-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, So/yKxnt06ItNsUsfytvXRSH+LXIaGhGVBT8XdxrsLJV5bNKCnWUYfE1JrlzzaEQ qnk2WNqsufW84Rw6ttq2cQ== 0000919463-05-000024.txt : 20050812 0000919463-05-000024.hdr.sgml : 20050812 20050812155423 ACCESSION NUMBER: 0000919463-05-000024 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20050812 DATE AS OF CHANGE: 20050812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BPC HOLDING CORP CENTRAL INDEX KEY: 0000919465 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 351814673 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-75706-01 FILM NUMBER: 051021623 BUSINESS ADDRESS: STREET 1: 101 OAKLEY ST STREET 2: P O BOX 959 CITY: EVANSVILLE STATE: IN ZIP: 47710 BUSINESS PHONE: 8124242904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERRY PLASTICS CORP CENTRAL INDEX KEY: 0000919463 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 351813706 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-75706 FILM NUMBER: 051021622 BUSINESS ADDRESS: STREET 1: 101 OAKLEY ST STREET 2: P O BOX 959 CITY: EVANSVILLE STATE: IN ZIP: 47710 BUSINESS PHONE: 8124242904 MAIL ADDRESS: STREET 1: PO BOX 959 CITY: EVANSVILLE STATE: IN ZIP: 47706-0959 424B3 1 pursuant424b2q05.txt FILED PURSUANT TO RULE 424(B)(3) File Number 333-115086 BERRY PLASTICS CORPORATION SUPPLEMENT NO. 3 TO AMENDMENT NO. 2 TO MARKET-MAKING PROSPECTUS DATED APRIL 7, 2005 THE DATE OF THIS SUPPLEMENT IS AUGUST 12, 2005 ON AUGUST 12, 2005, BPC HOLDING CORPORATION FILED THE ATTACHED FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 2, 2005 UNITED STATES 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 July 2, 2005, 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 33-75706 BPC HOLDING CORPORATION (Exact Name of Registrant as Specified in Its Charter)
Delaware 35-1814673 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification No.)
BERRY PLASTICS CORPORATION (Exact Name of Registrant as Specified in Its Charter)
Delaware 35-1813706 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification No.) 101 Oakley Street 47710 Evansville, Indiana (Address of Principal Executive Offices) (Zip code)
(Registrants' Telephone Number, Including Area Code): (812) 424-2904 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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X]Yes [ ]No Indicate by check mark whether the registrants are accelerated filers (as defined by Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: As of August 4, 2005, there were outstanding 3,370,759 shares of the Common Stock, $.01 par value, of BPC Holding Corporation. As of August 4, 2005, there were outstanding 100 shares of the Common Stock, $.01 par value, of Berry Plastics Corporation. 1 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. Such 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: a) 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; b) catastrophic loss of our key manufacturing facilities; c) risks related to our acquisition strategy and integration of acquired businesses, including Kerr; d) risks associated with our substantial indebtedness and debt service; e) performance of our business and future operating results; f) risks of competition in our existing and future markets; g) general business and economic conditions, particularly an economic downturn; h) increases in the cost of compliance with laws and regulations, including environmental laws and regulations; and i) the factors discussed in our Form 10-K for the fiscal year ended January 1, 2005 in the section entitled "Risk Factors." Readers should carefully review the factors discussed in our Form 10-K for the fiscal year ended January 1, 2005 in the section entitled "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 SEC. Our internet address is www.berryplastics.com. The information contained on our website is not being incorporated herein. We are currently in the process of finalizing our Code of Ethics. 2 BPC HOLDING CORPORATION BERRY PLASTICS CORPORATION FORM 10-Q INDEX FOR QUARTERLY PERIOD ENDED JULY 2, 2005 Page No. PART I. FINANCIAL INFORMATION -------- Item 1. Financial Statements: Consolidated Balance Sheets............................ 4 Consolidated Statements of Operations.................. 6 Consolidated Statements of Changes in Stockholders' Equity 7 Consolidated Statements of Cash Flows.................. 8 Notes to Consolidated Financial Statements............. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27 Item 4. Controls and Procedures................................ 28 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................... 29 SIGNATURE........................................................... 30 3 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements BPC HOLDING CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, except share information)
JULY 2, JANUARY 1, 2005 2005 ---------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 5,653 $ 264 Accounts receivable (less allowance for doubtful accounts of $5,432 at July 2, 2005 and $3,207 at January 1, 2005) 153,806 83,162 Inventories: Finished goods 93,260 70,371 Raw materials and supplies 43,642 38,663 ---------- --------- 136,902 109,034 Prepaid expenses and other current assets 24,997 27,339 ---------- --------- Total current assets 321,358 219,799 Property and equipment: Land 10,320 10,016 Buildings and improvements 69,497 64,758 Machinery, equipment and tooling 404,070 297,972 Construction in progress 73,669 19,812 ---------- --------- 557,556 392,558 Less accumulated depreciation 137,668 110,586 ---------- --------- 419,888 281,972 Intangible assets: Deferred financing fees, net 19,263 19,883 Customer relationships, net 82,046 84,959 Goodwill 670,391 358,883 Trademarks, net 33,128 33,448 Other intangibles, net 7,446 6,106 ---------- --------- 812,274 503,279 Other 121 94 ---------- ---------- Total assets $1,553,641 $1,005,144 ========== ==========
4 BPC HOLDING CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (In Thousands of Dollars, except share information)
JULY 2, JANUARY 1, 2005 2005 ---------- --------- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 84,494 $ 55,671 Accrued expenses and other current liabilities 41,987 16,693 Accrued interest 20,575 18,816 Employee compensation, payroll and other taxes 34,549 28,190 Current portion of long-term debt 14,178 10,335 ---------- --------- Total current liabilities 195,783 129,705 Long-term debt, less current portion 1,153,376 687,223 Other long-term liabilities 21,790 4,325 ---------- --------- Total liabilities 1,370,949 821,253 Stockholders' equity: Preferred Stock; $.01 par value: 500,000 shares authorized; 0 shares issued and outstanding at July 2,2005 and January 1, 2005 - - Common Stock; $.01 par value: 5,000,000 shares authorized; 3,400,201 shares issued and 3,379,099 shares outstanding at July 2, 2005; and 3,398,807 shares issued and 3,378,305 shares outstanding at January 1, 2005 34 34 Additional paid-in capital 345,147 345,001 Adjustment of the carryover basis of continuing stockholders (196,603) (196,603) Notes receivable - common stock (15,253) (14,856) Treasury stock: 21,102 shares and 20,502 shares of common stock at July 2, 2005 and January 1, 2005, respectively (2,155) (2,049) Retained earnings 44,728 39,178 Accumulated other comprehensive income 6,794 13,186 ---------- ---------- Total stockholders' equity 182,692 183,891 ---------- ---------- Total liabilities and stockholders' equity $1,553,641 $1,005,144 ========== ==========
See notes to consolidated financial statements. 5 BPC HOLDING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands of Dollars)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED -------------------- ---------------------- JULY 2, JUNE 26, JULY 2, JUNE 26, 2005 2004 2005 2004 -------------------- ---------------------- (UNAUDITED) (UNAUDITED) Net sales $282,871 $ 211,041 $508,181 $ 402,767 Cost of goods sold 233,477 164,565 417,493 313,180 -------------------- ----------------------- Gross profit 49,394 46,476 90,688 89,587 Operating expenses: Selling 7,593 6,940 14,895 13,551 General and administrative 9,546 9,660 18,425 18,890 Research and development 1,428 893 2,456 1,780 Amortization of intangibles 1,985 1,739 3,758 3,474 Other expenses 389 1,539 693 4,044 -------------------- ----------------------- Operating income 28,453 25,705 50,461 47,848 Other expenses: Loss on disposal of equipment - 4 - - Unrealized loss on investment 937 - 1,569 - -------------------- ----------------------- Income before interest and taxes 27,516 25,701 48,892 47,848 Interest: Expense (16,513) (13,037) (30,535) (26,537) Write off of deferred financing fees (7,045) - (7,045) - Income 208 198 412 404 -------------------- ----------------------- Income before income taxes 4,166 12,862 11,724 21,715 Income taxes 2,415 5,471 6,174 9,502 -------------------- ----------------------- Net income $ 1,751 $ 7,391 $ 5,550 $ 12,213 ==================== =======================
See notes to consolidated financial statements. 6 BPC HOLDING CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (In Thousands of Dollars)
ADJUSTMENT OF ACCUMULATED THE CARRYOVER NOTES OTHER ADDITIONAL BASIS OF RECEIVABLE- COMPREHENSIVE COMMON PAID-IN CONTINUING COMMON TREASURY RETAINED INCOME STOCK CAPITAL STOCKHOLDERS STOCK STOCK EARNINGS (LOSSES) TOTAL --------------------------------------------------------------------------------------- Balance at January 1, 2005 $ 34 $345,001 $(196,603) $ (14,856) $ (2,049) $39,178 $13,186 $183,891 ----- -------- ---------- ---------- --------- ------- -------- --------- Interest on notes receivable - - - (397) - - - (397) Translation loss - - - - - - (2,904) (2,904) Issuance of common stock - 104 - - - - - 104 Sale of treasury stock - 42 - - 92 - - 134 Purchase of treasury stock - - - - (198) - - (198) Other comprehensive losses - - - - - - (3,488) (3,488) Net income - - - - - 5,550 - 5,550 ----- -------- ---------- ---------- --------- ------- -------- --------- Balance at July 2, 2005 $ 34 $345,147 $(196,603) $ (15,253) $ (2,155) $44,728 $ 6,794 $182,692 ===== ======== ========== ========== ========= ======= ======== =========
See notes to consolidated financial statements. 7 BPC HOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars)
TWENTY-SIX WEEKS ENDED --------------------------- JULY 2, JUNE 26, 2005 2004 ----------- ----------- (Unaudited) (Unaudited) OPERATING ACTIVITIES Net income $ 5,550 $ 12,213 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 30,391 26,480 Non-cash interest expense 982 916 Write off of deferred financing fees 7,045 - Unrealized loss on investment in Southern Packaging 1,569 - Amortization of intangibles 3,758 3,474 Deferred income taxes 5,641 9,451 Changes in operating assets and liabilities: Accounts receivable, net (21,910) (21,322) Inventories 8,697 1,688 Prepaid expenses and other receivables 4,019 (80) Other assets (12) 23 Accrued interest 1,759 84 Payables and accrued expenses 3,896 6,100 ----------- ----------- Net cash provided by operating activities 51,385 39,027 INVESTING ACTIVITIES Additions to property and equipment (32,303) (28,652) Proceeds from disposal of property and equipment 1,710 3,384 Proceeds from working capital settlement on business acquisition - 6,687 Acquisitions of businesses (468,106) (396) ----------- ----------- Net cash used for investing activities (498,699) (18,977) FINANCING ACTIVITIES Proceeds from long-term borrowings 466,457 1,172 Payments on long-term borrowings (5,806) (16,800) Proceeds from issuance of common stock 104 53 Proceeds from sale of treasury stock 134 108 Purchase of treasury stock (198) (141) Debt financing costs (8,000) (171) ----------- ----------- Net cash provided by (used for) financing activities 452,691 (15,779) Effect of exchange rate changes on cash 12 206 ----------- ----------- Net increase in cash and cash equivalents 5,389 4,477 Cash and cash equivalents at beginning of period 264 26,192 ----------- ----------- Cash and cash equivalents at end of period $5,653 $30,669 =========== ===========
See notes to consolidated financial statements. 8 BPC Holding Corporation Notes to Consolidated Financial Statements (In thousands of dollars, except as otherwise noted) (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of BPC Holding Corporation (the "Company") 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 BPC Holding Corporation ("Holding") and its wholly-owned subsidiary, Berry Plastics Corporation ("Berry"), and Berry's wholly-owned subsidiaries. For further information, refer to the consolidated financial statements and footnotes thereto included in Holding's and Berry's Form 10-K filed with the Securities and Exchange Commission for the year ended January 1, 2005. 2. RECENT ACQUISITIONS AND INVESTMENT On November 20, 2003, Berry acquired Landis Plastics, Inc. (the "Landis Acquisition") for aggregate consideration of approximately $229.7 million, including deferred financing fees. The operations from the Landis Acquisition are included in Berry's operations since the acquisition date. In accordance with EITF 95-3, the Company established opening balance sheet reserves related to plant shutdown, severance and unfavorable lease arrangement costs. The opening balances and current year activity is presented in the following table.
ESTABLISHED TWENTY-SIX WEEKS ENDED JULY 2, 2005 ------------------------------------------- AT OPENING REDUCTION BALANCE JANUARY 1, IN JULY 2, SHEET 2005 ESTIMATE PAYMENTS 2005 ------------ ------------------------------------------- EITF 95-3 reserves $3,206 $1,268 $(422) $(285) $561
On April 11, 2005, a subsidiary of Berry, Berry Plastics de Mexico, S. de R.L. de C.V., acquired all of the injection molding closure assets from Euromex Plastics, S.A. de C.V. ("Euromex"), an injection molding manufacturer located in Toluca, Mexico ("the Mexico Acquisition"), for aggregate consideration of approximately $9.1 million (including taxes). The purchase price was allocated to fixed assets ($4.1 million), inventory ($1.6 million), other receivables ($1.0 million), goodwill ($0.6 million), and other intangibles ($1.8 million). The allocation of purchase price is preliminary and subject to change based on actual expenses and adjustments of estimates. The purchase was financed through borrowings under the Company's revolving line of credit and cash on hand. The operations from the Mexico Acquisition are included in Berry's operations since the acquisition date. 9 On June 3, 2005, Berry acquired Kerr Group, Inc. ("Kerr") for aggregate consideration of approximately $458.8 million (the "Kerr Acquisition"), excluding deferred financing fees. The operations from the Kerr Acquisition are included in Berry's operations since the acquisition date. The purchase price was financed through additional term loan borrowings under an amendment to Berry's senior secured credit facility and cash on hand. In accordance with EITF 95-3, the Company established opening balance sheet reserves of $2.7 million related to plant shutdown and severance costs. No charges were made against the accrual in the periods presented. The following table summarizes the allocation of purchase price to intangible assets. The allocation is preliminary and subject to change based on actual expenses, adjustments of estimated receivables and reserves, the completion of the fixed asset appraisals and intangible asset review, and the finalization of opening deferred taxes. In addition, an expense of $0.7 million was charged to cost of goods sold in the thirteen weeks ended July 2, 2005 related to the write-up of Kerr's finished goods inventory to fair market value in accordance with purchase accounting.
JUNE 3, 2005 ---------- Purchase price $ 448,814 Estimated transaction costs 10,000 ---------- Total consideration 458,814 Less: Net tangible assets acquired (146,712) ---------- Intangible assets $ 312,102 ==========
The pro forma financial results presented below are unaudited and assume that the Kerr Acquisition occurred at the beginning of the respective period. Pro forma results have not been adjusted to reflect the Mexico Acquisition as they do not differ materially from the pro forma results presented below. The information presented is for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Kerr Acquisition been consummated at the beginning of the respective period, nor are they necessarily indicative of future operating results. Further, the information reflects only pro forma adjustments for additional interest expense, elimination of Berry's write off of deferred financing fees, and elimination of Kerr's closing expenses, net of the applicable income tax effects.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ---------------------- ------------------------ JULY 2, JUNE 26, JULY 2, JUNE 26, 2005 2004 2005 2004 ---------------------- ------------------------ Pro forma net sales $353,824 $304,314 $678,605 $586,731 Pro forma net income 6,803 7,184 10,617 11,964
On November 1, 2004, the Company entered into a series of agreements with Mr. Pan Shun Ming, principal shareholder of Southern Packaging Group Ltd. ("Southern Packaging"), to jointly expand participation in the plastic packaging business in China and the surrounding region. In connection therewith, Berry Plastics Asia Pte. Ltd. acquired a 10% stake in Southern Packaging, which has been recorded in other current assets as a trading security at its fair market value of $1.5 million as of July 2, 2005, resulting in an unrealized loss of $0.9 million and $1.6 million in the thirteen and twenty-six weeks ended July 2, 2005, respectively. 10 3. LONG-TERM DEBT Long-term debt consists of the following:
JULY 2, JANUARY 1, 2005 2005 ---------- ---------- Berry 10 3/4% Senior Subordinated Notes $335,000 $335,000 Debt premium on 10 3/4% Notes, net 8,288 8,876 Term loan 795,000 330,780 Revolving lines of credit 1,775 480 Nevada Industrial Revenue Bonds - 1,500 Capital leases 27,491 20,922 ---------- ---------- 1,167,554 697,558 Less current portion of long-term debt 14,178 10,335 ---------- ---------- $1,153,376 $687,223 ========== ==========
The current portion of long-term debt consists of $8.0 million of quarterly installments on the term loan and $6.2 million of principal payments related to capital lease obligations. On July 22, 2002, the Company entered into a credit and guaranty agreement and a related pledge security agreement with a syndicate of lenders led by Goldman Sachs Credit Partners L.P., as administrative agent (the "Credit Facility"). On November 10, 2003, in connection with the Landis Acquisition, the Credit Facility was amended and restated (the "Amended and Restated Credit Facility"). On August 9, 2004, the Amended and Restated Credit Facility was amended and restated (the "Second Amended and Restated Credit Facility"). On January 1, 2005, a First Amendment to the Second Amended and Restated Credit Facility was entered into to permit Fifth Third Bank to assume the role of Administrative Agent and for Goldman Sachs Credit Partners, L.P. to resign as Administrative Agent. On June 3, 2005, the Company entered into a Second Amendment to the Second Amended and Restated Credit Agreement (the "New Credit Facility") with Deutsche Bank Trust Company Americas assuming the role of Administrative Agent. As a result of the amendment, the Company expensed $7.0 million of unamortized deferred financing costs. The New Credit Facility provides (1) a $795.0 million term loan and (2) a $150.0 million revolving credit facility. The New Credit Facility permits the Company to borrow up to an additional $150.0 million of incremental senior term indebtedness from lenders willing to provide such loans subject to certain restrictions. The terms of the additional indebtedness will be determined by the market conditions at the time of borrowing. The maturity date of the term loan is December 2, 2011, and the maturity date of the revolving credit facility is March 31, 2010. The indebtedness under the New Credit Facility is guaranteed by Holding and all of its domestic subsidiaries. The obligations of Berry under the New Credit Facility and the guarantees thereof are secured by substantially all of the assets of such entities. At July 2, 2005, there were no borrowings outstanding on this revolving credit facility. The revolving credit facility allows up to $35.0 million of letters of credit to be issued instead of borrowings under the revolving credit facility. At July 2, 2005 and January 1, 2005, the Company had $13.7 million and $8.5 million, respectively, in letters of credit outstanding under the revolving credit facility. 11 The New Credit Facility contains significant financial and operating covenants, including prohibitions on the ability to incur certain additional indebtedness or to pay dividends, and restrictions on the ability to make capital expenditures. The New Credit Facility also contains borrowing conditions and customary events of default, including nonpayment of principal or interest, violation of covenants, inaccuracy of representations and warranties, cross- defaults to other indebtedness, bankruptcy and other insolvency events (other than in the case of certain foreign subsidiaries). The Company was in compliance with all the financial and operating covenants at July 2, 2005. The term loan amortizes quarterly as follows: $1,987,500 each quarter beginning September 30, 2005 and ending September 30, 2010 and $188,315,625 each quarter beginning December 31, 2010 and ending September 30, 2011. Borrowings under the New Credit Facility bear interest, at the Company's option, at either (i) a base rate (equal to the greater of the prime rate and the federal funds rate plus 0.5%) plus the applicable margin (the "Base Rate Loans") or (ii) an adjusted eurodollar LIBOR (adjusted for reserves) plus the applicable margin (the "Eurodollar Rate Loans"). With respect to the term loan, the "applicable margin" is (i) with respect to Base Rate Loans, 1.25% per annum and (ii) with respect to Eurodollar Rate Loans, 2.25% per annum. In addition, the applicable margins with respect to the term loan can be further reduced by an additional .25% per annum subject to the Company meeting a leverage ratio target, which was not met based on the results through July 2, 2005. With respect to the revolving credit facility, the "applicable margin" is subject to a pricing grid which ranges from 2.75% per annum to 2.00% per annum, depending on the leverage ratio (2.75% based on results through July 2, 2005). The "applicable margin" with respect to Base Rate Loans will always be 1.00% per annum less than the "applicable margin" for Eurodollar Rate Loans. In October 2002, Berry entered into an interest rate collar arrangement to protect $50.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The collar floor is set at 1.97% LIBOR (London Interbank Offering Rate) and capped at 6.75% LIBOR. The agreement was effective January 15, 2003. In June 2005, Berry entered into three separate interest rate swap transactions to protect $300.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The agreements were effective June 3, 2005 and expire on June 3, 2008. The agreements swap three month variable LIBOR contracts for a fixed rate three year rate of 3.897%. At July 2, 2005, the Company had unused borrowing capacity under the New Credit Facility's revolving line of credit of $136.3 million. Although the $136.3 million was available at July 2, 2005, the covenants under our New Credit Facility may limit our ability to make such borrowings in the future. 4. STOCK-BASED COMPENSATION The Company currently accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (Revised 2004,) Share-Based Payment ("SFAS No. 123R"), which requires that the compensation cost relating to share- based payment transactions be recognized in financial statements based on alternative fair value models. The share-based compensation cost will be measured based on the fair value of the equity or liability instruments issued. The Company will adopt SFAS No. 123R as required, which is currently in the first quarter of 2006. For purposes of the pro forma disclosures, the estimated fair value of the stock options is amortized to employee compensation expense over the related vesting period. Because compensation expense is 12 recognized over the vesting period, the initial impact on pro forma net income may not be representative of compensation expense in future years, when the effect of amortization of multiple awards would be reflected in the Consolidated Statement of Operations. The following is a reconciliation of reported net income to net income as if the Company used the fair value method of accounting for stock-based compensation.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ------------------------------------------------- JULY 2, JUNE 26, JULY 2, JUNE 26, 2005 2004 2005 2004 ------------------------------------------------- Reported net income $1,751 $7,391 $5,550 $12,213 Total stock-based employee compensation expense determined under fair value based method, for all awards, net of tax (571) (504) (1,143) (1,010) ------------------------------------------------- Pro forma net income $1,180 $6,887 $4,407 $11,203 =================================================
5. COMPREHENSIVE INCOME (LOSSES) Comprehensive income (losses) is comprised of net income, 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 minimum pension liability adjustments. The details of comprehensive income (losses) are as follows:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ------------------------------------------------- JULY 2, JUNE 26, JULY 2, JUNE 26, 2005 2004 2005 2004 ------------------------------------------------- Net income $ 1,751 $7,391 $ 5,550 $ 12,213 Other comprehensive income (losses) (3,468) (100) (3,488) 588 Currency translation income (losses) (1,819) 473 (2,904) 358 ------------------------------------------------- Comprehensive income (losses) $(3,536) $7,764 $ (842) $ 13,159 =================================================
6. INCOME TAXES 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 TWENTY-SIX WEEKS ENDED ------------------------------------------------- JULY 2, JUNE 26, JULY 2, JUNE 26, 2005 2004 2005 2004 ------------------------------------------------- Income tax expense computed at statutory rate $ 1,458 $ 4,502 $ 4,103 $ 7,600 State income tax expense, net of federal taxes 258 797 727 1,346 Expenses not deductible for income tax purposes 120 98 241 197 Change in valuation allowance 666 321 1,205 643 Other (87) (247) (102) (284) ------------------------------------------------- Income tax expense $ 2,415 $ 5,471 $ 6,174 $ 9,502 =================================================
13 7. RETIREMENT BENEFITS In connection with the Kerr Acquisition, the Company acquired two defined benefit pension plans which cover substantially all former employees and former union employees at Kerr's former Lancaster facility. The Company also acquired a retiree health plan from Kerr, which covers certain healthcare and life insurance benefits for certain retired employees and their spouses. The Company also maintains a defined benefit pension plan covering the Poly-Seal employees under a collective bargaining agreement. The Company's retirement plans have a minimum pension liability of $15.9 million at July 2, 2005. The Company is currently in the process of obtaining an actuarial report to true up the liability as of the acquisition date for the Kerr plans, and accordingly, the balance is preliminary as of July 2, 2005. Net pension and retiree health benefit expense included the following components:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ------------------------------------------------- JULY 2, JUNE 26, JULY 2, JUNE 26, 2005 2004 2005 2004 ------------------------------------------------- Components of net period benefit cost: Defined Benefit Pension Plans Service cost $ 70 $ 67 $ 140 $ 134 Interest cost 317 88 417 176 Expected return on plan assets (284) (100) (394) (200) Amortization of prior service cost 28 24 56 48 Recognized actuarial loss 2 2 4 4 ------------------------------------------------- Net periodic benefit cost $ 133 $ 81 $ 223 $ 162 ================================================= Retiree Health Benefit Plan Service cost $ 2 $ - $ 2 $ - Interest cost 50 - 50 - ------------------------------------------------- Net periodic benefit cost $ 52 $ - $ 52 $ - =================================================
The Company expects to contribute approximately $1.0 million during fiscal 2005, of which $0.2 million was made in the twenty-six weeks ended July 2, 2005, to the defined benefit pension plans and the retiree health benefit plan. 8. 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 Berry's financial condition. 14 9. OPERATING SEGMENTS In connection with the Kerr Acquisition, Berry reorganized its operations into two reportable segments: rigid open top and rigid closed top. The realignment occurred in an effort to integrate the operations of Kerr, better service its customers, and provide a more efficient organization. Prior periods have been restated to be aligned with the new reporting structure in order to provide comparable results. The Company evaluates performance and allocates resources to segments based on operating income before depreciation and amortization of intangibles adjusted to exclude (1) uncompleted acquisition expense, (2) acquisition integration expense, and (3) plant shutdown expense (collectively, "Adjusted EBITDA"). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company's Form 10-K filed with the Securities and Exchange Commission for the year ended January 1, 2005.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED --------------------------------------------------- JULY 2, JUNE 26, JULY 2, JUNE 26, 2005 2004 2005 2004 --------------------------------------------------- Net sales: Rigid Open Top $ 204,470 $170,883 $ 388,378 $ 324,953 Rigid Closed Top 78,401 40,158 119,803 77,814 --------------------------------------------------- Total net sales 282,871 211,041 508,181 402,767 Adjusted EBITDA: Rigid Open Top 34,156 34,488 64,986 66,888 Rigid Closed Top 13,769 7,845 21,020 14,958 --------------------------------------------------- Total Adjusted EBITDA 47,925 42,333 86,006 81,846 Total assets: Rigid Open Top 800,096 792,269 800,096 792,269 Rigid Closed Top 753,545 227,454 753,545 227,454 --------------------------------------------------- Total assets 1,553,641 1,019,723 1,553,641 1,019,723 Reconciliation of Adjusted EBITDA to income before income taxes: Adjusted EBITDA for reportable segments $ 47,925 $ 42,333 $ 86,006 $ 81,846 Net interest expense (23,350) (12,839) (37,168) (26,133) Depreciation (16,395) (13,350) (30,391) (26,480) Amortization (1,985) (1,739) (3,758) (3,474) Loss on disposal of equipment - (4) - - Unrealized loss on investment (937) - (1,569) - Acquisition integration expense (1,092) (913) (1,396) (1,079) Plant shutdown expense - (626) - (2,965) ---------------------------------------------------- Income before income taxes $ 4,166 $ 12,862 $ 11,724 $ 21,715 ====================================================
15 10.CONDENSED CONSOLIDATING FINANCIAL INFORMATION Holding conducts its business through its wholly owned subsidiary, Berry. Holding and all of Berry's domestic subsidiaries fully, jointly, severally, and unconditionally guarantee on a senior subordinated basis the $335.0 million aggregate principal amount of 10 3/4% Berry Plastics Corporation Senior Subordinated Notes due 2012. Berry is 100% owned by Holding. Each of Berry's subsidiaries is 100% owned, directly or indirectly, by Berry. Separate narrative information or financial statements of guarantor subsidiaries have not been included as management believes they would not be material to investors. Presented below is condensed consolidating financial information for Holding, Berry, and its subsidiaries at July 2, 2005 and January 1, 2005 and for the thirteen and twenty-six week periods ended July 2, 2005 and June 26, 2004. The equity method has been used with respect to investments in subsidiaries.
JULY 2, 2005 ---------------------------------------------------------------------------------------------- BPC Holding Berry Plastics Combined Combined Corporation Corporation Guarantor Non-guarantor Consolidating (Parent) (Issuer) Subsidiaries Subsidiaries Adjustments Consolidated ----------- -------------- ------------ ------------- ------------- ------------ CONSOLIDATING BALANCE SHEET Current assets $ - $ 63,910 $ 238,313 $ 19,135 $ - $ 321,358 Net property and equipment - 96,026 305,901 17,961 - 419,888 Other noncurrent assets 182,692 1,233,197 671,896 13,646 (1,289,036) 812,395 ----------- -------------- ------------ ------------- -------------- ------------ Total assets $ 182,692 $1,393,133 $1,216,110 $ 50,742 $(1,289,036) $1,553,641 =========== ============== ============ ============= ============== ============ Current liabilities $ - $ 78,701 $ 112,104 $ 4,978 $ - $ 195,783 Noncurrent liabilities - 1,131,740 1,215,013 42,427 (1,214,014) 1,175,166 Equity (deficit) 182,692 182,692 (111,007) 3,337 (75,022) 182,692 Total liabilities and ------------ -------------- ------------ ------------- -------------- ------------ equity (deficit) $ 182,692 $ 1,393,133 $ 1,216,110 $ 50,742 $ (1,289,036) $ 1,553,641 ============ ============== ============ ============= ============== ============
JANUARY 1, 2005 ---------------------------------------------------------------------------------------------- BPC Holding Berry Plastics Combined Combined Corporation Corporation Guarantor Non-guarantor Consolidating (Parent) (Issuer) Subsidiaries Subsidiaries Adjustments Consolidated ------------ -------------- ------------ ------------- -------------- ------------ CONSOLIDATING BALANCE SHEET Current assets $ - $ 68,449 $139,338 $ 12,012 $ - $ 219,799 Net property and equipment - 76,555 188,841 16,576 - 281,972 Other noncurrent assets 183,891 770,971 363,091 12,328 (826,908) 503,373 ------------ -------------- ------------ ------------- -------------- ------------ Total assets $183,891 $915,975 $691,270 $40,916 $(826,908) $1,005,144 ============ ============== ============ ============= ============== ============ Current liabilities $ - $ 81,053 $ 42,004 $ 6,648 $ - $ 129,705 Noncurrent liabilities - 651,031 747,720 27,258 (734,461) 691,548 Equity (deficit) 183,891 183,891 (98,454) 7,010 (92,447) 183,891 ------------ -------------- ------------ ------------- -------------- ------------ Total liabilities and equity (deficit) $183,891 $915,975 $691,270 $40,916 $(826,908) $1,005,144 ============ ============== ============ ============= ============== ============
16
THIRTEEN WEEKS ENDED JULY 2, 2005 ---------------------------------------------------------------------------------------- BPC Holding Berry Plastics Combined Combined Corporation Corporation Guarantor Non-guarantor Consolidating (Parent) (Issuer) Subsidiaries Subsidiaries Adjustments Consolidated ----------- -------------- ------------ ------------- ------------- ------------ CONSOLIDATING STATEMENT OF OPERATIONS Net sales $ - $ 79,937 $ 195,520 $ 7,414 $ - $ 282,871 Cost of goods sold - 59,815 166,359 7,303 - 233,477 ----------- -------------- ------------ ------------- ------------- ------------ Gross profit - 20,122 29,161 111 - 49,394 Operating expenses - 7,773 12,230 938 - 20,941 ----------- -------------- ------------ ------------- ------------- ------------ Operating income (loss) - 12,349 16,931 (827) - 28,453 Other expenses - - - 937 - 937 Interest expense (income), net (197) 1,517 21,723 307 - 23,350 Income taxes 14 2,278 50 73 - 2,415 Equity in net (income) loss from subsidiary (1,568) 6,986 2,144 - (7,562) - ----------- -------------- ------------ ------------- ------------- ------------ Net income (loss) $ 1,751 $ 1,568 $ (6,986) $ (2,144) $ 7,562 $ 1,751 =========== ============== ============ ============= ============= ============
THIRTEEN WEEKS ENDED JUNE 26, 2004 ---------------------------------------------------------------------------------------- BPC Holding Berry Plastics Combined Combined Corporation Corporation Guarantor Non-guarantor Consolidating (Parent) (Issuer) Subsidiaries Subsidiaries Adjustments Consolidated ----------- -------------- ------------ ------------- ------------- ------------ CONSOLIDATING STATEMENT OF OPERATIONS Net sales $ - $ 64,009 $ 141,005 $ 6 $ - $ 211,041 Cost of goods sold - 44,031 114,370 6,164 - 164,565 ----------- -------------- ------------ ------------- ------------- ------------ Gross profit - 19,978 26,635 (137) - 46,476 Operating expenses - 7,590 12,270 911 - 20,771 ----------- -------------- ------------ ------------- ------------- ------------ Operating income (loss) - 12,388 14,365 (1,048) - 25,705 Other expenses - - - 4 - 4 Interest expense (income), net (196) (3,750) 16,633 152 - 12,839 Income taxes (benefit) 14 5,582 70 (195) - 5,471 Equity in net (income) loss from (7,209) 3,347 1,009 - 2,853 - subsidiary ----------- -------------- ------------ ------------- ------------- ------------ Net income (loss) $ 7,391 $ 7,209 $ (3,347) $ (1,009) $ (2,853) $ 7,391 =========== ============== ============ ============= ============= ============
17
TWENTY-SIX WEEKS ENDED JULY 2, 2005 ---------------------------------------------------------------------------------------- BPC Holding Berry Plastics Combined Combined Corporation Corporation Guarantor Non-guarantor Consolidating (Parent) (Issuer) Subsidiaries Subsidiaries Adjustments Consolidated ----------- -------------- ------------ ------------- ------------- ------------ CONSOLIDATING STATEMENT OF OPERATIONS Net sales $ - $140,959 $ 353,523 $ 13,699 $ - $508,181 Cost of goods sold - 104,532 299,193 13,768 - 417,493 ----------- -------------- ------------ ------------- ------------- ------------ Gross profit - 36,427 54,330 (69) - 90,688 Operating expenses - 15,113 23,392 1,722 - 40,227 ----------- -------------- ------------ ------------- ------------- ------------ Operating income (loss) - 21,314 30,938 (1,791) - 50,461 Other expenses - - - 1,569 - 1,569 Interest expense (income), net (397) (3,157) 40,229 493 - 37,168 Income taxes 21 6,001 56 96 - 6,174 Equity in net (income) loss from subsidiary (5,174) 13,296 3,949 - (12,071) - ----------- -------------- ------------ ------------- ------------- ------------ Net income (loss) $ 5,550 $ 5,174 $ (13,296) $ (3,949) $ 12,071 $ 5,550 =========== ============== ============ ============= ============= ============ CONSOLIDATING STATEMENT OF CASH FLOWS Net income (loss) $ 5,550 $ 5,174 $ (13,296) $ (3,949) $ 12,071 $ 5,550 Non-cash expenses - 21,375 24,487 3,52 - 49,386 Equity in net (income) loss from (5,174) 13,296 3,949 - (12,071) - subsidiary Changes in working capital (396) (19,736) 20,315 (3,734 - (3,551) ----------- -------------- ------------ ------------- ------------- ------------ Net cash provided by (used for) operating activities (20) 20,109 35,455 (4,159) - 51,385 Net cash used for investing activities - (473,294) (11,678) (13,727) - (498,699) Net cash provided by (used for) financing activities 20 453,149 (18,821) 18,343 - 452,691 Effect of exchange rate changes on cash - - - 12 - 12 ----------- -------------- ------------ ------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents - (36) 4,956 469 - 5,389 Cash and cash equivalents at beginning of period - 85 42 137 - 264 ----------- -------------- ------------ ------------- ------------- ------------ Cash and cash equivalents at end of $ - $ 49 $ 4,998 $ 606 $ - $ 5,653 period =========== ============== ============ ============= ============= ============
18
TWENTY-SIX WEEKS ENDED JUNE 26, 2004 ---------------------------------------------------------------------------------------- BPC Holding Berry Plastics Combined Combined Corporation Corporation Guarantor Non-guarantor Consolidating (Parent) (Issuer) Subsidiaries Subsidiaries Adjustments Consolidated ----------- -------------- ------------ ------------- ------------- ------------ CONSOLIDATING STATEMENT OF OPERATIONS Net sales $ - $ 115,145 $ 275,225 $ 12,397 $ - $ 402,767 Cost of goods sold - 79,378 221,365 12,437 - 313,180 ----------- -------------- ------------ ------------- ------------- ------------ Gross profit - 35,767 53,860 (40) - 89,587 Operating expenses - 14,318 25,639 1,782 - 41,739 ----------- -------------- ------------ ------------- ------------- ------------ Operating income (loss) - 21,449 28,221 (1,822) - 47,848 Interest expense (income), net (381) (7,090) 33,283 321 - 26,133 Income taxes (benefit) 28 9,523 80 (129) - 9,502 Equity in net (income)loss from (11,860) 7,156 2,014 - 2,690 - subsidiary ----------- -------------- ------------ ------------- ------------- ------------ Net income (loss) $ 12,213 $ 11,860 $ (7,156) $ (2,014) $ (2,690) $ 12,213 =========== ============== ============ ============= ============= ============ CONSOLIDATING STATEMENT OF CASH FLOWS Net income (loss) $ 12,213 $ 11,860 $ (7,156) $ (2,014) $(2,690) $ 12,213 Non-cash expenses - 17,563 20,843 1,915 - 40,321 Equity in net (income) loss from (11,860) 7,156 2,014 - 2,690 - subsidiary Changes in working capital (380) 6,741 (17,976) (1,892) - (13,507) ----------- -------------- ------------ ------------- ------------- ------------ Net cash provided by (used for) operating activities (27) 43,320 (2,275) (1,991) - 39,027 Net cash provided by (used for) investingactivities - (15,782) (5,814) 2,619 - (18,977) Net cash provided by (used for) financing activities 27 (21,894) 6,516 (428) - (15,779) Effect of exchange rate changes on cash - - - 206 - 206 ----------- -------------- ------------ ------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents - 5,644 (1,573) 406 - 4,477 Cash and cash equivalents at beginning of period - 24,290 1,666 236 - 26,192 ----------- -------------- ------------ ------------- ------------- ------------ Cash and cash equivalents at end of period $ - $ 29,934 $ 93 $ 642 $ - $ 30,669 =========== ============== ============ ============= ============= ============
19 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 "BPC Holding" or "Holding" refer to BPC Holding Corporation, references to "we," "our" or "us" refer to BPC Holding Corporation together with its consolidated subsidiaries, and references to "Berry Plastics" or the "Company" refer to Berry Plastics Corporation, a wholly owned subsidiary of BPC Holding Corporation. 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. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in our Form 10-K for the fiscal year ended January 1, 2005 (the "2004 10-K") in the section titled "Risk Factors" and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission. Our actual results may differ materially from those contained in any forward-looking statements. You should read the explanation of the qualifications and limitations on these forward-looking statements on page 2 of this report. CRITICAL ACCOUNTING POLICIES We disclose those accounting policies that we consider to be significant in determining the amounts to be utilized for communicating our consolidated financial position, results of operations and cash flows in the second note to our consolidated financial statements in our 2004 10-K. Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results are likely to differ from these estimates, but management does not believe such differences will materially affect our financial position or results of operations, although no assurance can be given as to such affect. We believe that the following accounting policies are the most critical because they have the greatest impact on the presentation of our financial condition and results of operations. Accounts receivable. We evaluate our allowance for doubtful accounts on a quarterly basis and review any significant customers with delinquent balances to determine future collectibility. We base our determinations on legal issues (such as bankruptcy status), past history, current financial and credit agency reports, and the experience of our credit representatives. We reserve accounts that we deem to be uncollectible in the quarter in which we make the determination. We maintain additional reserves based on our historical bad debt experience. We believe, based on past history and our credit policies, that the 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 our results of operations. Our allowance for doubtful accounts was $5.4 million and $3.2 million as of July 2, 2005 and January 1, 2005, respectively. Inventory obsolescence. We evaluate our reserve for inventory obsolescence on a quarterly basis and review inventory on-hand to determine future salability. We base our determinations on the age of the inventory and the experience of our personnel. We reserve inventory that we deem to be not salable in the quarter in which we make the determination. We believe, based on past history and 20 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 our results of operations. Our reserve for inventory obsolescence was $6.7 million and $3.8 million as of July 2, 2005 and January 1, 2005, respectively. Medical insurance. We offer our employees medical insurance that is primarily self-insured by us. As a result, we accrue a liability for known claims as well as the estimated amount of expected claims incurred but not reported. We evaluate our medical claims liability on a quarterly basis and obtain an independent actuarial analysis on an annual basis. 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 our results of operations. Our accrued liability for medical claims was $4.8 million and $2.0 million, including reserves for expected medical claims incurred but not reported, as of July 2, 2005 and January 1, 2005, respectively. Workers' compensation. We are primarily self-insured under a large deductible program for the majority of our facilities for workers' compensation claims. On a quarterly basis, we evaluate our liability based on third-party adjusters' independent analyses by claim. Based on these analyses, 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 our results of operations. Our accrued liability for workers' compensation claims was $4.4 million and $3.5 million as of July 2, 2005 and January 1, 2005, respectively. Revenue recognition. Revenue from sales of products is recognized at the time product is shipped to the customer at which time title and risk of ownership transfer to the purchaser. Impairments of Long-Lived Assets. In accordance with the methodology described in FASB Statement No. 142, "Goodwill and Other Intangible Assets" and FASB Statement 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. In addition, we annually review our indefinite lived intangibles 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 in accordance with FAS 109. We use tax-planning to minimize or defer tax liabilities to future periods. In recording effective tax rates and related liabilities and assets, we rely upon estimates, which are based upon our interpretation of United States and local tax laws as they apply to our legal entities and our overall tax structure. Audits by various 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 21 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. 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 BPC Holding and its consolidated subsidiaries. This is not to suggest that other risk factors such as changes in economic conditions, changes in material costs and others could not adversely impact our consolidated financial position, results of operations and cash flows in future periods. ACQUISITIONS We maintain a selective and disciplined acquisition strategy, which is focused on improving our financial performance in the long-term, enhancing our market positions and expanding our product lines or, in some cases, providing us with a new or complementary product line. Most businesses we have historically acquired had profit margins that are lower than that of our existing business, which resulted in a temporary decrease in our margins. We have historically achieved significant reductions in manufacturing and overhead costs of acquired companies by introducing advanced manufacturing processes, exiting low-margin businesses or product lines, reducing headcount, rationalizing facilities and machinery, applying best practices and capitalizing on economies of scale. In connection with our acquisitions, we have in the past and may in the future incur charges related to these reductions and rationalizations. On April 11, 2005, a subsidiary of Berry, Berry Plastics de M{e'}xico, S. de R.L. de C.V., acquired all of the injection molding closure assets from Euromex Plastics, S.A. de C.V. ("Euromex"), an injection molding manufacturer located in Toluca, Mexico ("the Mexico Acquisition"), for aggregate consideration of approximately $9.1 million (including taxes). The purchase was financed through borrowings under the Company's revolving line of credit and cash on hand. The operations from the Mexico Acquisition are included in Berry's operations since the acquisition date. On June 3, 2005, Berry acquired Kerr Group, Inc. ("Kerr") for aggregate consideration of approximately $458.8 million (the "Kerr Acquisition"), excluding deferred financing fees. The operations from the Kerr Acquisition are included in Berry's operations since the acquisition date. The purchase price was financed through additional term loan borrowings under an amendment to Berry's senior secured credit facility and cash on hand. RESULTS OF OPERATIONS 13 WEEKS ENDED JULY 2, 2005 (THE "QUARTER") COMPARED TO 13 WEEKS ENDED JUNE 26, 2004 (THE "PRIOR QUARTER") Net Sales. Net sales increased $71.9 million, or 34%, to $282.9 million for the Quarter from $211.0 million for the Prior Quarter with an approximate 12% increase in net selling price due to higher resin costs passed through to our customers. Our base business volume, excluding selling price changes and acquired business, increased by approximately $9.4 million or 5% in the Quarter over the Prior Quarter. The following discussion in this section provides a comparison by business segment. Rigid open top net sales increased $33.6 million from the Prior Quarter to $204.5 million 22 for the Quarter. The increase in rigid open top net sales was primarily a result of increased selling prices and base business growth in several of the division's product lines with significant growth in the thermoformed polypropylene drink cup line. Rigid closed top net sales increased $38.2 million from the Prior Quarter to $78.4 million for the Quarter. The increase in rigid closed top net sales can be primarily attributed to net sales in the Quarter from the Kerr Acquisition and Mexico Acquisition of $34.1 million and $1.0 million, respectively, and increased selling prices. Gross Profit. Gross profit increased by $2.9 million to $49.4 million (17% of net sales) for the Quarter from $46.5 million (22% of net sales) for the Prior Quarter. This dollar increase of 6% was primarily attributed to the increased sales volume noted above. When compared to the Prior Quarter, the Quarter was negatively impacted by the timing effect of higher resin costs and other raw material costs partially offset by the 12% increase in net selling prices due to higher resin costs passed through to our customers. In addition, an expense of $0.7 million was charged to cost of goods sold in the Quarter related to the write-up and subsequent sale of Kerr's finished goods inventory to fair market value in accordance with purchase accounting. Significant productivity improvements were made since the Prior Quarter, including the addition of state-of-the-art injection molding, thermoforming and post molding equipment at several of our facilities. Operating Expenses. Selling expenses increased by $0.7 million to $7.6 million for the Quarter from $6.9 million for the Prior Quarter principally as a result of increased selling expenses associated with higher sales partially offset by cost reduction efforts. General and administrative expenses decreased $0.2 million from $9.7 million for the Prior Quarter to $9.5 million for the Quarter primarily as a result of decreased accrued bonus expense partially offset by general and administrative expenses from the Kerr Acquisition. Research and development expenses increased by $0.5 million over the Prior Quarter primarily due to the Kerr Acquisition and increased development efforts. Amortization of intangibles remained relatively constant with an increase of $0.3 million over the Prior Quarter. During the Quarter, transition expenses were $0.4 million related to integrating acquired businesses. In the Prior Quarter, transition expenses were $0.9 million related to the Landis Acquisition and $0.6 million related to the shutdown and reorganization of facilities. Interest Expense, Net. Net interest expense increased $10.6 million to $23.4 million for the Quarter compared to $12.8 million for the Prior Quarter primarily due to a write off of unamortized deferred financing fees of $7.0 million as a result of the amendment to our senior credit facility, increased rates of interest on borrowings, and increased borrowings to finance the Kerr Acquisition. Income Taxes. For the Quarter, we recorded income tax expense of $2.4 million or an effective tax rate of 58%. The effective tax rate is greater than the statutory rate due to the impact of state taxes and foreign location losses for which no benefit was currently provided. The decrease of $3.1 million from $5.5 million in the Prior Quarter, or an effective tax rate of 43%, was attributed to the decrease in income before income taxes. Net Income. Net income was $1.8 million for the Quarter compared to $7.4 million for the Prior Quarter for the reasons discussed above. 23 26 WEEKS ENDED JULY 2, 2005 ("YTD") COMPARED TO 26 WEEKS ENDED JUNE 26, 2004 ("PRIOR YTD") Net Sales. Net sales increased $105.4 million, or 26%, to $508.2 million for the YTD from $402.8 million for the Prior YTD with an approximate 11% increase in net selling price due to higher resin costs passed through to our customers. Our base business volume, excluding selling price changes and acquired business, increased by approximately $22.7 million or 6% in the YTD over the Prior YTD. Our resin pounds sold, excluding acquired businesses, increased by 8% in the YTD over the Prior YTD. The following discussion in this section provides a comparison by business segment. Rigid open top net sales increased $63.4 million from the Prior YTD to $388.4 million for the YTD. The increase in rigid open top net sales was primarily a result of increased selling prices and base business growth in several of the division's product lines with significant growth in the thermoformed polypropylene drink cup line. Rigid closed top net sales increased $42.0 million from the Prior YTD to $119.8 million for the YTD. The increase in rigid closed top net sales can be primarily attributed to net sales in the YTD from the Kerr Acquisition and Mexico Acquisition of $34.1 million and $0.3 million, respectively, and increased selling prices. Gross Profit. Gross profit increased by $1.1 million to $90.7 million (18% of net sales) for the YTD from $89.6 million (22% of net sales) for the Prior YTD. This 1% dollar increase was primarily attributed to the increased sales volume noted above. When compared to the Prior YTD, the YTD was negatively impacted by the timing effect of higher resin costs and other raw material costs partially offset by the 11% increase in net selling prices due to higher resin costs passed through to our customers. In addition, an expense of $0.7 million was charged to cost of goods sold in the YTD related to the write-up and subsequent sale of Kerr's finished goods inventory to fair market value in accordance with purchase accounting. Significant productivity improvements were made since the Prior YTD, including the addition of state-of-the-art injection molding, thermoforming and post molding equipment at several of our facilities. Operating Expenses. Selling expenses increased by $1.3 million to $14.9 million for the YTD from $13.6 million for the Prior YTD principally as a result of increased selling expenses associated with higher sales partially offset by cost reduction efforts. General and administrative expenses decreased $0.5 million from $18.9 million for the Prior YTD to $18.4 million for the YTD primarily as a result of decreased accrued bonus expense partially offset by general and administrative expenses from the Kerr Acquisition. Research and development expenses increased by $0.7 million over the Prior YTD primarily due to the Kerr Acquisition and increased development efforts. Amortization of intangibles remained relatively constant with an increase of $0.3 million for the YTD from the Prior YTD. During the YTD, transition expenses were $0.7 million related to integrating acquired businesses. In the Prior YTD, transition expenses were $1.1 million related to the Landis Acquisition and $3.0 million related to the shutdown and reorganization of facilities. Interest Expense, Net. Net interest expense increased $11.1 million to $37.2 million for the YTD compared to $26.1 million for the Prior YTD primarily due to a write off of unamortized deferred financing fees of $7.0 million as a result of the amendment to our senior credit facility, increased rates of interest on borrowings, and increased borrowings to finance the Kerr Acquisition. Income Taxes. For the YTD, we recorded income tax expense of $6.2 million or an effective tax rate of 53%. The effective tax rate was greater than the statutory rate due to the impact of state taxes and foreign location losses for which no benefit was currently provided. The decrease of $3.3 24 million from $9.5 million in the Prior Quarter, or an effective tax rate of 44%, was attributed to the decrease in income before income taxes. Net Income. Net income was $5.6 million for the YTD compared to $12.2 million for the Prior YTD for the reasons discussed above. LIQUIDITY AND CAPITAL RESOURCES On July 22, 2002, we entered into a credit and guaranty agreement and a related pledge security agreement with a syndicate of lenders led by Goldman Sachs Credit Partners L.P., as administrative agent (the "Credit Facility"). On November 10, 2003, in connection with the Landis Acquisition, the Credit Facility was amended and restated (the "Amended and Restated Credit Facility"). On August 9, 2004, the Amended and Restated Credit Facility was amended and restated (the "Second Amended and Restated Credit Facility"). On January 1, 2005, a First Amendment to the Second Amended and Restated Credit Facility was entered into to permit Fifth Third Bank to assume the role of Administrative Agent and for Goldman Sachs Credit Partners, L.P. to resign as Administrative Agent. On June 3, 2005, we entered into a Second Amendment to the Second Amended and Restated Credit Agreement (the "New Credit Facility") with Deutsche Bank Trust Company Americas assuming the role of Administrative Agent. As a result of the amendment, we expensed $7.0 million of unamortized deferred financing costs. The New Credit Facility provides (1) a $795.0 million term loan and (2) a $150.0 million revolving credit facility. The New Credit Facility permits the Company to borrow up to an additional $150.0 million of incremental senior term indebtedness from lenders willing to provide such loans subject to certain restrictions. The terms of the additional indebtedness will be determined by the market conditions at the time of borrowing. The maturity date of the term loan is December 2, 2011, and the maturity date of the revolving credit facility is March 31, 2010. The indebtedness under the New Credit Facility is guaranteed by Holding and all of its domestic subsidiaries. The obligations of Berry Plastics under the New Credit Facility and the guarantees thereof are secured by substantially all of the assets of such entities. At July 2, 2005, there were no borrowings outstanding on this revolving credit facility. The revolving credit facility allows up to $35.0 million of letters of credit to be issued instead of borrowings under the revolving credit facility. At July 2, 2005 and January 1, 2005, the Company had $13.7 million and $8.5 million, respectively, in letters of credit outstanding under the revolving credit facility. The New Credit Facility contains significant financial and operating covenants, including prohibitions on the ability to incur certain additional indebtedness or to pay dividends, and restrictions on the ability to make capital expenditures. The New Credit Facility also contains borrowing conditions and customary events of default, including nonpayment of principal or interest, violation of covenants, inaccuracy of representations and warranties, cross- defaults to other indebtedness, bankruptcy and other insolvency events (other than in the case of certain foreign subsidiaries). The Company was in compliance with all the financial and operating covenants at July 2, 2005. The term loan amortizes quarterly as follows: $1,987,500 each quarter beginning September 30, 2005 and ending September 30, 2010 and $188,315,625 each quarter beginning December 31, 2010 and ending September 30, 2011. Borrowings under the New Credit Facility bear interest, at the Company's option, at either (i) a base rate (equal to the greater of the prime rate and the federal funds rate plus 0.5%) plus the applicable 25 margin (the "Base Rate Loans") or (ii) an adjusted eurodollar LIBOR (adjusted for reserves) plus the applicable margin (the "Eurodollar Rate Loans"). With respect to the term loan, the "applicable margin" is (i) with respect to Base Rate Loans, 1.25% per annum and (ii) with respect to Eurodollar Rate Loans, 2.25% per annum. In addition, the applicable margins with respect to the term loan can be further reduced by an additional .25% per annum subject to the Company meeting a leverage ratio target, which was not met based on the results through July 2, 2005. With respect to the revolving credit facility, the "applicable margin" is subject to a pricing grid which ranges from 2.75% per annum to 2.00% per annum, depending on the leverage ratio (2.75% based on our leverage ratio of 5.2:1.0 based on our results through July 2, 2005). The "applicable margin" with respect to Base Rate Loans will always be 1.00% per annum less than the "applicable margin" for Eurodollar Rate Loans. In October 2002, Berry entered into an interest rate collar arrangement to protect $50.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The collar floor is set at 1.97% LIBOR (London Interbank Offering Rate) and capped at 6.75% LIBOR. The agreement was effective January 15, 2003. In June 2005, Berry entered into three separate interest rate swap transactions to protect $300.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The agreements were effective June 3, 2005 and expire on June 3, 2008. The agreements swap three month variable LIBOR contracts for a fixed rate three year rate of 3.897%. At July 2, 2005, the Company had unused borrowing capacity under the New Credit Facility's revolving line of credit of $136.3 million. On July 22, 2002, we completed an offering of $250.0 million aggregate principal amount of 10 3/4% Senior Subordinated Notes due 2012 (the "2002 Notes"). The net proceeds to us from the sale of the 2002 Notes, after expenses, were $239.4 million. The proceeds from the 2002 Notes were used in our refinancing. The 2002 Notes mature on July 15, 2012, and interest is payable semi-annually on January 15 and July 15 of each year. Holding and all of our domestic subsidiaries fully, jointly, severally, and unconditionally guarantee the 2002 Notes. On November 20, 2003, we completed an offering of $85.0 million aggregate principal amount of additional 2002 Notes (the "Add-on Notes" and together with the 2002 Notes, the "Notes"). The net proceeds to us from the sale of the Add- on Notes, after expenses, were $91.8 million as the Add-on Notes were sold at a premium of 12% over the face amount. The proceeds from the Add-on Notes were used in the financing of the Landis Acquisition. The Add-on Notes constitute a single class with the 2002 Notes. Holding and all of our domestic subsidiaries fully, jointly, severally, and unconditionally guarantee the Add-on Notes. We are not required to make mandatory redemption or sinking fund payments with respect to the Notes. On or subsequent to July 15, 2007, the Notes may be redeemed at our option, in whole or in part, at redemption prices ranging from 105.375% in 2007 to 100% in 2010 and thereafter. Upon a change in control, as defined in the indenture under which the Notes were issued (the "Indenture"), each holder of Notes will have the right to require us to repurchase all or any part of such holder's Notes at a repurchase price in cash equal to 101% of the aggregate principal amount thereof plus accrued interest. The Indenture restricts our ability to incur additional debt and contains other provisions which could limit our liquidity. Net cash provided by operating activities was $51.4 million for the YTD compared to $39.0 million for the Prior YTD. The increase of $12.4 million is primarily the result of improved working capital and strong growth as noted above. 26 Net cash used for investing activities increased from $19.0 million for the Prior YTD to $498.7 million for the YTD primarily as a result of the Kerr Acquisition. Capital spending of $32.3 million in the YTD included $2.3 million for buildings and systems, $9.7 million for molds, $12.0 million for molding and printing machines, and $8.3 million for accessory equipment and systems. Capital expenditures for 2005 are expected to be approximately $71.8 million. Net cash provided by financing activities was $452.7 million for the YTD compared to $15.8 million used for financing activities in the Prior YTD. This change of $468.5 million can be primarily attributed to the financing obtained in connection with the Kerr Acquisition. 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, we anticipate that our cash interest, working capital and capital expenditure requirements for 2005 will be satisfied through a combination of funds generated from operating activities and cash on hand, together with funds available under the New Credit Facility. We base such belief on historical experience and the substantial funds available under the New 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 2004 10-K. In particular, increases in the cost of resin which we are unable to pass through to our customers on a timely basis or significant acquisitions could severely impact our liquidity. At July 2, 2005, our cash balance was $5.7 million, and we had unused borrowing capacity under the New Credit Facility's borrowing base of $136.3 million. Although the $136.3 million was available at July 2, 2005, the covenants under our New Credit Facility may limit our ability to make such borrowings in the future. Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk We are exposed to market risk from changes in interest rates primarily through our New Credit Facility. The New Credit Facility is comprised of (1) a $795.0 million term loan and (2) a $150.0 million revolving credit facility. At July 2, 2005, there were no borrowings outstanding on the revolving credit facility. The net outstanding balance of the term loan at July 2, 2005 was $795.0 million. The term loan bears interest at the Eurodollar rate plus the applicable margin. Future borrowings under the New Credit Facility bear interest, at our option, at either (1) the base rate, which is a rate per annum equal to the greater of the prime rate and the federal funds effective rate in effect on the date of determination plus 0.5% plus the applicable margin or (2) an adjusted Eurodollar Rate which is equal to the rate for Eurodollar deposits plus the applicable margin. We utilize interest rate instruments to reduce the impact of either increases or decreases in interest rates on its floating rate debt. Pursuant to a requirement in the Credit Facility and as a result of an economic slowdown and corresponding interest rate reductions, we entered into an interest rate collar arrangement in October 2002 to protect $50.0 million of the outstanding variable rate term loan debt from future interest rate volatility. Under the interest rate collar agreement, the Eurodollar rate with respect to the $50.0 million of outstanding variable rate term loan debt will not exceed 6.75% or drop below 1.97%. In June 2005, Berry entered into three separate interest rate swap transactions to protect $300.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The agreements were effective June 3, 2005 and expire on June 3, 2008. The agreements swap three month variable LIBOR contracts for a fixed rate three year rate of 3.897%. 27 At July 2, 2005, the Eurodollar rate applicable to the term loan was 3.35%. If the Eurodollar rate increases 0.25% and 0.5%, we estimate an annual increase in our interest expense of approximately $1.2 million and $2.5 million, respectively. Plastic Resin Cost Risk We are exposed to market risk from changes in plastic resin prices that could impact our results of operations and financial condition. We manage our exposure to these market risks through our normal operations with purchasing negotiation, mechanical hedging, switching between certain resin products and, when deemed appropriate, by using derivative financial instruments in accordance with established policies and procedures. The derivative financial instruments generally used are forward contracts. The derivative financial instruments utilized by the Company in its hedging activities are considered risk management tools and are not used for trading purposes. As part of our risk management strategy, in the fourth quarter of 2004, we entered into resin forward hedging transactions constituting approximately 15% of our estimated 2005 resin needs and 10% of our 2006 estimated resin needs based on 2004 volumes prior to the Kerr Acquisition. These contracts obligate the Company to make or receive a monthly payment equal to the difference in the unit cost of resin per the contract and an industry index times the contracted pounds of plastic resin. Such contracts are designated as hedges of a portion of the Company's forecasted purchases through 2006 and are effective in hedging the Company's exposure to changes in resin prices during this period. The contracts qualify as cash flow hedges under SFAS No. 133 and accordingly are marked to market with unrealized gains and losses deferred through other comprehensive income and recognized in earnings when realized as an adjustment to cost of goods sold. The fair values of these contracts at July 2, 2005 was an unrealized gain, after income taxes, of $2.9 million. Item 4. Controls and Procedures (a) Disclosure controls and procedures. As required by new Rule 13a-15 under the Securities Exchange Act of 1934, 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 28 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K (a)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 29 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. BPC Holding Corporation Berry Plastics Corporation August 12, 2005 By: /s/ James M. Kratochvil ------------------------------- James M. Kratochvil Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the entities listed above (Principal Financial and Accounting Officer) 30 -----END PRIVACY-ENHANCED MESSAGE-----