SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 1, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from___________________to__________________

Commission File Number 33-75706
BPC HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
35-1814673
(State or other jurisdiction
of incorporation or organization)
(IRS employer
identification number)
   

BERRY PLASTICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
35-1813706
(State or other jurisdiction
of incorporation or organization)
(IRS employer
identification number)
   
101 Oakley Street
Evansville, Indiana
 
47710
 
(Address of principal executive offices)
 
(Zip code)
 

Registrants' telephone number, including area code: (812) 424-2904

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. [X]Yes [ ]No

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers or non-accelerated filers. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark whether the registrants are shell companies (as defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of July 17, 2006, there were outstanding 3,375,611 shares of the Common Stock, $.01 par value, of BPC Holding Corporation. As of July 17, 2006, there were outstanding 100 shares of the Common Stock, $.01 par value, of Berry Plastics Corporation.


 
-1-


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q includes "forward-looking statements," within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to our financial condition, results of operations and business and our expectations or beliefs concerning future events. The forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations". You can identify certain forward-looking statements by our use of forward-looking terminology such as, but not limited to, "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "likely," "will," "would," "could" and similar expressions that identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our operations. The occurrence of the events described and the achievement of the expected results depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from the forward-looking statements contained in this Form 10-Q. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 
·
changes in prices and availability of resin and other raw materials and our ability to pass on changes in raw material prices on a timely basis;
 
·
catastrophic loss of one of our key manufacturing facilities;
 
·
risks related to our acquisition strategy and integration of acquired businesses;
 
·
risks associated with our substantial indebtedness and debt service;
 
·
performance of our business and future operating results;
 
·
risks of competition, including foreign competition, in our existing and future markets;
 
·
general business and economic conditions, particularly an economic downturn;
 
·
increases in the cost of compliance with laws and regulations, including environmental laws and regulations; and
 
·
the factors discussed in our Form 10-K for the fiscal year ended December 31, 2005 in the section titled “Risk Factors.”

Readers should carefully review the factors discussed in our Form 10-K for the fiscal year ended December 31, 2005 in the section titled “Risk Factors” and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission and should not place undue reliance on our forward-looking statements. We undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

AVAILABLE INFORMATION

We make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments, if any, to those reports through our Internet website as soon as practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission. Our internet address is www.berryplastics.com. The information contained on our website is not being incorporated herein. We are currently in the process of finalizing our Code of Ethics.

 
-2-


BPC Holding Corporation
Berry Plastics Corporation


Form 10-Q Index

For Quarterly Period Ended July 1, 2006




   
Page No.
Part I.
Financial Information
 
     
 
Item 1.Financial Statements:
 
 
Consolidated Balance Sheets
4
 
Consolidated Statements of Income
6
 
Consolidated Statements of Changes in Stockholders’ Equity
7
 
Consolidated Statements of Cash Flows
8
 
Notes to Consolidated Financial Statements
9
     
 
Item 2.Management’s Discussion and Analysis of
 
 
Financial Condition and Results of Operations
20
     
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
29
 
Item 4. Controls and Procedures
30
     
Part II.
Other Information
 
     
 
Item 1.Legal Proceedings
31
 
Item 1A.Risk Factors
31
 
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
31
 
Item 3.Defaults Upon Senior Securities
31
 
Item 4.Submission of Matters to a Vote of Security Holders
31
 
Item 5.Other Information
31
 
Item 6. Exhibits
31
     
Signature
 
32


 
-3-


Part 1. Financial Information
Item 1. Financial Statements

BPC Holding Corporation
Consolidated Balance Sheets
(In Thousands of Dollars, except share information)


   
July 1,
2006
 
December 31,
2005
 
   
    (Unaudited)
     
Assets
             
Current assets:
             
Cash and cash equivalents
 
$
35,251
 
$
24,756
 
Accounts receivable (less allowance for doubtful accounts of $6,376 at July 1, 2006 and $5,766 at December 31, 2005)
   
166,924
   
140,443
 
Inventories:
             
Finished goods
   
113,560
   
101,632
 
Raw materials and supplies
   
49,794
   
50,716
 
     
163,354
   
152,348
 
Deferred income taxes
   
8,623
   
22,905
 
Prepaid expenses and other current assets
   
29,245
   
39,037
 
Total current assets
   
403,397
   
379,489
 
               
Property and equipment:
             
Land
   
12,345
   
12,292
 
Buildings and improvements
   
95,139
   
92,810
 
Equipment and construction in progress
   
551,547
   
497,364
 
     
659,031
   
602,466
 
Less accumulated depreciation
   
222,561
   
179,022
 
     
436,470
   
423,444
 
Intangible assets:
             
Deferred financing fees, net
   
16,783
   
18,333
 
Customer relationships, net
   
248,662
   
255,981
 
Goodwill
   
495,693
   
495,258
 
Trademarks, net
   
45,131
   
47,065
 
Other intangibles, net
   
27,150
   
28,260
 
     
833,419
   
844,897
 
               
Total assets
 
$
1,673,286
 
$
1,647,830
 
 

 
-4-



BPC Holding Corporation
Consolidated Balance Sheets (continued)
(In Thousands of Dollars, except share information)

   
July 1,
2006
 
December 31,
2005
 
   
(Unaudited)
     
Liabilities and stockholders' equity
             
Current liabilities:
             
Accounts payable
 
$
97,310
 
$
64,970
 
Accrued interest
   
17,046
   
20,165
 
Employee compensation, payroll and other taxes
   
44,472
   
43,915
 
Accrued expenses and other current liabilities
   
30,332
   
34,730
 
Current portion of long-term debt
   
14,419
   
13,928
 
Total current liabilities
   
203,579
   
177,708
 
               
Long-term debt, less current portion
   
1,121,401
   
1,146,692
 
Deferred income taxes
   
94,466
   
94,934
 
Other long-term liabilities
   
26,171
   
25,108
 
Total liabilities
   
1,445,617
   
1,444,442
 
Stockholders' equity:
             
Preferred Stock; $.01 par value: 500,000 shares authorized; 0 shares issued and outstanding at July 1, 2006 and December 31, 2005
   
   
 
Common Stock; $.01 par value: 5,000,000 shares authorized; 3,398,807 shares issued and 3,374,351 shares outstanding at July 1, 2006; and 3,398,807 shares issued and 3,374,348 shares outstanding at December 31, 2005
   
34
   
34
 
Additional paid-in capital
   
348,715
   
346,943
 
Adjustment of the carryover basis of continuing stockholders
   
(196,603
)
 
(196,603
)
Notes receivable - common stock
   
(11,389
)
 
(14,273
)
Treasury stock: 23,196 and 24,459 shares of common stock at July 1, 2006 and December 31, 2005, respectively
   
(3,525
)
 
(3,547
)
Retained earnings
   
76,881
   
58,969
 
Accumulated other comprehensive income
   
13,556
   
11,865
 
Total stockholders’ equity
   
227,669
   
203,388
 
Total liabilities and stockholders’ equity
 
$
1,673,286
 
$
1,647,830
 

 
See notes to consolidated financial statements.

 
-5-



BPC Holding Corporation
Consolidated Statements of Income
(In Thousands of Dollars)

   
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
   
July 1,
 
July 2,
 
July 1,
 
July 2,
 
   
2006
 
2005
 
2006
 
2005
 
   
(Unaudited)
 
(Unaudited)
 
                   
Net sales
 
$
375,114
 
$
282,871
 
$
731,078
 
$
508,181
 
Cost of goods sold
   
299,320
   
233,477
   
583,941
   
417,493
 
Gross profit
   
75,794
   
49,394
   
147,137
   
90,688
 
                           
Operating expenses:
                         
Selling
   
9,723
   
7,593
   
20,143
   
14,895
 
General and administrative
   
16,991
   
9,546
   
31,794
   
18,425
 
Research and development
   
1,899
   
1,428
   
3,875
   
2,456
 
Amortization of intangibles
   
5,325
   
1,985
   
10,689
   
3,758
 
Other expenses
   
2,724
   
389
   
3,781
   
693
 
Operating income
   
39,132
   
28,453
   
76,855
   
50,461
 
                           
Other expenses (income):
                         
Unrealized loss (gain) on investment in Southern Packaging
   
(515
)
 
937
   
(299
)
 
1,569
 
Income before interest and taxes
   
39,647
   
27,516
   
77,154
   
48,892
 
                           
Interest:
                         
Expense
   
22,721
   
16,513
   
45,123
   
30,535
 
Loss on extinguished debt
   
   
7,045
   
   
7,045
 
Income
   
(218
)
 
(208
)
 
(612
)
 
(412
)
Income before income taxes
   
17,144
   
4,166
   
32,643
   
11,724
 
                           
Income taxes
   
7,412
   
2,415
   
14,731
   
6,174
 
Net income
 
$
9,732
 
$
1,751
 
$
17,912
 
$
5,550
 

 
See notes to consolidated financial statements.


 
-6-



BPC Holding Corporation
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(In Thousands of Dollars)

   
 
 
 
Common
Stock
 
 
 
Additional
Paid-In
Capital
 
Adjustment of the carryover basis of continuing stockholders
 
 
Notes receivable - common stock
 
 
 
 
Treasury Stock
 
 
 
 
Retained
Earnings
 
Accumulated Other Comprehensive
Income
(Losses)
 
 
 
 
 
Total
 
                                   
Balance at December 31, 2005
 
$
34
 
$
346,943
 
$
(196,603
)
$
(14,273
)
$
(3,547
)
$
58,969
 
$
11,865
 
$
203,388
 
Collection on notes receivable
   
   
   
   
3,234
   
   
   
   
3,234
 
Purchase of treasury stock
   
   
(204
)
 
   
   
(827
)
 
   
   
(1,031
)
Sale of treasury stock
   
   
   
   
   
849
   
   
   
849
 
Interest on notes receivable
   
   
   
   
(350
)
 
   
   
   
(350
)
Stock-based compensation
   
   
1,976
   
   
   
   
   
   
1,976
 
Translation gains
   
   
   
   
   
   
   
1,758
   
1,758
 
Other comprehensive losses
   
   
   
   
   
   
   
(67
)
 
(67
)
Net income
   
   
   
   
   
   
17,912
   
   
17,912
 
Balance at July 1, 2006
 
$
34
 
$
348,715
 
$
(196,603
)
$
(11,389
)
$
(3,525
)
$
76,881
 
$
13,556
 
$
227,669
 

 
See notes to consolidated financial statements.


 
-7-




BPC Holding Corporation
Consolidated Statements of Cash Flows
(In Thousands of Dollars)

   
Twenty-six Weeks Ended
 
 
 
July 1,
2006
 
July 2,
2005
 
   
(Unaudited)
 
(Unaudited)
 
Operating activities
             
Net income
 
$
17,912
 
$
5,550
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation
   
43,307
   
30,391
 
Non-cash interest expense
   
954
   
982
 
Write off of deferred financing fees
   
   
7,045
 
Amortization of intangibles
   
10,689
   
3,758
 
Non-cash compensation
   
1,976
   
 
Unrealized (gain) loss on investment in Southern Packaging
   
(299
)
 
1,569
 
Deferred income taxes
   
13,833
   
5,641
 
Changes in operating assets and liabilities:
             
Accounts receivable, net
   
(26,077
)
 
(21,910
)
Inventories
   
(10,783
)
 
8,697
 
Prepaid expenses and other assets
   
9,452
   
4,007
 
Accrued interest
   
(3,118
)
 
1,759
 
Payables and accrued expenses
   
29,296
   
3,896
 
Net cash provided by operating activities
   
87,142
   
51,385
 
               
Investing activities
             
Additions to property and equipment
   
(52,217
)
 
(32,303
)
Proceeds from disposal of property and equipment
   
23
   
1,710
 
Acquisitions of businesses
   
   
(468,106
)
Net cash used for investing activities
   
(52,194
)
 
(498,699
)
               
Financing activities
             
Proceeds from long-term borrowings
   
   
466,457
 
Payments on long-term borrowings
   
(27,624
)
 
(13,900
)
Proceeds from notes receivable
   
3,234
   
 
Purchase of treasury stock
   
(1,031
)
 
 
Sale of treasury stock
   
849
   
134
 
Net cash provided by (used for) financing activities
   
(24,572
)
 
452,691
 
Effect of exchange rate changes on cash
   
119
   
12
 
Net increase in cash and cash equivalents
   
10,495
   
5,389
 
Cash and cash equivalents at beginning of period
   
24,756
   
264
 
Cash and cash equivalents at end of period
 
$
35,251
 
$
5,653
 

 


See notes to consolidated financial statements.

 
-8-


BPC Holding Corporation
Notes to Consolidated Financial Statements
(In thousands of dollars, except as otherwise noted)
(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of BPC Holding Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full fiscal year. The accompanying financial statements include the results of BPC Holding Corporation (“Holding”) and its wholly-owned subsidiary, Berry Plastics Corporation (“Berry”), and Berry’s wholly-owned subsidiaries. For further information, refer to the consolidated financial statements and footnotes thereto included in Holding’s and Berry’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2005. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

2.
Recent Development

On June 28, 2006, Holding and affiliates of the private equity firms of Apollo Management, L.P. (“Apollo”) and Graham Partners, Inc. (“Graham Partners,” and together with Apollo, the “Sponsors”) signed a definitive agreement for the Sponsors to acquire Holding for an enterprise value of $2.25 billion in aggregate consideration (subject to adjustments in accordance with the definitive agreement). The transaction is subject to customary closing conditions. The parties expect to consummate the transaction by the end of the third quarter. Following the transaction, Apollo will own a majority of the Company’s common stock.

3.
Recent Acquisitions

On April 11, 2005, a subsidiary of Berry, Berry Plastics de México, S. de R.L. de C.V., acquired all of the injection molding closure assets from Euromex Plastics, S.A. de C.V. (“Euromex”), an injection molding manufacturer located in Toluca, Mexico (“the Mexico Acquisition”), for aggregate consideration of approximately $8.2 million. The purchase price was allocated to fixed assets ($4.1 million), inventory ($1.6 million), goodwill ($0.7 million), and other intangibles ($1.8 million). The purchase was financed through borrowings under the Company’s revolving line of credit and cash on hand. The operations from the Mexico Acquisition are included in Berry’s operations since the acquisition date.

On June 3, 2005, Berry acquired Kerr Group, Inc. (“Kerr”) for aggregate consideration of approximately $454.8 million (the “Kerr Acquisition”), including direct costs associated with the acquisition. The operations from the Kerr Acquisition are included in Berry’s operations since the acquisition date. The purchase price was financed through additional term loan borrowings under an amendment to Berry’s senior secured credit facility and cash on hand. The following table

 
-9-


summarizes the allocation of purchase price and the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition.

Current assets
 
$
85,417
 
Property and equipment
   
145,688
 
Goodwill
   
134,003
 
Customer relationships
   
182,094
 
Trademarks
   
16,140
 
Other intangibles
   
22,291
 
Total assets
   
585,633
 
         
Current liabilities
   
56,862
 
Long-term liabilities
   
73,942
 
Total liabilities
   
130,804
 
         
Net assets acquired
 
$
454,829
 
 

In accordance with the criteria stated in Emerging Issues Task Force (“EITF”) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (“EITF 95-3”), the Company established opening balance sheet reserves related to plant shutdown and severance costs. The opening balances and current year activity is presented in the following table.

   
Established
     
   
at Opening
Balance
Sheet
 
 
January 1, 2006
 
 
 
Payments
 
 
July 1,
2006
 
EITF 95-3 reserves
 
$
2,700
 
$
2,221
 
$
(588
)
$
1,633
 

 

The pro forma financial results presented below are unaudited and assume that the Kerr Acquisition occurred at the beginning of the respective period. Pro forma results have not been adjusted to reflect the Mexico Acquisition as they do not differ materially from the pro forma results presented below. Pro forma net sales and net income was $352,963 and $5,503, respectively, for the thirteen weeks ended July 2, 2005. Pro forma net sales and net income was $676,496 and $7,227, respectively, for the twenty-six weeks ended July 2, 2005. The financial results for the thirteen and twenty-six weeks ended July 1, 2006 have not been adjusted as the acquired businesses were owned by Berry for the entire period. The information presented is for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Kerr Acquisition been consummated at the beginning of the respective period, nor are they necessarily indicative of future operating results. Further, the information reflects only pro forma adjustments for additional amortization, additional interest expense, elimination of Berry’s write off of deferred financing fees, and elimination of Kerr’s closing expenses, net of the applicable income tax effects.

 
-10-



4. Long-Term Debt

Long-term debt consists of the following:

   
July 1,
2006
 
December 31, 2005
 
Berry 10 ¾% Senior Subordinated Notes
 
$
335,000
 
$
335,000
 
Debt premium on 10 ¾% Notes, net
   
7,111
   
7,699
 
Term loans
   
767,050
   
791,025
 
Capital leases
   
26,659
   
26,896
 
     
1,135,820
   
1,160,620
 
Less current portion of long-term debt 
   
14,419
   
13,928
 
   
$
1,121,401
 
$
1,146,692
 

 

The current portion of long-term debt consists of $7.9 million of quarterly installments on the term loans and $6.5 million of principal payments related to capital lease obligations.

On July 22, 2002, the Company entered into a credit and guaranty agreement and a related pledge security agreement with a syndicate of lenders led by Goldman Sachs Credit Partners L.P., as administrative agent (the “Credit Facility”). On November 10, 2003, in connection with the acquisition of Landis Plastics, Inc., the Credit Facility was amended and restated (the “Amended and Restated Credit Facility”). On August 9, 2004, the Amended and Restated Credit Facility was amended and restated (the “Second Amended and Restated Credit Facility”). On January 1, 2005, a First Amendment to the Second Amended and Restated Credit Facility was entered into to permit Fifth Third Bank to assume the role of administrative agent and for Goldman Sachs Credit Partners, L.P. to resign as administrative agent. On June 3, 2005, the Company entered into a Second Amendment to the Second Amended and Restated Credit Agreement with Deutsche Bank Trust Company Americas assuming the role of administrative agent. As a result of the second amendment to the New Credit Facility, we expensed $7.0 million of unamortized deferred financing costs. On October 26, 2005, the Company entered into a Third Amendment to the Second Amended and Restated Credit Agreement (the “New Credit Facility”) that reduced the applicable margin on the term loan.

The New Credit Facility provides (1) a $795.0 million term loan and (2) a $150.0 million revolving credit facility. The New Credit Facility permits the Company to borrow up to an additional $150.0 million of incremental senior term indebtedness from lenders willing to provide such loans subject to certain restrictions. The terms of the additional indebtedness will be determined by the market conditions at the time of borrowing. The maturity date of the term loan is December 2, 2011, and the maturity date of the revolving credit facility is March 31, 2010. The indebtedness under the New Credit Facility is guaranteed by Holding and all of its domestic subsidiaries. The obligations of Berry under the New Credit Facility and the guarantees thereof are secured by substantially all of the assets of such entities. At July 1, 2006, there were no borrowings outstanding on this revolving credit facility. The revolving credit facility allows up to $35.0 million of letters of credit to be issued instead of borrowings under the revolving credit facility. At July 1, 2006 and December 31, 2005, the Company had $14.7 million in letters of credit outstanding under the revolving credit facility.

 
-11-



The New Credit Facility contains significant financial and operating covenants, including prohibitions on the ability to incur certain additional indebtedness or to pay dividends, and restrictions on the ability to make capital expenditures. The New Credit Facility also contains borrowing conditions and customary events of default, including nonpayment of principal or interest, violation of covenants, inaccuracy of representations and warranties, cross-defaults to other indebtedness, bankruptcy and other insolvency events (other than in the case of certain foreign subsidiaries). The Company was in compliance with all the financial and operating covenants at July 1, 2006. The term loan amortizes quarterly as follows: $1,987,500 each quarter which began on September 30, 2005 and ends September 30, 2010 and $188,315,625 each quarter beginning December 31, 2010 and ending September 30, 2011. In June 2006, the Company made a voluntary prepayment of $20.0 million on the Company’s senior term loan.

Borrowings under the New Credit Facility bear interest, at the Company’s option, at either (i) a base rate (equal to the greater of the prime rate and the federal funds rate plus 0.5%) plus the applicable margin (the ‘‘Base Rate Loans’’) or (ii) an adjusted eurodollar LIBOR (adjusted for reserves) plus the applicable margin (the ‘‘Eurodollar Rate Loans’’). With respect to the term loan, the ‘‘applicable margin’’ is (i) with respect to Base Rate Loans, 1.00% per annum and (ii) with respect to Eurodollar Rate Loans, 2.00% per annum. In addition, the applicable margins with respect to the term loan can be further reduced by an additional .25% per annum subject to the Company meeting a leverage ratio target, which was met based on the results through July 1, 2006. With respect to the revolving credit facility, the ‘‘applicable margin’’ is subject to a pricing grid which ranges from 2.75% per annum to 2.00% per annum, depending on the leverage ratio (2.50% based on results through July 1, 2006). The ‘‘applicable margin’’ with respect to Base Rate Loans will always be 1.00% per annum less than the ‘‘applicable margin’’ for Eurodollar Rate Loans. In October 2002, Berry entered into an interest rate collar arrangement to protect $50.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The collar floor is set at 1.97% LIBOR (London Interbank Offering Rate) and capped at 6.75% LIBOR. The agreement was effective January 15, 2003 and expires on July 15, 2006. In June 2005, Berry entered into three separate interest rate swap transactions to protect $300.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The agreements were effective June 3, 2005 and expire on June 3, 2008. The agreements swap three month variable LIBOR contracts for a fixed rate three year rate of 3.897%. All of the Company’s interest rate hedge transactions are accounted for under the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133”). At July 1, 2006, the Company had unused borrowing capacity under the New Credit Facility’s revolving line of credit of $135.3 million. Although the $135.3 million was available at July 1, 2006, the covenants under our New Credit Facility may limit our ability to make such borrowings in the future.

5. Stock-Based Compensation

The Company previously applied the intrinsic value method prescribed in Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees.” In December 2004, the FASB issued SFAS No. 123R (Revised 2004,) Share-Based Payment (“SFAS 123R”), which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on alternative fair value models. The share-based compensation cost will be measured based on the fair value of the equity or liability instruments issued. The Company adopted SFAS 123R on January 1, 2006 using the modified prospective method and recorded $2.0 million in the twenty-six week period ended July 1, 2006 of non-cash charges

 
-12-


for stock compensation related to amortization of the fair value of unvested stock options. Under this method, the Company will recognize compensation cost, on a prospective basis, for the portion of outstanding awards for which the requisite service has not yet been rendered as of January 1, 2006.  In addition, the Company will recognize compensation cost on any new grants based upon the grant date fair value of those awards calculated under SFAS 123 for pro forma disclosure purposes. Accordingly, we have not restated prior period amounts. The following table illustrates the pro forma effect on net income for periods prior to adoption of SFAS 123R as if we had applied the fair value recognition provisions of SFAS 123 during such periods.

   
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
   
July 2, 2005
 
July 2, 2005
 
Reported net income
 
$
1,751
 
$
5,550
 
Total stock-based employee compensation expense determined under fair value based method, for all awards, net of tax
   
(571
)
 
(1,143
)
Pro forma net income
 
$
1,180
 
$
4,407
 

6. Comprehensive Income

Comprehensive income is comprised of net income, other comprehensive income (losses), and gains or losses resulting from currency translations of foreign investments. Other comprehensive income (losses) includes unrealized gains or losses on derivative financial instruments and minimum pension liability adjustments. The details of comprehensive income (losses) are as follows:

   
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
   
July 1,
2006
 
July 2,
2005
 
July 1,
2006
 
July 2,
2005
 
Net income
 
$
9,732
 
$
1,751
 
$
17,912
 
$
5,550
 
Other comprehensive income (losses)
   
675
   
(3,468
)
 
(67
)
 
(3,488
)
Currency translation income (losses)
   
1,422
   
(1,819
)
 
1,758
   
(2,904
)
Comprehensive income (losses)
 
$
11,829
 
$
(3,536
)
$
19,603
 
$
(842
)

 

7. Income Taxes

A reconciliation of income tax expense, computed at the federal statutory rate, to income tax expense, as provided for in the financial statements, is as follows:

   
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
   
July 1,
2006
 
July 2,
2005
 
July 1,
2006
 
July 2,
2005
 
Income tax expense computed at statutory rate
 
$
6,000
 
$
1,458
 
$
11,425
 
$
4,103
 
State income tax expense, net of federal taxes
   
815
   
258
   
1,551
   
727
 
Expenses not deductible for income tax purposes
   
189
   
120
   
359
   
241
 
Change in valuation allowance
   
810
   
666
   
1,618
   
1,205
 
Other
   
(402
)
 
(87
)
 
(222
)
 
(102
)
Income tax expense
 
$
7,412
 
$
2,415
 
$
14,731
 
$
6,174
 

 


 
-13-


8. Employee Retirement Plans

In connection with the Kerr Acquisition, the Company acquired two defined benefit pension plans which cover substantially all former employees and former union employees at Kerr’s former Lancaster facility. The Company also acquired a retiree health plan from Kerr, which covers certain healthcare and life insurance benefits for certain retired employees and their spouses. The Company also maintains a defined benefit pension plan covering the Poly-Seal employees under a collective bargaining agreement. The Company’s defined benefit and retiree health benefit plans have a minimum pension liability of $19.9 million at July 1, 2006 and December 31, 2005, which are recorded as other liabilities in the consolidated balance sheets. Net pension and retiree health benefit expense included the following components:

   
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
   
July 1,
2006
 
July 2,
2005
 
July 1,
2006
 
July 2,
2005
 
Components of net period benefit cost:
                         
Defined Benefit Pension Plans
                         
Service cost
 
$
64
 
$
70
 
$
128
 
$
140
 
Interest cost
   
562
   
317
   
1,124
   
417
 
Expected return on plan assets
   
(634
)
 
(284
)
 
(1,268
)
 
(394
)
Amortization of prior service cost
   
23
   
28
   
46
   
56
 
Recognized actuarial loss
   
4
   
2
   
8
   
4
 
Net periodic benefit cost
 
$
19
 
$
133
 
$
38
 
$
223
 
                           
Retiree Health Benefit Plan
                         
Service cost
 
$
4
 
$
2
 
$
8
 
$
2
 
Interest cost
   
97
   
50
   
194
   
50
 
Recognized actuarial loss
   
(23
)
 
   
(46
)
 
 
Net periodic benefit cost
 
$
78
 
$
52
 
$
156
 
$
52
 

The Company expects to contribute approximately $2.2 million during fiscal 2006, of which $0.1 million and $0.2 million was made in the thirteen weeks and twenty-six weeks ended July 1, 2006, respectively, to the defined benefit pension plans and the retiree health benefit plan.

9. Contingencies

The Company is party to various legal proceedings involving routine claims which are incidental to the business. Although the legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company believes that any ultimate liability would not be material to the Company’s financial condition or results of operations.

 
-14-


10. Operating Segments

In connection with the Kerr Acquisition, Berry reorganized its operations into two reportable segments: rigid open top and rigid closed top. The realignment occurred in an effort to integrate the operations of Kerr, better service the Company’s customers, and provide a more efficient organization. Prior periods have been restated to be aligned with the new reporting structure in order to provide comparable results. The Company evaluates performance and allocates resources to segments based on operating income before depreciation and amortization of intangibles adjusted to exclude (1) uncompleted acquisition expense, (2) acquisition integration expense, (3) plant shutdown expense, and (4) non-cash compensation (collectively, “Adjusted EBITDA”). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

   
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
   
July 1,
2006
 
July 2,
2005
 
July 1,
2006
 
July 2,
2005
 
Net sales: 
                         
Rigid Open Top
 
$
222,835
 
$
204,470
 
$
429,066
 
$
388,378
 
Rigid Closed Top
   
152,279
   
78,401
   
302,012
   
119,803
 
Total net sales
   
375,114
   
282,871
   
731,078
   
508,181
 
Adjusted EBITDA:
                         
Rigid Open Top
   
40,951
   
34,156
   
79,999
   
64,986
 
Rigid Closed Top
   
29,446
   
13,769
   
56,617
   
21,020
 
Total Adjusted EBITDA
   
70,397
   
47,925
   
136,616
   
86,006
 
Total assets:
                         
Rigid Open Top
   
885,252
   
800,096
   
885,252
   
800,096
 
Rigid Closed Top
   
788,034
   
753,545
   
788,034
   
753,545
 
Total assets
   
1,673,286
   
1,553,641
   
1,673,286
   
1,553,641
 
Reconciliation of Adjusted EBITDA to net income:
                         
Adjusted EBITDA for reportable segments
 
$
70,397
 
$
47,925
 
$
136,616
 
$
86,006
 
Net interest expense
   
(22,503
)
 
(23,350
)
 
(44,511
)
 
(37,168
)
Depreciation
   
(22,222
)
 
(16,395
)
 
(43,307
)
 
(30,391
)
Amortization
   
(5,325
)
 
(1,985
)
 
(10,689
)
 
(3,758
)
Income taxes
   
(7,412
)
 
(2,415
)
 
(14,731
)
 
(6,174
)
Unrealized gain (loss) on investment in Southern Packaging
   
515
   
(937
)
 
299
   
(1,569
)
Acquisition integration expense
   
(2,730
)
 
(1,092
)
 
(3,789
)
 
(1,396
)
Non-cash compensation
   
(988
)
 
   
(1,976
)
 
 
Net income
 
$
9,732
 
$
1,751
 
$
17,912
 
$
5,550
 

 


 
-15-


11. Condensed Consolidating Financial Information

Holding conducts its business through its wholly owned subsidiary, Berry. Holding and all of Berry’s domestic subsidiaries fully, jointly, severally, and unconditionally guarantee on a senior subordinated basis the $335.0 million aggregate principal amount of 10 ¾% Berry Plastics Corporation Senior Subordinated Notes due 2012. Each of Berry’s subsidiaries is 100% owned, directly or indirectly, by Berry. Separate narrative information or financial statements of guarantor subsidiaries have not been included as management believes they would not be material to investors. Presented below is condensed consolidating financial information for Holding, Berry, and its subsidiaries at July 1, 2006 and December 31, 2005 and for the thirteen and twenty-six week periods ended July 1, 2006 and July 2, 2005. The equity method has been used with respect to investments in subsidiaries.

   
July 1, 2006
 
   
BPC Holding Corporation 
(Parent)
 
Berry Plastics Corporation (Issuer)
 
Combined Guarantor Subsidiaries
 
Combined
Non-guarantor Subsidiaries
 
 
Consolidating Adjustments
 
 
 
Consolidated
 
Consolidating Balance Sheet
                         
Current assets
 
$
 
$
134,178
 
$
244,146
 
$
25,073
 
$
 
$
403,397
 
Net property and equipment
   
   
92,996
   
322,238
   
21,236
   
   
436,470
 
Other noncurrent assets
   
227,669
   
1,308,083
   
693,392
   
13,669
   
(1,409,394
)
 
833,419
 
Total assets
 
$
227,669
 
$
1,535,257
 
$
1,259,776
 
$
59,978
 
$
(1,409,394
)
$
1,673,286
 
                                       
Current liabilities
 
$
 
$
97,241
 
$
96,614
 
$
9,724
 
$
 
$
203,579
 
Noncurrent liabilities
   
   
1,210,347
   
1,349,490
   
46,806
   
(1,364,605
)
 
1,242,038
 
Equity (deficit)
   
227,669
   
227,669
   
(186,328
)
 
3,448
   
(44,789
)
 
227,669
 
Total liabilities and equity (deficit)
 
$
227,669
 
$
1,535,257
 
$
1,259,776
 
$
59,978
 
$
(1,409,394
)
$
1,673,286
 

   
December 31, 2005
 
   
BPC Holding Corporation 
(Parent)
 
Berry Plastics Corporation
 (Issuer)
 
Combined Guarantor Subsidiaries
 
Combined
Non-guarantor Subsidiaries
 
 
Consolidating Adjustments
 
 
 
Consolidated
 
Consolidating Balance Sheet
                         
Current assets
 
$
 
$
132,192
 
$
224,471
 
$
22,826
 
$
 
$
379,489
 
Net property and equipment
   
   
91,831
   
311,649
   
19,964
   
   
423,444
 
Other noncurrent assets
   
203,388
   
1,292,315
   
703,500
   
13,214
   
(1,367,520
)
 
844,897
 
Total assets
 
$
203,388
 
$
1,516,338
 
$
1,239,620
 
$
56,004
 
$
(1,367,520
)
$
1,647,830
 
                                       
Current liabilities
 
$
 
$
81,349
 
$
87,269
 
$
9,090
 
$
 
$
177,708
 
Noncurrent liabilities
   
   
1,231,601
   
1,333,925
   
40,783
   
(1,339,575
)
 
1,266,734
 
Equity (deficit)
   
203,388
   
203,388
   
(181,574
)
 
6,131
   
(27,945
)
 
203,388
 
Total liabilities and equity (deficit)
 
$
203,388
 
$
1,516,338
 
$
1,239,620
 
$
56,004
 
$
(1,367,520
)
$
1,647,830
 

 

 


 
-16-



   
Thirteen Weeks Ended July1, 2006
 
   
BPC Holding Corporation 
(Parent)
 
Berry Plastics Corporation
 (Issuer)
 
Combined Guarantor Subsidiaries
 
Combined
Non-guarantor Subsidiaries
 
 
Consolidating Adjustments
 
 
 
Consolidated
 
Consolidating Statement of Operations
 
Net sales
 
$
 
$
86,928
 
$
279,706
 
$
8,480
 
$
 
$
375,114
 
Cost of goods sold
   
   
64,320
   
226,213
   
8,787
   
   
299,320
 
Gross profit
   
   
22,608
   
53,493
   
(307
)
 
   
75,794
 
Operating expenses
   
988
   
10,387
   
24,339
   
948
   
   
36,662
 
Operating income (loss)
   
(988
)
 
12,221
   
29,154
   
(1,255
)
 
   
39,132
 
Other income
   
   
   
   
(515
)
 
   
(515
)
Interest expense (income) , net
   
(159
)
 
(10,214
)
 
31,983
   
893
   
   
22,503
 
Income taxes
   
14
   
7,206
   
66
   
126
   
   
7,412
 
Equity in net (income) loss from subsidiary
   
(10,575
)
 
4,654
   
1,759
   
   
4,162
   
 
Net income (loss)
 
$
9,732
 
$
10,575
 
$
(4,654
)
$
(1,759
)
$
(4,162
)
$
9,732
 
     

   
Thirteen Weeks Ended July 2, 2005
 
   
BPC Holding Corporation 
(Parent)
 
Berry Plastics Corporation
 (Issuer)
 
Combined Guarantor Subsidiaries
 
Combined
Non-guarantor Subsidiaries
 
 
Consolidating Adjustments
 
 
 
Consolidated
 
Consolidating Statement of Operations
 
Net sales
 
$
 
$
79,937
 
$
195,520
 
$
7,414
 
$
 
$
282,871
 
Cost of goods sold
   
   
59,815
   
166,359
   
7,303
   
   
233,477
 
Gross profit
   
   
20,122
   
29,161
   
111
   
   
49,394
 
Operating expenses
   
   
7,773
   
12,230
   
938
   
   
20,941
 
Operating income (loss)
   
   
12,349
   
16,931
   
(827
)
 
   
28,453
 
Other expenses
   
   
   
   
937
   
   
937
 
Interest expense (income), net
   
(197
)
 
1,517
   
21,723
   
307
   
   
23,350
 
Income taxes
   
14
   
2,278
   
50
   
73
   
   
2,415
 
Equity in net (income) loss from subsidiary
   
(1,568
)
 
6,986
   
2,144
   
   
(7,562
)
 
 
Net income (loss)
 
$
1,751
 
$
1,568
 
$
(6,986
)
$
(2,144
)
$
7,562
 
$
1,751
 
                   
                   

 

 

 
-17-


 


   
Twenty-six Weeks Ended July 1, 2006
 
   
BPC Holding Corporation 
(Parent)
 
Berry Plastics Corporation
 (Issuer)
 
Combined Guarantor
Subsidiaries
 
Combined
Non-guarantor Subsidiaries
 
 
Consolidating Adjustments
 
 
 
Consolidated
 
Consolidating Statement of Operations
 
Net sales
 
$
 
$
157,488
 
$
557,036
 
$
16,554
 
$
 
$
731,078
 
Cost of goods sold
   
   
115,458
   
451,175
   
17,308
   
   
583,941
 
Gross profit
   
   
42,030
   
105,861
   
(754
)
 
   
147,137
 
Operating expenses
   
1,976
   
19,258
   
46,755
   
2,293
   
   
70,282
 
Operating income (loss)
   
(1,976
)
 
22,772
   
59,106
   
(3,047
)
 
   
76,855
 
Other income
   
   
   
   
(299
)
 
   
(299
)
Interest expense (income), net
   
(349
)
 
(20,268
)
 
63,576
   
1,552
   
   
44,511
 
Income taxes
   
21
   
14,276
   
293
   
141
   
   
14,731
 
Equity in net (income) loss from subsidiary
   
(19,560
)
 
9,204
   
4,441
   
   
5,915
   
 
Net income (loss)
 
$
17,912
 
$
19,560
 
$
(9,204
)
$
(4,441
)
$
(5,915
)
$
17,912
 
 
Consolidating Statement of Cash Flows
 
Net income (loss)
 
$
17,912
 
$
19,560
 
$
(9,204
)
$
(4,441
)
 
(5,915
)
$
17,912
 
Non-cash expenses
   
1,976
   
22,642
   
43,496
   
2,346
   
   
70,460
 
Equity in net (income) loss from subsidiary
   
(19,560
)
 
9,204
   
4,441
   
   
5,915
   
 
Changes in working capital
   
(350
)
 
8,203
   
(9,806
)
 
723
   
   
(1,230
)
Net cash provided by (used for) operating activities
   
(22
)
 
59,609
   
28,927
   
(1,372
)
 
   
87,142
 
Net cash used for investing activities
   
   
(5,115
)
 
(44,234
)
 
(2,845
)
 
   
(52,194
)
Net cash provided by (used for) financing activities
   
22
   
(45,048
)
 
15,288
   
5,166
   
   
(24,572
)
Effect of exchange rate changes on cash
   
   
   
   
119
   
   
119
 
Net increase (decrease) in cash and cash equivalents
   
   
9,446
   
(19
)
 
1,068
   
   
10,495
 
Cash and cash equivalents at beginning of period
   
   
22,814
   
313
   
1,629
   
   
24,756
 
Cash and cash equivalents at end of period
 
$
 
$
32,260
 
$
294
 
$
2,697
 
$
¾
 
$
35,251
 
 

 
-18-



   
Twenty-six Weeks Ended July 2, 2005
 
   
BPC Holding Corporation 
(Parent)
 
Berry Plastics Corporation
 (Issuer)
 
Combined Guarantor Subsidiaries
 
Combined
Non-guarantor Subsidiaries
 
 
Consolidating Adjustments
 
 
 
Consolidated
 
Consolidating Statement of Operations
 
Net sales
 
$
 
$
140,959
 
$
353,523
 
$
13,699
 
$
 
$
508,181
 
Cost of goods sold
   
   
104,532
   
299,193
   
13,768
   
   
417,493
 
Gross profit
   
   
36,427
   
54,330
   
(69
)
 
   
90,688
 
Operating expenses
   
   
15,113
   
23,392
   
1,722
   
   
40,227
 
Operating income (loss)
   
   
21,314
   
30,938
   
(1,791
)
 
   
50,461
 
Other expenses
   
   
   
   
1,569
   
   
1,569
 
Interest expense (income), net
   
(397
)
 
(3,157
)
 
40,229
   
493
   
   
37,168
 
Income taxes
   
21
   
6,001
   
56
   
96
   
   
6,174
 
Equity in net (income) loss from subsidiary
   
(5,174
)
 
13,296
   
3,949
   
   
(12,071
)
 
 
Net income (loss)
 
$
5,550
 
$
5,174
 
$
(13,296
)
$
(3,949
)
$
12,071
 
$
5,550
 

       
Consolidating Statement of Cash Flows
 
Net income (loss)
 
$
5,550
 
$
5,174
 
$
(13,296
)
$
(3,949
)
$
12,071
 
$
5,550
 
Non-cash expenses
   
   
21,375
   
24,487
   
3,524
   
   
49,386
 
Equity in net (income) loss from subsidiary
   
(5,174
)
 
13,296
   
3,949
   
   
(12,071
)
 
 
Changes in working capital
   
(396
)
 
(19,736
)
 
20,315
   
(3,734
)
 
   
(3,551
)
Net cash provided by (used for) operating activities
   
(20
)
 
20,109
   
35,455
   
(4,159
)
 
   
51,385
 
Net cash used for investing activities
   
   
(473,294
)
 
(11,678
)
 
(13,727
)
 
   
(498,699
)
Net cash provided by (used for) financing activities
   
20