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
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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
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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.
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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%.
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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
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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