SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-Q





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





For the quarterly period ended June 27, 2009


or


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




Commission File Number 333-138380


BERRY PLASTICS CORPORATION


(f/k/a Berry Plastics Holding Corporation)


(Exact name of registrant as specified in its charter)


Delaware
35-1814673(State or other jurisdiction
of incorporation or organization)
(IRS employer
identification number)





SEE TABLE OF ADDITIONAL REGISTRANT GUARANTORS





Registrant’s telephone number, including area code:  (812) 424-2904


Securities registered pursuant to Section 12(b) of the Act:  None


Securities registered pursuant to Section 12(g) of the Act:  None


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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).   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 in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes [   ]  No [X]





As of August 10, 2009, all of the outstanding 100 shares of the Common Stock, $.01 par value, of Berry Plastics Corporation were held by Berry Plastics Group, Inc.





1


Table of Additional Registrant Guarantors


Exact Name
Jurisdiction of Organization
Primary Standard Industrial Classification Code Number
I.R.S.  Employer Identification No.
Name, Address and Telephone Number of Principal Executive OfficesAerocon, LLC
Delaware
3089
35-1948748
(a)Berry Iowa, LLC
Delaware
3089
42-1382173
(a)Berry Plastics Design, LLC
Delaware
3089
62-1689708
(a)Berry Plastics Technical Services, Inc.
Delaware
3089
57-1029638
(a)Berry Sterling Corporation
Delaware
3089
54-1749681
(a)CPI Holding Corporation
Delaware
3089
34-1820303
(a)Knight Plastics, Inc.
Delaware
3089
35-2056610
(a)Packerware Corporation
Delaware
3089
48-0759852
(a)Pescor, Inc.
Delaware
3089
74-3002028
(a)Poly-Seal, LLC
Delaware
3089
52-0892112
(a)Venture Packaging, Inc.
Delaware
3089
51-0368479
(a)Venture Packaging Midwest, Inc.
Delaware
3089
34-1809003
(a)Berry Plastics Acquisition Corporation III
Delaware
3089
37-1445502
(a)Berry Plastics Opco, Inc.
Delaware
3089
30-0120989
(a)Berry Plastics Acquisition Corporation V
Delaware
3089
36-4509933
(a)Berry Plastics Acquisition Corporation VIII
Delaware
3089
32-0036809
(a)Berry Plastics Acquisition Corporation IX
Delaware
3089
35-2184302
(a)Berry Plastics Acquisition Corporation X
Delaware
3089
35-2184301
(a)Berry Plastics Acquisition Corporation XI
Delaware
3089
35-2184300
(a)Berry Plastics Acquisition Corporation XII
Delaware
3089
35-2184299
(a)Berry Plastics Acquisition Corporation XIII
Delaware
3089
35-2184298
(a)Berry Plastics Acquisition Corporation XV, LLC
Delaware
3089
35-2184293
(a)Kerr Group, LLC
Delaware
3089
95-0898810
(a)Saffron Acquisition, LLC
Delaware
3089
94-3293114
(a)Setco, LLC
Delaware
3089
56-2374074
(a)Sun Coast Industries, LLC
Delaware
3089
59-1952968
(a)Tubed Products, LLC
Delaware
3089
56-2374082
(a)Cardinal Packaging, Inc.
Ohio
3089
34-1396561
(a)Landis Plastics, LLC
Delaware
3089
36-2471333
(a)Covalence Specialty Adhesives LLC
Delaware
2672
20-4104683
(a)Covalence Specialty Coatings LLC
Delaware
2672
20-4104683
(a)Caplas LLC
Delaware
3089
20-3888603
(a)Caplas Neptune, LLC
Delaware
3089
20-5557864
(a)Captive Holdings, Inc.
Delaware
3089
20-1290475
(a)Captive Plastics, Inc.
New Jersey
3089
22-1890735
(a)Grafco Industries Limited Partnership
Maryland
3089
52-1729327
(a)Rollpak Acquisition Corporation
Indiana
3089
03-0512845
(a)Rollpak Corporation
Indiana
3089
35-1582626
(a)


(a)  101 Oakley Street, Evansville, IN 47710





CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS


2





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;


·
risks related to disruptions in the overall economy and the financial markets may adversely impact our business;


·
performance of our business and future operating results;


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


·
reliance on unpatented know-how and trade secrets


·
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 other factors discussed in our Form 10-K for the fiscal year ended September 27, 2008 in the section titled “Risk Factors.”





Readers should carefully review the factors discussed in our Form 10-K for the fiscal year ended September 27, 2008 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.


3


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.


4





Berry Plastics Corporation





Form 10-Q Index





For Quarterly Period Ended June 27, 2009







Page No.Part I.                      Financial InformationItem 1.         Financial Statements:Consolidated Balance Sheets
6Consolidated Statements of Operations
8Consolidated Statements of Changes inStockholders’ Equity
9Consolidated Statements of Cash Flows
10Notes to Consolidated Financial Statements
11Item 2.        Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
27Item 3.        Quantitative and Qualitative Disclosures about Market Risk
40Item 4.        Controls and Procedures
41Part II.                           Other InformationItem 1.         Legal Proceedings
43Item 1A.      Risk Factors
43Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds
44Item 3.         Defaults Upon Senior Securities
44Item 4.         Submission of Matters to a Vote of Security Holders
44Item 5.         Other Information
44Item 6.         Exhibits
44Signature
45





5


Part 1.   Financial Information


Item 1.   Financial Statements





Berry Plastics Corporation


Consolidated Balance Sheets


(In Millions of Dollars)





June 27, 2009


September 27, 2008(Unaudited)AssetsCurrent assets:Cash and cash equivalents

$
28.5


$
189.7Accounts receivable (less allowance for doubtful accounts of $9.7 at June 27, 2009 and $12.1 at September 27, 2008)


328.1



422.5Inventories, net:Finished goods


232.2



306.1Raw materials and work in process


151.9



194.2384.1



500.3Deferred income taxes


35.3



35.3Prepaid expenses and other current assets


25.6



49.3Total current assets


801.6



1,197.1Property and equipment:Land


40.3



39.1Buildings and improvements


175.6



165.3Equipment and construction in progress


1,078.5



978.51,294.4



1,182.9Less accumulated depreciation


423.7



320.1870.7



862.8Goodwill, intangible assets and deferred costs


2,567.8



2,662.2Other assets


136.9



2.02,704.7



2,664.2Total assets

$
4,377.0


$
4,724.1


6





Berry Plastics Corporation


Consolidated Balance Sheets (continued)


(In Millions of Dollars)





June 27,
2009


September 27,
2008(Unaudited)Liabilities and stockholders' equityCurrent liabilities:Accounts payable

$
205.0


$
253.8Accrued expenses and other current liabilities


213.2



206.6Current portion of long-term debt


20.8



21.4Total current liabilities


439.0



481.8Long-term debt, less current portion


3,343.9



3,578.2Deferred income taxes


187.2



212.3Other long-term liabilities


98.3



99.9Total liabilities


4,068.4



4,372.2Commitments and contingenciesStockholders' equity:Parent Company Investment, net


628.8



617.2Accumulated deficit


(288.5
)


(253.0
)Accumulated other comprehensive loss


(31.7
)


(12.3
)Total stockholders’ equity


308.6



351.9Total liabilities and stockholders’ equity

$
4,377.0


$
4,724.1








See notes to consolidated financial statements.


7





Berry Plastics Corporation


Consolidated Statements of Operations


(Unaudited)


(In Millions of Dollars)








Thirteen Weeks Ended


Thirty-Nine Weeks EndedJune 27, 2009


June 28, 2008


June 27, 2009


June 28, 2008Net sales

$
769.7


$
939.9


$
2,392.5


$
2,546.9Cost of goods sold


612.6



800.8



1,986.0



2,186.6Gross profit


157.1



139.1



406.5



360.3Operating expenses:Selling, general and administrative


84.9



85.5



249.1



250.9Restructuring and impairment charges


8.0



3.4



8.8



8.6Other operating expenses


6.9



3.6



17.4



22.5Operating income


57.3



46.6



131.2



78.3Other income


(9.9
)


—



(24.7
)


—Interest expense, net


60.2



64.2



198.6



192.9Net income (loss) from continuing operations before income taxes


7.0



(17.6
)


(42.7
)


(114.6
)Income tax expense (benefit)


5.7



(6.4
)


(11.4
)


(42.8
)Net income (loss) from continuing operations

$
1.3


$
(11.2
)

$
(31.3
)

$
(71.8
)Discontinued operations, net of income taxes


—



—



(4.2
)


—Net income (loss)

$
1.3


$
(11.2
)

$
(35.5
)

$
(71.8
)








See notes to consolidated financial statements.


8


Berry Plastics Corporation


Consolidated Statement of Changes in Stockholders' Equity


For Thirty-Nine Weeks Ended June 27, 2009 and June 28, 2008


(Unaudited)


(In Millions of Dollars)





Parent Company Investment


Accumulated Other Comprehensive
Income (Loss)


Accumulated
Deficit


Total


Comprehensive Income (Loss)Balance at September 29, 2007

$
598.1


$
3.8


$
(151.9
)

$
450.0Stock compensation expense


15.3



—



—



15.3Net loss


—



—



(71.8
)


(71.8
)

$
(71.8
)Currency translation


—



2.1



—



2.1



2.1Derivative valuation


—



(5.4
)


—



(5.4
)


(5.4
)Balance at June 28, 2008

$
613.4


$
0.5


$
(223.7
)

$
390.2


$
(75.1
)





Parent Company Investment


Accumulated Other Comprehensive
Income (Loss)


Accumulated
Deficit


Total


Comprehensive Income (Loss)Balance at September 27, 2008

$
617.2


$
(12.3
)

$
(253.0
)

$
351.9Stock compensation expense


12.1



—



—



12.1Net transfers to parent


(0.5
)


—



—



(0.5
)Net loss


—



—



(35.5
)


(35.5
)

$
(35.5
)Currency translation


—



(21.0
)


—



(21.0
)


(21.0
)Derivative valuation


—



1.6



—



1.6



1.6Balance at June 27, 2009

$
628.8


$
(31.7
)

$
(288.5
)

$
308.6


$
(54.9
)





See notes to consolidated financial statements.





9





Berry Plastics Corporation


Consolidated Statements of Cash Flows


(Unaudited)


(In Millions of Dollars)





Thirty-Nine Weeks EndedJune 27, 2009


June 28, 2008Operating activitiesNet loss

$
(35.5
)

$
(71.8
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization


188.7



187.9Non-cash interest expense


24.3



9.1Non-cash compensation


12.1



15.3Other non-cash expense


11.9



—Non-cash gain on investment in 10 1⁄4% Senior   Subordinated Notes


(23.6
)


—Deferred income tax benefit


(14.8
)


(47.0
)Changes in operating assets and liabilities:Accounts receivable, net


87.7



(1.0
)Inventories


112.4



(71.8
)Prepaid expenses and other assets


22.3



1.2Accounts payable and other liabilities


(45.7
)


23.4Net cash provided by operating activities


339.8



45.3Investing activitiesAdditions to property and equipment


(144.2
)


(125.2
)Proceeds from disposal of assets


1.9



82.3Investment in Berry Plastics Group debt securities


(132.0
)


—Acquisition of businesses, net of cash acquired


(4.6
)


(577.1
)Net cash used for investing activities


(278.9
)


(620.0
)Financing activitiesProceeds from long-term borrowings


0.8



1,191.0Repayments on long-term borrowings


(222.1
)


(588.6
)Sale of interest rate hedge


—



2.4Debt financing costs


(0.4
)


(25.3
)Transfers to parent, net


(0.5
)


—Net cash (used for) provided by financing activities


(222.2
)


579.5Effect of exchange rate changes on cash


0.1



(0.3
)Net (decrease) increase in cash and cash equivalents


(161.2
)


4.5Cash and cash equivalents at beginning of period


189.7



14.6Cash and cash equivalents at end of period

$
28.5


$
19.1





See notes to consolidated financial statements.


10


Berry Plastics Corporation


Notes to Consolidated Financial Statements


(Unaudited)


(In millions of dollars, except as otherwise noted)





1.
Background and Nature of Operations





Berry Plastics Corporation (“Berry” or the “Company”) manufactures and markets plastic packaging products, plastic film products, specialty adhesives and coated products.  At June 27, 2009 the Company had 64 production and manufacturing facilities, with 58 located in the United States.  Berry is
a wholly-owned subsidiary of Berry Plastics Group, Inc. (“Berry Group”).  Berry Group is primarily owned by affiliates of Apollo Management, L.P. and Graham Partners.  Berry, through its wholly owned subsidiaries operates in four primary segments:  Rigid Open Top, Rigid Closed Top, Flexible Films, and Tapes/Coatings.  The Company’s customers are located principally throughout the United States, without significant concentration in any one region or with
any one customer.








2.
Basis of Presentation





The accompanying unaudited Consolidated Financial Statements of Berry have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X of the Securities Act of 1934.  Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full fiscal year.  The accompanying financial statements include the results of the Company and its
wholly owned subsidiaries.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended September 27, 2008.  All intercompany transactions have been eliminated.  The Company issued financial statements by filing with the Securities and Exchange Commission on August 10, 2009. The Company has evaluated subsequent events up to the time
of the filing.





Related Party Transactions and Allocations


The Company’s operating results for the thirteen and thirty-nine week periods ended June 27, 2009 and June 28, 2008 represent the Consolidated Results of Operations of the Company.  The balance sheets as of June 27, 2009 and September 27, 2008 represent the Consolidated Balance Sheets of the Company as of the respective dates.  Berry
has recorded expense in their financial statements of $0.1 million and $6.0 million for the thirteen weeks ended and $12.1 million and $15.3 million for the thirty-nine weeks ended as of June 27, 2009 and June 28, 2008, respectively, related to stock compensation of Berry Group.  The Company has recorded management fees of $1.8 million and $1.8 million for the thirteen weeks ended and $4.7 million and $4.5 million for the thirty-nine weeks ended June 27, 2009 and June 28, 2008, respectively, charged
by Apollo and other investors to Berry Group and recorded income taxes to push down the respective amounts that relate to the


11


consolidated operations of the Company.  Parent Company Investment includes the equity from Berry Group that was invested in Berry by Apollo and other shareholders.





BP Parallel LLC, a non-guarantor subsidiary of the Company invested $129.4 million during the third quarter to purchase assignments totaling $391.3 million of Berry Group’s senior unsecured term loan (“Senior Unsecured Term Loan”).  The Senior Unsecured Term Loan matures on June 5, 2014.  Interest on
the loan is payable on a quarterly basis and bears interest at Berry Group’s option based on (1) a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Credit Suisse as its “prime rate” plus 525 basis points or (2) LIBOR (0.56% at June 27, 2009) plus 625 basis points.  The Senior Unsecured Term Loan contains a payment in kind (“PIK”) option
which allows Berry Group to forgo paying cash interest and to add the PIK interest to the outstanding balance of the loan.  This expires on the five year anniversary of the loan and if elected increases the rate per annum by 75 basis points for the specific interest period.  Berry Group at its election may make the quarterly interest payments in cash, may make the payments by paying 50% of the interest in cash and 50% in PIK interest or 100% in PIK interest for the first five years.  The
notes are unsecured and there are no guarantees by Berry Plastics Corporation.





The Company is accounting for its investments in the Senior Unsecured Term Loan as a held-to-maturity investment in accordance with the investment accounting standards of the Financial Accounting Standards Board (“FASB”).  The Company has the intent and ability to hold the security to maturity.  The investment
is stated at amortized cost and the discount is being accreted under the effective interest method to interest income until the maturity of the debt on June 5, 2014.  The Company has recorded their investment in Other assets in the Consolidated Balance Sheet and is recording the interest income and the income from the discount on the purchase of Senior Unsecured Term Loan in Interest expense, net in the Consolidated Statements of Operations.  The Company has recognized $3.0 million of interest
and accretion income for the thirteen andthirty-nine weekperiodsended June 27, 2009.





3.  Acquisition and Divestiture





Erie County Plastics Corporation


In November 2008, Berry was the successful bidder to acquire certain assets of Erie County Plastics Corporation (“Erie Plastics”), a custom injection molder of plastics packaging and components, for $4.6 million.  Erie Plastics previously filed for bankruptcy protection on September 29, 2008.





Sale of Capsol Berry Plastics S.p.a.


In March 2009, the Company sold Capsol Berry Plastics S.p.a.  This business generated annual net sales of approximately $17.0 million and was included in the Rigid Closed Top segment.  The sale resulted in a net loss of $4.2 million, net of tax, which is included in discontinued operations.





4.  Restructuring





The Company announced various restructuring plans in the last three fiscal years which included shutting down facilities in all four of the Company’s operating segments.


12


In 2009 the Company announced the intention to shut down a manufacturing facility within its Flexible Films division located in Bloomington, Minnesota and a manufacturing facility within its Rigid Open Top division located in Toluca, Mexico.  The $7.8 million of non-cash asset impairment costs recognized as of June 27, 2009 related
to these restructuring plans has been reported as Restructuring expense in the Consolidated Statements of Operations. The remaining liability has been included within Accrued expenses on the Consolidated Balance Sheet.





The table below sets forth the Company’s estimate of the total cost of the restructuring programs, the cumulative portion recognized through June 27, 2009 and the portion expected to be recognized in a future period:





Expected Total Costs


Recognized through June 27, 2009


To be Recognized in FutureSeverance and termination benefits

$
8.7


$
8.5


$
0.2Facility exit costs


20.7



19.4



1.3Asset impairment


25.9



25.9



—Other


7.0



3.6



3.4Total

$
62.3


$
57.4


$
4.9





The Company incurred restructuring costs related to severance, asset impairment and facility exit costs of $8.0 million and $3.4 million for the thirteen weeks ended and $8.8 million and $8.6 million for the thirty-nine weeks ended as of June 27, 2009 and June 28, 2008, respectively.





The table below sets forth the activity with respect to the restructuring accrual at September 27, 2008 and June 27, 2009:





Employee
Severance
and Benefits


Facilities
Exit
Costs

Other


Non-cash


TotalBalance at September 29, 2007

$
3.0


$
10.4


$
―


$
―


$
13.4Charges


0.3



7.9



1.4



―



9.6Cash payments


(3.3
)


(14.2
)


(1.4
)


―



(18.9
)Balance at September 27, 2008


―



4.1



―



―



4.1Charges


0.7



0.3



―



7.8



8.8Non-cash asset impairment


―



―



―



(7.8
)


(7.8
)Cash payments


(0.3
)


(1.4
)


―



―



(1.7
)Balance at June 27, 2009

$
0.4


$
3.0


$
―


$
―


$
3.4





13


5.  Goodwill, Intangible Assets and Deferred Costs





The following table sets forth the gross carrying amount and accumulated amortization of the Company’s goodwill, intangible assets and deferred costs:





June 27,2009


September 27, 2008

Amortization PeriodDeferred financing fees

$
68.9


$
69.3

Respective debtAccumulated amortization


(21.8
)


(15.5
)Deferred financing fees, net


47.1



53.8Goodwill


1,435.4



1,449.3

Indefinite livedCustomer relationships


1,030.2



1,033.0

11 – 20 yearsTrademarks


264.9



265.2

Indefinite livedOther intangibles


53.4



53.3

10-20 yearsAccumulated amortization


(263.2
)


(192.4
)Intangible assets, net


1,085.3



1,159.1Total Goodwill, Intangible Assets and Deferred Costs

$
2,567.8


$
2,662.2





6.  Accrued Expenses and Other Current Liabilities





The following table sets forth the totals included in Accrued expenses and other current liabilities on the Consolidated Balance Sheet.





June 27, 2009


September 27, 2008Employee compensation, payroll and other taxes

$
66.1


$
62.3Interest


36.5



27.8Restructuring


3.4



4.1Rebates


42.4



51.5Other


64.8



60.9$
213.2


$
206.6





14


7.      Long-Term Debt





Long-term debt consists of the following:





Maturity Date

June 27,2009


September 27, 2008Term loan
April 3, 2015

$
1,176.0


$
1,185.0Revolving line of credit
April 3, 2013


70.0



257.1First Priority Senior Secured Floating Rate Notes
February 15, 2015


680.6



680.6Debt discount on First Priority Notes



(15.8
)


(18.0
)Second Priority Senior Secured Fixed Rate Notes
September 15, 2014


525.0



525.0Second Priority Senior Secured Floating Rate Notes
September 15, 2014


225.0



225.011% Senior Subordinated Notes
September 15, 2016


451.2



441.210 1⁄4% Senior Subordinated Notes
March 1, 2016


221.1



265.0Capital leases and other
Various


31.6



38.73,364.7



3,599.6Less current portion of long-term debt



(20.8
)


(21.4
)$
3,343.9


$
3,578.2





The current portion of long-term debt consists of $12.0 million of principal payments on the term loan and $8.8 million of principal payments related to capital lease obligations.  The Company was in compliance with its covenants as of June 27, 2009.





At June 27, 2009 the fair value of the Company’s long-term debt approximated the carrying amount, except for the Company’s term loan, Senior Secured First Priority Notes, Fixed Rate Notes, Floating Rate Notes, 11% Senior Subordinated Notes and 10 1⁄4% Senior Subordinated Notes for which the carrying value exceeded the fair value
by $147.0 million, $81.7 million, $78.8 million, $76.5 million, $126.3 million and $61.9 million, respectively.





At June 27, 2009, there was $70.0 million outstanding on the revolving line of credit and $31.9 million in letters of credit outstanding.  At June 27, 2009, the Company had unused borrowing capacity of $279.8 million (net of defaulting lenders) under the revolving line of credit subject to the solvency of the Company’s lenders
to fund their obligations and the Company’s borrowing base calculations.





In fiscal 2009, BP Parallel LLC, a non-guarantor subsidiary of the Company, had purchased $43.9 million of 10 1⁄4% Senior Subordinated Notes for $19.6 million in cash, plus accrued interest.  The repurchase resulted in a net gain of $23.6 million, which is recorded in Other income in the Consolidated Statement of Operations.  The
Company funded the purchases with cash on hand.


15





8. Derivative Instruments





As part of the overall risk management, the Company uses derivative instruments to reduce exposure to changes in interest rates and resin prices.  For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair
value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.  To the extent hedging relationships are found to be effective, as determined by SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities(“SFAS 133”), changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item are recorded to Accumulated other comprehensive loss. Management believes
hedge effectiveness is evaluated properly in preparation of the financial statements.





Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating-rate borrowings.  Forward contracts on plastic resin, the Company’s primary raw material, are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing
process.





Cash Flow Hedging Strategy


For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated other comprehensive loss and reclassified into earnings in the same line item associated with the forecasted transaction and in the same line item associated
with the transaction and in the same period or periods during which the hedged transaction affects earnings.  The Company’s forward derivative agreements related to resin contracts are currently immaterial.





The Company entered into three interest rate swap transactions in 2007 and 2008, and initially designated these hedges as cash flow hedges under SFAS 133.  The Company settled one of these instruments in April 2008 and is amortizing the remaining balance from Accumulated other comprehensive loss to Interest expense.  The
remaining two hedges were accounted as cash flow hedges through November 5, 2008, at which time the Company determined the swaps no longer qualified as a cash flow hedge.  The balance in Accumulated other comprehensive loss is being amortized to Interest expense and the future changes in the derivative value are being recorded in Other income.





Liability DerivativesDerivatives not designated as hedging instruments under Statement 133
Balance Sheet Location

June 27, 2009


September 27, 2008Interest rate swaps
Other LT liabilities

$
14.8


$
15.0Accrued exp and other current liabilities


4.4



―$
19.2


$
15.0





16


The effect of the derivative instruments on the Consolidated Statement of Operations for the thirteen and thirty-nine weeks ended June 27, 2009, are as follows:


Income Statement

Thirteen Weeks Ended


Thirty-Nine Weeks EndedLocation

June 27, 2009


June 27, 2009Derivatives not designated as hedging instruments under Statement 133Interest rate swaps
Other income

$
(2.6
)

$
(1.4
)Interest expense

$
3.5


$
9.4





In August 2007, the Company entered into two separate interest rate swap transactions to protect $600.0 million of the outstanding variable rate term loan debt from future interest rate volatility.  The swap agreements became effective in November 2007.  The first agreement had a notional amount of $300.0 million and became
effective November 5, 2007 and swaps three month variable LIBOR contracts for a fixed two year rate of 4.875% and expires on November 5, 2009.  The second agreement had a notional amount of $300.0 million and became effective November 5, 2007 and swaps three month variable LIBOR contracts for a fixed three year rate of 4.920% and expires on November 5, 2010.  The counterparty to these agreements is a global financial institution.





On January 22, 2008, the Company 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 had a notional amount of $300.0 million and swap three
month variable LIBOR contracts for a fixed three year rate of 2.962%.  On April 23, 2008, the Company elected to settle this derivative instrument and received $2.4 million on April 25, 2008 as a result of this settlement.  The offset is included in Accumulated other comprehensive loss and is being amortized to Interest expense through February 5, 2011, the original term of the swap agreement.





The Company’s term loan gives the option to elect different interest rate reset options.  On November 5, 2008, the Company began and continues to utilize 1-month LIBOR contracts for the underlying senior secured credit facility.  The Company’s change in interest rate selection along with the continued use of
this alternative rate caused the Company to lose hedge accounting on both of the interest rate swaps entered into in August 2007.  The Company has recorded all subsequent changes in fair value from November 5, 2008 to June 27, 2009 in the statement of operations and is amortizing the previously recorded unrealized loss in Accumulated other comprehensive loss to Interest expense through the end of the respective swap agreement.


17


9.  Fair Value Measurements





In September 2006, the FASB issued the Statement of Financial Accounting Standards (“SFAS”) No. 157 and in February 2007, issued SFAS No. 159. Both standards address aspects of the expanding application of fair value accounting.  Effective September 28, 2008, we adopted SFAS No. 157 and SFAS No. 159.  In
accordance with the provisions of the FASB Staff Position No. FAS 157-2, we have decided to defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.  SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value.  We have
not elected to measure any financial assets or financial liabilities at fair value that were not previously required to be measured at fair value.




SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value.  SFAS 157 also establishes a three-level hierarchy (Level 1, 2 or 3) for
fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date.  SFAS 157 requires the consideration of the counterparty’s or the Company’s nonperformance risk when assessing fair value.





As of June 27, 2009, the Company has interest rate swap liabilities totaling $19.2 million which the fair value was determined using Level 2 inputs as other significant observable inputs were available.





10.  Stockholders’ Equity and Stock Option Plans





In connection with the merger of Berry Group and Covalence Specialty Materials Holding Corp. in April of 2007, Berry Group modified its outstanding stock options to provide for (i) the vesting of an additional twenty percent (20%) of the total number of shares underlying such outstanding options; (ii) the conversion of options with escalating
exercise prices to a fixed priced option, with no increase in the exercise price as of the date of grant of such escalating priced option; and (iii) with respect to each outstanding option, the vesting of which was contingent upon the achievement of performance goals, the deemed achievement of all such performance goals.  On June 7, 2007, Berry Group’s Board of Directors declared a special one-time dividend of $77 per common share and option to shareholders of record as of June 6, 2007.  This
dividend reduced Berry Group’s shareholders equity for owned shares by $530.2 million.  In connection with this dividend payment, $34.5 million related to unvested stock options was placed in escrow and was subject to time based vesting through June 7, 2009.  In December 2008, the Executive Committee of Berry Group modified the vesting provisions related to the remaining $33.0 million being held in escrow.  This resulted in the immediate vesting and accelerating the recognition
of the remaining unrecorded stock compensation expense of $11.4 million in selling, general and administrative expenses recorded in the first fiscal quarter of 2009.





18


11.  Comprehensive Income (Loss)





The details of comprehensive income (loss) are as follows:


Thirteen Weeks Ended


Thirty-Nine Weeks EndedJune 27,
2009


June 28,
2008


June 27,
2009


June 28,
2008Net income (loss)

$
1.3


$
(11.2
)

$
(35.5
)

$
(71.8
)Derivative instruments


2.6



11.3



1.6



(5.4
)Currency translation income (loss)


11.5



2.0



(21.0
)


2.1Comprehensive income (loss)

$
15.4


$
2.1


$
(54.9
)

$
(75.1
)





12. Income Taxes





The effective tax rate from continuing operations was 26.7% and 37.3% for the thirty-nine weeks ended June 27, 2009 and June 28, 2008, respectively.  A reconciliation of income tax benefit, computed at the federal statutory rate, to income tax benefit, as provided for in the financial statements, is as follows:





Thirty-Nine Weeks EndedJune 27,
2009


June 28,
2008Income tax benefit computed at statutory rate

$
(14.9
)

$
(40.1
)State income tax benefit, net of federal taxes


(0.9
)


(2.5
)Expenses not deductible for income tax purposes


0.5



0.2Change in valuation allowance


3.2



0.8Other


0.7



(1.2
)Income tax benefit

$
(11.4
)

$
(42.8
)





19


13. Operating Segments





Berry’s operations are organized into four reportable segments: Rigid Open Top, Rigid Closed Top, Flexible Films, and Tapes/Coatings.  The Company has manufacturing and distribution centers in the United States, Canada, Mexico, Belgium and India.  The Company evaluates the performance of and allocates resources to
these segments based on revenue and other segment profit measures.  The North American operation represents 94% of the Company’s net sales and 97% of the total assets.  Selected information by reportable segment is presented in the following table:





Thirteen Weeks Ended


Thirty-Nine Weeks EndedJune 27, 2009


June 28, 2008


June 27, 2009


June 28, 2008Net sales:Rigid Open Top

$
265.3


$
284.6


$
792.5


$
755.7Rigid Closed Top


203.7



247.5



644.5



607.1Flexible Films


199.8



278.0



636.9



806.2Tapes/Coatings


100.9



129.8



318.6



377.9Total net sales

$
769.7


$
939.9


$
2,392.5


$
2,546.9Operating income (loss):Rigid Open Top

$
30.3


$
26.3


$
85.6


$
51.8Rigid Closed Top


18.1



20.7



42.4



35.9Flexible Films


7.0



(2.7
)


2.6



(11.5
)Tapes/Coatings


1.9



2.3



0.6



2.1Total operating income

$
57.3


$
46.6


$
131.2


$
78.3Depreciation and amortization:Rigid Open Top

$
21.2


$
21.5


$
61.4


$
65.1Rigid Closed Top


23.1



23.6



69.0



62.2Flexible Films


11.1



11.3



33.3



33.4Tapes/Coatings


8.4



8.9



25.0



27.2Total depreciation and amortization

$
63.8


$
65.3


$
188.7


$
187.9








June 27,2009


September 27, 2008Total assets:Rigid Open Top

$
1,830.4


$
2,019.6Rigid Closed Top


1,525.6



1,648.8Flexible Films


660.6



637.8Tapes/Coatings


360.4



417.9Total assets

$
4,377.0


$
4,724.1





20





14.         Condensed Consolidating Financial Information





The Company has Senior Secured First Priority Notes, Second Priority Fixed and Floating Rate Notes and 10 1⁄4% Senior Subordinated Notes outstanding which are fully, jointly, severally, and unconditionally guaranteed by substantially all of Berry’s domestic subsidiaries.  Separate narrative information or financial statements
of the guarantor subsidiaries have not been included because they are 100% wholly owned by the parent company and the guarantor subsidiaries unconditionally guarantee such debt on a joint and several basis.  Presented below is condensed consolidating financial information for the parent company, guarantor subsidiaries and non-guarantor subsidiaries.  The equity method has been used with respect to investments in subsidiaries.  The principal elimination entries eliminate investments
in subsidiaries and intercompany balances and transactions.





June 27, 2009Parent
Company


Guarantor Subsidiaries


Non-guarantor Subsidiaries


Eliminations


ConsolidatedConsolidating Balance SheetCurrent assets

$
175.5


$
557.4


$
68.7


$
—


$
801.6Net property and equipment


188.7



647.4



34.6



—



870.7Other noncurrent assets


3,470.9



2,318.4



211.1



(3,296.2
)


2,704.7Total assets

$
3,835.1


$
3,523.2


$
314.4


$
(3,296.2
)

$
4,377.0Current liabilities

$
125.1


$
291.8


$
23.6


$
(1.5
)

$
439.0Noncurrent liabilities


3,401.4



262.1



9.7



(43.8
)


3,629.4Equity (deficit)


308.6



2,969.3



281.1



(3,250.9
)


308.6Total liabilities and equity (deficit)

$
3,835.1


$
3,523.2


$
314.4


$
(3,296.2
)

$
4,377.0





September 27, 2008Parent Company


Guarantor Subsidiaries


Non-guarantor Subsidiaries


Eliminations


ConsolidatedConsolidating Balance SheetCurrent assets

$
433.2


$
672.2


$
91.7


$
—


$
1,197.1Net property and equipment


201.2



610.9



50.7



—



862.8Other noncurrent assets


3,442.8



2,378.3



67.7



(3,224.6
)


2,664.2Total assets

$
4,077.2


$
3,661.4


$
210.1


$
(3,224.6
)

$
4,724.1Current liabilities

$
145.3


$
308.6


$
27.9


$
—


$
481.8Noncurrent liabilities


3,580.0



296.7



13.7



—



3,890.4Equity (deficit)


351.9



3,056.1



168.5



(3,224.6
)


351.9Total liabilities and equity (deficit)

$
4,077.2


$
3,661.4


$
210.1


$
(3,224.6
)

$
4,724.1








21





Thirteen Weeks Ended June 27, 2009Parent Company


Guarantor Subsidiaries


Non-guarantor Subsidiaries


Eliminations


ConsolidatedConsolidating Statement of OperationsNet sales

$
169.6


$
550.8


$
49.3


$
—


$
769.7Cost of goods sold


147.6



424.1



40.9



—



612.6Gross profit


22.0



126.7



8.4



—



157.1Selling, general, and administrative expense


16.4



63.7



4.8



—



84.9Restructuring and impairment charges


2.8



—



5.2



—



8.0Other operating expenses


1.4



5.7



(0.2
)


—



6.9Operating income (loss)


1.4



57.3



(1.4
)


—



57.3Other income


(9.9
)


—



—



—



(9.9
)Interest expense (income), net


72.5



(15.7
)


3.4



—



60.2Equity in net income of subsidiary


62.6



—



—



(62.6
)


—Income (loss) before income taxes


1.4



73.0



(4.8
)


(62.6
)


7.0Income tax expense


0.1



2.5



3.1



—



5.7Net income (loss)

$
1.3


$
70.5


$
(7.9
)

$
(62.6
)

$
1.3








Thirteen Weeks Ended June 28, 2008Parent Company


Guarantor Subsidiaries


Non-guarantor Subsidiaries


Eliminations


ConsolidatedConsolidating Statement of OperationsNet sales

$
241.8


$
630.4


$
67.7


$
—


$
939.9Cost of goods sold


226.6



515.3



58.9



—



800.8Gross profit


15.2



115.1



8.8



—



139.1Selling, general, and administrative expense


23.2



55.0



7.3



—



85.5Restructuring and impairment charges


1.0



2.4



—



—



3.4Other operating expenses


2.0



0.5



1.1



—



3.6Operating income (loss)


(11.0
)


57.2



0.4



—



46.6Interest expense (income), net


76.1



(14.4
)


2.5



—



64.2Equity in net income of subsidiary


75.9



—



—



(75.9
)


—Income (loss) before income tax


(11.2
)


71.6



(2.1
)


(75.9
)


(17.6
)Income tax expense (benefit)


—



(7.3
)


0.9



—



(6.4
)Net income (loss)

$
(11.2
)

$
78.9


$
(3.0
)

$
(75.9
)

$
(11.2
)














22








Thirty-Nine Weeks Ended June 27, 2009Parent Company


Guarantor Subsidiaries


Non-guarantor Subsidiaries


Eliminations


ConsolidatedConsolidating Statement of OperationsNet sales

$
559.3


$
1,679.3


$
153.9


$
—


$
2,392.5Cost of goods sold


509.4



1346.4



130.2



—



1,986.0Gross profit


49.9



332.9



23.7



—



406.5Selling, general, and administrative expense


60.0



173.2



15.9



—



249.1Restructuring and impairment charges


3.5



0.1



5.2



—



8.8Other operating expenses


3.3



13.7



0.4



—



17.4Operating income (loss)


(16.9
)


145.9



2.2



—



131.2Other expenses (income)


(31.2
)


6.5



—



—



(24.7
)Interest expense (income), net


231.8



(42.2
)


9.0



—



198.6Equity in net income of subsidiary


188.6



—



—



(188.6
)


—Gain (loss) from continuing operations before income taxes


(28.9
)


181.6



(6.8
)


(188.6
)


(42.7
)Income tax expense (benefit)


2.4



(17.6
)


3.8



—



(11.4
)Income (loss) from continuing operations


(31.3
)


199.2



(10.6
)


(188.6
)


(31.3
)Discontinued operations, net of income taxes


(4.2
)


—



—



—



(4.2
)Net income (loss)

$
(35.5
)

$
199.2


$
(10.6
)

$
(188.6
)

$
(35.5
)





Consolidating Statement of Cash FlowsNet cash flow from operating activities


233.7



99.5



6.6


$
—


$
339.8Investing activities:Purchase of property, plant, and equipment


(31.3
)


(109.9
)


(3.0
)


—



(144.2
)Proceeds from disposal of assets


—



1.9



—



—



1.9Investment in Berry Group, Inc.


—



—



(132.0
)


—



(132.0
)Acquisition of business net of cash acquired


(4.6
)


—



—



—



(4.6
)Net cash flow from investing activities


(35.9
)


(108.0
)


(135.0
)


—



(278.9
)Financing activities:Proceeds from long-term borrowings


—



—



0.8



—



0.8Payments on long-term borrowings


(221.0
)


—



(1.1
)


—



(222.1
)Debt financing costs


(0.4
)


—



—



—



(0.4
)Equity contributions (distributions), net


(132.5
)


—



132.0



—



(0.5
)Net cash flow from financing activities


(353.9
)


—



131.7



—



(222.2
)Effect of exchange rate changes on cash


—



—



0.1



—



0.1Net increase (decrease) in cash and cash equivalents


(156.1
)


(8.5
)


3.4



—



(161.2
)Cash and cash equivalents at beginning of period


172.6



8.7



8.4



—



189.7Cash and cash equivalents at end of period

$
16.5


$
0.2


$
11.8


$
—


$
28.5








23








Thirty-Nine Weeks Ended June 28, 2008Parent Company


Guarantor Subsidiaries


Non-guarantor Subsidiaries


Eliminations


ConsolidatedConsolidating Statement of OperationsNet sales

$
721.0


$
1,642.1


$
183.8


$
—


$
2,546.9Cost of goods sold


665.6



1,356.5



164.5



—



2,186.6Gross profit


55..4



285.6



19.3



—



360.3Selling, general, and administrative expense


71.1



161.6



18.2



—



250.9Restructuring and impairment charges


6.2



2.4



—



—



8.6Other operating expenses


11.3



7.8



3.4



—



22.5Operating income (loss)


(33.2
)


113.8



(2.3
)


—



78.3Interest expense (income), net


228.5



(41.8
)


6.2



—



192.9Equity in net income of subsidiary


190.1



—



—



(190.1
)


—Income (loss) before income tax


(71.6
)


155.6



(8.5
)


(190.1
)


(114.6
)Income taxes (benefit)


0.2



(45.0
)


2.0



—



(42.8
)Net income (loss)

$
(71.8
)

$
200.6


$
(10.5
)

$
(190.1
)

$
(71.8
)





Consolidating Statement of Cash FlowsNet cash flow from operating activities

$
28.4


$
20.2


$
(3.3
)

$
—


$
45.3Investing activities:Purchase of property, plant, and equipment


(31.3
)


(92.1
)


(1.8
)


—



(125.2
)Proceeds from disposal of assets


—



82.3



—



—



82.3Acquisition of business net of cash acquired


(577.1
)


—



—



—



(577.1
)Net cash flow from investing activities


(608.4
)


(9.8
)


(1.8
)


—



(620.0
)Financing activities:Proceeds from long-term borrowings


1,191.0



—



—



—



1,191.0Payments on long-term borrowings


(588.0
)


—



(0.6
)


—



(588.6
)Sale of interest rate hedge


2.4



—



—



—



2.4Debt financing costs


(25.3
)


—



—



—



(25.3
)Net cash flow from financing activities


580.1



—



(0.6
)


—



579.5Effect of exchange rate changes on cash


—



—



(0.3
)


—



(0.3
)Net increase (decrease) in cash and cash equivalents


0.1



10.4



(6.0
)


—



4.5Cash and cash equivalents at beginning of period


0.9



7.7



6.0



—



14.6Cash and cash equivalents at end of period

$
1.0


$
18.1


$
—


$
—


$
19.1





24


15.         Contingencies and Commitments





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 business, financial condition,
results of operations or cash flows of the Company.





16.         Recent Financial Accounting Standards





In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.”  This statement replaces FASB Statement No. 141, “Business Combinations.” 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 adoption of SFAS 141 did not have a material impact on the Company’s results of operations or financial position in the current Form 10-Q.





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 consolidated 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 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. The adoption of SFAS 160 did not have a material
impact on the Company’s results of operations or financial position in the current Form 10-Q.





In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, which is an amendment of FASB Statement No. 133.  This statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting.  This
statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2008.  The disclosure provision of SFAS No. 161 are included in Note 8.





In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 is modeled after the same principles as the subsequent event guidance in auditing literature with some terminology changes and additional disclosures. SFAS 165 is effective for interim and
annual periods ending after June 15, 2009, and is required to be applied


25


prospectively.  Except for the disclosure requirements, the adoption of SFAS 165 had no material impact on the Company’s consolidated financial statements.





In April 2009, the FASB issued FASB Staff Position 107-1, “Disclosures About Fair Value of Financial Instruments” (FSP 107-1).   FSP 107-1 requires disclosures about fair value of all financial instruments for interim reporting periods. The applicable disclosures are included in Note 7 and 9. The implementation of
this FSP was not material to our consolidated financial position or results of operations.





17. Subsequent Events





In July 2009, BP Parallel LLC purchased $5.8 million of 10 1⁄4% Senior Subordinated Notes for $4.2 million in cash, plus accrued interest and invested $26.6 million to purchase assignments of $106.3 million principal of Senior Unsecured Term Loan.  The Company funded the purchases with cash on hand.





In July 2009, BP Parallel LLC agreed to invest $11.9 million to purchase assignments of $20.3 million principal of Senior Unsecured Term Loan.  The Company expects to close in the fourth quarter of fiscal 2009.


26


Item 2.


Management’s Discussion and Analysis of Financial Condition and


Results of Operations





Unless the context requires otherwise, references in this Management's Discussion and Analysis of Financial Condition and Results of Operations to “Company” refer to Berry Plastics Corporation, references to “we,” “our” or “us” refer to Berry Plastics Corporation together with its consolidated
subsidiaries, after giving effect to the transactions described in the next paragraph.  You should read the following discussion in conjunction with the consolidated financial statements of the Company and its subsidiaries and the accompanying notes thereto, which information is included elsewhere herein.  The Company is a wholly owned subsidiary of Berry Plastics Group, Inc.  This discussion contains forward-looking statements and involves numerous risks and uncertainties, including,
but not limited to, those described in our Form 10-K filed with the SEC for the fiscal year ended September 27, 2008 section titled “Risk Factors” and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission.  Our actual results may differ materially from those contained in any forward-looking statements.  You should read the explanation of the qualifications and limitations on these forward-looking statements starting
on page 4 of this report.





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 which was subsequently changed to Berry Plastics Corporation on December 29, 2007 (“Berry” or the “Company”).  The combination was accounted for as a merger of entities
under common control.  We believe the combination of these entities will provide us with significant opportunities for growth through increased operational efficiencies, reduced fixed costs, optimization of manufacturing assets and improvement in the efficiency of capital spending.





Acquisitions





We maintain a selective and disciplined acquisition strategy, which is focused on improving our long term financial performance, enhancing our market positions and expanding our product lines or, in some cases, providing us with a new or complementary product line.  Most businesses we have acquired had profit margins that are lower
than that of our existing business, which resulted in a temporary decrease in our margins.  We have historically achieved significant reductions in manufacturing and overhead costs of acquired companies by introducing advanced manufacturing processes, exiting low-margin businesses or product lines, reducing headcount, rationalizing facilities and machinery, applying best practices and capitalizing on economies of scale.  In connection with our acquisitions, we have in the past and may in the
future incur charges related to these reductions and rationalizations.




The Company has a long history of acquiring and integrating companies.  The Company has been able to achieve these synergies by eliminating duplicative costs and rationalizing facilities and


27




integrating the production into the most efficient operating facility.  While the expected benefits on earnings are estimated at the commencement of each transaction, once the execution of the plan and integration occur, we are generally unable to accurately estimate or track what the ultimate effects on future earnings have been
due to systems integrations and movement of activities to multiple facilities.  The historical business combinations have not allowed the Company to accurately separate realized synergies compared to what was initially identified during the due diligence phase of each acquisition.




The Company has included the expected impact of restructuring plans within our unrealized synergies which are in turn recognized in earnings after the restructuring plans are completed.  While the expected benefits on earnings is estimated at the commencement of each plan, due to the nature of the matters we are generally unable
to accurately estimate or track what the ultimate effects have been.  The Company intends to fund these restructuring plans with cash available on hand.





Recent Developments





The Company has been able to estimate expected benefits on earnings from the acquired entities at the commencement of each transaction, however once the execution of the plan and integration occur, we are unable to accurately estimate or track what the ultimate effect on future earnings have been due to systems integrations and movement of
activities to multiple facilities.





Acquisition of Assets of Erie County Plastics Corporation


In November 2008, the Company was the successful bidder to acquire certain assets of Erie County Plastics Corporation, a custom injection molder of plastics packaging and components for $4.6 million.  Erie Plastics previously filed for bankruptcy protection on September 29, 2008.  Synergies identified from the Erie acquisition
were $4.0 million.





Sale of Capsol Berry Plastics S.p.a.


In March 2009, the Company sold Capsol Berry Plastics S.p.a.  This business generated annual net sales of approximately $17.0 million and was included in our Rigid Closed Top segment.





Joint Plan of Reorganization of Pliant Corporation.


On July 9, 2009, Apollo Management VI, L.P. and certain of its affiliates filed with the U.S. Bankruptcy Court for the District of Delaware a Joint Plan of Reorganization (the “Apollo Proposal”) providing for the reorganization of the plastics film and flexible packaging producer Pliant Corporation (“Pliant”). Pursuant
to the Apollo Proposal, Apollo Management VI, L.P. or its affiliates would contribute up to $193 million to Pliant in exchange for up to 75% of Pliant’s common equity on a fully-diluted basis. In addition, pursuant to the Apollo Proposal Berry would contribute its stretch films business to Pliant and enter into an intercompany services agreement with Pliant pursuant to which Berry and Pliant would provide to each other certain contract manufacturing and other services for a period of five years (subject
to early termination or extension). In exchange for entering into the intercompany services agreement and contributing its stretch films business to Pliant, Berry would receive 20% of Pliant’s common equity and a right to receive, subject to satisfaction of certain performance-based thresholds, an additional 5% of Pliant’s common equity, in each case on a fully-diluted basis.  The stretch films business represents less than




28


5% of Berry’s Net sales for the 52 week period ended, June 27, 2009 and approximately 2% of Berry’s total assets as of June 27, 2009.  The net effect of the intercompany services agreement and the contribution of the stretch films business are expected to have an immaterial impact on Berry’s Adjusted EBITDA.  Pliant’s
Official Committee of Unsecured Creditors has indicated its support for the Apollo Proposal; however, it has no contractual obligation to support the Apollo Proposal, and no assurance can be made that it will continue to do so.




On July 31, 2009, Pliant and the Ad Hoc Committee representing Pliant’s First Lien Noteholders (the “Ad Hoc Committee”), each of which had previously objected to the Apollo Proposal, agreed preliminarily to support the Apollo Proposal and withdraw their objections.  There can be no assurance that a final
agreement to support the Apollo Proposal will be reached and thus that Pliant and the Ad Hoc Committee will not reassert their objections.




The U.S. Bankruptcy Court has scheduled a hearing for August 20, 2009 at which the disclosure statement relating to the Apollo Proposal is tentatively scheduled to be approved for submission to Pliant claimholders to vote on the Apollo Proposal.  There is no guarantee that the disclosure statement will be approved on
that date or at all, that claimholders will vote to accept the Apollo Proposal, or that the Court will enter a confirmation order on the terms currently anticipated.  Further, even if the Apollo Proposal is ultimately approved, the consummation of the transaction will be subject to several conditions precedent set forth in the Court’s confirmation order and the plan of reorganization.  As such, there can be no assurance as to whether or when a reorganization of Pliant will
be completed and, if completed, the ultimate terms of such reorganization.




Executive Summary





Business.The Company is organized into four operating segments: Rigid Open Top, Rigid Closed Top, Flexible Films and Tapes/Coatings.  The Rigid Open Top division sells products in three categories including containers,
foodservice items and home and party.  The Rigid Closed Top division sells products in three categories including closures and overcaps, bottles and prescription containers and tubes.  The Flexible Films division sells primarily plastic trash bags, stretch film and plastic sheeting to the agricultural, horticultural institutional, foodservice and retail markets.  Our Tapes/Coatings division sells specialty adhesive products and flexible packaging and building materials to a variety
of different industries including building and construction, retail, automotive, industrial and medical markets.





Raw Material Trends.Our primary raw material is plastic resin and it accounts for approximately 45% of our total cost of sales.  Polypropylene and polyethylene account for more than 80% of our
plastic resin purchases based on the pounds purchased.  The average industry prices, as published in industry sources, per pound were as follows:





Polyethylene Butene Film


Polypropylene2009


2008


2007


2009


2008


20071st quarter

$
.67


$
.82


$
.64


$
.56


$
.85


$
.712nd quarter


.59



.84



.63



.46



.80



.713rd quarter


.64



.91



.69



.53



.89



.774th quarter


.66



1.00



.75



.62



.99



.79





29


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.





Outlook.The Company is impacted by general economic and industrial growth, housing starts, automotive builds, plastic resin availability and affordability, and general industrial production. Our business
has both geographic and end market diversity which reduces the impact of any one of these factors on our overall performance. We are impacted by our ability to maintain selling price increases, raw material pricing and volume growth of our customers.  We expect continued strength in our thermoforming product lines, which would have a positive impact on volumes in our Rigid Open Top segment.  We continually focus on improving our overall profitability by implementing cost reduction programs
for our manufacturing, selling, general and administrative expenses on an annual basis.  We have continued this in 2009 to help counteract some of the volume declines we have seen in the marketplace.  We anticipate continued softness in U.S. housing starts in 2009 that will impact our volume in both our Tapes/Coatings and Flexible Films segments.  We also anticipate continued softness in 2009 in North American automotive build rates will continue to exert downward volume pressure
on certain product lines that are included in our Tapes/Coatings segment.





Results of Operations





Comparison of the 13 Weeks Ended June 27, 2009 (the “Quarter”) and the 13 Weeks Ended June 28, 2008 (the “Prior Quarter”)





Net Sales.  Net sales decreased by 18% to $769.7 million for the Quarter from $939.9 million for the Prior Quarter.  This $170.2 million decrease includes a base volume decline of 7% and net selling price decreases of 11%.  The following discussion in this
section provides a comparison of net sales by business segment.





Thirteen Weeks EndedJune 27, 2009


June 28, 2008Net sales:Rigid Open Top

$
265.3


$
284.6Rigid Closed Top


203.7



247.5Flexible Films


199.8



278.0Tapes/Coatings


100.9



129.8Total net sales

$
769.7


$
939.9





Net sales in the Rigid Open Top segment decreased from $284.6 million in the Prior Quarter to $265.3 million in the Quarter as a result of net selling price decreases of 14% offset by base volume growth of 7%.  The base volume growth is primarily attributed to increased sales in various container product lines, thermoformed drink
cups and houseware product lines partially offset by reduced volumes in our injection drink cup product line.  Net sales in the Rigid Closed Top business decreased from $247.5 million in the Prior Quarter to $203.7 million in the Quarter as a result of base volume decline of 6% and net selling price decreases of 12%. The base volume decline is attributed to decreased sales in our overcaps and tubes product lines primarily as a result of contracting end use markets along with decreased sales in our closures
product line primarily


30


attributed to the sale of Capsol Berry Plastics S.p.a.  The Flexible Films business net sales decreased from $278.0 million in the Prior Quarter to $199.8 million in the Quarter as a result of base volume decline of 14% and net selling price decreases of 14%.  The base volume decline is primarily attributed to the slowness
in the housing sector.  Net sales in the Tapes/Coatings business decreased from $129.8 million in the Prior Quarter to $100.9 million in the Quarter primarily as a result of base volume decline of 22% primarily attributed to softness in the new home construction, corrosion protection and automotive markets.





Gross Profit.  Gross profit increased by $18.0 million to $157.1 million (20% of net sales) for the Quarter from $139.1 million (15% of net sales) for the Prior Quarter.  This increase is primarily attributed to a timing lag of passing through raw material costs to
our customers in our Rigid Open Top and Rigid Closed Top segments, realization of synergies and cost reduction efforts partially offset by lower volumes.





Operating Expenses.  Selling, general and administrative expenses decreased by $0.6 million to $84.9 million for the Quarter from $85.5 million for the Prior Quarter primarily as a result of cost reduction efforts and realization of synergies partially offset by increased accrued
bonus expense.  Restructuring and impairment charges increased to $8.0 million in the Quarter compared to $3.4 million in the Prior Quarter as a result of $7.8 million of non-cash fixed asset impairment charges in the Quarter associated with plant consolidations within the Flexible Films and Rigid Open Top segments.  Other expenses increased from $3.6 million in the Prior Quarter to $6.9 million for the Quarter primarily as a result of costs associated with cost reduction efforts.





Operating Income. Operating income increased $10.7 million from $46.6 million in the Prior Quarter to $57.3 million in the Quarter.  The following discussion in this section provides a comparison of operating income by business segment.





Thirteen Weeks EndedJune 27, 2009


June 28, 2008Operating income (loss):Rigid Open Top

$
30.3


$
26.3Rigid Closed Top


18.1



20.7Flexible Films


7.0



(2.7
)Tapes/Coatings


1.9



2.3Total operating income

$
57.3


$
46.6





Operating income for the Rigid Open Top business increased from $26.3 million for the Prior Quarter to $30.3 million in the Quarter.  The increase of $4.0 million is attributable to base volume growth and a timing lag of passing through a reduction in raw material costs to our customers.  Operating income for the Rigid
Closed Top business decreased from $20.7 million for the Prior Quarter to $18.1 million in the Quarter.  The decrease of $2.6 million is primarily attributable to base volume decline.  Operating income for the Flexible Film business increased from an operating loss of $2.7 million for the Prior Quarter to operating income of $7.0 million in the Quarter.  The increase of $9.7 million is primarily attributable to improved operating performance and decreased raw material costs.  Operating
income for the Tapes/Coatings business decreased from an operating income of $2.3 million for the Prior Quarter to $1.9 million in the Quarter.  The decrease of $0.4 million is primarily attributable to base volume decline.


31





Other Income.Other income recorded in the Quarter is attributed to a $7.4 million gain related to the repurchase of the 10 1⁄4% Senior Subordinated Notes and a gain attributed to the fair value adjustment for our interest rate swaps.





Interest Expense, Net.  Net interest expense decreased $4.0 million to $60.2 million for the Quarter from $64.2 million in the Prior Quarter primarily attributed to a decline in borrowing costs of our variable rate debt instruments partially offset by amortization of previously
recorded unrealized loss in Accumulated other comprehensive loss attributed to our interest rate swaps.





Income Tax Expense (Benefit).For the Quarter, we recorded an income tax expense on continued operations of $5.7 million as compared to an income tax benefit of $6.4 million in the Prior Quarter primarily attributed to improved operating results.  The effective tax
rate is less then the statutory rate due to the loss and relative impact of permanent items and establishment of valuation allowance for certain foreign operating losses where the benefits are not expected to be realized.





Net Income (Loss).  Net income was $1.3 million for the Quarter compared to a net loss of $11.2 million for the Prior Quarter for the reasons discussed above.





39 Weeks Ended June 27, 2009 (“YTD”) Compared to the 39 Weeks Ended June 28, 2008 (“Prior YTD”)





Net Sales.  Net sales decreased by 6% to $2,392.5 million for the YTD from $2,546.9 million for the Prior YTD.  This $154.4 million decrease includes base volume decline of 7% and net selling price decreases of 2% offset by acquisition volume growth of 3%.  The
following discussion in this section provides a comparison of net sales by business segment.





Thirty-Nine Weeks EndedJune 27, 2009


June 28, 2008Net sales:Rigid Open Top

$
792.5


$
755.7Rigid Closed Top


644.5



607.1Flexible Films


636.9



806.2Tapes/Coatings


318.6



377.9Total net sales

$
2,392.5


$
2,546.9





Net sales in the Rigid Open Top business increased from $755.7 million in the Prior YTD to $792.5 million in the YTD as a result of base volume growth of 5%.  The base volume growth is primarily attributed to growth in our thermoformed drink cups.  Net sales in the Rigid Closed Top business increased from $607.1 million
in the Prior YTD to $644.5 million in the YTD as a result of acquisition volume growth attributed to Captive, MAC and Erie Plastics of 16% partially offset by a base volume decline of 5% and net selling price decreases of 5%.  The base volume decline is attributed to decreased sales in our overcaps and tubes product lines primarily as a result of contracting end use markets along with decreased sales in our closures product line primarily attributed to the sale of Capsol Berry Plastics S.p.a.    The
Flexible Films business net sales decreased from $806.2 million in the Prior YTD to $636.9 million in the YTD as a result of base volume decline of 15% and net selling price decreases of 6%.  The base volume decline is primarily attributed


32


to the slowness in the housing sector.  Net sales in the Tapes/Coatings business decreased from $377.9 million in the Prior YTD to $318.6 million in the YTD primarily as a result of base volume decline of 18% partially offset by net selling price increases of 2%.The base
volume decline is primarily attributed to softness in the new home construction, corrosion protection and automotive markets.





Gross Profit.  Gross profit increased by $46.2 million to $406.5 million (17% of net sales) for the YTD from $360.3 million (14% of net sales) for the Prior YTD.  This increase is primarily attributed to a timing lag of passing through raw material costs to our customers
in our Rigid Open Top and Rigid Closed Top segments, realization of synergies and cost reduction efforts partially offset by lower volumes.





Operating Expenses.  Selling, general and administrative expenses decreased by $1.8 million to $249.1 million for the YTD from $250.9 million for the Prior YTD primarily as a result of cost reduction efforts and realization of synergies partially offset by increased accrued
bonus expense.  Restructuring and impairment charges increased to $8.8 million in the YTD compared to $8.6 million in the Prior YTD as a result of a $7.8 million of non-cash fixed asset impairment charges in the associated with the plant consolidations within the Flexible Films and Rigid Open Top segments.  Other expenses decreased from $22.5 million in the Prior YTD to $17.4 million for the YTD primarily as a result of a decrease in business optimization expenses.





Operating Income. Operating income increased $52.9 million from $78.3 million in the Prior YTD to $131.2 million in the YTD.  The following discussion in this section provides a comparison of operating income by business segment.





Thirty-Nine Weeks EndedJune 27, 2009


June 28, 2008Operating income (loss):Rigid Open Top

$
85.6


$
51.8Rigid Closed Top


42.4



35.9Flexible Films


2.6



(11.5
)Tapes/Coatings


0.6



2.1Total operating income

$
131.2


$
78.3





Operating income for the Rigid Open Top business increased from $51.8 million for the Prior YTD to $85.6 million in the YTD.  The increase of $33.8 million is primarily attributable to base volume growth and a timing lag of passing through changes in raw material costs to our customers.  Operating income for the Rigid Closed
Top business increased from $35.9 million for the Prior YTD to $42.4 million in the YTD.  The increase of $6.5 million is primarily attributable to acquisition of Captive and Erie Plastics.  Operating income for the Flexible Film business increased from an operating loss of $11.5 million for the Prior YTD to operating income of $2.6 million in the YTD primarily due to decreased business optimization expense.  Operating income for the Tapes/Coatings business decreased from $2.1 million
for the Prior YTD to $0.6 million in the YTD.  The decrease of $1.5 million is primarily attributable to base volume decline.


33


Other Income.Other income recorded YTD primarily consists of $23.6 million of gains related to the repurchase of the 10 1⁄4% Senior Subordinated Notes and gains attributed to the fair value adjustment of our interest rate swaps.





Interest Expense, Net.  Net interest expense increased $5.7 million to $198.6 million for the YTD from $192.9 million primarily as a result of increased borrowings to finance the Captive acquisition and amortization of previously recorded unrealized loss in Accumulated other
comprehensive loss attributed to our interest rate swaps in the Prior YTD partially offset by a decline in borrowing costs of our variable rate debt.





Income Tax Benefit.For the YTD, we recorded an income tax benefit of $11.4 million or an effective tax rate of 26.7%, which is a change of $31.4 million from the income tax benefit of $42.8 million or an effective tax rate of 37.3% in the Prior YTD.  The effective
tax rate is less than the statutory rate primarily attributed to the loss and relative impact to permanent items and establishment of valuation allowance for certain foreign operating losses where the benefits are not expected to be realized.





Discontinued Operations, Net of Income Taxes.  The Company recorded a loss of $4.2 million, net of income taxes of $2.2 million, as a result of the sale of Capsol Berry Plastics S.p.a.  The results of operation of Capsol Berry Plastics S.p.a are not material.





Net Loss.  Net loss was $35.5 million for the YTD compared to a net loss of $71.8 million for the Prior YTD for the reasons discussed above.





Liquidity and Capital Resources





Senior Secured Credit Facility


The Company’s senior secured credit facilities consist of $1,200.0 million term loan and $381.7 million asset based revolving line of credit, net of defaulting lenders.  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 LIBOR rate on the term loan and the line of credit were 0.30% and 0.31% at June 27, 2009, respectively, determined by reference to the costs of funds for eurodollar deposits in dollars in the LIBOR for the interest period relevant to such borrowing plus the applicable margin.  The applicable margin for LIBOR rate borrowings under the revolving
credit facility ranges from 1.00% to 1.75% and for the term loan is 2.00%.  The line of credit is also subject to an unused commitment fee for unused borrowings 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.  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 June 27, 2009, the Company had $28.5 million
of cash and $70.0 million outstanding on the revolving credit facility providing unused borrowing capacity of $279.8 million under the revolving line of credit subject to the solvency of our lenders to fund their obligations and our borrowing base calculations.  The Company was in compliance with all covenants at June 27, 2009.


34





Our fixed charge coverage ratio, as defined in the revolving credit facility, is calculated based on a numerator consisting of Adjusted EBITDA less pro forma adjustments, 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.  We are obligated to sustain a minimum fixed charge coverage ratio of 1.0 to 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 June 27, 2009, the Company
had unused borrowing capacity of $279.8 million under the revolving credit facility subject to a borrowing base and thus was not subject to the minimum fixed charge coverage ratio covenant.  Our fixed charge ratio as of June 27, 2009 was 1.0 to 1.0.





Despite not having financial maintenance covenants, our debt agreements contain certain negative covenants.  The failure to comply with these negative covenants could restrict our ability to incur additional indebtedness, effect acquisitions, enter into certain significant business combinations, make distributions or redeem indebtedness.  The
term loan facility contains a negative covenant first lien secured leverage ratio covenant of 4.0 to 1.0 on a pro forma basis for a proposed transaction, such as an acquisition or incurrence of additional first lien debt.  Our first lien secured leverage ratio was 3.8 to 1.0 as of June 27, 2009.





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 $512.7 million for the twelve months ended June 27, 2009 to net loss.





52 Weeks ended
June 27, 2009Adjusted EBITDA

$
512.7Net interest expense


(267.4
)Depreciation and amortization


(257.6
)Income tax benefit


17.8Business optimization expense


(23.3
)Restructuring and impairment (a)


(9.8
)Stock based compensation


(16.4
)Management fees


(6.1
)Other non-cash income


17.3Pro forma cost reductions


(14.6
)Pro forma synergies (b)


(17.4
)Net loss

$
(64.8
)





Cash flow from operating activities

$
304.3Cash flow from investing activities

$
(314.5
)Cash flow from financing activities

$
19.3


(a)
Includes $7.8 of non-cash asset impairments.


(b)
Represents synergies related to the following: Covalence ($6.0 million), Captive ($7.8 million), MAC ($0.4million) and Erie ($3.2 million).


35


(c)


For comparison purposes, the following table reconciles our Adjusted EBITDA for the thirteen weeks ended June 27, 2009 and June 28, 2008.





Thirteen Weeks EndedJune 27, 2009


June 28, 2008Adjusted EBITDA

$
141.3


$
137.7Net interest expense


(60.2
)


(64.2
)Depreciation and amortization


(63.8
)


(65.3
)Income tax benefit (expense)


(5.7
)


6.4Business optimization expense


(6.9
)


(1.4
)Restructuring and impairment (a)


(8.0
)


(3.4
)Stock based compensation


(0.1
)


(6.0
)Management fees


(1.8
)


(1.8
)Other non-cash income (expense)


9.9



(0.4
)Pro forma cost reductions


(1.5
)


(4.5
)Pro forma synergies


(1.9
)


(8.3
)Net income (loss)

$
1.3


$
(11.2
)


(a)   Includes $7.8 of non-cash asset impairments.








Cash flow from operating activities

$
112.9


$
44.8Cash flow from investing activities

$
(178.0
)

$
(45.8
)Cash flow from financing activities

$
(43.0
)

$
0.6





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.





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 10 1⁄4% 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.





At June 27, 2009, BP Parallel LLC, a non-guarantor subsidiary of the Company, had purchased $43.9 million of 10 1⁄4% Senior Subordinated Notes for $19.6 million in cash, plus accrued interest.  The repurchase resulted in a net gain of $23.6 million, which is in Other income in our Consolidated Statement of Operations.  The
Company funded the purchases with cash on hand.


36


In July 2009, BP Parallel LLC purchased $5.8 million of 10 1⁄4% Senior Subordinated Notes for $4.2 million in cash, plus accrued interest. The Company funded the purchase with cash on hand.





Berry Group Indebtedness


On June 5, 2007, the Company’s parent, Berry Plastics Group, Inc. (“Berry Group”), entered into a $500.0 million senior unsecured term loan agreement (“Senior Unsecured Term Loan”) with a syndicate of lenders.  The Senior Unsecured Term Loan matures on June 5, 2014 and was sold at a 1% discount, which
is being amortized over the life of the loan.  Interest on the agreement is payable on a quarterly basis and bears interest at the Company’s option based on (1) a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Credit Suisse as its “prime rate” plus 525 basis points or (2) LIBOR (0.56% at June 27, 2009) plus 625 basis points.  The Senior
Unsecured Term Loan contains a payment in kind (“PIK”) option which allows Berry Group to forgo paying cash interest and to add the PIK interest to the outstanding balance of the loan.  This expires on the five year anniversary of the loan and if elected increases the rate per annum by 75 basis points for the specific interest period.  Berry Group at its election may make the quarterly interest payments in cash, may make the payments by paying 50% of the interest in cash and 50%
in PIK interest or 100% in PIK interest for the first five years.  The notes are unsecured and there are no guarantees by Berry Plastics Corporation or any of its subsidiaries and therefore this financial obligation is not recorded in the Consolidated Financial Statements of Berry Plastics Corporation.  Berry Group elected to exercise the PIK interest option during 2008 and the first, second and third quarters of 2009.





Berry Group at its election may call the notes up to the first anniversary date for 100% of the principal balance plus accrued and unpaid interest and an applicable premium.  Berry Group’s call option for the notes between the one year and two year and two year and three year anniversary dates changes to 102% and 101% of the
outstanding principal balance plus accrued and unpaid interest, respectively.  The notes also contain a put option which allows the lender to require Berry Group to repay any principal and applicable PIK interest that has accrued if Berry Group has an applicable high yield discount obligation (“AHYDO”) within the definition outlined in the Internal Revenue Code, section 163(i)(1) at each payment period subsequent to the five year anniversary date.





At June 27, 2009, BP Parallel LLC had invested $132.0 million to purchase assignments of $391.3 million principal of the Senior Unsecured Term Loan.  The balance on the Senior Unsecured Term Loan is $201.0 million, net of the BP Parallel LLC investment.





In July 2009, BP Parallel LLC invested $26.6 million to purchase assignments of $106.3 million principal of Senior Unsecured Term Loan.






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Cash Flows


Net cash provided by operating activities was $339.8 million for the YTD compared to $45.3 million for the Prior YTD.  This increase of $294.5 million is primarily the result of a $224.9 million change in working capital primarily due to declining resin costs and improved operating performance primarily driven by realization of synergies
and the timing lag of passing through reduction of raw material costs in our Rigid Open Top and Rigid Closed Top segments.





Net cash used for investing activities decreased from $620.0 million for the Prior YTD to $278.9 million for the YTD primarily as a result of the acquisition of Captive and disposal of assets related to a sale-leaseback transaction in the Prior YTD partially offset by increased capital spending and the investment in the Senior Unsecured Term
Loan in the YTD.  Our capital expenditures are forecasted to be approximately $195 million for fiscal 2009 and will be funded from cash flows from operating activities and availability under our revolving credit facilities.





Net cash used for financing activities was $222.2 million for the YTD compared to net cash provided by financing activities of $579.5 million for the Prior YTD.  This change of $801.7 million is primarily attributed to the reduction of revolving line of credit and the borrowing of the Senior Secured Bridge Loan to fund the Captive
acquisition in the Prior YTD.





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 over the next twelve months.  We base such belief on historical experience and the funds available
under the senior secured credit facility.  However, we cannot predict our future results of operations and our ability to meet our obligations involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended September 27, 2008.  In particular, increases in the cost of resin which we are unable to pass through to our customers on a timely
basis or significant acquisitions could severely impact our liquidity.  At June 27, 2009, our cash balance was $28.5 million, and we had unused borrowing capacity of $279.8 million under our revolving line of credit, net of defaulting lenders.





Accounts Receivable and Inventory





June 27, 2009


September 27, 2008Net Sales (last 12 months)

$
3,358.7


$
3,513.1Average Accounts Receivable


368.2



397.5AR Turnover Rate  (a)


9.1



8.8Cost of Goods Sold (last 12 months)

$
2,818.7


$
3,019.3Average Inventory


440.5



442.8Inventory Turnover Rate  (b)


6.4



6.8


(a) Accounts Receivable Turnover Rate = Revenue for the last twelve months divided by average accounts receivable.


(b) Inventory Turnover Rate = Cost of goods sold for the last twelve months divided by average ending inventory.


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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 27, 2008.  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.  The following critical accounting policies have been updated for the period ended June 27, 2009.




Goodwill. We are required to perform a review for impairment of goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS 142). Goodwill is considered to be
impaired if we determine that the carrying value of the reporting unit exceeds its fair value. In addition to the annual review, an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances could include, but are not limited to: a significant decline in our earnings, a significant decline in the total value of our Company, unanticipated competition or a loss
of key personnel.





The following table presents carrying value as of our most recent evaluation for impairment of goodwill compared to Goodwill by reportable segment:





Carrying Value as of


Goodwill as ofJune 30, 2008


June 27, 2009


September 27, 2008Rigid Open Top

$
1,433.4


$
646.3


$
646.3Rigid Closed Top


1,470.6



766.4



773.9Flexible Films


462.4



16.9



23.3Tapes/Coatings


336.9



5.8



5.8Total

$
3,703.3


$
1,435.4


$
1,449.3




In accordance with our policy, we completed our most recent completed annual evaluation for impairment of goodwill as of June 30, 2008 and determined that no goodwill impairment existed. Our evaluation included management estimates of cash flow projections based on an internal strategic review. Key assumptions from this strategic review included
EBITDA growth.  For purposes of this test, we held our EBITDA as a percentage of revenue at approximately 13.5% which has been consistent with our historical experience.  Growth by reporting unit varies in 2009 as the Rigid Open Top and Rigid Closed Top segments is driving the majority of the increase and the Flexible Films and Tapes/Coatings segments are expecting to have inflationary type earnings growth in 2009.  For the purposes of this test, the Company has forecasted overall
growth of only 3.5% in the following three years and has further reduced this to 3.0% in the terminal year.  We assumed that the Company would maintain its capital spending of approximately $200 million to continue to increase efficiencies in production and have assumed that these efficiencies would be offset by other rising costs in selling, general and administrative expenses.  All of these assumptions were utilized to


39




calculate our discounted cash flows for each reporting unit in order to determine that no goodwill was impaired.  Finally, we performed sensitivity analysis by changing the weighted average cost of capital by 10% which still resulted in no goodwill impairment.  We also performed a calculation of our total enterprise value
utilizing comparable EBITDA multiples of our peer companies to corroborate that the fair value that was derived from discounted cash flow analysis was consistent with our market peers.   Given the uncertainty in economic trends, we cannot guarantee that when we complete our future annual or other periodic reviews for impairment of goodwill that a material impairment charge will not be recorded. Goodwill totaled $1.4 billion at June 27, 2009 with substantially all of our Goodwill relating to our
Rigid Open Top and Closed Top segments.  Our annual evaluation for impairment of goodwill as of June 28, 2009 was not finalized by the date of this report.





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.





Item 3.                        Quantitative and Qualitative Disclosures about Market Risk





Interest Rate Risk


We are exposed to market risk from changes in interest rates primarily through our senior secured credit facilities, senior secured first priority notes and second priority senior secured notes.  Our senior secured credit facilities are comprised of (i) a $1,200.0 million term loan and (ii) a $400.0 million revolving credit
facility.  At June 27, 2009, $70.0 million was outstanding on the revolving credit facility.  The net outstanding balance of the term loan at June 27, 2009 was $1,176.0 million.  Borrowings under our senior secured credit facilities bear interest, at our option, at either an alternate base rate or an adjusted LIBOR rate for a one-, two-, three- or six month interest period, or a nine- or twelve-month period, if available to all relevant lenders, in each case, plus an applicable
margin.  The alternate base rate is the mean the greater of (i) Credit Suisse’s prime rate and (ii) one-half of 1.0% over the weighted average of rates on overnight Federal Funds as published by the Federal Reserve Bank of New York.  Our $680.6 million of senior secured first priority notes accrue interest at a rate per annum, reset quarterly, equal to LIBOR plus 4.75%. Our second priority senior secured notes are comprised of (i) $525.0 million fixed rate notes and (ii)
$225.0 million floating rate notes.  The floating rate notes bear interest at a rate of LIBOR plus 3.875% per annum, which resets quarterly.





At June 27, 2009, the LIBOR rate of 0.30% was applicable to the term loan, 1.13% was applicable to the senior secured first priority notes and 1.32% was applicable to the second priority floating rate notes.  If the LIBOR rate increases 0.25% and 0.5%, we estimate an annual increase in our interest expense of $3.9 million and $7.8
million, respectively.


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In August 2007, Berry entered into two separate interest rate swap transactions to protect $600.0 million of the outstanding variable rate term loan debt from future interest rate volatility.  The swap agreements became effective in November 2007.  The first agreement had a notional amount of $300.0 million and became effective
November 5, 2007 and swaps three month variable LIBOR contracts for a fixed two year rate of 4.875% and expires on November 5, 2009.  The second agreement had a notional amount of $300.0 million and became effective November 5, 2007 and swaps three month variable LIBOR contracts for a fixed three year rate of 4.920% and expires on November 5, 2010.  The Company’s term loan gives them the option to elect different interest rate reset options.  On November 5, 2008, the Company
began and continues to utilize 1-month LIBOR contracts for the underlying senior term loan.  The Company’s change in interest rate selection along with their continued use of this alternative rate caused the Company to lose hedge accounting.  The Company has recorded all subsequent changes in fair value from November 5, 2008 to June 27, 2009 in the income statement and is amortizing the interest rate swap balance in Accumulated other comprehensive income to Interest expense through the
end of the respective swap agreement.  The Company estimates the fair value of the interest rate swap transactions identified above to be a liability of $19.2 million and $15.0 million as of June 27, 2009 and September 27, 2008, respectively.  The fair value of these interest rate swaps is subject to movements in LIBOR and may fluctuate in future periods.  A .25% change in LIBOR would not have a material impact on the fair value of the interest rate swaps.





Plastic Resin Cost Risk


We are exposed to market risk from changes in plastic resin prices that could impact our results of operations and financial condition.  We manage our exposure to these market risks through our normal operations with purchasing negotiation, mechanical hedging, switching between certain resin products and, when deemed appropriate,
by using derivative financial instruments in accordance with established policies and procedures. The derivative financial instruments generally used are forward contracts.  The derivative financial instruments utilized by the Company in its hedging activities are considered risk management tools and are not used for trading purposes.





Item 4.                        Controls and Procedures





(a)
Evaluation of disclosure controls and procedures.





Our management team is responsible for the preparation and integrity of the Consolidated Financial Statements appearing in this Form 10-Q.  Berry’s principal executive officer and principal financial officer have concluded that Berry’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this Form 10-Q, are effective at the reasonable assurance level as discussed below to ensure that information required to be disclosed by Berry in the reports under the Securities and Exchange Act of 1934, as amended, is recorded, processed , summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission
and that such information is accumulated and communicated to Berry’s management, including its principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosure.  The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including consolidated subsidiaries, is made known to members of senior management and the Board of Directors.  As required by Rule 13a-15
under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, we carried out an evaluation under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  The Company's


41


management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of June 27, 2009.  Based on the identification and the evaluation of the material weaknesses in internal control
over financial reporting described below, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 27, 2009, the Company’s disclosure controls and procedures were not effective.





Management’s Report on Internal Control over Financial Reporting





Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





A material weakness is a control deficiency, or combination of control deficiencies, that results in the reasonable possibility that there is more than a remote likelihood that a misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected in a timely manner. A control deficiency
exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A design deficiency exists when a control necessary to meet the control objective is missing or an existing control is not properly designed so that, even if the control operates as designed, the control objective is not always met.  In connection with Management’s assessment of the Company’s
internal control over financial reporting, Management identified the following material weaknesses in the Company’s internal control over financial reporting as of June 27, 2009.







·
Ineffective review of account reconciliations to ensure that account balances were accurate and agreed to appropriate supporting detail, calculations or other documentation.






·
Ineffective review of the Company’s tax provision to ensure that deferred tax balances were properly stated.




42


Plans to Remediate Material Weaknesses in Internal Control over Financial Reporting





In light of the material weaknesses described above, the Company performed additional analysis and other procedures to ensure that the Consolidated Financial Statements included in this report were prepared in accordance with accounting principles generally accepted in the United States ("GAAP").  These procedures included additional
testing of certain balances and accounts as of June 27, 2009 to ensure the accuracy of the annual financial statements.





Management has engaged in, and continues to engage in, substantial efforts to address the material weaknesses in the Company’s internal control over financial reporting.  The Company is in the process of implementing new account reconciliation procedures to ensure that the balances were accurate and agreed to appropriate supporting
detail, calculations or other documentation.  In addition, the Company is also designing new procedures to ensure their book to tax differences are properly identified and all deferred tax balances are properly stated.





While the Company believes that these remedial actions will result in correcting the material weaknesses in its internal control over financial reporting, the exact timing of when the conditions will be corrected is dependent upon future events.







(b)
Changes in internal controls.





During 2009, the Company converted the Flexible Films segment from Old Covalence Holding financial systems to Berry’s financial systems which has resulted in cohesive disclosure controls, consistent procedures and the remediation of a previously identified material weakness.  Other internal control changes that could
materially affect or are reasonably likely to materially affect the Company’s internal control over financial reporting are discussed under “Plans to Remediation of Material Weaknesses in Internal Control over Financial Reporting” in Item 9A(a) above.





Part II.  Other Information





Item 1.            Legal Proceedings





There has been no material changes in legal proceedings from the items disclosed in our Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended September 27, 2008.





Item 1A.         Risk Factors





You should carefully consider the risks described in our Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended September 27, 2008, including those under the heading “Risk Factors” and other information contained in this Quarterly Report before investing in our securities. Realization of any of these
risks could have a material adverse effect on our business, financial condition, cash flows and results


43


of operations.  There were no material changes in the Company’s risk factors since described in our Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended September 27, 2008.





Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds





Not Applicable





Item 3.            Defaults Upon Senior Securities





Not Applicable





Item 4.            Submission of Matters to a Vote of Security Holders





Not Applicable





Item 5.            Other Information





Not Applicable





Item 6.            Exhibits





31.1
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer





31.2
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer





32.1
Section 1350 Certification of the Chief Executive Officer





32.2           Section 1350 Certification of the Chief Financial Officer


44





SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Berry Plastics Corporation





August 10, 2009








By: /s/ James M. Kratochvil


James M. Kratochvil




Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)





45