#4bogteq
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X] Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
quarterly period ended March 31, 2007
or
[
] Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
transition period from___________________to__________________
Commission
File Number 333-138380
BERRY
PLASTICS HOLDING CORPORATION
(formerly
known as BPC Holding Corporation)
(Exact
name of registrant as specified in its charter)
Delaware
|
35-1814673
|
(State
or other jurisdiction
of
incorporation or organization)
|
(IRS
employer
identification
number)
|
SEE
TABLE OF ADDITIONAL REGISTRANT GUARANTORS
Registrant’s
telephone number, including area code: (812) 424-2904
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 if the registrants are well-known seasoned issuers, as defined
in
Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate
by check mark if the registrants are not required to file reports pursuant
to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes [X]
No [
]
Indicate
by check mark whether the registrants: (1) have 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 such shorter period that the registrant was required
to
file such reports), and (2) have 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 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: Not applicable.
Indicate
by check mark whether the registrants are large accelerated filers, accelerated
filers, or non-accelerated filers. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X
]
Indicate
by check mark whether the registrants are shell companies (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes [ ] No
[X]
As
of May
14,
2007,
all of the outstanding 100 shares of the Common Stock, $.01 par value, of Berry
Plastics Holding Corporation were held by Berry Plastics Group, Inc. The
financial presentation presented in the Berry Plastics Holding Corporation
financial statements reflects the consolidated operations and financial position
including the results and equity structure of Berry Plastics Group, Inc.
Table
of Additional Registrant Guarantors
Exact
Name
|
Jurisdiction
of Organization
|
Primary
Standard Industrial Classification Code Number
|
I.R.S.
Employer Identification No.
|
Name,
Address and Telephone Number of Principal Executive
Offices
|
Berry
Plastics Corporation
|
Delaware
|
3089
|
35-1813706
|
(a)
|
Aerocon,
Inc.
|
Delaware
|
3089
|
35-1948748
|
(a)
|
Berry
Iowa Corporation
|
Delaware
|
3089
|
42-1382173
|
(a)
|
Berry
Plastics Design Corporation
|
Delaware
|
3089
|
62-1689708
|
(a)
|
Berry
Plastics Technical Services, Inc.
|
Delaware
|
3089
|
57-1029638
|
(a)
|
Berry
Sterling Corporation
|
Delaware
|
3089
|
54-1749681
|
(a)
|
CPI
Holding Corporation
|
Delaware
|
3089
|
34-1820303
|
(a)
|
Knight
Plastics, Inc.
|
Delaware
|
3089
|
35-2056610
|
(a)
|
Packerware
Corporation
|
Delaware
|
3089
|
48-0759852
|
(a)
|
Pescor,
Inc.
|
Delaware
|
3089
|
74-3002028
|
(a)
|
Poly-Seal
Corporation
|
Delaware
|
3089
|
52-0892112
|
(a)
|
Venture
Packaging, Inc.
|
Delaware
|
3089
|
51-0368479
|
(a)
|
Venture
Packaging Midwest, Inc.
|
Delaware
|
3089
|
34-1809003
|
(a)
|
Berry
Plastics Acquisition Corporation III
|
Delaware
|
3089
|
37-1445502
|
(a)
|
Berry
Plastics Acquisition Corporation V
|
Delaware
|
3089
|
36-4509933
|
(a)
|
Berry
Plastics Acquisition Corporation VII
|
Delaware
|
3089
|
30-0120989
|
(a)
|
Berry
Plastics Acquisition Corporation VIII
|
Delaware
|
3089
|
32-0036809
|
(a)
|
Berry
Plastics Acquisition Corporation IX
|
Delaware
|
3089
|
35-2184302
|
(a)
|
Berry
Plastics Acquisition Corporation X
|
Delaware
|
3089
|
35-2184301
|
(a)
|
Berry
Plastics Acquisition Corporation XI
|
Delaware
|
3089
|
35-2184300
|
(a)
|
Berry
Plastics Acquisition Corporation XII
|
Delaware
|
3089
|
35-2184299
|
(a)
|
Berry
Plastics Acquisition Corporation XIII
|
Delaware
|
3089
|
35-2184298
|
(a)
|
Berry
Plastics Acquisition Corporation XV, LLC
|
Delaware
|
3089
|
35-2184293
|
(a)
|
Kerr
Group, Inc.
|
Delaware
|
3089
|
95-0898810
|
(a)
|
Saffron
Acquisition Corporation
|
Delaware
|
3089
|
94-3293114
|
(a)
|
Setco,
LLC
|
Delaware
|
3089
|
56-2374074
|
(a)
|
Sun
Coast Industries, Inc.
|
Delaware
|
3089
|
59-1952968
|
(a)
|
Tubed
Products, LLC
|
Delaware
|
3089
|
56-2374082
|
(a)
|
Cardinal
Packaging, Inc.
|
Ohio
|
3089
|
34-1396561
|
(a)
|
Landis
Plastics, Inc.
|
Illinois
|
3089
|
36-2471333
|
(a)
|
Covalence
Specialty Adhesives LLC
|
Delaware
|
2672
|
20-4104683
|
(a)
|
Covalence
Specialty Coatings LLC
|
Delaware
|
2672
|
20-4104683
|
(a)
|
Rollpack
Acquisition Corporation
|
Indiana
|
3089
|
03-0512845
|
(a)
|
Rollpack
Corporation
|
Indiana
|
3089
|
35-1582626
|
(a)
|
(a)
101
Oakley Street, Evansville, IN 47710
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Form
10-Q includes "forward-looking statements," within the meaning of Section 27A
of
the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), with respect to our financial condition, results of operations
and business and our expectations or beliefs concerning future events. The
forward-looking statements include, in particular, statements about our plans,
strategies and prospects under the heading "Management’s Discussion and Analysis
of Financial Condition and Results of Operations". You can identify certain
forward-looking statements by our use of forward-looking terminology such as,
but not limited to, "believes," "expects," "anticipates,"
"estimates," "intends," "plans," "targets," "likely," "will," "would," "could"
and similar expressions that identify forward-looking statements. All
forward-looking statements involve risks and uncertainties. Many risks and
uncertainties are inherent in our industry and markets. Others are more specific
to our operations. The occurrence of the events described and the achievement
of
the expected results depend on many events, some or all of which are not
predictable or within our control. Actual results may differ materially from
the
forward-looking statements contained in this Form 10-Q. Factors that could
cause
actual results to differ materially from those expressed or implied by the
forward-looking statements include:
· |
changes
in prices and availability of resin and other raw materials and our
ability to pass on changes in raw material prices on a timely
basis;
|
· |
catastrophic
loss of one of our key manufacturing
facilities;
|
· |
risks
related to our acquisition strategy and integration of acquired
businesses;
|
· |
risks
associated with our substantial indebtedness and debt
service;
|
· |
performance
of our business and future operating
results;
|
· |
risks
of competition, including foreign competition, in our existing and
future
markets;
|
· |
general
business and economic conditions, particularly an economic
downturn;
|
· |
increases
in the cost of compliance with laws and regulations, including
environmental laws and regulations;
and
|
· |
the
factors discussed in our Form 10-K for the fiscal year ended December
30,
2006 in the section titled “Risk
Factors.”
|
Readers
should carefully review the factors discussed in our Form 10-K
for the
fiscal year ended December 30, 2006 in the section titled “Risk Factors” and
other risk factors identified from time to time in our periodic filings with
the
Securities and Exchange Commission and should not place undue reliance on our
forward-looking statements. We undertake no obligation to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
AVAILABLE
INFORMATION
We
make
available, free of charge, our annual reports on Form 10-K, quarterly reports
on
Form 10-Q, current reports on Form 8-K and amendments, if any, to those reports
through our Internet website as soon as practicable after they have been
electronically filed with or furnished to the Securities and Exchange
Commission. Our internet address is www.berryplastics.com. The information
contained on our website is not being incorporated herein. We
are
currently in the process of finalizing our code of ethics.
Berry
Plastics Holding Corporation
Form
10-Q Index
For
Quarterly Period Ended March
31, 2007
Part
I.
|
Financial
Information
|
|
Page
No.
|
|
|
|
|
|
Item
1.
|
Financial
Statements:
|
|
|
|
Consolidated
Balance Sheets
|
5
|
|
|
Consolidated
Statements of Operations
|
7
|
|
|
Consolidated
Statement of Changes in Stockholders’ Equity
|
8
|
|
|
Consolidated
Statements of Cash Flows
|
9
|
|
|
Notes
to Consolidated Financial Statements
|
10
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of
|
|
|
|
Financial
Condition and Results of Operations
|
23
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
32
|
|
Item
4.
|
Controls
and Procedures
|
33
|
|
|
|
|
Part
II.
|
Other
Information
|
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
34
|
|
Item
1A.
|
Risk
Factors
|
34
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
34
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
34
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
34
|
|
Item
5.
|
Other
Information
|
34
|
|
Item
6.
|
Exhibits
|
34
|
|
|
|
|
Signature
|
35
|
|
|
Part
1. Financial Information
Item
1.
Financial Statements
Berry
Plastics Holding Corporation
Consolidated
Balance Sheets
(In
Thousands of Dollars, except share information)
|
|
Company
|
|
Company
|
|
|
|
March
31,
2007
|
|
December
30,
2006
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,347
|
|
$
|
19,549
|
|
Accounts
receivable (less allowance for doubtful accounts of $5,256 at March
31,
2007 and $5,369 at December 30, 2006)
|
|
|
170,974
|
|
|
145,387
|
|
Inventories:
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
116,031
|
|
|
111,635
|
|
Raw
materials and supplies
|
|
|
46,838
|
|
|
48,885
|
|
|
|
|
162,869
|
|
|
160,520
|
|
Deferred
income taxes
|
|
|
21,030
|
|
|
21,531
|
|
Prepaid
expenses and other current assets
|
|
|
18,053
|
|
|
24,416
|
|
Total
current assets
|
|
|
385,273
|
|
|
371,403
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Land
|
|
|
15,506
|
|
|
15,504
|
|
Buildings
and improvements
|
|
|
83,324
|
|
|
83,329
|
|
Equipment
and construction in progress
|
|
|
412,911
|
|
|
390,018
|
|
|
|
|
511,741
|
|
|
488,851
|
|
Less
accumulated depreciation
|
|
|
46,923
|
|
|
24,874
|
|
|
|
|
464,818
|
|
|
463,977
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
Deferred
financing fees, net
|
|
|
40,381
|
|
|
41,763
|
|
Customer
relationships, net
|
|
|
498,264
|
|
|
504,663
|
|
Goodwill
|
|
|
989,240
|
|
|
989,181
|
|
Trademarks,
net
|
|
|
182,200
|
|
|
182,200
|
|
Other
intangibles, net
|
|
|
15,301
|
|
|
15,469
|
|
|
|
|
1,725,386
|
|
|
1,733,276
|
|
Total
assets
|
|
$
|
2,575,477
|
|
$
|
2,568,656
|
|
Berry
Plastics Holding Corporation
Consolidated
Balance Sheets (continued)
(In
Thousands of Dollars, except share information)
|
|
Company
|
|
Company
|
|
|
|
March
31,
2007
|
|
December
30,
2006
|
|
|
|
(Unaudited)
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
104,541
|
|
$
|
89,030
|
|
Accrued
interest
|
|
|
14,832
|
|
|
26,010
|
|
Employee
compensation, payroll and other taxes
|
|
|
42,173
|
|
|
37,113
|
|
Accrued
expenses and other current liabilities
|
|
|
28,157
|
|
|
31,297
|
|
Current
portion of long-term debt
|
|
|
12,250
|
|
|
12,400
|
|
Total
current liabilities
|
|
|
201,953
|
|
|
195,850
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
1,860,898
|
|
|
1,860,474
|
|
Deferred
income taxes
|
|
|
197,806
|
|
|
197,801
|
|
Other
long-term liabilities
|
|
|
20,081
|
|
|
20,344
|
|
Total
liabilities
|
|
|
2,280,738
|
|
|
2,274,469
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock; $.01 par value: 200,000,000 shares authorized; 4,937,196
shares
issued and outstanding at March 31, 2007
|
|
|
49
|
|
|
49
|
|
Additional
paid-in capital
|
|
|
494,450
|
|
|
493,581
|
|
Adjustment
of the carryover basis of continuing stockholders
|
|
|
(173,422
|
)
|
|
(173,422
|
)
|
Notes
receivable - common stock
|
|
|
(10,207
|
)
|
|
(9,935
|
)
|
Treasury
stock
|
|
|
—
|
|
|
(63
|
)
|
Accumulated
deficit
|
|
|
(18,151
|
)
|
|
(18,065
|
)
|
Accumulated
other comprehensive income
|
|
|
2,020
|
|
|
2,042
|
|
Total
stockholders’ equity
|
|
|
294,739
|
|
|
294,187
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,575,477
|
|
$
|
2,568,656
|
|
See
notes to consolidated financial statements.
Berry
Plastics Holding Corporation
Consolidated
Statements of Operations
(In
Thousands of Dollars)
|
|
Thirteen
Weeks Ended
|
|
|
|
Company
|
|
Predecessor
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
sales
|
|
$
|
364,584
|
|
$
|
355,964
|
|
Cost
of goods sold
|
|
|
282,929
|
|
|
284,621
|
|
Gross
profit
|
|
|
81,655
|
|
|
71,343
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Selling
|
|
|
10,186
|
|
|
10,420
|
|
General
and administrative
|
|
|
16,454
|
|
|
14,803
|
|
Research
and development
|
|
|
1,904
|
|
|
1,976
|
|
Amortization
of intangibles
|
|
|
6,678
|
|
|
5,364
|
|
Other
expenses
|
|
|
3,282
|
|
|
1,057
|
|
Operating
income
|
|
|
43,151
|
|
|
37,723
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
Unrealized
loss on investment in Southern Packaging
|
|
|
—
|
|
|
216
|
|
Income
before interest and taxes
|
|
|
43,151
|
|
|
37,507
|
|
Interest:
|
|
|
|
|
|
|
|
Expense
|
|
|
42,861
|
|
|
22,402
|
|
Income
|
|
|
(282
|
)
|
|
(394
|
)
|
Income
before income taxes
|
|
|
572
|
|
|
15,499
|
|
Income
taxes
|
|
|
658
|
|
|
7,319
|
|
Net
income (loss)
|
|
$
|
(86
|
)
|
$
|
8,180
|
|
See
notes to consolidated financial statements.
Berry
Plastics Holding Corporation
Consolidated
Statement of Changes in Stockholders' Equity
(Unaudited)
(In
Thousands of Dollars)
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Adjustment
of the carryover basis of continuing stockholders
|
|
Notes
receivable - common stock
|
|
Treasury
Stock
|
|
Accumulated
Deficit
|
|
Accumulated
Other Comprehensive
Income
(Losses)
|
|
Total
|
|
Balance
at December 30, 2006
|
|
$
|
49
|
|
$
|
493,581
|
|
$
|
(173,422
|
)
|
$
|
(9,935
|
)
|
$
|
(63
|
)
|
$
|
(18,065
|
)
|
$
|
2,042
|
|
$
|
294,187
|
|
Sale
of stock to management
|
|
|
—
|
|
|
619
|
|
|
—
|
|
|
(122
|
)
|
|
63
|
|
|
—
|
|
|
—
|
|
|
560
|
|
Interest
on notes receivable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(150
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(150
|
)
|
Stock-based
compensation
|
|
|
—
|
|
|
250
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
250
|
|
Translation
losses
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(123
|
)
|
|
(123
|
)
|
Other
comprehensive gains
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
101
|
|
|
101
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(86
|
)
|
|
—
|
|
|
(86
|
)
|
Balance
at March 31, 2007
|
|
$
|
49
|
|
$
|
494,450
|
|
$
|
(173,422
|
)
|
$
|
(10,207
|
)
|
$
|
—
|
|
$
|
(18,151
|
)
|
$
|
2,020
|
|
$
|
294,739
|
|
See
notes to consolidated financial statements.
Berry
Plastics Holding Corporation
Consolidated
Statements of Cash Flows
(In
Thousands of Dollars)
|
|
Thirteen
Weeks Ended
|
|
|
|
Company
|
|
Predecessor
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Operating
activities
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(86
|
)
|
$
|
8,180
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
22,034
|
|
|
21,085
|
|
Non-cash
interest expense
|
|
|
1,400
|
|
|
477
|
|
Amortization
of intangibles
|
|
|
6,678
|
|
|
5,364
|
|
Non-cash
compensation
|
|
|
250
|
|
|
988
|
|
Unrealized
loss on investment
|
|
|
—
|
|
|
216
|
|
Deferred
income taxes
|
|
|
501
|
|
|
6,712
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(25,550
|
)
|
|
(25,230
|
)
|
Inventories
|
|
|
(2,355
|
)
|
|
(8,745
|
)
|
Prepaid
expenses and other assets
|
|
|
6,291
|
|
|
9,280
|
|
Accrued
interest
|
|
|
(11,178
|
)
|
|
(9,014
|
)
|
Payables
and accrued expenses
|
|
|
17,002
|
|
|
39,697
|
|
Net
cash provided by operating activities
|
|
|
14,987
|
|
|
49,010
|
|
Investing
activities
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(19,233
|
)
|
|
(31,899
|
)
|
Proceeds
from disposal of property and equipment
|
|
|
—
|
|
|
73
|
|
Net
cash used for investing activities
|
|
|
(19,233
|
)
|
|
(31,826
|
)
|
Financing
activities
|
|
|
|
|
|
|
|
Proceeds
from long-term borrowings
|
|
|
115
|
|
|
529
|
|
Payments
on long-term borrowings
|
|
|
(3,532
|
)
|
|
(3,840
|
)
|
Sale
of stock to management
|
|
|
560
|
|
|
1
|
|
Debt
financing costs
|
|
|
(19
|
)
|
|
—
|
|
Net
cash used for financing activities
|
|
|
(2,876
|
)
|
|
(3,310
|
)
|
Effect
of exchange rate changes on cash
|
|
|
(80
|
)
|
|
(32
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(7,202
|
)
|
|
13,842
|
|
Cash
and cash equivalents at beginning of period
|
|
|
19,549
|
|
|
24,756
|
|
Cash
and cash equivalents at end of period
|
|
$
|
12,347
|
|
$
|
38,598
|
|
See
notes to consolidated financial statements.
Berry
Plastics Holding Corporation
Notes
to
Consolidated Financial Statements
(In
thousands of dollars, except as otherwise noted)
(Unaudited)
The
accompanying unaudited consolidated financial statements of Berry Plastics
Holding Corporation, formerly BPC Holding Corporation (“Predecessor”), have been
prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the periods presented
are
not necessarily indicative of the results that may be expected for the full
fiscal year. The accompanying financial statements include the results of Berry
Plastics Holding Corporation (“Holding” or the “Company”) and its wholly-owned
subsidiary, Berry Plastics Corporation (“Berry”), and Berry’s wholly-owned
subsidiaries. Holding is a wholly-owned subsidiary of Berry Plastics Group,
Inc.
(“Group”). The
financial presentation presented in the Holding financial statements reflects
the consolidated operations and financial position including the results of
Group. For
further information, refer to the consolidated financial statements and
footnotes thereto included in Holding’s Form 10-K filed with the Securities and
Exchange Commission for the year ended December 30, 2006. Certain amounts in
the
prior year financial statements have been reclassified to conform to the current
year presentation.
On
September 20, 2006, BPC Acquisition Corp. merged with and into BPC Holding
Corporation pursuant to an agreement and plan of merger (the “Merger”), dated
June 28, 2006, with BPC Holding Corporation continuing as the surviving
corporation. Following the consummation of the Merger, BPC Holding Corporation
changed its name to Berry Plastics Holding Corporation. Pursuant to the Merger,
Holding is a wholly-owned subsidiary of Group, the principal stockholders of
which are Apollo Investment Fund VI, L.P., AP Berry Holdings, LLC, an affiliate
of Graham Partners II, L.P., and management. Apollo Investment Fund VI, L.P.
and
AP Berry Holdings, LLC are affiliates of Apollo Management, L.P. (the “Buyer”),
which is a private investment firm. Graham Partners II, L.P. is an affiliate
of
Graham Partners, Inc. (“Graham”), a private equity firm.
The
total
amount of funds required to consummate the Merger and to pay fees related to
the
Merger was $2.4 billion. The Merger was primarily funded with (1) the issuance
of $750.0 million aggregate principal amount of second priority senior secured
notes, (2) new borrowings of $675.0 million in Term B loans, (3) the
issuance of $425.0 million aggregate principal amount of senior subordinated
notes, and (4) contributed equity. The seller used the proceeds received from
the Merger to repay the outstanding indebtedness and accrued interest of $726.9
million under the term loans from the old senior secured credit facility and
$335.0 million plus accrued interest and tender fees to repurchase all of the
outstanding 10 ¾% senior subordinated notes payable due 2012.
The
Merger has been accounted for under the purchase method of accounting, and
accordingly, the purchase price has been allocated to the identifiable assets
and liabilities based on estimated fair values at the acquisition date. The
allocation is preliminary and is subject to change. The Company is amortizing
its definite lived intangible assets over a weighted-average life of 20 years.
The Company has applied the provisions of Emerging Issues Task Force 88-16,
whereby, the carryover equity interests of certain management shareholders
from
the Predecessor to the Successor were recorded at their Predecessor basis.
The
application of these provisions has preliminarily reduced stockholders’ equity
and intangibles by $173.4 million. The following table summarizes the allocation
of purchase price and the estimated fair values of the assets acquired and
liabilities assumed at the date of the acquisition.
|
September
20,
2006
|
Current
assets
|
$
389,318
|
Property
and equipment
|
473,160
|
Goodwill
|
989,181
|
Customer
relationships
|
511,900
|
Trademarks
|
182,200
|
Other
intangibles
|
59,045
|
Total
assets
|
2,604,804
|
|
|
Current
liabilities
|
197,449
|
Long-term
liabilities
|
2,103,357
|
Total
liabilities
|
2,300,806
|
|
|
Net
assets acquired
|
$
303,998
|
The
$304.0 million of net assets acquired consists of Apollo, Graham and
management’s $428.8 million cash contribution and $31.8 million of carryover
basis in rollover stock, net of the $5.9 million charge to loss on extinguished
debt for bridge financing fees arranged to fund the Merger but not utilized
and
a $150.7 million deemed cash dividend to the selling shareholders that was
required to be recognized by Emerging Issues Task Force Issue No. 88-16, Basis
in Leveraged Buyout Transactions.
The
following pro forma financial results are unaudited and assume that the Merger
occurred at the beginning of the respective period. Pro forma net sales for
the
thirteen weeks ended April 1, 2006 were $355,964 and net loss was $5,286. The
financial results for the thirteen weeks ended March 31, 2007 have not been
adjusted as the Merger was reflected in the results for the entire period.
The
information presented is for informational purposes only and is not necessarily
indicative of the operating results that would have occurred had the Merger
been
consummated at the beginning of the respective period, nor are they necessarily
indicative of future operating results. Further, the information reflects only
pro forma adjustments for additional amortization expense of definite lived
intangible assets, additional interest expense, and management fees, net of
the
applicable income tax effects.
On
June
3, 2005, Berry acquired Kerr Group, Inc. (“Kerr”) for aggregate consideration of
$454.8 million (the “Kerr Acquisition”), including direct costs associated with
the acquisition. The operations from the Kerr Acquisition are included in
Berry’s operations since the acquisition date. The purchase price was financed
through
additional term loan borrowings under an amendment to Berry’s prior senior
secured credit facility and cash on hand. In accordance with the criteria stated
in Emerging Issues Task Force (“EITF”) Issue No. 95-3, “Recognition of
Liabilities in Connection with a Purchase Business Combination” (“EITF 95-3”),
the Company established opening balance sheet reserves of $2.7 million related
to plant shutdown and severance costs, of which $1.2 million was accrued as
of
March 31, 2007. The remaining reserve relates to the shutdown of the Company’s
Oxnard, California facility. This was communicated to employees on April 26,
2007. The Company plans to shut down the facility beginning in the second
quarter of 2007 and expect to have the equipment and production relocated to
other Berry facilities by the end of calendar 2007.
4. Long-Term
Debt
Long-term
debt consists of the following:
|
|
Company
|
|
Company
|
|
|
|
March
31,
2007
|
|
December
30,
2006
|
|
Term
loans
|
|
$
|
671,625
|
|
$
|
673,313
|
|
Italian
revolving line of credit
|
|
|
1,004
|
|
|
874
|
|
Second
Priority Senior Secured Fixed Rate Notes
|
|
|
525,000
|
|
|
525,000
|
|
Second
Priority Senior Secured Floating Rate Notes
|
|
|
225,000
|
|
|
225,000
|
|
Senior
Subordinated Notes
|
|
|
425,000
|
|
|
425,000
|
|
Capital
leases
|
|
|
25,519
|
|
|
23,687
|
|
|
|
|
1,873,148
|
|
|
1,872,874
|
|
Less
current portion of long-term debt
|
|
|
12,250
|
|
|
12,400
|
|
|
|
$
|
1,860,898
|
|
$
|
1,860,474
|
|
The
current portion of long-term debt consists of $6.8 million of quarterly
installments on the term loans and $5.5 million of principal payments related
to
capital lease obligations.
Senior
Secured Credit Facility
On
September 20, 2006, the Company entered into a credit agreement and a related
guarantee and collateral agreement with a syndicate of lenders. This senior
secured credit facility (the “Credit Facility”) provides financing of up to
$875.0 million, consisting of (1) $675.0 million in term loans and (2) a $200.0
million revolving credit facility. The interest rates per annum applicable
to
loans under the Credit Facility are, at the Company’s option, equal to either an
alternate base rate or an adjusted LIBOR rate for a one-, two-, three- or
six-month interest period, or a nine- or twelve-month period, if available
from
all relevant lenders, in each case, plus an applicable margin. The alternate
base rate means the greater of (1) Credit Suisse’s prime rate and
(2) one-half of 1.0% over the weighted average of rates on overnight
Federal Funds. The Company also pays a customary commitment fee to the lenders
under the revolving credit facility in respect of the unutilized commitments
thereunder at a rate equal to 0.5% per annum (subject to reduction upon
attainment of certain leverage ratios) and letter of credit and agency fees.
The
Credit Facility requires a prepayment on outstanding term loans, subject to
certain exceptions, with (1) beginning with the first full fiscal year after
the
closing, 50% (which percentage can be as low as 0% upon the achievement of
certain leverage ratios) of excess cash flow less the amount of certain
voluntary prepayments, (2) so long as our total net first lien leverage ratio
is
above a certain threshold, 100% of the net cash proceeds of any incurrence
of
debt other than excluded debt issuances, and (3) so long as the total net first
lien leverage ratio is above a certain threshold, 100% of the net cash proceeds
of all non-ordinary course asset sales and casualty and condemnation events,
if
the Company does not reinvest or commit to reinvest those proceeds in assets
to
be used in our business or to make certain other permitted investments within
15
months. The Company may voluntarily repay outstanding loans under the Credit
Facility at any time without premium or penalty.
The
term
loans amortize each year in an amount equal to 1% per annum in equal
quarterly installments for the first six years and nine months, with the
remaining amount payable on September 20, 2013. Principal amounts outstanding
under the revolving credit facility will be due and payable in full on September
20, 2012. All obligations under the Credit Facility are unconditionally
guaranteed by Group and, subject to certain exceptions, each existing and future
direct and indirect domestic subsidiary. All obligations under the Credit
Facility and the guarantees of those obligations are secured by substantially
all assets of the Company and each subsidiary guarantor subject to certain
exceptions: (1) a first priority pledge of all equity interests of Holdings
held
by the Company, a pledge of 100% of the equity interests of all guarantors
and a
first priority pledge of 65% of the voting equity interests of certain foreign
subsidiaries; and (2) a first priority security interest in substantially all
tangible and intangible assets as of the Company and each subsidiary guarantor.
The
Credit Facility contains customary covenants that, among other things, restrict,
subject to certain exceptions, the ability, and the ability of subsidiaries,
to
incur indebtedness, sell assets, make investments, engage in acquisitions,
mergers or consolidations and make dividend and other restricted payments.
In
addition, the Credit Facility requires the Company to maintain the
total
net first lien leverage ratio below a certain ratio
and also
contains certain customary affirmative covenants and events of default. The
Company was in compliance with all the financial and operating covenants at
March 31, 2007.
At
March
31,
2007, there were no borrowings outstanding on the revolving credit facility.
The
revolving credit facility allows up to $50.0 million of letters of credit to
be
issued instead of borrowings under the revolving credit facility. At March
31,
2007 and December 30, 2006, the Company had $14.8 million under the
Credit Facility in letters of credit outstanding. At March 31, 2007, the Company
had unused borrowing capacity of $185.2 million under the revolving line of
credit. Although the $185.2 million was available at March 31, 2007, the
covenants under the Credit Facility may limit our ability to make such
borrowings in the future.
Second
Priority Senior Secured Notes
On
September 20, 2006, Holding issued $750.0 million of second priority senior
secured notes (“Second Priority Notes”) comprised of (1) $525.0 million
aggregate principal amount of 8 7/8%
second
priority fixed rate notes (“Fixed Rate Notes”) and (2) $225.0 million aggregate
principal amount of second priority senior secured floating rate notes
(“Floating Rate Notes”). The Second Priority Notes mature on September 15, 2014.
Interest on the Fixed Rate Notes is due semi-annually on March 15 and September
15. The Floating Rate Notes bear interest at a rate of LIBOR plus 3.875% per
annum, which resets quarterly. Interest on the Floating Rate Notes is payable
quarterly on March 15, June 15, September 15 and December 15
of each year.
The
Second Priority Notes are secured by a second priority security interest in
the
collateral granted to the collateral agent under the Credit Facility for the
benefit of the holders and other future parity lien debt that may be issued
pursuant to the terms of the indenture. These liens will be junior in priority
to the liens on the same collateral securing the Credit Facility and to all
other permitted prior liens. The Second Priority Notes are guaranteed, jointly
and severally, on a second priority senior secured basis, by each domestic
subsidiary that guarantees the Credit Facility. The Second Priority Notes
contain customary covenants that, among other things, restrict, subject to
certain exceptions, our ability, and the ability of subsidiaries, to incur
indebtedness, sell assets, make investments, engage in acquisitions, mergers
or
consolidations and make dividend and other restricted payments.
On
or
after September 15, 2010 and 2008, the Company may redeem some or all of the
Fixed Rate Notes and Floating Rate Notes, respectively, at specified redemption
prices. Additionally, on or prior to September 15, 2009 and 2008, we may redeem
up to 35% of the aggregate principal amount of the Fixed Rate Notes and Floating
Rate Notes, respectively, with the net proceeds of specified equity offerings
at
specified redemption prices. If a change of control occurs, the Company must
give holders of the Second Priority Notes an opportunity to sell their notes
at
a purchase price of 101% of the principal amount plus accrued and unpaid
interest. The Company was in compliance with all covenants at March 31,
2007.
Senior
Subordinated
Notes
On
September 20, 2006, the Company issued $425.0 million in aggregate
principal amount of senior subordinated notes (“Senior Subordinated Notes”) to
Goldman, Sachs and Co. in a private placement that is exempt from registration
under the Securities Act. The Senior Subordinated Notes are unsecured, senior
subordinated obligations and are guaranteed on an unsecured, senior subordinated
basis by each of our subsidiaries that guarantee the Credit Facility and the
Second Priority Notes. The Senior Subordinated Notes mature in 2016 and bear
interest at a rate of 11% per annum. Such interest is payable quarterly in
cash;
provided, however, that on any quarterly interest payment date on or prior
to
the third anniversary of the issuance, the Company can satisfy up to 3% of
the
interest payable on such date by capitalizing such interest and adding it to
the
outstanding principal amount of the Senior Subordinated Notes.
The
Senior Subordinated Notes may be redeemed at the Company’s option under
circumstances and at redemption prices set forth in the indenture. Upon the
occurrence of a change of control, the Company is required to offer to
repurchase all of the Senior Subordinated Notes. The indenture sets forth
covenants and events of default that are substantially similar to those set
forth in the indenture governing the Second Priority Notes. The Senior
Subordinated Notes contain additional affirmative covenants and certain
customary representations, warranties and conditions. The Company was in
compliance with all covenants at March 31, 2007.
5. Stock-Based
Compensation
The
Company previously applied the intrinsic value method prescribed in Accounting
Principles Board Opinion 25, “Accounting for Stock Issued to Employees.” In
December 2004, the FASB issued SFAS
No.
123 (Revised 2004,) Share-Based Payment (“SFAS 123R”), which requires that the
compensation cost relating to share-based payment transactions be recognized
in
financial statements based on alternative fair value models. The share-based
compensation cost is measured based on the fair value of the equity or liability
instruments issued. The Company adopted SFAS 123R on January 1, 2006 using
the
modified prospective method. The Company recorded $250 and $988 in non-cash
charges for stock compensation related to amortization of the fair value of
unvested stock options for the thirteen weeks ended March 31, 2007, and April
1,
2006, respectively. Under this method, the Company recognized compensation
cost,
on a prospective basis, for the portion of outstanding awards for which the
requisite service had not yet been rendered as of January 1, 2006. In addition,
the Company will recognize compensation cost on any new grants based upon the
grant date fair value of those awards calculated under SFAS 123. Accordingly,
we
have not restated prior period amounts.
6. Comprehensive
Income (Loss)
Comprehensive
income (loss) is comprised of net income (loss), other comprehensive income
(losses), and gains or losses resulting from currency translations of foreign
investments. Other comprehensive income (losses) includes unrealized gains
or
losses on derivative financial instruments and available for sale securities
and
minimum pension liability adjustments. The details of comprehensive income
(losses) are as follows:
|
|
Thirteen
Weeks Ended
|
|
|
|
Company
|
|
Predecessor
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
Net
income (loss)
|
|
$
|
(86
|
)
|
$
|
8,180
|
|
Other
comprehensive income (losses)
|
|
|
101
|
|
|
(742
|
)
|
Currency
translation income (losses)
|
|
|
(123
|
)
|
|
336
|
|
Comprehensive
income (losses)
|
|
$
|
(108
|
)
|
$
|
7,774
|
|
7. Income
Taxes
Our
effective tax rate was 115% and 47% for the three months ended March 31, 2007
and April 1, 2006, respectively. This
rate
differs from the federal statutory rate of 35% primarily due to state and
foreign income taxes and losses in foreign jurisdictions for which no benefit
has been recognized. A
reconciliation of income tax expense, computed at the federal statutory rate,
to
income tax expense, as provided for in the financial statements, is as
follows:
|
|
Thirteen
Weeks Ended
|
|
|
|
Company
|
|
Predecessor
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
Income
tax expense computed at statutory rate
|
|
$
|
200
|
|
$
|
5,425
|
|
State
income tax expense, net of federal taxes
|
|
|
31
|
|
|
736
|
|
Expenses
not deductible for income tax purposes
|
|
|
90
|
|
|
170
|
|
Change
in valuation allowance
|
|
|
291
|
|
|
808
|
|
Other
|
|
|
46
|
|
|
180
|
|
Income
tax expense
|
|
$
|
658
|
|
$
|
7,319
|
|
We
adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109” (“FIN 48”), at the beginning of fiscal
2007. At the adoption date and as of March 31, 2007, we had no material
unrecognized tax benefits and no adjustments to liabilities or the statement
of
operations were required. We recognize interest and penalties related to
uncertain tax positions in income tax expense which were zero for the three
months ended March 31, 2007. Tax years 2004 through 2006 and 2003 through 2006
are subject to examination by the federal and state taxing authorities,
respectively. There are no material income tax examinations currently in
process.
8. Employee
Retirement Plans
In
connection with the Kerr Acquisition, the Company assumed
two defined benefit pension plans which cover substantially all former employees
and former union employees at Kerr’s former Lancaster facility. The Company also
acquired a retiree health plan from Kerr, which covers certain healthcare and
life insurance benefits for certain retired employees and their spouses. The
Company also maintains a defined benefit pension plan covering the Poly-Seal
employees under a collective bargaining agreement. The Company’s defined benefit
and retiree health benefit plans have an accrued pension liability of $13.6
million at March 31, 2007, and $14.3 million at December 30, 2006, respectively,
which are recorded as other long-term liabilities in the consolidated balance
sheets. Net pension and retiree health benefit expense included the following
components:
|
|
Thirteen
Weeks Ended
|
|
|
|
Company
|
|
Predecessor
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
Components
of net period benefit cost:
|
|
|
|
|
|
Defined
Benefit Pension Plans
|
|
|
|
|
|
Service
cost
|
|
$
|
65
|
|
$
|
64
|
|
Interest
cost
|
|
|
558
|
|
|
562
|
|
Expected
return on plan assets
|
|
|
(638
|
)
|
|
(634
|
)
|
Amortization
of prior service cost
|
|
|
1
|
|
|
23
|
|
Recognized
actuarial loss
|
|
|
—
|
|
|
4
|
|
Net
periodic benefit cost
|
|
$
|
(14
|
)
|
$
|
19
|
|
|
|
|
|
|
|
|
|
Retiree
Health Benefit Plan
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4
|
|
$
|
4
|
|
Interest
cost
|
|
|
84
|
|
|
97
|
|
Recognized
actuarial loss
|
|
|
—
|
|
|
(23
|
)
|
Net
periodic benefit cost
|
|
$
|
88
|
|
$
|
78
|
|
The
Company expects
to
contribute approximately $3.0 million during fiscal 2007, of which $1.6 million
and $0.1 million was made in the thirteen weeks ended March 31, 2007, and April
1, 2006, respectively, to the defined benefit pension plans and the retiree
health benefit plan.
9. Operating
Segments
Berry
organizes its operations into two reportable segments: open top and closed
top.
The Company evaluates performance and allocates resources to segments based
on
operating income before depreciation and amortization of intangibles adjusted
to
exclude (1) Merger expense, (2) business optimization expense, and (3) non-cash
compensation (collectively, “Bank Compliance EBITDA”). The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies.
|
|
Thirteen
Weeks Ended
|
|
|
|
Company
|
|
Predecessor
|
|
|
|
March
31, 2007
|
|
April
1,
2006
|
|
Net
sales:
|
|
|
|
|
|
Open
Top
|
|
$
|
209,389
|
|
$
|
206,231
|
|
Closed
Top
|
|
|
155,195
|
|
|
149,733
|
|
Total
net sales
|
|
|
364,584
|
|
|
355,964
|
|
Bank
Compliance EBITDA:
|
|
|
|
|
|
|
|
Open
Top
|
|
|
44,398
|
|
|
39,048
|
|
Closed
Top
|
|
|
30,991
|
|
|
27,171
|
|
Total
Bank Compliance EBITDA
|
|
|
75,389
|
|
|
66,219
|
|
Total
assets:
|
|
|
|
|
|
|
|
Open
Top
|
|
|
1,482,970
|
|
|
893,157
|
|
Closed
Top
|
|
|
1,092,507
|
|
|
793,363
|
|
Total
assets
|
|
|
2,575,477
|
|
|
1,686,520
|
|
Reconciliation
of Bank
Compliance EBITDA to net income (loss):
|
|
|
|
|
|
|
|
Bank
Compliance EBITDA for reportable segments
|
|
$
|
75,389
|
|
$
|
66,219
|
|
Net
interest expense
|
|
|
(42,579
|
)
|
|
(22,008
|
)
|
Depreciation
|
|
|
(22,034
|
)
|
|
(21,085
|
)
|
Amortization
|
|
|
(6,678
|
)
|
|
(5,364
|
)
|
Income
taxes
|
|
|
(658
|
)
|
|
(7,319
|
)
|
Unrealized
loss on investment in Southern Packaging
|
|
|
—
|
|
|
(216
|
)
|
Business
optimization expense
|
|
|
(2,444
|
)
|
|
(1,059
|
)
|
Non-cash
compensation
|
|
|
(250
|
)
|
|
(988
|
)
|
Management
fees
|
|
|
(832
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
(86
|
)
|
$
|
8,180
|
|
10. Condensed
Consolidating Financial Information
Holding
conducts its business through its wholly owned subsidiary, Berry. Certain of
Berry’s domestic subsidiaries fully, jointly, severally, and unconditionally
guarantee on a second priority basis the
$750.0
million aggregate principal amount of Holding’s Second Priority Notes due
2014.
Each of
Holding’s subsidiaries is 100% owned, directly or indirectly, by Holding.
Separate narrative information or financial statements of guarantor subsidiaries
have not been included as management believes they would not be material to
investors. Presented below is condensed consolidating financial information
for
Group, Holding, and its subsidiaries at March 31, 2007 (Company) and December
30, 2006 (Company) and for the thirteen week periods ended March 31, 2007
(Company) and April 1, 2006 (Predecessor). The equity method has been used
with
respect to investments in subsidiaries.
|
|
March
31, 2007
|
|
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
359,974
|
|
$
|
25,299
|
|
$
|
—
|
|
$
|
385,273
|
|
Net
property and equipment
|
|
|
438,341
|
|
|
26,477
|
|
|
—
|
|
|
464,818
|
|
Other
noncurrent assets
|
|
|
1,740,438
|
|
|
8,316
|
|
|
(23,368
|
)
|
|
1,725,386
|
|
Total
assets
|
|
$
|
2,538,753
|
|
$
|
60,092
|
|
$
|
(23,368
|
)
|
$
|
2,575,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
192,122
|
|
$
|
9,831
|
|
$
|
—
|
|
$
|
201,953
|
|
Noncurrent
liabilities
|
|
|
2,050,999
|
|
|
27,786
|
|
|
—
|
|
|
2,078,785
|
|
Equity
(deficit)
|
|
|
295,632
|
|
|
22,475
|
|
|
(23,368
|
)
|
|
294,739
|
|
Total
liabilities and equity (deficit)
|
|
$
|
2,538,753
|
|
$
|
60,092
|
|
$
|
(23,368
|
)
|
$
|
2,575,477
|
|
|
|
December
30, 2006
|
|
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
347,762
|
|
$
|
23,641
|
|
$
|
—
|
|
$
|
371,403
|
|
Net
property and equipment
|
|
|
437,859
|
|
|
26,118
|
|
|
—
|
|
|
463,977
|
|
Other
noncurrent assets
|
|
|
1,757,348
|
|
|
24
|
|
|
(24,096
|
)
|
|
1,733,276
|
|
Total
assets
|
|
$
|
2,542,969
|
|
$
|
49,783
|
|
$
|
(
24,096
|
)
|
$
|
2,568,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
187,691
|
|
$
|
8,159
|
|
$
|
—
|
|
$
|
195,850
|
|
Noncurrent
liabilities
|
|
|
2,060,219
|
|
|
18,400
|
|
|
—
|
|
|
2,078,619
|
|
Equity
(deficit)
|
|
|
295,059
|
|
|
23,224
|
|
|
(24,096
|
)
|
|
294,187
|
|
Total
liabilities and equity (deficit)
|
|
$
|
2,542,969
|
|
$
|
49,783
|
|
$
|
(24,096
|
)
|
$
|
2,568,656
|
|
|
|
Thirteen
Weeks Ended March 31, 2007 (Company)
|
|
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Statement of Operations
|
|
Net
sales
|
|
$
|
352,895
|
|
$
|
11,689
|
|
$
|
—
|
|
$
|
364,584
|
|
Cost
of goods sold
|
|
|
272,042
|
|
|
10,887
|
|
|
—
|
|
|
282,929
|
|
Gross
profit
|
|
|
80,853
|
|
|
802
|
|
|
—
|
|
|
81,655
|
|
Operating
expenses
|
|
|
37,458
|
|
|
1,046
|
|
|
—
|
|
|
38,504
|
|
Operating
income (loss)
|
|
|
43,395
|
|
|
(244
|
)
|
|
—
|
|
|
43,151
|
|
Interest
expense, net
|
|
|
42,142
|
|
|
437
|
|
|
—
|
|
|
42,579
|
|
Income
taxes
|
|
|
611
|
|
|
47
|
|
|
—
|
|
|
658
|
|
Equity
in net (income) loss from subsidiary
|
|
|
728
|
|
|
—
|
|
|
(728
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
(86
|
)
|
$
|
(728
|
)
|
$
|
728
|
|
$
|
(86
|
)
|
|
|
|
Consolidating
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(86
|
)
|
$
|
(728
|
)
|
|
728
|
|
$
|
(86
|
)
|
Non-cash
expenses
|
|
|
29,851
|
|
|
1.012
|
|
|
—
|
|
|
30,863
|
|
Equity
in net (income) loss from subsidiary
|
|
|
728
|
|
|
—
|
|
|
(728
|
)
|
|
—
|
|
Changes
in working capital
|
|
|
(15,853
|
)
|
|
63
|
|
|
—
|
|
|
(15,790
|
)
|
Net
cash provided by operating activities
|
|
|
14,640
|
|
|
347
|
|
|
—
|
|
|
14,987
|
|
Net
cash used for investing activities
|
|
|
(17,840
|
)
|
|
(1,393
|
)
|
|
—
|
|
|
(19,233
|
)
|
Net
cash provided by (used for) financing activities
|
|
|
(3,752
|
)
|
|
876
|
|
|
—
|
|
|
(2,876
|
)
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
(80
|
)
|
|
—
|
|
|
(80
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(6,952
|
)
|
|
(250
|
)
|
|
—
|
|
|
(7,202
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
18,606
|
|
|
943
|
|
|
—
|
|
|
19,549
|
|
Cash
and cash equivalents at end of period
|
|
$
|
11,654
|
|
$
|
693
|
|
$
|
¾
|
|
$
|
12,347
|
|
|
|
Thirteen
Weeks Ended April 1, 2006 (Predecessor)
|
|
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Statement of Operations
|
|
Net
sales
|
|
$
|
347,890
|
|
$
|
8,074
|
|
$
|
—
|
|
$
|
355,964
|
|
Cost
of goods sold
|
|
|
276,100
|
|
|
8,521
|
|
|
—
|
|
|
284,621
|
|
Gross
profit
|
|
|
71,790
|
|
|
(447
|
)
|
|
—
|
|
|
71,343
|
|
Operating
expenses
|
|
|
32,275
|
|
|
1,345
|
|
|
—
|
|
|
33,620
|
|
Operating
income (loss)
|
|
|
39,515
|
|
|
(1,792
|
)
|
|
—
|
|
|
37,723
|
|
Other
expense
|
|
|
—
|
|
|
216
|
|
|
—
|
|
|
216
|
|
Interest
expense, net
|
|
|
21,349
|
|
|
659
|
|
|
—
|
|
|
22,008
|
|
Income
taxes
|
|
|
7,304
|
|
|
15
|
|
|
—
|
|
|
7,319
|
|
Equity
in net (income) loss from subsidiary
|
|
|
2,682
|
|
|
—
|
|
|
(2,682
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
8,180
|
|
$
|
(2,682
|
)
|
$
|
2,682
|
|
$
|
8,180
|
|
|
|
|
Consolidating
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
8,180
|
|
$
|
(2,682
|
)
|
|
2,682
|
|
$
|
8,180
|
|
Non-cash
expenses
|
|
|
33,386
|
|
|
1,456
|
|
|
—
|
|
|
34,842
|
|
Equity
in net (income) loss from subsidiary
|
|
|
2,682
|
|
|
—
|
|
|
(2,682
|
)
|
|
—
|
|
Changes
in working capital
|
|
|
10,041
|
|
|
(4,053
|
)
|
|
—
|
|
|
5,988
|
|
Net
cash provided by (used for) operating activities
|
|
|
54,289
|
|
|
(5,279
|
)
|
|
—
|
|
|
49,010
|
|
Net
cash used for investing activities
|
|
|
(31,398
|
)
|
|
(428
|
)
|
|
—
|
|
|
(31,826
|
)
|
Net
cash provided by (used for) financing activities
|
|
|
(9,107
|
)
|
|
5,797
|
|
|
—
|
|
|
(3,310
|
)
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
(32
|
)
|
|
—
|
|
|
(32
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
13,784
|
|
|
58
|
|
|
—
|
|
|
13,842
|
|
Cash
and cash equivalents at beginning of period
|
|
|
23,128
|
|
|
1,628
|
|
|
—
|
|
|
24,756
|
|
Cash
and cash equivalents at end of period
|
|
$
|
36,912
|
|
$
|
1,686
|
|
$
|
¾
|
|
$
|
38,598
|
|
11. Contingencies
The
Company is party to various legal proceedings involving routine claims which
are
incidental to the business. Although the legal and financial liability with
respect to such proceedings cannot be estimated with certainty, the Company
believes that any ultimate liability would not be material to the Company’s
financial condition or results of operations.
12. Recent
Financial Accounting Standards
In
September 2006, the FASB issued FASB No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 is definitional and disclosure oriented
and addresses how companies should approach measuring fair value when required
by GAAP; it does not create or modify any current GAAP requirements to apply
fair value accounting. The standard provides a single definition for fair value
that is to be applied consistently for all accounting applications, and also
generally describes and prioritizes according to reliability the methods and
inputs used in valuations. FAS 157 prescribes various disclosures about
financial statement categories and amounts which are measured at fair value,
if
such disclosures are not already specified elsewhere in GAAP. The new
measurement and disclosure requirements of FAS 157 are effective for fiscal
years beginning after November 15, 2007. We do not expect the adoption of FAS
157 to have a significant impact on the Company’s results of operations or
financial position.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," ("SFAS No. 159"), which permits
companies to choose to measure certain financial instruments and other items
at
fair value that are not currently required to be measured at fair value. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007.
We
have
not determined the effect that the adoption of SFAS No. 159 will have on our
consolidated financial statements.
Covalence
Merger
On
April
3, 2007, Berry Plastics Group, Inc. completed its stock-for-stock merger (the
“Covalence Merger”) with Covalence Specialty Materials Holding Corp.,
another
Apollo controlled entity. The resulting company retained the name Berry Plastics
Group, Inc. Immediately following the Covalence Merger, Berry Plastics Holding
Corporation and Covalence Specialty Materials Corp. were combined as a direct
subsidiary of Berry Plastics Group, Inc. The resulting company retained the
name
Berry Plastics Holding Corporation. The Covalence Merger was accounted for
as a
merger of entities under common control. In
connection with the closing of the Covalence Merger, Berry Plastics Holding
Corporation adopted the fiscal year-end of the accounting acquirer (Covalence
Specialty Materials Corp.). The Company has adopted the September year-end
and
commencing with periodic reports after the consummation of the merger on April
3, 2007, will begin filing its periodic reports on a consolidated
basis.
In
connection with the Covalence Merger, Holding also entered into new senior
secured credit facilities (the “New Berry Credit Facility”) and replaced and
repaid the existing Credit Facility and Covalence Specialty Materials Corp.’s
credit facilities. The $1.6 billion senior secured credit facility has a $400
million asset based revolving credit facility including a $100 million letter
of
credit sublimit, and $1.2 billion term loan facility. Repayment of 1% of the
term loan per annum must be made quarterly with the balance payable upon the
final maturity date. Interest on the term and revolving loan facilities is
LIBOR
plus 2.0% and LIBOR plus 1.25%, respectively. The Company used available cash
to
fund the Covalence Merger and there were no amounts outstanding at closing
on
the revolving credit facility.
Sale
of UK Operations
On
April
10, 2007, the
Company sold its wholly owned subsidiary, Berry Plastics UK Ltd., to Plasticum
Group N.V. for approximately $10.0 million. This business represented
annual net sales of less than $9.0 million.
Acquisition
of Rollpak
On
April
11, 2007, the Company completed its acquisition of 100% of the outstanding
common stock of Rollpak Acquisition Corporation, which is the sole stockholder
of Rollpak Corporation. Rollpak Corporation is a flexible film manufacturer
located in Goshen, Indiana. The purchase price was funded utilizing cash on
hand.
Shut-down
of Oxnard, California Facility (see Note 3)
On
April
26, 2007, the Company announced its intention to shut down its manufacturing
facility located in Oxnard, California. The Company intends to complete this
shutdown prior to December 31, 2007. The business from this facility is
being moved to other existing facilities. The Company does not expect the costs
associated with this shutdown to be material.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
Unless
the context requires otherwise, references in this Management's Discussion
and
Analysis of Financial Condition and Results of Operations to “Berry Plastics
Holding” or “Holding” refer to Berry Plastics Holding Corporation, references to
“we,” “our” or “us” refer to Berry Plastics Holding Corporation together with
its consolidated subsidiaries, and references to “Berry Plastics” or the
“Company” refer to Berry Plastics Corporation, a wholly owned subsidiary of
Holding. For analysis purposes, the results under Holding’s prior ownership
(“Predecessor”) have been combined with results subsequent to the merger on
September 20, 2006 described below. You should read the following discussion
in
conjunction with the consolidated financial statements of Holding and its
subsidiaries and the accompanying notes thereto, which information is included
elsewhere herein. Holding
is a wholly-owned subsidiary of Berry Plastics Group, Inc. (“Group”).
This
discussion contains forward-looking statements and involves numerous risks
and
uncertainties, including, but not limited to, those described in our Form 10-K
for the fiscal year ended December 30, 2006 (the “2006 10-K”) in the section
titled “Risk Factors” and other risk factors identified from time to time in our
periodic filings with the Securities and Exchange Commission. Our actual results
may differ materially from those contained in any forward-looking statements.
You should read the explanation of the qualifications and limitations on these
forward-looking statements on page 3 of this report.
On
September 20, 2006, BPC Acquisition Corp. merged with and into BPC Holding
Corporation pursuant to an agreement and plan of merger (the “Merger”), dated
June 28, 2006, with BPC Holding Corporation continuing as the surviving
corporation. Following the consummation of the Merger, BPC Holding Corporation
changed its name to Berry Plastics Holding Corporation. Pursuant to the Merger,
Holding is a wholly-owned subsidiary of Group, the principal stockholders of
which are Apollo Investment Fund VI, L.P., AP Berry Holdings, LLC and an
affiliate of Graham Partners II, L.P. Apollo Investment Fund VI, L.P. and AP
Berry Holdings, LLC are affiliates of Apollo Management, L.P. (the “Buyer”),
which is a private investment firm. Graham Partners II, L.P. is an affiliate
of
Graham Partners, Inc. (“Graham”), a private equity firm. The total amount of
funds required to consummate the Merger and to pay fees related to the Merger
was $2.4 billion.
Critical
Accounting Policies
We
disclosed those accounting policies that we consider to be significant in
determining the amounts to be utilized for communicating our consolidated
financial position, results of operations and cash flows in the second note
to
our consolidated financial statements in our 2006 10-K. Our discussion and
analysis of our financial condition and results of operations are based on
our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of financial statements in conformity with these principles requires management
to make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results are likely to differ from
these estimates, but management does not believe such differences will
materially affect our financial position or results of operations, although
no
assurance can be given as to such affect. We believe that the following
accounting policies are the most critical because they have the greatest impact
on the presentation of our financial condition and results of
operations.
Allowance
for doubtful accounts.
We
evaluate our allowance for doubtful accounts on a quarterly basis and review
any
significant customers with delinquent balances to determine future
collectibility. We base our determinations on legal issues (such as bankruptcy
status), past history, current financial and credit agency reports, and the
experience of our credit representatives. We reserve accounts that we deem
to be
uncollectible in the quarter in which we make the determination. We maintain
additional reserves based on our historical bad debt experience. Additionally,
our allowance for doubtful accounts includes a reserve for cash discounts that
are offered to some of our customers for prompt payment. We believe, based
on
past history and our credit policies, that our net accounts receivable are
of
good quality. A ten percent increase or decrease in our bad debt experience
would not have a material impact on the results of operations of the Company.
Our allowance for doubtful accounts was $5.3 million and $5.4 million as of
March 31, 2007 and December 30, 2006, respectively.
Inventory
obsolescence.
We
evaluate our reserve for inventory obsolescence on a quarterly basis and review
inventory on-hand to determine future salability. We base our determinations
on
the age of the inventory and the experience of our personnel. We reserve
inventory that we deem to be not salable in the quarter in which we make the
determination. We believe, based on past history and our policies and
procedures, that our net inventory is salable. A ten percent increase or
decrease in our inventory obsolescence experience would not have a material
impact on the results of operations of the Company. Our reserve for inventory
obsolescence was $7.0 million and $8.0 million as of March
31, 2007
and December 30, 2006, respectively.
Medical
insurance.
We
offer our employees medical insurance that is primarily self-insured by us.
As a
result, we accrue a liability for known claims as well as the estimated amount
of expected claims incurred but not reported. We evaluate our medical claims
liability on a quarterly basis, obtain an independent actuarial analysis on
an
annual basis and perform payment lag analysis. Based on our analysis, we believe
that our recorded medical claims liability should be sufficient. A ten percent
increase or decrease in our medical claims experience would not have a material
impact on the results of operations of the Company. Our accrued liability for
medical claims was $3.7 million and $4.0 million, including reserves for
expected medical claims incurred but not reported, as of March 31, 2007 and
December 30, 2006, respectively.
Workers’
compensation insurance.
Starting in fiscal 2000, we converted the majority of our facilities to a large
deductible program for workers’ compensation insurance. On a quarterly basis, we
evaluate our liability based on third-party adjusters’ independent analyses by
claim. Based on our analysis, we believe that our recorded workers’ compensation
liability should be sufficient. A ten percent increase or decrease in our
workers’ compensations claims experience would not have a material impact on the
results of operations of the Company. Our accrued liability for workers’
compensation claims was $5.1 million and $5.0 million as of March 31, 2007
and
December 30, 2006, respectively.
Revenue
recognition. The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No.
101, “Revenue Recognition in Financial Statements” (“SAB 101”) and SEC Staff
Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Revenue is
recognized when the title and risk of loss have passed to the customer, there
is
persuasive evidence of an arrangement, delivery has occurred or services have
been rendered, the sales price is fixed or determinable, and collectibility
is
reasonably assured. Shipping and handling costs are included in cost of sales.
Impairments
of Long-Lived Assets.
In
accordance with the methodology described in Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, we review long-lived assets for impairment whenever events
or changes in circumstances indicate the carrying amount of such assets may
not
be recoverable. Impairment losses are recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets’
carrying amounts. The impairment loss is measured by comparing the fair value
of
the asset to its carrying amount. No impairments were recorded in the financial
statements included in this Form 10-Q.
Goodwill
and Other Indefinite Lived Intangible Assets.
In
accordance with the methodology described in SFAS No. 142, “Goodwill and Other
Intangible Assets”, we review our goodwill and other indefinite lived intangible
assets for impairment whenever events or changes in circumstances indicate
the
carrying amount of such assets may not be recoverable. Impairment losses are
recorded when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets’
carrying amounts. The impairment loss is measured by comparing the fair value
of
the asset to its carrying amount. In addition, we annually review our goodwill
and other indefinite lived intangible assets for impairment. No impairments
were
recorded in the financial statements included in this Form 10-Q.
Deferred
Taxes and Effective Tax Rates.
We
estimate the effective tax rates and associated liabilities or assets for each
legal entity of ours in accordance with SFAS No. 109. We use tax-planning to
minimize or defer tax liabilities to future periods. In recording effective
tax
rates and related liabilities and assets, we rely upon estimates, which are
based upon our interpretation of United States and local tax laws as they apply
to our legal entities and our overall tax structure. Audits by local tax
jurisdictions, including the United States Government, could yield different
interpretations from our own and cause the Company to owe more taxes than
originally recorded. For interim periods, we accrue our tax provision at the
effective tax rate that we expect for the full year. As the actual results
from
our various businesses vary from our estimates earlier in the year, we adjust
the succeeding interim periods’ effective tax rates to reflect our best estimate
for the year-to-date results and for the full year. As part of the effective
tax
rate, if we determine that a deferred tax asset arising from temporary
differences is not likely to be utilized, we will establish a valuation
allowance against that asset to record it at its expected realizable value.
Our
valuation allowance against deferred tax assets was $9.2 million and $8.9
million as of March 31, 2007 and December 30, 2006, respectively.
Pension.
Pension
benefit costs include assumptions for the discount rate, retirement age, and
expected return on plan assets. Retiree medical plan costs include assumptions
for the discount rate, retirement age, and health-care-cost trend rates. These
assumptions have a significant effect on the amounts reported. In addition
to
the analysis below, see the notes to the consolidated financial statements
for
additional information regarding our retirement benefits. Periodically, we
evaluate the discount rate and the expected return on plan assets in our defined
benefit pension and retiree health benefit plans. In evaluating these
assumptions, we consider many factors, including an evaluation of the discount
rates, expected return on plan assets and the health-care-cost trend rates
of
other companies; our historical assumptions compared with actual results; an
analysis of current market conditions and asset allocations; and the views
of
advisers. In evaluating our expected retirement age assumption, we consider
the
retirement ages of our past employees eligible for pension and medical benefits
together with our expectations of future retirement ages. We believe our pension
and retiree medical plan assumptions are appropriate based upon the above
factors. A one percent increase or decrease in our health-care-cost trend rates
would not have a material impact on the results of operations of the Company.
Also, a one quarter percentage point change in our discount rate or expected
return on plan assets would not have a material impact on the results of
operations of the Company.
Based
on
a critical assessment of our accounting policies and the underlying judgments
and uncertainties affecting the application of those policies, we believe that
our consolidated financial statements provide a meaningful and fair perspective
of Holding and its consolidated subsidiaries. This is not to suggest that other
risk factors such as changes in economic conditions, changes in material costs
and others could not adversely impact our consolidated financial position,
results of operations and cash flows in future periods.
Acquisitions
We
maintain a selective and disciplined acquisition strategy, which is focused
on
improving our financial performance in the long-term, enhancing our market
positions and expanding our product lines or, in some cases, providing us with
a
new or complementary product line. Most businesses we have historically acquired
had profit margins that are lower than that of our existing business, which
resulted in a temporary decrease in our margins. We have historically achieved
significant reductions in manufacturing and overhead costs of acquired companies
by introducing advanced manufacturing processes, exiting low-margin businesses
or product lines, reducing headcount, rationalizing facilities and machinery,
applying best practices and capitalizing on economies of scale. In connection
with our acquisitions, we have in the past and may in the future incur charges
related to these reductions and rationalizations.
Recent
Developments
Covalence
Merger
On
April
3, 2007, Berry Plastics Group, Inc. completed its stock-for-stock merger (the
“Covalence Merger”) with Covalence Specialty Materials Holding Corp.,
another
Apollo controlled entity. The resulting company retained the name Berry Plastics
Group, Inc. Immediately following the Covalence Merger, Berry Plastics Holding
Corporation and Covalence Specialty Materials Corp. were combined as a direct
subsidiary of Berry Plastics Group, Inc. The resulting company retained the
name
Berry Plastics Holding Corporation. The Covalence Merger was accounted for
as a
merger of entities under common control. In
connection with the closing of the Covalence Merger, Berry Plastics Holding
Corporation adopted the fiscal year-end of the accounting acquirer (Covalence
Specialty Materials Corp.). The Company has adopted the September year-end
and
commencing with periodic reports after the consummation of the merger on April
3, 2007, will begin filing its periodic reports on a consolidated
basis.
In
connection with the Covalence Merger, Holding also entered into new senior
secured credit facilities (the “New Berry Credit Facility”) and replaced and
repaid the existing Credit Facility and Covalence Specialty Materials Corp.’s
credit facilities. The $1.6 billion senior secured credit facility has a $400
million asset based revolving credit facility including a $100 million letter
of
credit sublimit, and $1.2 billion term loan facility. Repayment of 1% of the
term loan per annum must be made quarterly with the balance payable upon the
final maturity date. Interest on the term and revolving loan facilities is
LIBOR
plus 2.0% and LIBOR plus 1.25%, respectively. The Company used available cash
to
fund the Covalence Merger and there were no amounts outstanding at closing
on
the revolving credit facility.
Sale
of UK Operations
On
April
10, 2007, the
Company sold its wholly owned subsidiary, Berry Plastics UK Ltd., to Plasticum
Group N.V. for approximately $10.0 million. This business represented
annual net sales of less than $9.0 million.
Acquisition
of Rollpak
On
April
11, 2007, the Company completed its acquisition of 100% of the outstanding
common stock of Rollpak Acquisition Corporation, which is the sole stockholder
of Rollpak Corporation. Rollpak Corporation is a flexible film manufacturer
located in Goshen, Indiana. The purchase price was funded utilizing cash on
hand.
Shut-down
of Oxnard, California Facility (see Note 3)
On
April
26, 2007, the Company announced its intention to shut down its manufacturing
facility located in Oxnard, California. The Company intends to complete this
shutdown prior to December 31, 2007. The business from this facility is
being moved to other existing facilities. The Company does not expect the costs
associated with this shutdown to be material.
Results
of Operations
Comparison
of the 13 Weeks Ended March 31, 2007 (the “Quarter”) and the 13 Weeks Ended
April 1, 2006 (the “Prior Quarter”)
Net
Sales.
Net
sales increased 2% to $364.6 million for the Quarter from $356.0 million for
the
Prior Quarter. This $8.6 million increase included a decrease of approximately
$6.6 million or 2% in selling prices, offset by increased base business volume
of approximately $15.2 million or 4%. Our resin pounds sold increased by 4%
in
the Quarter over the Prior Quarter. The following discussion in this section
provides a comparison of net sales by business segment. Open top net sales
increased $3.2 million from the Prior Quarter to $209.4 million for the Quarter.
The increase in open top net sales was primarily a result of volume growth
in
the container business and 26% base business price adjusted volume growth in
the
thermoformed polypropylene drink cup line partially offset by lower selling
prices as noted above. Closed top net sales increased $5.4 million from the
Prior Quarter to $155.2 million for the Quarter. The increase in closed top
net
sales can be primarily attributed to base business price adjusted volume growth
in the prescription vial, closure, and tube product categories partially offset
by lower selling prices as noted above.
Gross
Profit.
Gross
profit increased by $10.4 million to $81.7 million (22% of net sales) for the
Quarter from $71.3 million (20% of net sales) for the Prior Quarter. This
increase of $10.4 million or 15% can be primarily attributed to the combined
impact of the additional sales volume driven by the organic growth noted above,
the timing effect of reduced resin costs versus selling prices, and productivity
improvement initiatives that have been implemented since the Prior Quarter.
Significant productivity improvements were made since the Prior Quarter,
including the installation of state-of-the-art equipment at several of our
facilities. These productivity improvements were partially offset by increased
costs from inflation such as higher energy prices.
Operating
Expenses.
Selling
expenses decreased by $0.2 million even with 4% organic growth to $10.2 million
for the Quarter from $10.4 million for the Prior Quarter principally as a result
of cost reduction efforts. General and administrative expenses increased by
$1.7
million from $14.8 million for the Prior Quarter to $16.5 million for the
Quarter primarily as a result of higher bonus expense in the Quarter partially
offset by savings from cost reduction efforts. Research and development expenses
remained relatively flat with a decrease of $0.1 million from the Prior Quarter.
Amortization of intangibles increased $1.3 million from the Prior Quarter to
$6.7 million in the Quarter primarily due to the amortization of intangible
assets from the acquisition by Apollo. Other expenses increased from $1.1
million in the Prior Quarter to $3.3 million for the Quarter primarily due
to
startup costs associated with the new thermoforming lines in Lawrence, Kansas
and management fees to our sponsors.
Interest
Expense, Net.
Net
interest expense increased $20.6 million to $42.6 million for the Quarter
compared to $22.0 million for the Prior Quarter primarily due to an increase
in
debt as a result of the acquisition by Apollo.
Income
Taxes. For
the
Quarter, we recorded an income tax expense of $0.7 million or an effective
tax
rate of 115%. The effective tax rate is higher than the statutory rate primarily
as a result of foreign losses in the Quarter for which no benefit was provided
as the Company is recording a valuation allowance against the net operating
loss
in these foreign locations. The
decrease of $6.6 million from $7.3 million in the Prior Quarter was primarily
attributed to the decrease in income before income taxes for the reasons
discussed above.
Net
Income (Loss).
Net
loss was $0.1 million for the Quarter compared to net income of $8.2 million
for
the Prior Quarter for the reasons discussed above.
Liquidity
and Capital Resources
On
September 20, 2006, the Company entered into a credit agreement and a related
guarantee and collateral agreement with a syndicate of lenders. This senior
secured credit facility (the “Credit Facility”) provides financing of up to
$875.0 million, consisting of (1) $675.0 million in term loans and (2) a $200.0
million revolving credit facility. The interest rates per annum applicable
to
loans under the Credit Facility are, at the Company’s option, equal to either an
alternate base rate or an adjusted LIBOR rate for a one-, two-, three- or
six-month interest period, or a nine- or twelve-month period, if available
from
all relevant lenders, in each case, plus an applicable margin. The alternate
base rate means the greater of (1) Credit Suisse’s prime rate and
(2) one-half of 1.0% over the weighted average of rates on overnight
Federal Funds. The Company also pays a customary commitment fee to the lenders
under the revolving credit facility in respect of the unutilized commitments
thereunder at a rate equal to 0.5% per annum (subject to reduction upon
attainment of certain leverage ratios) and letter of credit and agency fees.
The
Credit Facility requires a prepayment on outstanding term loans, subject to
certain exceptions, with (1) beginning with the first full fiscal year after
the
closing, 50% (which percentage can be as low as 0% upon the achievement of
certain leverage ratios) of excess cash flow less the amount of certain
voluntary prepayments, (2) so long as our total net first lien leverage ratio
is
above a certain threshold, 100% of the net cash proceeds of any incurrence
of
debt other than excluded debt issuances, and (3) so long as the total net first
lien leverage ratio is above a certain threshold, 100% of the net cash proceeds
of all non-ordinary course asset sales and casualty and condemnation events,
if
the Company does not reinvest or commit to reinvest those proceeds in assets
to
be used in our business or to make certain other permitted investments within
15
months. The Company may voluntarily repay outstanding loans under the Credit
Facility at any time without premium or penalty.
The
term
loans amortize each year in an amount equal to 1% per annum in equal
quarterly installments for the first six years and nine months, with the
remaining amount payable on September 20, 2013. Principal amounts outstanding
under the revolving credit facility will be due and payable in full on September
20, 2012. All obligations under the Credit Facility are unconditionally
guaranteed by Group and, subject to certain exceptions, each existing and future
direct and indirect domestic subsidiary. All obligations under the Credit
Facility and the guarantees of those obligations are secured by substantially
all assets of the Company and each subsidiary guarantor subject to certain
exceptions: (1) a first priority pledge of all equity interests of Holdings
held
by the Company, a pledge of 100% of the equity interests of all guarantors
and a
first priority pledge of 65% of the voting equity interests of certain foreign
subsidiaries; and (2) a first priority security interest in substantially all
tangible and intangible assets as of the Company and each subsidiary guarantor.
The
Credit Facility contains customary covenants that, among other things, restrict,
subject to certain exceptions, the ability, and the ability of subsidiaries,
to
incur indebtedness, sell assets, make investments, engage in acquisitions,
mergers or consolidations and make dividend and other restricted payments.
In
addition, the Credit Facility requires the Company to maintain the total net
first lien leverage ratio below a certain ratio and also contains certain
customary affirmative covenants and events of default. The Company was in
compliance with all the financial and operating covenants at March 31,
2007.
At
March
31,
2007, there were no borrowings outstanding on the revolving credit facility.
The
revolving credit facility allows up to $50.0 million of letters of credit to
be
issued instead of borrowings under the revolving credit facility. At March
31,
2007 and December 30, 2006, the Company had $14.8 million under the
Credit Facility in letters of credit outstanding. At March 31, 2007, the Company
had unused borrowing capacity of $185.2 million under the revolving line of
credit. Although the $185.2 million was available at March 31, 2007, the
covenants under the Credit Facility may limit our ability to make such
borrowings in the future. A key financial metric utilized in the calculation
of
the first lien leverage ratio is bank compliance EBITDA. The following table
reconciles our bank compliance EBITDA of $291.4 million for the twelve month
period ended March 31, 2007 to net loss.
|
|
12
months ended
March
31,
2007
|
|
|
|
|
|
Bank
compliance EBITDA
|
|
$
|
291,435
|
|
Net
interest expense
|
|
|
(131,851
|
)
|
Depreciation
|
|
|
(87,627
|
)
|
Amortization
|
|
|
(23,995
|
)
|
Income
tax benefit
|
|
|
16,456
|
|
Gain
on investment in Southern Packaging
|
|
|
515
|
|
Loss
on extinguished debt
|
|
|
(39,916
|
)
|
Merger
expense
|
|
|
(81,309
|
)
|
Business
optimization expense
|
|
|
(13,455
|
)
|
Non-cash
compensation
|
|
|
(2,647
|
)
|
Management
fees
|
|
|
(1,732
|
)
|
Pro
forma synergies
|
|
|
(9,308
|
)
|
Net
loss
|
|
$
|
(83,434
|
)
|
While
the
determination of appropriate adjustments in the calculation of bank compliance
EBITDA is subject to interpretation under the terms of the Credit Facility,
management believes the adjustments described above are in accordance with
the
covenants in the Credit Facility. Bank compliance EBITDA should not be
considered in isolation or construed as an alternative to our net income or
other measures as determined in accordance with GAAP. In addition, other
companies in our industry or across different industries may calculate bank
covenants and related definitions differently than we do, limiting the
usefulness of our calculation of bank compliance EBITDA as a comparative
measure.
Second
Priority Senior Secured Notes
On
September 20, 2006, Holding issued $750.0 million of second priority senior
secured notes (“Second Priority Notes”) comprised of (1) $525.0 million
aggregate principal amount of 8 7/8%
second
priority fixed rate notes (“Fixed Rate Notes”) and (2) $225.0 million aggregate
principal amount of second priority senior secured floating rate notes
(“Floating Rate Notes”). The Second Priority Notes mature on September 15, 2014.
Interest on the Fixed Rate Notes is due semi-annually on March 15 and September
15. The Floating Rate Notes bear interest at a rate of LIBOR plus 3.875% per
annum, which resets quarterly. Interest on the Floating Rate Notes is payable
quarterly on March 15, June 15, September 15 and December 15
of each year.
The
Second Priority Notes are secured by a second priority security interest in
the
collateral granted to the collateral agent under the Credit Facility for the
benefit of the holders and other future parity lien debt that may be issued
pursuant to the terms of the indenture. These liens will be junior in priority
to the liens on the same collateral securing the Credit Facility and to all
other permitted prior liens. The Second Priority Notes are guaranteed, jointly
and severally, on a second priority senior secured basis, by each domestic
subsidiary that guarantees the Credit Facility. The Second Priority Notes
contain customary covenants that, among other things, restrict, subject to
certain exceptions, our ability, and the ability of subsidiaries, to incur
indebtedness, sell assets, make investments, engage in acquisitions, mergers
or
consolidations and make dividend and other restricted payments.
On
or
after September 15, 2010 and 2008, the Company may redeem some or all of the
Fixed Rate Notes and Floating Rate Notes, respectively, at specified redemption
prices. Additionally, on or prior to September 15, 2009 and 2008, we may redeem
up to 35% of the aggregate principal amount of the Fixed Rate Notes and Floating
Rate Notes, respectively, with the net proceeds of specified equity offerings
at
specified redemption prices. If a change of control occurs, the Company must
give holders of the Second Priority Notes an opportunity to sell their notes
at
a purchase price of 101% of the principal amount plus accrued and unpaid
interest.
Senior
Subordinated
Notes
On
September 20, 2006, the Company issued $425.0 million in aggregate
principal amount of senior subordinated notes (“Senior Subordinated Notes”) to
Goldman, Sachs and Co. in a private placement that is exempt from registration
under the Securities Act. The Senior Subordinated Notes are unsecured, senior
subordinated obligations and are guaranteed on an unsecured, senior subordinated
basis by each of our subsidiaries that guarantee the Credit Facility and the
Second Priority Notes. The Senior Subordinated Notes mature in 2016 and bear
interest at a rate of 11% per annum. Such interest is payable quarterly in
cash;
provided, however, that on any quarterly interest payment date on or prior
to
the third anniversary of the issuance, the Company can satisfy up to 3% of
the
interest payable on such date by capitalizing such interest and adding it to
the
outstanding principal amount of the Senior Subordinated Notes.
The
Senior Subordinated Notes may be redeemed at the Company’s
option
under circumstances and at redemption prices set forth in the indenture. Upon
the occurrence of a change of control, the Company is required to offer to
repurchase all of the Senior Subordinated Notes. The indenture sets forth
covenants and events of default that are substantially similar to those set
forth in the indenture governing the Second Priority Notes. The Senior
Subordinated Notes contain additional affirmative covenants and certain
customary representations, warranties and conditions.
Cash
Flows
Net
cash
provided by operating activities was $15.0 million for the Quarter compared
to
$49.0 million for the Prior Quarter. The decrease of $34.0 million is primarily
the result of lower net income in the Quarter due in part to an increase in
interest expense partially offset by improved operations as operating income
before depreciation and amortization increased $7.7 million over the Prior
Quarter.
Net
cash
used for investing activities decreased from $31.8 million for the Prior Quarter
to $19.2 million for the Quarter primarily as a result of decreased levels
of
capital spending in the Quarter as the Prior Quarter included capital spending
for the thermoforming expansion. Capital spending of $19.2 million in the
Quarter included $1.7 million for buildings and systems, $7.6 million for molds,
$4.8 million for molding and decorating machines, and $5.1 million for accessory
equipment and systems.
Net
cash
used in financing activities was $2.9 million for the Quarter compared to $3.3
million in the Prior Quarter. This decrease of $0.4 million can be primarily
attributed to proceeds received from the sale of stock to management in the
Quarter.
Increased
working capital needs occur whenever we experience strong incremental demand
or
a significant rise in the cost of raw material, particularly plastic resin.
However, based
on
our current level of operations, we believe that cash flow from operations
and
available cash, together with available borrowings under our senior secured
credit facilities, will be adequate to meet our short-term liquidity
needs.
We base
such belief on historical experience and the funds available under the Credit
Facility. However, we cannot predict our future results of operations and our
ability to meet our obligations involves numerous risks and uncertainties,
including, but not limited to, those described in the “Risk Factors” section of
our 2006 10-K. In particular, increases in the cost of resin which we are unable
to pass through to our customers on a timely basis or significant acquisitions
could severely impact our liquidity. At March 31, 2007, our cash balance was
$12.3 million, and we had unused borrowing capacity under the Credit Facility’s
borrowing base of $182.5 million. Although the $185.2 million was available
at
March 31, 2007, the covenants under our Credit Facility may limit our ability
to
make such borrowings in the future.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
Interest
Rate Risk
We
are
exposed to market risk from changes in interest rates primarily through our
Credit Facility and the $225.0 million of Second Priority Senior Secured
Floating Rate Notes. The Credit Facility is comprised of (1) a $675.0 million
term loan and (2) a $200.0 million revolving credit facility. At March 31,
2007,
there were no borrowings on the revolving credit facility, and the net
outstanding balance of the term loan at March 31, 2007 was $671.6 million.
At
March 31, 2007, the Eurodollar rate applicable to the term loan and the Second
Priority Senior Secured Floating Rate Notes was 5.36%. If the Eurodollar rate
increases 0.25% and 0.5%, we estimate an annual increase in our interest expense
of approximately $2.2 million and $4.5 million, respectively.
Plastic
Resin Cost Risk
We
are
exposed to market risk from changes in plastic resin prices that could impact
our results of operations and financial condition. We manage our exposure to
these market risks through our normal operations with purchasing negotiation,
mechanical hedging, switching between certain resin products and, when deemed
appropriate, by using derivative financial instruments in accordance with
established policies and procedures. The derivative financial instruments
generally used are forward contracts. The derivative financial instruments
utilized by the Company in its hedging activities are considered risk management
tools and are not used for trading purposes.
Item
4. Controls
and Procedures
(a)
Disclosure controls and procedures.
As
required by Rule 13a-15 under the Exchange Act, the Company’s management carried
out an evaluation with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures, as of the end of the last fiscal quarter. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission’s rules and
forms. In connection with the new rules, we currently are in process of further
reviewing and documenting our disclosure controls and procedures, including
our
internal controls and procedures for financial reporting, and may from time
to
time make changes aimed at enhancing their effectiveness and to ensure that
our
systems evolve with our business.
(b)
Changes in internal control over financial reporting.
There
were no changes in our internal control over financial reporting identified
in
connection with our evaluation of our disclosure controls and procedures that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Part
II. Other Information
Item
1. Legal
Proceedings
There
have been no material changes in legal proceedings from the items disclosed
in
the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Item
1A. Risk
Factors
You
should carefully consider the risks described in our Annual Report on Form
10-K
for the year ended December 30,
2006,
including those under the heading “Risk Factors” appearing in Item 1A of Part I
of the Form 10-K and other information contained in this Quarterly Report before
investing in our securities. Realization of any of these risks could have a
material adverse effect on our business, financial condition, cash flows and
results of operations. There were no material changes in the Company’s risk
factors in the first quarter of 2007.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Not
Applicable
Item
3. Defaults
Upon Senior Securities
Not
Applicable
Item
4. Submission
of Matters to a Vote of Security Holders
Not
Applicable
Item
5. Other
Information
Not
Applicable
Item
6. Exhibits
31.1 Rule
13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2 Rule
13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32.1 Section
1350 Certification of the Chief Executive Officer
32.2 Section
1350 Certification of the Chief Financial Officer
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Berry
Plastics Holding Corporation
May
15,
2007
By:
/s/
James M. Kratochvil
James
M.
Kratochvil
Executive
Vice President, Chief Financial Officer,
Treasurer
and Secretary (Principal Financial
and
Accounting Officer)