Berry Plastics Holding Corp 10-Q Q3 2007
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 June 30, 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
(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 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 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
August 13, 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.
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)
|
Rollpak
Acquisition Corporation
|
Indiana
|
3089
|
03-0512845
|
(a)
|
Rollpak
Corporation
|
Indiana
|
3089
|
35-1582626
|
(a)
|
(a)
101
Oakley Street, Evansville, IN 47710
INTRODUCTION
On
April
3, 2007, Berry Plastics Group, Inc. (“Old Group”), parent of Berry Plastics
Holding Corporation, was merged (the “Merger”) with another Apollo Management,
L.P. (“Apollo”) controlled company, Covalence Specialty Materials Holding
Corporation (“CSM Holding”). The resulting company retained the name Berry
Plastics Group, Inc (“Group”). Immediately following the Merger, Berry Plastics
Holding Corporation (“Old Berry”) and Covalence Specialty Materials Corp.
(“Covalence”) were combined as a direct subsidiary of Group. The resulting
company retained the name Berry Plastics Holding Corporation (“Berry” or the
“Company”).
For
accounting purposes, Old Group and CSM Holding are considered entities under
the
common control of Apollo as defined in Emerging Issues Task Force 02-5
“Definition of Common Control in Relation to FASB Statement of Financial
Accounting Standards No. 141, Business Combinations”. The financial statements
of these entities are presented retroactively on a consolidated basis in a
manner similar to a pooling of interests, and include the results of operations
of each business from the date of acquisition by the Apollo affiliates. Apollo
acquired CSM Holding on February 16, 2006, and Old Group on September 20, 2006.
As Apollo acquired Covalence first, Covalence is deemed the predecessor for
accounting purposes. In connection with the closing of the Merger, the Company
adopted the fiscal year-end (September) of the accounting acquirer
(Covalence).
The
financial data for the Company for the thirteen weeks ended June 30, 2006 and
for the period from February 16, 2006 to June 30, 2006 include the results
of
operations of Covalence only. The results for the period from October 1, 2005
to
February 16, 2006 represent the combined results of the predecessor of
Covalence, Tyco Plastics & Adhesives. The financial data for the Company for
the thirteen and thirty-nine weeks ended June 30, 2007 include the consolidated
results of operations of Covalence and the Company. The balance sheets as of
September 30, 2006 and June 30, 2007 also represent the consolidated balance
sheets of Covalence and the Company as of each date, respectively. Accordingly,
the results of operations and financial position of Berry Plastics Holding
Corporation presented in this quarterly report on Form 10-Q are not comparable
to previous quarterly and annual reports on Form 10-Q and Form 10-K,
respectively, for the Company or Covalence. All adjustments that management
considers necessary for a fair presentation of Berry Plastics Holding
Corporation’s financial position and results of operations as of the date and
for the period indicated have been included.
On
May 4,
2007, the Company filed a registration statement on Form S-4, which became
effective as of May 11, 2007, with the U.S. Securities and Exchange Commission
(the “SEC”) to exchange Covalence’s $265 million 10 ¼% senior subordinated notes
due March 1, 2016. This registration statement includes the audited supplemental
combined financial statements of Berry Plastics Holding Corporation as of
September 30, 2006 and for the period from February 17, 2006 to September 30,
2006 (the period the entities were under common control) and the unaudited
supplemental combined financial statements as of and for the thirteen weeks
ended December 30, 2006.
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 S-4 Registration Statement filed with
the
Securities and Exchange Commission (“SEC”) on May 4, 2007 in the section
titled “Risk Factors.”
|
Readers
should carefully review the factors discussed in our Form S-4 filed with the
SEC
on May 4, 2007
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.
Berry
Plastics Holding Corporation
Form
10-Q Index
For
Quarterly Period Ended June
30, 2007
Part
I.
|
Financial
Information
|
|
Page
No. |
|
|
|
|
|
Item
1.
|
Financial
Statements:
|
|
|
|
Condensed
Consolidated Balance Sheets
|
6
|
|
|
Condensed
Consolidated Statements of Operations
|
8
|
|
|
Condensed
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
|
29
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
40
|
|
Item
4.
|
Controls
and Procedures
|
40
|
|
|
|
|
Part
II.
|
Other
Information
|
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
41
|
|
Item
1A.
|
Risk
Factors
|
41
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
41
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
41
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
41
|
|
Item
5.
|
Other
Information
|
41
|
|
Item
6.
|
Exhibits
|
41
|
|
|
|
|
Signature
|
|
|
42
|
Part
1. Financial Information
Item
1.
Financial Statements
Berry
Plastics Holding Corporation
Condensed
Consolidated Balance Sheets
(In
Millions of Dollars)
|
|
June
30,
2007
|
|
September
30, 2006
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
11.9
|
|
$
|
83.1
|
|
Accounts
receivable (less allowance for doubtful accounts of $9.3 at June
30, 2007
and $9.6 at September 30, 2006)
|
|
|
360.8
|
|
|
357.1
|
|
Inventories:
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
201.8
|
|
|
238.3
|
|
Raw
materials and work in process
|
|
|
157.5
|
|
|
166.8
|
|
|
|
|
359.3
|
|
|
405.1
|
|
Deferred
income taxes
|
|
|
49.5
|
|
|
17.0
|
|
Prepaid
expenses and other current assets
|
|
|
34.1
|
|
|
41.6
|
|
Total
current assets
|
|
|
815.6
|
|
|
903.9
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Land
|
|
|
36.2
|
|
|
32.6
|
|
Buildings
and improvements
|
|
|
182.9
|
|
|
177.1
|
|
Equipment
and construction in progress
|
|
|
701.6
|
|
|
638.6
|
|
|
|
|
920.7
|
|
|
848.3
|
|
Less
accumulated depreciation
|
|
|
133.8
|
|
|
31.7
|
|
|
|
|
786.9
|
|
|
816.6
|
|
|
|
|
|
|
|
|
|
Deferred
financing fees, net
|
|
|
38.0
|
|
|
64.8
|
|
Goodwill
|
|
|
1,129.6
|
|
|
989.2
|
|
Other
intangible assets, net
|
|
|
1,106.8
|
|
|
1,046.2
|
|
Other
assets
|
|
|
0.7
|
|
|
0.7
|
|
|
|
|
2,275.1
|
|
|
2,100.9
|
|
Total
assets
|
|
$
|
3,877.6
|
|
$
|
3,821.4
|
|
Berry
Plastics Holding Corporation
Condensed
Consolidated Balance Sheets (continued)
(In
Millions of Dollars)
|
|
June
30,
2007
|
|
September
30,
2006
|
|
|
|
(Unaudited)
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
230.2
|
|
$
|
272.1
|
|
Accrued
expenses and other current liabilities
|
|
|
189.4
|
|
|
173.5
|
|
Current
portion of long-term debt
|
|
|
17.2
|
|
|
16.0
|
|
Total
current liabilities
|
|
|
436.8
|
|
|
461.6
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
2,664.8
|
|
|
2,612.3
|
|
Deferred
income taxes
|
|
|
269.8
|
|
|
249.6
|
|
Other
long-term liabilities
|
|
|
20.8
|
|
|
23.1
|
|
Total
liabilities
|
|
|
3,392.2
|
|
|
3,346.6
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
—
|
|
|
65.2
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Contributed
equity from parent, net
|
|
|
608.8
|
|
|
440.6
|
|
Accumulated
deficit
|
|
|
(126.1
|
)
|
|
(31.2
|
)
|
Accumulated
other comprehensive income
|
|
|
2.7
|
|
|
0.2
|
|
Total
stockholders’ equity
|
|
|
485.4
|
|
|
409.6
|
|
Total
liabilities, minority interest, and stockholders’ equity
|
|
$
|
3,877.6
|
|
$
|
3,821.4
|
|
See
notes to consolidated financial statements.
Berry
Plastics Holding Corporation
Condensed
Consolidated Statements of Operations
(In
Millions of Dollars)
|
|
Thirteen
Weeks Ended
|
|
|
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
Thirty-Nine
Weeks Ended June 30, 2007
|
|
February
17, 2006 to
June
30,
2006
|
|
October
1, 2005 to February 16, 2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
sales
|
|
$
|
807.3
|
|
$
|
442.5
|
|
$
|
2,252.5
|
|
$
|
648.3
|
|
$
|
666.9
|
|
Cost
of goods sold
|
|
|
667.9
|
|
|
403.9
|
|
|
1,905.0
|
|
|
587.3
|
|
|
579.0
|
|
Gross
profit
|
|
|
139.4
|
|
|
38.6
|
|
|
347.5
|
|
|
61.0
|
|
|
87.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
88.6
|
|
|
47.8
|
|
|
240.0
|
|
|
58.8
|
|
|
50.0
|
|
Charges
and allocations from Tyco International, Ltd. and
affiliates
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.4
|
|
Other
operating expenses
|
|
|
27.6
|
|
|
0.1
|
|
|
39.2
|
|
|
0.3
|
|
|
0.6
|
|
Operating
income (loss)
|
|
|
23.2
|
|
|
(9.3
|
)
|
|
68.3
|
|
|
1.9
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses (income)
|
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
|
(0.6
|
)
|
|
—
|
|
Interest
expense, net
|
|
|
59.8
|
|
|
21.0
|
|
|
178.8
|
|
|
33.2
|
|
|
2.1
|
|
Interest
expense, net - Tyco International, Ltd. and affiliates
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.5
|
|
Loss
on extinguished debt
|
|
|
37.3
|
|
|
—
|
|
|
37.3
|
|
|
—
|
|
|
—
|
|
Income
(loss) before income taxes and minority interest
|
|
|
(73.9
|
)
|
|
(29.3
|
)
|
|
(147.8
|
)
|
|
(30.7
|
)
|
|
19.3
|
|
Income
tax expense (benefit)
|
|
|
(27.9
|
)
|
|
(10.0
|
)
|
|
(54.7
|
)
|
|
(10.3
|
)
|
|
1.6
|
|
Minority
interest
|
|
|
—
|
|
|
(0.7
|
)
|
|
(2.7
|
)
|
|
(0.7
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
(46.0
|
)
|
$
|
(18.6
|
)
|
$
|
(90.4
|
)
|
$
|
(19.7
|
)
|
$
|
17.7
|
|
See
notes to consolidated financial statements.
Berry
Plastics Holding Corporation
Consolidated
Statements of Cash Flows
(In
Millions of Dollars)
|
|
Thirty-Nine
Weeks Ended June 30, 2007
|
|
February
17, 2006 to
June
30, 2006
|
|
October
1, 2005 to February 16, 2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(90.4
|
)
|
$
|
(19.7
|
)
|
$
|
17.7
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used for)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
150.6
|
|
|
27.6
|
|
|
15.4
|
|
Non-cash
interest expense
|
|
|
5.9
|
|
|
1.5
|
|
|
—
|
|
Provisions
for losses on accounts receivable and inventory
|
|
|
—
|
|
|
2.1
|
|
|
3.5
|
|
Non-cash
restructuring
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Loss
(gain) on disposal of fixed assets
|
|
|
1.7
|
|
|
—
|
|
|
(3.0
|
)
|
Non-cash
compensation
|
|
|
15.6
|
|
|
—
|
|
|
—
|
|
Minority
interest
|
|
|
(2.7
|
)
|
|
(0.7
|
)
|
|
—
|
|
Write-off
of deferred financing fees
|
|
|
35.5
|
|
|
—
|
|
|
—
|
|
Deferred
income taxes
|
|
|
(57.1
|
)
|
|
(10.3
|
)
|
|
1.2
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
14.7
|
|
|
(24.4
|
)
|
|
17.0
|
|
Inventories
|
|
|
43.5
|
|
|
41.2
|
|
|
(94.3
|
)
|
Prepaid
expenses and other assets
|
|
|
7.1
|
|
|
7.0
|
|
|
(11.0
|
)
|
Due
to Tyco International, Ltd. and affiliates
|
|
|
—
|
|
|
—
|
|
|
(106.7
|
)
|
Accounts
payable and other current liabilities
|
|
|
(10.3
|
)
|
|
79.0
|
|
|
38.5
|
|
Other,
net
|
|
|
—
|
|
|
(4.1
|
)
|
|
2.2
|
|
Net
cash provided by (used for) operating activities
|
|
|
114.1
|
|
|
99.2
|
|
|
(119.2
|
)
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(67.7
|
)
|
|
(11.6
|
)
|
|
(12.2
|
)
|
Proceeds
from disposal of assets
|
|
|
11.7
|
|
|
0.2
|
|
|
3.1
|
|
Acquisition
of business, net of cash acquired
|
|
|
(75.8
|
)
|
|
(927.7
|
)
|
|
—
|
|
Net
cash used for investing activities
|
|
|
(131.8
|
)
|
|
(939.1
|
)
|
|
(9.1
|
)
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term borrowings
|
|
|
1,221.1
|
|
|
783.4
|
|
|
—
|
|
Payments
on long-term borrowings
|
|
|
(1,178.4
|
)
|
|
(50.0
|
)
|
|
(79.4
|
)
|
Equity
contributions (distributions), net
|
|
|
(87.8
|
)
|
|
197.5
|
|
|
—
|
|
Change
in Predecessor parent company investment
|
|
|
—
|
|
|
—
|
|
|
224.2
|
|
Change
in book overdraft
|
|
|
—
|
|
|
—
|
|
|
(14.2
|
)
|
Debt
financing costs
|
|
|
(8.5
|
)
|
|
(27.7
|
)
|
|
—
|
|
Net
cash provided by (used for) financing activities
|
|
|
(53.6
|
)
|
|
903.2
|
|
|
130.6
|
|
Effect
of exchange rate changes on cash
|
|
|
0.1
|
|
|
0.2
|
|
|
(0.2
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(71.2
|
)
|
|
63.5
|
|
|
2.1
|
|
Cash
and cash equivalents at beginning of period
|
|
|
83.1
|
|
|
27.0
|
|
|
2.7
|
|
Cash
and cash equivalents at end of period
|
|
$
|
11.9
|
|
$
|
90.5
|
|
$
|
4.8
|
|
See
notes to consolidated financial statements.
Berry
Plastics Holding Corporation
Notes
to
Consolidated Financial Statements
(In
millions of dollars, except as otherwise noted)
(Unaudited)
1. Background
and Nature of Operations
Berry
Plastics Holding Corporation manufactures and markets plastic packaging
products, plastic film products, specialty adhesives and coated products. At
June 30, 2007 the Company had 62 production and manufacturing facilities,
with 54 located in the United States.
On
April
3, 2007, Berry Plastics Group, Inc. (“Old Group”), parent of Berry Plastics
Holding Corporation, was merged (the “Merger”) with another Apollo Management,
L.P. (“Apollo”) controlled company, Covalence Specialty Materials Holding
Corporation (“CSM Holding”). The resulting company retained the name Berry
Plastics Group, Inc. (“Group”). Immediately following the Merger, Berry Plastics
Holding Corporation (“Old Berry”) and Covalence Specialty Materials Corp.
(“Covalence”) were combined as a direct subsidiary of Group. The resulting
company retained the name Berry Plastics Holding Corporation (“Berry” or the
“Company”). In connection with the closing of the Merger, the Company adopted
the fiscal year-end (September) of the accounting acquirer
(Covalence).
2.
Basis of Presentation
The
accompanying unaudited consolidated financial statements of Berry 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 the
Company and its wholly-owned subsidiaries. The Company is a wholly-owned
subsidiary of Group. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company’s Form S-4
filed with the Securities and Exchange Commission on May 4, 2007. Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation.
Prior
to
the Merger, Old Berry and Covalence were considered entities under the common
control of Apollo affiliates as defined in Emerging Issues Task Force (“EITF”)
Issue No. 02-5, Definition of Common Control in Relation to FASB Statement
of Financial Accounting Standards No. 141, Business Combinations. As a
result of the Merger, the financial statements of these entities are being
presented retroactively on a combined basis in a manner similar to a pooling
of
interests, and include the results of operations of each business from the
date
of acquisition by the Apollo affiliates. The accompanying financial statements
include the following entities:
|
•
|
|
the
predecessor to Covalence Specialty Materials Corp., Tyco Plastics
&
Adhesives, for the period from October 1, 2005 to February 16,
2006
|
|
•
|
|
the
former Covalence Specialty Materials Corp. for the periods from February
17, 2006 (the date of acquisition) to June 30, 2006 and October 1,
2006 to
June 30, 2007
|
|
•
|
|
the
former Berry Plastics Holding Corporation, as of September 30, 2006
and
for the period from October 1, 2006 to June 30, 2007
|
The
acquisitions by affiliates of Apollo of Covalence and Old Berry have both been
accounted for by the purchase method of accounting. All intercompany
transactions have been eliminated. In connection with the closing of the Merger
on April 3, 2007, Old Berry and Covalence extinguished their credit facilities
and Covalence’s Second Priority Floating Rate Notes and Berry replaced these
borrowings with a new credit facility comprised of a $400 million asset based
revolving line of credit and a $1.2 billion term loan (See Long-Term Debt
footnote).
The
financial information presented in Berry’s financial statements as of June 30,
2007 and September 30, 2006 and for the periods from October 1, 2006 to June
30,
2007 and February 17, 2006 to September 30, 2006 reflects all expenses incurred
by Berry and Covalence. Berry has recorded expense in their financial statements
related to stock compensation of Group, management fees charged by Apollo and
other investors to Group and income taxes for Group’s operations. Contributed
equity from parent includes the equity from Group that was invested in Berry
by
Apollo and other shareholders. Berry, through its wholly-owned subsidiaries
operates in four primary segments: open top, closed top, flexible film, and
tapes/coatings. The Company’s customers are located principally throughout the
United States, without significant concentration in any one region or with
any
one customer. The Company performs periodic credit evaluations of its customers’
financial condition and generally does not require collateral.
3.
|
Merger
and Apollo Acquisitions
|
Covalence
Merger
In
connection with the Covalence Merger, Old Berry and Covalence extinguished
their
respective senior credit facilities and Covalence’s Second Priority Floating
Rate Notes. The Company recognized a loss of $37.3 million related to the
extinguishment of debt in the current quarter. In addition, the Company incurred
transaction costs of $3.9 million, which were recorded in other expenses in
the
current quarter. These costs represented legal, accounting and other fees paid
in connection with the Covalence Merger.
Apollo
Acquisition of CSM Holding
On
February 16, 2006, substantially all of the assets and liabilities of Tyco
Plastics & Adhesives were acquired by Covalence, under a Stock and Asset
Purchase Agreement dated December 20, 2005 and entered into among CSM Holding,
an affiliate of Apollo Management V, L.P. and the direct parent of Covalence,
Tyco International S.A. and Tyco Group S.a.r.l. Under the agreement, Covalence
acquired Tyco’s businesses through the acquisition of certain equity interests
of, and certain assets and liabilities held by direct and indirect operating
subsidiaries of, Tyco International Ltd. (“Tyco”). The initial purchase price
was $975.2 million, subject to working capital adjustments and was funded with
a
new $350.0 million term loan, $175.0 million of Second Priority Floating Rate
Notes, $265.0 million of 10 ¼% Senior Subordinated Notes and an equity
contribution of approximately $197.5 million. Covalence has performed an
evaluation of the fair values of the real and personal property, inventory
and
certain identifiable intangible assets in connection with the
purchase
price allocation related to the acquisition. A valuation study was undertaken,
which supports the purchase price allocation. The valuation study resulted
in a
fair value step-up to real and personal property, inventory and certain
identifiable intangible assets. Covalence recognized $6.8 million as a charge
to
cost of sales relating to the sale of inventory that was stepped-up to fair
value for this acquisition. Based on the valuation study and other available
information, Covalence has recorded a purchase price of $916.1 million, which
includes $975.2 million of original purchase price partially offset by favorable
working capital adjustments from Tyco of approximately $63.6 million and $25.5
million and an unfavorable post-closing working capital adjustment of $30.0
million that was paid to Tyco. Covalence incurred a $3.7 million charge related
to a loss on extinguished debt for bridge financing fees arranged to fund the
acquisition that were not utilized. The following table summarizes the
allocation of fair values of the Company’s assets acquired and liabilities
assumed at the date of acquisition.
|
|
February
16, 2006
|
|
|
|
|
Current
assets
|
|
|
$
|
429.0
|
|
Property,
plant and equipment
|
|
|
|
345.4
|
|
Goodwill.
|
|
|
|
4.0
|
|
Intangible
assets.
|
|
|
|
364.4
|
|
Deferred
financing fees and other non-current assets
|
|
|
|
24.1
|
|
Assets
acquired
|
|
|
|
1,166.9
|
|
|
|
|
|
|
|
Current
liabilities.
|
|
|
|
183.7
|
|
Non
current liabilities
|
|
|
|
67.1
|
|
Liabilities
assumed.
|
|
|
|
250.8
|
|
|
|
|
$
|
916.1
|
|
Apollo
Acquisition of Berry
On
September 20, 2006, BPC Acquisition Corp. merged with and into BPC Holding
Corporation pursuant to an agreement and plan of merger (the “Berry 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 (“Old Berry”). Pursuant
to the Berry Merger, Old Berry is a wholly-owned subsidiary of Old Group, the
principal stockholders of which were Apollo Investment Fund VI, L.P., AP Berry
Holdings, LLC, Graham Berry Holdings, 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 equity
firm.
Graham Berry Holdings, L.P. is an affiliate of Graham Partners, Inc. (“Graham”),
a private equity firm.
The
total
amount of funds required to consummate the Berry Merger and to pay fees was
$2.4
billion. The Berry 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 Berry 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. A valuation study was undertaken, which supports the purchase
price allocation. 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 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
|
|
$
|
389.3
|
|
Property
and equipment
|
|
|
473.2
|
|
Goodwill
|
|
|
993.7
|
|
Customer
relationships
|
|
|
511.9
|
|
Trademarks
|
|
|
182.2
|
|
Other
intangibles
|
|
|
59.0
|
|
Total
assets
|
|
|
2,609.3
|
|
|
|
|
|
|
Current
liabilities
|
|
|
202.1
|
|
Long-term
liabilities
|
|
|
2,103.3
|
|
Total
liabilities
|
|
|
2,305.4
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
303.9
|
|
Acquisition
of Minority Interest of Old Berry and Covalence
On
April
3, 2007, shares of Old Group and CSM Holding were exchanged for shares in Group.
The minority shareholders and management held ownership interests of 28% and
4%
for Old Group and CSM Holding, respectively. The acquisition of these ownership
interests was accounted for under the purchase method of accounting and
pushed-down to the Company. The following table summarizes the step-up to fair
value of the assets acquired and liabilities assumed at the date of acquisition
based upon the percentage ownership acquired from the minority shareholders.
|
|
April
3,
|
|
|
|
2007
|
|
Current
assets
|
|
$
|
2.6
|
|
Fixed
assets
|
|
|
7.9
|
|
Intangible
assets
|
|
|
101.0
|
|
Goodwill
|
|
|
106.2
|
|
Total
assets
|
|
|
217.7
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
(44.8
|
)
|
Other
liabilities
|
|
|
0.5
|
|
Total
liabilities
|
|
|
(44.3
|
)
|
|
|
|
|
|
Net
assets stepped-up
|
|
$
|
173.4
|
|
As
a
result of the exchange of minority interest shares, stockholders’ equity was
adjusted by $236.1 million, consisting of the $173.4 million step-up to fair
value of net assets and a $62.7 million reclassification from minority interest
to stockholders’ equity. Additionally, $0.2 million and $4.5 million of
accumulated other comprehensive income and accumulated deficit, respectively,
were reclassified to recognize an accumulated negative basis by minority
interest holders whose shares were exchanged.
Of
the
$101.0 million of acquired intangible assets, approximately $67.4 million was
assigned to customer relationships, $34.8 million to tradenames and a $1.2
million reduction was assigned to patents. The acquired definite-lived
intangible assets will be amortized over a weighted average useful life of
20
years. The Company allocated the goodwill between its open top and closed top
segments. None of this goodwill is expected to be deductible for tax purposes.
4.
Recent Acquisition and Disposal
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 with annual net sales of approximately $50.0 million
in calendar 2006. The purchase price was funded utilizing cash on hand. The
Rollpak acquisition 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.
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. At the time of the
sale, the annual net sales of this business was less than
$9.0 million.
5.
Restructuring and Other Expenses
Coatings
Reorganization
On
February 6, 2007, Covalence announced a restructuring program in its Coatings
division. The planned actions relate to the exiting of two product lines, the
closure of a manufacturing facility, the termination of certain employees and
the relocation of certain operations. The business that is in the process of
being exited accounts for less than $25.0 million of annual net sales. During
the quarter ended March 30, 2007, the Company recorded charges of $3.9 million
which was comprised of $3.4 million of asset impairments, $0.2 million of
severance and $0.3 million of relocation and other restructuring charges. In
the
quarter ended June 30, 2007, the Company recorded additional charges of $0.4
million for severance and $1.0 million for equipment and employee relocation
and
other restructuring charges. These charges are included in other operating
expenses on the income statement.
Covalence
Reorganization
In
connection with the Merger on April 3, 2007, the Company announced that it
would
close the Covalence corporate headquarters in Bedminster, NJ and the Company’s
coatings division headquarters in Shreveport, LA. The reorganization was part
of
the integration plan to consolidate certain corporate functions at the Company’s
headquarters in Evansville, Indiana and to consolidate the adhesives and
coatings segment into one new segment called tapes/coatings. In connection
with
these changes, the Company recorded severance charges in the quarter ended
June
30, 2007 of $3.0 million and lease termination charges of $1.9 million. These
costs are included in other operating expenses in the income statement. The
Company has substantially completed this reorganization as of June 30,
2007.
Shut-down
of Oxnard, California Facility
On
April
26, 2007, the Company announced its intention to shut down its manufacturing
facility located in Oxnard, California. The Company has stopped all production
in the facility and is in the process of moving the equipment and inventory
to
other Berry locations. The Company intends to complete this move by December
31,
2007. The Company had previously established a reserve of $1.2 million for
the
shutdown of the Oxnard facility in connection with the Kerr Group acquisition.
This accrual included estimates for severance and lease termination costs.
The
Company recorded an additional charge of $4.0 million for severance and lease
termination costs in the quarter ended June 30, 2007. In addition, the Company
recorded other restructuring charges related to equipment and inventory
relocation and other operating costs of the facility of approximately $1.5
million in the quarter ended June 30, 2007. These restructuring charges are
included in other operating expenses in the income statement.
Activity
for the restructuring reserves is as follows:
|
|
Employee
Severance
and
Benefits
|
|
Facilities
Exit
Costs
|
|
Other
|
|
Non-cash
Charges
|
|
Total
|
|
Balance
at September 30, 2005
|
|
$
|
2.2
|
|
$
|
1.6
|
|
$
|
―
|
|
$
|
―
|
|
$
|
3.8
|
|
Charges
|
|
|
―
|
|
|
0.6
|
|
|
―
|
|
|
―
|
|
|
0.6
|
|
Utilization
|
|
|
―
|
|
|
(0.6
|
)
|
|
―
|
|
|
―
|
|
|
(0.6
|
)
|
Balance
at February 16, 2006
|
|
|
2.2
|
|
|
1.6
|
|
|
―
|
|
|
―
|
|
|
3.8
|
|
Charges
|
|
|
―
|
|
|
0.7
|
|
|
―
|
|
|
―
|
|
|
0.7
|
|
Utilization
|
|
|
(0.9
|
)
|
|
(1.5
|
)
|
|
―
|
|
|
―
|
|
|
(2.4
|
)
|
Transferred
to Tyco
|
|
|
(1.3
|
)
|
|
―
|
|
|
―
|
|
|
―
|
|
|
(1.3
|
)
|
Balance
at June 30, 2006
|
|
$
|
―
|
|
$
|
0.8
|
|
$
|
―
|
|
$
|
―
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
$
|
―
|
|
$
|
0.7
|
|
$
|
―
|
|
$
|
―
|
|
$
|
0.7
|
|
Charges
|
|
|
3.7
|
|
|
7.3
|
|
|
0.3
|
|
|
3.4
|
|
|
14.7
|
|
Utilization
|
|
|
(0.4
|
)
|
|
(2.4
|
)
|
|
―
|
|
|
―
|
|
|
(2.8
|
)
|
Balance
at June 30, 2007
|
|
$
|
3.3
|
|
$
|
5.6
|
|
$
|
0.3
|
|
$
|
3.4
|
|
$
|
12.6
|
|
Middlesex
Flood
The
Company experienced a flood at its Middlesex, NJ facility during the quarter
ended June 30, 2007. The Company incurred costs of approximately $1.5 million
related to the flood which included the write-off of damaged inventory of $0.3
million, equipment repairs of $0.7 million, and other costs of $0.5 million.
These costs are included in other operating expenses for the quarter ended
June
30, 2007.
6. Long-Term
Debt
Long-term
debt consists of the following:
|
|
June
30,
2007
|
|
September
30, 2006
|
|
Term
loans
|
|
$
|
1,197.0
|
|
$
|
974.3
|
|
Revolving
line of credit
|
|
|
20.0
|
|
|
20.0
|
|
Second
Priority Senior Secured Fixed Rate Notes
|
|
|
525.0
|
|
|
525.0
|
|
Second
Priority Senior Secured Floating Rate Notes
|
|
|
225.0
|
|
|
225.0
|
|
Second
Priority Floating Rate Notes - Retired
|
|
|
—
|
|
|
175.0
|
|
10
¼% Senior Subordinated Notes
|
|
|
265.0
|
|
|
265.0
|
|
11%
Senior Subordinated Notes
|
|
|
425.0
|
|
|
425.0
|
|
Capital
leases and other
|
|
|
25.0
|
|
|
19.0
|
|
|
|
|
2,682.0
|
|
|
2,628.3
|
|
Less
current portion of long-term debt
|
|
|
17.2
|
|
|
16.0
|
|
|
|
$
|
2,664.8
|
|
$
|
2,612.3
|
|
The
current portion of long-term debt consists of $12.0 million of quarterly
installments on the term loans and $5.2 million of principal payments related
to
capital lease obligations.
Senior
Secured Credit Facility
In
connection with the Merger, the Company entered into senior secured credit
facilities that include a term loan in the principal amount of $1,200.0 million
and a revolving credit facility which provides borrowing availability equal
to
the lesser of (a) $400.0 million or (b) the borrowing base, which is a function,
among other things, of the Company’s accounts receivable and inventory. The term
loan matures on April 3, 2015 and the revolving credit facility matures on
April
3, 2013.
The
borrowings under the senior secured credit facilities bear interest at a rate
equal to an applicable margin plus, as determined at our option, either (a)
a
base rate (“Base Rate”) determined by reference to the higher of (1) the prime
rate of Credit Suisse, Cayman Islands Branch, as administrative agent, in the
case of the term loan facility or Bank of America, N.A., as administrative
agent, in the case of the revolving credit facility and (2) the U.S. federal
funds rate plus 1/2 of 1% or (b) a eurodollar rate (“LIBOR”) determined by
reference to the costs of funds for eurodollar deposits in dollars in the London
interbank market for the interest period relevant to such borrowing Bank
Compliance for certain additional costs. The initial applicable margin for
LIBOR
rate borrowings under the revolving credit facility was 1.25% and under the
term
loan was 2.00%. The initial applicable margin for base rate borrowings under
the
revolving credit facility was 0% and under the term loan was 1.00%.
The
term
loan facility requires minimum quarterly principal payments of $3.0 million
for
the first eight years, which commenced in June 2007, with the remaining amount
payable on April 3, 2015. In addition, the Company must prepay the outstanding
term loan, subject to certain exceptions, with (1) beginning with the Company’s
first fiscal year after the closing, 50% (which percentage is subject to a
minimum of 0% upon the achievement of certain leverage ratios) of excess cash
flow (as defined in the credit agreement); and (2) 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 its business or to make certain other permitted investments within
15
months, subject to certain limitations.
In
addition to paying interest on outstanding principal under the senior secured
credit facilities, the Company is required to pay a commitment fee to the
lenders under the revolving credit facilities in respect of the unutilized
commitments thereunder at a rate equal to 0.25% to 0.35% per annum depending
on
the average daily available unused borrowing capacity. The Company also pays
a
customary letter of credit fee, including a fronting fee of 0.125% per annum
of
the stated amount of each outstanding letter of credit, and customary agency
fees.
The
Company may voluntarily repay outstanding loans under the senior secured credit
facilities at any time without premium or penalty, other than customary
“breakage” costs with respect to eurodollar loans. The senior secured credit
facilities contain various restrictive covenants that, among other things and
subject to specified exceptions, prohibit the Company from prepaying other
indebtedness, and restrict its ability to incur indebtedness or liens, make
investments or declare or pay any dividends. All obligations under the senior
secured credit facilities are unconditionally guaranteed by Group and, subject
to certain exceptions, each of the Company’s existing and future direct and
indirect domestic subsidiaries. The guarantees of those obligations are secured
by substantially
all of the Company’s assets as well as those of each domestic subsidiary
guarantor. The Company was in compliance with all the financial and operating
covenants at June 30, 2007.
At
June
30, 2007, there was $20.0 million 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 June
30,
2007, the Company had $29.4 million under the Credit Facility in letters of
credit outstanding. At June 30, 2007, the Company had unused borrowing capacity
of $350.6 million under the revolving line of credit.
Second
Priority Senior Secured Notes
On
September 20, 2006, the Company 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 June 30,
2007.
10
¼%
Senior Subordinated Notes
In
connection with Apollo’s acquisition of CSM Holding, Covalence issued $265.0
million of 10 ¼% senior subordinated notes due March 1, 2016. The notes are
senior subordinated obligations of the Company and rank junior to all other
senior indebtedness that does not contain similar subordination provisions.
No
principal payments are required with respect to the senior subordinated notes
prior to maturity.
The
indenture relating to the notes contain a number of covenants that, among other
things and subject to certain exceptions, restrict the Company’s ability and the
ability of its restricted subsidiaries to incur indebtedness or issue
disqualified stock or preferred stock, pay dividends or
redeem
or
repurchase stock, make certain types of investments, sell assets, incur certain
liens, restrict dividends or other payments from subsidiaries, enter into
transactions with affiliates and consolidate, merge or sell all or substantially
all of the Company’s assets. The Company was in compliance with all covenants at
June 30, 2007.
11%
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 June 30, 2007.
7. Stockholders’
Equity and Stock
Option Plans
On
June
7----, 2007, Group’s Board of Directors declared a special one-time dividend of
$77 per common share to shareholders of record as of June 6, 2007. The dividend
was paid June 8, 2007, which reduced Group’s shareholders’ equity for owned
shares by approximately $530.2 million. In connection with this dividend,
the Company paid a dividend of approximately $87.0 million to Group. This
dividend is reflected as a reduction of Contributed equity from
parent.
In
connection with the Merger, Group modified its outstanding stock options to
provide for (i) the vesting of an additional twenty percent (20%) of the total
number of shares underlying such outstanding options; (ii) the conversion of
options with escalating exercise prices to a fixed priced option, with no
increase in the exercise price as of the date of grant of such escalating priced
option; and (iii) with respect to each outstanding option, the vesting of which
was contingent upon the achievement of performance goals, the deemed achievement
of all such performance goals.
During
the third quarter, the Group also clarified the anti-dilution provisions of
its stock option plans to require payment of special dividends to holders of
outstanding stock options. In connection with the $77 per share dividend paid
during the quarter, holders of vested stock options received $13.7 million,
while an additional $34.5 million will be paid to nonvested option holders
on
the second anniversary of the dividend grant date (assuming the nonvested option
holders remain employed by the Company).
This
resulted in the immediate expensing of $13.7 million related to the payment
of
dividends on vested awards, less $0.8 million that was expensed in prior
periods, and will result in $34.5 million of additional expense that will be
recognized over the two-year service period beginning June 8, 2007.
8. 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
|
|
|
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
Thirty-Nine
Weeks Ended June 30,
2007
|
|
February
17, 2006 to
June
30, 2006
|
|
October
1, 2005 to
February
16, 2006
|
|
Net
income (loss)
|
|
$
|
(46.0
|
)
|
$
|
(18.6
|
)
|
|
(90.4
|
)
|
$
|
(19.7
|
)
|
$
|
17.7
|
|
Other
comprehensive income (losses)
|
|
|
0.5
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
—
|
|
Currency
translation income (losses)
|
|
|
0.3
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
1.7
|
|
Comprehensive
income (losses)
|
|
$
|
(45.2
|
)
|
$
|
(18.6
|
)
|
$
|
(88.1
|
)
|
$
|
(19.7
|
)
|
$
|
19.4
|
|
9. Income
Taxes
The
effective tax rate was 38% and 34% for the thirteen months ended June 30, 2007
and June 30, 2006, respectively. 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
|
|
|
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
Thirty-Nine
Weeks Ended June 30,
2007
|
|
February
17, 2006 to
June
30, 2006
|
|
October
1, 2005 to
February
16, 2006
|
|
Income
tax expense (benefit) computed at
statutory
rate
|
|
$
|
(25.9
|
)
|
$
|
(10.2
|
)
|
$
|
(51.7
|
)
|
$
|
(10.7
|
)
|
$
|
6.8
|
|
State
income tax expense (benefit), net of
federal
taxes
|
|
|
(3.6
|
)
|
|
(1.2
|
)
|
|
(5.9
|
)
|
|
(1.2
|
)
|
|
—
|
|
Expenses
not deductible for income tax
purposes
|
|
|
0.2
|
|
|
0.2
|
|
|
0.6
|
|
|
0.2
|
|
|
—
|
|
U.S.
partnership income taxed at the
partner
level
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.8
|
)
|
Non-U.S.
earnings
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
Change
in valuation allowance
|
|
|
—
|
|
|
0.4
|
|
|
0.9
|
|
|
0.5
|
|
|
—
|
|
Other
|
|
|
1.4
|
|
|
0.8
|
|
|
1.4
|
|
|
0.9
|
|
|
—
|
|
Income
tax expense (benefit)
|
|
$
|
(27.9
|
)
|
$
|
(10.0
|
)
|
$
|
(54.7
|
)
|
$
|
(10.3
|
)
|
$
|
1.6
|
|
10. Employee
Retirement Plans
|
|
Thirteen
Weeks Ended
June 30, 2007
|
|
Thirty-Nine
Weeks Ended
June 30, 2007
|
|
Components
of net period benefit cost:
|
|
|
|
|
|
Defined
Benefit Pension Plans
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
0.1
|
|
$
|
0.2
|
|
Interest
cost
|
|
|
0.5
|
|
|
1.7
|
|
Expected
return on plan assets
|
|
|
(0.6
|
)
|
|
(2.0
|
)
|
Net
periodic benefit cost
|
|
$
|
—
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Retiree
Health Benefit Plan
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
—
|
|
$
|
—
|
|
Interest
cost
|
|
|
0.1
|
|
|
0.3
|
|
Recognized
actuarial loss
|
|
|
—
|
|
|
—
|
|
Net
periodic benefit cost
|
|
$
|
0.1
|
|
$
|
0.3
|
|
The
Company expects
to
contribute approximately $3.0 million during fiscal 2007, of which $0.3 million
and $2.3 million was made in the thirteen weeks and thirty-nine weeks ended
June
30, 2007, respectively, to the defined benefit pension plans and the retiree
health benefit plan.
11. Operating
Segments
In
connection with the closing of the Covalence Merger, Berry
organized its operations into four reportable segments: open top, closed top,
flexible films, and tapes/coatings.
|
|
Thirteen
Weeks Ended
|
|
|
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
Thirty-Nine
Weeks Ended
June
30, 2007
|
|
February
17, 2006 to June 30,
2006
|
|
October
1, 2005 to February 16, 2006
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
Open
Top
|
|
$
|
240.0
|
|
$
|
—
|
|
$
|
643.1
|
|
$
|
—
|
|
$
|
—
|
|
Closed
Top
|
|
|
152.0
|
|
|
—
|
|
|
450.3
|
|
|
—
|
|
|
—
|
|
Flex
Film
|
|
|
275.6
|
|
|
284.3
|
|
|
761.0
|
|
|
412.5
|
|
|
449.5
|
|
Tapes/Coatings
|
|
|
139.7
|
|
|
160.8
|
|
|
401.8
|
|
|
239.7
|
|
|
221.4
|
|
Intercompany
|
|
|
—
|
|
|
(2.6
|
)
|
|
(3.7
|
)
|
|
(3.9
|
)
|
|
(4.0
|
)
|
Total
net sales
|
|
$
|
807.3
|
|
$
|
442.5
|
|
$
|
2,252.5
|
|
$
|
648.3
|
|
$
|
666.9
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open
Top
|
|
$
|
20.8
|
|
$
|
—
|
|
$
|
67.2
|
|
$
|
—
|
|
$
|
—
|
|
Closed
Top
|
|
|
11.4
|
|
|
—
|
|
|
34.3
|
|
|
—
|
|
|
—
|
|
Flex
Film
|
|
|
10.9
|
|
|
(3.6
|
)
|
|
3.8
|
|
|
0.7
|
|
|
22.8
|
|
Tapes/Coatings
|
|
|
(0.6
|
)
|
|
6.0
|
|
|
(5.8
|
)
|
|
14.3
|
|
|
9.7
|
|
Corporate
|
|
|
(19.3
|
)
|
|
(11.7
|
)
|
|
(31.2
|
)
|
|
(13.1
|
)
|
|
(5.6
|
)
|
Total
operating income (loss)
|
|
$
|
23.2
|
|
$
|
(9.3
|
)
|
$
|
68.3
|
|
$
|
1.9
|
|
$
|
26.9
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open
Top
|
|
$
|
17.0
|
|
$
|
—
|
|
$
|
47.1
|
|
$
|
—
|
|
|
—
|
|
Closed
Top
|
|
|
14.3
|
|
|
—
|
|
|
41.8
|
|
|
—
|
|
|
—
|
|
Flex
Film
|
|
|
12.1
|
|
|
11.2
|
|
|
34.3
|
|
|
13.9
|
|
|
9.4
|
|
Tapes/Coatings
|
|
|
8.4
|
|
|
9.3
|
|
|
26.2
|
|
|
11.0
|
|
|
5.9
|
|
Corporate
|
|
|
0.2
|
|
|
2.7
|
|
|
1.2
|
|
|
2.7
|
|
|
0.1
|
|
Total
depreciation and amortization
|
|
$
|
52.0
|
|
$
|
23.2
|
|
$
|
150.6
|
|
$
|
27.6
|
|
$
|
15.4
|
|
|
|
June
30,
2007
|
|
September
30, 2006
|
|
Total
assets:
|
|
|
|
|
|
Open
Top
|
|
$
|
1,699.4
|
|
$
|
1,950.8
|
|
Closed
Top
|
|
|
1,175.0
|
|
|
666.9
|
|
Flex
Film
|
|
|
567.2
|
|
|
676.9
|
|
Tapes/Coatings
|
|
|
436.0
|
|
|
449.9
|
|
Corporate
|
|
|
—
|
|
|
76.9
|
|
Total
assets
|
|
$
|
3,877.6
|
|
$
|
3,821.4
|
|
12. Condensed
Consolidating Financial Information
The
Company, a wholly owned subsidiary of Group, has Second Priority Fixed and
Floating Rate Notes and 10 ¼% Senior Subordinated Notes outstanding which are
fully, jointly, severally, and unconditionally guaranteed by Berry’s domestic
subsidiaries. Separate narrative information or financial statements of the
guarantor subsidiaries have not been included because they are 100% wholly
owned
by the parent company and the guarantor subsidiaries unconditionally guarantee
such debt on a joint and several basis. Presented below is condensed
consolidating financial information for the parent company, guarantor
subsidiaries and non-guarantor subsidiaries. The equity method has been used
with respect to investments in subsidiaries. The principal elimination entries
eliminate investments in subsidiaries and intercompany balances and
transactions.
|
|
June
30, 2007
|
|
|
|
Parent
Company
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Consolidating
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
248.7
|
|
$
|
502.2
|
|
$
|
64.7
|
|
$
|
—
|
|
$
|
815.6
|
|
Net
property and equipment
|
|
|
215.9
|
|
|
536.7
|
|
|
34.3
|
|
|
—
|
|
|
786.9
|
|
Other
noncurrent assets
|
|
|
2,805.9
|
|
|
2,012.6
|
|
|
17.2
|
|
|
(2,560.6
|
)
|
|
2,275.1
|
|
Total
assets
|
|
$
|
3,270.5
|
|
$
|
3,051.5
|
|
$
|
116.2
|
|
$
|
(2,560.6
|
)
|
$
|
3,877.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
192.5
|
|
$
|
221.7
|
|
$
|
22.6
|
|
$
|
—
|
|
$
|
436.8
|
|
Noncurrent
liabilities
|
|
|
2,592.6
|
|
|
315.1
|
|
|
47.7
|
|
|
—
|
|
|
2,955.4
|
|
Equity
(deficit)
|
|
|
485.4
|
|
|
2,514.7
|
|
|
45.9
|
|
|
(2,560.6
|
)
|
|
485.4
|
|
Total
liabilities and equity (deficit)
|
|
$
|
3,270.5
|
|
$
|
3,051.5
|
|
$
|
116.2
|
|
$
|
(2,560.6
|
)
|
$
|
3,877.6
|
|
|
|
September
30, 2006
|
|
|
|
Parent
Company
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
355.6
|
|
$
|
478.3
|
|
$
|
70.0
|
|
$
|
—
|
|
$
|
903.9
|
|
Net
property and equipment
|
|
|
219.4
|
|
|
556.5
|
|
|
40.7
|
|
|
—
|
|
|
816.6
|
|
Other
noncurrent assets
|
|
|
2,253.7
|
|
|
216.8
|
|
|
7.7
|
|
|
(377.3
|
)
|
|
2,100.9
|
|
Total
assets
|
|
$
|
2,828.7
|
|
$
|
1,251.6
|
|
$
|
118.4
|
|
$
|
(377.3
|
)
|
$
|
3,821.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
(286.9
|
)
|
$
|
673.5
|
|
$
|
70.6
|
|
$
|
4.4
|
|
$
|
461.6
|
|
Noncurrent
liabilities
|
|
|
2,706.1
|
|
|
238.3
|
|
|
5.8
|
|
|
—
|
|
|
2,950.2
|
|
Equity
(deficit)
|
|
|
409.5
|
|
|
339.8
|
|
|
42.0
|
|
|
(381.7
|
)
|
|
409.6
|
|
Total
liabilities and equity (deficit)
|
|
$
|
2,828.7
|
|
$
|
1,251.6
|
|
$
|
118.4
|
|
$
|
(377.3
|
)
|
$
|
3,821.4
|
|
|
|
Thirteen
Weeks Ended June 30, 2007
|
|
|
|
Parent
Company
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Statement of Operations
|
|
Net
sales
|
|
$
|
248.9
|
|
$
|
506.3
|
|
$
|
52.1
|
|
$
|
—
|
|
$
|
807.3
|
|
Cost
of goods sold
|
|
|
215.6
|
|
|
405.7
|
|
|
46.6
|
|
|
—
|
|
|
667.9
|
|
Gross
profit
|
|
|
33.3
|
|
|
100.6
|
|
|
5.5
|
|
|
—
|
|
|
139.4
|
|
Operating
expenses
|
|
|
45.4
|
|
|
67.3
|
|
|
3.5
|
|
|
—
|
|
|
116.2
|
|
Operating
income (loss)
|
|
|
(12.1
|
)
|
|
33.3
|
|
|
2.0
|
|
|
—
|
|
|
23.2
|
|
Interest
expense (income), net
|
|
|
65.0
|
|
|
(5.9
|
)
|
|
0.7
|
|
|
—
|
|
|
59.8
|
|
Loss
on extinguished debt
|
|
|
15.4
|
|
|
21.9
|
|
|
—
|
|
|
—
|
|
|
37.3
|
|
Income
taxes (benefit)
|
|
|
—
|
|
|
(27.9
|
)
|
|
—
|
|
|
—
|
|
|
(27.9
|
)
|
Equity
in net (income) loss from subsidiary
|
|
|
(46.5
|
)
|
|
(1.3
|
)
|
|
—
|
|
|
47.8
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
(46.0
|
)
|
$
|
46.5
|
|
$
|
1.3
|
|
$
|
(47.8
|
)
|
$
|
(46.0
|
)
|
|
|
Thirteen
Weeks Ended June 30, 2006
|
|
|
|
Parent
Company
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Statement of Operations
|
|
Net
sales
|
|
$
|
272.9
|
|
$
|
138.0
|
|
$
|
35.7
|
|
$
|
(4.1
|
)
|
$
|
442.5
|
|
Cost
of goods sold
|
|
|
262.4
|
|
|
110.8
|
|
|
33.3
|
|
|
(2.6
|
)
|
|
403.9
|
|
Gross
profit
|
|
|
10.5
|
|
|
27.2
|
|
|
2.4
|
|
|
(1.5
|
)
|
|
38.6
|
|
Operating
expenses
|
|
|
30.2
|
|
|
14.4
|
|
|
3.3
|
|
|
—
|
|
|
47.9
|
|
Operating
income (loss)
|
|
|
(19.7
|
)
|
|
12.8
|
|
|
(0.9
|
)
|
|
(1.5
|
)
|
|
(9.3
|
)
|
Other
expense (income)
|
|
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
Interest
expense, net
|
|
|
21.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21.0
|
|
Income
taxes
|
|
|
(10.8
|
)
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
(10.0
|
)
|
Minority
interest
|
|
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
Equity
in net (income) loss from subsidiary
|
|
|
(9.6
|
)
|
|
—
|
|
|
—
|
|
|
9.6
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
(18.6
|
)
|
|
12.8
|
|
$
|
(1.7
|
)
|
$
|
8.1
|
|
$
|
(18.6
|
)
|
|
|
Thirty-nine
Weeks Ended June 30, 2007
|
|
|
|
Parent
Company
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Statement of Operations
|
|
Net
sales
|
|
$
|
716.3
|
|
$
|
1,399.1
|
|
$
|
143.0
|
|
$
|
(5.9
|
)
|
$
|
2,252.5
|
|
Cost
of goods sold
|
|
|
651.8
|
|
|
1,129.1
|
|
|
130.0
|
|
|
(5.9
|
)
|
|
1,905.0
|
|
Gross
profit
|
|
|
64.5
|
|
|
270.0
|
|
|
13.0
|
|
|
—
|
|
|
347.5
|
|
Operating
expenses
|
|
|
(88.0
|
)
|
|
356.6
|
|
|
11.1
|
|
|
(0.5
|
)
|
|
279.2
|
|
Operating
income (loss)
|
|
|
152.5
|
|
|
(86.6
|
)
|
|
1.9
|
|
|
0.5
|
|
|
68.3
|
|
Loss
on extinguished debt
|
|
|
15.4
|
|
|
21.9
|
|
|
—
|
|
|
—
|
|
|
37.3
|
|
Interest
expense (income), net
|
|
|
204.2
|
|
|
(7.1
|
)
|
|
1.9
|
|
|
(20.2
|
)
|
|
178.8
|
|
Income
tax expense (benefit)
|
|
|
(18.0
|
)
|
|
(38.2
|
)
|
|
1.5
|
|
|
—
|
|
|
(54.7
|
)
|
Minority
interest
|
|
|
(2.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.7
|
)
|
Equity
in net (income) loss from subsidiary
|
|
|
49.1
|
|
|
(1.2
|
)
|
|
—
|
|
|
(47.9
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
(95.5
|
)
|
$
|
(62.0
|
)
|
$
|
(1.5
|
)
|
$
|
68.6
|
|
$
|
(90.4
|
)
|
|
|
|
Consolidating
Statement of Cash Flows
|
|
|
|
Net
cash provided by (used for) operating activities
|
|
|
137.7
|
|
|
(23.0
|
)
|
|
(0.6
|
)
|
|
—
|
|
|
114.1
|
|
Net
cash used for investing activities
|
|
|
(943.7
|
)
|
|
819.4
|
|
|
(7.5
|
)
|
|
—
|
|
|
(131.8
|
)
|
Net
cash provided by (used for) financing activities
|
|
|
744.7
|
|
|
(802.6
|
)
|
|
4.3
|
|
|
—
|
|
|
(53.6
|
)
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(61.3
|
)
|
|
(6.2
|
)
|
|
(3.7
|
)
|
|
—
|
|
|
(71.2
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
62.3
|
|
|
15.0
|
|
|
5.8
|
|
|
—
|
|
|
83.1
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1.0
|
|
$
|
8.8
|
|
$
|
2.1
|
|
$
|
—
|
|
$
|
11.9
|
|
|
|
February
17, 2006 to June 30, 2006
|
|
|
|
Parent
Company
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Statement of Operations
|
|
Net
sales
|
|
$
|
412.3
|
|
$
|
187.1
|
|
$
|
50.5
|
|
$
|
(1.6
|
)
|
$
|
648.3
|
|
Cost
of goods sold
|
|
|
390.1
|
|
|
152.1
|
|
|
46.4
|
|
|
(1.3
|
)
|
|
587.3
|
|
Gross
profit
|
|
|
22.2
|
|
|
35.0
|
|
|
4.1
|
|
|
(0.3
|
)
|
|
61.0
|
|
Operating
expenses
|
|
|
31.7
|
|
|
22.8
|
|
|
4.6
|
|
|
—
|
|
|
59.1
|
|
Operating
income (loss)
|
|
|
(9.5
|
)
|
|
12.2
|
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
1.9
|
|
Other
expenses (income)
|
|
|
(0.5
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
Interest
expense (income), net
|
|
|
28.5
|
|
|
1.7
|
|
|
3.0
|
|
|
—
|
|
|
33.2
|
|
Income
tax expense (benefit)
|
|
|
(10.9
|
)
|
|
(0.5
|
)
|
|
1.1
|
|
|
—
|
|
|
(10.3
|
)
|
Minority
interest
|
|
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
Equity
in net (income) loss from subsidiary
|
|
|
(6.2
|
)
|
|
—
|
|
|
—
|
|
|
6.2
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
(19.7
|
)
|
$
|
11.1
|
|
$
|
4.6
|
|
|
(6.5
|
)
|
$
|
(19.7
|
)
|
|
|
|
Consolidating
Statement of Cash Flows
|
|
|
|
Net
cash provided by (used for) operating activities
|
|
$
|
95.3
|
|
$
|
(3.4
|
)
|
$
|
7.3
|
|
$
|
—
|
|
$
|
99.2
|
|
Net
cash used for investing activities
|
|
|
(938.3
|
)
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(939.1
|
)
|
Net
cash provided by (used for) financing activities
|
|
|
903.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
903.2
|
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
60.2
|
|
|
(3.9
|
)
|
|
7.2
|
|
|
—
|
|
|
63.5
|
|
Cash
and cash equivalents at beginning of period
|
|
|
18.4
|
|
|
5.5
|
|
|
3.1
|
|
|
—
|
|
|
27.0
|
|
Cash
and cash equivalents at end of period
|
|
$
|
78.6
|
|
$
|
1.6
|
|
$
|
10.3
|
|
$
|
—
|
|
|
90.5
|
|
|
|
October
1, 2005 to February 16, 2006
|
|
|
|
Parent
Company
|
|
Combined
Guarantor Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Consolidating
Statement of Operations
|
|
Net
sales
|
|
$
|
420.4
|
|
$
|
196.3
|
|
$
|
52.8
|
|
$
|
(2.6
|
)
|
$
|
666.9
|
|
Cost
of goods sold
|
|
|
369.6
|
|
|
168.5
|
|
|
43.1
|
|
|
(2.2
|
)
|
|
579.0
|
|
Gross
profit
|
|
|
50.8
|
|
|
27.8
|
|
|
9.7
|
|
|
(0.4
|
)
|
|
87.9
|
|
Operating
expenses
|
|
|
30.6
|
|
|
26.7
|
|
|
3.7
|
|
|
—
|
|
|
61.0
|
|
Operating
income (loss)
|
|
|
20.2
|
|
|
1.1
|
|
|
6.0
|
|
|
(0.4
|
)
|
|
26.9
|
|
Other
expenses (income)
|
|
|
7.9
|
|
|
(9.6
|
)
|
|
1.7
|
|
|
—
|
|
|
—
|
|
Interest
expense (income), net
|
|
|
9.4
|
|
|
(2.2
|
)
|
|
0.4
|
|
|
—
|
|
|
7.6
|
|
Income
taxes
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
1.6
|
|
Equity
in net (income) loss from subsidiary
|
|
|
(14.8
|
)
|
|
—
|
|
|
—
|
|
|
14.8
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
17.7
|
|
$
|
12.9
|
|
$
|
2.3
|
|
$
|
14.4
|
|
$
|
17.7
|
|
|
|
|
Consolidating
Statement of Cash Flows
|
|
|
|
Net
cash provided by (used for) operating activities
|
|
$
|
(126.2
|
)
|
$
|
3.8
|
|
$
|
3.2
|
|
$
|
—
|
|
$
|
(119.2
|
)
|
Net
cash used for investing activities
|
|
|
(6.2
|
)
|
|
(2.8
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(9.1
|
)
|
Net
cash provided by (used for) financing activities
|
|
|
132.4
|
|
|
(0.6
|
)
|
|
(1.2
|
)
|
|
—
|
|
|
130.6
|
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
—
|
|
|
0.4
|
|
|
1.7
|
|
|
—
|
|
|
2.1
|
|
Cash
and cash equivalents at beginning of period
|
|
|
—
|
|
|
0.1
|
|
|
2.6
|
|
|
—
|
|
|
2.7
|
|
Cash
and cash equivalents at end of period
|
|
$
|
—
|
|
$
|
0.5
|
|
$
|
4.3
|
|
$
|
—
|
|
$
|
4.8
|
|
13. 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.
14. Recent
Financial Accounting Standards
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), which is an interpretation of SFAS No. 109,
“Accounting for Income Taxes.” FIN 48 provides measurement and recognition
guidance related to accounting for uncertainty in income taxes. FIN 48 also
requires increased disclosure with respect to the uncertainty in
income
taxes.
The Company will adopt the provisions of FIN 48 on October 1, 2007, as required,
and is currently evaluating the impact of such adoption on its supplemental
combined financial statements.
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 the
Company’s fiscal year beginning October 1, 2008. 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 the
Company’s fiscal year beginning October 1, 2008. We have not determined the
effect that the adoption of SFAS No. 159 will have on our consolidated financial
statements.
15. Subsequent
Events
On
July
10, 2007, Berry announced a restructuring of the operations within its Flexible
Film division. The restructuring will include the closing of four manufacturing
locations: Yonkers, New York; Columbus, Georgia; City of Industry,
California and Santa Fe Springs, California. The Company intends to complete
each of the closings prior to December 31, 2007. The business at each facility
being closed will be transferred to other Berry facilities. The affected
business accounted for less than $100 million of net sales for the last twelve
months ended June 30, 2007. The Company expects this project to generate
approximately $20 million of annual savings when fully implemented. The
estimated cash liability associated with this restructuring program is estimated
at $30 million, which includes new equipment, relocation of existing equipment,
and other transition costs.
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 “Holding” refer to
Berry Plastics Holding Corporation, references to “we,” “our” or “us” refer to
Berry Plastics Holding Corporation together with its consolidated subsidiaries.
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 S-4
filed with the SEC on May 4, 2007 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 starting
on page 3 of this report.
On
April
3, 2007, Berry Plastics Group, Inc. (“Old Group”) was merged (the “Merger”) with
another Apollo Management, L.P. (“Apollo”) controlled company, Covalence
Specialty Materials Holding Corporation (“CSM Holding”). The resulting company
retained the name Berry Plastics Group, Inc. (“Group”). Immediately following
the Merger, Berry Plastics Holding Corporation (“Old Berry”) and Covalence
Specialty Materials Corp. (“Covalence”) were combined as a direct subsidiary of
Group. The resulting company retained the name Berry Plastics Holding
Corporation (“Berry” or “the Company”). In connection with the closing of the
Merger, the Company adopted the fiscal year-end (September) of the accounting
acquirer (Covalence).
For
accounting purposes, Old Group and CSM Holding are considered entities under
the
common control of Apollo as defined in Emerging Issues Task Force 02-5
“Definition of Common Control in Relation to FASB Statement of Financial
Accounting Standards No. 141, Business Combinations”. The financial statements
of these entities are presented retroactively on a consolidated basis in a
manner similar to a pooling of interests, and include the results of operations
of each business from the date of acquisition by the Apollo affiliates. Apollo
acquired CSM Holding on February 16, 2006, and Old Group on September 20,
2006.
The
financial data for the Company for the thirteen weeks ended June 30, 2006 and
for the period from February 16, 2006 to June 30, 2006 include the results
of
operations of Covalence only. The results for the period from October 1, 2005
to
February 16, 2006 represent the results of the predecessor of Covalence. The
financial data for the Company for the thirteen and thirty-nine weeks ended
June
30, 2007 include the consolidated results of operations of Covalence and the
Company. The balance sheets as of September 30, 2006 and June 30, 2007 also
represent the consolidated balance sheets of Covalence and the Company as of
each date, respectively. Accordingly, the results of operations and financial
position of Berry Plastics Holding Corporation presented in this quarterly
report on Form 10-Q are not comparable to previous quarterly and annual reports
on Form 10-Q and Form 10-K, respectively, for the Company or Covalence.
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 Form S-4 filed
with the SEC on May 4, 2007. 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 an ongoing 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 period 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 $9.3 million and $9.6 million as of
June 30, 2007 and September 30, 2006, respectively.
Inventory
obsolescence.
We
evaluate our reserve for inventory obsolescence on an ongoing 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 $15.7 million and $16.6 million as of June 30, 2007 and
September 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 an ongoing 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 $7.5 million and $9.1 million, including reserves for
expected medical claims incurred but not reported, as of June 30, 2007 and
September 30, 2006, respectively.
Workers’
compensation insurance.
The
majority of our facilities are in 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 $7.0 million
and $5.9 million as of June 30, 2007 and September 30, 2006,
respectively.
Revenue
recognition. The
Company recognizes revenue in accordance with 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, foreign, state, 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.
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 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
On
July
10, 2007, we
announced a restructuring of the operations within our Flexible Film division.
The restructuring will include the closing of four manufacturing locations:
Yonkers, New York; Columbus, Georgia; City of Industry, California and Santa
Fe
Springs, California. We intend to complete each of the closings prior to
December 31, 2007. The business at each facility being closed will be
transferred to other Company facilities. The affected business accounted for
less than $100 million of net sales for the last twelve months ended June 30,
2007. The Company expects this project to generate approximately $20 million
of
annual savings when fully implemented. The estimated cash liability associated
with this restructuring program is estimated at $30 million, which includes
new
equipment, relocation of existing equipment, and other transition
costs.
Results
of Operations
Comparison
of the 13 Weeks Ended June 30, 2007 (the “Quarter”) and the 13 Weeks Ended June
30, 2006 (the “Prior Quarter”)
Net
Sales.
Net
sales increased 82% to $807.3 million for the Quarter from $442.5 million for
the Prior Quarter. This $364.8 million increase is primarily the result of
the
Old Berry net sales of $375.1 million that are not included in the Prior
Quarter. The following discussion in this section provides a comparison of
net
sales by business segment. Net sales in the rigid open top business increased
from $222.8 million in the Prior Quarter (Old Berry) to $240.0 million in the
Quarter. Base volume growth in the rigid open top business, excluding net
selling price decreases, was 6% driven primarily by strong growth in dairy
containers and thermoformed and injection drink cups. Net sales in the rigid
closed top business decreased slightly from $152.3 million in the Prior Quarter
(Old Berry) to $152.0 million in the Quarter. Base volume growth in the rigid
closed top business, excluding net selling price decreases, was relatively
flat
partially the result of the sale of Berry U.K. business in April 2007. The
flexible film business net sales decreased from $284.3 million in the Prior
Quarter to $275.6 million in the Quarter. This decrease of $8.7 million can
be
primarily attributed to lower selling prices partially offset by volume from
the
Rollpak acquisition. Net sales in the tapes/coatings business decreased from
$160.8 million in the Prior Quarter to $139.7 million in the Quarter primarily
driven by softness in the new home construction market.
Gross
Profit.
Gross
profit increased by $100.8 million to $139.4 million (17% of net sales) for
the
Quarter from $38.6 million (9% of net sales) for the Prior Quarter. This
increase of $100.8 million or 261% is primarily the result of Old Berry not
being included in the Prior Quarter, the combined impact of additional sales
volume driven by the organic growth noted above, the timing effect of reduced
resin costs versus selling prices, productivity improvement initiatives in
the
rigid business that have been implemented since the Prior Quarter, and synergies
from the Merger. The gross profit of Old Berry in the Prior Quarter was $75.8
million. 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 and wage
inflation.
Operating
Expenses.
Selling, general and administrative expenses increased by $40.8 million to
$88.6
million for the Quarter from $47.8 million for the Prior Quarter primarily
the
result of the Old Berry selling, general and administrative expenses of $33.9
million that are not included in the Prior Quarter. The remaining increase
of
$6.9 million can be attributed to a stock compensation charge
of
$14.8
million in the Quarter partially offset by cost reduction efforts including
the
synergistic opportunities from the merger of Covalence and Berry. Other expenses
increased from $0.1 million in the Prior Quarter to $27.6 million for the
Quarter primarily as a result of costs incurred in connection with the Covalence
Merger and the Oxnard shutdown.
Interest
Expense, Net.
Net
interest expense increased $38.8 million to $59.8 million for the Quarter
compared to $21.0 million for the Prior Quarter primarily the result of the
Old
Berry net interest expense of $22.5 million that is not included in the Prior
Quarter and interest on additional borrowings to fund the Apollo acquisition
of
Old Group.
Loss
on Extinguished Debt.
The
Company incurred a $37.3 million loss on extinguished debt in the Quarter
primarily as a result of the write-off of deferred financing fees from
Covalence’s and Old Berry’s senior credit facilities and Covalence’s second
priority floating rate note that were extinguished in connection with the
Covalence Merger.
Income
Tax Expense (Benefit). For
the
Quarter, we recorded an income tax benefit of $27.9 million or an effective
tax
rate of 38%. The
change of $17.9 million from the benefit of $10.0 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 $46.0 million for the Quarter compared to a net loss of $18.6 million
for the Prior Quarter for the reasons discussed above.
Three
Quarters Ended June 30, 2007 (“YTD”)
Compared
to the Three Quarters Ended June 30, 2006 (“Prior YTD”)
Note.
For
comparison purposes, the results from October 1, 2005 to February 16, 2006
have
been combined with the results from February 17, 2006 to June 30, 2006 to
formulate the Prior YTD.
Net
Sales.
Net
sales increased 71% to $2,252.5 million for the YTD from $1,315.2 million for
the Prior YTD. This $937.3 million increase is primarily the result of the
Old
Berry net sales of $1,050.3 million that are not included in the Prior YTD.
The
following discussion in this section provides a comparison of net sales by
business segment. Net sales in the rigid open top business increased from $616.1
million in the Prior YTD (Old Berry) to $643.1 million in the YTD driven
primarily by strong growth in dairy containers and thermoformed drink cups.
Net
sales in the rigid closed top business increased from $434.2 million in the
Prior YTD (Old Berry) to $450.3 million in the YTD primarily as a result of
strong growth in closures and prescription vials. The flexible film business
net
sales decreased from $862.0 million in the Prior YTD to $761.0 million in the
YTD. This decrease of $101.0 million can be primarily attributed to lower
selling prices and a mild hurricane season partially offset by volume from
the
Rollpak acquisition. Net sales in the tapes/coatings business decreased from
$461.1 million in the Prior YTD to $401.8 million in the YTD primarily driven
by
softness in the new home construction market.
Gross
Profit.
Gross
profit increased by $198.6 million to $347.5 million (15% of net sales) for
the
YTD from $148.9 million (11% of net sales) for the Prior YTD. This increase
of
$198.6 million or 133% is primarily the result of Old Berry not being included
in the Prior YTD, the combined impact of additional sales volume driven by
the
organic growth noted above, the timing effect of resin costs versus selling
prices, and productivity improvement initiatives that have been implemented
since the
Prior
YTD. The gross profit of Old Berry in the Prior YTD was $213.6 million.
Significant productivity improvements were made since the Prior YTD, 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 and wage inflation.
Operating
Expenses.
Selling, general and administrative expenses increased by $131.2 million to
$240.0 million for the YTD from $108.8 million for the Prior YTD primarily
as a
result of the Old Berry selling, general and administrative expenses of $102.5
million that are not included in the Prior YTD. The remaining increase of $28.6
million can be attributed to a stock compensation charge of $15.6 million in
the
YTD and increased amortization of intangibles from Apollo’s purchase of Old
Group and CSM Holding. Other expenses increased from $0.9 million in the Prior
YTD to $39.2 million for the YTD primarily as a result of costs incurred in
connection with the Covalence Merger and the Oxnard shutdown.
Interest
Expense, Net.
Net
interest expense increased $143.5 million to $178.8 million for the YTD compared
to $35.3 million for the Prior YTD primarily as a result of the Old Berry net
interest expense of $66.5 million that is not included in the Prior YTD and
interest on additional borrowings to fund the Apollo acquisition of Old
Group.
Loss
on Extinguished Debt.
The
Company incurred a $37.3 million loss on extinguished debt in the YTD primarily
as a result of the write-off of deferred financing fees from Covalence’s and Old
Berry’s senior credit facilities and Covalence’s second priority floating rate
notes that were extinguished in connection with the Covalence Merger.
Income
Tax Expense (Benefit). For
the
YTD, we recorded an income tax benefit of $54.7 million or an effective tax
rate
of 37%. The change of $46.0 million from the benefit of $8.7 million in the
Prior YTD was primarily attributed to the decrease in income before income
taxes
for the reasons discussed above.
Net
Income (Loss).
Net
loss was $90.4 million for the YTD compared to a net loss of $2.0 million for
the Prior YTD for the reasons discussed above.
Liquidity
and Capital Resources
In
connection with the Covalence Merger, the Company entered into senior secured
credit facilities that include a term loan in the principal amount of $1,200.0
million and a revolving credit facility which provides borrowing availability
equal to the lesser of (a) $400.0 million or (b) the borrowing base, which
is a
function, among other things, of the Company’s accounts receivable and
inventory. The term loan matures on April 3, 2015 and the revolving credit
facility matures on April 3, 2013.
The
borrowings under the senior secured credit facilities bear interest at a rate
equal to an applicable margin plus, as determined at our option, either (a)
a
base rate (“Base Rate”) determined by reference to the higher of (1) the prime
rate of Credit Suisse, Cayman Islands Branch, as administrative agent, in the
case of the term loan facility or Bank of America, N.A., as administrative
agent, in the case of the revolving credit facility and (2) the U.S. federal
funds rate plus 1/2 of 1% or (b) a eurodollar rate (“LIBOR”) determined by
reference to the costs of funds for eurodollar deposits in dollars in the London
interbank market for the interest period relevant to such borrowing Bank
Compliance for certain additional costs. The initial applicable margin for
LIBOR
rate
borrowings under the revolving credit facility was 1.25% and under the term
loan
was 2.00%. The initial applicable margin for base rate borrowings under the
revolving credit facility was 0% and under the term loan was 1.00%.
The
term
loan facility requires minimum quarterly principal payments of $3.0 million
for
the first eight years, which commenced in June 2007, with the remaining amount
payable on April 3, 2015. In addition, the Company must prepay the outstanding
term loan, subject to certain exceptions, with (1) beginning with the Company’s
first fiscal year after the closing, 50% (which percentage is subject to a
minimum of 0% upon the achievement of certain leverage ratios) of excess cash
flow (as defined in the credit agreement); and (2) 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 its business or to make certain other permitted investments within
15
months, subject to certain limitations.
In
addition to paying interest on outstanding principal under the senior secured
credit facilities, the Company is required to pay a commitment fee to the
lenders under the revolving credit facilities in respect of the unutilized
commitments thereunder at a rate equal to 0.25% to 0.35% per annum depending
on
the average daily available unused borrowing capacity. The Company also pays
a
customary letter of credit fee, including a fronting fee of 0.125% per annum
of
the stated amount of each outstanding letter of credit, and customary agency
fees.
The
Company may voluntarily repay outstanding loans under the senior secured credit
facilities at any time without premium or penalty, other than customary
“breakage” costs with respect to eurodollar loans. The senior secured credit
facilities contain various restrictive covenants that, among other things and
subject to specified exceptions, prohibit the Company from prepaying other
indebtedness, and restrict its ability to incur indebtedness or liens, make
investments or declare or pay any dividends. All obligations under the senior
secured credit facilities are unconditionally guaranteed by Group and, subject
to certain exceptions, each of the Company’s existing and future direct and
indirect domestic subsidiaries. The guarantees of those obligations are secured
by substantially
all of the Company’s assets as well as those of each domestic subsidiary
guarantor. The Company was in compliance with all the financial and operating
covenants at June 30, 2007.
At
June
30, 2007, there were $20.0 million 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 June
30,
2007, the Company had $29.4 million under the Credit Facility in letters of
credit outstanding. At June 30, 2007, the Company had unused borrowing capacity
of $350.6 million under the revolving line of credit. 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 $481.0
million for the twelve month period ended June 30, 2007 to net
loss.
|
|
Thirty-Nine
Weeks
Ended
June 30,
2007
|
|
Thirteen
Weeks
Ended
September 30,
2006
|
|
12
months ended
June
30, 2007
|
|
|
|
|
|
|
|
|
|
Bank
compliance EBITDA
|
|
$
|
291.0
|
|
$
|
102.6
|
|
$
|
481.0
|
|
Net
interest expense
|
|
|
(178.8
|
)
|
|
(15.8
|
)
|
|
(194.6
|
)
|
Depreciation
and amortization
|
|
|
(150.6
|
)
|
|
(23.4
|
)
|
|
(174.0
|
)
|
Income
tax benefit
|
|
|
54.7
|
|
|
3.4
|
|
|
58.1
|
|
Loss
on extinguished debt
|
|
|
(37.3
|
)
|
|
—
|
|
|
(37.3
|
)
|
Business
optimization expense
|
|
|
(44.0
|
)
|
|
(2.5
|
)
|
|
(46.5
|
)
|
Stock
based compensation
|
|
|
(15.6
|
)
|
|
(0.1
|
)
|
|
(15.7
|
)
|
Management
fees
|
|
|
(2.7
|
)
|
|
(0.1
|
)
|
|
(2.8
|
)
|
Inventory
write-up
|
|
|
(9.8
|
)
|
|
—
|
|
|
(9.8
|
)
|
Minority
interest
|
|
|
2.7
|
|
|
1.1
|
|
|
3.8
|
|
Pro
forma synergies (Covalence and Rollpak)
|
|
|
—
|
|
|
—
|
|
|
(76.9
|
)
|
Pro
forma synergies (Oxnard and Norwich)
|
|
|
—
|
|
|
—
|
|
|
(5.5
|
)
|
Pro
forma Rollpak EBITDA
|
|
|
—
|
|
|
—
|
|
|
(5.0
|
)
|
Old
Berry bank compliance EBITDA
|
|
|
—
|
|
|
(69.8
|
)
|
|
(69.8
|
)
|
Net
loss
|
|
$
|
(90.4
|
)
|
$
|
(4.6
|
)
|
$
|
(95.0
|
)
|
For
comparison purposes, the
following table reconciles our bank compliance EBITDA for the thirteen weeks
ended June 30, 2007 and June 30, 2006 to net loss.
|
|
Thirteen
Weeks Ended June 30,
2007
|
|
Thirteen
Weeks Ended June 30,
2006
|
|
|
|
|
|
|
|
Bank
compliance EBITDA
|
|
$
|
117.6
|
|
$
|
96.1
|
|
Net
interest expense
|
|
|
(59.8
|
)
|
|
(21.0
|
)
|
Depreciation
and amortization
|
|
|
(52.0
|
)
|
|
(23.2
|
)
|
Income
tax benefit
|
|
|
27.9
|
|
|
10.0
|
|
Loss
on extinguished debt
|
|
|
(37.3
|
)
|
|
—
|
|
Business
optimization expense
|
|
|
(23.9
|
)
|
|
(2.9
|
)
|
Stock
based compensation
|
|
|
(14.8
|
)
|
|
—
|
|
Management
fees
|
|
|
(1.0
|
)
|
|
(0.9
|
)
|
Inventory
write-up
|
|
|
(2.7
|
)
|
|
(7.0
|
)
|
Minority
interest
|
|
|
—
|
|
|
0.7
|
|
Old
Berry bank compliance EBITDA
|
|
|
—
|
|
|
(70.4
|
)
|
Net
loss
|
|
$
|
(46.0
|
)
|
$
|
(18.6
|
)
|
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 (loss)
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, the Company 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 June 30,
2007.
10
¼%
Senior Subordinated Notes
In
connection with Apollo’s acquisition of CSM Holding, Covalence issued $265.0
million of 10 ¼% senior subordinated notes due March 1, 2016. The notes are
senior subordinated obligations of the Company and rank junior to all other
senior indebtedness that does not contain similar subordination provisions.
No
principal payments are required with respect to the senior subordinated notes
prior to maturity.
The
indenture relating to the notes contain a number of covenants that, among other
things and subject to certain exceptions, restrict the Company’s ability and the
ability of its restricted subsidiaries to incur indebtedness or issue
disqualified stock or preferred stock, pay dividends or redeem or repurchase
stock, make certain types of investments, sell assets, incur certain liens,
restrict dividends or other payments from subsidiaries, enter into transactions
with affiliates and consolidate, merge or sell all or substantially all of
the
Company’s assets. The Company was in compliance with all covenants at June 30,
2007.
11%
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 June 30, 2007.
Cash
Flows
Net
cash
provided by operating activities was $114.1 million for the YTD compared to
a
use of $20.0 million for the Prior YTD. The increase of $134.1 million is
primarily the result of improved operations in the YTD and the inclusion of
Old
Berry in the YTD.
Net
cash
used for investing activities decreased from $948.2 million for the Prior YTD
to
$131.8 million for the YTD primarily as a result of the Apollo acquisition
of
Covalence in the Prior YTD.
Net
cash
used in financing activities was $53.6 million for the YTD compared to net
cash
provided by financing activities of $1,033.8 million in the Prior YTD. This
change of $1,087.4 million can be primarily attributed to proceeds received
related to the financing of the Apollo acquisition of CSM Holding in the Prior
YTD.
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 Form S-4 filed with the Securities and Exchange
Commission on May 4, 2007. 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 June 30, 2007, our cash
balance was $11.9 million, and we had unused borrowing capacity under the Credit
Facility’s borrowing base of $350.6 million.
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 $1,200.0 million
term loan and (2) a $400.0 million revolving credit facility. At June 30, 2007,
$20.0 million was outstanding on the revolving credit facility, and the net
outstanding balance of the term loan at June 30, 2007 was $1,197.0 million.
At
June 30, 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 $3.6 million and $7.2 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
our
Form
S-4 filed with the Securities
and Exchange Commission
on May
4, 2007.
Item
1A. Risk
Factors
You
should carefully consider the risks described in our Form
S-4
filed with the Securities
and Exchange Commission
on May
4, 2007,
including those under the heading “Risk Factors” 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 since described in our Form
S-4
filed with the Securities
and Exchange Commission
on May
4, 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
August
14, 2007
By:
/s/
James M. Kratochvil
James
M.
Kratochvil
Executive
Vice President, Chief Financial Officer,
Treasurer
and Secretary (Principal Financial and
Accounting
Officer)