424B3 1 d424b3.htm FINAL PROSPECTUS Final Prospectus
Table of Contents

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-150372

PROSPECTUS

LOGO

Berry Plastics Corporation

(formerly Berry Plastics Holding Corporation)

OFFER TO EXCHANGE

$680,600,000 First Priority Floating Rate Senior Secured Notes due 2015

registered under the Securities Act of 1933

For

A Like Principal Amount of First Priority Floating Rate Senior Secured Notes due 2015

Berry Plastics Corporation, which we refer to as Berry Plastics or the Issuer, is offering to exchange up to $680,600,000 aggregate principal amount of our First Priority Floating Rate Senior Secured Notes due 2015 that are registered under the Securities Act of 1933, or the exchange notes, for an equal principal amount of our First Priority Floating Rate Senior Secured Notes due 2015, or the outstanding notes, which were issued previously without registration under the Securities Act. We refer to the outstanding notes and the exchange notes collectively in this prospectus as the notes and we use the terms Berry, we, us, our and the Company to refer to Berry Plastics and its predecessors and consolidated subsidiaries. The exchange notes are substantially identical to the outstanding notes, except that the exchange notes will not be subject to transfer restrictions or entitled to registration rights, and the additional interest provisions applicable to the outstanding notes in some circumstances relating to the timing of the exchange offer will not apply to the exchange notes. The outstanding notes are, and the exchange notes will be, issued by Berry Plastics Corporation and guaranteed by Aerocon, LLC, Berry Iowa, LLC, Berry Plastics Design, LLC, Berry Plastics Opco, Inc., Berry Plastics Technical Services, Inc., Berry Sterling Corporation, Captive Holdings, Inc., Captive Plastics, Inc., Caplas Neptune, LLC, Caplas LLC, Covalence Specialty Coatings LLC, Covalence Specialty Adhesives LLC, CPI Holding Corporation, Knight Plastics, Inc., Packerware Corporation, Pescor, Inc., Poly-Seal, LLC, Rollpak Acquisition Corporation, Rollpak Corporation, Venture Packaging, Inc., Venture Packaging Midwest, Inc., Berry Plastics Acquisition Corporation III, Berry Plastics Acquisition Corporation V, Berry Plastics Acquisition Corporation VIII, Berry Plastics Acquisition Corporation IX, Berry Plastics Acquisition Corporation X, Berry Plastics Acquisition Corporation XI, Berry Plastics Acquisition Corporation XII, Berry Plastics Acquisition Corporation XIII, Berry Plastics Acquisition Corporation XV, LLC, Grafco Industries Limited Partnership, Kerr Group, LLC, Saffron Acquisition, LLC, Setco, LLC, Sun Coast Industries, LLC, Tubed Products, LLC, Cardinal Packaging, Inc. and Landis Plastics, LLC, all wholly owned subsidiaries of Berry Plastics Corporation. We refer to each of the existing and future domestic subsidiaries of Berry Plastics that will guarantee the notes as the Guarantors or the Note Guarantors. The exchange notes will represent the same debt as the outstanding notes and we will issue the exchange notes under the same Indentures.

Terms of the Exchange Offer. The exchange offer expires at 5:00 p.m., New York City time, on June 10, 2008, unless extended. Completion of the exchange offer is subject to certain customary conditions, which we may waive. The exchange offer is not conditioned upon any minimum principal amount of the outstanding notes being tendered for exchange. You may withdraw tenders of outstanding notes at any time before the exchange offer expires.

All outstanding notes that are validly tendered and not withdrawn will be exchanged for exchange notes. The exchange of outstanding notes for exchange notes pursuant to the exchange offer should not be a taxable event for U.S. federal income tax purposes.

There is no existing market for the exchange notes to be issued, and we do not intend to apply for listing or quotation on any exchange or other securities market.

See “ Risk Factors” beginning on page 20 for a discussion of the factors you should consider in connection with the exchange offer and exchange of outstanding notes for exchange notes.

 

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE OUTSTANDING NOTES OR THE EXCHANGE NOTES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

The date of this prospectus is May 9, 2008.


Table of Contents

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state or other jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

 

TABLE OF CONTENTS

 

     Page

Where You Can Find Additional Information

   ii

Summary

   1

Risk Factors

   20

The Exchange Offer

   35

Use of Proceeds

   44

Capitalization

   45

Selected Historical Financial Data

   46

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   48

Business

   64

Management

   79

Certain Relationships and Related Party Transactions

   88

Principal Stockholders

   89

Description of Other Indebtedness

   91

Description of the Exchange Notes

   96

Material U.S. Federal Income Tax Consequences

   169

Plan of Distribution

   171

Legal Matters

   172

Experts

   172

Index to Financial Statements

   F-1

 

 

Each broker-dealer that receives exchange notes for its own account pursuant to this exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. The accompanying letter of transmittal relating to the exchange offer states that by so acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act of 1933, as amended. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for outstanding notes where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of 180 days after consummation of the registered exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any resale. See “Plan of Distribution.”

 

i


Table of Contents

WHERE YOU CAN FIND ADDITIONAL INFORMATION

The indenture governing the notes requires us to file annual and quarterly reports and other information with the Securities and Exchange Commission. You may read and copy any reports, statements and other information we file at the Commission’s public reference room in Washington, D.C. You may request copies of the documents, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC. Please call 1-800-SEC-0330 for further information on the public reference rooms. Our filings will also be available to the public from commercial document retrieval services and at the website maintained by the SEC at http://www.sec.gov.

Unless stated below, our reports and other information that we have filed, or may in the future file, with the SEC are not incorporated by reference into and do not constitute part of this prospectus.

The SEC allows us to “incorporate by reference” information into this prospectus. This means that we can disclose important information by referring to another document filed separately with the SEC. Any information incorporated by reference is considered to be part of this prospectus. This prospectus and the information that we later file with the SEC may update and supersede the information incorporated by reference.

Any person, including any beneficial owner, to whom this prospectus is delivered may request copies of this prospectus or other information concerning us, without charge, by written or telephonic request directed to us at Berry Plastics Corporation, 101 Oakley Street, Evansville, Indiana 47710, Telephone: (812) 424-2904 or from the SEC through the SEC’s website at the address provided above. Documents incorporated by reference are available without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference into those documents.

To obtain timely delivery of any of our filings, agreements or other documents, you must make your request to us no later than five business days before the expiration date of the exchange offer or any extension thereof. We may extend the exchange offer in our sole discretion. See “Exchange Offer” for more detailed information.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our liquidity, our beliefs and management’s assumptions. Such forward-looking statements include statements regarding expected financial results and other planned events, including but not limited to, anticipated liquidity, Adjusted EBITDA, and capital expenditures. Words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “project,” “target,” “goal,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual future events or results may differ materially from these statements.

The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements:

 

   

risks associated with our substantial indebtedness and debt service;

 

   

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;

 

   

risks of competition, including foreign competition, in our existing and future markets;

 

   

risks related to our acquisition strategy and integration of acquired businesses;

 

   

reliance on unpatented proprietary know-how and trade secrets;

 

   

increases in the cost of compliance with laws and regulations, including environmental laws and regulations;

 

ii


Table of Contents
   

catastrophic loss of one of our key manufacturing facilities;

 

   

our ownership structure;

 

   

reduction in net worth; and

 

   

the other factors discussed in the section of this prospectus titled “Risk Factors.”

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth in this prospectus under “Risk Factors,” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. Moreover, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

 

iii


Table of Contents

SUMMARY

The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and consolidated financial statements included elsewhere in this prospectus. This summary is not complete and may not contain all of the information that may be important to you. You should carefully read the entire prospectus, including the “Risk Factors” section and our consolidated financial statements and notes to those statements, before making an investment decision.

Our Company

We believe we are one of the world’s leading manufacturers and marketers of value-added plastic packaging products. We manufacture a broad range of innovative, high quality packaging solutions using our collection of over 1,700 proprietary molds and an extensive set of internally developed processes and technologies. Our principal products include containers, drink cups, bottles, closures and overcaps, tubes, prescription vials, trash bags, stretch films, plastic sheeting and tapes which we sell to more than 13,000 customers in attractive and stable end markets, including food and beverage, healthcare, personal care, quick service and family dining restaurants, custom and retail, agricultural, horticultural, institutional, industrial, construction, aerospace, and automotive. Our customers are comprised of a favorable balance of leading, national, blue-chip customers as well as a collection of smaller local specialty businesses. Our top 10 customers represented approximately 24% of our fiscal 2007 net sales with no customer accounting for more than 6% of our fiscal 2007 net sales. The average length of our relationship with these customers is more than 21 years. We believe that we are one of the largest global purchasers of polyethylene resin, our principal raw material, buying approximately 1.2 billion pounds in 2007. Additionally, we operate 70 strategically located manufacturing facilities and have extensive distribution capabilities. We believe that our proprietary tools and technologies, low-cost manufacturing capabilities and significant operating and purchasing scale provide us with a competitive advantage in the marketplace.

We believe that our unique combination of leading market positions, proven management team, product and customer diversity and manufacturing and design innovation provides access to a variety of growth opportunities and has allowed us to achieve consistent organic volume growth in excess of market growth rates. Our strong profit margins and efficient deployment of capital have allowed us to consistently generate strong cash flow and high returns on invested capital.

Our Businesses

We operate in the plastic segment of the approximately $121 billion U.S. packaging sector, which accounted for approximately $46 billion, or 38%, of total packaging industry sales in 2006, the most recently reported year. Demand for our plastic packaging products is driven by the consumption of consumer products including food, beverages, pharmaceuticals and personal care products. Plastic packaging has benefited from a shift from metal, paper and glass containers which has taken place over the last 20 years. This conversion has been driven by factors including consumer preference, weight advantages, shatter resistance and barrier properties. Recent technological advancements have allowed for additional conversions of packaging from glass to plastic containers for a number of products that require barrier properties and/or are filled at high temperatures. These new technologies have created many new market segment opportunities and avenues for significant growth.

The product categories on which we focus utilize similar manufacturing processes, share common raw materials (principally PP and PE resin) and sell into end markets where customers demand innovative packaging solutions and quick and seamless design and delivery. We organize our business into four operating divisions: rigid open top, rigid closed top, flexible films, and tapes and coatings.

 

 

1


Table of Contents

Rigid Open Top – approximately 29% of net sales for the fiscal year ended September 29, 2007

Our rigid open top division is comprised of three product categories: containers, foodservice items (drink cups, institutional catering, and cutlery) and housewares. The largest end-users for our containers are food products companies. We believe that we offer one of the broadest product lines among U.S.-based injection-molded plastic container and drink cup manufacturers and we are a leader in thermoformed container and drink cup offerings, which provide a superior combination of value and quality relative to competing processes. Many of our open top products are manufactured from proprietary molds that we develop and own, which results in significant switching costs to our customers. In addition to a complete product line, we have sophisticated printing capabilities and in-house graphic arts and tooling departments, which allow us to integrate ourselves into, and add material value to, our customers’ packaging design processes. Our product engineers work directly with customers to design and commercialize new drink cups and containers. In order to identify new markets and applications for existing products and opportunities to create new products, we rely extensively on our national sales force. Once these opportunities are identified, our sales force works with our product design engineers and artists to satisfy customers’ needs. Our low-cost manufacturing capability with plants strategically located throughout the United States and a dedication to high-quality products and customer service have allowed us to further develop and maintain strong relationships with our attractive base of customers including Dean Foods, General Mills, McDonald’s, Wal-Mart and Yum! Brands.

Rigid Closed Top – approximately 20% of net sales for the fiscal year ended September 29, 2007

Our rigid closed top division is comprised of four product categories: closures and overcaps, prescription vials, bottles, and tubes. We believe that this line of products gives us a competitive advantage in being able to provide a complete plastic package to our customers. We have a number of leading positions in which we have been able to leverage this capability such as prescription vial packages and Tab II® pharmaceutical packages. Our innovative design center and product development engineers regularly work with our customers to develop differentiated packages that offer unique shelf presence, functionality, and cost competitiveness. The combination of our package design and engineering with our world-class manufacturing facilities uniquely positions us to take projects from concept to end product. We utilize the latest in manufacturing technology, offering several different manufacturing processes, including injection molding, compression molding, extrusion and various blow molding processes, as well as decoration and lining services. This allows us to match the optimal manufacturing platform with each customer’s desired package design and volume. Our state of the art mold designs, and our quality system, which includes the latest in vision systems and process control, allow us to meet the increasingly high standards of our customers. In addition, we have a strong reputation for quality and service, and have received numerous “Supplier Quality Achievement Awards” from customers, as well as “Distribution Industry Awards” from market associations. Our rigid closed top products are used principally in the pharmaceutical, healthcare, household chemical, and personal care end markets. Representative customers include Kraft, L’Oreal, Novartis, PepsiCo, Procter & Gamble and Target Stores. We believe that we have a unique line of rigid closed top products, and as a result of the acquisitions of MAC Closures, Inc. in December 2007 and the Captive Acquisition, our rigid closed top division has increased its scale and breadth of product offerings. See “Business—Recent Developments.”

Flexible Films – approximately 33% of net sales for the fiscal year ended September 29, 2007

Our flexible films division manufactures and sells primarily polyethylene-based film products. Our principal products include trash bags, drop cloths, agricultural film, stretch film, shrink film and custom packaging film. We are one of the largest producers of plastic trash bags, stretch film and plastic sheeting in the United States. Our flexible products are used principally in the agricultural, horticultural, institutional, foodservice and retail markets. Our Ruffies® trash bags are a leading value brand of retail trash bags in the United States. In addition to our branded products, for many of our customers we are the primary supplier of private label plastic film products, which are

 

 

2


Table of Contents

growing more quickly than the overall films market. We believe that no other single competitor has comparable scale of distribution capabilities or diversity of plastic film products across the end markets in which we participate. This scale and diversity enable us to serve leading blue-chip customers such as Home Depot and Wal-Mart.

Tapes and Coatings – approximately 18% of net sales for the fiscal year ended September 29, 2007

Our tapes and coatings division produces and sells a diverse portfolio of specialty adhesive and coated and laminated products for niche applications in the industrial, oil, gas and water supply, HVAC, building and construction, retail, automotive, and medical markets. Our principal tape products include heat-shrinkable and polyethylene-based pipeline coatings, PE coated cloth tapes, splicing and laminating tapes, flame-retardant tapes, vinyl-coated tapes, and a variety of other specialty tapes, including carton sealing, masking, mounting and OEM medical tapes. We sell our tape products to retailers, distributors and end users, and manufacture these products primarily under eight brands, including Nashua® and Polyken® . We manufacture and sell a diversified portfolio of coated and laminated products, including flexible packaging, multi-wall bags, fiber-drum packaging, housewrap, and polypropylene-based storage containers. These products are sold for use in packaging, construction, and material handling applications to a diverse group of end users in the food, consumer, building and construction, medical, chemical, agriculture, mining and military markets. We sell our coated products under a number of brands, including Barricade® and R-Wrap®. In addition, a number of our construction-related products are sold under private labels. Our customers include converters, distributors, contractors and manufacturers.

Our Strengths

We believe our consistent financial performance is the direct result of the following competitive strengths:

Leading market positions across a broad product offering. One of our key business strategies is to be a market leader in each of our product lines. Through quality manufacturing, innovation in product design, a focus on customer service and a skilled and dedicated workforce, we have achieved leading competitive positions in many of our major product lines, including thinwall, pry-off, dairy and clear polypropylene containers; drink cups; spice and pharmaceutical bottles and prescription vials; spirits, continuous thread, and pharmaceutical closures; aerosol overcaps and plastic squeeze tubes; plastic trash bags, stretch film and plastic sheeting; and cloth and foil tape products and adhesives. We believe that our leading market positions enable us to attract and expand our business with blue chip customers, cross-sell products, launch new products and maintain high margins.

Large, diverse and stable customer base. We sell our packaging solutions to over 13,000 customers, ranging from large multinational corporations to small local businesses in diverse industries. Our customers are principally engaged in industries that are considered to be generally less sensitive to changing economic conditions, including pharmaceuticals, food, dairy, and health and beauty. Our top 10 customers represented approximately 24% of our fiscal 2007 net sales with no customer accounting for more than 6% of our fiscal 2007 net sales. Our co-design capabilities and proactive approach to customer service makes us an integral part of our customers’ long-term marketing and packaging decisions. The average length of our relationship with our top 10 customers is 21 years.

Strong organic growth through continued focus on best-in-class technology and innovation. We believe that our manufacturing technology and expertise are best-in-class and that we are a leader in new product innovation, as evidenced by our offering of an extensive proprietary product line of value-added plastic packaging in North America. We currently own over 1,700 proprietary molds and have pioneered a variety of production processes such as what we believe to be the world’s largest deep draw PP thermoforming system for

 

 

3


Table of Contents

drink cups. We focus our research and development efforts on high value-added products that offer unique performance characteristics and provide opportunities to achieve premium pricing and further enhance our strategic position with our customers. Our dedicated professionals work collaboratively with our customers’ marketing departments in identifying and delivering new package designs. This skill set has allowed us to consistently achieve annual organic volume growth in excess of market growth rates.

Scale and low-cost operations drive profitability. We believe we are one of the largest domestic manufacturers and suppliers of plastic packaging solutions and we believe we are one of the lowest cost manufacturers in the industry. We believe that our proprietary tools and technologies, low-cost manufacturing capabilities and operating and purchasing scale, which increased significantly with the Berry Covalence Merger, provide us with a competitive advantage in the marketplace. Our large, high-volume equipment and flexible, cross-facility manufacturing capabilities result in lower unit-production costs than many of our competitors as we can leverage our fixed costs, higher capacity utilization and longer production runs. Our scale also enhances our purchasing power and lowers our cost of raw materials such as resin, a raw material where we believe we are one of the largest global buyers in the market. In addition, as a result of the strategic location of our 70 manufacturing facilities and our national footprint of several warehouse and distribution facilities, we have broad distribution capabilities, which reduce shipping costs and allow for quick turnaround times to our customers. Our scale enables us to dedicate certain sales and marketing efforts to particular products, customers or geographic regions, when applicable, which enables us to develop expertise that is valued by our customers. In addition, to continuously improve our cost position, our managers are charged with meeting specific cost reduction and productivity improvement targets each year, with a material amount of their compensation tied to their performance versus these targets.

Ability to pass through changes in the price of resin. We have generally been able to pass through to our customers increases in the cost of raw materials, especially resin, the principal raw material used in manufacturing our products. In many cases, we have contractual price escalators/de-escalators tied to the price of resin that result in relatively rapid price adjustments to these customers. In addition, we have experienced high success rates in quickly passing through increases and decreases in the price of resin to customers without indexed price agreements. Historically, we have consistently grown our earnings even during periods of volatility in raw material markets.

Track record of strong and stable cash flow. We believe our strong earnings, combined with our modest capital expenditure profile, limited working capital requirements and relatively low cash taxes due to various tax attributes, result in the generation of significant cash flow. We have a consistent track record of generating high cash flow as a percentage of net sales relative to our plastic packaging peers. In addition, the capital expenditures required to support our targeted manufacturing platforms and market segments is lower than in many other areas of the plastic packaging industry.

Motivated management team with highly successful track record. We believe our management team is among the deepest and most experienced in the packaging industry. Our 22 senior executives possess an average of 17 years of packaging industry experience, and have combined experience of over 367 years at Berry. The senior management team includes Chairman and CEO Ira Boots, who has been with us for 30 years, and COO Brent Beeler and CFO Jim Kratochvil, who have each been with us for over 23 years. This team has been responsible for developing and executing our strategy that has generated a track record of earnings growth and strong cash flow. In addition, management has successfully integrated 26 acquisitions since 1988, and has generally achieved significant reductions in manufacturing and overhead costs of acquired companies by introducing advanced manufacturing processes, reducing headcount, rationalizing facilities and tools, applying best practices and capitalizing on economies of scale. Members of Berry’s senior management team and other employees own approximately 20% of the equity of Berry Plastics Group, Inc., the parent company of Berry Plastics, which we refer to as Berry Group.

 

 

4


Table of Contents

Our Strategy

Our goal is to maintain and enhance our market position and leverage our core strengths to increase profitability and maximize cash flow. Our strategy to achieve these goals includes the following elements:

Increase sales to our existing customers. We believe we have significant opportunities to increase our share of the packaging purchases made by our more than 13,000 existing customers as we expand our product portfolio and extend our existing product lines. We believe our broad and growing product lines will allow us to capitalize on the corporate consolidation occurring among our customers and the continuing consolidation of their vendor relationships. With our extensive manufacturing capabilities, product breadth and national distribution capabilities, we can provide our customers with a cost-effective, single source from which to purchase a broad range of their plastic packaging needs.

Aggressively pursue new customers. We intend to aggressively pursue new customer relationships in order to drive additional organic growth. We believe that our national direct sales force, our ability to offer new customers a cost-effective, single source from which to purchase a broad range of plastic packaging products, and our proven ability to design innovative new products position us well to continue to grow and diversify our existing customer base.

Manage costs and capital expenditures to drive cash flow and returns on capital. We continually focus on reducing our costs in order to maintain and enhance our low-cost position. We employ a team culture of continuous improvement operating under an ISO management system and employing Six Sigma throughout the organization. Our principal cost-reduction strategies include (i) leveraging our scale to reduce material costs, (ii) efficiently reinvesting capital into our manufacturing processes to maintain technological leadership and achieve productivity gains, (iii) focusing on ways to streamline operations through plant and overhead rationalization and (iv) monitoring and rationalizing the number of vendors from which we purchase materials in order to increase our purchasing power. In addition, each of our over 400 managers is charged with meeting specific cost reduction and productivity improvement targets each year, with a material amount of their compensation tied to their performance versus these targets. Return on capital is a key metric throughout the organization and we require that capital expenditures meet certain return thresholds, which encourages prudent levels of spending on expansion and cost saving opportunities.

Selectively pursue strategic acquisitions. In addition to the significant growth in earnings and cash flow we expect to generate from organic volume growth and continued cost reductions, we believe that there will continue to be opportunities for future growth through selective and prudent acquisitions. Our industry is highly fragmented and our customers are focused on working with a small set of key vendors. We have a successful track record of executing and integrating acquisitions, having completed 26 acquisitions since 1988, and have developed an expertise in synergy realization. In the past five years, we have acquired and successfully integrated Landis Plastics Inc., Kerr Group Inc., and Rollpak Corporation, and we have recently merged with Covalence, realizing significant synergies. We intend to continue to apply a selective and disciplined acquisition strategy, which is focused on improving our financial performance in the long-term and further developing our scale and diversity in new or existing product lines. The Captive Acquisition is in line with our acquisition strategy.

 

 

5


Table of Contents

Recent Developments

On January 22, 2008, Berry entered into an interest rate swap transaction to protect $300.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The swap agreement became effective February 5, 2008. The swap agreement has a notional amount of $300.0 million and swaps three-month variable LIBOR contracts for a fixed three-year rate of 2.962%. This swap agreement expires on February 7, 2011.

On February 5, 2008, Berry Plastics acquired Captive Holdings, Inc., the parent company of Captive Plastics, Inc., which we refer to as Captive, for approximately $500 million, which we refer to as the Captive Acquisition. Berry Plastics completed the Captive Acquisition utilizing the proceeds from a $520 million bridge loan facility pursuant to a Senior Secured Bridge Loan Credit Agreement with Bank of America, N.A., Goldman Sachs Credit Partners L.P. and Lehman Brothers Inc. which we refer to as the Bridge Loan Credit Facility. The Bridge Loan Credit Facility was repaid in full with the net proceeds of the offering of the outstanding notes. See “Use of Proceeds”.

The Company’s fiscal 2008 second quarter ended on March 29, 2008. Below is an unaudited estimate of the Company’s financial performance for the fiscal 2008 second quarter. These amounts are only estimates and may be revised materially as a result of management’s completion of the Company’s results for the second fiscal quarter of 2008.

Berry Plastics estimates that its net sales will total approximately $845 million during its fiscal 2008 second quarter, representing an increase of 14% as compared to its fiscal 2007 second quarter. This increase of 14% is primarily attributed to higher selling prices in both the rigid and flexible businesses, higher volume in rigid, lower volume in flexible, and acquisition volume from Captive, MAC Closures, and Rollpak. Also, the Company estimates that its fiscal 2008 second quarter Adjusted EBITDA, excluding adjustments for acquisitions and unrealized synergies, will be approximately $99 million, an increase from approximately $97 million for the fiscal 2007 second quarter. This increase is primarily the result of additional sales volume from acquisitions and achievement of synergies partially offset by increased raw material costs. In order to mitigate the effect of rising raw material costs, management has put several cost reduction plans into place. These plans include decreasing resin usage, reducing variable expenses and reducing workforce. Additionally, Berry Plastics estimates that its Adjusted EBITDA for the fiscal 2008 second quarter will be approximately $118 million as compared to $145 million for the fiscal 2007 second quarter. The Company also estimates that, for the twelve months ended March 29, 2008, Adjusted EBITDA will be approximately $544 million. Adjusted EBITDA is a Non-GAAP number. For more information concerning Adjusted EBITDA, see footnote (2) to “—Summary Historical Financial Data.”

 

 

6


Table of Contents

The following table reconciles net income (loss) to Adjusted EBITDA for fiscal 2008 projected second quarter and fiscal 2007 second quarter:

 

     Unaudited  
     Thirteen Weeks Ended  

($ in millions)

   Estimated
March 29, 2008
    Actual
March 31, 2007
 

Adjusted EBITDA

   $ 118     $ 145  

Pro forma Rollpak, MAC and Captive EBITDA

     (5 )     (21 )

Pro forma synergies (Covalence, Rollpak, MAC, Captive and Oxnard)

     (14 )     (29 )

Pro forma sale/leaseback

     —         2  

Net interest expense

     (64 )     (59 )

Depreciation and amortization

     (60 )     (49 )

Income tax benefit

     16       7  

Business optimization expense

     (10 )     (2 )

Restructuring and impairment

     —         (4 )

Loss on disposal of fixed assets

     —         (2 )

Management fees

     (1 )     (1 )

Stock based compensation

     (5 )     (1 )
                

Net income (loss)

   $ (25 )   $ (14 )
                

The following table reconciles net income (loss) to Adjusted EBITDA for the twelve months ended March 29, 2008.

 

     Unaudited  

($ in millions)

   12 Months Ended
March 29, 2008
 

Adjusted EBITDA

   $ 544  

Net interest expense

     (244 )

Depreciation and amortization

     (241 )

Income tax benefit

     97  

Loss on extinguished debt

     (37 )

Business optimization expense

     (46 )

Restructuring and impairment

     (39 )

Stock based compensation

     (28 )

Management fees

     (6 )

Inventory write-up

     (5 )

Pro forma synergies (Covalence and Rollpak)

     (56 )

Pro forma synergies (MAC, Captive and Oxnard)

     (20 )

Pro forma sale/leaseback

     5  

Pro forma MAC and Captive EBITDA

     (52 )
        

Net income (loss)

   $ (128 )
        

 

 

7


Table of Contents

As of the end of the second fiscal quarter, Berry Plastics estimates a cash balance of $18 million and outstanding debt of $3,323 million (excluding $244 million available under the revolving line of credit) as detailed in the left column of the following table. The column on the right sets forth such estimates adjusted to give pro forma effect to the offering of the outstanding notes and the use of proceeds.

 

     Unaudited

($ in millions)

   Estimated
March 29, 2008
   As Adjusted
March 29, 2008

Term loan

   $ 1,191    $ 1,191

Senior Secured Bridge Loan

     520      0

Revolving line of credit

     131      0

Notes(1)

     0      661

Second Priority Senior Secured Fixed Rate Notes

     525      525

Second Priority Senior Secured Floating Rate Notes

     225      225

11% Senior Subordinated Notes

     435      435

10 1/4% Senior Subordinated Notes

     265      265

Capital leases and other

     31      31
             
   $ 3,323    $ 3,333
             

 

(1)   $680.6 million of outstanding notes were sold by the Company to the initial purchasers for $661.4 million.

Additional Information

Berry Plastics is a Delaware corporation. Our principal executive offices are located at 101 Oakley Street, Evansville, Indiana 47710. Our telephone number is (812) 424-2904. Our website address is located at www.berryplastics.com. The information that appears on our website is not a part of, and is not incorporated into, this prospectus.

Our Sponsors

Apollo Management, L.P., which we refer to, together with its affiliates, as Apollo, was founded in 1990 and is among the most active and successful private investment firms in the United States in terms of both number of investment transactions completed and aggregate dollars invested. With current assets under management of more than $41 billion, Apollo has managed the investment of more than $31 billion in equity capital, since inception, in a wide variety of industries, both domestically and internationally. Companies owned or controlled by Apollo or in which Apollo has a significant equity investment include, among others, Hexion Specialty Chemicals, Rexnord Industries LLC, Momentive Performance Materials, NCL Corporation, Oceania Cruises and Noranda Aluminum.

Graham Partners, Inc., which we refer to, together with its affiliates, as Graham Partners and, together with Apollo, as the Sponsors, is a leading middle market industrial private equity firm based in suburban Philadelphia with over $850 million under management. Graham Partners is sponsored by the privately held Graham Group, an industrial and investment concern with global interests in plastics, packaging, machinery, building products and outsource manufacturing. Graham Partners seeks to acquire industrial companies that participate in growing manufacturing niches, often involving plastics or other synthetic materials, where Graham Partners can leverage its unique combination of operating resources and financial expertise. Companies owned or controlled by Graham Partners’ affiliates or in which Graham Partners’ affiliates have significant equity investment include, among others, National Diversified Sales, Inc., Supreme Corq LLC, Infiltrator Systems, Inc., Nailite International, Inc., Line-X LLC, Schneller, LLC and Western Industries, Inc.

 

 

8


Table of Contents

Summary of the Exchange Offer

The following is a brief summary of the terms of the exchange offer. For a more complete description of the exchange offer, see “The Exchange Offer.”

 

Securities Offered

Up to $680,600,000 aggregate principal amount of the exchange notes which have been registered under the Securities Act.

 

  The form and terms of these exchange notes are identical in all material respects to those of the outstanding notes of the same series except that:

 

   

the exchange notes have been registered under the U.S. federal securities laws and will not bear any legend restricting their transfer;

 

   

the exchange notes bear a different CUSIP number than the outstanding notes;

 

   

the exchange notes will not be subject to transfer restrictions or entitled to registration rights; and

 

   

the exchange notes will not be entitled to additional interest provisions applicable to the outstanding notes in some circumstances relating to the timing of the exchange offer. See “The Exchange Offer—Terms of the Exchange Offer; Acceptance of Tendered Notes.”

 

The Exchange Offer

We are offering to exchange the exchange notes for a like principal amount of the outstanding notes.

 

  We will accept any and all outstanding notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on June 10, 2008. Holders may tender some or all of their outstanding notes pursuant to the exchange offer. However, outstanding notes may be tendered only in integral multiples of $1,000 in principal amount, subject to a minimum denomination of $2,000.

 

  In order to be exchanged, an outstanding note must be properly tendered and accepted. All outstanding notes that are validly tendered and not withdrawn will be exchanged. As of the date of this prospectus, there are $680,600,000 aggregate principal amount of outstanding notes. We will issue exchange notes promptly after the expiration of the exchange offer. See “The Exchange Offer—Terms of the Exchange Offer—Acceptance of Tendered Notes.”

 

Transferability of Exchange Notes

Based on interpretations by the staff of the SEC, as detailed in previous no-action letters issued to third parties, we believe that the exchange notes issued in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act as long as:

 

   

you are acquiring the exchange notes in the ordinary course of your business;

 

 

9


Table of Contents
   

you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate in a distribution of the exchange notes; and

 

   

you are not our “affiliate” as defined in Rule 405 under the Securities Act.

 

   

If you are an affiliate of ours, or are engaged in or intend to engage in or have any arrangement or understanding with any person to participate in the distribution of the exchange notes:

 

   

you cannot rely on the applicable interpretations of the staff of the SEC;

 

   

you will not be entitled to participate in the exchange offer; and

 

   

you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

 

  Each broker or dealer that receives exchange notes for its own account in the exchange offer for outstanding notes that were acquired as a result of market-making or other trading activities must acknowledge that it will comply with the prospectus delivery requirements of the Securities Act in connection with any offer to resell or other transfer of the exchange notes issued in the exchange offer.

 

  Furthermore, any broker-dealer that acquired any of its outstanding notes directly from us, in the absence of an exemption therefrom,

 

   

may not rely on the applicable interpretation of the staff of the SEC’s position contained in Exxon Capital Holdings Corp., SEC no-action letter (April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1993); and

 

   

must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes.

 

  See “Plan of Distribution.”

 

  We do not intend to apply for listing of the exchange notes on any securities exchange or to seek approval for quotation through an automated quotation system. Accordingly, there can be no assurance that an active market will develop upon completion of the exchange offer or, if developed, that such market will be sustained or as to the liquidity of any market.

Expiration Date

The exchange offer will expire at 5:00 p.m., New York City time, on June 10, 2008, unless we extend the expiration date.

 

 

10


Table of Contents

Exchange Date; Issuance of Exchange Notes

The date of acceptance for exchange of the outstanding notes is the exchange date, which will be the first business day following the expiration date of the exchange offer. We will issue the exchange notes in exchange for the outstanding notes tendered and accepted in the exchange offer promptly following the exchange date. See “The Exchange Offer—Terms of the Exchange Offer; Acceptance of Tendered Notes.”

 

Conditions to the Exchange Offer

The exchange offer is subject to customary conditions. We may assert or waive these conditions in our reasonable discretion. See “The Exchange Offer—Conditions to the Exchange Offer” for more information regarding conditions to the exchange offer.

 

Special Procedures for Beneficial Holders

If you beneficially own outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender in the exchange offer, you should contact such registered holder promptly and instruct such person to tender on your behalf. See “The Exchange Offer—Procedures for Tendering Outstanding Notes.”

 

Effect of Not Tendering

Any outstanding notes that are not tendered in the exchange offer, or that are not accepted in the exchange, will remain subject to the restrictions on transfer. Since the outstanding notes have not been registered under the U.S. federal securities laws, you will not be able to offer or sell the outstanding notes except under an exemption from the requirements of the Securities Act or unless the outstanding notes are registered under the Securities Act. Upon the completion of the exchange offer, we will have no further obligations, except under limited circumstances, to provide for registration of the outstanding notes under the U.S. federal securities laws. See “The Exchange Offer—Effect of Not Tendering.”

 

Withdrawal Rights

You may withdraw your tender at any time before the exchange offer expires.

 

Interest on Exchange Notes and the Outstanding Notes

The exchange notes will bear interest from the most recent interest payment date to which interest has been paid on the outstanding notes, or, if no interest has been paid, from April 21, 2008. Interest on the outstanding notes accepted for exchange will cease to accrue upon the issuance of the exchange notes.

 

Acceptance of Outstanding Notes and Delivery of Exchange Notes

Subject to the conditions stated in the section “The Exchange Offer—Conditions to the Exchange Offer” of this prospectus, we will accept for exchange any and all outstanding notes which are properly tendered in the exchange offer before 5:00 p.m., New York City time, on the expiration date. The exchange notes will be delivered promptly

 

 

11


Table of Contents
 

after the expiration date. See “The Exchange Offer—Terms of the Exchange Offer; Acceptance of Tendered Notes.”

 

Material U.S. Federal Income Tax Consequences

The exchange by a U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences”) of outstanding notes for exchange notes to be issued in the exchange offer should not result in a taxable transaction for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences—Exchange Offer.”

 

Accounting Treatment

We will not recognize any gain or loss for accounting purposes upon the completion of the exchange offer. The expenses of the exchange offer that we pay will be charged to expense in accordance with generally accepted accounting principles. See “The Exchange Offer—Accounting Treatment.”

 

Exchange Agent

Wells Fargo Bank, National Association, the trustee under the Indenture, is serving as exchange agent in connection with the exchange offer. The address and telephone number of the exchange agent are listed under the heading “The Exchange Offer—Exchange Agent.”

 

Use of Proceeds

We will not receive any proceeds from the issuance of exchange notes in the exchange offer. The net proceeds from the issuance of the outstanding notes were used to repay in full the $520.0 million Bridge Loan Credit Facility, to repay amounts outstanding under its revolving credit facility (estimated at $131 million as of March 29, 2008) and to pay related fees and expenses, as well as fees and expenses related to the offering of the outstanding notes, with any remaining proceeds to be used by the Issuer for general corporate purposes. See “Use of Proceeds.”

 

 

12


Table of Contents

Summary of the Terms of the Exchange Notes

The form and terms of the exchange notes and the outstanding notes are identical in all material respects, except that the transfer restrictions, registration rights and additional interest provisions in some circumstances relating to the timing of the exchange offer, which are applicable to the outstanding notes, do not apply to the exchange notes. The exchange notes will evidence the same debt as the outstanding notes and will be governed by the same indenture, which we refer to as the Indenture.

 

Issuer

Berry Plastics Corporation

 

Notes Offered

$680,600,000 aggregate principal amount of first priority floating rate senior secured notes due 2015.

 

Maturity Date

The notes will mature on February 15, 2015.

 

Interest

Interest on the notes will accrue at a rate per annum equal to three-month LIBOR plus 4.75% and will be payable quarterly, in cash in arrears, on January 15, April 15, July 15 and October 15 of each year, commencing July 15, 2008.

 

Original Issue Discount

The exchange notes, like the outstanding notes, are expected to have original issue discount for U.S. federal income tax purposes. A U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences”) of an exchange note will be required to include such original issue discount in gross income as it accrues, in advance of the receipt of cash attributable to that income and regardless of the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences—Original Issue Discount.”

 

Guarantees

The notes will be fully and unconditionally guaranteed on a senior secured basis by each of the Issuer’s existing and future direct or indirect domestic subsidiaries that is a restricted subsidiary, subject to certain exceptions described under “Description of the Exchange Notes—Note Guarantees,” provided that any of the Issuer’s subsidiaries that guarantees the obligations under our term loan facility shall guarantee the notes. Under certain circumstances, subsidiaries may be released from these guarantees without the consent of the holders of the notes. See “Description of the Exchange Notes—Note Guarantees.”

 

  The notes will not be guaranteed by Berry Group, the Issuer’s parent.

 

Security

The notes will be secured by a lien (subject to certain exceptions and permitted liens) on substantially all of the Issuer’s and the Guarantors’ assets (including equipment, owned real property, accounts and inventory), and are subject to the intercreditor arrangements described below. The collateral securing the notes will not include (i) any license, contract or agreement of the Issuer or the Guarantors, if and only for so long as the grant of a security interest under the security documents would result in a breach or default

 

 

13


Table of Contents
 

under, or abandonment, invalidation or unenforceability of that license, contract or agreement; (ii) any deposit accounts, securities accounts or cash; (iii) any equity interests or other securities of the Issuer’s subsidiaries to the extent that the pledge of such equity interests or other securities results in the Issuer’s being required to file separate financial statements of such subsidiary with the SEC, as further described in “Description of the Exchange Notes—Security for the Notes,” (iv) any securities or other equity interests of the Issuer’s foreign subsidiaries (other than a pledge of 65% of the Issuer’s first-tier foreign subsidiaries, with certain exceptions) and (v) certain other assets.

 

  The value of collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. The liens on the collateral may be released without the consent of the holders of notes if collateral is disposed of in a transaction that complies with the indenture, security documents and intercreditor agreements. In the event of a liquidation of the collateral, the proceeds may not be sufficient to satisfy the obligations under the notes and any other indebtedness secured on a senior or pari passu basis. See “Risk Factors—Risks Related to the Notes—It may be difficult to realize the value of the collateral securing the notes.”

In addition to not guaranteeing the notes, the Issuer’s parent will not pledge the stock of the Issuer as security for the notes.

 

  You should read “Description of the Exchange Notes—Security for the Notes” for a more complete description of the security granted to the holders of the notes.

 

Ranking

The notes and guarantees will constitute senior secured debt of the Issuer. Subject to the contractual arrangements described above under “Security” and below under “Intercreditor Arrangements,” they will rank:

 

   

equally in right of payment with all of the Issuer’s and the Guarantors’ existing and future senior debt;

 

   

senior in right of payment to all of the Issuer’s and the Guarantors’ existing and future subordinated debt; and

 

   

effectively junior in right of payment to all existing and future indebtedness and other liabilities of any subsidiary that is not a Guarantor of the notes.

 

  Assuming we had completed the offering of the outstanding notes and applied the net proceeds as intended, as of December 29, 2007, we would have had $1,869.4 million of first lien senior secured debt outstanding (including the notes). In addition, as of such date we would have had $368.2 million of availability under our revolving credit facility, all of which is secured by a first priority lien on the collateral securing the notes.

 

 

14


Table of Contents

Intercreditor Arrangements

The right of holders of notes to receive the proceeds of certain collateral, including accounts, inventory, certain cash and proceeds and products of the foregoing and certain assets related thereto, will be contractually second to the rights of holders of all of the Issuer’s and the Guarantors’ obligations under the revolving credit facility and holders of certain other obligations and will be equal to the rights of holders of all of the Issuer’s and the Guarantors’ obligations under our term loan facility and holders of certain other obligations. The right of holders of notes to receive the proceeds of all other collateral securing the notes shall be contractually equal to the rights of holders of all of our obligations under the term loan facility and the holders of certain other obligations and senior to the rights of holders of all of our obligations under the revolving credit facility. The rights of holders of notes to receive proceeds of the collateral will be contractually senior to the rights of holders of our existing second priority floating and fixed rate senior secured notes to receive proceeds of the collateral. The collateral agent for the trustee and the holders of the notes is a party to intercreditor agreements among the trustee under the indenture governing our existing second priority senior secured notes and the collateral agents under the senior secured credit facilities as to the relative priorities of their respective security interests in the assets securing Berry Plastics’ and the Guarantors’ obligations under the notes, our second priority senior secured notes and senior secured credit facilities and certain other matters relating to the administration of security interests. The terms of the intercreditor agreements are set forth under “Description of the Exchange Notes—Security for the Notes.”

 

Optional Redemption

On or after April 15, 2010, the Issuer may redeem some or all of the notes at any time at the redemption prices described in the section “Description of the Exchange Notes—Optional Redemption.” The Issuer may also redeem some or all of the notes before April 15, 2010 at a redemption price of 100% of the principal amount plus accrued and unpaid interest, if any, to the redemption date, plus a “make-whole” premium.

 

  Additionally, on or prior to April 15, 2010, we may redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of specified equity offerings at the redemption price specified in the “Description of the Exchange Notes—Optional Redemption,” plus accrued and unpaid interest and additional interest, if any, to the redemption date.

 

Change of Control

If the Issuer experiences certain kinds of changes of control, it must offer to purchase the notes at 101% of their principal amount, plus accrued and unpaid interest. For more details, see the section “Description of the Exchange Notes—Change of Control.”

 

Mandatory Offer to Repurchase

If the Issuer or any of its restricted subsidiaries sells certain assets, the Issuer must, under certain circumstances, offer to repurchase the

 

 

15


Table of Contents
 

notes at the prices listed in the section “Description of the Exchange Notes—Certain Covenants—Asset Sales.”

 

Certain Covenants

The indenture governing the notes contains covenants that limit the Issuer’s ability and certain of the Issuer’s subsidiaries’ ability to:

 

   

incur or guarantee additional indebtedness;

 

   

pay dividends and make other restricted payments;

 

   

create restrictions on the payment of dividends or other distributions to the Issuer from its restricted subsidiaries;

 

   

create or incur certain liens;

 

   

make certain investments;

 

   

engage in sales of assets and subsidiary stock; and

 

   

transfer all or substantially all of the assets of the Issuer or any of the Note Guarantors or enter into merger or consolidation transactions.

 

  These covenants are subject to a number of important limitations and exceptions as described under “Description of the Exchange Notes— Certain Covenants.” Certain covenants will cease to apply to the notes at all times after the notes have investment grade ratings from both Moody’s Investors Service, Inc., or Moody’s, and Standard & Poor’s Ratings Group, or S&P; provided that no default has occurred and is continuing. Similarly, the “Change of Control” covenant will be suspended with respect to the notes during all periods when the notes have investment grade ratings from Moody’s and S&P; provided that no default has occurred and is continuing.

 

Registration Rights

The Issuer and the Guarantors have agreed to use their commercially reasonable efforts to file an exchange offer registration statement to exchange the notes for new issues of substantially identical debt securities registered under the Securities Act or, if required, to file a shelf registration statement to cover resales of the notes under certain circumstances. The Issuer and the Guarantors will use their commercially reasonable efforts to cause the exchange offer registration statement to be declared effective by the SEC on or prior to 270 days after the issue date of the notes and to complete the exchange offer with respect to the notes within 30 business days thereof. In addition, the Issuer and the Guarantors have agreed, if obligated to file a shelf registration statement with respect to the notes, to file such shelf registration statement on or prior to 90 days after such a filing obligation arises and to use commercially reasonable efforts to cause such shelf registration statement to be declared effective by the SEC on or prior to 270 days after such obligation arises. If the Issuer fails to satisfy its registration obligations under the registration rights agreement, the Issuer will be required to pay additional interest to the holders of the notes under certain circumstances. See “Description of the Exchange Notes—Registration Rights; Additional Interest.”

You should refer to the section entitled “Risk Factors” for an explanation of certain risks of investing in the notes.

 

 

16


Table of Contents

Summary Historical Financial Data

The following table sets forth certain historical financial data for Berry Plastics and Tyco Plastics & Adhesives. Our fiscal year is the 52- or 53-week period ending generally on the Saturday closest to September 30. The summary historical financial data for the fiscal year ended September 29, 2007, for the period from February 17, 2006 to September 30, 2006, for the period from October 1, 2005 to February 16, 2006 and for the fiscal year ended September 29, 2005 has been derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus.

The summary historical financial data as of and for the thirteen weeks ended December 29, 2007 and December 30, 2006 is derived from our unaudited financial statements included elsewhere in this prospectus. The summary historical financial data set forth below should be read in conjunction with and is qualified in its entirety by reference to the audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus.

The selected historical financial data of Tyco Plastics & Adhesives have been derived from the audited financial statements that were prepared in accordance with GAAP. These financial statements have been prepared on a going-concern basis, as if certain assets of Tyco Plastics & Adhesives, which was acquired by Covalence Specialty Materials Corporation, which we refer to as Old Covalence, on February 16, 2006, had existed as an entity separate from Tyco International Group S.A. during the periods presented. Tyco charged the predecessor operations a portion of its corporate support costs, including engineering, legal, treasury, planning, environmental, tax, auditing, information technology and other corporate services, based on usage, actual costs or other allocation methods considered reasonable by Tyco management. Accordingly, expenses included in the financial statements may not be indicative of the level of expenses which might have been incurred had the predecessor been operating as a separate stand-alone company.

The following financial information should be read in conjunction with “Risk Factors,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements included elsewhere in this prospectus.

 

 

17


Table of Contents
     Berry Plastics     TP&A
  Unaudited     Audited
  Thirteen weeks ended     Year ended
September 29,
2007
    Period from
February 17,
2006 to
September 30,
2006
    Period from
October 1,
2005 to
February 16,
2006
  Year ended
September 29,
2005
  December 29,
2007
    December 30,
2006
         
($ in millions)                                

Statement of Operations Data:

             

Net sales

  $ 762.7     $ 703.6     $ 3,055.0     $ 1,138.8        $ 666.9   $ 1,725.2

Cost of sales

    653.9       617.2       2,583.4       1,022.9       579.0     1,477.4
                                           

Gross profit

    108.8       86.4       471.6       115.9       87.9     247.8

Operating expenses

    98.3       79.0       404.2       108.2       61.0     184.3
                                           

Operating income

    10.5       7.4       67.4       7.7       26.9     63.5

Loss on extinguished debt

    —         —         37.3       12.3       —       —  

Interest expense, net(1)

    61.5       59.9       237.6       46.5       7.6     15.7
                                           

Loss before income taxes

    (51.0 )     (52.5 )     (207.5 )     (51.1 )     19.3     47.8

Income tax benefit

    (19.7 )     (19.5 )     (88.6 )     (18.1 )     1.6     3.8

Minority interest

    —         (2.2 )     (2.7 )     (1.8 )     —       —  
                                           

Net loss

  $ (31.3 )   $ (30.8 )   $ (116.2 )   $ (31.2 )   $ 17.7   $ 44.0
                                           
 

Balance Sheet Data (at period end):

             

Working capital(1)

  $ 372.8     $ 403.8     $ 369.8     $ 442.3       $ 51.5

Total assets

    3,902.3       3,658.5       3,869.4       3,821.4         1,206.7

Total debt

    2,725.4       2,605.1       2,710.7       2,628.3         —  

Shareholders’ equity

    420.3       379.7       450.0       409.6         855.1
 

Other Financial Data:

             

Capital expenditures

  $ 38.6     $ 14.2     $ 99.3     $ 34.8     $ 12.2   $ 32.1

Depreciation and amortization

    59.6       49.1       220.2       54.6       15.6     41.6

Adjusted EBITDA(2)

        491.7          

 

(1)   Represents total current assets less total current liabilities.
(2)   We define “Adjusted EBITDA” as net income (loss) before depreciation and amortization, income tax expense (benefit), interest expense (net) and certain non-recurring or non-cash charges and as adjusted for acquired businesses, including unrealized synergies, which are more particularly defined in our credit documents and the indentures governing our notes. Adjusted EBITDA is used by our lenders for debt covenant compliance purposes and by our management as one of several measures to evaluate management performance. Adjusted EBITDA eliminates what we believe are non-recurring expenses and certain other charges that we believe do not reflect operations and underlying operational performance. The result, we believe, more accurately reflects the underlying performance of the Company and therefore provides our management and investors with a more meaningful metric to assess performance over time.

Although we use Adjusted EBITDA as a financial measure to assess the performance of our business, the use of Adjusted EBITDA has important limitations, including that Adjusted EBITDA:

 

   

does not represent funds available for dividends, reinvestment or other discretionary uses, or account for one-time expenses and charges;

 

   

does not reflect cash outlays for capital expenditures or contractual commitments;

 

   

does not reflect changes in, or cash requirements for, working capital;

 

   

does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on indebtedness;

 

   

does not reflect income tax expense or the cash necessary to pay income taxes;

 

   

excludes depreciation and amortization and although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements;

 

 

18


Table of Contents
   

does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and

 

   

may be calculated differently by other companies, including other companies in our industry, limiting its usefulness as a comparative measure.

Consequently, management does not, and you should not, consider Adjusted EBITDA as (i) an alternative to operating or net income or cash flows from operating activities, in each case determined in accordance with GAAP, (ii) an indicator of our cash flow or (iii) a measure of liquidity.

Reconciliation of Net Income (Loss) to Adjusted EBITDA

 

($ in millions)

   Year ended
September 29, 2007
 

Adjustments to reconcile Net loss to Adjusted EBITDA:

  

Net income (loss)

   $ (116.2 )

Interest expense, net

     237.6  

Income tax benefit

     (88.6 )

Depreciation and amortization

     220.2  

Minority interest

     (2.7 )

Stock option expense

     19.6  

Loss on extinguished debt

     37.3  

Non-cash inventory write-up

     13.9  

Management fees

     5.9  

Business optimization expenses(a)

     37.7  

Restructuring and impairment charges(b)

     39.1  

Rollpak(c)

     3.5  

Oxnard and Norwich synergies(d)

     3.7  

Covalence and Rollpak synergies(e)

     80.7  
        

Adjusted EBITDA

   $ 491.7  
        

 

(a)   Business optimization expenses consist of expenses related to transaction and merger costs associated with the Berry Covalence Merger, facility integration costs associated with the Berry Covalence Merger, expenses related to facility integration expenses associated with the Kerr acquisition, costs associated with Berry Plastics’ thermoforming expansion, laminate tube introduction and other miscellaneous product launches and other one-time costs.
(b)   Restructuring and impairment charges relate to Berry Plastics’ decision to exit five flexible film facilities, one closed top facility, one tapes/coatings facility and the shut-down of Old Covalence’s corporate headquarters and a divisional headquarters. These charges have been accounted for under the provisions of Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-lived Assets and Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The costs consist of severance and termination benefits, facility exit costs, non-cash impairment charges and other costs.
(c)   Represents the adjustment to reflect the impact of the Rollpak acquisition to annualize the results for the year ended September 29, 2007.
(d)   Represents synergies associated with the Oxnard facility shutdown and Norwich facility disposal for the year ended September 29, 2007.
(e)   Represents purchasing, administrative, plant rationalization and restructuring, and operational cost savings associated with the Berry Covalence Merger. This adjustment also includes cost savings related to Rollpak.

 

 

19


Table of Contents

RISK FACTORS

Investing in the notes involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus, including our financial statements and the related notes, before deciding to participate in the offer. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. If any of the following risks materialize, our business, financial condition or results of operations could be materially and adversely affected. In that case, you may lose some or all of your investment.

Risks Related to the Notes

If you fail to exchange your outstanding notes, they will continue to be restricted securities and may become less liquid.

Outstanding notes that you do not tender or that we do not accept will, following the exchange offer, continue to be restricted securities, and you may not offer to sell them except under an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We will issue the exchange notes in exchange for the outstanding notes in the exchange offer only following the satisfaction of the procedures and conditions set forth in “The Exchange Offer—Procedures for Tendering Outstanding Notes.” Such procedures and conditions include timely receipt by the exchange agent of such outstanding notes and of a properly completed and duly executed letter of transmittal. Because we anticipate that most holders of the outstanding notes will elect to exchange their outstanding notes, we expect that the liquidity of the market for the outstanding notes remaining after the completion of the exchange offer will be substantially limited. Any outstanding notes tendered and exchanged in the exchange offer will reduce the aggregate principal amount at maturity of the outstanding notes. Further, following the exchange offer, if you did not tender your outstanding notes, you generally will not have any further registration rights, and such outstanding notes will continue to be subject to certain transfer restrictions.

You may find it difficult to sell your exchange notes because there is no existing trading market for the exchange notes.

The exchange notes are being offered to the holders of the outstanding notes. The outstanding notes were issued on April 21, 2008, primarily to a small number of institutional investors. There is no existing trading market for the exchange notes and there can be no assurance regarding the future development of a market for the exchange notes, or the ability of the holders of the exchange notes to sell their exchange notes or the price at which such holders may be able to sell their exchange notes. If such a market were to develop, the exchange notes could trade at prices that may be higher or lower than the initial offering price of the outstanding notes depending on many factors, including prevailing interest rates, our financial position, operating results and the market for similar securities. We do not intend to apply for listing or quotation of the exchange notes on any exchange and we do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. The initial purchasers of the outstanding notes are not obligated to make a market in the exchange notes, and any market-making may be discontinued at any time without notice. Therefore, there can be no assurance as to the liquidity of any trading market for the exchange notes or that an active market for the exchange notes will develop. As a result, the market price of the exchange notes, as well as your ability to sell the exchange notes, could be adversely affected.

Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of such securities. There can be no assurance that the market for the exchange notes will not be subject to similar disruptions. Any such disruptions may have an adverse effect on holders of the exchange notes.

 

20


Table of Contents

Broker-dealers may become subject to the registration and prospectus delivery requirements of the Securities Act and any profit on the resale of the exchange notes may be deemed to be underwriting compensation under the Securities Act.

Any broker-dealer that acquires exchange notes in the exchange offer for its own account in exchange for outstanding notes which it acquired through market-making or other trading activities must acknowledge that it will comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction by that broker-dealer. Any profit on the resale of the exchange notes and any commission or concessions received by a broker-dealer may be deemed to be underwriting compensation under the Securities Act.

You may not receive the exchange notes in the exchange offer if the exchange offer procedures are not properly followed.

We will issue the exchange notes in exchange for your outstanding notes only if you properly tender the outstanding notes before expiration of the exchange offer. Neither we nor the exchange agent are under any duty to give notification of defects or irregularities with respect to the tenders of the outstanding notes for exchange. If you are the beneficial holder of outstanding notes that are held through your broker, dealer, commercial bank, trust company or other nominee, and you wish to tender such notes in the exchange offer, you should promptly contact the person through whom your outstanding notes are held and instruct that person to tender on your behalf.

We have substantial indebtedness, which could affect our ability to meet our obligations under the notes and may otherwise restrict our activities.

As of December 29, 2007, we would have had, after giving pro forma effect to the Captive Acquisition, the offering of the outstanding notes and the intended use of proceeds, $3,315.8 million of outstanding indebtedness and, for the year ended December 29, 2007, debt service payment obligations including principal and interest of $297.0 million. In addition, we would have had $368.2 million of availability under our revolving credit facility. We are permitted by the terms of the notes and our other debt instruments to incur substantial additional indebtedness, subject to the restrictions therein. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations.

Our substantial indebtedness could have important consequences to you. For example, it could:

 

   

make it more difficult for us to satisfy our obligations under our indebtedness, including the notes;

 

   

limit our ability to borrow money for our working capital, capital expenditures, debt service requirements or other corporate purposes;

 

   

require us to dedicate a substantial portion of our cash flow to payments on our indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures, product development and other corporate requirements;

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

limit our ability to respond to business opportunities; and

 

   

subject us to financial and other restrictive covenants, which, if we fail to comply with these covenants and our failure is not waived or cured, could result in an event of default under our debt.

Despite our substantial indebtedness, we and our subsidiaries may still be able to incur significantly more debt. This could intensify the risks described above.

The terms of the indenture governing the notes and our second priority notes and the terms of our senior secured credit facilities contain restrictions on our and our subsidiaries’ ability to incur additional indebtedness,

 

21


Table of Contents

including senior secured indebtedness that will be pari passu with the notes, subject to the terms of the intercreditor agreements. However, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Accordingly, we or our subsidiaries could incur significant additional indebtedness in the future, much of which could constitute secured or senior indebtedness. The more leveraged we become, the more we, and in turn our securityholders, become exposed to the risks described above under “—We have substantial indebtedness, which could affect our ability to meet our obligations under the notes and may otherwise restrict our activities.”

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

Our ability to pay principal and interest on the notes and to satisfy our other debt obligations will depend upon, among other things:

 

   

our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and

 

   

the future availability of borrowings under our senior secured credit facilities, which depends on, among other things, our complying with the covenants in our senior secured credit facilities.

We cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our senior secured credit facilities or otherwise, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on the notes. See “Disclosure Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements, including our senior secured credit facilities and the indentures governing the notes and our second priority notes, may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. Furthermore, the Sponsors have no continuing obligation to provide us with debt or equity financing.

Repayment of our debt, including the notes, is dependent on cash flow generated by our subsidiaries.

Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness, including the notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and (if they are not Guarantors of the notes) their ability to make such cash available to us by dividend, debt repayment or otherwise. Unless they are Guarantors of the notes, our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing the notes limits the ability of our subsidiaries to incur consensual restrictions on

 

22


Table of Contents

their ability to pay dividends or make other intercompany payments to us, these limitations will be subject to certain qualifications and exceptions. In the event that we do not receive distributions from our non-Guarantor subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the notes.

The collateral securing the notes is subject to control by other creditors with first priority liens, subject to the terms of the intercreditor agreements. If there is a default, the value of the collateral may not be sufficient to repay both the holders of the notes and the other first priority creditors.

The notes will be secured on a first priority basis by substantially all of the collateral securing our senior secured credit facilities (subject to certain exceptions described herein). In addition, under the terms of the indenture governing the notes, we are permitted in the future to incur additional indebtedness and other obligations that may share in the first priority liens on the collateral securing the notes and our senior secured credit facilities.

Under the terms of the senior lender intercreditor agreement, the holders of debt under our revolving credit facility will be entitled to receive proceeds from the realization of certain collateral (including accounts, inventory, certain cash and proceeds and products of the foregoing and certain assets related thereto) to repay their obligations in full before the holders of the notes and holders of debt under our term credit facility will be entitled to any recovery from such collateral. Under the terms of the senior lender intercreditor agreement, at any time that obligations under our revolving credit facility and certain other obligations are outstanding, any actions that may be taken in respect of such collateral, including the ability to cause the commencement of enforcement proceedings against such collateral and to control the conduct of such proceedings, will be at the direction of the holders of the obligations under the revolving credit facility and such other obligations and neither the trustee nor the notes collateral agent, on behalf of the holders of the notes, will have the ability to control or direct such actions, even if the rights of the holders of the notes are adversely affected, subject to certain exceptions. See “Description of the Notes—Security for the Notes.” In addition, because the holders of the obligations under the revolving credit facility and certain other obligations control the disposition of such collateral, such holders could decide not to proceed against such collateral, regardless of whether there is a default under the documents governing such indebtedness or under the indenture governing the notes. In such event, the only remedy available to the holders of the notes would be to sue for payment on the notes and the related subsidiary guarantees. We cannot assure you that, in the event of a foreclosure, the proceeds from the sale of all of such collateral would be sufficient to satisfy the amounts outstanding under the notes, the term loan facility and the other revolving credit facility obligations. As of December 29, 2007, on a pro forma basis after giving effect to the Captive Acquisition, the offering of the outstanding notes and the intended use of proceeds, the aggregate amount of senior secured indebtedness outstanding and constituting first priority lien obligations would have been approximately $1,869.4 million. In addition, we would have had $368.2 million of availability under our revolving credit facility. Under the indenture governing the notes, we could also incur additional indebtedness secured by first priority liens so long as such first priority liens are securing indebtedness permitted to be incurred by the covenants described under “Description of the Exchange Notes” and certain other conditions are met. Our ability to designate future debt as first priority secured debt and our ability to enable the holders thereof to share in the collateral on a pari passu basis with holders of the notes and our senior secured credit facilities may have the effect of diluting the ratio of the value of such collateral to the aggregate amount of the obligations secured by the collateral.

In addition, the asset sale covenant and the definition of asset sale, each in the indenture governing the notes, have a number of exceptions pursuant to which we would be able to sell collateral without being required to reinvest the proceeds of such sale into assets that will comprise collateral, or collateral of the same type, or to make an offer to the holders of the notes to repurchase the notes. See “Description of the Exchange Notes—Certain Covenants—Asset Sales,” and “Description of the Exchange Notes—Certain Definitions”.

Our senior secured credit facilities have the benefit of security interests in the stock of the Issuer and a guarantee from Berry Group, which the notes will not. The pledges of stock of subsidiaries of the Issuer in favor

 

23


Table of Contents

of lenders under our senior secured credit facilities are subject to fewer limitations than those applicable to pledges of stock of subsidiaries of the Issuer in favor of the holders of the notes. The proceeds of such assets, if any, may not be available to repay the notes.

It may be difficult to realize the value of the collateral securing the notes.

The collateral securing the notes will be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the collateral agent and any other creditors that also have the benefit of first liens on the collateral securing the notes from time to time, whether on or after the date the notes are issued. The initial purchasers have neither analyzed the effect of, nor participated in any negotiations relating to such exceptions, defects, encumbrances, liens and other imperfections. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the notes as well as the ability of the collateral agent to realize or foreclose on such collateral.

The collateral securing the notes does not include all of our or the Guarantors’ assets. In particular, the collateral does not include (i) any property or assets owned by our foreign subsidiaries and two of our domestic subsidiaries, (ii) any license, contract or agreement, if and only for so long as the grant of a security interest under the security documents relating to the notes would result in a breach or default under, or abandonment, invalidation or unenforceability of, such license, contract or agreement, (iii) in certain cases, equity interests or other securities of our subsidiaries, (iv) any vehicle, (v) deposit accounts, securities accounts or cash, (vi) real property held by us or any of our subsidiaries under a lease, and (vii) certain other exceptions described in such security documents. No appraisals of any collateral have been prepared in connection with the offering of the outstanding notes. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. We cannot assure you that the fair market value of the collateral as of the date of this prospectus exceeds the principal amount of the debt secured thereby. The value of the assets pledged as collateral for the notes could be impaired in the future as a result of changing economic conditions, our failure to implement our business strategy, competition and other future trends. In the event that a bankruptcy case is commenced by or against us, if the value of the collateral is less than the amount of principal and accrued and unpaid interest on the notes and all other senior secured obligations, interest may cease to accrue on the notes from and after the date the bankruptcy petition is filed.

The security interest of the collateral agent will be subject to practical problems generally associated with the realization of security interests in collateral. For example, the collateral agent may need to obtain the consent of a third party to obtain or enforce a security interest in a contract. We cannot assure you that the collateral agent will be able to obtain any such consent. We also cannot assure you that the consents of any third parties will be given when required to facilitate a foreclosure on such assets. Accordingly, the collateral agent may not have the ability to foreclose upon those assets and the value of the collateral may significantly decrease.

Furthermore, in the event the bankruptcy court determines that the value of the collateral is not sufficient to repay all amounts due on the notes, the holders of the notes would have “undersecured claims” as to the difference. Federal bankruptcy laws do not permit the payment or accrual of interest, costs, and attorneys’ fees for “undersecured claims” during the debtor’s bankruptcy case.

Your rights in the collateral may be adversely affected by the failure to perfect security interests in collateral.

Applicable law provides that a security interest in certain tangible and intangible assets can only be properly perfected and its priority retained through certain actions undertaken by the secured party. The liens in the collateral securing the notes may not be perfected if the collateral agent is not able to take the actions necessary to perfect any of these liens on or prior to the date of the indenture governing the notes. Applicable law provides that certain property and rights acquired after the grant of a general security interest, such as real property,

 

24


Table of Contents

equipment subject to a certificate and certain proceeds, can only be perfected at the time such property and rights are acquired and identified. We and our Guarantors have limited obligations to perfect the noteholders’ security interest in specified collateral. There can be no assurance that the collateral agent will monitor, or that we will inform the collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired collateral. The collateral agent for the trustee and the holders of the notes has no obligation to monitor the acquisition of additional property or rights that constitute collateral or the perfection of any security interest. Such failure may result in the loss of the security interest in the collateral or the priority of the security interest in favor of the notes against third parties.

The security documentation related to the notes provides that the Issuer and the Guarantors are obligated to deliver mortgages and related documentation to the collateral agent within 120 days after the issue date of the outstanding notes in order to provide the holders of the notes a perfected security interest in certain real property owned by the Issuer and the Guarantors. Such real property is subject to mortgages in favor of the lenders under our senior secured credit facilities and holders of our second priority notes. Until such time as such mortgages and related documentation are delivered, if at all, such real estate and the proceeds thereof will not constitute collateral securing the notes.

The intercreditor arrangements do not require our term loan lenders to share the proceeds of collateral with holders of the notes to the extent the security interest granted on such collateral in favor of the holders of the notes is not perfected.

Bankruptcy laws may limit your ability to realize value from the collateral.

The right of the trustee as collateral agent to repossess and dispose of the collateral upon the occurrence of an event of default under the indenture governing the notes is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy case were to be commenced by or against us before the collateral agent repossessed and disposed of the collateral. Upon the commencement of a case under the bankruptcy code, a secured creditor such as the collateral agent is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, without bankruptcy court approval, which may not be given. Moreover, the bankruptcy code permits the debtor to continue to retain and use collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral as of the commencement of the bankruptcy case and may include cash payments or the granting of additional security if and at such times as the bankruptcy court in its discretion determines that the value of the secured creditor’s interest in the collateral is declining during the pendency of the bankruptcy case. A bankruptcy court may determine that a secured creditor may not require compensation for a diminution in the value of its collateral if the value of the collateral exceeds the debt it secures.

In view of the lack of a precise definition of the term “adequate protection” and the broad discretionary power of a bankruptcy court, it is impossible to predict:

 

   

how long payments under the notes could be delayed following commencement of a bankruptcy case;

 

   

whether or when the collateral agent could repossess or dispose of the collateral;

 

   

the value of the collateral at the time of the bankruptcy petition; or

 

   

whether or to what extent holders of the notes would be compensated for any delay in payment or loss of value of the collateral through the requirement of “adequate protection.”

Any disposition of the collateral during a bankruptcy case would also require permission from the bankruptcy court. Furthermore, in the event a bankruptcy court determines the value of the collateral is not

 

25


Table of Contents

sufficient to repay all amounts due on first priority lien debt, the holders of the notes would hold a secured claim that is equal to the secured claim of the holders of debt under the senior secured credit facilities and other first priority debt permitted by the indentures and the credit documents, subject to the terms of the senior lender intercreditor agreement.

The value of the collateral securing the notes may not be sufficient to secure post-petition interest.

In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us, holders of the notes will only be entitled to post-petition interest under the bankruptcy code to the extent that the value of their security interest in the collateral is greater than their pre-bankruptcy claim. Holders of the notes that have a security interest in collateral with a value equal or less than their pre-bankruptcy claim will not be entitled to post-petition interest under the bankruptcy code. No appraisal of the fair market value of the collateral has been prepared in connection with the offering of the outstanding notes and we therefore cannot assure you that the value of the noteholders’ interest in the collateral equals or exceeds the principal amount of the notes.

In the event of a bankruptcy of us or any of the Guarantors, holders of the notes may be deemed to have an unsecured claim to the extent that our obligations in respect of the notes exceed the fair market value of the collateral securing the notes.

In any bankruptcy proceeding with respect to us or any of the Guarantors, it is possible that the bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair market value of the collateral with respect to the notes on the date of the bankruptcy filing was less than the then-current principal amount of the notes. Upon a finding by the bankruptcy court that the notes are under-collateralized, the claims in the bankruptcy proceeding with respect to the notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the collateral. Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement on the part of the notes to receive post-petition interest and a lack of entitlement on the part of the unsecured portion of the notes to receive other “adequate protection” under federal bankruptcy laws. In addition, if any payments of post-petition interest had been made at the time of such a finding of under-collateralization, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the notes.

Any future pledge of collateral might be avoidable in bankruptcy.

Any future pledge of collateral in favor of the collateral agent for the trustee and holders of the notes, including pursuant to security documents delivered after the date of the indenture governing the notes, might be avoidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, among others, if the pledgor is insolvent at the time of the pledge, the pledge permits the holders of the notes to receive a greater recovery than if the pledge had not been given and a bankruptcy proceeding in respect of the pledgor is commenced within 90 days following the pledge, or, in certain circumstances, a longer period.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.

Any default under the agreements governing our indebtedness, including a default under our senior secured credit facilities, that is not waived by the required lenders, and any remedies sought by the holders of such indebtedness, could prohibit us from making payments of principal, premium, if any, or interest on the notes and could substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including our senior secured credit

 

26


Table of Contents

facilities), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facilities, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. See “Description of Other Indebtedness” and “Description of the Exchange Notes.”

Under certain circumstances, equity interests or other securities securing the notes will be released automatically from holders’ priority lien and will no longer be deemed to be collateral.

The security documents provide that upon the filing of or during the effectiveness of a registration statement, solely with respect to the notes, if Rule 3-16 of Regulation S-X under the Securities Act and the Exchange Act (or any successor regulation) requires (or is replaced with another rule or regulation, or any other law, rule or regulation is adopted which would require) the filing with the SEC (or any other governmental agency) of separate financial statements of any of our subsidiaries because such subsidiary’s equity interests or other securities secure the notes, such equity interests or other securities will automatically be deemed not to be part of the collateral to the extent necessary not to be subject to such requirement. As a result holders could lose all or a portion of their security interest in such equity interests or other securities.

The notes will be structurally subordinated to all liabilities of our non-Guarantor subsidiaries.

The notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries that are not guaranteeing the notes, which include two of our domestic subsidiaries and all of our non-U.S. subsidiaries. These non-Guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary Guarantors have to receive any assets of any of the non-Guarantor subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of notes to realize proceeds from the sale of any of those subsidiaries’ assets, will be effectively subordinated to the claims of those subsidiaries’ creditors, including trade creditors and holders of preferred equity interests of those subsidiaries. Accordingly, in the event of a bankruptcy, liquidation or reorganization of any of our non-Guarantor subsidiaries, these non-guarantor subsidiaries will pay the holders of their debts, holders of preferred equity interests and their trade creditors before they will be able to distribute any of their assets to us.

Federal and state fraudulent transfer laws permit a court, under certain circumstances, to void the notes, the guarantees and security interests, and, if that occurs, you may not receive any payments on the notes.

The issuance of the notes and the guarantees may be subject to review under federal and state fraudulent transfer and conveyance statutes if a bankruptcy, liquidation or reorganization case or a lawsuit, including under circumstances in which bankruptcy is not involved, were commenced at some future date by us, by the Guarantors or on behalf of our unpaid creditors or the unpaid creditors of a Guarantor. While the relevant laws may vary from state to state, the obligations in respect of the notes and the guarantees, and the granting of the security interests in respect thereof, will generally be a fraudulent conveyance if (i) the consideration was paid with the intent of hindering, delaying or defrauding creditors or (ii) we or any of our subsidiary Guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for issuing either the notes or a guarantee, and, in the case of (ii) only, one of the following is also true:

 

   

we or any of our subsidiary Guarantors were or was insolvent or rendered insolvent by reason of issuing the notes or the guarantees;

 

27


Table of Contents
   

payment of the consideration left us or any of our subsidiary Guarantors with an unreasonably small amount of capital to carry on the business; or

 

   

we or any of our subsidiary Guarantors intended to, or believed that we or it would, incur debts beyond our or its ability to pay as they mature.

If a court were to find that the issuance of the notes or a guarantee was a fraudulent conveyance, the court could void the payment obligations under the notes or such guarantee or subordinate the notes or such guarantee to presently existing and future indebtedness of ours or such subsidiary Guarantor, or require the holders of the notes to repay any amounts received with respect to the notes or such guarantee or void or otherwise decline to enforce the security interests and related security agreements in respect thereof. In the event of a finding that a fraudulent conveyance occurred, you may not receive any repayment on the notes. Further, the voidance of the notes could result in an event of default with respect to our other debt and that of our subsidiary Guarantors that could result in acceleration of such debt.

The measures of insolvency for purposes of fraudulent conveyance laws vary depending upon the law of the jurisdiction that is being applied. Generally, an entity would be considered insolvent if, at the time it incurred indebtedness:

 

   

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;

 

   

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts and liabilities, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they become due.

We cannot be certain as to the standards a court would use to determine whether or not we or the subsidiary Guarantors were solvent at the relevant time, or regardless of the standard used, that the issuance of the notes and the guarantees would not be subordinated to our or any subsidiary Guarantor’s other debt.

If the guarantees were legally challenged, any guarantee could also be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the subsidiary Guarantor, the obligations of the applicable subsidiary Guarantor were incurred for less than fair consideration. A court could thus void the obligations under the guarantees, subordinate them to the applicable subsidiary Guarantor’s other debt or take other action detrimental to the holders of the notes.

Because each Guarantor’s liability under its guarantees may be reduced to zero, avoided or released under certain circumstances, you may not receive any payments from some or all of the Guarantors.

You have the benefit of the guarantees of the Guarantors. However, the guarantees by the Guarantors are limited to the maximum amount that the Guarantors are permitted to guarantee under applicable law. As a result, a Guarantor’s liability under its guarantee could be reduced to zero, depending on the amount of other obligations of such Guarantor. Further, under the circumstances discussed more fully above, a court under Federal or state fraudulent conveyance and transfer statutes could void the obligations under a guarantee or further subordinate it to all other obligations of the Guarantor. In addition, you will lose the benefit of a particular guarantee if it is released under certain circumstances described under “Description of the Exchange Notes—Note Guarantees.”

The terms of our senior secured credit facilities and the indentures governing the notes, our second priority notes and our senior subordinated notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

Our senior secured credit agreements and the indentures governing the second priority notes and our senior subordinates notes contain, the indenture governing the notes contains, and any future indebtedness of ours

 

28


Table of Contents

would likely contain, a number of restrictive covenants that will impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

pay dividends and make other restricted payments;

 

   

create or incur certain liens;

 

   

make certain investments;

 

   

engage in sales of assets and subsidiary stock;

 

   

enter into transactions with affiliates;

 

   

transfer all or substantially all of our assets or enter into merger or consolidation transactions; and

 

   

make capital expenditures.

In addition, under certain circumstances our revolving credit facility requires us to maintain a minimum fixed charge coverage ratio. As a result of these covenants, we will be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.

A failure to comply with the covenants contained in our senior secured credit facilities, the indenture governing the notes, or the indentures governing our existing second priority notes or senior subordinated notes could result in an event of default under our senior secured credit facilities, the indenture governing the notes or the indentures governing our existing second priority notes or senior subordinated notes, which, if not cured or waived, could have a material adverse affect on our business, financial condition and results of operations. In the event of any default under our senior secured credit facilities, the indenture governing the notes, or the indentures governing our existing second priority notes or senior subordinated notes, the lenders thereunder:

 

   

will not be required to lend any additional amounts to us;

 

   

could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable;

 

   

may have the ability to require us to apply all of our available cash to repay these borrowings; or

 

   

may prevent us from making debt service payments under our other agreements, including the indenture governing the notes, any of which could result in an event of default under the notes.

If the indebtedness under our senior secured credit facilities or our other indebtedness, including the notes, were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full. See “Description of Other Indebtedness” and “Description of the Exchange Notes.”

U.S. Holders will be required to pay U.S. federal income tax on accrual of original issue discount on the exchange notes.

The exchange notes, like the outstanding notes, are expected to have original issue discount for U.S. federal income tax purposes. A U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences”) of an exchange note will be required to include such original issue discount in gross income as it accrues, in advance of the receipt of cash attributable to that income and regardless of the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences—Original Issue Discount.”

 

29


Table of Contents

We may not be able to repurchase the notes upon a change of control.

Upon a change of control, we will be required to make an offer to repurchase all outstanding notes unless we have previously given notice of our intention to exercise our right to redeem the notes or unless such obligation is suspended. See “Description of the Exchange Notes—Certain Covenants.” We may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control offer or, if then permitted under the indenture governing the notes, to redeem the notes. A failure to make the applicable change of control offer or to pay the applicable change of control purchase price when due would result in a default under each of the indentures. The occurrence of a change of control would also constitute an event of default under our senior secured credit facilities and may constitute an event of default under the terms of our other indebtedness. The terms of the loan and security agreement governing our senior secured credit facilities limit our right to purchase or redeem certain indebtedness. In the event any purchase or redemption is prohibited, we may seek to obtain waivers from the required lenders under our senior secured credit facilities to permit the required repurchase or redemption, but the required lenders have no obligation to grant, and may refuse to grant such a waiver. A change of control is defined in the indenture governing the notes and does not include all transactions that could involve a change of control of our day-to-day operations, including a transaction involving the Management Group as defined in the indenture governing the notes. See “Description of the Exchange Notes—Change of Control.”

There may be no active trading market for the notes, and if one develops, it may not be liquid.

The notes will constitute new issues of securities for which there is no established trading market. We do not intend to list the notes (or any exchange notes that may be issued pursuant to the exchange offer we have agreed to make) on any national securities exchange or to seek the admission of the notes (or any such exchange notes) for quotation through the National Association of Securities Dealers Automated Quotation System. Although the initial purchasers have advised us that they currently intend to make a market in the notes (and the exchange notes, if issued), they are not obligated to do so and may discontinue such market making activity at any time without notice. In addition, market-making activity will be subject to the limits imposed by the Securities Act and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and may be limited during the exchange offer and the pendency of any shelf registration statement. Although we expect that the notes will be eligible for trading in PORTAL, there can be no assurance as to the development or liquidity of any market for the notes (or the exchange notes, if issued), the ability of the holders of the notes (or the exchange notes, if issued) to sell their notes (or the exchange notes, if issued) or the price at which the holders would be able to sell their notes (or the exchange notes, if issued). Future trading prices of the notes and the exchange notes will depend on many factors, including:

 

   

our operating performance and financial condition;

 

   

our ability to complete the offer to exchange the notes for the exchange notes;

 

   

the interest of securities dealers in making a market; and

 

   

the market for similar securities.

Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market for the notes, if any, may be subject to similar disruptions. Any such disruptions may adversely affect the value of your notes.

 

30


Table of Contents

Risks Related to Our Business

Our substantial indebtedness could have important consequences. For example, it could:

 

   

make it more difficult for us to satisfy our obligations under our indebtedness;

 

   

limit our ability to borrow money for our working capital, capital expenditures, debt service requirements or other corporate purposes;

 

   

require us to dedicate a substantial portion of our cash flow to payments on our indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures, product development and other corporate requirements;

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

limit our ability to respond to business opportunities; and

 

   

subject us to financial and other restrictive covenants, which, if we fail to comply with these covenants and our failure is not waived or cured, could result in an event of default under our debt.

Increases in resin prices or a shortage of available resin could harm our financial condition and results of operations.

To produce our products, we use large quantities of plastic resins, which accounted for 38% of our cost of goods sold in fiscal 2007. Plastic resins are subject to price fluctuations, including those arising from supply shortages and changes in the prices of natural gas, crude oil and other petrochemical intermediates from which resins are produced. Over the past several years, we have at times experienced rapidly increasing resin prices. If rapid increases in resin prices continue, our revenue and profitability may be materially and adversely affected, both in the short-term as we attempt to pass through changes in the price of resin to customers under current agreements and in the long-term as we negotiate new agreements or if our customers seek product substitution.

We source plastic resin primarily from major industry suppliers such as Basell, Chevron, Dow, ExxonMobil, Flint Hills Resources, LP, Lyondell, Nova, Sunoco, Equistar, Westlake and Total. We have long-standing relationships with certain of these suppliers but have not entered into a firm supply contract with any of them. We may not be able to arrange for other sources of resin in the event of an industry-wide general shortage of resins used by us, or a shortage or discontinuation of certain types of grades of resin purchased from one or more of our suppliers. Any such shortage may materially negatively impact our competitive position versus companies that are able to better or more cheaply source resin.

We may not be able to compete successfully and our customers may not continue to purchase our products.

We face intense competition in the sale of our products and compete with multiple companies in each of our product lines. We compete on the basis of a number of considerations, including price, service, quality, product characteristics and the ability to supply products to customers in a timely manner. Our products also compete with metal, glass, paper and other packaging materials as well as plastic packaging products made through different manufacturing processes. Some of these competitive products are not subject to the impact of changes in resin prices which may have a significant and negative impact on our competitive position versus substitute products. Our competitors may have financial and other resources that are substantially greater than ours and may be better able than us to withstand price competition. In addition, some of our customers do and could in the future choose to manufacture the products they require for themselves. Each of our product lines faces a different competitive landscape. Competition could result in our products losing market share or our having to reduce our prices, either of which would have a material adverse effect on our business and results of operations and financial condition. In addition, since we do not have long-term arrangements with many of our customers these competitive factors could cause our customers to shift suppliers and/or packaging material quickly.

 

31


Table of Contents

We may pursue and execute acquisitions, which could adversely affect our business.

As part of our growth strategy, we plan to consider the acquisition of other companies, assets and product lines that either complement or expand our existing business and create economic value. We cannot assure you that we will be able to consummate any such transactions or that any future acquisitions will be consummated at acceptable prices and terms. We continually evaluate potential acquisition opportunities in the ordinary course of business, including those that could be material in size and scope. Acquisitions, including the Captive Acquisition, involve a number of special risks, including:

 

   

the diversion of management’s attention to the assimilation of the acquired companies and their employees and on the management of expanding operations;

 

   

the incorporation of acquired products into our product line;

 

   

the increasing demands on our operational systems;

 

   

possible adverse effects on our reported operating results, particularly during the first several reporting periods after such acquisitions are completed; and

 

   

the loss of key employees and the difficulty of presenting a unified corporate image.

We may become responsible for unexpected liabilities that we failed or were unable to discover in the course of performing due diligence in connection with the Captive Acquisition, historical acquisitions and any future acquisitions. We cannot assure you that indemnification rights we have obtained in the Stock Purchase Agreement, or will in the future obtain, will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property acquired. Any of these liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

In addition, we may not be able to successfully integrate Captive or future acquisitions without substantial costs, delays or other problems. The costs of such integration could have a material adverse effect on our operating results and financial condition. Although in the Captive Acquisition we conducted and will continue to conduct in future acquisitions what we believe to be a prudent level of investigation regarding the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses. Until we actually assume operating control of a target’s business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the entities we acquire and their operations.

We may not be successful in protecting our intellectual property rights, including our unpatented proprietary know-how and trade secrets, or in avoiding claims that we infringed on the intellectual property rights of others.

In addition to relying on patent and trademark rights, we rely on unpatented proprietary know-how and trade secrets, and employ various methods, including confidentiality agreements with employees and consultants, to protect our know-how and trade secrets. However, these methods and our patents and trademarks may not afford complete protection and there can be no assurance that others will not independently develop the know-how and trade secrets or develop better production methods than us. Further, we may not be able to deter current and former employees, contractors and other parties from breaching confidentiality agreements and misappropriating proprietary information and it is possible that third parties may copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights. Additionally, we have licensed, and may license in the future, patents, trademarks, trade secrets, and similar proprietary rights to third parties. While we attempt to ensure that our intellectual property and similar proprietary rights are protected when entering into business relationships, third parties may take actions that could materially and adversely affect our rights or the value of our intellectual property, similar proprietary rights

 

32


Table of Contents

or reputation. In the future, we may also rely on litigation to enforce our intellectual property rights and contractual rights, and, if not successful, we may not be able to protect the value of our intellectual property. Any litigation could be protracted and costly and could have a material adverse effect on our business and results of operations regardless of its outcome.

Our success depends in part on our ability to obtain, or license from third parties, patents, trademarks, trade secrets and similar proprietary rights without infringing on the proprietary rights of third parties. Although we believe our intellectual property rights are sufficient to allow us to conduct our business without incurring liability to third parties, our products may infringe on the intellectual property rights of such persons. Furthermore, no assurance can be given that we will not be subject to claims asserting the infringement of the intellectual property rights of third parties seeking damages, the payment of royalties or licensing fees and/or injunctions against the sale of our products. Any such litigation could be protracted and costly and could have a material adverse effect on our business and results of operations.

Current and future environmental and other governmental requirements could adversely affect our financial condition and our ability to conduct our business.

Our operations are subject to federal, state, local and foreign environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes and require clean up of contaminated sites. While we have not been required historically to make significant capital expenditures in order to comply with applicable environmental laws and regulations, we cannot predict with any certainty our future capital expenditure requirements because of continually changing compliance standards and environmental technology. Furthermore, violations or contaminated sites that we do not know about (including contamination caused by prior owners and operators of such sites) (or newly discovered information) could result in additional compliance or remediation costs or other liabilities, which could be material. We have limited insurance coverage for potential environmental liabilities associated with historic and current operations and we do not anticipate increasing such coverage in the future. We may also assume significant environmental liabilities in acquisitions. In addition, federal, state, local and foreign governments could enact laws or regulations concerning environmental matters that increase the cost of producing, or otherwise adversely affect the demand for, plastic products. Legislation that would prohibit, tax or restrict the sale or use of certain types of plastic and other containers, and would require diversion of solid wastes such as packaging materials from disposal in landfills, has been or may be introduced in the U.S. Congress, in state legislatures and other legislative bodies. Although we believe that the laws promulgated to date have not had a material adverse effect on us, there can be no assurance that future legislation or regulation would not have a material adverse effect on us. Furthermore, a decline in consumer preference for plastic products due to environmental considerations could have a negative effect on our business.

The Food and Drug Administration (“FDA”) regulates the material content of direct-contact food and drug packages we manufacture pursuant to the Federal Food, Drug and Cosmetic Act. Furthermore, some of our products are regulated by the Consumer Product Safety Commission (“CPSC”) pursuant to various federal laws, including the Consumer Product Safety Act and the Poison Prevention Packaging Act. Both the FDA and the CPSC can require the manufacturer of defective products to repurchase or recall these products and may also impose fines or penalties on the manufacturer. Similar laws exist in some states, cities and other countries in which we sell products. In addition, laws exist in certain states restricting the sale of packaging with certain levels of heavy metals and imposing fines and penalties for noncompliance. Although we use FDA-approved resins and pigments in our products that directly contact food and drug products and we believe our products are in material compliance with all applicable requirements, we remain subject to the risk that our products could be found not to be in compliance with these and other requirements. A recall of any of our products or any fines and penalties imposed in connection with non-compliance could have a materially adverse effect on us. See “Business—Environmental Matters and Government Regulation.”

 

33


Table of Contents

In the event of a catastrophic loss of one of our key manufacturing facilities, our business would be adversely affected.

While we manufacture our products in a large number of diversified facilities and maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of one of our key manufacturing facilities due to accident, labor issues, weather conditions, natural disaster or otherwise, whether short or long-term, could have a material adverse effect on us.

Our business operations could be significantly disrupted if members of our senior management team were to leave.

Our success depends to a significant degree upon the continued contributions of our senior management team. Our senior management team has extensive manufacturing, finance and engineering experience, and we believe that the depth of our management team is instrumental to our continued success. While we have entered into employment agreements with certain executive officers, the loss of any of our key executive officers in the future could significantly impede our ability to successfully implement our business strategy, financial plans, expansion of services, marketing and other objectives.

Goodwill and other intangibles represent a significant amount of our net worth, and a write-off could result in lower reported net income and a reduction of our net worth.

At December 29, 2007, the net value of our goodwill and other intangibles was $2,235.0 million. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under this accounting standard, we are no longer required or permitted to amortize goodwill reflected on our balance sheet. We are, however, required to evaluate goodwill reflected on our balance sheet when circumstances indicate a potential impairment, or at least annually, under the impairment testing guidelines outlined in the standard. Future changes in the cost of capital, expected cash flows, or other factors may cause our goodwill to be impaired, resulting in a non-cash charge against results of operations to write-off goodwill for the amount of impairment. If a significant write-off is required, the charge would have a material adverse effect on our reported results of operations and net worth in the period of any such write-off.

We are controlled by funds affiliated with Apollo Management and its interests as an equity holder may conflict with yours.

A majority of the common stock of our parent company, Berry Group, on a fully-diluted basis, is held by funds affiliated with Apollo Management. Funds affiliated with Apollo Management control Berry Group and therefore us as a wholly owned subsidiary of Berry Group. As a result, Apollo has the power to elect a majority of the members of our board of directors, appoint new management and approve any action requiring the approval of the holders of Berry Group’s stock, including approving acquisitions or sales of all or substantially all of our assets. The directors elected by Apollo have the ability to control decisions affecting our capital structure, including the issuance of additional capital stock, the implementation of stock repurchase programs and the declaration of dividends. Apollo’s interests may not in all cases be aligned with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, Apollo’s interests, as equity holders, might conflict with your interests. Affiliates of Apollo may also have an interest in pursuing acquisitions, divestitures, financings and other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to you. Additionally, Apollo is in the business of investing in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Furthermore, Apollo has no continuing obligation to provide us with debt or equity financing or to provide us with joint purchasing or similar opportunities with its other portfolio companies. Apollo may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

 

34


Table of Contents

THE EXCHANGE OFFER

Purpose and Effect of the Exchange Offer

We entered into a registration rights agreement with the initial purchasers of the outstanding notes, in which we agreed to file a registration statement relating to an offer to exchange the outstanding notes for the exchange notes. The registration statement of which this prospectus forms a part was filed in compliance with this obligation. We also agreed to use our commercially reasonable efforts to file the registration statement as soon as practicable with the SEC and to use all commercially reasonable efforts to cause it to become effective under the Securities Act. The exchange notes will have terms substantially identical to the outstanding notes except that the exchange notes do not contain terms with respect to transfer restrictions and registration rights and additional interest payable for the failure to consummate the exchange offer. See “Description of the Exchange Notes—Registration Rights; Additional Interest”

Transferability of the Exchange Notes

We are making this exchange offer in reliance on interpretations of the staff of the SEC set forth in several no-action letters. However, we have not sought our own no-action letter. Based upon these interpretations, we believe that you, or any other person receiving exchange notes, may offer for resale, resell or otherwise transfer such exchange notes without complying with the registration and prospectus delivery requirements of the U.S. federal securities laws, if:

 

   

you, or the person or entity receiving such exchange notes, is acquiring such exchange notes in the ordinary course of business;

 

   

neither you nor any such person or entity is participating in or intends to participate in a distribution of the exchange notes within the meaning of the U.S. federal securities laws;

 

   

neither you nor any such person or entity has an arrangement or understanding with any person or entity to participate in any distribution of the exchange notes;

 

   

neither you nor any such person or entity is our “affiliate” as such term is defined under Rule 405 under the Securities Act; and

 

   

you are not acting on behalf of any person or entity who could not truthfully make these statements.

In order to participate in the exchange offer, each holder of exchange notes must represent to us that each of these statements is true:

 

   

such holder is not an affiliate of ours;

 

   

such holder is not engaged in and does not intend to engage in, and has no arrangement or understanding with any person to participate in a distribution of the exchange notes; and

 

   

any exchange notes such holder receives will be acquired in the ordinary course business.

Broker-dealers and each holder of outstanding notes intending to use the exchange offer to participate in a distribution of exchange notes (1) may not rely under the SEC’s policy on the applicable interpretation of the staff of the SEC’s position contained in Exxon Capital Holdings Corp., SEC no-action letter (April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1993) and (2) must comply with the registration and prospectus requirements of the Securities Act in connection with a secondary resale transaction and will deliver a prospectus in connection with any such resale of the exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of the exchange notes received in exchange for the outstanding notes where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that for a period of not less than 180 days after the expiration date for the

 

35


Table of Contents

exchange offer, we will make this prospectus available to broker-dealers for use in connection with any such resale, if requested by the initial purchasers or by a broker-dealer that receives the exchange notes for its own account in the exchange offer in exchange for the outstanding notes, as a result of market-making activities or other trading activities.

Terms of the Exchange Offer; Acceptance of Tendered Notes

Upon the terms and subject to the conditions of the exchange offer, we will accept any and all outstanding notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on June 10, 2008. The date of acceptance for exchange of the outstanding notes, and completion of the exchange offer, is the exchange date, which will be the first business day following the expiration date (unless extended as described in this prospectus). We will issue, on or promptly after the exchange date, an aggregate principal amount of up to $680,600,000 of exchange notes in exchange for a like principal amount of outstanding notes tendered and accepted in the exchange offer. Holders may tender some or all of their outstanding notes pursuant to the exchange offer. However, outstanding notes may be tendered only in integral multiples of $1,000, subject to a minimum denomination of $2,000.

The form and terms of the exchange notes will be identical in all material respects to the form and terms of the outstanding notes except that:

 

   

the exchange notes have been registered under the U.S. federal securities laws and will not bear any legend restricting their transfer;

 

   

the exchange notes bear a different CUSIP number from the outstanding notes;

 

   

the exchange notes will not be subject to transfer restrictions or entitled to registration rights; and

 

   

the holders of the exchange notes will not be entitled to certain rights under the registration rights agreement, including the provisions for an increase in the interest rate on the outstanding notes in some circumstances relating to the timing of the exchange offer.

The exchange notes will evidence the same debt as the outstanding notes. Holders of exchange notes will be entitled to the benefits of the Indenture.

As of the date of this prospectus, $680,600,000 aggregate principal amount of the outstanding notes was outstanding. The exchange notes offered will be limited to $680,600,000 in aggregate principal amount.

In connection with the issuance of the outstanding notes, we have arranged for the outstanding notes to be issued in the form of global notes through the facilities of The Depository Trust Company, or “DTC” acting as depositary. The exchange notes will also be issued in the form of global notes registered in the name of DTC or its nominee and each beneficial owner’s interest in it will be transferable in book-entry form through DTC.

Holders of outstanding notes do not have any appraisal or dissenters’ rights in connection with the exchange offer. Outstanding notes which are not tendered for exchange or are tendered but not accepted in connection with the exchange offer will remain outstanding and be entitled to the benefits of the Indenture under which they were issued, including accrual of interest, but, subject to a limited exception, will not be entitled to any registration rights under the applicable registration rights agreement. See “Effect of Not Tendering.”

We will be deemed to have accepted validly tendered outstanding notes when and if we have given oral or written notice to the exchange agent of our acceptance. The exchange agent will act as agent for the tendering holders for the purpose of receiving the exchange notes from us. If any tendered outstanding notes are not accepted for exchange because of an invalid tender, the occurrence of other events described in this prospectus or otherwise, we will return the certificates for any unaccepted outstanding notes, at our expense, to the tendering holder promptly after expiration of the exchange offer.

 

36


Table of Contents

Holders who tender outstanding notes in the exchange offer will not be required to pay brokerage commissions or fees with respect to the exchange of outstanding notes. Tendering holders will also not be required to pay transfer taxes in the exchange offer. We will pay all charges and expenses in connection with the exchange offer as described under the subheading “Solicitation of Tenders; Fees and Expenses.” However, we will not pay any taxes incurred in connection with a holder’s request to have exchange notes or non-exchanged notes issued in the name of a person other than the registered holder. See “Transfer Taxes” in this section below.

Expiration Date; Extensions; Amendment

The exchange offer will expire at 5:00 p.m., New York City time, on June 10, 2008, which we refer to as the expiration date, unless we extend the exchange offer. To extend the exchange offer, we will notify the exchange agent and each registered holder of outstanding notes of any extension before 9:00 a.m. New York City time, on the next business day after the previously scheduled expiration date. We reserve the right to extend the exchange offer, delay accepting any tendered outstanding notes or, if any of the conditions described below under the heading “Conditions to the Exchange Offer” have not been satisfied, to terminate the exchange offer. Subject to the terms of the registration rights agreement, we also reserve the right to amend the terms of the exchange offer in any manner. We will give oral or written notice of such delay, extension, termination or amendment to the exchange agent.

If we amend the exchange offer in a manner that we consider material, we will disclose such amendment by means of a prospectus supplement, and we will extend the exchange offer for a period of five to ten business days.

If we determine to make a public announcement of any delay, extension, amendment or termination of the exchange offer, we will do so by making a timely release through an appropriate news agency.

If we delay accepting any outstanding notes or terminate the exchange offer, we promptly will pay the consideration offered, or return any outstanding notes deposited, pursuant to the exchange offer as required by Rule 14e-1(c) under the Exchange Act.

Procedures for Tendering Outstanding Notes

We understand that the exchange agent has confirmed with DTC that any financial institution that is a participant in DTC’s system may use its Automated Tender Offer Program, or “ATOP,” to tender outstanding notes. We further understand that the exchange agent will request, within two business days after the date the exchange offer commences, that DTC establish an account relating to the outstanding notes for the purpose of facilitating the exchange offer, and any participant may make book-entry delivery of outstanding notes by causing DTC to transfer the outstanding notes into the exchange agent’s account in accordance with ATOP procedures for transfer. Although delivery of the outstanding notes may be effected through book-entry transfer into the exchange agent’s account at DTC, unless an agent’s message is received by the exchange agent in compliance with ATOP procedures, an appropriate letter of transmittal properly completed and duly executed with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the exchange agent at its address set forth below on or prior to the expiration date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under the procedures.

The term “agent’s message” means a message, transmitted by DTC and received by the exchange agent and forming part of a book-entry confirmation, stating that DTC has received an express acknowledgment from a participant tendering outstanding notes that are the subject of the book-entry confirmation and that the participant has received and agrees to be bound by the terms of the letter of transmittal and that we may enforce such agreement against the participant. An agent’s message must, in any case, be transmitted to and received or confirmed by the exchange agent, at its address set forth under the caption “Exchange Agent” below, prior to

 

37


Table of Contents

5:00 p.m., New York City time, on the expiration date. Delivery of documents to DTC in accordance with its procedures does not constitute delivery to the exchange agent.

Unless the tender is being made in book-entry form, to tender in the exchange offer, you must:

 

   

complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal;

 

   

have the signatures guaranteed if required by the letter of transmittal; and

 

   

mail or otherwise deliver the letter of transmittal or such facsimile, together with the outstanding notes and any other required documents, to the exchange agent prior to 5:00 p.m., New York City time, on the expiration date.

By executing the letter of transmittal, you will make to us the representations set forth in the second paragraph under the heading “Transferability of the Exchange Notes.”

All tenders not withdrawn before the expiration date and the acceptance of the tender by us will constitute agreement between you and us under the terms and subject to the conditions in this prospectus and in the letter of transmittal including an agreement to deliver good and marketable title to all tendered notes prior to the expiration date free and clear of all liens, charges, claims, encumbrances, adverse claims and rights and restrictions of any kind.

The method of delivery of outstanding notes and the letter of transmittal and all other required documents to the exchange agent is at the election and sole risk of the holder. Instead of delivery by mail, you should use an overnight or hand delivery service. In all cases, you should allow for sufficient time to ensure delivery to the exchange agent before the expiration of the exchange offer. You may request your broker, dealer, commercial bank, trust company or nominee to effect these transactions for you. You should not send any note, letter of transmittal or other required document to us.

Any beneficial owner whose outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on behalf of the beneficial owner. If the beneficial owner wishes to tender on that owner’s own behalf, the beneficial owner must, prior to completing and executing the letter of transmittal and delivering such beneficial owner’s outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in such beneficial owner’s name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time.

The exchange of outstanding notes will be made only after timely receipt by the exchange agent of certificates for outstanding notes, a letter of transmittal and all other required documents, or timely completion of a book-entry transfer. If any tendered notes are not accepted for any reason or if outstanding notes are submitted for a greater principal amount than the holder desires to exchange, the exchange agent will return such unaccepted or non-exchanged notes to the tendering holder promptly after the expiration or termination of the exchange offer. In the case of outstanding notes tendered by book-entry transfer, the exchange agent will credit the non-exchanged notes to an account maintained with The Depository Trust Company.

Guarantee of Signatures

Signatures on letters of transmittal or notices of withdrawal must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or another “eligible Guarantor institution” within the meaning of Rule 17Ad-15 under the Exchange Act, unless the original notes tendered pursuant thereto are tendered:

 

   

by a registered holder who has not completed the box entitled “Special Issuance Instructions” or “Special Delivery Instructions” on the letter of transmittal; and

 

   

for the account of an eligible Guarantor institution.

 

38


Table of Contents

In the event that a signature on a letter of transmittal or a notice of withdrawal is required to be guaranteed, such guarantee must be made by:

 

   

a member firm of a registered national securities exchange of the Financial Industry Regulatory Authority;

 

   

a commercial bank or trust company having an office or correspondent in the United States; and

 

   

another eligible Guarantor institution.

Signature on the Letter of Transmittal; Bond Powers and Endorsements

If the letter of transmittal is signed by a person other than the registered holder of the outstanding notes, the registered holder must endorse the outstanding notes or provide a properly completed bond power. Any such endorsement or bond power must be signed by the registered holder as that registered holder’s name appears on the outstanding notes. Signatures on such outstanding notes and bond powers must be guaranteed by an “eligible Guarantor institution.”

If you sign the letter of transmittal or any outstanding notes or bond power as a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, fiduciary or in any other representative capacity, you must so indicate when signing. You must submit satisfactory evidence to the exchange agent of your authority to act in such capacity.

Determination of Valid Tenders; Our Rights under the Exchange Offer

All questions as to the validity, form, eligibility, time of receipt, acceptance and withdrawal of tendered notes will be determined by us in our sole discretion, which determination will be final and binding on all parties. We expressly reserve the absolute right, in our sole discretion, to reject any or all outstanding notes not properly tendered or any outstanding notes the acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the absolute right in our sole discretion to waive or amend any conditions of the exchange offer or to waive any defects or irregularities of tender for any particular note, whether or not similar defects or irregularities are waived in the case of other notes. Our interpretation of the terms and conditions of the exchange offer will be final and binding on all parties. No alternative, conditional or contingent tenders will be accepted. Unless waived, any defects or irregularities in connection with tenders of outstanding notes must be cured by the tendering holder within such time as we determine.

Although we intend to request the exchange agent to notify holders of defects or irregularities in tenders of outstanding notes, neither we, the exchange agent nor any other person will have any duty to give notification of defects or irregularities in such tenders or will incur any liability to holders for failure to give such notification. Holders will be deemed to have tendered outstanding notes only when such defects or irregularities have been cured or waived. Any outstanding notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent to the tendering holders, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date.

 

39


Table of Contents

Guaranteed Delivery Procedures

If you desire to tender outstanding notes pursuant to the exchange offer and (1) certificates representing such outstanding notes are not immediately available, (2) time will not permit your letter of transmittal, certificates representing such outstanding notes and all other required documents to reach the exchange agent on or prior to the expiration date, or (3) the procedures for book-entry transfer (including delivery of an agent’s message) cannot be completed on or prior to the expiration date, you may nevertheless tender such outstanding notes with the effect that such tender will be deemed to have been received on or prior to the expiration date if all the following conditions are satisfied:

 

   

you must effect your tender through an “eligible Guarantor institution,” which is defined above under the heading “Guarantee of Signatures.”

 

   

a properly completed and duly executed notice of guaranteed delivery, substantially in the form provided by us herewith, or an agent’s message with respect to guaranteed delivery that is accepted by us, is received by the exchange agent on or prior to the expiration date as provided below; and

 

   

the certificates for the tendered notes, in proper form for transfer (or a book entry confirmation of the transfer of such notes into the exchange agent account at DTC as described above), together with a letter of transmittal (or a manually signed facsimile of the letter of transmittal) properly completed and duly executed, with any signature guarantees and any other documents required by the letter of transmittal or a properly transmitted agent’s message, are received by the exchange agent within three New York Stock Exchange, Inc. trading days after the date of execution of the notice of guaranteed delivery.

The notice of guaranteed delivery may be sent by hand delivery, facsimile transmission or mail to the exchange agent and must include a guarantee by an eligible Guarantor institution in the form set forth in the notice of guaranteed delivery.

Withdrawal Rights

Except as otherwise provided in this prospectus, you may withdraw tendered notes at any time before 5:00 p.m., New York City time, on the expiration date. For a withdrawal of tendered notes to be effective, a written or facsimile transmission notice of withdrawal must be received by the exchange agent on or prior to the expiration of the exchange offer at the address set forth herein. Any notice of withdrawal must:

 

   

specify the name of the person having tendered the outstanding notes to be withdrawn;

 

   

identify the outstanding notes to be withdrawn (including the certificate number(s) of the outstanding notes physically delivered) and principal amount of such notes, or, in the case of notes transferred by book-entry transfer, the name and number of the account at DTC;

 

   

be signed by the holder in the same manner as the original signature on the letter of transmittal by which such outstanding notes were tendered, with any required signature guarantees, or be accompanied by documents of transfer sufficient to have the trustee with respect to the outstanding notes register the transfer of such outstanding notes into the name of the person withdrawing the tender; and

 

   

specify the name in which any such notes are to be registered, if different from that of the registered holder.

If the outstanding notes have been tendered under the book entry delivery procedure described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn outstanding notes and otherwise comply with the procedures of DTC’s book entry transfer facility.

We will determine all questions as to the validity, form and eligibility (including time of receipt) of such outstanding notes in our sole discretion, and our determination will be final and binding on all parties. Any permitted withdrawal of notes may not be rescinded. Any notes properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of the exchange offer. The exchange agent will return any withdrawn

 

40


Table of Contents

notes without cost to the holder promptly after withdrawal of the notes. Holders may retender properly withdrawn notes at any time before the expiration of the exchange offer by following one of the procedures described above under the heading “Procedures for Tendering Outstanding Notes.”

Conditions to the Exchange Offer

Notwithstanding any other term of the exchange offer, we will not be required to accept for exchange, or issue any exchange notes for, any outstanding notes, and may terminate or amend the exchange offer before the acceptance of the outstanding notes, if:

 

   

we determine that the exchange offer violates any law, statute, rule, regulation or interpretation by the staff of the SEC or any order of any governmental agency or court of competent jurisdiction; or

 

   

any action or proceeding is instituted or threatened in any court or by or before any governmental agency relating to the exchange offer which, in our judgment, could reasonably be expected to impair our ability to proceed with the exchange offer.

The conditions listed above are for our sole benefit and may be asserted by us regardless of the circumstances giving rise to any of these conditions. We may waive these conditions in our reasonable discretion in whole or in part at any time and from time to time prior to the expiration date. The failure by us at any time to exercise any of the above rights shall not be considered a waiver of such right, and such right shall be considered an ongoing right which may be asserted at any time and from time to time.

In addition, we will not accept for exchange any outstanding notes tendered, and no exchange notes will be issued in exchange for those outstanding notes, if at any time any stop order is threatened or issued with respect to the registration statement for the exchange offer and the exchange notes or the qualification of the Indenture under the Trust Indenture Act of 1939. In any such event, we must use commercially reasonable efforts to obtain the withdrawal or lifting of any stop order at the earliest possible moment.

Effect of Not Tendering

To the extent outstanding notes are tendered and accepted in the exchange offer, the principal amount of outstanding notes will be reduced by the amount so tendered and a holder’s ability to sell untendered outstanding notes could be adversely affected. In addition, after the completion of the exchange offer, the outstanding notes will remain subject to restrictions on transfer. Because the outstanding notes have not been registered under the U.S. federal securities laws, they bear a legend restricting their transfer absent registration or the availability of a specific exemption from registration. The holders of outstanding notes not tendered will have no further registration rights, except that, under limited circumstances, we may be required to file a “shelf” registration statement for a continuous offer of outstanding notes.

Accordingly, the outstanding notes not tendered may be resold only:

 

   

to us or our subsidiaries;

 

   

pursuant to a registration statement which has been declared effective under the Securities Act;

 

   

for so long as the outstanding notes are eligible for resale pursuant to Rule 144A under the Securities Act to a person the seller reasonably believes is a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the transfer is being made in reliance on Rule 144A; or

 

   

pursuant to any other available exemption from the registration requirements of the Securities Act (in which case we and the trustee shall have the right to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to us and the trustee), subject in each of the foregoing cases to any requirements of law that the disposition of the seller’s property or the property of such investor account or accounts be at all times within its or their control and in compliance with any applicable state securities laws.

 

41


Table of Contents

Upon completion of the exchange offer, due to the restrictions on transfer of the outstanding notes and the absence of such restrictions applicable to the exchange notes, it is likely that the market, if any, for outstanding notes will be relatively less liquid than the market for exchange notes. Consequently, holders of outstanding notes who do not participate in the exchange offer could experience significant diminution in the value of their outstanding notes, compared to the value of the exchange notes.

Regulatory Approvals

Other than the U.S. federal securities laws, there are no U.S. federal or state regulatory requirements that we must comply with and there are no approvals that we must obtain in connection with the exchange offer.

Solicitation of Tenders; Fees and Expenses

We will bear the expenses of soliciting tenders and are mailing the principal solicitation. However, our officers and regular employees and those of our affiliates may make additional solicitation by telegraph, telecopy, telephone or in person.

We have not retained any dealer-manager in connection with the exchange offer. We will not make any payments to brokers, dealers, or others soliciting acceptances of the exchange offer. However, we may pay the exchange agent reasonable and customary fees for its services and may reimburse it for its reasonable out-of-pocket expenses.

We will pay the cash expenses incurred in connection with the exchange offer. These expenses include fees and expenses of the exchange agent and trustee, accounting and legal fees and printing costs, among others.

Fees and Expenses

We will not make any payment to brokers, dealers or others soliciting acceptances of the exchange offer. We will pay certain other expenses to be incurred in connection with the exchange offer, including the fees and expenses of the exchange agent and certain accounting and legal fees.

Holders who tender their outstanding notes for exchange will not be obligated to pay transfer taxes. However, if:

 

   

exchange notes are to be delivered to, or issued in the name of, any person other than the registered holder of the outstanding notes tendered;

 

   

tendered outstanding notes are registered in the name of any person other than the person signing the letter of transmittal; or

 

   

a transfer tax is imposed for any reason other than the exchange of outstanding notes in connection with the exchange offer,

then the amount of any such transfer taxes (whether imposed on the registered holder or any other person) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption from them is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to the tendering holder.

Transfer Taxes

We will pay all transfer taxes, if any, required to be paid by us in connection with the exchange of the outstanding notes for the exchange notes. However, holders who instruct us to register exchange notes in the name of, or request that outstanding notes not tendered or not accepted for exchange be returned to, a person other than the registered holder, will be responsible for the payment of any transfer tax arising from such transfer.

 

42


Table of Contents

Accounting Treatment

The exchange notes will be recorded at the same carrying value as the outstanding notes as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes upon the completion of the exchange offer. The expenses of the exchange offer that we pay will be charged to expense in accordance with generally accepted accounting principles.

The Exchange Agent

Wells Fargo Bank, National Association is serving as the exchange agent for the exchange offer. ALL EXECUTED LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE EXCHANGE AGENT AT THE ADDRESS LISTED BELOW. Questions, requests for assistance and requests for additional copies of this prospectus or the letter of transmittal should be directed to the exchange agent at the address or telephone number listed below.

 

By Registered or Certified Mail:   

Wells Fargo Bank, N.A.

Corporate Trust Operations

  

MAC N9303-121

P.O. Box 1517

Minneapolis, MN 55480

By Overnight Courier or Regular Mail:   

Wells Fargo Bank, N.A.

Corporate Trust Operations

  

MAC N9303-121

6th & Marquette Avenue

Minneapolis, MN 55479

By Hand Delivery:   

Wells Fargo Bank, N.A.

Corporate Trust Services

  

608 2nd Avenue South

Northstar East Building—12th Floor

Minneapolis, MN 55402

Confirm by Telephone:    (800) 344-5128

Originals of all documents sent by facsimile should be promptly sent to the exchange agent by registered or certified mail, by hand, or by overnight delivery service.

DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.

 

43


Table of Contents

USE OF PROCEEDS

We will not receive any proceeds from the issuance of exchange notes in the exchange offer. The net proceeds from the issuance of the outstanding notes was used to repay in full the $520.0 million Bridge Loan Credit Facility, to repay amounts outstanding under its revolving credit facility (estimated at $131 million as of March 29, 2008) and to pay related fees and expenses, as well as fees and expenses related to the offering of the outstanding notes, with any remaining proceeds to be used by the Issuer for general corporate purposes. In consideration for issuing the exchange notes, we will receive in exchange the outstanding notes of like principal amount. The outstanding notes surrendered in exchange for exchange notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the exchange notes will not result in any increase in our indebtedness. We have agreed to bear the expenses of the exchange offer. No underwriter is being used in connection with the exchange offer.

 

44


Table of Contents

CAPITALIZATION

The following table sets forth our cash and capitalization as of December 29, 2007 both on an actual basis and on a pro forma basis to give effect to the offering of the outstanding notes and the application of the proceeds therefrom. You should read this table in conjunction with the consolidated financial statements and the related notes included elsewhere in this prospectus and “The Captive Acquisition,” “Selected Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of
December 29, 2007
 
     Unaudited  
     Actual    Pro
Forma
 
     ($ in millions)  

Cash

   $ 21.8    $ 82.2 (1)
               

Term loan

   $ 1,194.0    $ 1,194.0  

Revolving line of credit

     71.0      —    

Bridge Loan Credit Facility (2)

     —        —    

Notes (3)

     —        661.4  

Second Priority Fixed Rate Senior Secured Notes

     525.0      525.0  

Second Priority Floating Rate Senior Secured Notes

     225.0      225.0  

11% Senior Subordinated Notes

     431.4      431.4  

10 1/4% Senior Subordinated Notes

     265.0      265.0  

Capital leases and other

     14.0      14.0  
               

Total debt, including current portion

     2,725.4      3,315.8  

Total stockholders’ equity

     420.3      420.3  
               

Total capitalization

   $ 3,145.7    $ 3,736.1  
               

 

(1)   Assumes repayment of $71.0 million of outstanding loans under our revolving credit facility. As of March 29, 2008, we had approximately $131 million in loans outstanding under this facility. Therefore, the actual cash balance at the closing of the offering of the outstanding notes was be significantly lower.
(2)   On February 5, 2008, we entered into the Bridge Loan Credit Facility. The Bridge Loan Credit Facility was repaid in full with the net proceeds of the offering of the outstanding notes. See “Use of Proceeds.”
(3)   $680.6 million of outstanding notes were sold to the initial purchasers for $661.4 million.

 

45


Table of Contents

SELECTED HISTORICAL FINANCIAL DATA

The following table presents selected historical financial data for Berry Plastics and Tyco Plastics & Adhesives and should be read in conjunction with, and is qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the respective financial statements and notes to the financial statements included elsewhere in this prospectus.

The selected historical financial data of Tyco Plastics & Adhesives have been derived from the audited financial statements that were prepared in accordance with GAAP. These financial statements have been prepared on a going-concern basis, as if certain assets of Tyco Plastics & Adhesives, which was acquired by Old Covalence on February 16, 2006, had existed as an entity separate from Tyco International Group S.A., which we refer to as Tyco Group, during the periods presented. Tyco Group charged the predecessor operations a portion of its corporate support costs, including engineering, legal, treasury, planning, environmental, tax, auditing, information technology and other corporate services, based on usage, actual costs or other allocation methods considered reasonable by Tyco Group management. Accordingly, expenses included in the financial statements may not be indicative of the level of expenses which might have been incurred had the predecessor been operating as a separate stand-alone company.

 

    Berry Plastics     TP&A  
    Thirteen weeks ended     Year
ended
September 29,
2007
    Period from
February 17,
2006 to
September 30,
2006
    Period from
October 1,
2005 to
February 16,
2006
  Year
ended
September 29,
2005
  Year
ended
September 29,
2004
    Year
ended
September 29,
2003
 
    December 29,
2007
    December 30,
2006
             
                      ($ in millions)                      

Statement of Operations Data:

                 

Net revenue(1)

  $ 762.7     $ 703.6     $ 3,055.0     $ 1,138.8     $ 666.9   $ 1,725.2   $ 1,658.8     $ 1,597.8  

Cost of sales

    653.9       617.2       2,583.4       1,022.9       579.0     1,477.4     1,366.2       1,344.1  
                                                           

Gross profit

    108.8       86.4       471.6       115.9       87.9     247.8     292.6       253.7  

Charges and allocations from Tyco and affiliates

    —         —         —         —         10.4     56.4     65.0       95.3  

Selling, general and administrative expenses

    81.8       74.5       321.5       107.6       50.0     124.6     130.2       108.3  

Restructuring and impairment charges (credits), net

    3.5       0.3       39.1       —         0.6     3.3     57.9       (0.8 )

Other operating expenses

    13.0       4.1       43.6       0.6       —       —       —         —    
                                                           

Operating income

    10.5       7.5       67.4       7.7       26.9     63.5     39.5       50.9  

Other expense

    —         0.1       37.3       12.3       —       —       —         —    

Interest expense, net

    61.5       59.9       237.6       46.5       2.1     4.5     6.3       6.5  

Interest expense (income), net—Tyco and affiliates

    —         —         —         —         5.5     11.2     (1.7 )     3.6  
                                                           

Income (loss) before income taxes

    (51.0 )     (52.5 )     (207.5 )     (51.1 )     19.3     47.8     34.9       40.8  

Income tax expense (benefit)

    (19.7 )     (19.5 )     (88.6 )     (18.1 )     1.6     3.8     2.4       2.9  

Minority interest

    —         (2.2 )     (2.7 )     (1.8 )     —       —       0.2       0.2  

Cumulative effect of accounting change

    —         —         —         —         —       —       —         17.8  
                                                           

Net income (loss)

  $ (31.3 )   $ (30.8 )   $ (116.2 )   $ (31.2 )   $ 17.7   $ 44.0   $ 32.3     $ 19.9  
                                                           

 

46


Table of Contents
    Berry Plastics     TP&A  
    Thirteen weeks ended     Year
ended
September 29,
2007
    Period from
February 17,
2006 to
September 30,
2006
    Period from
October 1,
2005 to
February 16,
2006
    Year
ended
September 29,
2005
    Year
ended
September 29,
2004
    Year
ended
September 29,
2003
 
    December 29,
2007
    December 30,
2006
             
                      ($ in millions)                          

Balance Sheet Data (at period end):

                 

Cash and cash equivalents

  $ 21.8     $ 73.6     $ 14.6     $ 83.1     $ 4.9     $ 2.7     $ 3.7     $ 7.9  

Property, plant and equipment, net

    766.0       797.1       785.0       816.6       275.6       283.1       291.1       342.8  

Total assets

    3,902.3       3,658.5       3,869.4       3,821.4       1,279.5       1,206.7       1,215.0       1,283.3  

Total long-term obligations (at end of period)

    2,708.3       2,589.7       2,693.3       2,612.3       —         —         79.5       136.5  

Shareholders’ equity

    420.3       379.7       450.0       409.6       877.7       855.1       822.8       877.0  
 

Cash Flow and other Financial Data:

                 

Net cash provided by (used in) operating activities

  $ 20.7     $ 59.8     $ 137.3     $ 96.7     $ (119.2 )   $ 117.3     $ 89.2     $ 123.8  

Net cash used in investing activities

    (30.1 )     (44.4 )     (164.3 )     (3,252.0 )     (9.1 )     (29.2 )     (15.5 )     (13.2 )

Net cash provided by (used in) financing activities

    14.6       (24.7 )     (40.4 )     3,212.5       130.6       (89.2 )     (77.7 )     (106.8 )

Capital expenditures

    38.6       14.2       99.3       34.8       12.2       32.1       16.5       14.6  

 

(1)   Net revenue includes related party revenue of $11.6 million for the period from October 1, 2005 to February 16, 2006 and $23.4 million, $26.0 million and $25.8 million for the years ended September 30, 2005, 2004 and 2003, respectively. Additionally, revenue is presented net of certain rebates paid to customers.

 

47


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section presents selected historical financial data for Berry Plastics, Old Covalence, and the assets and liabilities of Tyco International Ltd., which we refer to as Tyco, that were acquired on February 16, 2006, by Covalence Specialty Materials Holding Corp, which we refer to as Old Covalence Holding, pursuant to the Stock and Asset Purchase Agreement dated December 20, 2005 among an affiliate of Apollo Management V, L.P., Tyco and Tyco Group S.à r.l., which we refer to as Tyco Plastics & Adhesives or TP&A, and should be read in conjunction with, and is qualified by reference to, the respective financial statements and notes to the financial statements included elsewhere in this prospectus.

The selected historical financial data of Tyco Plastics & Adhesives have been derived from the audited financial statements that were prepared in accordance with GAAP. These financial statements have been prepared on a going-concern basis, as if certain assets of Tyco Plastics & Adhesives, which was acquired by Old Covalence on February 16, 2006, had existed as an entity separate from Tyco during the periods presented. Tyco charged the predecessor operations a portion of its corporate support costs, including engineering, legal, treasury, planning, environmental, tax, auditing, information technology and other corporate services, based on usage, actual costs or other allocation methods considered reasonable by Tyco management. Accordingly, expenses included in the financial statements may not be indicative of the level of expenses which might have been incurred had the predecessor been operating as a separate stand-alone company.

Formation of Berry Plastics

On April 3, 2007, Berry Plastics Group, Inc. (“Old Berry Group”) completed a stock-for-stock merger (the “Berry Covalence Merger”) with Covalence Specialty Materials Holding Corp. (“Old Covalence Holding”). The resulting company retained the name Berry Plastics Group, Inc. (“Berry Group”). Immediately following the Berry Covalence Merger, Berry Plastics Holding Corporation (“Old Berry Holding”) and Covalence Specialty Materials Corp. (“Old Covalence”) were combined as a direct subsidiary of Berry Group. The resulting company retained the name Berry Plastics Holding Corporation. The combination was accounted for as a merger of entities under common control.

On December 28, 2007, Berry Plastics Holding Corporation was combined together with Berry Plastics Corporation in a merger in which Berry Plastics Holding Corporation survived and was renamed Berry Plastics Corporation (“Berry Plastics”).

Apollo V Acquisition of Old Covalence Holding

On February 16, 2006, Old Covalence Holding was formed through the acquisition of substantially all of the assets and liabilities of Tyco Plastics & Adhesives under a Stock and Asset Purchase Agreement dated December 20, 2005 among an affiliate of Apollo Management V, L.P. (“Apollo V”), Tyco International Group S.A. and Tyco Group S.à r.l.

Apollo VI Acquisition of Old Berry Group

On September 20, 2006, BPC Acquisition Corp. merged with and into BPC Holding Corporation pursuant to an agreement and plan of merger (the “Apollo Berry Merger”), dated June 28, 2006, with BPC Holding Corporation continuing as the surviving corporation. Following the consummation of the Apollo Berry Merger, BPC Holding Corporation changed its name to Berry Plastics Holding Corporation. Pursuant to the Apollo Berry Merger, Old Berry Holding was a wholly owned subsidiary of Old Berry Group, the principal stockholders of which were Apollo Investment Fund VI, L.P., AP Berry Holdings, LLC, Graham Berry Holdings and management. Apollo Investment Fund VI, L.P. (“Apollo VI”) and AP Berry Holdings, LLC are affiliates of

 

48


Table of Contents

Apollo Management, L.P. (“Apollo”), which is a private investment firm. Graham Berry Holdings, L.P. is an affiliate of Graham Partners, Inc. (“Graham”), a private equity firm.

Overview

You should read the following discussion in conjunction with the consolidated financial statements of Berry Plastics 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 the “Risk Factors” section. Our actual results may differ materially from those contained in any forward-looking statements.

We believe we are one of the world’s leading manufacturers and marketers of value-added plastic packaging products. We manufacture a broad range of innovative, high quality packaging solutions using our collection of over 1,700 proprietary molds and an extensive set of internally developed processes and technologies. Our principal products include containers, drink cups, bottles, closures and overcaps, tubes, prescription vials, trash bags, stretch films, plastic sheeting and tapes which we sell to more than 13,000 customers in attractive and stable end markets, including food and beverage, healthcare, personal care, quick service and family dining restaurants, custom and retail, agricultural, horticultural, institutional, industrial, construction, aerospace, and automotive. Our customers comprised of a favorable balance of leading, national, blue-chip customers as well as a collection of smaller local specialty businesses. Our top 10 customers represented approximately 24% of our fiscal 2007 net sales with no customer accounting for more than 6% of our fiscal 2007 net sales. The average length of our relationship with these customers is more than 21 years. We believe that we are one of the largest global purchasers of polyethylene resin, our principal raw material, buying approximately 1.2 billion pounds in 2007. Additionally, we operate 70 strategically located manufacturing facilities and have extensive distribution capabilities. We believe that our proprietary tools and technologies, low-cost manufacturing capabilities and significant operating and purchasing scale provide us with a competitive advantage in the marketplace.

We believe that our unique combination of leading market positions, proven management team, product and customer diversity and manufacturing and design innovation provides access to a variety of growth opportunities and has allowed us to achieve consistent organic volume growth in excess of market growth rates. Our strong profit margins and efficient deployment of capital have allowed us to consistently generate strong cash flow and high returns on invested capital.

Acquisitions, Disposition and Facility Rationalizations

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. 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.

Acquisition of MAC Closures, Inc.

On December 19, 2007, the Company acquired 100% of the outstanding common stock of MAC Closures, Inc. (“MAC”), a plastic cap and closure manufacturer with operations located in Waterloo, Quebec and Oakville, Ontario. MAC is a fully integrated manufacturer of injection molded plastic caps and closures primarily serving the pharmaceutical, nutraceutical, personal care, amenity, and household and industrial chemical industries with calendar year 2007 sales of $37.1 million. MAC manufactures stock and custom products for U.S. and Canadian based private and national brand owners, distributors and other packaging suppliers. The purchase price was funded utilizing cash on hand from the sale-leaseback transaction discussed elsewhere in this prospectus. The

 

49


Table of Contents

MAC acquisition has been accounted for under the purchase method of accounting, and accordingly, the purchase price has been allocated to the identifiable assets and liabilities based on estimated fair values at the acquisition date. The allocation is preliminary and subject to change.

Acquisition of Captive Holdings, Inc.

On February 5, 2008, Berry Plastics completed its purchase from Captive Holdings, LLC of 100% of the outstanding shares of Captive Holdings, Inc., the parent company of Captive. Pursuant to the definitive agreement concerning the Captive Acquisition, the aggregate purchase price for the shares was approximately $500 million, subject to certain post-closing upward or downward adjustments. Captive manufactures blow-molded bottles and injection-molded closures for the food, healthcare, spirits and personal care end markets. To finance the purchase of the shares, Berry Plastics used the proceeds of the bridge loans made pursuant to a $520.0 million bridge facility as described in more detail on Form 8-K filed on February 11, 2008.

Sale of UK Operations

On April 10, 2007, the Company sold its wholly owned subsidiary, Berry Plastics UK Ltd., to Plasticum Group N.V. for approximately $10.0 million. At the time of the sale, the annual net sales of this business were less than $9.0 million.

Rollpak Acquisition

On April 11, 2007, Berry Plastics completed its acquisition of 100% of the outstanding common stock of Rollpak Acquisition Corporation, which is the sole stockholder of Rollpak Corporation. Rollpak Corporation is a flexible film manufacturer located in Goshen, Indiana. The purchase price was funded utilizing cash on hand.

Plant Rationalizations

On February 6, 2007, Old Covalence announced a restructuring program in its Coatings division. The planned actions relate to the exiting of two product lines, the closure of a manufacturing facility, the termination of certain employees and the relocation of certain operations. The business that is in the process of being exited accounts for less than $25.0 million of annual net sales. During fiscal 2007, the Company recorded charges of $6.1 million which was comprised of $3.4 million of asset impairments, $0.8 million of severance and $1.9 million of relocation and other restructuring charges.

On April 26, 2007, the Company announced its intention to shut down its manufacturing facility located in Oxnard, California. The Company has stopped all production in the facility and is in the process of moving the equipment and inventory to other Berry locations. The Company had previously established a reserve of $1.2 million for the shutdown of the Oxnard facility in connection with the acquisition of Kerr Group, Inc. in June 2005. This accrual included estimates for severance and lease termination costs. The Company recorded an additional charge of $5.1 million for severance and lease termination costs in fiscal 2007. In addition, the Company recorded other restructuring charges related to equipment and inventory relocation and other operating costs of the facility of $0.4 million in fiscal 2007.

In connection with the Berry Covalence Merger on April 3, 2007, the Company announced that it would close the Old Covalence corporate headquarters in Bedminster, NJ and the Company’s coatings division headquarters in Shreveport, LA. The reorganization was part of the integration plan to consolidate certain corporate functions at the Company’s headquarters in Evansville, Indiana and to consolidate the adhesives and coatings segment into one new segment called tapes and coatings. In connection with these changes, the Company recorded severance charges in fiscal 2007 of $3.5 million and lease termination charges of $1.9 million. The Company has substantially completed this reorganization.

On July 10, 2007, we announced a restructuring of the operations within our flexible films division. The restructuring will include the closing of four manufacturing locations: Yonkers, New York; Columbus, Georgia;

 

50


Table of Contents

City of Industry, California and Santa Fe Springs, California. The business at each facility being closed will be transferred to other Company facilities. The affected business accounted for less than $100 million of annual net sales. On September 27, 2007, we announced our plans to rationalize our Sparks, Nevada manufacturing location. We intend to complete the closing prior to August 1, 2008. The business will be transferred to other Company facilities. The affected business accounted for approximately $10 million of annual net sales. The Company recorded an expense of $22.1 million in fiscal 2007 related to these restructuring activities.

Critical Accounting Policies

We disclosed those accounting policies that we consider to be significant in determining the amounts to be utilized for communicating our consolidated financial position, results of operations and cash flows in the Form 10-K filed with the SEC for the fiscal year ended September 29, 2007. Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results are likely to differ from these estimates, but management does not believe such differences will materially affect our financial position or results of operations, although no assurance can be given as to such affect. We believe that the following accounting policies are the most critical because they have the greatest impact on the presentation of our financial condition and results of operations.

Allowance for doubtful accounts. We evaluate our allowance for doubtful accounts on an ongoing basis and review any significant customers with delinquent balances to determine future collectibility. We base our determinations on legal issues (such as bankruptcy status), past history, current financial and credit agency reports, and the experience of our credit representatives. We reserve accounts that we deem to be uncollectible in the quarter in which we make the determination. We maintain additional reserves based on our historical bad debt experience. Additionally, our allowance for doubtful accounts includes a reserve for cash discounts that are offered to some of our customers for prompt payment. We believe, based on past history and our credit policies that our net accounts receivable are of good quality. We believe a ten percent increase or decrease in our bad debt experience would not have a material impact on the results of operations of the Company. Our allowance for doubtful accounts was $13.9 million and $11.3 million as of December 29, 2007 and September 29, 2007, respectively.

Inventory obsolescence. We evaluate our reserve for inventory obsolescence on an ongoing basis and review inventory on-hand to determine future salability. We base our determinations on the age of the inventory and the experience of our personnel. We reserve inventory that we deem to be not salable in the quarter in which we make the determination. We believe, based on past history and our policies and procedures, that our net inventory is salable. We believe a ten percent increase or decrease in our inventory obsolescence experience would not have a material impact on the results of operations of the Company. Our reserve for inventory obsolescence was $13.5 million and $14.9 million as of December 29, 2007 and September 29, 2007, respectively.

Medical insurance. We offer our employees medical insurance that is primarily self-insured by us. As a result, we accrue a liability for known claims as well as the estimated amount of expected claims incurred but not reported. We evaluate our medical claims liability on an ongoing basis, obtain an independent actuarial analysis on an annual basis and perform payment lag analysis. Based on our analysis, we believe that our recorded medical claims liability should be sufficient. We believe a ten percent increase or decrease in our medical claims experience would not have a material impact on the results of operations of the Company. Our accrued liability for medical claims was $6.0 million and $6.7 million, including reserves for expected medical claims incurred but not reported, as of December 29, 2007 and September 29, 2007, respectively.

Workers’ compensation insurance. The majority of our facilities are in a large deductible program for workers’ compensation insurance. On a quarterly basis, we evaluate our liability based on third-party adjusters’

 

51


Table of Contents

independent analyses by claim. Based on our analysis, we believe that our recorded workers’ compensation liability should be sufficient. We believe a ten percent increase or decrease in our workers’ compensations claims experience would not have a material impact on the results of operations of the Company. Our accrued liability for workers’ compensation claims was $6.3 million and $6.7 million as of December 29, 2007 and September 29, 2007, respectively.

Revenue recognition. The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Revenue from sales of products is recognized at the time product is shipped to the customer, collectibility is probable and title and risk of ownership transfer to the purchaser.

Impairments of Long-Lived Assets. In accordance with the methodology described in Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount.

Goodwill and Other Indefinite Lived Intangible Assets. In accordance with the methodology described in SFAS No. 142, “Goodwill and Other Intangible Assets”, we review our goodwill and other indefinite lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable or at least annually as required by SFAS No. 142. We evaluate impairment of goodwill by comparing its estimated fair value to its carrying value. We estimate fair value by computing the expected future discounted operating cash flows based on historical result trends. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about future operating performance. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, economic conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value. Impairment of our goodwill could significantly affect our operating results and financial position. Goodwill totaled $1,181.8 million at December 29, 2007. No impairment was recorded during the thirteen week periods ended December 29, 2007 or December 30, 2006, respectively.

Deferred Taxes and Effective Tax Rates. We estimate the effective tax rates and associated liabilities or assets for each legal entity of ours in accordance with SFAS No. 109. We use tax-planning to minimize or defer tax liabilities to future periods. In recording effective tax rates and related liabilities and assets, we rely upon estimates, which are based upon our interpretation of United States, foreign, state, and local tax laws as they apply to our legal entities and our overall tax structure. Audits by local tax jurisdictions, including the United States Government, could yield different interpretations from our own and cause the Company to owe more taxes than originally recorded. For interim periods, we accrue our tax provision at the effective tax rate that we expect for the full year. As the actual results from our various businesses vary from our estimates earlier in the year, we adjust the succeeding interim periods’ effective tax rates to reflect our best estimate for the year-to-date results and for the full year. As part of the effective tax rate, if we determine that a deferred tax asset arising from temporary differences is not likely to be utilized, we will establish a valuation allowance against that asset to record it at its expected realizable value. Our valuation allowance against deferred tax assets was $3.1 million as of December 29, 2007 and September 29, 2007.

Accrued Rebates. We offer various rebates to our customers in exchange for their purchases. These rebate programs are individually negotiated with our customers and contain a variety of different terms and conditions. Certain rebates are calculated as flat percentages of purchases, while others included tiered volume incentives. These rebates may be payable monthly, quarterly, or annually. The calculation of the accrued rebate balance involves significant management estimates, especially where the terms of the rebate involve tiered volume levels that require estimates of expected annual sales. These provisions are based on estimates derived from current

 

52


Table of Contents

program requirements and historical experience. We use all available information when calculating these reserves. Our accrual for customer rebates was $39.0 million and $35.9 million as of December 29, 2007 and September 29, 2007, respectively.

Pension. Pension benefit costs include assumptions for the discount rate, retirement age, and expected return on plan assets. Retiree medical plan costs include assumptions for the discount rate, retirement age, and health-care-cost trend rates. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see the notes to the consolidated financial statements for additional information regarding our retirement benefits. Periodically, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit plans. In evaluating these assumptions, we consider many factors, including an evaluation of the discount rates, expected return on plan assets and the health-care-cost trend rates of other companies; our historical assumptions compared with actual results; an analysis of current market conditions and asset allocations; and the views of advisers. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with our expectations of future retirement ages. We believe our pension and retiree medical plan assumptions are appropriate based upon the above factors. A one percent increase or decrease in our health-care-cost trend rates would not have a material impact on the results of operations of the Company. Also, a one quarter percentage point change in our discount rate or expected return on plan assets would not have a material impact on the results of operations of the Company.

Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements provide a meaningful and fair perspective of the Company and its consolidated subsidiaries. This is not to suggest that other risk factors such as changes in economic conditions, changes in material costs, our ability to pass through changes in material costs, and others could not materially adversely impact our consolidated financial position, results of operations and cash flows in future periods.

Results of Operations

Comparison of the 13 Weeks Ended December 29, 2007 (the “Quarter”) and the 13 Weeks Ended December 30, 2006 (the “Prior Quarter”)

Net Sales. Net sales increased 8% to $762.7 million for the Quarter from $703.6 million for the Prior Quarter. This $59.1 million increase is primarily the result of strong base business organic volume growth of 4% and 2% acquisition volume growth. The following discussion in this section provides a comparison of net sales by business segment. Net sales in the rigid open top business increased from $193.7 million in the Prior Quarter to $223.2 million in the Quarter. Base volume growth in the rigid open top business, excluding net selling price decreases, was very strong at 12% driven primarily by strong growth in dairy containers, housewares, and thermoformed and injection drink cups. Net sales in the rigid closed top business increased 4% from $143.2 million in the Prior Quarter to $148.4 million in the Quarter. Base volume growth in the rigid closed top business, excluding net selling price decreases, was 4% for the Quarter driven by growth in bottles, prescription vials, and overcaps and closures. The flexible film business net sales increased 10% from $246.1 million in the Prior Quarter to $270.4 million in the Quarter. This increase of $24.3 million can be primarily attributed to the Rollpak acquisition and increased selling prices. Net sales in the tapes/coatings business decreased slightly from $122.1 million in the Prior Quarter to $120.7 million in the Quarter primarily driven by softness in the new home construction market partially offset by strong volume growth in the corrosion protection business.

Gross Profit. Gross profit increased by $22.4 million to $108.8 million (14% of net sales) for the Quarter from $86.4 million (12% of net sales) for the Prior Quarter. This increase of $22.4 million or 26% is primarily the result of the additional sales volume noted above and productivity improvements in the flexible films and tapes/coatings segments as a result of realizing synergies from the Berry Covalence Merger. These productivity improvements were partially offset by the timing lag of passing through increased raw material costs to

 

53


Table of Contents

customers. In addition, in the Prior Quarter, an expense of $7.2 million was charged to cost of goods sold related to the write-up and subsequent sale of finished goods inventory to fair market value in accordance with purchase accounting.

Operating Expenses. Selling, general and administrative expenses increased by $7.3 million to $81.8 million for the Quarter from $74.5 million for the Prior Quarter primarily the result of a $4.2 million increase in stock compensation expense in the Quarter over the Prior Quarter, $4.1 million increase in amortization of intangible assets, and increased expenses as a result of the organic and acquisition volume growth partially offset by realization of synergies from the Berry Covalence Merger. Restructuring and impairment charges were $3.5 million in the Quarter primarily as a result of costs incurred associated with the plant consolidations within the flexible films segment. Other expenses increased from $4.1 million in the Prior Quarter to $13.0 million for the Quarter primarily as a result of expenses associated with the integration of Old Covalence and the corresponding achievement of synergies.

Interest Expense, Net. Net interest expense increased $1.6 million to $61.5 million for the Quarter from $59.9 million in the Prior Quarter primarily as a result of increased borrowings to finance the Rollpak acquisition.

Income Tax Benefit. For the Quarter, we recorded an income tax benefit of $19.7 million or an effective tax rate of 38.6%, which is a slight change of $0.2 million from the income tax benefit of $19.5 million or an effective tax rate of 37.1% in the Prior Quarter.

Net Loss. Net loss was $31.3 million for the Quarter compared to a net loss of $30.8 million for the Prior Quarter for the reasons discussed above.

Discussion of Results of Operations for the Fiscal Year Ended September 29, 2007

Net Revenue. Net revenue for the fiscal year ended September 29, 2007 was $3,055.0 million. Net sales in the rigid open top business was $881.3 million primarily driven by solid volume from containers and continued strong volume in the thermoformed polypropylene drink cup product line. Net sales in the rigid closed top business ended at $598.0 million primarily as a result of solid volume from closures, bottles, and prescription vials. The flexible film business generated net revenue of $1,042.8 million. Net sales in the tapes and coatings business of $536.7 million were negatively impacted by softness in the new home construction market.

Cost of Sales. Cost of goods sold for the fiscal year ended September 29, 2007 was $2,583.4 million. Cost of goods sold was adversely impacted by the non-cash write-up of finished goods inventory $11.2 million partially offset by cost reduction program.

Gross Profit. Gross profit for the fiscal year ended September 29, 2007 was $471.6 million (15.4% of net revenue). Significant productivity improvements were made in the fiscal year ended September 29, 2007, including the installation of state-of-the-art equipment at several of our facilities. These productivity improvements were partially offset by increased costs from inflation such as higher energy prices and wage inflation.

Selling, General and Administrative expenses. Selling, general and administrative expenses for the fiscal year ended September 29, 2007 was $321.5 million (10.5% of net revenues). Items favorably impacting selling, general and administrative expenses included synergies generated from the Merger, partially offset by stock compensation expense of $19.6 million. Intangible asset amortization represented $77.6 million of the total.

Restructuring and impairment charges (credit), net. Restructuring and impairment charges (credit), net for the fiscal year ended September 29, 2007 were $39.1 million consisting of $7.5 million for severance and termination benefits, $11.3 million of facility exit costs, $18.1 million of non-cash asset impairment charges, and

 

54


Table of Contents

$2.2 million of other costs as a result of the plant rationalizations and corporate headquarter consolidations discussed above.

Other Operating Expenses. Other operating expenses for the fiscal year ended September 29, 2007 were $43.6 million which primarily consisted of expenses incurred in connection with the closing of the Merger and subsequent integration costs, management fees to our sponsors of $5.9 million, and other non-recurring expenses.

Operating Income. Operating income for the fiscal year ended September 29, 2007 was $67.4 million driven by the items noted above.

Discussion of Results of Operations for the period from February 17, 2006 to September 29, 2006

Net Revenue. Net revenue for the period February 17, 2006 to September 29, 2006 was $1,138.8 million. Net revenue for the period was impacted by pricing actions, which had been implemented to offset inflation in raw materials, particularly in polyethylene resin, in the Old Covalence plastics operating segment partially offset by lower volumes driven by a mild hurricane season and continued efforts by customers to structurally reduce inventories. Included as a reduction of net revenue is $79.4 million attributable to customer rebates, sales incentives, trade promotions and coupons and $20.6 million attributable to discounts to customers and product returns.

Cost of Sales. Cost of goods sold for the period February 17, 2006 to September 29, 2006 was $1,022.9 million. Cost of goods sold was adversely impacted by inflation in raw materials of $65.9 million experienced in the Old Covalence plastics operating segment partially offset by lower volumes. In addition, cost of sales was impacted by step up in value of inventory of $6.8 million and increased depreciation costs of $8.4 million as a result of purchase price allocations in connection with Apollo V’s acquisition of Old Covalence Holding and increased freight rates resulting from higher fuel prices. The effect of these items was partially offset by the favorable impact of our cost reduction and manufacturing efficiency programs. Included as a reduction of cost of goods sold was $8.7 million attributable to rebates from vendors.

Gross Profit. Gross profit for the period February 17, 2006 to September 29, 2006 was $115.9 million. Gross profit was negatively impacted by raw material inflation, experienced by the Old Covalence plastics operating segment, and the impact of purchase method of accounting attributable to Apollo V’s acquisition of Old Covalence Holding. Partially offsetting these costs were the continuing benefits of the Company’s cost reduction programs and the pricing actions previously mentioned.

Selling, General and Administration Expenses. Selling, general and administrative expenses for the period February 17, 2006 to September 29, 2006 were $107.6 million. Items negatively impacting selling, general and administrative expense included the increased impact of depreciation and amortization of $16.5 million from the purchase method of accounting attributable to Apollo V’s acquisition of Old Covalence Holding executive severance expense of $3.6 million, additional corporate support costs.

Operating Income. Operating income for the period February 17, 2006 to September 29, 2006 was $7.7 million. Operating income was negatively impacted by raw material inflation experienced by the Old Covalence plastics operating segment, increase in inventory cost, higher depreciation and amortization costs resulting from purchase price allocation in connection with Apollo V’s acquisition of Old Covalence Holding, executive severance and additional corporate support costs, partially offset by the favorable impact of our cost reduction and manufacturing efficiency programs.

Discussion of Results of Operations for the period from October 1, 2005 to February 16, 2006

Net Revenue. Net revenue for the period from October 1, 2005 to February 16, 2006 was $666.9 million. Net revenue for the period reflects pricing actions, implemented to offset polyethylene resin inflation experienced

 

55


Table of Contents

primarily in TP&A’s Plastics division. Included as a reduction of net revenue is $54.8 million attributable to customer rebates, sales incentives, trade promotions and coupons and $15.4 million attributable to discounts to customers and product returns.

Cost of Sales. Cost of goods sold for the period from October 1, 2005 to February 16, 2006 was $579.0 million. Cost of goods sold was adversely impacted by inflation in polyethylene resin of $41.2 million and increased freight rates of $1.8 million resulting from higher fuel prices. The effects of these items were partially offset by the favorable impact of cost reduction and manufacturing efficiency programs. Included as a reduction of cost of goods sold was $5.2 million attributable to rebates from vendors.

Gross Profit. Gross profit for the period from October 1, 2005 through February 16, 2006 was $87.9 million. Gross profit was negatively impacted by resin raw material inflation experienced by TP&A’s Plastics division and increased freight rates resulting from higher fuel prices partially offset by the pricing actions previously mentioned and the continuing benefits of cost reduction programs.

Selling, General and Administrative expenses. Selling, general and administrative expenses for the period from October 1, 2005 to February 16, 2006 were $50.0 million. Items favorably impacting selling, general and administrative expenses included lower Tyco administrative fees of $12.2 million as a result of the elimination of the receivables factoring and resin purchasing programs, partially offset by stock option expense of $1.7 million following Tyco’s adoption of Statement of Financial Accounting Standards No. 123R.

Operating Income. Operating income for the period from October 1, 2005 to February 16, 2006 was $26.9 million. Operating income was negatively impacted by resin raw material inflation experienced by TP&A’s Plastics division and increased freight rates resulting from higher fuel prices, partially offset by pricing actions previously mentioned, the continuing benefits of cost reduction programs and lower Tyco administrative fees in selling, general and administrative expenses.

Discussion of Results of Operations for the Year Ended September 30, 2005

Net Revenue. Net revenue during the twelve month period ending September 30, 2005 was $1,725.2 million. Net revenue for the period was impacted by increases in pricing to offset inflation in polyethylene resin in TP&A’s Plastics division and higher volume in TP&A’s Adhesives segment driven by successful introduction of new products, partially offset by lower volumes in TP&A’s Plastics and Coated Products division. These lower volumes resulted from a reduction in non-profitable products as well as completion of a plant rationalization program in TP&A’s Plastics division. The plant rationalization program was started during the first quarter of fiscal 2004 and substantially completed in the fiscal first quarter of 2005. This program was undertaken as part of the 2004 restructuring activities and was focused on consolidating and reducing the number of production facilities. This program required the closure of less productive facilities, moving of equipment, production capability and the hiring and training of direct labor employees. Additional learning curve issues continued into the second and third fiscal quarters of 2005. Included as a reduction of net revenue is $141.9 million attributable to customer rebates, sales incentives, trade promotions and coupons and $34.8 million attributable to discounts to customers and product returns.

Cost of Sales. Cost of sales during the twelve month period ending September 30, 2005 was $1,477.4 million. Cost of sales was impacted by inflation in raw materials in TP&A’s Plastics division due to increased prices from polyethylene resin, higher sales volume from TP&A’s Adhesives division as wells as increased freight rates and unfavorable manufacturing results as a result of completion of the plant rationalization plan, partially offset by the positive impact of cost reduction and manufacturing efficiency plans and lower sales volume in TP&A’s Plastics and Coated Products divisions. Included as a reduction of cost of goods sold was $14.6 million attributable to rebates from vendors.

Gross Profit. Gross profit decreased 15.1 percent during the twelve month period ending September 30, 2005 to $247.8 million from the previous year. Decrease in gross profit was primarily driven by raw material

 

56


Table of Contents

inflation experienced by TP&A’s Plastics division, higher freight rates, unfavorable manufacturing results, partially offset by favorable impact from TP&A’s cost reduction and manufacturing efficiency plans.

Selling, General and Administrative expenses. Selling, general and administrative expenses during the twelve month period ended September 30, 2005 were $124.6 million. Selling, general and administrative expenses were impacted by general inflation and an increase in sales and technical marketing headcount in TP&A’s Adhesives division.

Restructuring expenses. Restructuring expenses were $3.3 million during the twelve month period ending September 30, 2005. This was a result of the completion of the restructuring program that was started in fiscal year 2004 and completed early fiscal year 2005.

Operating Income. Operating income during the twelve month period ending September 30, 2005 was $63.5 million and was driven by items previously addressed.

Income Tax Matters

As of September 29, 2007, the Company has unused operating loss carryforwards of $399.6 million for federal and $524.9 million for state income tax purposes which begin to expire in 2021 and $8.8 million for foreign operating loss carryforwards. Alternative minimum tax credit carryforwards of approximately $7.4 million are available to Berry Group indefinitely to reduce future years’ federal income taxes. The Company is in the process of determining whether the Covalence operating loss carry forward of $30.4 million may be subject to an annual limitation due to the Berry Covalence Merger. As a result of the Apollo Berry Merger, the unused non-Covalence operating loss carryforward is subject to an annual limitation of $208.0 million under Sec. 382 of the Internal Revenue Code. Due to prior year Sec. 382 limit carryforwards, substantially all federal operating loss carryforwards are available for immediate use. As part of the effective tax rate calculation, if we determine that a deferred tax asset arising from temporary differences is not likely to be utilized, we will establish a valuation allowance against that asset to record it at its expected realizable value. Our valuation allowance against deferred tax assets was $3.1 million and $11.5 million as of September 29, 2007 and September 29, 2006, respectively, related to the foreign operating loss carryforwards.

Liquidity and Capital Resources

Senior Secured Credit Facilities

The Company’s senior secured credit facilities consist of $1,200.0 million term loan and $400.0 million asset based revolving line of credit. The availability under the revolving line of credit is the lesser of $400.0 million or based on a defined borrowing base which is calculated based on available accounts receivable and inventory. The term loan matures on April 3, 2015 and the revolving line of credit matures on April 3, 2013. The interest rate on the term loan and the line of credit were 5.25% and 5.73% at December 29, 2007, respectively. The line of credit is also subject to an unused commitment fee for unused borrowing ranging from 0.25% to 0.35% per annum and a letter of credit fee of 0.125% per annum for each letter of credit that is issued. At December 29, 2007, there was $71.0 million outstanding on the revolving line of credit. The revolving line of credit allows up to $100.0 million of letters of credit to be issued instead of borrowings under the revolving line of credit. At December 29, 2007, the Company had $31.8 million under the revolving line of credit in letters of credit outstanding. At December 29, 2007, the Company had unused borrowing capacity of $297.2 million under the revolving line of credit. The Company was in compliance with all covenants at December 29, 2007.

 

57


Table of Contents

A key financial metric utilized in the calculation of the first lien leverage ratio is Adjusted EBITDA. The following table reconciles our Adjusted EBITDA of $496.5 million for the twelve months ended December 29, 2007 to net income (loss). Adjusted EBITDA is a Non-GAAP number. For more information concerning Adjusted EBITDA, see footnote (2) to “—Summary Historical Financial Data.”

 

     12 months
ended
December 29,
2007
 

Adjusted EBITDA

   $ 496.5  

Net interest expense

     (239.2 )

Depreciation and amortization

     (230.7 )

Income tax benefit

     88.8  

Loss on extinguished debt

     (37.3 )

Business optimization expense

     (39.0 )

Restructuring and impairment

     (42.6 )

Stock based compensation

     (23.8 )

Management fees

     (6.4 )

Inventory write-up

     (5.2 )

Minority interest

     0.5  

Pro forma synergies (Covalence and Rollpak)

     (69.7 )

Pro forma synergies (MAC, Norwich and Oxnard)

     (4.9 )

Pro forma sale/leaseback

     6.6  

Pro forma MAC and Rollpak EBITDA

     (10.3 )
        

Net income (loss)

   $ (116.7 )
        

For comparison purposes, the following table reconciles our Adjusted EBITDA for the thirteen weeks ended December 29, 2007 and December 30, 2006.

 

     Thirteen Weeks Ended  
     December 29,
2007
    December 30,
2006
 

Adjusted EBITDA

   $ 91.3     $ 76.5  

Net interest expense

     (61.5 )     (59.9 )

Depreciation and amortization

     (59.6 )     (49.1 )

Income tax benefit

     19.7       19.5  

Business optimization expense

     (11.7 )     (10.0 )

Restructuring and impairment

     (3.5 )     —    

Stock based compensation

     (4.7 )     (0.5 )

Management fees

     (1.3 )     (0.8 )

Inventory write-up and Merger expense

     —         (8.7 )

Minority interest

     —         2.2  
                

Net income (loss)

   $ (31.3 )   $ (30.8 )
                

While the determination of appropriate adjustments in the calculation of Adjusted EBITDA is subject to interpretation under the terms of the our senior secured credit facilities, management believes the adjustments described above are in accordance with the covenants in the senior secured credit facilities. Adjusted EBITDA should not be considered in isolation or construed as an alternative to our net loss, operating cash flows or other measures as determined in accordance with GAAP. In addition, other companies in our industry or across different industries may calculate bank covenants and related definitions differently than we do, limiting the usefulness of our calculation of Adjusted EBITDA as a comparative measure.

 

58


Table of Contents

Second Priority Senior Secured Notes

The Company’s $750.0 million of second priority senior secured notes (“Second Priority Notes”) are comprised of (1) $525.0 million aggregate principal amount of 8 7/8% second priority fixed rate notes (“Fixed Rate Notes”) and (2) $225.0 million aggregate principal amount of second priority senior secured floating rate notes (“Floating Rate Notes”). The Second Priority Notes mature on September 15, 2014. Interest on the Fixed Rate Notes is due semi-annually on March 15 and September 15. The Floating Rate Notes bear interest at LIBOR (5.69% at December 29, 2007) plus 3.875% per annum, which resets quarterly. Interest on the Floating Rate Notes is payable quarterly on March 15, June 15, September 15 and December 15 of each year. The Company was in compliance with all covenants at December 29, 2007.

11% Senior Subordinated Notes

The Company’s $425.0 million in aggregate principal amount of 11% senior subordinated notes (“11% Senior Subordinated Notes”) were sold in a private placement to Goldman, Sachs and Co. and are exempt from registration under the Securities Act. The 11% Senior Subordinated Notes mature on September 15, 2016. Interest is payable quarterly in cash; provided, however, that on any quarterly interest payment date on or prior to the third anniversary of the issuance, the Company can satisfy up to 3% of the interest payable on such date by capitalizing such interest and adding it to the outstanding principal amount of the 11% Senior Subordinated Notes. The Company elected to satisfy 3% of its interest obligation ($3.2 million each) in satisfaction of its interest obligations for its September 2007 and December 2007 interest payments. The Company was in compliance with all covenants at December 29, 2007.

10 1/4% Senior Subordinated Notes

The Company’s $265.0 million in aggregate principal amount of 10 1/4% senior subordinated notes (“10 1/4% Senior Subordinated Notes”) mature on March 1, 2016. The notes are senior subordinated obligations of the Company and rank junior to all other senior indebtedness that does not contain similar subordination provisions. No principal payments are required with respect to the senior subordinated notes prior to maturity. Interest on the 10 1/4% Senior Subordinated Notes is due semi-annually on March 1 and September 1. The Company was in compliance with all covenants at December 29, 2007.

At December 29, 2007, our cash balance was $21.8 million, and we had unused borrowing capacity of $297.2 million under our revolving line of credit.

Contractual Obligations and Off Balance Sheet Transactions

Our contractual cash obligations as of September 29,2007 on a pro forma basis for the Captive Acquisition, the offering of the outstanding notes and the application of the proceeds therefrom are summarized in the following table.

 

     Payments Due by Period at September 29, 2007
     Total    < 1 year    1-3 years    4-5 years    > 5 years

Long-term debt, excluding capital leases

   $ 3,318.3    $ 12.0    $ 24.0    $ 24.0    $ 3,258.3

Capital leases

     27.2      8.1      9.8      9.3      —  

Interest rate payments

     2,149.8      280.2      560.3      560.3      749.0

Operating leases

     233.2      33.7      63.7      50.8      85.0
                                  

Total contractual cash obligations

   $ 5,728.5    $ 334.0    $ 657.8    $ 644.4    $ 4,092.3
                                  

 

59


Table of Contents

Our contractual cash obligations as of September 29, 2007 are summarized in the following table.

 

     Payments Due by Period at September 29, 2007
     Total    < 1 year    1-3 years    4-5 years    > 5 years

Long-term debt, excluding capital leases

   $ 2,687.7    $ 12.0    $ 24.0    $ 24.0    $ 2,627.7

Capital leases

     27.2      8.1      9.8      9.3      —  

Interest rate payments

     1,797.4      233.0      465.9      466.0      632.5

Operating leases

     233.2      33.7      63.7      50.8      85.0
                                  

Total contractual cash obligations

   $ 4,745.5    $ 286.8    $ 563.4    $ 550.1    $ 3,345.2
                                  

Cash Flows from Operating Activities

Net cash provided by operating activities was $20.7 million for the Quarter compared $59.8 million for the Prior Quarter. This decrease of $39.1 million is primarily the result of a $47.1 million change in working capital partially offset by improved operations in the Quarter.

Net cash provided by operating activities was $137.3 million for the fiscal year ended September 29, 2007. Cash flow provided by operating activities was negatively impacted by costs incurred as a result of the Apollo Berry Merger, the Berry Covalence Merger, and the restructuring activities noted above.

During the period from February 17, 2006 to September 29, 2006, we generated $96.7 million of net cash from operating activities principally due to improved inventory turnover and accounts payable terms.

TP&A net cash usage during the period from October 1, 2005 to February 16, 2006 was $119.2 million, principally due to changes in raw material purchases and payment terms as a result of the discontinuance of the resin purchasing agreement with Tyco prior to the Apollo V’s purchase of Old Covalence Holding. During the period from October 1, 2005 to February 16, 2006, accounts payable and inventory experienced a one-time change due to the discontinuance of the raw materials resin purchasing program TP&A had with an affiliate of Tyco. Under that program, amounts payable for raw materials purchases was classified as “Due to Tyco International”. Upon termination of the program, Tyco loaned TP&A an amount equal to the amount classified in “Due to Tyco International” to pay the affiliate for the remaining balance due for the raw materials purchases. Following the discontinuance of this program, raw material purchases are now included as a component of “Accounts payable”.

Net cash provided by TP&A operating activities increased to $117.3 million for the year ended September 30, 2005, including a reduction in cash payments made for the fiscal 2005 restructuring plan of $7.6 million, as well as decreases in working capital (exclusive of cash). Working capital was reduced in fiscal 2005 through efforts to improve receivable and payable days outstanding, offset by an increase in the average cost of polyethylene resin. In addition, due to supply chain disruptions as a result of the hurricanes in the fall of 2005, TP&A’s inventory volume was lower than normal.

Cash Flows from Investing Activities

Net cash used for investing activities decreased from $44.4 million for the Prior Quarter to $30.1 million for the Quarter primarily as a result of increased capital spending and the acquisition of MAC Closures, Inc. in the Quarter partially offset by proceeds from a sale-leaseback transaction.

Net cash used for investing activities was $164.3 million for the fiscal year ended September 29, 2007. Our investments in capital expenditures totaled $99.3 million partially offset by $10.8 million of cash received from disposition of assets which was primarily the sale of Berry Plastics UK Ltd. in April 2007. In addition, we used $75.8 million primarily for (1) the acquisition of Rollpak Corporation and (2) a $30.0 million payment to Tyco as finalization of the working capital settlement.

During the period from February 17, 2006 to September 29, 2006, we used $3,252.0 million of net cash in investing activities, primarily due to the Apollo Berry Merger, Apollo V’s acquisition of Old Covalence Holding

 

60


Table of Contents

and investments in capital expenditures of $34.8 million during the period During the period from October 1, 2005 to February 16, 2006, TP&A used $12.2 million of net cash in investing activities for capital expenditures.

Net cash used for TP&A’s investing activities was $29.2 million for the year ended September 30, 2005 primarily due to investments in new products in TP&A’s Plastics and Adhesives segments, safety upgrades in manufacturing facilities and replacement and upgrades to certain aged equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities was $14.6 million for the Quarter compared to net cash used for financing activities of $24.7 million in the Prior Quarter. This change of $39.3 million can be primarily attributed to the change in working capital discussed above.

Net cash used for financing activities was $40.4 million for the fiscal year ended September 29, 2007. In the period, we generated cash of $1,233.0 million from long-term borrowing in connection with the Berry Covalence Merger and paid $9.7 million of debt financing costs associated with closing these borrowings. We paid $1,161.2 million of long-term borrowings primarily as a result of the Berry Covalence Merger and had net equity distributions of $102.5 million primarily a result of the dividend to Berry Group in June 2007 described above.

During the period from February 17, 2006 to September 29, 2006, we generated net cash of $3,212.5 million in our financing activities due principally to the issuance of long-term debt of $2,653.4 million and net equity contributions of $680.8 million in connection with the Apollo Berry Merger and Apollo V’s acquisition of Old Covalence Holding partially offset by payments on long-term debt totaling $50.7 million and debt financing costs of $71.0 million.

During the period from October 1, 2005 to February 16, 2006, cash generated from TP&A’s financing activities was $130.6 million due to the change in the resin purchasing arrangement with an affiliate of Tyco prior to Apollo V’s acquisition of Old Covalence Holding, partially offset by the retirement of outstanding capital lease obligations. In fiscal 2005, TP&A used $89.2 million in financing activities. These activities primarily resulted from a reduction in capital lease obligations of $61.1 million.

Increased working capital needs occur whenever we experience strong incremental demand or a significant rise in the cost of raw material, particularly plastic resin. However, based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our senior secured credit facilities, will be adequate to meet our short-term liquidity needs. We base such belief on historical experience and the funds available under our revolving 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”. 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 December 29, 2007, our cash balance was $21.8 million, and we had unused borrowing capacity under our revolving credit facility’s borrowing base of $297.2 million.

Recently Issued Accounting Standards

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidatcd financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, we do not expect the adoption of SFAS 160 to have a significant impact on the Company’s results of operations or financial position.

 

61


Table of Contents

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. This statement replaces FASB Statement No. 141, Business Combination. This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently assessing the impact of the statement.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which includes an amendment of FASB Statement No. 51. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement allows entities to report unrealized gains and losses at fair value for those selected items. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of the statement.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective in fiscal 2008, and the Company is currently assessing the impact of the statement.

The Company adopted SFAS No. 154, Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3, on January 1, 2006. SFAS NO. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change or unless specific transition provisions are proscribed in the accounting pronouncements. SFAS No. 154 does not change the accounting guidance for reporting a correction of an error in previously issued financial statements or a change in accounting estimate. The adoption of SFAS No. 154 did not have an impact on our consolidated financial statements.

In September 2006 the FASB issued FASB No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by GAAP; it does not create or modify any current GAAP requirements to apply fair value accounting. The standard provides a single definition for fair value that is to be applied consistently for all accounting applications, and also generally describes and prioritizes according to reliability the methods and inputs used in valuations. FAS 157 prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. The new measurement and disclosure requirements of FAS 157 are currently planned to be effective for the Company in the first quarter of 2008, though a recently proposed FASB staff position may delay certain portions of the Statement. We do not expect the adoption of FAS 157 to have a significant impact on the Company’s results of operations or financial position.

In September 2006, the Financial Accounting Standards Board issued FAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” FAS 158 requires employers to recognize the over- or under-funded status of defined benefit plans and other postretirement plans in the statement of financial position and to recognize changes in the funded

 

62


Table of Contents

status in the year in which the changes occur through comprehensive income. In addition, FAS 158 requires employers to measure the funded status of plans as of the date of the year-end statement of financial position. The recognition and disclosure provisions of FAS 158 are effective for fiscal years ending after December 15, 2006, while the requirement to measure plan assets and benefit obligations as of a company’s year-end date is effective for fiscal years ending after December 15, 2008. The adoption of the recognition and disclosure provisions of FAS 158 resulted in the recognition of a decrease to other long-term liabilities of $4.4 million. The Company does not expect the adoption of the remaining provisions to have a material affect on the Company’s results of operations or financial position.

 

63


Table of Contents

BUSINESS

General

We believe we are one of the world’s leading manufacturers and marketers of value-added plastic packaging products. We manufacture a broad range of innovative, high quality packaging solutions using our collection of over 1,700 proprietary molds and an extensive set of internally developed processes and technologies. Our principal products include containers, drink cups, bottles, closures and overcaps, tubes, prescription vials, trash bags, stretch films, plastic sheeting and tapes which we sell to more than 13,000 customers in attractive and stable end markets, including food and beverage, healthcare, personal care, quick service and family dining restaurants, custom and retail, agricultural, horticultural, institutional, industrial, construction, aerospace, and automotive. Our customers comprised of a favorable balance of leading, national, blue-chip customers as well as a collection of smaller local specialty businesses. Our top 10 customers represented approximately 24% of our fiscal 2007 net sales with no customer accounting for more than 6% of our fiscal 2007 net sales. The average length of our relationship with these customers is more than 21 years. We believe that we are one of the largest global purchasers of polyethylene resin, our principal raw material, buying approximately 1.2 billion pounds in 2007. Additionally, we operate 70 strategically located manufacturing facilities and have extensive distribution capabilities. We believe that our proprietary tools and technologies, low-cost manufacturing capabilities and significant operating and purchasing scale provide us with a competitive advantage in the marketplace.

We believe that our unique combination of leading market positions, proven management team, product and customer diversity and manufacturing and design innovation provides access to a variety of growth opportunities and has allowed us to achieve consistent organic volume growth in excess of market growth rates. Our strong profit margins and efficient deployment of capital have allowed us to consistently generate strong cash flow and high returns on invested capital.

Berry’s Strengths

We believe our consistent financial performance is the direct result of the following competitive strengths:

Leading market positions across a broad product offering. One of our key business strategies is to be a market leader in each of our product lines. Through quality manufacturing, innovation in product design, a focus on customer service and a skilled and dedicated workforce, we have achieved leading competitive positions in many of our major product lines including thinwall, pry-off, dairy and clear polypropylene containers; drink cups; spice and pharmaceutical bottles and prescription vials; spirits, continuous thread, and pharmaceutical closures; aerosol overcaps and plastic squeeze tubes; plastic trash bags, stretch film and plastic sheeting; and cloth and foil tape products and adhesives. We believe that our leading market positions enable us to attract and expand our business with blue chip customers, cross-sell products, launch new products and maintain high margins.

Large, diverse and stable customer base. We sell our packaging solutions to over 13,000 customers, ranging from large multinational corporations to small local businesses in diverse industries. Our customers are principally engaged in industries that are considered to be generally less sensitive to changing economic conditions, including pharmaceuticals, food, dairy and health and beauty. Our top 10 customers represented approximately 24% of our fiscal 2007 net sales with no customer accounting for more than 6% of our fiscal 2007 net sales. Our co-design capabilities and proactive approach to customer service makes us an integral part of our customers’ long-term marketing and packaging decisions. We believe our commitment to service and quality has resulted in numerous single-source and long-term relationships with customers. The average length of our relationship with our top 10 customers is 21 years.

Strong organic growth through continued focus on best-in-class technology and innovation. We believe that our manufacturing technology and expertise are best-in-class and that we are a leader in new product innovation, as evidenced by our offering of an extensive proprietary product line of value-added plastic

 

64


Table of Contents

packaging in North America. We currently own over 1,700 proprietary molds and have pioneered a variety of production processes such as what we believe to be the world’s largest deep draw PP thermoforming system for drink cups. We focus our research and development efforts on high value-added products that offer unique performance characteristics and provide opportunities to achieve premium pricing and further enhance our strategic position with our customers. Our dedicated sales professionals work collaboratively with our customers’ marketing departments in identifying and delivering new package designs. This skill set has allowed us to consistently achieve annual organic volume growth in excess of market growth rates.

Scale and low-cost operations drive profitability. We are one of the largest domestic manufacturers and suppliers of plastic packaging solutions and we believe we are one of the lowest cost manufacturers in the industry. We believe that our proprietary tools and technologies, low-cost manufacturing capabilities and operating and purchasing scale, which increased significantly with the Berry Covalence Merger, provide us with a competitive advantage in the marketplace. Our large, high-volume equipment and flexible, cross-facility manufacturing capabilities result in lower unit-production costs than many of our competitors as we can leverage our fixed costs, higher capacity utilization and longer production runs. Our scale also enhances our purchasing power and lowers our cost of raw materials such as resin, a raw material where we believe we are one of the largest global buyers in the market. In addition, as a result of the strategic location of our 70 manufacturing facilities and our footprint of several warehouse and distribution facilities near our customers, we have broad distribution capabilities, which reduce shipping costs and allow for quick turnaround times to our customers. Our scale enables us to dedicate certain sales and marketing efforts to particular products, customers or geographic regions, when applicable, which enables us to develop expertise that is valued by our customers. In addition, to continuously improve our cost position, our managers are charged with meeting specific cost reduction and productivity improvement targets each year, with a material amount of their compensation tied to their performance versus these targets.

Ability to pass through changes in the price of resin. We have generally been able to pass through to our customers increases in the cost of raw materials, especially resin, the principal raw material used in manufacturing our products. In many cases, we have contractual price escalators/de-escalators tied to the price of resin that result in relatively rapid price adjustments to these customers. In addition, we have experienced high success rates in quickly passing through increases and decreases in the price of resin to customers without indexed price agreements. Historically, we have consistently grown our earnings even during periods of volatility in raw material markets.

Track record of strong and stable cash flow. Our strong earnings, combined with our modest capital expenditure profile, limited working capital requirements and relatively low cash taxes due to various tax attributes, result in the generation of significant cash flow. We have a consistent track record of generating high cash flow as a percentage of net sales relative to our plastic packaging peers. In addition, the capital expenditures required to support our targeted manufacturing platforms and market segments is lower than in many other areas of the plastic packaging industry.

Motivated management team with highly successful track record. We believe our management team is among the deepest and most experienced in the packaging industry. Our 22 senior executives possess an average of 17 years of packaging industry experience, and have combined experience of over 367 years at Berry. The senior management team includes Chairman and CEO Ira Boots, who has been with us for 30 years, and COO Brent Beeler and CFO Jim Kratochvil, who have each been with us for over 23 years. This team has been responsible for developing and executing our strategy that has generated a track record of earnings growth and strong cash flow. In addition, management has successfully integrated 26 acquisitions since 1988, and has generally achieved significant reductions in manufacturing and overhead costs of acquired companies by introducing advanced manufacturing processes, reducing headcount, rationalizing facilities and tools, applying best practices and capitalizing on economies of scale. Members of Berry’s senior management team and other employees own approximately 20% of the equity of Berry Group, Berry’s parent company.

 

65


Table of Contents

Berry’s Strategy

Our goal is to maintain and enhance our market position and leverage our core strengths to increase profitability and maximize cash flow. Our strategy to achieve these goals includes the following elements:

Increase sales to our existing customers. We believe we have significant opportunities to increase our share of the packaging purchases made by our more than 13,000 existing customers as we expand our product portfolio and extend our existing product lines. We believe our broad and growing product lines will allow us to capitalize on the corporate consolidation occurring among our customers and the continuing consolidation of their vendor relationships. With our extensive manufacturing capabilities, product breadth and national distribution capabilities, we can provide our customers with a cost-effective, single source from which to purchase a broad range of their plastic packaging needs.

Aggressively pursue new customers. We intend to aggressively pursue new customer relationships in order to drive additional organic growth. We believe that our national direct sales force, our ability to offer new customers a cost-effective, single source from which to purchase a broad range of plastic packaging products, and our proven ability to design innovative new products position us well to continue to grow and diversify our existing customer base.

Manage costs and capital expenditures to drive cash flow and returns on capital. We continually focus on reducing our costs in order to maintain and enhance our low-cost position. We employ a team culture of continuous improvement operating under an ISO management system and employing Six Sigma throughout the organization. Our principal cost-reduction strategies include (i) leveraging our scale to reduce material costs, (ii) efficiently reinvesting capital into our manufacturing processes to maintain technological leadership and achieve productivity gains, (iii) focusing on ways to streamline operations through plant and overhead rationalization and (iv) monitoring and rationalizing the number of vendors from which we purchase materials in order to increase our purchasing power. In addition, each of our over 400 managers is charged with meeting specific cost reduction and productivity improvement targets each year, with a material amount of their compensation tied to their performance versus these targets. Return on capital is a key metric throughout the organization and we require that capital expenditures meet certain return thresholds, which encourages prudent levels of spending on expansion and cost saving opportunities.

Selectively pursue strategic acquisitions. In addition to the significant growth in earnings and cash flow we expect to generate from organic volume growth and continued cost reductions, we believe that there will continue to be opportunities for future growth through selective and prudent acquisitions. Our industry is highly fragmented and our customers are focused on working with a small set of key vendors. We have a successful track record of executing and integrating acquisitions, having completed 26 acquisitions since 1988, and have developed an expertise in synergy realization. In the past five years, we have acquired and successfully integrated Landis Plastics Inc., Kerr Group Inc., and Rollpak Corporation, and we have recently merged with Covalence, realizing significant synergies. We intend to continue to apply a selective and disciplined acquisition strategy, which is focused on improving our financial performance in the long-term and further developing our scale and diversity in new or existing product lines. The Captive Acquisition is in line with our acquisition strategy.

Formation of Berry Holding

On April 3, 2007, Berry Plastics Group, Inc. (“Old Berry Group”) completed a stock-for-stock merger (the “Berry Covalence Merger”) with Covalence Specialty Materials Holding Corp. (“Old Covalence Holding”). The resulting company retained the name Berry Plastics Group, Inc. (“Berry Group”). Immediately following the Berry Covalence Merger, Berry Plastics Holding Corporation (“Old Berry Holding”) and Covalence Specialty Materials Corp. (“Old Covalence”) were combined as a direct subsidiary of Berry Group. The resulting company retained the name Berry Plastics Holding Corporation.

 

66


Table of Contents

On December 28, 2007, Berry Plastics Holding Corporation was combined with Berry Plastics Corporation in a merger in which Berry Plastics Holding Corporation survived and was renamed Berry Plastics Corporation (“Berry Plastics”).

Apollo V Acquisition of Old Covalence Holding

On February 16, 2006, Old Covalence Holding was formed through the acquisition of substantially all of the assets and liabilities of Tyco Plastics & Adhesives (“Tyco Plastics & Adhesives” or “TP&A”) under a Stock and Asset Purchase Agreement dated December 20, 2005 among an affiliate of Apollo Management V, L.P. (“Apollo V”), Tyco International Group S.A. and Tyco Group S.à r.l. The total purchase price consideration paid at the closing of the acquisition was approximately $916.1 million. The acquisition was funded with the proceeds from (1) an equity investment of $197.5 million by affiliates of Apollo V and certain members of senior management of Old Covalence, (2) the issuance of $265.0 million of senior subordinated notes, (3) term loan borrowings under senior secured credit facilities of $350.0 million (subsequently refinanced as described later in this prospectus), (4) borrowings under a floating rate loan of $175.0 million, and (5) pursuant to the terms of the Stock and Asset Purchase Agreement, a favorable net working capital adjustment of $59.1 million.

Apollo VI Acquisition of Old Berry Group

On September 20, 2006, BPC Acquisition Corp. merged with and into BPC Holding Corporation pursuant to an agreement and plan of merger (the “Apollo Berry Merger”), dated June 28, 2006, with BPC Holding Corporation continuing as the surviving corporation. Following the consummation of the Apollo Berry Merger, BPC Holding Corporation changed its name to Berry Plastics Holding Corporation. Pursuant to the Apollo Berry Merger, Old Berry Holding was a wholly owned subsidiary of Old Berry Group, the principal stockholders of which were Apollo Investment Fund VI, L.P. (“Apollo VI”), AP Berry Holdings, LLC, Graham Berry Holdings, L.P., and management. Apollo VI and AP Berry Holdings, LLC are affiliates of Apollo Management, L.P., which is a private investment firm. Graham Berry Holdings, L.P. is an affiliate of Graham Partners, Inc. (“Graham”), a private equity firm. The total amount of funds required to consummate the Apollo Berry Merger and to pay related fees was $2.4 billion. The Apollo Berry Merger was primarily funded with (1) the issuance of $750.0 million aggregate principal amount of second priority senior secured notes, (2) new borrowings of $675.0 million in Term B loans, (3) the issuance of $425.0 million aggregate principal amount of senior subordinated notes, and (4) contributed equity.

Product Overview

We operate in the plastic segment of the $121 billion U.S. packaging sector, which accounted for $46 billion, or 38%, of total packaging industry sales in 2006, the most recently reported year. Demand for our plastic packaging products is driven by the consumption of consumer products including food, beverages, pharmaceuticals and personal care products. Plastic packaging has benefited from a shift from metal, paper and glass containers which has taken place over the last 20 years. This conversion has been driven by factors including consumer preference, weight advantages, shatter resistance and barrier properties. Recent technological advancements have allowed for additional conversions of packaging from glass to plastic containers for a number of products that require barrier properties and/or are filled at high temperatures. These new technologies have created many new market segment opportunities and avenues for significant growth.

The product categories on which we focus utilize similar manufacturing processes, share common raw materials (principally PP and PE resin) and sell into end markets where customers demand innovative packaging solutions and quick and seamless design and delivery. We organize our business into four operating divisions: rigid open top, rigid closed top, flexible films, and tapes and coatings.

 

67


Table of Contents

Rigid Open Top

Our rigid open top division is comprised of three product categories: containers, foodservice items (drink cups, institutional catering and cutlery) and housewares. The largest end-uses for our containers are food products companies. We believe that we offer one of the broadest product lines among U.S.-based injection-molded plastic container and drink cup manufacturers and we are a leader in thermoformed container and drink cup offerings, which provide a superior combination of value and quality relative to competing processes. Many of our open top products are manufactured from proprietary molds that we develop and own, which results in significant switching costs to our customers. In addition to a complete product line, we have sophisticated printing capabilities and in-house graphic arts and tooling departments, which allow us to integrate ourselves into, and add material value to, our customers’ packaging design processes. Our product engineers work directly with customers to design and commercialize new drink cups and containers. In order to identify new markets and applications for existing products and opportunities to create new products, we rely extensively on our national sales force. Once these opportunities are identified, our sales force works with our product design engineers and artists to satisfy customers’ needs. We have a diverse customer base for our open top products, and no single open top customer exceeded 6% of our total net sales in fiscal 2007. Our primary competitors include Airlite, Huhtamaki, Letica, Polytainers, WinCup and Solo. These competitors individually only compete on certain of our open top products, whereas we offer the entire selection of open top products described below. Our low-cost manufacturing capability with plants strategically located throughout the United States and a dedication to high-quality products and customer service have allowed us to further develop and maintain strong relationships with our attractive base including Dean Foods, General Mills, McDonald’s, Wal-Mart and Yum! Brands.

Containers. We manufacture a collection of nationally branded container products and also seek to develop customized container products for niche applications by leveraging of our state-of-the-art design, decoration and graphic arts capabilities. This mix allows us to both achieve significant economies of scale, while also maintaining an attractive portfolio of specialty products. Our container capacities range from 4 ounces to 5 gallons and are offered in various styles with accompanying lids, bails and handles, some of which we produce, as well as a wide array of decorating options. We have long-standing supply relationships with many of the nation’s leading food and consumer products companies, including Dean Foods, General Mills, Kraft, Kroger and Unilever.

Foodservice. We believe that we are the largest provider of large size thermoformed polypropylene (“PP”) and injection-molded plastic drink cups in the United States. We are the leading producer of 32 ounce or larger thermoformed PP drink cups and offer a product line with sizes ranging from 12 to 44 ounces. Our thermoform process uses PP instead of more expensive polystyrene in producing deep draw drink cups to generate a cup of superior quality with a material competitive cost advantage versus thermoformed polystyrene drink cups. Additionally, we produce injection-molded plastic cups that range in size from 12 to 64 ounces. Primary markets for our plastic drink cups are quick service and family dining restaurants, convenience stores, stadiums and retail stores. Many of our cups are decorated, often as promotional items, and we believe we have a reputation in the industry for innovative, state-of-the-art graphics. Selected drink cup customers and end users include Hardee’s, McDonald’s, Quik Trip, Subway and Yum! Brands.

Housewares. Our participation in the housewares market is focused on producing semi-disposable plastic housewares and plastic garden products. Examples of our products include plates, bowls, pitchers, tumblers and outdoor flowerpots. We sell virtually all of our products in this market through major national retail marketers and national chain stores, such as Wal-Mart. PackerWare is our recognized brand name in these markets and PackerWare branded products are often co-branded by our customers. Our strategy in this market has been to provide high value to consumers at a relatively modest price, consistent with the key price points of the retail marketers. We believe outstanding service and the ability to deliver products with timely combination of color and design further enhance our position in this market. This focus allowed PackerWare to be named Wal-Mart’s category manager for its entire seasonal housewares department.

 

68


Table of Contents

Rigid Closed Top

Our rigid closed top division is comprised of four product categories: closures and overcaps, prescription vials, bottles, and tubes. We believe that this line of products gives us a competitive advantage in being able to provide a complete plastic package to our customers. We have a number of leading positions in which we have been able to leverage this capability such as prescription vial packages and Tab II® pharmaceutical packages. Our innovative design center and product development engineers regularly work with our customers to develop differentiated packages that offer unique shelf presence, functionality, and cost competitiveness. The combination of our package design and engineering with our world class manufacturing facilities, uniquely positions us to take projects from concept to end product. We utilize the latest in manufacturing technology, offering several different manufacturing processes, including injection molding, compression molding, extrusion and various blow molding processes, as well as decoration and lining services. This allows us to match the optimal manufacturing platform with each customer’s desired package design and volume. Our state of the art mold designs, and our quality system, which includes the latest in vision systems and process control, allow us to meet the increasingly high standards of our customers. In addition, we have a strong reputation for quality and service, and have received numerous “Supplier Quality Achievement Awards” from customers, as well as “Distribution Industry Awards” from market associations. Our rigid closed top products are used principally in the pharmaceutical, healthcare, household chemical, and personal care end markets. Representative customers include PepsiCo, Kraft, Target Stores, Novartis, L’Oreal and Procter & Gamble. We believe that we have a unique line of rigid closed top products, and as a result of the acquisitions of MAC Closures, Inc. in December 2007 and the Captive Acquisition, our rigid closed top division has increased its scale and breadth of product offerings. See “Business—Recent Developments.”

Closures and Overcaps. We are a leading producer of closures and overcaps in many of our product lines, including continuous thread and child resistant closures, as well as aerosol overcaps. Our dispensing closure product line has been growing very rapidly, as more markets migrate towards functional closures. We currently sell our closures into numerous end markets, including pharmaceutical, vitamin and nutritional, healthcare, food and beverage and personal care. In addition to traditional closures, we are a provider of a wide selection of custom closure solutions including fitments and plugs for medical applications, cups and spouts for liquid laundry detergent, and dropper bulb assemblies for medical and personal care applications. Further, we believe that we are the leading domestic producer of injection-molded aerosol overcaps. Our aerosol overcaps are used in a wide variety of consumer goods including spray paints, household and personal care products, insecticides and numerous other commercial and consumer products. We believe our technical capabilities, expertise and low cost position have allowed us to become the leading provider of closures and overcaps to a diverse set of leading companies in the markets we serve. Our manufacturing advantage is driven by our position on the forefront of various processes including the latest in single and bi-injection technology, molding of thermoplastic and thermoset resins, compression molding of thermoplastic resins, accurate reproduction of colors and proprietary packing technology that minimizes freight cost and warehouse space. Many of our overcaps and closures are manufactured from proprietary molds, which we develop and own. This results in significant switching costs to our customers. In addition, we utilize state of the art lining, assembly, and decorating equipment in secondary operations. Our closures and aerosol overcaps customers include McCormick, Bayer, Diageo, Pepsico, Wyeth, Kraft, Sherwin-Williams and S.C. Johnson.

Prescription Vials. We are a leading supplier in the prescription vial and closure market supplying a complete line of amber plastic vials with both one-piece and two-piece child-resistant closures. We sell prescription packages to distributors and directly to pharmacies, including major retail chains such as Wal-Mart and CVS.

Bottles. Our bottle business targets similar markets as our closure business. We believe we are the leading supplier of spice containers in the United States and have a leadership position in various vitamin and nutritional markets, as well as selling bottles into prescription and pharmaceutical applications. We offer a variety of personal care packages, and see the personal care market as a strong opportunity to grow our business. While

 

69


Table of Contents

offering a set of stock bottles in the vitamin and nutritional markets, our design capabilities, along with internal engineering strength give us the ability to compete on customized designs to provide differentiation from traditional packages. We expect our bottle segment to experience continued growth in the healthcare product line, as the patented child resistant and senior friendly Tab II® product offering gains popularity. Our strong product offerings in continuous threaded, child-resistant, and tamper-evident closures, make “one-stop” shopping available to many key customers. We offer our customers decorated bottles with hot stamping, silk screening and labeling. We sell these products to personal care, pharmaceutical, food and consumer product customers, including McCormick, Nature’s Bounty, Leiner, John Paul Mitchell and Novartis.

Tubes. We believe that we are one of the largest suppliers of extruded plastic squeeze tubes in the United States. We offer a complete line of tubes from 1/2” to 2 3/16” in diameter. In fiscal 2007, we also introduced laminate tubes. Our focus has been to ensure that we are able to meet the increasing trend towards large diameter tubes with high-end decoration. We have recently introduced proprietary designs in this market that have won prestigious package awards and are viewed as very innovative both in appearance, functionality, and from a sustainability standpoint. The majority of our tubes are sold in the personal care market, focusing on products like facial/cold creams, shampoos, conditioners, bath/shower gels, lotions, sun care, hair gels and anti-aging creams. We also sell our tubes into the pharmaceutical and household chemical markets. We believe that our ability to provide creative package designs, with state of the art decorating, combined with a complementary line of closures, makes us a preferred supplier for many customers in our target markets including Kao Brands, L’Oreal, Avon, and Procter & Gamble.

Flexible Films

Our flexible films division manufactures and sells primarily polyethylene-based film products. Our principal products include trash bags, drop cloths, agricultural film, stretch film, shrink film and custom packaging film. We are one of the largest producers of plastic trash bags, stretch film and plastic sheeting in the United States. Our flexible products are used principally in the agricultural, horticultural, institutional, foodservice and retail markets. Our Ruffies® trash bags are a leading value brand of retail trash bags in the United States. In addition to our branded products for many of our customers, we are the primary supplier of private label plastic film products, which are growing more quickly than the overall films market. We believe that no other single competitor has comparable scale or diversity of plastic film products across the end markets in which we participate. This scale and diversity enable us to serve leading blue-chip customers such as Wal-Mart and Home Depot.

Do-It-Yourself. We sell branded and private label plastic sheeting for construction, consumer, and agricultural end users. These products are sold under leading brands such as Film-Gard® and Tufflite®. Our products also include drop cloths, painters’ plastics, greenhouse films, irrigation tubing, Ruffies®, Ruffies Pro® and private label trash bags. Our do-it-yourself products are sold primarily through wholesale outlets, hardware stores and home centers, paint stores and mass merchandisers, as well as agricultural distributors.

Institutional. We sell trash-can liners, food bags and meal kits for “away from home” locations such as offices, restaurants, schools, hospitals, hotels, municipalities and manufacturing facilities. We also sell products under the Big City®, Hospi-Tuff®, Plas-Tuff®, Rhino-X® and Steel-Flex® brands.

Custom Films. We manufacture a diverse group of niche custom films, including shrink-bundling film, used to wrap and consolidate sets of products, and barrier films for food, beverage and industrial packaging. These products are sold directly to converters and end users, as well as through distributors.

Stretch Films. We produce both hand and machine-wrap stretch films, which are used by end users to wrap products and packages for storage and shipping. We sell stretch film products to distributors and retail and industrial end users under the MaxTech® and PalleTech® brands.

 

70


Table of Contents

Retail. We primarily sell branded and private label retail trash bags. Our Ruffies® brand of trash bags is a leading value brand in the United States. Private label products are manufactured to the specifications of retailers and carry their customers’ brands. Retail products are sold to mass merchandisers, grocery stores, and drug stores.

Tapes and Coatings

Our tapes and coatings division produces and sells a diverse portfolio of specialty adhesive and coated and laminated products for niche applications in the industrial, oil, gas and water supply, HVAC, building and construction, retail, automotive and medical markets. We sell our tape products to retailers, distributors and end users, and manufacture these products primarily under eight brands, including Nashua® and Polyken®. Our principal tape products include heat shrinkable and polyethylene-based pipe coatings, PE coated cloth tapes, splicing/laminating tapes, flame-retardant tapes, vinyl-coated tapes, and a variety of other specialty tapes, including carton sealing, masking, mounting and OEM medical tapes. We use a wide range of substrates and basic weights of paper, film, foil and woven and non-woven fabrics to produce our products. For fiscal 2007, no single customer accounted for more than 4% of our total net sales. We manufacture our tape products under numerous brands and include the following product groups:

Tape Products. We are the leading North American manufacturer of cloth and foil tape products. Other tape products include high-quality, high performance liners of splicing and laminating tapes, flame-retardant tapes, vinyl-coated and carton sealing tapes, electrical, double-faced cloth, masking, mounting, OEM medical and other specialty tapes. These products are sold under the National™, Nashua® , and Polyken® brands in the United States. Tape products are sold primarily through distributors and directly to end users and are used predominantly in industrial, HVAC, automotive, construction and retail market applications. In addition to serving our core tape end markets, we are also a leading producer of tapes in the niche aerospace, construction and medical end markets. We believe that our success in serving these additional markets is principally due to a combination of technical and manufacturing expertise leveraged in favor of customized applications.

Corrosion Protection Products. We are the leading global producer of adhesive products to infrastructure, rehabilitation and new pipeline projects throughout the world. Our products deliver superior performance across all climates and terrains for the purpose of sealing, coupling, rehabilitation and corrosion protection of pipelines. Products include heat-shrinkable coatings, single- and multi-layer sleeves, pipeline coating tapes, anode systems for cathodic protection and epoxy coatings. Our products are sold under a number of brands, including Polyken®, Powercrete®, Raychem® and Raychem Anodeflex®. These products are used in oil, gas and water supply and construction applications. Our customers primarily include contractors managing discrete construction projects around the world as well as distributors and applicators.

Specialty Adhesives. Our Specialty Adhesives manufacturing and design capabilities support many applications in virtually every industry. We produce single and double coated transfer tapes for bonding applications for the medical, aerospace, specialty industrial and automotive assembly end-markets. Our products are primarily sold under its Patco™ and STG™ brand names and the vast majority of them are sold directly to end-use customers with whom we work to develop products for application-specific uses.

We manufacture and sell a diversified portfolio of coated and laminated products, including flexible packaging, multi-wall bags, fiber-drum packaging, housewrap, and polypropylene-based storage containers. These products are sold for use in packaging, construction, and material handling applications. We sell our coated products under a number of brands, including Barricade® and R-Wrap®. In addition, a number of our construction-related products are also sold under private labels. Our customers include converters, distributors, contractors and manufacturers. We provide products to a diverse group of end users in the food, consumer, building and construction, medical, chemical, agriculture, mining and military markets under the following product lines:

 

71


Table of Contents

Flexible Packaging. We manufacture specialty coated and laminated products for a wide variety of packaging applications. The key end-markets and applications for our products include food, consumer, healthcare, industrial and military pouches, roll wrap, multi-wall bags and fiber drum packaging. Our products are sold under the MarvelGuard™ and MarvelSeal™ brands and are predominately sold to converters who transform them into finished goods.

Building Products. We produce exterior linerboard and foil laminated sheathing, housewrap and exterior window and door flashings for the building and construction end-markets. Our products are sold under a number of market leading brands, including Barricade®, Contour™, Energy-Wrap®, Opti-Flash®, R-Wrap®, Thermo-Ply®, and WeatherTrek® . These products are sold to wholesale distributors, lumberyards and directly to building contractors.

FIBC. We manufacture customized polypropylene-based, woven and sewn containers for the transportation and storage of raw materials such as seeds, titanium dioxide, clay and resin pellets.

Marketing and Sales

We reach our large and diversified base of over 13,000 customers through our direct field sales force of dedicated professionals and the strategic use of distributors. Our field sales, production and support staff meet with customers to understand their needs and improve our product offerings and services. Our scale enables us to dedicate certain sales and marketing efforts to particular products, customers or geographic regions, when applicable, which enables us to develop expertise that is valued by our customers. In addition, because we serve common customers across segments, we have the ability to efficiently utilize our sales and marketing resources to minimize costs. Highly skilled customer service representatives are strategically located throughout our facilities to support the national field sales force. In addition, telemarketing representatives, marketing managers and sales/marketing executives oversee the marketing and sales efforts. Manufacturing and engineering personnel work closely with field sales personnel and customer service representatives to satisfy customers’ needs through the production of high-quality, value-added products and on-time deliveries.

Our sales force is also supported by technical specialists and our in-house graphics and design personnel. Our creative services department includes computer-assisted graphic design capabilities and in-house production of photopolymer printing plates. We also have a centralized color matching and materials blending department that utilizes a computerized spectrophotometer to insure that colors match those requested by customers.

We believe that we have differentiated ourselves from competitors by building a reputation for high-quality products, customer service, and innovation. Our sales team monitors customer service in an effort to ensure that we remain the primary supplier for our key accounts. This strategy requires us to develop and maintain strong relationships with our customers, including end users as well as distributors and converters. We have a technical sales team with significant knowledge of our products and processes, particularly in specialized products. This knowledge enables our sales and marketing team to work closely with our research and development organization and our customers to co-develop products and formulations to meet specific performance requirements. This partnership approach enables us to further expand our relationships with our existing customer base, develop relationships with new customers and increase sales of new products.

We market our products both under their brand names, as well as under our customers’ private labels. We produce the leading value brand of retail trash bags (Ruffies®), and we also produce the Film-Gard® brand of plastic sheeting. We are also a leading U.S. manufacturer of cloth tape, through the Nashua® and Polyken® brands. We sell coated products under a number of leading brands including Barricade® and R-Wrap®.

Manufacturing

We manufacture our rigid open top and rigid closed top products utilizing several primary molding methods including: injection, thermoforming, compression, tube extrusion and blow molding. These processes begin with raw plastic pellets, which are then converted into finished products. In the injection process, the raw pellets are

 

72


Table of Contents

melted to a liquid state and injected into a multi-cavity steel mold where the resin is allowed to solidify to take the final shape of the part. In the thermoform process, the raw resin is softened to the point where sheets of material are drawn into multi-cavity molds and formed over the molds to form the desired shape. Compression molding is a high-speed process that begins with a continuously extruded plastic melt stream that is cut while remaining at molding temperature and carried to the mold cavity. Independent mold cavities close around the molten plastic, compressing it to form the part, which is cooled and ejected. In the tube extrusion process, we extrude resin that is solidified in the shape of a tube and then cut to length. The tube then has the head added by using another extruder that extrudes molten resin into a steel die where the cut tube is inserted into the steel die. In blow molding we use three blow molding systems: injection, extrusion, and stretch blow. Injection blow molding involves injecting molten resin into a multiple cavity steel die and allowing it to solidify into a preform. The parts are then indexed to a blow station where high-pressure air is used to form the preform into the bottle. In extrusion blow molding, we extrude molten plastic into a long tube and then aluminum dies clamp around the tube and high-pressure air is used to form the bottle. In stretch blow molding, we inject molten plastic into a multi-cavity steel mold where the parts are allowed to cool in the mold until they are solidified. The parts are then brought to a stretch blow molding machine where they are reheated and then placed in aluminum dies where high pressure air is used to form the bottle.

The final cured parts are transferred from the primary molding process to corrugated containers for shipment to customers or for post-molding secondary operations (offset printing, labeling, lining, silkscreening, handle applications, etc.). We believe that our molding, handling, and post-molding capabilities are among the best in the industry. Our overall manufacturing philosophy is to be a low-cost producer by using (1) high-speed molding machines, (2) modern multi-cavity hot runner, cold runner and insulated runner molds, (3) extensive material handling automation and (4) sophisticated post-molding technology. We utilize state-of-the-art robotic packaging processes for large volume products, which enable us to reduce breakage while lowering warehousing and shipping costs.

We continuously test raw material and finished-good shipments to ensure that both our inputs and outputs meet our quality specifications. Additionally, we perform regular audits of our products and processes throughout fabrication. Given the highly competitive industry in which we compete, product quality is important to maintaining our market positions. Our national manufacturing capabilities and broad distribution network allow us to provide a high level of service to our customers in nearly every major population center in North America. Our customer base includes many national retailers, manufacturers, and distributors which rely on us to distribute to locations throughout North America. Our broad distribution network enables us to work in conjunction with our customers to minimize their lead times and inventory levels. Each plant has maintenance capabilities to support manufacturing operations. We have historically made, and intend to continue to make, significant capital investments in plant and equipment because of our objectives to improve productivity, maintain competitive advantages and foster continued growth. Capital expenditures for 2007 were $99.3 million which includes a significant amount of expenditures for capacity additions and other growth opportunities across our business as well as expenditures related to cost-saving opportunities and our estimated annual level of maintenance capital expenditures of approximately $37.3 million.

Research, Product Development and Design

We believe our technology base and research and development support are among the best in the plastics packaging industry. Using three-dimensional computer aided design technology, our full time product designers develop innovative product designs and models for the packaging market. We can simulate the molding environment by running unit-cavity prototype molds in small injection-molding, thermoform, compression and blow molding machines for research and development of new products. Production molds are then designed and outsourced for production by various companies with which we have extensive experience and established relationships or built by one of our two in-house tooling divisions located in Evansville and Chicago. Our engineers oversee the mold-building process from start to finish. We currently have a collection of over 1,700 proprietary molds. Many of our customers work in partnership with our technical representatives to develop new,

 

73


Table of Contents

more competitive products. We have enhanced our relationships with these customers by providing the technical service needed to develop products combined with our internal graphic arts support. We also utilize our in-house graphic design department to develop color and styles for new rigid products. Our design professionals work directly with our customers to develop new styles and use computer-generated graphics to enable our customers to visualize the finished product.

Additionally, at our technical centers in Lancaster, Pennsylvania, Lexington, Massachusetts, and Homer, Louisiana, we prototype new ideas, conduct research and development of new products and processes, and qualify production systems that go directly to our facilities and into production. We also have a complete product testing and quality laboratory at our Lancaster, Pennsylvania, technical center. Our research and development team also maintains pilot manufacturing facilities in our technical centers in Lexington, Massachusetts and Homer, Louisiana, where we are able to experiment with new compositions and processes with a focus on minimizing waste and improving productivity. With this combination of manufacturing simulation and quality systems support we are able to improve time to market and reduce cost. We spent $11.2 million on research and development in fiscal 2007.

Quality Assurance

Total Quality Management philosophies, including the use of statistical process control and extensive involvement of employee teams are used to increase productivity and reduce cost. We use the guidelines of ISO 9001/2000 to build a strong foundation that encourages employee involvement and teamwork. Teamwork is the approach to problem-solving, increases continuous improvement and total employee participation. Training is provided in Six Sigma and developing teamwork at all levels.

Teams utilize the Six Sigma methodology to improve internal processes and provide a systematic approach to problem solving resulting in improved customer service. The drive for teamwork and continuous improvement is an ongoing quality focus. All of our facilities are ISO9001/2000 certified or have ISO Certification as a key goal to be accomplished.

Certification requires a demonstrated compliance by a company with a set of shipping, trading and technology standards promulgated by the International Organization for Standardization (“ISO”). ISO 9001/2000 is the discipline that encourages continuous improvement throughout the organization. Extensive testing of parts for size, color, strength and material quality using statistical process control techniques and sophisticated technology is also an ongoing part of our quality assurance activities.

Systems

We have launched a project to migrate multiple legacy management information and accounting systems to a single, company wide, management information and accounting system. The migration began in the third quarter of 2007 and is scheduled to be completed in the first quarter of 2009. Once fully implemented, this change to a shared services business model (for certain processes) along with a single, company-wide, management information and accounting system is intended to further enhance our internal control over financial reporting and our operating efficiencies.

Sources and Availability of Raw Materials

The most important raw material purchased by us is plastic resin. We purchased approximately $977.7 million of resin in fiscal 2007 with approximately 68% of our resin pounds being PE, 29% PP, and 3% other. Our plastic resin purchasing strategy is to deal with only high-quality, dependable suppliers, such as Basell, Chevron, Dow, ExxonMobil, Flint Hills Resources, LP, Lyondell, Nova, Sunoco, Equistar, Westlake and Total. We believe that we have maintained strong relationships with these key suppliers and expect that such relationships will continue into the foreseeable future. The resin market is a global market and, based on our experience, we believe

 

74


Table of Contents

that adequate quantities of plastic resins will be available at market prices, but we can give you no assurances as to such availability or the prices thereof.

We also purchase various other materials, including natural and butyl rubber, tackifying resins, chemicals and adhesives, paper and packaging materials, polyester staple, raw cotton, linerboard and kraft, woven and non-woven cloth and foil. These materials are generally available from a number of suppliers.

Employees

At the end of fiscal 2007, we had approximately 12,700 employees. We are party to the following collective bargaining agreements with the:

 

   

United Steelworkers of America (290 employees in Baltimore, MD), which expires in January 2011

 

   

United Steelworkers of America (28 employees in Vancouver, WA), which expires in January 2008

 

   

Unite Here Local 150 (127 employees in Bloomington, MN), which expires in March 2008

 

   

United Association of Workers of America (77 employees in Elizabeth, NJ), which expires in May 2008

 

   

United Automobile, Aerospace, and Agricultural Implement Workers of America, Local 882 (69 employees in Columbus, GA) which expires in October 2009

 

   

United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Ally Industrial and Service Workers International Union, Local 1008 (102 employees in Constantine, MI) which expires in December 2009

None of our other domestic employees are covered by collective bargaining agreements. We believe our relations with our employees are good.

Patents and Trademarks

We rely on a combination of patents, trade secrets, unpatented know-how, trademarks, copyrights and other intellectual property rights, nondisclosure agreements and other protective measures to protect our proprietary rights. We do not believe that any individual item of our intellectual property portfolio is material to our current business. We employ various methods, including confidentiality and non-disclosure agreements with third parties, employees and consultants, to protect our trade secrets and know-how. We have licensed, and may license in the future, patents, trademarks, trade secrets, and similar proprietary rights to and from third parties.

Environmental Matters and Government Regulation

Our past and present operations and our past and present ownership and operations of real property are subject to extensive and changing federal, state, local and foreign environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposition of wastes, and cleanup of contaminated soil and ground water, or otherwise relating to the protection of the environment. We believe that we are in substantial compliance with applicable environmental laws and regulations. However, we cannot predict with any certainty that we will not in the future incur liability, which could be significant under environmental statutes and regulations with respect to non-compliance with environmental laws, contamination of sites formerly or currently owned or operated by us (including contamination caused by prior owners and operators of such sites) or the off-site disposal of regulated materials, which could be material.

We may from time to time be required to conduct remediation of releases of regulated materials at our owned or operated facilities. None of our pending remediation projects are expected to result in material costs. Like any manufacturer, we are also subject to the possibility that we may receive notices of potential liability in connection with materials that were sent to third-party recycling, treatment, and/or disposal facilities under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended,

 

75


Table of Contents

(“CERCLA”), and comparable state statutes, which impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination, and for damages to natural resources. Liability under CERCLA is retroactive, and, under certain circumstances, liability for the entire cost of a cleanup can be imposed on any responsible party. No such notices are currently pending which are expected to result in material costs.

The Food and Drug Administration (“FDA”) regulates the material content of direct-contact food and drug packages, including certain packages we manufacture pursuant to the Federal Food, Drug and Cosmetics Act. Certain of our products are also regulated by the Consumer Product Safety Commission (“CPSC”) pursuant to various federal laws, including the Consumer Product Safety Act and the Poison Prevention Packaging Act. Both the FDA and the CPSC can require the manufacturer of defective products to repurchase or recall such products and may also impose fines or penalties on the manufacturer. Similar laws exist in some states, cities and other countries in which we sell our products. In addition, laws exist in certain states restricting the sale of packaging with certain levels of heavy metals, imposing fines and penalties for non-compliance. Although we use FDA approved resins and pigments in our products that directly contact food and drug products and believe they are in material compliance with all such applicable FDA regulations, and we believe our products are in material compliance with all applicable requirements, we remain subject to the risk that our products could be found not to be in compliance with such requirements.

The plastics industry, including us, is subject to existing and potential federal, state, local and foreign legislation designed to reduce solid wastes by requiring, among other things, plastics to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of plastic products. In particular, certain states have enacted legislation requiring products packaged in plastic containers to comply with standards intended to encourage recycling and increased use of recycled materials. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of these and other similar measures. We believe that the legislation promulgated to date and such initiatives to date have not had a material adverse effect on us. There can be no assurance that any such future legislative or regulatory efforts or future initiatives would not have a material adverse effect on us.

 

76


Table of Contents

Properties

The following table sets forth our principal manufacturing facilities as of September 29, 2007:

 

Location

   Square Footage   

Use

   Owned/Leased

Aarschot, Belgium

   70,611    Manufacturing    Leased

Ahoskie, NC

   150,000    Manufacturing    Owned

Albertville, AL

   318,000    Manufacturing    Owned

Altacomulco, Mexico

   116,250    Manufacturing    Owned

Anaheim, CA

   248,000    Manufacturing    Leased

Aurora, IL

   66,900    Manufacturing    Leased

Baltimore, MD

   244,000    Manufacturing    Owned

Baroda, India

   24,196    Manufacturing    Owned

Battleboro, NC

   390,654    Manufacturing    Owned

Beaumont, TX

   42,300    Manufacturing    Owned

Belleville, Canada

   46,000    Manufacturing    Owned

Bowling Green, KY

   168,000    Manufacturing    Leased

Bremen, GA

   140,000    Manufacturing    Owned

Bristol, RI

   23,000    Manufacturing    Owned

Charlotte, NC

   150,000    Manufacturing    Owned

Charlotte, NC

   53,095    Manufacturing    Leased

Chicago, IL

   472,000    Manufacturing    Leased

Columbus, GA

   70,000    Manufacturing    Owned

Constantine, MI

   144,000    Manufacturing    Owned

Coon Rapids, MN

   64,890    Manufacturing    Owned

Covington, GA

   306,889    Manufacturing    Owned

Cranbury, NJ

   204,000    Manufacturing    Leased

Doswell, VA

   249,456    Manufacturing    Owned

Easthampton, MA

   210,000    Manufacturing    Leased

Elizabeth, NJ

   46,258    Manufacturing    Leased

Evansville, IN

   552,000    Headquarters and manufacturing    Owned

Evansville, IN

   223,000    Manufacturing    Leased

Franklin, KY

   513,000    Manufacturing    Owned

Greenville, SC

   70,000    Manufacturing    Owned

Goshen, IN

   125,000    Manufacturing    Owned

Henderson, NV

   175,000    Manufacturing    Owned

Homer, LA

   186,000    Manufacturing    Owned

Houston, TX

   18,000    Manufacturing    Owned

Iowa Falls, IA

   100,000    Manufacturing    Owned

Jackson, TN

   211,000    Manufacturing    Leased

Lakeville, MN

   200,000    Manufacturing    Owned

Lawrence, KS

   424,000    Manufacturing    Owned

Middlesex, NJ

   29,020    Manufacturing    Owned

Milan, Italy

   125,000    Manufacturing    Leased

Minneapolis, MN

   200,645    Manufacturing    Owned

Monroe, LA

   452,500    Manufacturing    Owned

Monroeville, OH

   350,000    Manufacturing    Owned

Phoenix, AZ

   266,000    Manufacturing    Leased

Pryor, OK

   198,000    Manufacturing    Owned

Richmond, IN

   160,000    Manufacturing    Owned

San Luis Potosi, Mexico

   114,000    Manufacturing    Leased

 

77


Table of Contents

Location

   Square Footage   

Use

   Owned/Leased

Sarasota, FL

   74,000    Manufacturing    Owned

Sioux Falls, SD

   230,000    Manufacturing    Owned

Streetsboro, OH

   140,000    Manufacturing    Owned

Suffolk, VA

   110,000    Manufacturing    Owned

Syracuse, NY

   215,000    Manufacturing    Leased

Tijuana, Mexico

   260,831    Manufacturing    Owned

Toluca, Mexico

   172,000    Manufacturing    Leased

Vancouver, WA

   23,000    Manufacturing    Leased

Victoria, TX

   190,000    Manufacturing    Owned

Woodstock, IL

   170,000    Manufacturing    Owned
          
   10,295,495      
          

Legal Proceedings

We are party to various legal proceedings involving routine claims which are incidental to our business. Although our legal and financial liability with respect to such proceedings cannot be estimated with certainty, we believe that any ultimate liability would not be material to our financial condition.

 

78


Table of Contents

MANAGEMENT

Executive Officers, Officer and Directors

The following table provides information regarding the executive officers, officers and members of the board of directors of Berry Group, of which we are a wholly owned subsidiary.

 

Name

   Age   

Title

Ira G. Boots(1)(3)

   54    Chairman, Chief Executive Officer and Director

R. Brent Beeler

   55    President and Chief Operating Officer

James M. Kratochvil

   51    Executive Vice President, Chief Financial Officer, Treasurer and     Secretary

Anthony M. Civale(1)(2)

   34    Director

Patrick J. Dalton

   39    Director

Donald C. Graham(1)

   75    Director

Steven C. Graham(2)

   49    Director

Joshua J. Harris

   43    Director

Robert V. Seminara(1)(2)(3)

   37    Director

 

(1)   Member of the Compensation Committee.
(2)   Member of the Audit Committee.
(3)   Member of the Executive Committee.

The following table provides information regarding the executive officers, officers and members of the board of directors of Berry Plastics Corporation.

 

Name

   Age   

Title

Ira G. Boots(1)(3)

   54    Chairman, Chief Executive Officer and Director

R. Brent Beeler

   55    President and Chief Operating Officer

James M. Kratochvil

   51    Executive Vice President, Chief Financial Officer, Treasurer and     Secretary

Anthony M. Civale(1)(2)

   34    Director

Robert V. Seminara(1)(2)(3)

   37    Director

 

(1)   Member of the Compensation Committee.
(2)   Member of the Audit Committee.
(3)   Member of the Executive Committee.

Ira G. Boots has been Chairman of the Board and Chief Executive Officer of Berry Group since the Apollo Berry Merger in September 2006. Prior to the Apollo Berry Merger, Mr. Boots had been a director and Chief Executive Officer of Berry Plastics since June 2001, and had served Berry Plastics and its predecessor companies in numerous senior management roles since 1984.

R. Brent Beeler has been President and Chief Operating Officer of Berry Plastics Group since the Apollo Berry Merger. Prior to the Apollo Berry Merger, Mr. Beeler had been President and Chief Operating Officer of Berry Plastics since May 2005 and had served Berry Plastics and its predecessor companies in numerous senior management and senior sales roles since 1985.

James M. Kratochvil has been Executive Vice President, Chief Financial Officer, Treasurer and Secretary of Berry Group since the Apollo Berry Merger. Prior to the Apollo Berry Merger, Mr. Kratochvil had served as Executive Vice President, Chief Financial Officer, Treasurer and Secretary of Berry Plastics since December 1997, as Vice President, Chief Financial Officer and Secretary of Berry Plastics since 1991, and as Treasurer of Berry Plastics since May 1996. Mr. Kratochvil was employed by Berry Plastics and our predecessor companies from 1985 to 1991 as Controller.

 

79


Table of Contents

Anthony M. Civale has been a member of our Board of Directors since the consummation of the Apollo Berry Merger. Mr. Civale is a Partner at Apollo Management, where he has worked since 1999. Prior to that time, Mr. Civale was employed by Deutsche Bank Securities in the Financial Sponsors Group within its Corporate Finance Division. Mr. Civale also serves on the boards of directors of Goodman Global Inc. and Oceania Cruises Inc.

Patrick J. Dalton has been a member of our Board of Directors since the consummation of the Apollo Berry Merger. Mr. Dalton joined Apollo Management in June 2004 as a partner and as a member of Apollo Investment Management’s (“AIM”) Investment Committee. Mr. Dalton is also the Chief Investment Officer of AIM and a member of the Investment Committees of Apollo Investment Europe, Apollo Credit Liquidity Fund and Artus/Apollo Loan Fund. Before joining Apollo, Mr. Dalton was a vice president with Goldman, Sachs & Co.’s Principal Investment Area with a focus on mezzanine investing since 2000. From 1990 to 2000, Mr. Dalton was a Vice President with the Chase Manhattan Bank where he worked most recently in the Acquisition Finance Department. Mr. Dalton graduated from Boston College with a BS in Finance and received his MBA from Columbia Business School.

Donald C. Graham founded the Graham Group, an industrial and investment concern, and has been a member of our Board of Directors since the consummation of the Apollo Berry Merger. The Graham Group is engaged in a broad array of businesses, including industrial process technology development, capital equipment production, and consumer and industrial products manufacturing. Mr. Graham founded Graham Packaging Company, in which he sold a controlling interest in 1998. The Graham Group’s three legacy industrial businesses operate in more than 80 locations worldwide, with combined sales of more than $2.75 billion. Mr. Graham currently serves on the board of directors of Western Industries, Inc., Supreme Corq LLC, National Diversified Sales, Inc., Infiltrator Systems, Inc., Touchstone Wireless Repair and Logistics LP, Nurture, Inc., Graham Engineering Corporation and Graham Architectural Products Corporation.

Steven C. Graham founded Graham Partners and has been a member of our Board of Directors since the consummation of the Apollo Berry Merger. Prior to founding Graham Partners in 1998, Mr. Graham oversaw the Graham Group’s corporate finance division starting in 1988. Prior to 1988, Mr. Graham was a member of the investment banking division of Goldman, Sachs & Co., and was an Acquisition Officer for the RAF Group, a private equity investment group. Mr. Graham currently serves on the board of directors of Graham Architectural Products Corporation, Western Industries, Inc., National Diversified Sales, Inc., HB&G Building Products, Inc., Nailite International, Inc., Schneller LLC, Supreme Corq LLC, Line-X, LLC, Abrisa Industrial Glass, Inc., Infiltrator Systems, Inc., The Masonry Group LLC, Aerostructures Acquisition, LLC, Transaxle LLC, ICG Commerce Holdings, Inc., and B&B Electronics Manufacturing Company.

Joshua J. Harris has been a member of our Board of Directors since the consummation of the Apollo Berry Merger. Mr. Harris is a founding Senior Partner at Apollo Management and has served as an officer of certain affiliates of Apollo since 1990. Prior to that time, Mr. Harris was a member of the Mergers and Acquisitions Department of Drexel Burnham Lambert Incorporated. Mr. Harris is also a director of AP Alternative Assets, Apollo Global Management LLC, Ceva Logistics, Hexion Specialty Chemicals, Metals USA, Momentive Corporation, Noranda Corporation, and Verso Paper Holdings.

Robert V. Seminara has been a member of our Board of Directors since the consummation of the Apollo Berry Merger. Mr. Seminara is a Partner at Apollo Management, where he has worked since 2003. Prior to that time, Mr. Seminara was a managing director of Evercore Partners LLC. Mr. Seminara also serves on the board of directors of Hexion Specialty Chemicals, Inc.

Board Committees

Our board of directors has a Compensation Committee, an Audit Committee and an Executive Committee. The Compensation Committee makes recommendations concerning salaries and incentive compensation for our

 

80


Table of Contents

employees and consultants. The Audit Committee, which consists of at least one financial expert, recommends the annual appointment of auditors with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees, accounting principles we use in financial reporting, internal auditing procedures and the adequacy of our internal control procedures.

Compensation Discussion and Analysis

Berry Group has a Compensation Committee comprised of Messrs. Boots, Seminara, Civale, and Donald Graham. The annual salary and bonus paid to Messrs. Boots, Kratochvil, Beeler, Hobson, Unfried, and all other vice presidents and above (collectively, the “Senior Management Group”) for fiscal 2007 were determined by the Compensation Committee in accordance with their respective employment agreements. The Compensation Committee makes all final compensation decisions for our executive officers. Below are the principles outlining our executive compensation principles and practices.

Compensation Philosophy and Analysis

Our goal as an employer is to ensure that our pay practices are equitable with regard to market wages, facilitate appropriate retention and to reward exceptional performance. The Human Resources Team obtains regional and national compensation survey data. In the past we have conducted studies with Mercer, Clark Consulting, The Conference Board and Salary.com to study other manufacturing companies similar in size. The objective is to understand how our executives compare to similarly situated people in other companies. Our study includes base salary, bonus and a time-based option value for one year. It ignores the value of any 401(k) match and medical insurance as compared to market. Those benefits are generally below market.

The Company believes that executive compensation should be designed to align closely with the interests of the Company, the executive officers and its stockholders, and to attract, motivate, reward and retain superior management talent. Berry utilizes the following guidelines pertaining to executive compensation:

 

   

Pay compensation that is competitive with the practices of other manufacturing businesses similar in size. We used Covalence as a guideline in wage comparisons this year to better align our executive team to the higher base wages paid by Covalence. In some instances, the Covalence vice presidents had their base lowered to support a higher Company bonus structure.

 

   

Wage enhancements aligned with the performance of the Company.

 

   

Pay for performance by setting performance goals determined by the CEO along with the Compensation Committee for our officers and providing a short-term incentive through a bonus plan that is based upon achievement of these goals.

 

   

Providing long-term incentives in the form of stock options, in order to retain those individuals with the leadership abilities necessary for increasing long-term shareholder value while aligning with the interests of our investors. The Compensation Committee recommends to the board of directors the number and type of stock options for the executives.

Role of Compensation Committee

The Compensation Committee’s specific roles are:

 

   

to approve and recommend to our board of directors all compensation plans for (1) the CEO of the Company, (2) all employees of the Company and its subsidiaries who report directly to the CEO and (3) other members of the Senior Management Group, as well as all compensation for our board of directors;

 

   

to approve the short-term compensation of the Senior Management Group and to recommend short-term compensation for members of our board of directors;

 

81


Table of Contents
   

to approve and authorize grants under the Company’s or its subsidiaries’ incentive plans, including all equity plans and long-term incentive plans; and

 

   

to prepare any report on executive compensation required by SEC rules and regulations for inclusion in our annual proxy statement, if any.

Role of Executives Officers

Ira Boots, Chairman and Chief Executive Officer, Brent Beeler, Chief Operating Officer, Jim Kratochvil, Chief Financial Officer and Marcia Jochem, Executive Vice President of Human Resources annually review the performance of each member of our Senior Management Group. Together they review annual goals and the performance of each individual executive officer. This information, along with the performance of the Company and market data, determines the wage adjustment recommendation presented to the Compensation Committee. All other compensation decisions with respect to officers of the Company are made by Mr. Boots pursuant to policies established in consultation with the Compensation Committee and recommendations from the Human Resource Department.

The Compensation Committee evaluates the performance of the CEO and determines the CEO’s compensation in light of the goals and objectives of the compensation program. On at least an annual basis, the Compensation Committee expects to review the performance of the CEO as compared with the achievement of the Company’s goals and any individual goals. The CEO together with the Human Resource Department will assess the performance and compensation of the other named executives. The Human Resource Department, together with the CEO, annually will review the performance of each member of the Senior Management Group as compared with the achievement of Company or operating division goals, as the case may be, together with each executive’s individual goals and makes recommendations to the Compensation Committee. The Compensation Committee can exercise its discretion in modifying any recommended adjustments or awards to the executives. Both performance and compensation are evaluated to ensure that the Company is able to attract and retain high quality executives in vital positions and that the compensation, taken as a whole, is competitive and appropriate compared to that of similarly situated executives in other corporations within the industry.

Executive Compensation Program

The compensation for our executive officers is primarily in the following three categories: (1) salary, (2) bonus and (3) stock options. Berry has selected these elements because each is considered useful and/or necessary to meet one or more of the principal objectives of the business. Base salary and bonus targets are set with the goal of motivating executive officers and adequately compensating and rewarding them on a day-to-day basis for the time spent and the services they perform while our equity programs are geared toward providing an incentive and reward for the achievement of long-term business objectives and retaining key talent and more closely aligning the interests of the executive officers with our shareholders. In light of the Berry Covalence Merger, the Company determined that it was appropriate to increase compensation of the executive officers to reflect the increase in duties and to better align the base salaries of the two companies. We believe that these elements of compensation, when combined, are effective, and will continue to be effective.

The compensation program is reviewed on an annual basis. In setting individual compensation levels for a particular executive, the total compensation package is considered as well as the executive’s past and expected future contributions to our business.

Base Salary

Our executive officers’ base salaries depend on their position within the Company, the scope of their responsibilities and the period during which they have been performing those responsibilities and their overall performance. Base salaries are reviewed on a regular basis annually and will be adjusted from time to time to

 

82


Table of Contents

realign salaries with market levels after taking into account individual responsibilities, performance and experience, as well as the terms of any agreements we have in place with such executive officer.

Annual Bonus

Berry has a long history of sharing profits with employees. This philosophy is embedded in the corporate culture and is one of many practices that have enabled the Company to continually focus on improvement and be successful. Below is the calculation, funding and annual payment practice for the executive bonus program which is subject to approval every year by the board of directors. It is our goal to exceed our commitments year after year. Depending on our overall business performance specifically related to EBITDA and Company growth and each executive’s individual performance, he or she would be eligible to receive a bonus ranging from zero to 108% of his or her base salary. Performance targets are generally set on an annualized basis.

1. Calculation:

75%–based on achieving 100% of annual EBITDA target

25%–based on growing the equity value of the Company

2. Funding:

By meeting both targets, executives qualify to earn 68.5% of their annualized salary in a bonus payment. This target slides up or down depending on the performance of the Company.

3. Payment:

With board approval, bonus is paid on an annual basis, which normally happens at the end of February. In February 2007, executive bonus payout included only those months since the Apollo Berry Merger, as the first nine months were paid at the time of the Apollo Berry Merger.

The Compensation Committee is currently working with the executive officers to determine the performance metrics to apply to our 2008 bonus plan year, and we expect that our executive officers will continue to be subject to the same financial performance metrics as other salaried employees of the Company.

Stock Options

In connection with the completion of the Apollo Berry Merger, we adopted the Berry Plastics Group, Inc., 2006 Equity Incentive Plan (“the Equity Incentive Plan”) which permits us to grant stock options, rights to purchase shares, restricted stock, restricted stock units, and other stock-based rights to employees or directors of, or consultants to, us, or any of our subsidiaries. The Equity Incentive Plan is administered by our board of directors or, if determined by such board, by the Compensation Committee of the board. As of September 30, 2007, approximately 622,000 shares of our common stock have been reserved for issuance under the Equity Incentive Plan.

As discussed below, we have awarded stock options to members of our management. However, the Compensation Committee has not established any formal program, plan or practice for the issuance of equity awards to employees. We do not have any program, plan or practice in place for selecting grant dates for awards under the Equity Incentive Plan in coordination with the release of material non-public information. Under the Equity Incentive Plan, the exercise price for the option awards is the fair market value of the stock of Berry Group on the date of grant. The fair market value of Berry Group’s stock is determined by the board of directors on a regular basis, at least annually, using accepted valuation techniques. The Compensation Committee is not prohibited from granting awards at times when it is in possession of material non-public information. However, no inside information was taken into account in determining the number of options previously awarded or the

 

83


Table of Contents

exercise price for those awards, and we did not “time” the release of any material non-public information to affect the value of those awards.

The Compensation Committee believes that the granting of awards under the Equity Incentive Plan promotes, on a short-term and long-term basis, an enhanced personal interest and alignment of interests of those executives receiving equity awards with the goals and strategies of the Company. The Compensation Committee also believes that the equity grants provide not only financial rewards to such executives for achieving Company goals but also provide additional incentives for executives to remain with the Company.

Immediately following the completion of the Apollo Berry Merger, we granted management participants stock options that are subject to the terms of the Equity Incentive Plan. In connection with the grants, we entered into stock option award agreements with the management participants.

The exercise price per share of our common stock subject to the options granted to the management participants was the fair market value per share on the date of grant.

Generally, the options will become vested and exercisable ratably over a five-year period, subject to the grantee’s continued provision of services to the Company as of the applicable vesting date, and in some cases, the performance of the Company.

Since the Apollo Berry Merger, Berry Group clarified the anti-dilution provisions of its stock option plans to require payment to holders of outstanding stock options of special dividends and a pro-rata share of transaction fees that may be paid to our Sponsors in connection with certain future transactions. In connection with the $77 per share dividend paid, holders of vested stock options received $13.7 million, while an additional $34.5 million will be paid to nonvested option holders on the second anniversary of the dividend grant date (assuming the nonvested option holders remain employed by the Company).

The maximum term of stock options granted by Berry Group is ten years. However, subject to certain exceptions set forth in the applicable stock option award agreement, unvested options will automatically expire 90 days after the date of a grantee’s termination of employment, or one year in the case of termination due to death or disability. In the case of a termination of employment due to death or disability, an additional 20% of an individual’s options will vest 20% of outstanding options become vested earlier upon a “change in control” of Berry Group, and 40% of outstanding options become vested earlier if such change in control results in the achievement of a targeted internal rate of return.

Shares of Berry Group common stock acquired under the Equity Incentive Plan are subject to restrictions on transfer, repurchase rights, and other limitations set forth in a stockholders agreement.

Post-Employment Compensation

We provide post-employment compensation to our employees, including our named executive officers, as a continuance of the post-retirement programs sponsored by prior owners and applicable to our employees prior to the Apollo Berry Merger. The Compensation Committee believes that offering such compensation allows us to attract and retain qualified employees and executives in a highly competitive marketplace and rewards our employees and executives for their contribution to the Company during their employment. The principal components of our post-employment executive officer compensation program include a qualified defined contribution 401(k) plan and a retirement health plan.

401(k) Plan

Our executive officers are eligible to participate in our company-wide 401(k) qualified plan for employees. The Company awards a $200 lump sum contribution annually for participating in the plan and matches dollar for

 

84


Table of Contents

dollar the first $300, and a 10% match thereafter. Participants who contribute at least $1,000 will also receive an addition $150 lump sum deposit at the end of the year. Company matching contributions are 100% vested immediately.

Perquisites and Other Personal Benefits

While we believe that perquisites should be a minor part of executive compensation, we recognize the need to provide our executive officers with perquisites and other personal benefits that are reasonable, competitive and consistent with the overall compensation program in order to enable us to attract and retain qualified employees for key positions. Accordingly, we provide our executive officers with leased company vehicles including maintenance and operational cost. The Compensation Committee periodically reviews the perquisites provided to our executive officers.

The following table sets forth a summary of the compensation paid by us to our Chief Executive Officer and our four other most highly compensated executive officers (collectively, the “Named Executive Officers”) for services rendered in all capacities to us during fiscal 2007, 2006 and 2005.

Summary Compensation Table

 

Name and Principal Position

   Fiscal
Year
   Salary    Option
Awards
($)
   Bonus(1)    All Other
Compensation
   Total ($)

Ira G. Boots
Chairman and Chief Executive Officer

   2007    $ 760,434    $ —      $ 649,431    $ —      $ 1,409,865
   2006      589,031      704,178      9,840,217      —        11,133,426
   2005      452,058      —        299,323      —        751,381

James M. Kratochvil
Executive Vice President, Chief Financial Officer, Treasurer and Secretary

   2007
2006
   $
 
406,602
333,817
   $
 
—  
403,332
   $
 
349,694
4,300,854
   $
 
—  
—  
   $
 
756,296
5,038,003
   2005      291,229      —        192,422      —        483,651
                 

R. Brent Beeler
Executive Vice President and Chief Operating Officer

   2007    $ 605,119    $ —      $ 549,519    $ —      $ 1,154,638
   2006      501,432      403,332      3,977,444      —        4,882,208
   2005      368,640      135,000      236,325      —        739,965

Randall J. Hobson
President—Rigid Closed Top Division

   2007    $ 259,940    $ —      $ 249,781    $ —      $ 509,721
   2006      237,006      264,480      850,424      —        1,351,910
   2005      162,707      56,520      95,900      —        315,127

G. Adam Unfried
President—Rigid Open Top Division

   2007    $ 259,953    $ —      $ 249,781    $ —      $ 509,734
   2006      237,087      264,480      856,060      —        1,357,627
   2005      166,449      56,520      90,420      —        313,389

 

(1)   Amounts shown include amounts paid to Messrs. Boots, Kratochvil, Beeler, Hobson, and Unfried at the time of the Apollo Berry Merger of $9,450,000, $4,050,000, $3,650,000, $700,000, and $700,000, respectively.

Employment Agreements

In connection with the Apollo Berry Merger, Berry Plastics entered into employment agreements with each of Messrs. Boots, Beeler and Kratochvil that supersede their previous employment agreements with Berry Plastics and that expire on December 31, 2011. In addition, Messrs. Hobson and Unfried entered into amendments to their existing employment agreements with Berry Plastics that extend the terms of such agreements through December 31, 2011 (each of the agreements with Messrs. Boots, Beeler, Kratochvil, Hobson and Unfried, as amended, an “Employment Agreement” and, collectively, the “Employment Agreements”). The Employment Agreements provided for fiscal 2007 base compensation are disclosed in the “Summary

 

85


Table of Contents

Compensation Table” above. Salaries are subject in each case to annual adjustment at the discretion of the Compensation Committee of the board of directors of Berry Plastics. The Employment Agreements entitle each executive to participate in all other incentive compensation plans established for executive officers of Berry Plastics. Berry Plastics may terminate each Employment Agreement for “cause” or a “disability” (as such terms are defined in the Employment Agreements). Specifically, if any of Messrs. Boots, Beeler, Kratochvil, Hobson, and Unfried is terminated by Berry Plastics without “cause” or resigns for “good reason” (as such terms are defined in the Employment Agreements), that individual is entitled to: (1) the greater of (a) base salary until the later of one year after termination or (b) 1/12 of one year’s base salary for each year of employment up to 30 years with Berry Plastics or a predecessor in interest (excluding Messrs. Hobson and Unfried, who would be entitled to (a) only) and (2) the pro rata portion of his annual bonus. Each Employment Agreement also includes customary noncompetition, nondisclosure and nonsolicitation provisions.

Grants of Plan-Based Awards for Fiscal 2007

As discussed previously, in connection with the Apollo Berry Merger, we adopted the Equity Incentive Plan. No equity awards were granted to our named executive officers in fiscal 2007.

Outstanding Equity Awards at Fiscal Year-End Table

 

Name

   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   Option
Exercise
Price
   Option
Expiration
Date

Ira G. Boots

   10,563    25,860    $ 100    9/20/16

James M. Kratochvil

   6,051    14,811    $ 100    9/20/16

R. Brent Beeler

   6,051    14,811    $ 100    9/20/16

Randall J. Hobson

   3,966    9,714    $ 100    9/20/16

G. Adam Unfried

   3,966    9,714    $ 100    9/20/16

Option Exercises and Stock Vested for 2007

No options were exercised by our named executive officers in fiscal 2007.

Compensation for Directors

Non-employee directors receive $12,500 per quarter plus $2,000 for each meeting they attend and are reimbursed for out-of-pocket expenses incurred in connection with their duties as directors. In addition, directors of Old Covalence received $12,500 per quarter plus $2,000 for each meeting they attend and were reimbursed for out-of-pocket expenses incurred in connection with their duties as directors. For the fiscal year ended September 29, 2007, we paid non-employee directors’ fees on a combined basis as shown in the following table.

Director Compensation Table for Fiscal 2007

 

Name

   Fees
Earned

or Paid
in Cash
($)
   Option
Awards
($)
   Total ($)

Anthony M. Civale

   $ 124,000    $ —      $ 124,000

Patrick J. Dalton

     50,000      —        50,000

Donald C. Graham

     62,500      —        62,500

Steven C. Graham

     62,500      —        62,500

Joshua J. Harris

     108,000      —        108,000

Robert V. Seminara

     116,000      —        116,000

 

86


Table of Contents

Equity Compensation Plan Information

The following table provides information as of September 29, 2007 regarding shares of common stock of Berry Group that may be issued under our Equity Incentive Plan.

 

Plan category

   Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
    Weighted Average
exercise price of
outstanding
options, warrants
and rights
   Number of securities
remaining available for
future issuance
under equity
compensation plan
(excluding securities
referenced
in column(a))
   (a )     

Equity compensation plans approved by security holders

   —       —      —  

Equity compensation plans not approved by security holders(1)

   618,620 (2)   100    3,632
               

Total

   618,620     100    3,632

 

(1)   Consists of the Equity Incentive Plan which our board adopted in September 2006.
(2)   Does not include shares of Berry Group common stock already purchased as such shares are already reflected in the Company’s outstanding shares.

2006 Equity Incentive Plan

As discussed previously, in connection with the Apollo Berry Merger, we adopted the Equity Incentive Plan. The purpose of the Equity Incentive Plan is to further our growth and success, to enable our directors, executive officers and employees to acquire shares of our common stock, thereby increasing their personal interest in our growth and success, and to provide a means of rewarding outstanding performance by such persons. Options granted under the Equity Incentive Plan may not be assigned or transferred, except to us or by will or the laws of descent or distribution. The Equity Incentive Plan terminates ten years after adoption and no options may be granted under the plan thereafter. The Equity Incentive Plan allows for the issuance of non-qualified options, options intended to qualify as “incentive stock options” within the meaning of the Internal Revenue Code of 1986, as amended, and stock appreciation rights.

The employees participating in the Equity Incentive Plan receive options and stock appreciation rights under the Equity Incentive Plan pursuant to individual option and stock appreciation rights agreements, the terms and conditions of which are substantially identical. Each option agreement provides for the issuance of options to purchase common stock of Berry Group.

As of September 29, 2007, there were outstanding options to purchase 612,928 shares of Berry Group’s common stock and stock appreciation rights with respect to 5,692 shares of Berry Group’s common stock.

 

87


Table of Contents

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

We make cash payments to Berry Group to enable it to pay any (i) federal, state or local income taxes to the extent that such income taxes are directly attributable to our and our subsidiaries’ income, (ii) franchise taxes and other fees required to maintain Berry Group’s legal existence and (iii) corporate overhead expenses incurred in the ordinary course of business and salaries or other compensation of employees who perform services for both Berry Group and us.

In connection with the Apollo Berry Merger, our Sponsors and certain of our employees who invested in Berry Group entered into a stockholders agreement. The stockholders agreement provides for, among other things, a restriction on the transferability of each such person’s equity ownership in us, tag-along rights, drag-along rights, piggyback registration rights and repurchase rights by us in certain circumstances.

Berry Plastics Corporation is charged a management fee by our Sponsors for the provision of management consulting and advisory services provided throughout the year. The management fee is the greater of $3.0 million or 1.25% of Adjusted EBITDA. In addition, our Sponsors have the right to terminate the agreement at any time, in which case the Sponsors will receive additional consideration equal to the present value of $21 million less the aggregate amount of annual management fees previously paid to the Sponsors, and the employee stockholders will receive a pro rata payment based on such amount.

Old Covalence was charged a management fee by Apollo Management V, L.P., an affiliate of its principal stockholder, for the provision of management consulting and advisory services provided throughout the year. The annual management fee is the greater of $2.5 million or 1.5% of Adjusted EBITDA. This agreement was terminated effective with the Berry Covalence Merger.

The Old Covalence fee was payable at the beginning of each fiscal year and the Berry Plastics fee is paid quarterly. Old Covalence paid $2.5 million in fiscal 2007. Old Berry Holding and Berry Plastics paid $2.5 million to entities affiliated with Apollo and $0.5 million to entities affiliated with Graham collectively for fiscal 2007.

 

88


Table of Contents

PRINCIPAL STOCKHOLDERS

We are a wholly owned subsidiary of Berry Group. The following table sets forth certain information regarding the beneficial ownership of the common stock of Berry Group with respect to each person that is a beneficial owner of more than 5% of its outstanding common stock and beneficial ownership of its common stock by each director and each executive officer named in the Summary Compensation Table and all directors and executive officers as a group as of March 29, 2008.

 

Name and Address of Owner(1)

   Number of
Shares of
Common
Stock(1)
   Percent of
Class
 

Apollo Investment Fund VI, L.P.(2)

   3,559,930    51.2 %

Apollo Investment Fund V, L.P.(3)

   1,902,558    27.4 %

AP Berry Holdings, L.P.(4)

   1,641,269    23.6 %

Graham Berry Holdings, LP(5)

   500,000    7.2 %

Ira G. Boots(6)

   134,299    1.9 %

James M. Kratochvil(6)

   76,340    1.1 %

R. Brent Beeler(6)

   76,563    1.1 %

G. Adam Unfried(6)

   17,725    *  

Randall J. Hobson(6)

   20,853    *  

Anthony M. Civale(7),(8)

   3,531    *  

Patrick J. Dalton(7),(8)

   2,000    *  

Donald C. Graham(7),(9)

   2,000    *  

Steven C. Graham(7),(9)

   2,000    *  

Joshua J. Harris(7),(8)

   3,531    *  

Robert V. Seminara(7),(8)

   3,531    *  

All directors and executive officers as a group (11 persons)

   342,373    4.9 %

 

 *   Less than 1% of common stock outstanding.
(1)   The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power, which includes the power to vote or direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest. Except as otherwise indicated in these footnotes, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock.
(2)   Represents all equity interests of Berry Group held of record by controlled affiliates of Apollo Investment Fund VI, L.P., including AP Berry Holdings, LLC and BPC Co-Investment Holdings, LLC. Apollo Management VI, L.P. has the voting and investment power over the shares held on behalf of Apollo. Each of Messrs. Civale, Dalton, Harris, and Seminara, who have relationships with Apollo, disclaim beneficial ownership of any shares of Berry Group that may be deemed beneficially owned by Apollo Management VI, L.P., except to the extent of any pecuniary interest therein. Each of Apollo Management VI, L.P., AP Berry Holdings, LLC and its affiliated investment funds disclaims beneficial ownership of any such shares in which it does not have a pecuniary interest. The address of Apollo Management VI, L.P., Apollo Investment Fund VI, L.P., and AP Berry Holdings LLC is c/o Apollo Management, L.P., 9 West 57th Street, New York, New York 10019.
(3)   Represents all equity interests of Berry Group held of record by controlled affiliates of Apollo Investment Fund V, L.P., including Apollo V Covalence Holdings, LLC and Covalence Co-Investment Holdings, L.P. Apollo Management V, L.P. has the voting and investment power over the shares held on behalf of Apollo. Each of Messrs. Civale, Dalton, Harris, and Seminara, who have relationships with Apollo, disclaim beneficial ownership of any shares of Berry Group that may be deemed beneficially owned by Apollo Management V, L.P., except to the extent of any pecuniary interest therein. Each of Apollo Management V, L.P., Apollo V Covalence Holdings, LLC and its affiliated investment funds disclaims beneficial ownership of any such shares in which it does not have a pecuniary interest. The address of Apollo Management V, L.P., Apollo Investment Fund V, L.P., and Apollo V Covalence Holdings, LLC is c/o Apollo Management, L.P., 9 West 57th Street, New York, New York 10019.
(4)   The address of AP Berry Holdings LLC is c/o Apollo Management, L.P., 9 West 57th Street, New York, New York 10019.
(5)  

Graham Partners II, L.P., as the sole member of the general partner of Graham Berry Holdings, L.P., has the voting and investment power over the shares held by Graham Berry Holdings, L.P. Each of Messrs. Steven Graham and Donald Graham, who have

 

89


Table of Contents
 

relationships with Graham Partners II, L.P. and/or Graham Berry Holdings, L.P., disclaim beneficial ownership of any shares of Berry Group that may be deemed beneficially owned by Graham Partners II, L.P. or Graham Berry Holdings, L.P. except to the extent of any pecuniary interest therein. Each of Graham Partners II, L.P. and its affiliates disclaims beneficial ownership of any such shares in which it does not have a pecuniary interest. The address of Graham Partners II, L.P. and Graham Berry Holdings, L.P. is 3811 West Chester Pike, Building 2, Suite 200 Newtown Square, Pennsylvania 19073.

(6)   The address of Messrs. Boots, Beeler, Kratochvil, Unfried, and Hobson is c/o Berry Plastics Corporation, 101 Oakley Street, Evansville, Indiana 47710. Total includes underlying options that are vested or scheduled to vest within 60 days of March 29, 2008.
(7)   Total represents underlying options that are vested or scheduled to vest within 60 days of March 29, 2008 for each of Messrs. Civale, Dalton, Donald Graham, Steven Graham, Harris and Seminara.
(8)   The address of Messrs. Civale, Harris, Seminara and Dalton is c/o Apollo Management, L.P., 9 West 57th Street, New York, New York 10019.
(9)   The address of Messrs. Steven Graham and Donald Graham is c/o Graham Partners II, L.P., 3811 West Chester Pike, Building 2, Suite 200 Newtown Square, Pennsylvania 19073.

 

90


Table of Contents

DESCRIPTION OF OTHER INDEBTEDNESS

First Priority Senior Secured Credit Facilities

The Company is a party to senior secured credit facilities that include a term loan in the principal amount of $1,200.0 million and a revolving credit facility which provides borrowing availability equal to the lesser of (a) $400.0 million or (b) the borrowing base, which is a function, among other things, of the Company’s accounts receivable and inventory. The term loan matures on April 3, 2015 and the revolving credit facility matures on April 3, 2013.

The borrowing base is, at any time of determination, an amount (net of reserves) equal to the sum of:

 

   

85% of the net amount of eligible accounts receivable; and

 

   

85% of the net orderly liquidation value of eligible inventory.

The revolving credit facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as swingline loans.

At December 29, 2007, the Company had unused borrowing capacity of $297.2 million under the revolving credit facility, and $31.8 million in letters of credit were outstanding.

The borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, as determined at our option, either (a) a base rate (“Base Rate”) determined by reference to the higher of (1) the prime rate of Credit Suisse, Cayman Islands Branch, as administrative agent, in the case of the term loan facility or Bank of America, N.A., as administrative agent, in the case of the revolving credit facility and (2) the U.S. federal funds rate plus 1/2 of 1% or (b) a eurodollar rate (“LIBOR”) determined by reference to the costs of funds for eurodollar deposits in dollars in the London interbank market for the interest period relevant to such borrowing adjusted for certain additional costs. The initial applicable margin for LIBOR rate borrowings under the revolving credit facility was 1.25% and under the term loan is 2.00%. The initial applicable margin for base rate borrowings under the revolving credit facility was 0% and under the term loan was 1.00%. The applicable margin for such borrowings under the revolving credit facility will be adjusted depending on quarterly average daily unused borrowing capacity under the revolving credit facility.

The term loan facility requires minimum quarterly principal payments of $3.0 million for the first eight years, commencing in June 2007, with the remaining amount payable on April 3, 2015. In addition, the Company must prepay the outstanding term loan, subject to certain exceptions, with:

 

   

50% (which percentage is subject to a minimum of 0% upon the achievement of certain leverage ratios) of excess cash flow (as defined in the term loan credit agreement); and

 

   

100% of the net cash proceeds of all non-ordinary course asset sales and casualty and condemnation events, if the Company does not reinvest or commit to reinvest those proceeds in assets to be used in its business or to make certain other permitted investments within 15 months, subject to certain limitations.

In addition to paying interest on outstanding principal under the senior secured credit facilities, the Company is required to pay a commitment fee to the lenders under the revolving credit facilities in respect of the unutilized commitments thereunder at a rate equal to 0.25% to 0.30% per annum depending on the average daily available unused borrowing capacity. The Company also pays a customary letter of credit fee, including a fronting fee of 0.125% per annum of the stated amount of each outstanding letter of credit, and customary agency fees.

The Company may voluntarily repay outstanding loans under the senior secured credit facilities at any time without premium or penalty, other than customary “breakage” costs with respect to eurodollar loans.

 

91


Table of Contents

The senior secured credit facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability, and the ability of our subsidiaries, to:

 

   

sell assets;

 

   

incur additional indebtedness;

 

   

repay other indebtedness;

 

   

pay dividends and distributions or repurchase our capital stock;

 

   

create liens on assets;

 

   

make investments, loans, guarantees or advances;

 

   

make certain acquisitions;

 

   

engage in mergers or consolidations;

 

   

enter into sale leaseback transactions;

 

   

engage in certain transactions with affiliates;

 

   

amend certain material agreements governing our indebtedness;

 

   

amend our organizational documents;

 

   

change the business conducted by us and our subsidiaries;

 

   

change our fiscal year end; and

 

   

enter into agreements that restrict dividends from subsidiaries.

In addition, the revolving credit facility requires us to maintain a minimum fixed charge coverage ratio at any time when the aggregate unused revolver capacity falls below 10% of the lesser of the revolving credit facility commitments and the borrowing base (and for 10 business days following the date upon which availability exceeds such threshold) or during the continuation of an event of default. In that event, we must satisfy a minimum fixed charge coverage ratio requirement of 1.0:1.0. The term loan facility also requires us to use commercially reasonable efforts to maintain corporate ratings from each of Moody’s Investors Service, Inc. (“Moody’s”), and Standard & Poor’s Ratings Group, Inc. (“S&P”) for the term loan facility. The senior secured credit facilities also contain certain other customary affirmative covenants and events of default.

All obligations under the senior secured credit facilities are unconditionally guaranteed by Berry Group and, subject to certain exceptions, each of the Company’s existing and future direct and indirect domestic subsidiaries. The guarantees of those obligations are secured by substantially all of the Company’s assets and those of each domestic subsidiary Guarantor as well as the equity interests in the Company held by Berry Group.

Second Priority Senior Secured Notes and Senior Subordinated Notes

The Company issued $750.0 million in aggregate principal amount of Second Priority Notes, comprised of $525.0 million in Fixed Rate Notes and $225.0 million in aggregate principal amount of Floating Rate Notes. The Second Priority Notes will mature on September 15, 2014. The notes were exchanged for substantially identical notes, except that the notes carried in exchange are not subject to transfer restrictions. All of our Second Priority Notes are secured, senior obligations and are guaranteed on a second priority secured, senior basis by each of our subsidiaries that guarantees our senior secured credit facilities. No principal payments are required with respect to the Second Priority Notes prior to maturity.

The Company issued, in a private placement exempt from the Securities Act, $425.0 million of 11% Senior Subordinated Notes due September 15, 2016. The 11% Senior Subordinated Notes are senior subordinated

 

92


Table of Contents

obligations of the Company and rank junior to all other senior indebtedness of the Company that does not contain similar subordination provisions. No principal payments are required with respect to the 11% Senior Subordinated Notes prior to maturity.

The Company also issued $265.0 million of 10 1/4% Senior Subordinated Notes due March 1, 2016. The currently outstanding 10 1/4% Senior Subordinated Notes are senior subordinated obligations of the Company and rank junior to all other senior indebtedness of the Company that does not contain similar subordination provisions. No principal payments are required with respect to the 10 1/4 % Senior Subordinated Notes prior to maturity.

The Fixed Rate Notes may be redeemed, at our option, prior to September 15, 2010, at a price equal to 100% of the principal amount of the Fixed Rate Notes redeemed, plus accrued and unpaid interest and additional interest, if any, to the redemption date, plus an “applicable premium.” On or after September 15, 2010, we may redeem some or all of the Fixed Rate Notes at redemption prices set forth in the indenture. The Floating Rate Notes may be redeemed, at our option, on or after September 15, 2008 at redemption prices set forth in the indenture. Additionally, on or prior to September 15, 2009 and September 15, 2008, we may redeem up to 35% of the aggregate principal amount of the Fixed Rate Notes and Floating Rate Notes, respectively, with the net proceeds of specified equity offerings at specified redemption prices. If a change of control occurs, the Company must give holders of the Second Priority Notes an opportunity to sell their notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. The 11% Senior Subordinated Notes and the 10 1/4% Senior Subordinated Notes may be redeemed at the Company’s option under circumstances and at redemption prices set forth in the applicable indenture. Upon the occurrence of a change of control, the Company is required to offer to repurchase all of the 11% Senior Subordinated Notes and the 10 1/4% Senior Subordinated Notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest.

The indentures relating to the Second Priority Notes and the Company’s other outstanding notes each contain a number of covenants that, among other things and subject to certain exceptions, restrict the ability of the Company and its restricted subsidiaries to incur indebtedness or issue disqualified stock or preferred stock, pay dividends or redeem or repurchase stock, make certain types of investments, sell assets, incur certain liens, enter into agreements restricting dividends or other payments from subsidiaries, enter into certain transactions with affiliates and consolidate, merge or sell all or substantially all of our assets.

Covenant Compliance

Our fixed charge coverage ratio, as defined in the revolving credit facility, is calculated based on a numerator consisting of Adjusted EBITDA less income taxes paid in cash and capital expenditures, and a denominator consisting of scheduled principal payments in respect of indebtedness for borrowed money, interest expense and certain distributions. Our fixed charge coverage ratio, as defined in the indentures relating to the Second Priority Notes, 11% Senior Subordinated Notes, 10 1/4% Senior Subordinated Notes, is calculated based on a numerator consisting of Adjusted EBITDA, and a denominator consisting of interest expense and certain distributions. We are required, under our debt incurrence covenant, to use a rolling four quarter Adjusted EBITDA in our calculations.

We are required to maintain a minimum fixed charge coverage ratio of 1.0:1.0 under the revolving credit facility at any time when the aggregate unused capacity under the revolving credit facility is less than 10% of the lesser of the revolving credit facility commitments and the borrowing base (and for 10 business days following the date upon which availability exceeds such threshold) or during the continuation of an event of default. At September 29, 2007, the Company had unused borrowing capacity of $320.7 million under the revolving credit facility subject to a borrowing base.

Failure to maintain a first lien secured indebtedness ratio of 4.0 to 1.0 under the term loan facility, a fixed charge coverage ratio of 2.0:1.0 under the indentures relating to the 11% Senior Subordinated Notes, 10 1/4%

 

93


Table of Contents

Senior Subordinated Notes and the Second Priority Notes, and unused borrowing capacity under the revolving credit facility of at least $100 million, or, if between $60 million and $100 million, a fixed charge coverage ratio of 1.0:1.0 under the revolving credit facility, can result in limiting our long-term growth prospects by hindering our ability to incur additional indebtedness, effect acquisitions, enter into certain significant business combinations, make distributions or redeem indebtedness.

Berry Plastics Group, Inc. Term Loan Credit Agreement

Berry Plastics Group, Inc., the corporate parent of Berry Plastics Corporation, entered into a term loan credit facility on June 5, 2007, providing for term loans of $500,000,000 in original principal amount. The term loans mature on June 5, 2014, are unsecured senior obligations of Berry Group and are not guaranteed by any of its subsidiaries.

The borrowings under the Berry Group term loan facility bear interest at a rate equal to an applicable margin plus, as determined at Berry Group’s option, either (a) a base rate (“Base Rate”) determined by reference to the higher of (1) the prime rate of Credit Suisse, Cayman Islands Branch, as administrative agent, and (2) the U.S. federal funds rate plus 1/2 of 1% or (b) a eurodollar rate (“LIBOR”) determined by reference to the costs of funds for eurodollar deposits in dollars in the London interbank market for a three-month interest period, adjusted for certain additional costs. The initial applicable margin for LIBOR borrowings under the Berry Group term loan facility was 6.25% per annum, and the initial applicable margin for base rate borrowings was 5.25% per annum.

For any interest period ending on or prior to June 5, 2012, Berry Group may, at its option, elect to pay interest on the term loans (a) in cash, (b) by increasing the outstanding principal amount of the term loans by the amount of interest accrued during such interest period (a “PIK Election”) or (c) by paying 50% of the interest accrued during such period in cash and 50% by PIK Election. Any portion of interest subject to a PIK Election shall be payable at LIBOR plus the applicable margin plus an additional 0.75% per annum. With respect to any interest period ending after June 5, 2012, interest will be payable in cash.

If the term loans would otherwise constitute “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended from time to time and the regulations promulgated and the rulings issued thereunder, then at the end of each interest period ending after June 5, 2012, Berry Group must repay in cash a portion of each term loan then outstanding equal to the portion of a term loan required to be repaid to prevent such term loan from being treated as an “applicable high yield discount obligation.” In other words, Berry Group expects that it will have to repay in cash at the end of the first interest period ending after June 5, 2012 (and at the end of each subsequent interest period) a principal amount of Berry Group term loans sufficient to cause the accrued and unpaid interest (including interest paid by PIK election) not to exceed the amount of interest that accrued on the term loans during the one-year period beginning on June 5, 2007.

The Berry Group term loans may be repaid, at its option, prior to June 5, 2008, at a price equal to 100% of the principal amount of the term loans repaid, plus accrued and unpaid interest, if any, to the repayment date, plus an “applicable premium.” On or after June 5, 2008 but on or prior to June 5, 2009, Berry Group may repay some or all of the term loans, at its option, at 102% of the principal amount of the term loans repaid, plus accrued and unpaid interest. On or after June 6, 2009 but on or prior to June 5, 2010, Berry Group may repay some or all of the term loans, at its option, at 101% of the principal amount of the term loans repaid, plus accrued and unpaid interest. At any time on or after June 6, 2010, Berry Group may repay some or all of the term loans, at its option, at 100% of the principal amount of the term loans repaid, plus accrued and unpaid interest.

Upon the occurrence of a change of control of Berry Group, lenders of the Berry Group term loans have the right to have their loans repaid at 101% of the principal amount thereof plus accrued and unpaid interest.

The credit agreement relating to the Berry Group term loans contains a number of covenants that, among other things and subject to certain exceptions, restrict the ability of Berry Group and its restricted subsidiaries to

 

94


Table of Contents

incur indebtedness or issue disqualified stock or preferred stock, pay dividends or redeem or repurchase stock, make certain types of investments, sell assets, incur certain liens, enter into agreements restricting dividends or other payments from subsidiaries, enter into certain transactions with affiliates and consolidate, merge or sell all or substantially all of their assets.

Because the Berry Group term loans are not obligations of Berry Plastics Corporation or its subsidiaries, the Berry Group term loans are not included in discussions of our debt elsewhere in this prospectus.

 

95


Table of Contents

DESCRIPTION OF THE EXCHANGE NOTES

We issued $680,600,000 million in aggregate principal amount of the outstanding notes to the initial purchasers on April 21, 2008. The initial purchasers sold the outstanding notes to “qualified institutional buyers,” as defined in Rule 144A under the Securities Act. The terms of the exchange notes are substantially identical to the terms of the outstanding notes. However, the exchange notes are not subject to transfer restrictions, registration rights or additional interest provisions unless held by certain broker-dealers, affiliates of Holdings or certain other persons. See “The Exchange Offer—Transferability of the Exchange Notes.” In addition, we do not plan to list the exchange notes on any securities exchange or seek quotation on any automated quotation system. The outstanding notes are traded on Nasdaq’s PORTAL system. Any outstanding notes that remain outstanding after the exchange offer, together with the exchange notes issued in the exchange offer, will be treated as a single class of securities for voting purposes under the Indenture. References to the “Notes” refer to the outstanding and exchange notes.

The following description is a summary of the material provisions of the Indenture. It does not restate the Indenture in its entirety. We urge you to read the Indenture because it, and not this description, define your rights as holders of the notes. Copies of the Indenture are available upon request to us at the address indicated under “Where You Can Find More Information About Us.” Certain defined terms used in this description but not defined below under “Certain Definitions” have the meanings assigned to them in the Indenture.

The registered holder of a note will be treated as the owner of it for all purposes. Only registered holders will have rights under the Indenture.

General

The exchange notes will be issued under the Indenture (the “Indenture”) governing the outstanding notes dated April 21, 2008, among Berry Plastics Corporation (formerly known as Berry Plastics Holding Corporation) (the “Issuer”) the Note Guarantors and Wells Fargo Bank, N.A., as trustee (the “Trustee”).

The following summary of certain provisions of the Indenture, the Notes, the Security Documents, the Intercreditor Agreements and the Registration Rights Agreement (as defined below) does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, the Notes, the Security Documents, the Intercreditor Agreements and the Registration Rights Agreement, including the definitions of certain terms therein and those terms made a part thereof by the TIA. Capitalized terms used in this “Description of the Exchange Notes” section and not otherwise defined have the meanings set forth in the section “—Certain Definitions.” As used in this “Description of the Exchange Notes” section, “we,” “us” and “our” mean the Issuer and its Subsidiaries, and the “Issuer” refers only to Berry Plastics Corporation, but not to any of its Subsidiaries.

The Issuer will issue the exchange notes with an initial aggregate principal amount of $680.6 million. The Issuer may issue additional Notes from time to time after the exchange offer (the “Additional Notes”). Any offering of Additional Notes is subject to the covenants described below under the caption “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” and “—Certain Covenants—Liens.” The Notes and any Additional Notes subsequently issued under the Indenture will be treated as a single class for all purposes under the Indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. Unless the context otherwise requires, for all purposes of the Indenture and this “Description of the Exchange Notes,” references to the Notes include any Additional Notes actually issued.

Principal of, premium, if any, and interest on the Notes will be payable, and the Notes may be exchanged or transferred, at the office or agency designated by the Issuer (which initially shall be the principal corporate trust office of the Trustee).

 

96


Table of Contents

The Notes will be issued only in fully registered form, without coupons, in minimum denominations of $2,000 and any integral multiple of $1,000. No service charge will be made for any registration of transfer or exchange of Notes, but the Issuer may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith.

Terms of the Notes

The Notes are senior obligations of the Issuer, will have the benefit of the security interest in the Collateral described below under “—Security for the Notes” and will mature on February 15, 2015. Interest on the Notes accrues at a rate per annum, reset quarterly, equal to LIBOR plus 4.75%, as determined by the calculation agent (the “Calculation Agent”), which shall initially be the Trustee. Interest on the Notes are payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing July 15, 2008. The Issuer will make each interest payment to the holders of record of the Notes on the immediately preceding January 1, April 1, July 1 and October 1. Interest on the Notes accrues from the Issue Date.

The amount of interest for each day that the Notes are outstanding (the “Daily Interest Amount”) will be calculated by dividing the interest rate in effect for such day by 360 and multiplying the result by the principal amount of the Notes. The amount of interest to be paid on the Notes for each Interest Period is calculated by adding the Daily Interest Amounts for each day in the Interest Period.

All percentages resulting from any of the above calculations will be rounded, if necessary, to the nearest one hundred thousandth of a percentage point, with five one-millionths of a percentage point being rounded upwards (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)) and all dollar amounts used in or resulting from such calculations will be rounded to the nearest cent (with one-half cent being rounded upwards).

The interest rate on the Notes will in no event be higher than the maximum rate permitted by New York law as the same may be modified by U.S. law of general application.

The Calculation Agent will, upon the written request of any holder of Notes, provide the interest rate then in effect with respect to the Notes. All calculations made by the Calculation Agent in the absence of manifest error will be conclusive for all purposes and binding on the Issuer, the Note Guarantors and the holders of the Notes.

Additional interest is payable with respect to the Notes in certain circumstances if the Issuer does not consummate the exchange offer (or shelf registration, if applicable) as further described under “—Registration Rights; Additional Interest.”

Optional Redemption

On or after April 15, 2010, the Issuer may redeem the Notes at its option, in whole at any time or in part from time to time, upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail or sent electronically to each holder’s registered address, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest and additional interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the twelve-month period commencing on                      of the years set forth below:

 

Period

   Redemption Price  

2010

   102.000 %

2011

   101.000 %

2012 and thereafter

   100.000 %

In addition, prior to April 15, 2010, the Issuer may redeem the Notes at its option, in whole at any time or in part from time to time, upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail or

 

97


Table of Contents

sent electronically to each holder’s registered address, at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest and additional interest, if any, to, the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

Notwithstanding the foregoing, at any time and from time to time on or prior to April 15, 2010, the Issuer may redeem in the aggregate up to 35% of the original aggregate principal amount of the Notes (calculated after giving effect to the issuance of Additional Notes) issued as of the time of such redemptions, with the net cash proceeds of one or more Equity Offerings (1) by the Issuer or (2) by any direct or indirect parent of the Issuer, in each case, to the extent the net cash proceeds thereof are contributed to the common equity capital of the Issuer or used to purchase Capital Stock (other than Disqualified Stock) of the Issuer from it, at a redemption price (expressed as a percentage of the principal amount thereof) of 100% plus a premium (expressed as a percentage of the principal amount thereof) equal to the interest rate per annum on the Notes applicable on the date on which notice of redemption is given, plus accrued and unpaid interest and additional interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 65% of the original aggregate principal amount of the Notes (calculated after giving effect to the issuance of Additional Notes) issued as of the time of such redemption must remain outstanding after each such redemption; and provided further that such redemption shall occur within 90 days after the date on which any such Equity Offering is consummated upon not less than 30 nor more than 60 days’ notice sent electronically or mailed to each holder of Notes being redeemed and otherwise in accordance with the procedures set forth in the Indenture.

Notice of any redemption upon any Equity Offering may be given prior to the completion thereof, and any such redemption or notice may, at the Issuer’s discretion, be subject to one or more conditions precedent, including, but not limited to, completion of the Equity Offering.

Selection

In the case of any partial redemption, selection of Notes for redemption will be made by the Trustee on a pro rata basis to the extent practicable; provided that no Notes of $2,000 or less shall be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption so long as the Issuer has deposited with the Paying Agent funds sufficient to pay the principal of, plus accrued and unpaid interest and additional interest (if any) on, the Notes to be redeemed.

Mandatory Redemption; Offers to Purchase; Open Market Purchases

The Issuer is not required to make any mandatory redemption or sinking fund payments with respect to the Notes. However, under certain circumstances, the Issuer may be required to offer to purchase Notes as described under the captions “—Change of Control” and “—Certain Covenants—Asset Sales.” We may at any time and from time to time purchase Notes in the open market or otherwise.

Ranking

The indebtedness evidenced by the Notes is senior Indebtedness of the Issuer, is equal in right of payment to all existing and future Pari Passu Indebtedness, has the benefit of the security interest in the Collateral described below under “—Security for the Notes” and is senior in right of payment to all existing and future Subordinated Indebtedness of the Issuer.

The indebtedness evidenced by the Note Guarantees is senior Indebtedness of the applicable Note Guarantor, is equal in right of payment to all existing and future Pari Passu Indebtedness of such Note Guarantor,

 

98


Table of Contents

will have the benefit of the security interest in the Collateral described below under “—Security for the Notes” and is senior in right of payment to all existing and future Subordinated Indebtedness of such Note Guarantor.

At December 29, 2007, on a pro forma basis after giving effect to the Transactions, the Issuer and its Subsidiaries would have had $1,869.4 million of Secured Indebtedness outstanding (excluding $31.8 million of letters of credit and $368.2 million of availability under our revolving credit facility) constituting First Priority Lien Obligations (as defined in this “Description of the Exchange Notes”).

Although the Indenture limits the Incurrence of Indebtedness by the Issuer and its Restricted Subsidiaries and the issuance of Disqualified Stock and Preferred Stock by the Restricted Subsidiaries, such limitation is subject to a number of significant qualifications and exceptions. Under certain circumstances, the Issuer and its Subsidiaries may be able to incur substantial amounts of Indebtedness. Such Indebtedness may be Secured Indebtedness constituting First Priority Lien Obligations. See “—Certain Covenants—Liens” and “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock.”

A significant portion of the operations of the Issuer is conducted through its Subsidiaries. Unless a Subsidiary is a Note Guarantor, claims of creditors of such Subsidiary, including trade creditors, and claims of preferred stockholders (if any) of such Subsidiary generally will have priority with respect to the assets and earnings of such Subsidiary over the claims of creditors of the Issuer, including holders of the Notes. The Notes, therefore, are effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of Subsidiaries of the Issuer that are not Note Guarantors. The Issuer’s Subsidiaries that are not Note Guarantors had $32.3 million of total liabilities outstanding as of December 29, 2007.

See “Risk Factors—Risks Related to the Notes.”

Security for the Notes

The Notes and the Note Guarantees are secured by security interests in the Collateral, subject to Permitted Liens. The Collateral consists of substantially all of the property and assets, in each case, that are held by the Issuer or any of the Note Guarantors, subject to the exceptions described below. The Collateral does not include (i) any property or assets owned by any Foreign Subsidiaries and two of the Issuer’s U.S. Subsidiaries, (ii) any license, contract or agreement of the Issuer or any of the Note Guarantors, if and only for so long as the grant of a security interest under the Security Documents would result in a breach or default under, or abandonment, invalidation or unenforceability of, that license, contract or agreement, (iii) any vehicle, (iv) any deposit accounts, securities accounts or cash, (v) any real property held by the Issuer or any of the Issuer’s Subsidiaries under a lease, (vi) certain other exceptions described in the Security Documents, (vii) any equity interests or other securities of any of the Issuer’s Subsidiaries to the extent that the pledge of such securities results in the Issuer’s being required to file separate financial statements of such Subsidiary with the SEC, but only to the extent necessary to not be subject to such requirement and only for so long as such requirement is in existence and (viii) equity interests of Foreign Subsidiaries, Qualified CFC Holding Companies owned by the Issuer or any Note Guarantor, or the equity interests of Berry Plastics Acquisition Corporation II or Berry Plastics Acquisition Corporation XIV, LLC, in each case other than a pledge of 65% of the outstanding equity interests of (a) each “first-tier” Foreign Subsidiary directly owned by the Issuer or any Note Guarantor (other than NIM Holdings Limited, Berry Plastics Asia Pte. Ltd., and Ociesse s.r.l.), and (b) each “first-tier” Qualified CFC Holding Company directly owned by the Issuer or any Note Guarantor. In addition, in the event that Rule 3-16 of Regulation S-X under the Securities Act and the Exchange Act (or any successor regulation) is amended, modified or interpreted by the SEC to require (or is replaced with another rule or regulation, or any other law, rule or regulation is adopted, which would require) the filing with the SEC (or any other governmental agency) of separate financial statements of any Subsidiary of the Issuer due to the fact that such Subsidiary’s securities secure the Notes, then the securities of such Subsidiary will not be subject to the Liens securing the Notes and will automatically be deemed not to be part of the Collateral but only to the extent necessary not to be subject to such requirement and only for so long as required to not be subject to the requirement. In the event that Rule 3-16

 

99


Table of Contents

of Regulation S-X under the Securities Act and the Exchange Act (or any successor regulation) is amended, modified or interpreted by the SEC to permit (or is replaced with another rule or regulation, or any other law, rule or regulation is adopted, which would permit) such Subsidiary’s securities to secure the Notes in excess of the amount then pledged without the filing with the SEC (or any other governmental agency) of separate financial statements of such Subsidiary, then the securities of such Subsidiary will automatically be deemed to be a part of the Collateral but only to the extent permitted to not be subject to any such financial statement requirement. Except for equity interests or other securities of certain of our Subsidiaries, to the extent any Term Loan Obligations are secured by any assets of any Note Guarantor or the Issuer, the Note Obligations shall be secured by such assets. The Note Obligations are not guaranteed by Berry Plastics Group, Inc., and are not secured by the equity interests in the Issuer held by Berry Plastics Group, Inc.

Notwithstanding the foregoing, the Security Documents shall provide that the Issuer and the Note Guarantors shall use commercially reasonable efforts to deliver to the Notes Collateral Agent as promptly as reasonably practicable after the Issue Date but in any event within 120 days of the Issue Date (subject to extension in the sole discretion of the Notes Collateral Agent), (a)(i) counterparts of each Mortgage to be entered into with respect to each real property owned by the Issuer and any Note Guarantor which real property is currently subject to a mortgage in favor of the Term Loan Secured Parties and Revolving Facility Secured Parties, duly executed and delivered by the record owner of such property and suitable for recording or filing and (ii) such other documents including, but not limited to, any consents, agreements and confirmations of third parties with respect to any such Mortgage or property, in each case consistent in form and substance with such documents as previously delivered to the Term Facility Administrative Agent and the Revolving Facility Administrative Agent; and (b) a policy, policies or pro forma policy or policies or marked up unconditional binder(s) of title insurance or foreign equivalent thereof, (if any and if available) as applicable, paid for by the Issuer, issued by a nationally recognized title insurance company insuring the Lien of each Mortgage (which may be the same as the company or companies insuring the mortgages in favor of the Term Loan Secured Parties and Revolving Facility Secured Parties) to be entered into on or after the Issue Date as a valid Lien on the applicable property described therein, free of any other Liens except as not prohibited by the covenant described under “—Certain Covenants—Liens” and Liens arising by operation of law, together with such customary endorsements (including zoning endorsements where reasonably appropriate and available), and with respect to any such property located in a state in which a zoning endorsement is not available, a zoning compliance letter from the applicable municipality in a form consistent with that previously delivered to the Term Facility Administrative Agent and Revolving Facility Administrative Agent or such other form as is customary for such municipality (it being understood that (x) no new or updated surveys shall be required to be delivered in connection with the delivery of any title insurance policies and (y) the last survey or update delivered or certified to the Term Facility Administrative Agent and Revolving Facility Administrative Agent shall be acceptable to the Notes Collateral Agent together with an affidavit from the property owner (if required by the title company) stating there have been no substantial changes materially affecting the use of the property in the business since the date of such last survey or update, so long as the same is sufficient for the title insurance company to remove the so-called standard survey exception and issue all survey-related endorsements to the title insurance policies described in clause (b) of this sentence, in substantially the same manner and to substantially the same extent as the title company has previously insured such Persons).

Security interests securing the Notes and the proceeds and distributions in respect thereof are subject to intercreditor arrangements described under “Senior Lender Intercreditor Agreement and Senior Fixed Collateral Intercreditor Agreement” and “Second Priority Intercreditor Agreement”. The First Priority Lien Obligations include Secured Bank Indebtedness and related obligations, as well as certain Hedging Obligations and certain other obligations in respect of cash management services. The Persons holding other First Priority Lien Obligations may have rights and remedies with respect to the property subject to such Liens that, if exercised, could adversely affect the value of the Collateral or the ability of the Notes Collateral Agent to realize or foreclose on the Collateral on behalf of holders of the Notes.

 

100


Table of Contents

The Issuer and the Note Guarantors are able to incur additional indebtedness in the future that could share in the Collateral, including additional First Priority Lien Obligations. The amount of such First Priority Lien Obligations and additional Indebtedness is and will be limited by the covenants described under “—Certain Covenants—Liens” and “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock.” Under certain circumstances, the amount of such First Priority Lien Obligations could be significant.

After-Acquired Collateral

The Note Documents also require the Issuer and the Note Guarantors, as applicable, to:

(a) If any asset (other than Real Property covered by paragraph (b) below or improvements thereto or any interest therein) that has an individual fair market value in an amount greater than $5.0 million is acquired by the Issuer or any Note Guarantor after the Issue Date or owned by an entity at the time it becomes a Note Guarantor (in each case other than (x) assets constituting Collateral under a Security Document that become subject to the Lien of such Security Document upon acquisition thereof and (y) assets that are not required to become subject to Liens in favor of the Notes Collateral Agent as described under “—Security for the Notes” or the Security Documents) (i) notify the Notes Collateral Agent thereof, and (ii) cause such asset to be subjected to a Lien securing the Note Obligations and take, and cause the Note Guarantors to take, such actions as shall be necessary to grant and perfect such Liens, all at the expense of the Issuer and the Note Guarantors, subject to the next paragraph; and

(b) Promptly notify the Notes Collateral Agent of the acquisition of and grant and cause each of the Note Guarantors to grant to the Notes Collateral Agent security interests and mortgages in such Real Property of the Issuer or any such Note Guarantor as are not covered by the original Mortgages, to the extent acquired after the Issue Date and having an individual fair market value at the time of acquisition in excess of $5.0 million pursuant to documentation substantially in the form of the Mortgages delivered to the Notes Collateral Agent after the Issue Date pursuant to the provisions described under “—Security for the Notes” (each, an “Additional Mortgage”) and constituting valid and enforceable Liens subject to no other Liens other than Liens not prohibited by the covenant described under “—Certain Covenants—Liens,” at the time of perfection thereof, record or file, and cause each such Note Guarantor to record or file, the Additional Mortgage or instruments related thereto in such manner and in such places as is required by law to establish, perfect, preserve and protect the Liens in favor of the Notes Collateral Agent required to be granted pursuant to the Additional Mortgages and pay, and cause each such Note Guarantor to pay, in full, all taxes, fees and other charges payable in connection therewith, in each case subject to the exceptions described in the first paragraph of “—Security for the Notes” and subject to the next paragraph. With respect to each such Additional Mortgage, if the Issuer delivers to the Term Facility Administrative Agent a title insurance policy, a survey, or other documents in connection with a mortgage on the applicable property, then it shall deliver to the Notes Collateral Agent contemporaneously with such Additional Mortgage a title insurance policy, a survey and such additional documents.

The provisions of the immediately preceding paragraphs (a) and (b) need not be satisfied with respect to (i) any Equity Interests acquired after the Issue Date (other than in the case of any person which is a Subsidiary of the Issuer, Equity Interests in such person issued or acquired after such person became a Subsidiary of the Issuer) in accordance with the Indenture if, and to the extent that, and for so long as (A) such Equity Interests constitute less than 100% of all applicable Equity Interests of such person and the person holding the remainder of such Equity Interests are not Affiliates, (B) doing so would violate applicable law or a contractual obligation binding on such Equity Interests and (C) with respect to such contractual obligations, such obligation existed at the time of the acquisition thereof and was not created or made binding on such Equity Interests in contemplation of or in connection with the acquisition of such Subsidiary, (ii) any assets acquired after the Issue Date, to the extent that, and for so long as, taking such actions would violate an enforceable contractual obligation binding on such assets that existed at the time of the acquisition thereof and was not created or made binding on such assets in contemplation or in connection with the acquisition of such assets (except in the case of assets acquired with

 

101


Table of Contents

Indebtedness permitted pursuant to paragraph (d) of “—Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” that is secured by a Permitted Lien) or (iii) those assets as to which the Issuer shall reasonably determine, as set forth in an Officers’ Certificate delivered to the Notes Collateral Agent, that the costs of obtaining or perfecting such a security interest are excessive in relation to the value of the security to be afforded thereby; provided, that, upon the reasonable request of the Notes Collateral Agent, the Issuer shall, and shall cause any applicable Subsidiary to, use commercially reasonable efforts to have waived or eliminated any contractual obligation of the types described in clause (i) and (ii) above. Notwithstanding the foregoing and subject to clause (vii) and related provisions under the first paragraph of “—Security for the Notes”, to the extent any Term Loan Obligations are secured by any assets of any Note Guarantor or the Issuer, the Issuer shall cause such asset to be subject to the Lien securing the Notes.

Security Documents and Intercreditor Agreements

The Issuer, the Note Guarantors and the Notes Collateral Agent have entered into one or more Security Documents defining the terms of the security interests that secure the Notes and the Note Guarantees. These security interests secure the payment and performance when due of all of the Obligations of the Issuer and the Note Guarantors under the Notes, the Indenture, the Note Guarantees and the Security Documents, as provided in the Security Documents. The Notes Collateral Agent will act as a collateral agent on behalf of the Trustee and the noteholders.

Senior Lender Intercreditor Agreement and Senior Fixed Collateral Intercreditor Agreement

The Term Facility Administrative Agent, the Term Loan Collateral Agent, the Revolving Facility Administrative Agent, the Revolving Facility Collateral Agent, the Bridge Loan Administrative Agent, the Bridge Loan Collateral Agent, the Issuer, the Subsidiaries of the Issuer named therein and Berry Plastics Group, Inc. entered into the Senior Lender Intercreditor Agreement, as supplemented as of the Issue Date through the execution and delivery of a joinder agreement by the Notes Collateral Agent, the Trustee, the Term Facility Administrative Agent, the Term Loan Collateral Agent, the Revolving Facility Administrative Agent, the Revolving Credit Facility Collateral Agent, Berry Plastics Group, Inc., the Issuer and the Note Guarantors, which may be amended from time to time without the consent of the holders of the Notes to add other parties holding Other First Priority Lien Obligations permitted to be incurred under the Revolving Credit Agreement, the Term Loan Credit Agreement, the Senior Fixed Collateral Intercreditor Agreement and the Senior Lender Intercreditor Agreement. The Senior Lender Intercreditor Agreement allocates the benefits of any Collateral between the holders of the Revolving Facility Obligations on the one hand and the holders of the Senior Fixed Obligations on the other hand.

The Term Facility Administrative Agent, the Term Loan Collateral Agent, the Bridge Loan Administrative Agent, the Bridge Loan Collateral Agent, the Issuer, the Subsidiaries of the Issuer named therein, and Berry Plastics Group, Inc. also entered into the Senior Fixed Collateral Intercreditor Agreement, as supplemented as of the Issue Date through the execution and delivery of a joinder agreement by the Notes Collateral Agent, the Trustee, the Term Facility Administrative Agent, the Term Loan Collateral Agent, Berry Plastics Group, Inc., the Issuer and the Note Guarantors, which may be amended from time to time without the consent of the holders of the Notes to add other parties holding Other First Priority Lien Obligations permitted to be incurred under the Term Loan Credit Agreement, Senior Lender Intercreditor Agreement and the Senior Fixed Collateral Intercreditor Agreement. As described below, the Senior Fixed Collateral Intercreditor Agreement allocates the benefits of the Common Collateral among the holders of the Senior Fixed Obligations, including the Note Obligations and the Term Loan Obligations.

Until Discharge of the Senior Secured Obligations of a particular Class, (a) the Applicable Collateral Agent shall have the sole right to act or refrain from acting with respect to the Senior Secured Obligations Collateral of such Class, (b) the Notes Collateral Agent, the Term Loan Collateral Agent, the Revolving Facility Collateral

 

102


Table of Contents

Agent and each collateral agent of any Series of Other First Priority Lien Obligations shall not follow any instructions with respect to such Senior Secured Obligations Collateral from any Junior Representative or from any Junior Secured Obligations Secured Parties, and (c) the Junior Representative and the Junior Secured Obligations Secured Parties will not and will not instruct the Applicable Collateral Agent, the Notes Collateral Agent, the Term Loan Collateral Agent or the Revolving Facility Collateral Agent to commence any judicial or non-judicial foreclosure proceedings with respect to, seek to have a trustee, receiver or similar official appointed for or over, attempt any action to take possession of, exercise any right, remedy or power with respect to, or otherwise take any action to enforce its interests in or realize upon, or take any other action available to it in respect of, the Junior Secured Obligations Collateral of such Class.

If a First Priority Event of Default has occurred and is continuing and the Revolving Facility Collateral Agent, the Term Loan Collateral Agent, the Notes Collateral Agent or any other collateral agent representing holders of any Series of Other First Priority Lien Obligations is taking action to enforce rights in respect of any Collateral, or any distribution is made in respect of any Collateral in any Bankruptcy Case of the Issuer or any Note Guarantor, the proceeds of any sale, collection or other liquidation of any such Collateral, and proceeds of any such distribution (subject, in the case of any such distribution, to the third paragraph immediately following) shall be applied as follows:

 

  (i)   In the case of Collateral other than Revolving Facility Senior Collateral,

FIRST, to the Applicable Fixed Collateral Agent for distribution in accordance with the Senior Fixed Collateral Intercreditor Agreement, and

SECOND, to the payment in full of the Revolving Facility Obligations; and

 

  (ii)   In the case of Revolving Facility Senior Collateral,

FIRST, to the payment in full of the Revolving Facility Obligations, and

SECOND, to the Applicable Fixed Collateral Agent for distribution in accordance with the Senior Fixed Collateral Intercreditor Agreement.

The Senior Fixed Collateral Intercreditor Agreement provides that if a First Priority Event of Default has occurred and is continuing and the Applicable Fixed Collateral Agent is taking action to enforce rights in respect of any Common Collateral, or any distribution is made with respect to any Common Collateral in any Bankruptcy Case of the Issuer or any Note Guarantor, the proceeds of any sale, collection or other liquidation of any such Collateral by the Applicable Fixed Collateral Agent (or received by the Applicable Fixed Collateral Agent pursuant to the Senior Lender Intercreditor Agreement as a result of any action by the Revolving Facility Collateral Agent), as applicable, and proceeds of any such distribution (subject, in the case of any such distribution, to the paragraph immediately following) to which the Senior Fixed Obligations are entitled under the Senior Lender Intercreditor Agreement shall be applied among the Senior Fixed Obligations as follows:

 

  (i)   in the case of Common Perfected Collateral, to the payment in full of the Senior Fixed Obligations on a ratable basis, and

 

  (ii)   in the case of Common Collateral other than Common Perfected Collateral, first to each Representative of each Series of holders of Senior Fixed Obligations that has at any time held a perfected security interest in such Collateral which security interest is not subject to avoidance as a preference under the Bankruptcy Code until each such Series of Senior Fixed Obligations has been paid in full, and in the case of more than one Series, on a ratable basis, and second to each Representative of each other Series of holders of Senior Fixed Obligations for whom such Collateral constitutes Common Collateral, on a ratable basis until each such Series has been paid in full.

Notwithstanding the foregoing, with respect to any Common Collateral in respect of which a third party has a security interest or lien that has been perfected prior to the Issue Date or the date of joinder of any Series of Other First Priority Lien Obligations (as applicable) or a lien that has become effective prior to the Issue Date or

 

103


Table of Contents

the date of joinder of any Series of Other First Priority Lien Obligations (as applicable) that is junior in priority to the security interest of the Term Loan Collateral Agent but senior (as determined by appropriate legal proceedings in the case of any dispute) to the security interest of the Notes Collateral Agent or any Note Secured Parties and/or any other Representative of the holders of any Other First Priority Lien Obligations or the other related secured parties of any Other First Priority Lien Obligations (such third party an “Intervening Creditor”), the value of any Collateral or proceeds which are allocated to such Intervening Creditor shall be deducted on a ratable basis solely from the Common Collateral or proceeds to be distributed to the Notes Collateral Agent and/ or such other Representative in respect of Other First Priority Lien Obligations and their respective secured parties that are junior in priority to such Intervening Creditor.

In addition, the Senior Lender Intercreditor Agreement provides that if the Issuer or any of its Subsidiaries is subject to a Bankruptcy Case:

 

  (1)   if the Issuer or any of its subsidiaries shall, as debtor(s)-in-possession, move for approval of financing (“DIP Financing”) to be provided by one or more lenders (the “DIP Lenders”) under Section 364 of the Bankruptcy Code or the use of cash collateral under Section 363 of the Bankruptcy Code, each Junior Secured Obligations Secured Party will agree not to object to such financing, to the Liens on the Senior Secured Obligations Collateral securing the same (“DIP Financing Liens”) or to the use of cash collateral that constitutes Senior Secured Obligations Collateral, unless the Senior Secured Obligations Secured Parties of any Series or an authorized representative of the Senior Secured Obligations Secured Parties of such Series, shall oppose or object to such DIP Financing, DIP Financing Liens or use of cash collateral (and, to the extent that such DIP Financing Liens are senior to, or rank pari passu with, the Liens on any such Senior Secured Obligations Collateral pursuant to the Security Documents, the Bank Agreement Security Documents or any other security documents with respect to Other First Priority Lien Obligations, the Junior Representative will, for itself and on behalf of the other Junior Secured Obligations Secured Parties, confirm the priorities with respect to such Collateral as set forth in the Senior Lender Intercreditor Agreement) so long as the Junior Secured Obligations Secured Parties retain the benefit of such Liens on all Junior Secured Obligations Collateral, including proceeds thereof arising after the commencement of such proceeding, with the same priority vis-à-vis the Senior Secured Obligations Secured Parties (other than with respect to any DIP Financing Liens) as existed prior to the commencement of the case under the U.S. Bankruptcy Code;

 

  (2)   each Junior Secured Obligations Secured Party will not object to or oppose a sale or other disposition of any Senior Secured Obligations Collateral (or any portion thereof) under Section 363 of the Bankruptcy Code or any other provision of the Bankruptcy Code if the Senior Secured Obligations Secured Parties of any Series shall have consented to such sale or disposition of such Senior Secured Obligations Collateral; and

 

  (3)  

each Junior Representative and each Junior Secured Obligations Secured Party will agree that if (i) the Issuer or any Note Guarantor shall become subject to a Bankruptcy Case, (ii) any Senior Secured Obligations are determined to be unsecured in part for purposes of Section 506(a) of the Bankruptcy Code, but would not have been deemed unsecured in part for such purposes, or would have been deemed to be unsecured in part by a lesser amount for such purposes, if each Series of the Senior Secured Obligations had been subject to a separate first priority perfected lien on the Senior Secured Obligations Collateral and each Series of Junior Secured Obligations had been secured by a separate second priority perfected lien on such Collateral, or if any such Liens which are documented in a single agreement had been documented in separate agreements (such arrangements being referred to as “Separate Security Arrangements”), and (iii) any payment or distribution is made in respect of such Senior Secured Obligations Collateral to or for the benefit or account of any Junior Secured Obligations Secured Parties (and such payment being a “Junior Payment”), then each Junior Representative and the Junior Secured Obligations Secured Parties (on a ratable basis) shall hold such Junior Payment (to the extent of the Excess Amount (as defined below)) in trust for the benefit of the Senior Secured Obligations Secured Parties and shall immediately pay and turn over to the Senior

 

104


Table of Contents
 

Representative, for the benefit of the Senior Secured Obligations Secured Parties (or, to the extent that such payment or distribution has been made to the Notes Collateral Agent, the Term Loan Collateral Agent, the Revolving Facility Collateral Agent, or each collateral agent of any Series of Other First Priority Lien Obligations, such collateral agent shall so hold and pay such amount), an amount equal to the lesser of (A) the Junior Payment and (B) the additional amount that would have been paid, payable or distributed to the Senior Secured Obligations Secured Parties if Separate Security Arrangements has been utilized (the lesser of (A) and (B) being the “Excess Amount”).

If the Issuer or any of its Subsidiaries shall become subject to any Bankruptcy Case, the Senior Fixed Collateral Intercreditor Agreement provides that (1) if the Issuer or any of its Subsidiaries shall, as debtor(s)-in- possession, move for approval of financing (the “DIP Financing”) to be provided by one or more lenders (the “DIP Lenders”) under Section 364 of the Bankruptcy Code or the use of cash collateral under Section 363 of the Bankruptcy Code, each Senior Fixed Obligations Secured Party will agree not to object to any such financing or to the Liens on Common Collateral securing the same (the “DIP Financing Liens”) or to any use of cash collateral that constitutes Common Collateral, unless the Term Loan Secured Parties, or a representative authorized by the Term Loan Secured Parties, shall then oppose or object to such DIP Financing or such DIP Financing Liens or use of cash collateral (and, (1) to the extent that such DIP Financing Liens are senior to the Liens on any such Common Collateral granted pursuant to the Senior Fixed Obligations security documents, each Representative for the Senior Fixed Obligations will, for itself and on behalf of the other Senior Fixed Obligations Secured Parties that it represents, subordinate its Liens with respect to such Collateral on the same terms as the Liens of the Term Loan Secured Parties (other than any Liens of the Term Loan Secured Parties constituting DIP Financing Liens) are subordinated thereto, and (2) to the extent that such DIP Financing Liens rank pari passu with the Liens on any such Common Collateral granted pursuant to the Senior Fixed Obligations security documents, each Representative for the Senior Fixed Obligations will, for itself and on behalf of the other Senior Fixed Obligations Secured Parties that it represents, confirm the priorities with respect to such Common Collateral as set forth in the Senior Fixed Collateral Intercreditor Agreement), in each case so long as:

(A) the Senior Fixed Obligations Secured Parties retain the benefit of their Liens on all such Common Collateral pledged to the DIP Lenders, including proceeds thereof arising after the commencement of such proceeding, with the same priority vis-à-vis all the other Senior Fixed Obligations Secured Parties (other than any Liens of the Term Loan Secured Parties constituting DIP Financing Liens) as existed prior to the commencement of the Bankruptcy Case,

(B) the Senior Fixed Obligations Secured Parties are granted Liens on any additional collateral pledged to the Term Loan Secured Parties or any other Senior Fixed Obligations Secured Parties as adequate protection or otherwise in connection with such DIP Financing or use of cash collateral, with the same priority vis-à-vis the Term Loan Secured Parties as set forth in the Senior Fixed Collateral Intercreditor Agreement,

(C) if any amount of such DIP Financing or cash collateral is applied to repay any of the Senior Fixed Obligations, such amount is applied pursuant to the immediately preceding clauses (i) and (ii) above, and

(D) if the Term Loan Secured Parties are granted adequate protection, including in the form of periodic payments, in connection with such DIP Financing or use of cash collateral, the proceeds of such adequate protection is applied pursuant to the immediately preceding clauses (i) and (ii) above;

provided that the Senior Fixed Obligations Secured Parties of each Series shall have a right to object to the grant of a Lien to secure the DIP Financing over any Collateral subject to Liens in favor of the Senior Fixed Obligations Secured Parties of such Series or its representative that shall not constitute Common Collateral; and provided, further, that the Term Loan Secured Parties shall not object to any other Senior Fixed Obligations Secured Party receiving adequate protection comparable to any adequate protection granted to the Term Loan Secured Parties in connection with a DIP Financing or use of cash collateral.

 

105


Table of Contents

Second Priority Intercreditor Agreement

The Second Priority Notes Trustee, the Term Facility Administrative Agent, the Term Loan Collateral Agent, the Revolving Facility Administrative Agent, the Revolving Facility Collateral Agent, the Bridge Loan Administrative Agent, the Bridge Loan Collateral Agent, the Issuer, the Subsidiaries of the Issuer party thereto and Berry Plastics Group, Inc. entered into the Second Priority Intercreditor Agreement, as supplemented as of the Issue Date through the execution and delivery of a joinder agreement by the Notes Collateral Agent, the Trustee, the Term Facility Administrative Agent, the Term Loan Collateral Agent, the Revolving Facility Administrative Agent, the Revolving Facility Collateral Agent, Berry Plastics Group, Inc., the Second Priority Notes Trustee, the Issuer and the Note Guarantors, which may be amended from time to time to add other parties holding second-priority secured Obligations and Other First Priority Lien Obligations permitted to be incurred under the Revolving Credit Agreement, the Term Loan Credit Agreement, the Second Priority Notes Indenture, the Senior Lender Intercreditor Agreement, the Senior Fixed Collateral Intercreditor Agreement and the Second Priority Intercreditor Agreement. Under the Second Priority Intercreditor Agreement, so long as the Discharge of Senior Claims has not occurred, the Collateral and any other collateral in respect of the second-priority Obligations or proceeds thereof received in connection with the sale or other disposition of, or collection on, such Collateral or other collateral upon the exercise of remedies as a secured party, shall be applied by the First Lien Agent to the First Priority Lien Obligations in such order as specified in the relevant documents covering the First Priority Lien Obligations until the Discharge of Senior Claims has occurred.

In addition, the Second Priority Intercreditor Agreement provides that (1) prior to the Discharge of Senior Claims, the holders of First Priority Lien Obligations and the First Lien Agent shall have the exclusive right to enforce rights, exercise remedies and make determinations regarding the release, disposition or restrictions with respect to Collateral without any consultation with or the consent of the Second Priority Notes Trustee or the holders of the Second Priority Notes and (2) the Second Priority Intercreditor Agreement may be amended, without the consent of the Second Priority Notes Trustee, First Lien Agent, any holder of First Priority Lien Obligations or the holders of the Second Priority Notes, to add additional secured creditors holding other second-priority secured Obligations (or any agent or trustee therefor) so long as such other Obligations are not prohibited by the provisions of the Credit Agreements, the Indenture, the Second Priority Notes Indenture, the credit agreement, indenture or other similar agreement relating to Other First Priority Lien Obligations and other second-priority secured Obligations. Any such additional party, the First Lien Agent and the Second Priority Notes Trustee shall be entitled to rely on the determination of officers of the Issuer that such modifications do not violate the provisions of the Credit Agreements, the Indenture or the Second Priority Notes Indenture if such determination is set forth in an Officers’ Certificate delivered to such party, the First Lien Agent and the Second Priority Notes Trustee; provided, however, that such determination will not affect whether or not the Issuer has complied with its undertakings in the Indenture, the Credit Agreements, the Security Documents, the Bank Agreement Security Documents, the Second Priority Notes Indenture or the Second Priority Intercreditor Agreement.

In addition, the Second Priority Intercreditor Agreement provides that:

 

  (1)  

if the Issuer or any Note Guarantor is subject to any insolvency or liquidation proceeding, and if the First Lien Agent shall desire to permit the use of cash collateral or to permit the Issuer or any Note Guarantor to obtain financing under Section 363 or Section 364 of the Bankruptcy Code or any similar provision in any Bankruptcy Law (“DIP Financing”), then the Second Priority Notes Trustee and the holders of Second Priority Notes agree not to object to and will not otherwise contest (a) such use of cash collateral or DIP Financing and will not request adequate protection or any other relief in connection therewith (except to the extent permitted by the clause 3 below) and, to the extent the Liens securing the First Priority Lien Obligations are subordinated or pari passu with such DIP Financing, will subordinate its Liens in the Collateral to such DIP Financing (and all Obligations relating thereto) on the same basis as the other Liens securing the obligations under the Second Priority Notes are so subordinated to the Liens securing First Priority Lien Obligations under the Second Priority Intercreditor Agreement; (b) any motion for relief from the automatic stay or from any injunction

 

106


Table of Contents
 

against foreclosure or enforcement in respect of the First Priority Lien Obligations made by the First Lien Agent or any holder of such obligations; (c) any lawful exercise by any holder of First Priority Lien Obligations of the right to credit bid such obligations at any sale in foreclosure of Senior Secured Obligations Collateral; (d) any other request for judicial relief made in any court by any holder of First Priority Lien Obligations relating to the lawful enforcement of any Lien on Senior Secured Obligations Collateral; or (e) any order relating to a sale of assets of the Issuer or any Note Guarantor for which the First Lien Agent has consented that provides, to the extent the sale is to be free and clear of Liens, that the Liens securing the First Priority Lien Obligations and the Second Priority Notes will attach to the proceeds of the sale on the same basis of priority as the Liens securing the Senior Secured Obligations do to the Liens securing the Second Priority Notes in accordance with the Second Priority Intercreditor Agreement;

 

  (2)   until the Discharge of Senior Claims, the Second Priority Notes Trustee, on behalf of itself and each holder of Second Priority Notes will not seek relief from the automatic stay or any other stay in any insolvency or liquidation proceeding in respect of the Collateral, without the prior written consent of the First Lien Agent and the required lenders under the Credit Agreements;

 

  (3)   the Second Priority Notes Trustee, on behalf of itself and the holders of Second Priority Notes, will not contest (or support any other Person contesting) (a) any request by the First Lien Agent or the holders of First Priority Lien Obligations for adequate protection or (b) any objection by the First Lien Agent or the holders of First Priority Lien Obligations to any motion, relief, action or proceeding based on such First Lien Agent’s or the holders of First Priority Lien Obligations’ claiming a lack of adequate protection. Notwithstanding the foregoing, in any insolvency or liquidation proceeding, (i) if the holders of First Priority Lien Obligations (or any subset thereof) are granted adequate protection in the form of additional collateral in connection with any DIP Financing or use of cash collateral under Section 363 or Section 364 of the Bankruptcy Code or any similar Bankruptcy Law, then the Second Priority Notes Trustee on behalf of itself and each holder of Second Priority Notes (A) may seek or request adequate protection in the form of a replacement Lien on such additional collateral, which Lien is subordinated to the Liens securing the First Priority Lien Obligations and such DIP Financing (and all Obligations relating thereto) on the same basis as the other Liens securing the Second Priority Notes are so subordinated to the Liens securing First Priority Lien Obligations under the Second Priority Intercreditor Agreement and (B) agrees that it will not seek or request, and will not accept, adequate protection in any other form, and (ii) in the event the Second Priority Notes Trustee on behalf of itself and each holder of Second Priority Notes seeks or requests adequate protection and such adequate protection is granted in the form of additional collateral, then the Second Priority Notes Trustee and the holders of the Second Priority Notes agree that the First Lien Agent shall also be granted a senior Lien on such additional collateral as security for the applicable First Priority Lien Obligations and any such DIP Financing and that any Lien on such additional collateral securing the Second Priority Notes shall be subordinated to the Liens on such collateral securing the First Priority Lien Obligations and any such DIP Financing (and all Obligations relating thereto) and any other Liens granted to the holders of First Priority Lien Obligations as adequate protection on the same basis as the other Liens securing the Second Priority Notes are so subordinated to such Liens securing First Priority Lien Obligations under the Second Priority Intercreditor Agreement; and

 

  (4)   until the Discharge of Senior Claims has occurred, the Second Priority Notes Trustee, on behalf of itself and each holder of Second Priority Notes, (i) will not assert or enforce any claim under Section 506(c) of the United States Bankruptcy Code senior to or on a parity with the Liens securing the First Priority Lien Obligations for costs or expenses of preserving or disposing of any Collateral, and (ii) will waive any claim it may now or hereinafter have arising out of the election by any holder of First Priority Lien Obligations of the application of Section 1111(b)(2) of the United States Bankruptcy Code.

 

107


Table of Contents

Subject to the terms of the Security Documents and Intercreditor Agreements, the Issuer and the Note Guarantors have the right to remain in possession and retain exclusive control of the Collateral securing the Notes and to freely operate the Collateral and to collect, invest and dispose of any income therefrom.

The proceeds from the sale of the Collateral may not be sufficient to satisfy the obligations owed to the holders of the Notes. By its nature some or all of the Collateral is and will be illiquid and may have no readily ascertainable market value. Accordingly, the Collateral may not be able to be sold in a short period of time, if salable. See “Risk Factors—Risks Related to the Notes—It may be difficult to realize the value of the collateral securing the notes.”

The holders of the Notes will not be entitled to the benefits of the Intercreditor Agreements with respect to any property of the Issuer and the Note Guarantors other than property constituting Collateral.

Release of Collateral

The Issuer and the Note Guarantors are entitled to the releases of property and other assets included in the Collateral from the Liens securing the Notes under any one or more of the following circumstances:

 

  (1)   to enable us to consummate the disposition of such property or assets to the extent not prohibited under the covenant described under “—Certain Covenants—Asset Sales”;

 

  (2)   in the case of a Note Guarantor that is released from its Note Guarantee with respect to the Notes, the release of the property and assets of such Note Guarantor;

 

  (3)   as described under “—Amendments and Waivers” below; or

 

  (4)   to the extent required by the terms of the Intercreditor Agreements.

The security interests in all Collateral securing the Notes also will be released upon (i) payment in full of the principal of, together with accrued and unpaid interest (including additional interest, if any) on, the Notes and all other Obligations under the Indenture, the Note Guarantees and the Security Documents that are due and payable at or prior to the time such principal, together with accrued and unpaid interest (including additional interest, if any), are paid (including pursuant to a satisfaction and discharge of the Indenture as described below under “—Satisfaction and Discharge”) or (ii) a legal defeasance or covenant defeasance under the Indenture as described below under “—Defeasance.”

Note Guarantees

Each of the Issuer’s direct and indirect Restricted Subsidiaries that were Domestic Subsidiaries on the Issue Date that guarantee Indebtedness under the Credit Agreements jointly and severally irrevocably and unconditionally guaranteed on a senior basis the performance and punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all obligations of the Issuer under the Indenture and the Notes, whether for payment of principal of, premium, if any, or interest or additional interest on the Notes, expenses, indemnification or otherwise (all such obligations guaranteed by such Note Guarantors being herein called the “Guaranteed Obligations”). The Guaranteed Obligations of each Note Guarantor are secured by security interests (subject to Permitted Liens) in the Collateral owned by such Note Guarantor. Such Note Guarantors have agreed to pay, in addition to the amount stated above, any and all expenses (including reasonable counsel fees and expenses) incurred by the Notes Collateral Agent, the Trustee or the holders of the Notes in enforcing any rights under the Note Guarantees.

Each Note Guarantee is limited in amount to an amount not to exceed the maximum amount that can be guaranteed by the applicable Note Guarantor without rendering the Note Guarantee, as it relates to such Note Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. See “Risk Factors—Risks Related to the Notes—Because each

 

108


Table of Contents

Guarantor’s liability under its guarantees may be reduced to zero, avoided or released under certain circumstances, you may not receive any payments from some or all of the Guarantors.”

If any additional direct or indirect Subsidiary of the Issuer is formed or acquired after the Issue Date (with any designation of an Unrestricted Subsidiary as a Restricted Subsidiary being deemed to constitute the acquisition of a Subsidiary) and if such Subsidiary is a Domestic Subsidiary, the Issuer will promptly notify the Trustee thereof and use commercially reasonable efforts to, as soon as practicable, cause such Subsidiary to execute a supplement to each of the Indenture, the applicable Security Documents and the Intercreditor Agreements, in the form specified therein, duly executed and delivered on behalf of such Subsidiary (as further described in “—Security for the Notes”). If any Subsidiary of the Issuer guarantees any Term Loan Obligations, the Issuer shall cause such Subsidiary to guarantee the Note Obligations substantially concurrently with guaranteeing such Term Loan Obligations. See “—Certain Covenants—Future Note Guarantors.”

Each Note Guarantee is a continuing guarantee and shall:

 

  (1)   remain in full force and effect until payment in full of all the Guaranteed Obligations;

 

  (2)   subject to the next succeeding paragraph, be binding upon each such Note Guarantor and its successors; and

 

  (3)   inure to the benefit of and be enforceable by the Notes Collateral Agent, the Trustee, the holders of the Notes and their successors, transferees and assigns.

A Note Guarantee of a Note Guarantor will be automatically released upon:

 

(1)

 

(a)

  the sale, disposition or other transfer (including through merger or consolidation) of the Capital Stock (including any sale, disposition or other transfer following which the applicable Note Guarantor is no longer a Restricted Subsidiary), of the applicable Note Guarantor if such sale, disposition or other transfer is made in compliance with the Indenture,
 

(b)

  the Issuer designating such Note Guarantor to be an Unrestricted Subsidiary in accordance with the provisions set forth under “—Certain Covenants—Limitation on Restricted Payments” and the definition of “Unrestricted Subsidiary,” or
 

(c)

  the Issuer’s exercise of its legal defeasance option or covenant defeasance option as described under “—Defeasance,” or the discharge of the Issuer’s obligations under the Indenture in accordance with the terms of the Indenture; and

 

  (2)   in the case of clause (1)(a) above, such Note Guarantor is released from its guarantees, if any, of, and all pledges and security, if any, granted in connection with, the Credit Agreements and any other Indebtedness of the Issuer or any Restricted Subsidiary of the Issuer.

A Note Guarantee also will be automatically released upon the applicable Subsidiary ceasing to be a Subsidiary as a result of any foreclosure of any pledge or security interest securing First Priority Lien Obligations, subject to, in each case, the application of the proceeds of such foreclosure in the manner described under “—Security for the Notes.”

 

109


Table of Contents

Change of Control

Upon the occurrence of any of the following events (each, a “Change of Control”), each holder will have the right to require the Issuer to repurchase all or any part of such holder’s Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), except to the extent the Issuer has previously elected to redeem Notes as described under “—Optional Redemption”:

 

  (1)   the sale, lease or transfer, in one or a series of related transactions, of all or substantially all the assets of the Issuer and its Subsidiaries, taken as a whole, to a Person other than any of the Permitted Holders; or

 

  (2)   the Issuer becomes aware (by way of a report or any other filing pursuant to Section 13(d) of the Exchange Act, proxy, vote, written notice or otherwise) of the acquisition by any Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision), including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than any of the Permitted Holders, in a single transaction or in a related series of transactions, by way of merger, consolidation or other business combination or purchase of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision), of more than 50% of the total voting power of the Voting Stock of the Issuer or any direct or indirect parent of the Issuer.

In the event that at the time of such Change of Control the terms of any Bank Indebtedness restrict or prohibit the repurchase of Notes pursuant to this covenant, then prior to the mailing or sending electronically of the notice to holders provided for in the immediately following paragraph but in any event within 30 days following any Change of Control, the Issuer shall:

 

  (1)   repay in full all such Bank Indebtedness or, if doing so will allow the purchase of Notes, offer to repay in full all such Bank Indebtedness and repay all Bank Indebtedness of each lender who has accepted such offer; or

 

  (2)   obtain the requisite consent under the agreements governing such Bank Indebtedness to permit the repurchase of the Notes as provided for in the immediately following paragraph.

See “Risk Factors—Risks Related to the Notes—We may not be able to repurchase the notes upon a change of control.”

Within 30 days following any Change of Control, except to the extent that the Issuer has exercised its right to redeem the Notes as described under “—Optional Redemption,” the Issuer shall mail or send electronically a notice (a “Change of Control Offer”) to each holder with a copy to the Trustee stating:

 

  (1)   that a Change of Control has occurred and that such holder has the right to require the Issuer to repurchase such holder’s Notes at a repurchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase (subject to the right of holders of record on a record date to receive interest on the relevant interest payment date);

 

  (2)   the circumstances and relevant facts and financial information regarding such Change of Control;

 

  (3)   the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is sent); and

 

  (4)   the instructions determined by the Issuer, consistent with this covenant, that a holder must follow in order to have its Notes purchased.

 

110


Table of Contents

A Change of Control Offer may be made in advance of a Change of Control, and conditioned upon such Change of Control, if a definitive agreement is in place for the Change of Control at the time of making of the Change of Control Offer.

The Issuer will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer.

Notes repurchased by the Issuer pursuant to a Change of Control Offer will have the status of Notes issued but not outstanding or will be retired and canceled at the option of the Issuer. Notes purchased by a third party pursuant to the preceding paragraph will have the status of Notes issued and outstanding.

The Issuer will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof.

This Change of Control repurchase provision is a result of negotiations between the Issuer and the initial purchasers. The Issuer has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Issuer could decide to do so in the future. Subject to the limitations discussed below, the Issuer could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Issuer’s capital structure or credit rating.

The occurrence of events which would constitute a Change of Control would constitute a default under the Credit Agreements. Future Bank Indebtedness of the Issuer may contain prohibitions on certain events which would constitute a Change of Control or require such Bank Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the holders of the Notes of their right to require the Issuer to repurchase the Notes could cause a default under such Bank Indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Issuer. Finally, the Issuer’s ability to pay cash to the holders of the Notes upon a repurchase may be limited by the Issuer’s then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. See “Risk Factors—Risks Related to the Notes—We may not be able to repurchase the notes upon a change of control.”

The definition of Change of Control includes a phrase relating to the sale, lease or transfer of “all or substantially all” the assets of the Issuer and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of Notes to require the Issuer to repurchase such Notes as a result of a sale, lease or transfer of less than all of the assets of the Issuer and its Subsidiaries taken as a whole to another Person or group may be uncertain.

The provisions under the Indenture relating to the Issuer’s obligation to make an offer to repurchase the Notes as a result of a Change of Control may be waived or modified with the written consent of the holders of a majority in principal amount of the Notes.

 

111


Table of Contents

Certain Covenants

Set forth below are summaries of certain covenants contained in the Indenture. If, on any date following the Issue Date, (i) the Notes have Investment Grade Ratings from both Rating Agencies, and the Issuer has delivered notice of such Investment Grade Ratings to the Trustee, and (ii) no Default has occurred and is continuing under the Indenture then, beginning on that day and continuing at all times thereafter regardless of any subsequent changes in the ratings of the Notes, the covenants specifically listed under the following captions in this “Description of the Exchange Notes” section of this prospectus will no longer be applicable to the Notes:

 

  (1)   “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock”;

 

  (2)   “—Limitation on Restricted Payments”;

 

  (3)   “—Dividend and Other Payment Restrictions Affecting Subsidiaries”;

 

  (4)   “—Asset Sales”;

 

  (5)   “—Transactions with Affiliates”;

 

  (6)   “—Future Note Guarantors”; and

 

  (7)   clause (4) of the first paragraph of “—Merger, Amalgamation, Consolidation or Sale of All or Substantially All Assets.”

In addition, during any period of time that (i) the Notes have Investment Grade Ratings from both Rating Agencies, and the Issuer has delivered notice of such Investment Grade Ratings to the Trustee, and (ii) no Default has occurred and is continuing under the Indenture (the occurrence of the events described in the foregoing clauses (i) and (ii) being collectively referred to as a “Covenant Suspension Event”), the Issuer and its Restricted Subsidiaries will not be subject to the covenant described under “Change of Control” (the “Suspended Covenant”). In the event that the Issuer and its Restricted Subsidiaries are not subject to the Suspended Covenant under the Indenture for any period of time as a result of the foregoing, and on any subsequent date (the “Reversion Date”) one or both of the Rating Agencies (a) withdraw their Investment Grade Rating or downgrade the rating assigned to the Notes below an Investment Grade Rating and/or (b) the Issuer or any of its Affiliates enters into an agreement to effect a transaction that would result in a Change of Control and one or more of the Rating Agencies indicate that if consummated, such transaction (alone or together with any related recapitalization or refinancing transactions) would cause such Rating Agency to withdraw its Investment Grade Rating or downgrade the ratings assigned to the Notes below an Investment Grade Rating, then the Issuer and its Restricted Subsidiaries will thereafter again be subject to the Suspended Covenant under the Indenture with respect to future events, including, without limitation, a proposed transaction described in clause (b) above.

The Issuer shall deliver written notice to the Trustee promptly upon the occurrence of any Reversion Date.

There can be no assurance that the Notes will ever achieve or maintain Investment Grade Ratings.

Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock. The Indenture provides that:

 

  (1)   the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, Incur any Indebtedness (including Acquired Indebtedness) or issue any shares of Disqualified Stock; and

 

  (2)   the Issuer will not permit any of its Restricted Subsidiaries (other than a Note Guarantor) to issue any shares of Preferred Stock;

provided, however, that the Issuer and any Restricted Subsidiary that is a Note Guarantor or a Foreign Subsidiary may Incur Indebtedness (including Acquired Indebtedness) or issue shares of Disqualified Stock and any Restricted Subsidiary may issue shares of Preferred Stock, in each case if the Fixed Charge Coverage Ratio of the

 

112


Table of Contents

Issuer for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is Incurred or such Disqualified Stock or Preferred Stock is issued would have been at least 2.00 to 1.00 determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been Incurred, or the Disqualified Stock or Preferred Stock had been issued, as the case may be, and the application of proceeds therefrom had occurred at the beginning of such four-quarter period.

The foregoing limitations will not apply to:

 

  (a)   the Incurrence by the Issuer or its Restricted Subsidiaries of Secured Indebtedness under the Credit Agreements and the issuance and creation of letters of credit and bankers’ acceptances thereunder (with letters of credit and bankers’ acceptances being deemed to have a principal amount equal to the face amount thereof) in the aggregate principal amount of $1,600.0 million plus an aggregate additional principal amount outstanding at any one time that does not cause the Secured Indebtedness Leverage Ratio of the Issuer to exceed 4.00 to 1.00, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom);

 

  (b)   the Incurrence by the Issuer and the Note Guarantors of Indebtedness represented by the Notes (not including any Additional Notes) and the Note Guarantees, as applicable;

 

  (c)   Indebtedness existing on the Issue Date (other than Indebtedness described in clauses (a) and (b));

 

  (d)   Indebtedness (including Capitalized Lease Obligations) Incurred by the Issuer or any of its Restricted Subsidiaries, Disqualified Stock issued by the Issuer or any of its Restricted Subsidiaries and Preferred Stock issued by any Restricted Subsidiaries of the Issuer to finance (whether prior to or within 270 days after) the purchase, lease, construction or improvement of property (real or personal) or equipment (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets (but no other material assets));

 

  (e)   Indebtedness Incurred by the Issuer or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit and bank guarantees issued in the ordinary course of business, including without limitation letters of credit in respect of workers’ compensation claims, health, disability or other benefits to employees or former employees or their families or property, casualty or liability insurance or self-insurance, and letters of credit in connection with the maintenance of, or pursuant to the requirements of, environmental or other permits or licenses from governmental authorities, or other Indebtedness with respect to reimbursement type obligations regarding workers’ compensation claims;

 

  (f)   Indebtedness arising from agreements of the Issuer or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, Incurred in connection with the Transactions or any other acquisition or disposition of any business, assets or a Subsidiary of the Issuer in accordance with the terms of the Indenture, other than guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition;

 

  (g)   Indebtedness of the Issuer to a Restricted Subsidiary; provided that any such Indebtedness owed to a Restricted Subsidiary that is not a Note Guarantor is subordinated in right of payment to the obligations of the Issuer under the Notes; provided, further, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Issuer or another Restricted Subsidiary) shall be deemed, in each case, to be an Incurrence of such Indebtedness;

 

  (h)  

shares of Preferred Stock of a Restricted Subsidiary issued to the Issuer or another Restricted Subsidiary; provided that any subsequent issuance or transfer of any Capital Stock or any other event which results in any Restricted Subsidiary that holds such shares of Preferred Stock of another Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such

 

113


Table of Contents
 

shares of Preferred Stock (except to the Issuer or another Restricted Subsidiary) shall be deemed, in each case, to be an issuance of shares of Preferred Stock;

 

  (i)   Indebtedness of a Restricted Subsidiary to the Issuer or another Restricted Subsidiary; provided that if a Note Guarantor incurs such Indebtedness to a Restricted Subsidiary that is not a Note Guarantor, such Indebtedness is subordinated in right of payment to the Note Guarantee of such Note Guarantor; provided, further, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any Restricted Subsidiary holding such Indebtedness ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Issuer or another Restricted Subsidiary) shall be deemed, in each case, to be an Incurrence of such Indebtedness;

 

  (j)   Hedging Obligations that are not incurred for speculative purposes and either: (1) for the purpose of fixing or hedging interest rate risk with respect to any Indebtedness that is permitted by the terms of the Indenture to be outstanding; (2) for the purpose of fixing or hedging currency exchange rate risk with respect to any currency exchanges; or (3) for the purpose of fixing or hedging commodity price risk (including resin price risk) with respect to any commodity purchases or sales;

 

  (k)   obligations in respect of performance, bid, appeal and surety bonds and completion guarantees provided by the Issuer or any Restricted Subsidiary in the ordinary course of business;

 

  (l)   Indebtedness or Disqualified Stock of the Issuer or any Restricted Subsidiary of the Issuer and Preferred Stock of any Restricted Subsidiary of the Issuer not otherwise permitted hereunder in an aggregate principal amount, which when aggregated with the principal amount or liquidation preference of all other Indebtedness, Disqualified Stock and Preferred Stock then outstanding and Incurred pursuant to this clause (l), does not exceed the greater of $100.0 million and 4.5% of Total Assets at the time of Incurrence (it being understood that any Indebtedness Incurred under this clause (l) shall cease to be deemed Incurred or outstanding for purposes of this clause (l) but shall be deemed Incurred for purposes of the first paragraph of this covenant from and after the first date on which the Issuer, or the Restricted Subsidiary, as the case may be, could have Incurred such Indebtedness under the first paragraph of this covenant without reliance upon this clause (l));

 

  (m)   any guarantee by the Issuer or a Note Guarantor of Indebtedness or other obligations of the Issuer or any of its Restricted Subsidiaries so long as the Incurrence of such Indebtedness Incurred by the Issuer or such Restricted Subsidiary is permitted under the terms of the Indenture; provided that if such Indebtedness is by its express terms subordinated in right of payment to the Notes or the Note Guarantee of such Restricted Subsidiary, as applicable, any such guarantee of such Note Guarantor with respect to such Indebtedness shall be subordinated in right of payment to such Note Guarantor’s Note Guarantee with respect to the Notes substantially to the same extent as such Indebtedness is subordinated to the Notes or the Note Guarantee of such Restricted Subsidiary, as applicable;

 

  (n)   the Incurrence by the Issuer or any of its Restricted Subsidiaries of Indebtedness or Disqualified Stock or Preferred Stock of a Restricted Subsidiary of the Issuer which serves to refund, refinance or defease any Indebtedness Incurred or Disqualified Stock or Preferred Stock issued as permitted under the first paragraph of this covenant and clauses (b), (c), (d), (n), (o), (s) and (t) of this paragraph or any Indebtedness, Disqualified Stock or Preferred Stock Incurred to so refund or refinance such Indebtedness, Disqualified Stock or Preferred Stock, including any Indebtedness, Disqualified Stock or Preferred Stock Incurred to pay premiums and fees in connection therewith (subject to the following proviso, “Refinancing Indebtedness”) prior to its respective maturity; provided, however, that such Refinancing Indebtedness:

 

  (1)   has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is Incurred which is not less than the remaining Weighted Average Life to Maturity of the Indebtedness, Disqualified Stock or Preferred Stock being refunded or refinanced;

 

  (2) has a Stated Maturity which is not earlier than the earlier of (x) the Stated Maturity of the Indebtedness being refunded or refinanced or (y) 91 days following the maturity date of the Notes;

 

114


Table of Contents
  (3) to the extent such Refinancing Indebtedness refinances (a) Indebtedness junior to the Notes or the Note Guarantee of such Restricted Subsidiary, as applicable, such Refinancing Indebtedness is junior to the Notes or the Note Guarantee of such Restricted Subsidiary, as applicable, or (b) Disqualified Stock or Preferred Stock, such Refinancing Indebtedness is Disqualified Stock or Preferred Stock;

 

  (4) is Incurred in an aggregate amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced plus premium, fees and expenses Incurred in connection with such refinancing;

 

  (5) shall not include (x) Indebtedness of a Restricted Subsidiary of the Issuer that is not a Note Guarantor that refinances Indebtedness of the Issuer or a Restricted Subsidiary that is a Note Guarantor, or (y) Indebtedness of the Issuer or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary; and

 

  (6) in the case of any Refinancing Indebtedness Incurred to refinance Indebtedness outstanding under clause (d) or (t), shall be deemed to have been Incurred and to be outstanding under such clause (d) or (t), as applicable, and not this clause (n) for purposes of determining amounts outstanding under such clauses (d) and (t);

provided, further, that subclauses (1) and (2) of this clause (n) will not apply to any refunding or refinancing of any Secured Indebtedness constituting First Priority Lien Obligations;

 

  (o)   Indebtedness, Disqualified Stock or Preferred Stock of (x) the Issuer or any of its Restricted Subsidiaries incurred to finance an acquisition or (y) Persons that are acquired by the Issuer or any of its Restricted Subsidiaries or merged with or into the Issuer or any of its Restricted Subsidiaries in accordance with the terms of the Indenture; provided, however, that after giving effect to such acquisition or merger, either

 

  (1)   the Issuer would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first sentence of this covenant; or

 

  (2)   the Fixed Charge Coverage Ratio of the Issuer would be greater than immediately prior to such acquisition or merger;

 

  (p)   Indebtedness Incurred by a Receivables Subsidiary in a Qualified Receivables Financing that is not recourse to the Issuer or any Restricted Subsidiary other than a Receivables Subsidiary (except for Standard Securitization Undertakings);

 

  (q)   Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business; provided that such Indebtedness is extinguished within five Business Days of its Incurrence;

 

  (r)   Indebtedness of the Issuer or any Restricted Subsidiary supported by a letter of credit or bank guarantee issued pursuant to any Credit Agreement, in a principal amount not in excess of the stated amount of such letter of credit;

 

  (s)   Contribution Indebtedness;

 

  (t)   Indebtedness of Foreign Subsidiaries; provided, however, that the aggregate principal amount of Indebtedness Incurred under this clause (t), when aggregated with the principal amount of all other Indebtedness then outstanding and Incurred pursuant to this clause (t), does not exceed $25.0 million at any one time outstanding;

 

  (u)   Indebtedness of the Issuer or any Restricted Subsidiary consisting of (x) the financing of insurance premiums or (y) take-or-pay obligations contained in supply arrangements, in each case, in the ordinary course of business; and

 

115


Table of Contents
  (v)   Indebtedness incurred on behalf of, or representing guarantees of Indebtedness of, joint ventures of the Issuer or any Restricted Subsidiary not in excess, at any one time outstanding, of $7.5 million.

For purposes of determining compliance with this covenant, in the event that an item of Indebtedness, Disqualified Stock or Preferred Stock meets the criteria of more than one of the categories of permitted Indebtedness described in clauses (a) through (v) above or is entitled to be Incurred pursuant to the first paragraph of this covenant, the Issuer shall, in its sole discretion, classify or reclassify, or later divide, classify or reclassify, such item of Indebtedness in any manner that complies with this covenant. Accrual of interest, the accretion of accreted value, the payment of interest in the form of additional Indebtedness with the same terms, the payment of dividends on Preferred Stock in the form of additional shares of Preferred Stock of the same class, accretion or amortization of original issue discount or liquidation preference and increases in the amount of Indebtedness outstanding solely as a result of fluctuations in the exchange rate of currencies will not be deemed to be an Incurrence of Indebtedness for purposes of this covenant. Guarantees of, or obligations in respect of letters of credit relating to, Indebtedness which is otherwise included in the determination of a particular amount of Indebtedness shall not be included in the determination of such amount of Indebtedness; provided that the Incurrence of the Indebtedness represented by such guarantee or letter of credit, as the case may be, was in compliance with this covenant.

For purposes of determining compliance with any U.S. dollar-denominated restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent principal amount of Indebtedness denominated in a foreign currency shall be calculated based on the relevant currency exchange rate in effect on the date such Indebtedness was Incurred, in the case of term debt, or first committed or first Incurred (whichever yields the lower U.S. dollar equivalent), in the case of revolving credit debt; provided that if such Indebtedness is Incurred to refinance other Indebtedness denominated in a foreign currency, and such refinancing would cause the applicable U.S. dollar- denominated restriction to be exceeded if calculated at the relevant currency exchange rate in effect on the date of such refinancing, such U.S. dollar-denominated restriction shall be deemed not to have been exceeded so long as the principal amount of such refinancing Indebtedness does not exceed the principal amount of such Indebtedness being refinanced.

Limitation on Restricted Payments. The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly:

 

  (1)   declare or pay any dividend or make any distribution on account of the Issuer’s or any of its Restricted Subsidiaries’ Equity Interests, including any payment made in connection with any merger, amalgamation or consolidation involving the Issuer (other than (A) dividends or distributions by the Issuer payable solely in Equity Interests (other than Disqualified Stock) of the Issuer; or (B) dividends or distributions by a Restricted Subsidiary so long as, in the case of any dividend or distribution payable on or in respect of any class or series of securities issued by a Restricted Subsidiary other than a Wholly Owned Restricted Subsidiary, the Issuer or a Restricted Subsidiary receives at least its pro rata share of such dividend or distribution in accordance with its Equity Interests in such class or series of securities);

 

  (2)   purchase or otherwise acquire or retire for value any Equity Interests of the Issuer or any direct or indirect parent of the Issuer;

 

  (3)  

make any principal payment on, or redeem, repurchase, defease or otherwise acquire or retire for value, in each case prior to any scheduled repayment or scheduled maturity, any Subordinated Indebtedness of the Issuer or any of its Restricted Subsidiaries (other than the payment, redemption, repurchase, defeasance, acquisition or retirement of (A) Subordinated Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such payment, redemption, repurchase, defeasance, acquisition or retirement and (B) Indebtedness permitted under clauses (g) and (i) of the second paragraph of the covenant described

 

116


Table of Contents
 

under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock”); or

 

  (4)   make any Restricted Investment.

(all such payments and other actions set forth in clauses (1) through (4) above being collectively referred to as “Restricted Payments”), unless, at the time of such Restricted Payment:

 

&nb