<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
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 24, 2000
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 __________
---------------------
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 incorporation) (I.R.S. Employer Identification No.)
</TABLE>
4335 WENDELL DRIVE, S.W.
ATLANTA, GEORGIA 30336
(Address of principal executive offices)
(404) 691-5830
(Registrant's telephone number, including area code)
---------------------
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 24, 2000.
The number of shares of the registrant's Common Stock outstanding at
September 15, 2000 was 4,218,560.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
"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 $906.5 million for the fiscal year ended June 24,
2000. The Company supplies packaging products to leading food and consumer
products companies that 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, Georgia Pacific, 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 17 primary
manufacturing facilities in 12 states, Mexico and the United Kingdom. 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.
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 substrates or 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, 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. Many
recent new food categories require more sophisticated packaging structures to
improve freshness, shelf life and resealability. Packaging must have specific
barrier
1
<PAGE> 3
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 that 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;
- new food categories that 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.
2
<PAGE> 4
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 that 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.
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 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 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 AND MARKETS
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, tissue/towel, copy
paper, 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 14% of the Company's fiscal 2000 annual revenues. Frito-Lay is the
Company's only customer that accounted for more than 10% of Printpack's
3
<PAGE> 5
fiscal 2000 revenues. 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."
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 24, 2000, the Company had approximately 3,800 employees.
Approximately 1,100 of these employees at six of the Company's facilities were
covered by ten collective bargaining agreements. The Company considers relations
with its employees to be generally good. During fiscal 2000, the Company
completed the negotiation of collective bargaining agreements with the unions
representing the St. Louis, Missouri and New Castle, Delaware plants.
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
4
<PAGE> 6
Printpack Illinois, Inc. ("Printpack Illinois"), a subsidiary of the Company
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 Alcoa Packaging and Consumer Products (a division of Alcoa), 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 the Company 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 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.
5
<PAGE> 7
The Company, like all flexible packaging manufacturers that 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., one location in
Mexico and one location in the United Kingdom. At the end of fiscal 2000, 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 Valley, Arizona; Rhinelander, Wisconsin; Villa Rica, Georgia;
Greensburg, Indiana; Jackson, Tennessee; New Castle, Delaware; Orange, Texas;
Shreveport, Louisiana; St. Louis, Missouri; Williamsburg, Virginia; Queretaro,
Mexico and Bury, England. 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."
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 2000 fiscal year ended June 24, 2000.
6
<PAGE> 8
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 15, 2000. The Company has not sold any securities in the last three
fiscal years.
The Company is currently restricted from paying dividends by the Indenture,
dated August 22, 1996, between the Company and State Street 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 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 and amended as of December 15, 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 24, 2000 and June 26, 1999.
7
<PAGE> 9
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 24, 2000, June 26, 1999, June 27, 1998, June 28, 1997,
and June 29, 1996. 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)
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................................... $906,539 $845,587 $831,689 $782,443 $442,931
Income from operations...................... 51,249 46,695 44,959 30,833 27,020
Income (loss) before extraordinary item..... 1,086 (2,376) (9,491) (14,561) 13,236
Extraordinary item -- loss on early
extinguishment of debt.................... -- -- -- (1,631) --
Net income (loss)........................... 1,086 (2,376) (9,491) (16,192) 13,236
BALANCE SHEET DATA:
Total assets................................ 552,877 591,363 608,436 650,510 231,269
Short-term debt............................. 4,410 5,496 3,445 3,831 5,504
Long-term debt.............................. 442,394 484,305 498,305 538,384 151,634
Shareholders' equity (deficit).............. (10,633) (8,779) (5,949) 3,542 13,460
OTHER FINANCIAL DATA:
Dividends paid to parent.................... -- -- -- -- 32,081
Ratio of earnings to fixed charges(2)....... 1.0x 0.9x 0.8x 0.6x 2.2x
</TABLE>
---------------
(1) The Company's fiscal year ends on the last Saturday of June.
(2) 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 and extraordinary items 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.
RESULTS OF OPERATIONS
General
Printpack, Inc. (the "Company") is one of the largest domestic
manufacturers and converters of flexible packaging products with revenues of
$906.5 million for the fiscal year ended June 24, 2000. The Company supplies
packaging products to leading food and consumer products companies that 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,
Georgia Pacific, Kellogg, Keebler, General Mills, Hershey, Mars, Nabisco,
Nestle, and Quaker Oats.
8
<PAGE> 10
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 17 primary
manufacturing facilities in 12 states, Mexico and the United Kingdom. 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.
As a result of the additional assets obtained in a significant acquisition
that occurred in fiscal 1997, 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 2000, 1999 and 1998, 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
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, 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 2000 Compared to Fiscal Year 1999
Net Sales
Net sales increased $60.9 million (7.2%) to $906.5 million in fiscal 2000
from $845.6 million in fiscal 1999, primarily due to higher sales volumes. The
Company was also able to pass along increases in the prices of certain raw
material costs that also contributed to the increase in net sales.
Gross Margin
Gross margin in fiscal 2000 increased $17.3 million (14.1%) to $139.9
million from $122.6 million in fiscal 1999. Gross margin as a percentage of net
sales in fiscal 2000 increased to 15.4% compared to 14.5% in fiscal 1999. The
increase in gross margin percentage is primarily attributable to higher sales
volume and lower waste in fiscal 2000 as compared to fiscal 1999 and cost
reduction initiatives. In addition, the Company recorded expense of $4.8 million
in fiscal 2000 and income of $0.3 million in fiscal 1999 related to the
Company's use of the LIFO inventory valuation method. Excluding the impact of
these items, gross margin would have been approximately $4.8 million higher in
fiscal 2000 and $0.3 million lower in fiscal 1999.
Operating Expenses
Operating expenses in fiscal 2000 increased $12.8 million (16.9%) to $88.7
million from $75.9 million in fiscal 1999. Operating expenses as a percentage of
net sales increased to 9.8% in fiscal 2000 from 9.0% in fiscal 1999. The
increase in operating expense dollars is primarily attributable to increases in
salaries, bonuses and the value of performance shares under the Incentive
Compensation Plan in fiscal 2000 as compared to fiscal 1999.
9
<PAGE> 11
Operating Income
Income from operations in fiscal 2000 increased $4.5 million (9.6%) from
$46.7 million in fiscal 1999 to $51.2 million in fiscal 2000, primarily as a
result of the increase in net sales and other changes described above.
Other Expense
Interest expense in fiscal 2000 decreased by $0.2 million (0.1%) to $49.7
million in fiscal 2000 from $49.9 million in fiscal 1999. The decrease in
interest expense for fiscal 2000 as compared to fiscal 1999 is primarily due to
reductions in outstanding debt, partially offset by higher interest rates.
As a result of the foregoing, income before provision for income taxes
totaled $1.5 million in fiscal 2000 as compared to loss before benefit for
income taxes of $3.8 million in fiscal 1999. Income tax expense for fiscal 2000
totaled $0.4 million (29% of income before provision for income taxes) as
compared to a net benefit of $1.4 million in fiscal 1999 (37% of loss before
benefit for income taxes). The decline in the effective tax rate from fiscal
1999 to fiscal 2000 is primarily the result of the reversal in fiscal 2000 of a
valuation allowance for a portion of the deferred tax assets related to taxable
loss carryforwards in foreign jurisdictions established in prior years.
Net income for fiscal 2000 was $1.1 million as compared to a loss of $2.4
million in fiscal 1999. The increase in income is primarily a result of the
increase in net sales and other changes described above.
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 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 million payment received in
settlement of claims made by the Company in connection with a significant
acquisition that occurred in fiscal 1997.
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.
10
<PAGE> 12
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.
RESEARCH AND DEVELOPMENT
The Company expenses its research and development costs as incurred. Such
expenditures were $10.3 million, $10.2 million and $9.0 million in fiscal 2000,
1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $0.7 million to $0.9 million at June
24, 2000 as compared to $1.6 million at June 26, 1999. The decline was due to
the decrease in cash at the Company's Mexican subsidiary which was higher than
normal at the end of fiscal 1999 in anticipation of payment for certain capital
expenditures in the first quarter of fiscal 2000. Cash flows from operations
were $73.7 million in fiscal 2000, $29.0 million (64.9%) higher than in fiscal
1999. This increase reflected a number of items, primarily decreases in working
capital and increased profitability.
In fiscal 2000, cash flows used in investing activities increased 4.1% to
$30.6 million. Capital expenditures of $20.9 million in fiscal 2000 and $33.9
million in fiscal 1999 continued to be principally for new property, plant and
equipment. The decrease in capital expenditures was primarily due to the
Company's planned efforts to reduce long-term debt. In addition, the Company
spent $10.1 million during fiscal 2000 to purchase the net assets of the Bury,
England facility of an affiliated entity. At the same time, proceeds from the
disposition of property and equipment decreased from $4.4 million in fiscal 1999
to $0.4 million in fiscal 2000 primarily as a result of the disposal in fiscal
1999 of the San Leandro, California and Dayton, Ohio facilities.
Cash used in financing activities in fiscal 2000 was $43.9 million compared
to $14.1 million in fiscal 1999. The increase in cash used in financing
activities is primarily a result of planned efforts to reduce long-term debt as
described above, partially offset by amounts borrowed to finance the purchase of
the net assets of the Bury, England facility described above. The Company also
paid approximately $1.2 million in fiscal 1999 to amend and restate its credit
agreement. During fiscal 2000 and 1999, the Company advanced $948,000 and
$949,000, respectively, to Printpack Holdings, Inc. The indentures and credit
agreement entered into in fiscal 1997 restrict future contributions to Printpack
Holdings, Inc.'s and Printpack Enterprises, Inc.'s 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 term
loans totaling approximately $89 million, a $60 million revolving credit
facility, a $10 million line of credit and a $50 million receivables
securitization facility. On June 24, 2000, Printpack had approximately $71.0
million available under its credit facilities.
11
<PAGE> 13
The Company's current ratio declined from 1.72 in fiscal 1999 to 1.61 in
fiscal 2000. The lower ratio in fiscal 2000 was primarily a result of decreases
in accounts receivable ($5.1 million) and prepaid and other current assets ($4.5
million).
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 $45.0 to $50.0
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 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.
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 customer base.
YEAR 2000
The Company suffered no significant impacts from the changing of the
calendar year to the Year 2000, and the Company's operations were not
interrupted. The Company has continued to conduct business with no noticeable
difficulty since the beginning of the calendar year 2000. The Company also
believes there are no significant continuing contingencies related to customers
or vendors. Costs incurred by the Company related to this issue were not
significant and all such costs have been expensed as incurred in the Company's
consolidated statements of operations.
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.
In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date
of FASB Statement No. 133", to defer for one year the effective date of
implementation of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. Management believes
that this Statement will not have a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued SAB
No. 101, "Revenue Recognition in Financial Statements," which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 outlines the basic criteria that must
be met to recognize revenue and provides guidance for disclosure related to
revenue recognition policies.
12
<PAGE> 14
SAB No. 101 will be effective for Printpack's fiscal year ending June 30, 2001.
Management believes that SAB No. 101 will not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
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 24, 2000, the
Company had approximately $446.8 million of indebtedness. The Company also had
approximately $71.0 million of additional borrowing availability under its
credit facilities. Stockholders' deficit at June 24, 2000 was approximately
$10.6 million.
For the fiscal years ended June 26, 1999 and June 27, 1998, earnings were
insufficient to cover fixed charges by approximately $3,341,000 and $11,251,000,
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 24, 2000, the indentures for the Notes
would permit additional borrowing of up to $71.0 million. If new debt is added
to the Company's and its subsidiaries' current debt levels, the related risks
could intensify.
13
<PAGE> 15
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 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 cost savings will be realized.
Management cannot assure 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 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.
14
<PAGE> 16
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 14% of
total sales in fiscal 2000. 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 INCURRED NET LOSSES IN FISCAL YEARS 1999, 1998 AND
1997 AND THERE CAN BE NO ASSURANCE THAT SUCH NET LOSSES WILL NOT OCCUR IN THE
FUTURE.
The Company 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 were the result of financing
costs incurred in connection with a significant acquisition that occurred in
fiscal 1997, slowed growth in end user markets and continuing price pressure
from the Company's competitors and significant customers. Although the Company
does not anticipate that these net losses will recur in the near future, there
can be no assurance that these net losses will not return in the future or that
the Company will be able to continue to profitably operate.
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 large companies, of which some
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
thirty-six 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 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 Alcoa Packaging and Consumer Products (a division of Alcoa), of which
some 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
15
<PAGE> 17
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 CREDIT FACILITIES 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 24, 2000, the Company had
approximately $132 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 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 that
16
<PAGE> 18
future laws, ordinances or regulations will not give rise to additional
compliance or remediation 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, Indiana facility began in the last week
of June 1997 and lasted until September 12, 1997. During the quarter ended
December 27, 1997, the Company entered into a new three-year collective
bargaining agreement with the union representing the Greensburg employees. In
addition, the Company completed the negotiations of collective bargaining
agreements with the union representing the Rhinelander, Wisconsin plant during
the quarter ended March 27, 1999 and the unions representing the New Castle,
Delaware and St. Louis, Missouri plants during the quarter ended March 25, 2000.
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 THE UNITED KINGDOM AND THERE ARE CERTAIN RISKS INHERENT IN DOING
BUSINESS IN MEXICO AND ON AN INTERNATIONAL LEVEL IN GENERAL.
The Company has plants in Queretaro, Mexico and Bury, England and may in
the future expand into additional international markets. There are certain risks
inherent in doing business 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;
17
<PAGE> 19
- technology export and import restrictions or prohibitions;
- 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 England and elsewhere if it chooses to
expand and, consequently, on its business, financial condition and results of
operations.
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 24, 2000, June 26, 1999 and
June 27, 1998, 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 interest
rate long-term debt instruments: (i) $83,231,000 (at June 24, 2000) secured
senior notes to banks payable in quarterly installments of $2,442,000 each
through the first quarter of fiscal 2003, $1,663,000 in the second quarter of
fiscal 2003, $220,000 in the third quarter of fiscal 2003 and continuing through
the second quarter of fiscal 2004 and a final payment of $58,710,000 during the
third quarter of fiscal 2004 (final installment due March 2004), with an
interest rate tied to LIBOR and payable quarterly; (ii) $5,858,000 (at June 24,
2000) secured notes to a bank payable in annual installments of $1,502,000 each
beginning in fiscal 2002 and continuing through fiscal 2004 and a final payment
of $1,352,000 during fiscal 2005 (final installment due July 2004), with an
interest rate tied to the bank's Base Rate as published from time to time and
payable monthly; (iii) 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
24, 2000, nothing was outstanding under this facility); (iv) a $10,000,000 line
of credit with an interest rate tied to the Federal Funds rate (approximately
$4,410,000 outstanding at June 24, 2000); and (v) $43,000,000 (at June 24, 2000)
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 $1,880,000 at June 24, 2000. 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, the
Federal Funds rate and a bank's base 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 24, 2000, 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 of Holdings 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.
18
<PAGE> 20
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. There were no material gains or losses recognized in fiscal years 2000
or 1999. The Company did not utilize foreign exchange derivative instruments in
fiscal 1998.
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, the Company has extended certain working
capital loans to Orflex Ltd., a joint venture 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 24, 2000. 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.
19
<PAGE> 21
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 24, 2000) POSITION
---- --------------------- --------
<S> <C> <C>
Dennis M. Love....................... 44 President, Chief Executive Officer
and Director(1)
James J. Greco....................... 57 Vice President and General Manager
James E. Love, III................... 43 Vice President, General Manager and
Director(1)
Nicklas D. Stucky.................... 54 Vice President, Human Resources
R. Michael Hembree................... 51 Vice President, Finance and
Administration
Neil Williams........................ 64 Director(2)
August Franchini, Jr................. 57 Vice President, Engineering
Terrence P. Harper................... 42 Vice President, Technology and
Support
Dellmer B. Seitter, III.............. 35 Treasurer and Assistant Secretary
Gay M. Love.......................... 71 Director(1)
Hugh M. Chapman...................... 67 Director(2)
Daniel K. Frierson................... 58 Director(3)
Roy Richards, Jr..................... 41 Director(3)
Timothy C. Tuff...................... 53 Director(2)
C. Keith Love........................ 39 Plant Manager, Hendersonville, N.C.
Plant, and Director(1)
William J. Love...................... 38 Director(1)
William E. Lewis..................... 56 Vice President and General Manager
John N. Stigler...................... 52 Vice President and General Manager
Michael A. Fisher.................... 53 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;
Caraustar Industries, Inc. and AGL Resources, both of which have securities
registered under the 1934 Act; and Cleveland Group.
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.
20
<PAGE> 22
Mr. Greco also served as a director of the Company from July 1996 until January
1998. Mr. Greco is also a director of Orflex, Ltd.
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 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 -- Director. Mr. Williams has served as General Counsel and
Global Partner for Amvescap PLC since September 1999. Prior to that time, Mr.
Williams was a partner at the law firm of Alston & Bird LLP (Managing Partner
from 1984 until 1996), counsel to the Company. Mr. Williams also serves as a
director of National Data Corporation and National Service Industries, both of
which have securities registered under the 1934 Act. Mr. Williams has served as
member of the Company's Board of Directors since 1977 and also served as the
Company's Secretary until September 1999.
August Franchini, Jr. -- Vice President, Engineering. Mr. Franchini became
Vice President, Engineering in June 1989. Prior to becoming Vice President,
Engineering, Mr. Franchini served as the Company's Manager of Industrial
Engineering, as well as Plant Manager of the Company's Grand Prairie, Texas
plant.
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 an 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 Printpack Enterprises,
Inc. ("Enterprises"). She was 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, each of which has securities
registered under the 1934 Act.
Daniel K. Frierson -- Director. Mr. Frierson has served as Chief Executive
Officer of The Dixie Group, Inc., a textile manufacturing business, since 1979.
Since 1987, Mr. Frierson has also served as Chairman of the Board of Directors
of such company, which has securities registered under the 1934 Act. Mr.
Frierson was first elected as a director of the Company during fiscal 1998. He
also serves as a director of SunTrust Bank of Chattanooga, N.A. and Astec
Industries, Inc. which has securities registered under the 1934 Act.
21
<PAGE> 23
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. Mr. Richards also serves as a
director of National Service Industries, Inc. which has securities registered
under the 1934 Act.
Timothy C. Tuff -- Director. Mr. Tuff is Chairman of the Board, President
and CEO of John H. Harland Company which has securities registered under the
1934 Act. John H. Harland Company 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.
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 as Plant Manager in February 1996. He formerly served as a
Shift 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, an affiliated entity, 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 July 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.
22
<PAGE> 24
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 2000, 1999, and 1998, for the Company's Chief
Executive Officer and the Company's four most highly compensated executive
officers other than the Chief Executive Officer for the fiscal year ended June
24, 2000.
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............................ 2000 $408,938 $191,840 $ -- $6,680
President and Chief Executive Officer 1999 377,680 122,441 -- 5,097
1998 317,950 165,736 202,372 4,794
Mr. Nicklas D. Stucky......................... 2000 159,990 59,888 -- 6,088
Vice President, Human Resources 1999 148,460 45,070 -- 5,062
1998 139,730 60,121 -- 5,062
Mr. James E. Love, III........................ 2000 227,251 87,967 -- 5,200
Vice President and General Manager 1999 207,645 47,400 -- 4,092
1998 142,740 61,141 -- 3,892
Mr. James J. Greco............................ 2000 240,840 124,583 -- 6,348
Vice President and General Manager 1999 205,895 81,628 70,280 5,000
1998 199,955 117,391 60,693 5,155
Mr. R. Michael Hembree........................ 2000 198,100 67,410 -- 6,230
Vice President, Finance and 1999 172,280 50,465 105,261 4,998
Administration 1998 156,590 65,301 9,599 5,471
</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 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 100% of the first one percent of contributions and
50% of contributions between two and six percent, 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.
23
<PAGE> 25
LONG-TERM INCENTIVE PLAN AWARDS IN FISCAL YEAR 2000
<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.......................................... 694.40 March 2005
Mr. Nicklas D. Stucky....................................... 216.78 March 2005
Mr. James E. Love, III...................................... 318.41 March 2005
Mr. James J. Greco.......................................... 450.95 March 2005
Mr. R. Michael Hembree...................................... 244.00 March 2005
</TABLE>
---------------
(1) Represents units of phantom stock (performance shares) granted in fiscal
year 2000 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 24, 2000.
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 invested in
performance shares may be reduced pro rata if the 15% limit would be exceeded
because of the full
24
<PAGE> 26
investment. The Company may call outstanding performance shares from
participants as it deems advisable if the 15% limit is reached so that new
shares may be issued.
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 a director since 1977 and from 1977 until September 1999, served
as the Company's Secretary, 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, James E. Love, III, R. Michael Hembree, and Nicklas D. Stucky,
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 an
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
As of June 24, 2000, the Company had approximately $10.4 million aggregate
principal amount of subordinated notes outstanding from shareholders (the
"Shareholder Notes"). These notes bear interest of 11% which is payable
annually. All of the shareholders of Holdings who are also directors and
officers of the Company are holders of the Shareholder Notes.
As of June 24, 2000, the Company had loans outstanding to Dennis M. Love
and Gay M. Love totaling approximately $65,000 and $119,000, respectively. These
amounts are payable on demand and bear no interest. During fiscal 2000, the
highest amount outstanding during the year from Gay M. Love was approximately
$119,000 and from Dennis M. Love was approximately $65,000.
25
<PAGE> 27
During fiscal 2000 and 1999, the Company advanced approximately $948,000
and $949,000, respectively, to Holdings for the redemption of common stock held
by retired, non-family shareholders. These advances have been reflected as an
increase in shareholder deficit in the consolidated balance sheets of the
Company. The Company advanced an additional $1,690,000 to Holdings in July 2000
for the same purpose. All amounts under these advances are still outstanding,
are payable on demand and bear no interest.
During fiscal 2000, 1999 and 1998, the Company sold equipment and inventory
and had miscellaneous other charges to an affiliated entity owned by Holdings
and Enterprises totaling approximately $200,000, $2,061,000 and $503,000,
respectively. As of June 26, 1999, the Company had approximately $2,564,000
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 $482,897 in fiscal 2000 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 former partner at the law firm of Alston & Bird LLP,
counsel to the Company.
During fiscal 2000, the Company established Printpack Enterprises, Ltd
(Enterprises, Ltd.) as a wholly owned subsidiary in the United Kingdom.
Enterprises, Ltd. entered into an agreement with an affiliated entity to
purchase certain assets and assume certain liabilities of the affiliated
entity's Bury, England plant, which also manufactures flexible packaging
material primarily for food industries in the United Kingdom and Europe. The
agreement was consummated on June 23, 2000 for a purchase price of approximately
$10.1 million. This acquisition was financed through the issuance of a new term
loan of $5.9 million and borrowings on the existing credit facilities of
Printpack, Inc. The acquisition of the facility was accounted for as a purchase
from an affiliated entity, and accordingly, the purchase was accounted for at
book value of net assets acquired which approximates fair market value.
The Company purchases for resale to its customers certain finished goods
inventories from Orflex. During fiscal 2000, purchases from Orflex totaled
approximately $763,000.
26
<PAGE> 28
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 24, 2000 and June 26, 1999
Statements of Operations and Comprehensive Income for the Three Years
Ended June 24, 2000
Statements of Cash Flows for the Three Years Ended June 24, 2000
Statements of Changes in Shareholders' Equity (Deficit) for the Three
Years Ended June 24, 2000
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 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
====== ====== ===== ======
Year ended June 24, 2000
Allowance for Doubtful Accounts.............. $ 886 $ 367 $(504) $ 749
====== ====== ===== ======
Allowance for Deferred Tax Assets............ $3,118 $ -- $ (94) $3,024
====== ====== ===== ======
</TABLE>
The notes to the financial statements are an integral part of this schedule.
27
<PAGE> 29
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, 2000 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, 2000
28
<PAGE> 30
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 shareholder 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>
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.
*10.1(a) -- Amendment No. 1, dated as of December 15, 1999, among
Printpack, Inc., the Institutions from time to time parties
hereto, as lenders, and Bank One, NA, 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, amended as of
July 15, 1999.
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 thereto 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.
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S> <C>
*24 -- Power of Attorney (included on page 31).
*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 Zellerback 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.)
99.10 -- 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
99.14 -- 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.
(b) Reports on Form 8-K
The Registrant filed no Current Reports on Form 8-K during the last quarter
of the fiscal year ended June 24, 2000.
30
<PAGE> 32
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 19, 2000.
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 19, 2000.
<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
/s/ GAY M. LOVE Director
---------------------------------------------------
Gay M. Love
Director
---------------------------------------------------
James E. Love, III
Director
---------------------------------------------------
William J. Love
</TABLE>
31
<PAGE> 33
<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 Director
---------------------------------------------------
Roy Richards, Jr.
/s/ TIMOTHY C. TUFF Director
---------------------------------------------------
Timothy C. Tuff
/s/ NEIL WILLIAMS Director
---------------------------------------------------
Neil Williams
</TABLE>
32
<PAGE> 34
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 24, 2000 and June 26, 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 24, 2000, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards generally
accepted in the United States of America, 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, 2000
F-1
<PAGE> 35
PRINTPACK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 24, JUNE 26,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 870 $ 1,565
Trade accounts receivable, less allowance for doubtful
accounts of $749 and $886.............................. 72,408 77,491
Inventories............................................... 84,323 84,000
Prepaid expenses and other current assets................. 13,678 18,199
Deferred income taxes..................................... 1,526 284
-------- --------
Total current assets.............................. 172,805 181,539
Property, plant and equipment, net.......................... 309,328 335,455
Goodwill, less accumulated amortization of $25,391 and
$21,559................................................... 42,678 46,510
Other assets................................................ 24,822 25,234
Deferred income taxes....................................... 3,244 2,625
-------- --------
$552,877 $591,363
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses..................... $ 74,477 $ 75,984
Accrued salaries, wages, benefits and bonuses............. 18,673 14,503
Current maturities of long-term debt...................... 9,769 9,769
Short-term borrowings under line of credit................ 4,410 5,496
-------- --------
Total current liabilities......................... 107,329 105,752
Long-term debt.............................................. 222,320 264,231
Subordinated long-term debt................................. 210,305 210,305
Other long-term liabilities................................. 23,556 19,854
-------- --------
Total liabilities................................. 563,510 600,142
-------- --------
Shareholders' deficit
Common stock, no par value, 15,000,000 shares authorized,
4,218,560 shares issued and outstanding................ 1,011 1,011
Additional paid-in capital................................ 6,687 6,687
Accumulated deficit....................................... (14,937) (16,023)
Receivable from parent.................................... (1,897) (949)
Accumulated other comprehensive income.................... (1,497) 495
-------- --------
Total shareholders' deficit....................... (10,633) (8,779)
-------- --------
Commitments and contingencies............................... -- --
-------- --------
$552,877 $591,363
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 36
PRINTPACK, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 24, JUNE 26, JUNE 27,
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $906,539 $845,587 $831,689
Cost of goods sold.......................................... 766,605 722,950 710,416
-------- -------- --------
Gross margin................................................ 139,934 122,637 121,273
Selling, administrative and research and development
expenses.................................................. 84,853 72,110 71,652
Amortization of goodwill.................................... 3,832 3,832 4,662
-------- -------- --------
Income from operations...................................... 51,249 46,695 44,959
Other expense
Interest expense.......................................... 49,673 49,857 52,221
Other, net................................................ 43 635 2,830
-------- -------- --------
Income (loss) before provision (benefit) for income taxes... 1,533 (3,797) (10,092)
-------- -------- --------
Provision (benefit) for income taxes
Current................................................... 933 560 501
Deferred.................................................. (486) (1,981) (1,102)
-------- -------- --------
447 (1,421) (601)
-------- -------- --------
Net income (loss)........................................... 1,086 (2,376) (9,491)
-------- -------- --------
Other comprehensive income, net of tax:
Foreign currency translation adjustment (net of income tax
(benefit) expense of ($482) and $193, respectively).... (1,172) 302 --
Minimum pension liability adjustment (net of income tax
benefit of $98)........................................ (240) -- --
-------- -------- --------
Comprehensive loss.......................................... $ (326) $ (2,074) $ (9,491)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 37
PRINTPACK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 24, JUNE 26, JUNE 27,
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net income (loss)......................................... $ 1,086 $ (2,376) $ (9,491)
-------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization of goodwill.............. 55,807 55,488 53,219
Amortization of prepaid financing costs................ 3,033 3,106 3,219
Loss on sale of property, plant and equipment.......... 941 635 179
Deferred income taxes.................................. (1,861) (4,641) (3,023)
Employee benefits, including performance shares........ 4,248 (419) (500)
Other.................................................. (75) 998 238
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable........... 5,083 (6,732) 5,316
(Increase) decrease in inventories................... 3,902 (3,008) 9,082
Decrease in prepaid expenses and other assets........ 1,439 858 1,927
Increase in accounts payable and accrued
liabilities....................................... 130 801 13,375
-------- --------- ---------
Total adjustments................................. 72,647 47,086 83,032
-------- --------- ---------
Net cash provided by operating activities......... 73,733 44,710 73,541
-------- --------- ---------
Investing activities
Purchases of property, plant and equipment................ (20,891) (33,862) (48,013)
Proceeds from sale of property, plant and equipment....... 437 4,436 2,212
Purchase of net assets from affiliated entity............. (10,108) -- --
Other..................................................... -- -- 12,000
-------- --------- ---------
Net cash used in investing activities............. (30,562) (29,426) (33,801)
-------- --------- ---------
Financing activities
Principal payments on long-term debt...................... (44,769) (18,000) (16,079)
Proceeds from issuance of long-term debt.................. 5,937 -- --
Net proceeds (repayments) from borrowings on line of
credit, revolving credit and receivable securitization
facilities............................................. (4,086) 6,051 (24,386)
Debt issuance costs....................................... -- (1,236) --
Payment for receivable from parent........................ (948) (949) --
-------- --------- ---------
Net cash used in financing activities............. (43,866) (14,134) (40,465)
-------- --------- ---------
Increase (decrease) in cash and cash equivalents............ (695) 1,150 (725)
Cash and cash equivalents, beginning of year................ 1,565 415 1,140
-------- --------- ---------
Cash and cash equivalents, end of year...................... $ 870 $ 1,565 $ 415
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 38
PRINTPACK, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL OTHER TOTAL
COMMON PAID-IN ACCUMULATED RECEIVABLE COMPREHENSIVE EQUITY
STOCK CAPITAL DEFICIT FROM PARENT INCOME (DEFICIT)
------ ---------- ----------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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)
Net income................... -- -- 1,086 -- -- 1,086
Receivable from parent....... -- -- -- (948) -- (948)
Foreign currency translation
adjustment................ -- -- -- -- (1,654) (1,654)
Minimum pension liability
adjustment................ -- -- -- -- (338) (338)
------ ------ -------- ------- ------- --------
Balance as of June 24, 2000.... $1,011 $6,687 $(14,937) $(1,897) $(1,497) $(10,633)
====== ====== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 39
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 and the United Kingdom. Printpack is a wholly-owned
subsidiary of Printpack Enterprises, Inc. ("Enterprises") which is 97% owned by
Printpack Holdings, Inc. ("Holdings"). Holdings and Enterprises are
non-operating holding companies that also control flexible packaging operations
conducted through separately chartered United Kingdom affiliates. In June 2000,
the Company established Printpack Enterprises, Ltd. as a subsidiary operating in
the United Kingdom. As more fully described in Note 2 below, Printpack
Enterprises, Ltd. subsequently acquired the Bury, England facility of an
affiliated entity.
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 24, 2000, June 26, 1999 and June 27, 1998 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 for domestic
inventories and first-in, first-out (FIFO) method for international inventories.
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 10 to 30 years for
buildings and 5 to 10 years for all other assets. 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.
PENSION AND OTHER 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" (SFAS No. 132) that revise disclosure
requirements of Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions" (SFAS No. 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". SFAS No. 132 does not change the
recognition or measurement of pension or postretirement benefit obligations or
expenses, but standardizes disclosure
F-6
<PAGE> 40
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
requirements for pensions and other postretirement benefits, eliminates certain
disclosures and requires some additional information.
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 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 24, 2000 and
June 26, 1999, management believes that goodwill has not been impaired.
On May 21, 1998, the Company entered into an agreement whereby Printpack
received $12,000,000 in settlement of claims made by the Company in connection
with a significant acquisition that occurred in fiscal 1997. These proceeds were
used to reduce the amount of goodwill recorded by the Company in the
acquisition.
REVENUE
Revenue is recognized at the time of shipment. Sales to one customer
approximated 14%, 15% and 14% of net sales during fiscal 2000, 1999 and 1998,
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 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 sheets as of June 24, 2000 and June 26, 1999 consists of
accumulated gains and losses arising from translating the financial statements
of the Company's subsidiaries operating in Mexico and the United Kingdom from
the functional currency to the reporting currency and also includes net losses
recognized pursuant to SFAS No. 87 as an additional pension liability not yet
recognized as net periodic pension cost.
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.
F-7
<PAGE> 41
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 net income for the fiscal year ended
June 27, 1998 and for the six-months ended December 26, 1998. 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 24, 2000 and June 26, 1999
consolidated balance sheets and as a component of other comprehensive income on
the consolidated statements of operations and comprehensive income.
The Company's subsidiary operating in the United Kingdom uses the British
Pound as the functional currency of the subsidiary's financial statements.
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 24, 2000 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.
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. There were no material gains or losses
recognized in fiscal years 2000 or 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 24, 2000,
June 26, 1999 and June 27, 1998 were approximately $10,281,000, $10,185,000 and
$8,994,000, 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.
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
F-8
<PAGE> 42
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 of
the consolidated company 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 2000, 1999 and 1998 were conducted in one
foreign country and are not considered material to the Company's consolidated
financial statements.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("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.
In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date
of FASB Statement No. 133", to defer for one year the effective date of
implementation of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. Management believes
that this Statement will not have a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued SAB
No. 101, "Revenue Recognition in Financial Statements," which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 outlines the basic criteria that must
be met to recognize revenue and provides guidance for disclosure related to
revenue recognition policies. SAB No. 101 will be effective for Printpack's
fiscal year ending June 30, 2001. Management believes that SAB No. 101 will not
have a material effect 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
During fiscal 2000, the Company established Printpack Enterprises, Ltd
(Enterprises, Ltd.) as a wholly-owned subsidiary in the United Kingdom.
Enterprises, Ltd. entered into an agreement with an affiliated entity to
purchase certain assets and assume certain liabilities of an affiliated entity's
Bury, England facility, which also manufactures flexible packaging material
primarily for food industries in the United Kingdom and Europe. The agreement
was consummated on June 23, 2000 for a purchase price of approximately $10.1
million. This acquisition was financed through the issuance of a new term loan
of $5.9 million and borrowings
F-9
<PAGE> 43
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
on the existing credit facilities of Printpack, Inc. totaling $4.2 million. The
acquisition of the facility was accounted for as a purchase from an affiliated
entity, and accordingly, the purchase was accounted for at book value of net
assets acquired, which approximates fair market value.
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 35,205 $30,264
Work-in-process............................................. 9,996 10,360
Finished goods.............................................. 60,222 59,323
-------- -------
105,423 99,947
Reduction to state inventories at last-in, first-out cost
(LIFO).................................................... 21,100 15,947
-------- -------
$ 84,323 $84,000
======== =======
</TABLE>
The Company recorded expense of approximately $4,800,000 in fiscal 2000 and
income of approximately $300,000 in fiscal 1999 related to the Company's use of
LIFO inventory valuation method.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 8,854 $ 8,873
Buildings................................................... 114,741 108,988
Machinery and equipment..................................... 509,791 485,789
Leasehold improvements...................................... 6,927 6,740
Construction in progress.................................... 6,492 13,708
--------- ---------
646,805 624,098
Less accumulated depreciation and amortization.............. (337,477) (288,643)
--------- ---------
$ 309,328 $ 335,455
========= =========
</TABLE>
During fiscal 1997, the Company closed two facilities acquired in
connection with a significant acquisition that occurred during fiscal 1997.
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 the assets of these
facilities to their estimated fair market value. During fiscal 1999, both of the
closed facilities were sold.
Depreciation expense was $51,975,000, $51,656,000 and $48,557,000 in fiscal
2000, 1999 and 1998, respectively.
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company
identified certain fixed assets as impaired during fiscal 2000. The charge to
write-down the value of these assets recorded by the Company in the amount of
$656,000 is included in Selling, Administrative and Research and Development
Expenses on the accompanying consolidated Statement of Operations and
Comprehensive Income for the year ended June 24, 2000.
F-10
<PAGE> 44
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT IN JOINT VENTURE
The Company has a joint venture investment with the OR Group in Orflex Ltd.
("Orflex"), an Ohio limited liability partnership. Under the terms of the joint
venture agreement, the Company contributed a plant in exchange for a 49% limited
partnership interest and cash.
As part of the joint venture agreement, the Company has guaranteed the debt
of the joint venture, which totaled approximately $1,880,000 at June 24, 2000
and $2,600,000 at June 26, 1999. 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 purchases for resale to its customers certain finished goods
inventories from Orflex. During 2000, 1999 and 1998, purchases from Orflex
totaled approximately $763,000, $789,000 and $1,423,000, respectively.
6. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
(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................................... 83,231 128,000
Variable rate secured note to bank due July 2004; interest
payable monthly; secured by substantially all of the
assets of Enterprises, Ltd................................ 5,858 --
Revolving credit facility with banks due 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
December 2003; interest payable quarterly at variable
rates..................................................... 43,000 46,000
11% unsecured subordinated notes payable to Holdings'
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
-------- --------
442,394 484,305
Less current portion........................................ (9,769) (9,769)
-------- --------
$432,625 $474,536
======== ========
</TABLE>
F-11
<PAGE> 45
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate principal maturities of long-term debt are as follows (in
thousands):
<TABLE>
<S> <C>
2001........................................................ $ 9,769
2002........................................................ 11,271
2003........................................................ 6,047
2004........................................................ 103,650
2005........................................................ 104,774
2006 and thereafter......................................... 206,883
--------
$442,394
========
</TABLE>
Certain agreements related to debt outstanding to banks as of June 24, 2000
and June 26, 1999 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 24, 2000 and June 26, 1999, 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 24, 2000 and June 26, 1999, 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 $4,410,000 and $5,496,000 at June 24, 2000 and June 26, 1999,
respectively.
The Company's available borrowings under its revolving credit facility were
$60,000,000 at June 24, 2000 and June 26, 1999, 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 24, 2000 and June 26,
1999, the Company had $43,000,000 and $46,000,000, respectively, of notes
outstanding under the Facility, collateralized by approximately $70 million and
$76 million, respectively, in trade receivables.
Total cash paid for interest, net of amounts capitalized, was approximately
$46,992,000, $45,619,000 and $46,903,000 during fiscal 2000, 1999 and 1998,
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 24, 2000 and June
26, 1999, approximately $3,466,000 and $3,445,000, respectively, has been
accrued under this agreement. Interest expense on this obligation approximated
$354,000, $368,000 and $381,000 during fiscal 2000, 1999 and 1998, respectively.
The Company is obligated under deferred compensation agreements to make
monthly payments in varying amounts to certain former officers and directors
through June 2015. At June 24, 2000 and June 26,
F-12
<PAGE> 46
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1999, the Company had accrued approximately $709,000 and $835,000, respectively,
relating to these agreements. For fiscal 2000, 1999, and 1998, interest expense
related to these agreements approximated $62,000, $69,000 and $81,000,
respectively.
Future minimum annual payments required by deferred compensation agreements
are as follows (in thousands):
<TABLE>
<S> <C>
2001........................................................ $ 618
2002........................................................ 635
2003........................................................ 652
2004........................................................ 659
2005........................................................ 676
2006 and thereafter......................................... 3,598
-------
Total minimum payments............................ 6,838
Less amounts representing interest at 8% to 12%............. (2,663)
-------
$ 4,175
=======
</TABLE>
8. SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses:
Trade accounts payable...................................... $36,469 $41,744
Accrued interest............................................ 12,183 13,148
Other items................................................. 25,825 21,092
------- -------
$74,477 $75,984
======= =======
</TABLE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
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.
F-13
<PAGE> 47
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 870 $ 870 $ 1,565 $ 1,565
Note receivable........................... 4,070 4,070 4,107 4,107
Long-term debt............................ (232,089) (228,089) (274,000) (269,650)
Subordinated debt......................... (210,305) (199,117) (210,305) (209,273)
</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 $3,769,000, $2,956,000 and $2,781,000 in fiscal 2000, 1999
and 1998, 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 $9,542,000, $6,660,000 and $7,939,000 has been recorded as expense
during fiscal 2000, 1999 and 1998, respectively. Approximately $9,671,000 and
$6,312,000 has been reflected as a liability at June 24, 2000 and June 26, 1999
for bonuses payable to all Company associates.
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 performance shares, 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 performance shares and have the option to defer an
additional fifteen percent of their annual cash bonus into performance shares,
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
$9,027,000 and $4,498,000 has been reflected as a liability at June 24, 2000 and
June 26, 1999, respectively. Approximately $5,070,000, $170,000 and $552,000 has
been recorded as expense relative to the Performance Share Plan during fiscal
2000, 1999 and 1998, respectively.
11. PENSION BENEFITS
As part of the acquisition of net assets from an affiliated entity on June
23, 2000, as more fully described in Note 2, the Company's subsidiary, Printpack
Enterprises, Ltd. assumed a liability for a defined benefit pension plan for
eligible associates. Benefits under the plan are based on a formula including
years of service and the associate's compensation.
F-14
<PAGE> 48
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the funded status of the plan:
<TABLE>
<CAPTION>
2000
--------------
(IN THOUSANDS)
<S> <C>
FUNDED STATUS OF THE PLAN:
Accumulated benefit obligation.............................. $10,665
Plan assets................................................. 9,976
-------
Funded status............................................... 689
Unrecognized prior service cost............................. (338)
-------
Net amount recognized............................. $ 351
=======
</TABLE>
<TABLE>
<CAPTION>
2000
--------------
(IN THOUSANDS)
<S> <C>
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET:
Accrued benefit liability................................... $ 689
Intangible asset............................................ (338)
-----
Net amount recognized............................. $ 351
=====
</TABLE>
The following table summarizes the principal financial assumptions used in
determining the actuarial present value of the benefit obligation:
<TABLE>
<CAPTION>
2000
----
<S> <C>
Discount rate............................................... 6.0%
Long-term rate of return on assets.......................... 7.5%
Salary increases............................................ 4.5%
</TABLE>
As of June 24, 2000 an additional minimum pension liability of $240,000
(net of income tax benefit of $98,000) was included as a component of other
comprehensive income.
12. POSTRETIREMENT BENEFITS
The Company provides group health and life insurance benefits to certain
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>
2000 1999 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost on projected benefit obligation............... $247 $374 $429
Actuarial loss.............................................. 16 102 85
---- ---- ----
Net cost.......................................... $263 $476 $514
==== ==== ====
Effect of 1% increase in the trend rates
Accumulated postretirement benefit obligation increase.... $322 $373 $309
==== ==== ====
Interest cost increase.................................... $ 26 $ 29 $ 25
==== ==== ====
</TABLE>
F-15
<PAGE> 49
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The postretirement plan's change in benefit obligation, funded status and
amount recognized in the Company's consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year....................... $3,355 $3,718
Interest cost............................................... 247 374
Actuarial loss.............................................. (121) (385)
Benefits paid............................................... (587) (352)
------ ------
Benefit obligation, end of year............................. $2,894 $3,355
====== ======
</TABLE>
<TABLE>
<CAPTION>
2000 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
FUNDED STATUS OF THE PLAN:
Benefit obligation.......................................... $2,894 $3,355
Unrecognized actuarial loss................................. (600) (736)
------ ------
Net amount recognized............................. $2,294 $2,619
====== ======
</TABLE>
<TABLE>
<CAPTION>
2000 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS:
Accrued benefit liability................................... $2,294 $2,619
------ ------
Net amount recognized............................. $2,294 $2,619
====== ======
</TABLE>
The assumed health care cost trend rate and the ultimate rate, achieved
July 1, 2000, used in measuring the accumulated postretirement benefit
obligation was 5.00%. The discount rate used to measure the accumulated
postretirement benefit obligation was 8.00% for fiscal 2000, 7.75% for fiscal
1999 and 7.00% for fiscal 1998.
13. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
2000 1999 1998
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision (benefit)
Federal................................................... $ 252 $ -- $ --
State..................................................... 223 200 240
Foreign................................................... 458 360 261
Deferred tax provision (benefit)
Federal................................................... (92) (1,794) (1,519)
State..................................................... (394) (187) 417
----- ------- -------
$ 447 $(1,421) $ (601)
===== ======= =======
</TABLE>
F-16
<PAGE> 50
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The differences between total tax provision (benefit) and the amount
determined by applying the federal statutory tax rate to income (loss) before
income taxes result from the following:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Tax provision (benefit) at federal statutory rate........... 35.0% (35.0)% (35.0)%
State income taxes, net of federal income tax provision
(benefit)................................................. 5.8 (5.1) (3.1)
Valuation allowance......................................... -- -- 13.7
Foreign taxes............................................... 21.0 6.3 1.9
Foreign valuation allowance................................. (68.0) (6.6) 15.5
Non-taxable items........................................... 32.8 -- --
Other....................................................... 2.6 3.0 1.0
----- ----- -----
29.2% (37.4)% (6.0)%
===== ===== =====
</TABLE>
The decrease in the effective tax rate for fiscal 2000 as compared to
fiscal 1999 was primarily due to the reversal of a valuation allowance for a
portion of the deferred tax assets related to taxable loss carryforwards in
foreign jurisdictions. 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.
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>
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 643 $ 696
Accrued incentive compensation............................ 3,718 2,667
Deferred income........................................... 451 602
Accrued postretirement and postemployment benefits........ 1,505 1,475
Accrued separation expenses............................... 117 193
Deferred compensation..................................... 1,723 1,798
Other accrued liabilities................................. 3,575 2,913
Carryforward of net operating loss and tax credits........ 26,256 25,476
Other..................................................... 295 264
------- -------
Total deferred tax assets......................... 38,283 36,084
Valuation allowance............................... (3,024) (3,118)
------- -------
Net deferred tax assets........................... 35,259 32,966
Deferred tax liabilities:
Excess of book over tax basis of property, plant and
equipment.............................................. 23,665 22,403
Excess of book over tax basis of intangible assets........ 4,755 5,180
Voluntary Employee Benefit Association contribution....... 1,375 1,309
Other..................................................... 694 1,165
------- -------
Total deferred tax liabilities.................... 30,489 30,057
------- -------
Net deferred tax asset............................ $ 4,770 $ 2,909
======= =======
</TABLE>
The valuation allowance for deferred tax assets at June 24, 2000 and June
26, 1999 was approximately $3,024,000 and $3,118,000, respectively. The net
change in the total valuation allowance for the years ended
F-17
<PAGE> 51
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
June 24, 2000 and June 26, 1999 was $(94,000) and $168,000, respectively. The
Company's net operating loss carryforwards expire in fiscal 2012, 2013 and 2019.
The Company paid no income taxes during the years ended June 24, 2000, June
26, 1999 and June 27, 1998.
14. 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>
2001........................................................ $ 1,264
2002........................................................ 1,059
2003........................................................ 735
2004........................................................ 693
2005........................................................ 544
2006 and thereafter......................................... 7,057
-------
$11,352
=======
</TABLE>
Rental expense approximated $4,315,000, $4,105,000 and $3,788,000 during
fiscal 2000, 1999 and 1998, respectively.
At June 24, 2000 and June 26, 1999, commitments relating to future
acquisitions of property, plant and equipment approximated $16,008,000 and
$12,517,000, 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-18
<PAGE> 52
PRINTPACK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. RELATED PARTY TRANSACTIONS
During fiscal 2000 and 1999, the Company advanced approximately $948,000
and $949,000, respectively, to Holdings for the redemption of common stock held
by retired, non-family shareholders. These advances are recorded as "Receivable
from parent" in the equity section of the accompanying consolidated balance
sheets. In addition, the Company advanced an additional $1,690,000 to Holdings
in July 2000 for the same purpose.
During fiscal 2000, 1999 and 1998, the Company sold inventory and equipment
and had other miscellaneous charges in the amount of approximately $200,000,
$2,061,000 and $503,000, respectively, to an affiliated entity. As of June 26,
1999, the receivable associated with these transactions totaled approximately
$2,564,000 and is recorded under the caption Prepaid Expenses and Other Current
Assets in the accompanying consolidated balance sheet. No amounts were due from
the affiliated entity as of June 24, 2000 relating to these transactions.
F-19
<PAGE> 53
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 shareholder 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>
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
*10.1(a) -- Amendment No. 1, dated as of December 15, 1999, among
Printpack, Inc., the Institutions from time to time parties
hereto, as lenders, and Bank One, NA, 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, amended as of
July 15, 1999
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 thereto 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
*24 -- Power of Attorney (included on page 31)
*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> 54
<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.)
99.10 -- 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
99.14 -- 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.
