexible Funding Corp.
10.8 -- Receivables Purchase Agreement dated as of August 22, 1996
by and among Flexible Funding Corp. as Seller, Falcon Asset
Securitization Corporation and the financial institutions
party hereto as Investors and The First National Bank of
Chicago, as Agent
++10.8(a) -- Waiver and Amendment of Receivables Purchase Agreement dated
as of September 21, 1998, by and among Flexible Funding
Corp., as Seller, Falcon Asset Securitization Corporation
and The First National Bank of Chicago, individually and as
agent
+++10.8(b) -- Amendment of Receivables Purchase Agreement dated as of May
21, 1999, by and among Flexible Funding Corp., as Seller,
Falcon Asset Securitization Corporation and The First
National Bank of Chicago, individually and as agent
10.9 -- Intercreditor Agreement, dated August 22, 1996, by and
between The First National Bank of Chicago, as Contractual
Representative and The First National Bank of Chicago, as
Agent
*12 -- Computation of Ratio of Earnings to Fixed Charges
*21 -- List of Subsidiaries
*27 -- Financial Data Schedule. (For SEC purposes only.)
99.1 -- Contribution Agreement dated as of January 5, 1995 by and
between Printpack, Inc. and Orflex Ltd.
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- -----------------------
<C> <S> <C>
99.2 -- Lease dated September 11, 1980 by and between Gulf Oil
Corporation and Crown Zellerbach Corporation relating to the
Orange, Texas Plant (the rights and obligations of the
lessee under the foregoing Lease have been assigned
ultimately to Printpack, Inc.)
99.3 -- Ground Lease dated September 11, 1980 by and between Gulf
Oil Corporation and Crown Zellerbach Corporation relating to
the Orange, Texas Plant (the rights and obligations of the
lessee under the foregoing Lease have been assigned
ultimately to Printpack, Inc.)
99.4 -- Ground Lease Agreement dated January 1, 1981 by and between
Gulf Oil Corporation and Crown Zellerbach Corporation
relating to the Orange, Texas Plant (the rights and
obligations of the lessee under the foregoing Lease have
been assigned ultimately to Printpack, Inc.)
99.5 -- Ground Lease dated September 9, 1985 by and between Chevron
Chemical Company and Crown Zellerbach Corporation relating
to the Orange, Texas Plant (the rights and obligations of
the lessee under the foregoing Lease have been assigned
ultimately to Printpack, Inc.)
99.6 -- Lease dated July 25, 1990 by and between The Lawson Group,
LTD and Shell Oil Company relating to the Williamsburg,
Virginia plant (the rights and obligations of the lessee
under the foregoing Lease have been assigned ultimately to
Printpack, Inc.)
99.7 -- Note Purchase Agreement dated, August 15, 1996, by and
between Printpack, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation relating to the 9 7/8% Senior Notes
due 2004 and the 10 5/8% Senior Subordinated Notes due 2006
99.8 -- Deferred Income Agreement dated December 17, 1984 with
Edward Hilbert, Jr.
99.9 -- Deferred Income Agreement dated December 17, 1984 with
Robert B. Paxton
99.10 -- Deferred Income Agreement dated July 10, 1996 with Neil
Williams
99.11 -- Family Security Agreement dated April 4, 1986 with Dennis M.
Love
99.12 -- Family Security Agreement dated February 24, 1986 with R.
Michael Hembree
99.13 -- Family Security Agreement dated February 24, 1986 with
Thomas J. Dunn, Jr.
99.14 -- Family Security Agreement dated February 24, 1986 with
Nicklas D. Stucky
99.15 -- Amended and Restated Employment Agreement dated June 23,
1983 with J. Erskine Love, Jr.
**99.16 -- Lease Amendment dated May 20, 1998 by and between GF
Associates and Printpack, Inc. relating to the Williamsburg,
Virginia plant (Amendment to the lease by and between The
Lawson Group, LTD and Shell Oil Company noted as exhibit
99.6 above originally filed on the Company's Registration
Statement on Form S-1 (File No. 333-13727) filed with the
Securities and Exchange Commission)
</TABLE>
- ---------------
* Items filed herewith.
** Exhibit is incorporated by reference herein to the exhibit of the same
number in the Company's Form 10-K for the fiscal year ended June 27, 1998.
+ Exhibit is incorporated by reference herein to exhibit 99.1 in the Company's
Form 8-K, dated June 10, 1999.
++ Exhibit is incorporated by reference herein to exhibit 99.2 in the Company's
Form 8-K, dated June 10, 1999.
+++ Exhibit is incorporated by reference herein to exhibit 99.3 in the Company's
Form 8-K, dated June 10, 1999.
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE(2)
-------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Pre-tax income (loss) from continuing
operations................................... $(3,797) $(10,092) $(16,657) $17,427 $18,345
Minority interest in the income of subsidiary
with fixed charges........................... 87 (377) (741) (1,111) (316)
Plus: Capitalized interest amortized during the
period....................................... 1,309 1,168 889 584 546
Less: Capitalized interest..................... (940) (1,950) (1,351) (887) (579)
------- -------- -------- ------- -------
(3,341) (11,251) (17,860) 16,013 17,996
------- -------- -------- ------- -------
Fixed charges:
Interest expense and amortization of debt
discount and premium on all
indebtedness.............................. 49,857 52,221 46,600 12,411 10,975
Rentals--33%................................... 1,368 1,250 1,223 573 581
------- -------- -------- ------- -------
Total fixed charges.................. 51,225 53,471 47,823 12,984 11,556
------- -------- -------- ------- -------
Earnings before income taxes, minority interest
and fixed charges............................ $47,884 $ 42,220 $ 29,963 $28,997 $29,552
======= ======== ======== ======= =======
Ratio of earnings to fixed charges............. 0.9 0.8 0.6 2.2 2.6
======= ======== ======== ======= =======
Earnings >(<) Fixed Charges.................... $(3,341) $(11,251) $(17,860) $16,013 $17,996
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include operating income (loss)
before income taxes, extraordinary items and cumulative effect of an
accounting change plus fixed charges. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and discount
or premium relating to any indebtedness, whether expensed or capitalized and
the portion of rental expense that is representative of the interest factor
in these rentals. In fiscal 1999, 1998 and 1997, earnings were insufficient
to cover fixed charges by approximately $3,341,000, $11,251,000 and
$17,860,000, respectively.
(2) The Company's fiscal year ends on the last Saturday of June.
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Printpack Illinois, Inc.
Flexible Funding Corp.
Empaques Printpack de Mexico, S.A. de C.V.
Printpack de Mexico, S.A. de C.V.
Printpack Packaging de Mexico, S.A. de C.V.
Servicios Printpack de Mexico, S.A. de C.V.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF PRINTPACK, INC. FOR THE YEAR ENDED JUNE 26, 1999, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUN-26-1999
<CASH> 1,565
<SECURITIES> 0
<RECEIVABLES> 78,377
<ALLOWANCES> 886
<INVENTORY> 84,000
<CURRENT-ASSETS> 181,539
<PP&E> 624,098
<DEPRECIATION> 288,643
<TOTAL-ASSETS> 591,363
<CURRENT-LIABILITIES> 105,752
<BONDS> 438,305
0
0
<COMMON> 1,011
<OTHER-SE> (9,790)
<TOTAL-LIABILITY-AND-EQUITY> 591,363
<SALES> 845,587
<TOTAL-REVENUES> 845,587
<CGS> 722,950
<TOTAL-COSTS> 722,950
<OTHER-EXPENSES> 76,063
<LOSS-PROVISION> 514
<INTEREST-EXPENSE> 49,857
<INCOME-PRETAX> (3,797)
<INCOME-TAX> (1,421)
<INCOME-CONTINUING> (2,376)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,376)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
