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EX-31.2 - EX-31.2 - Pregis Holding II CORPc57135a1exv31w2.htm
EX-21.1 - EX-21.1 - Pregis Holding II CORPc57135a1exv21w1.htm
EX-32.2 - EX-32.2 - Pregis Holding II CORPc57135a1exv32w2.htm
EX-32.1 - EX-32.1 - Pregis Holding II CORPc57135a1exv32w1.htm
EX-31.1 - EX-31.1 - Pregis Holding II CORPc57135a1exv31w1.htm
EX-12.1 - EX-12.1 - Pregis Holding II CORPc57135a1exv12w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K/A
(Amendment No. 1)
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     
Commission file number: 333-130353-04
PREGIS HOLDING II CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  20-3321581
(I.R.S. Employer Identification No.)
     
1650 Lake Cook Road
Deerfield, Illinois
  60015
(Address of Principal Executive Offices)   (Zip Code)
(847) 597-2200
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
     
    Name of each exchange
Title of each class   on which registered
Securities registered pursuant to Section 12(g) of the Act: None
(Title of class)
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes þ No o
     Indicate by check mark whether the registrant (1) has 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) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, 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 o No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ (Do not check if a smaller reporting company)   Small reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The registrant has no common stock, voting or non-voting, held by non-affiliates.
     There is no public market for the Company’s common stock. There were 149.0035 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding as of December 31, 2009 and as of March 25, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
     Certain exhibits to the registrant’s registration statement on Form S-4, as amended, are incorporated by reference into Item 15 of this report.
 
 

 


 

TABLE OF CONTENTS
         
    Page  
PART I
 
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PART II
 
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PART III
 
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PART IV
 
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 EX-12.1
 EX-21.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


Table of Contents

     This Form 10-K/A is the same as the original Form 10-K filed on March 25, 2010, except that the Form 10-K/A includes Exhibits 32.1 and 32.2 which were inadvertently omitted from the original submission.
PART I
     Except as otherwise required by the context, (1) references in this report to “our company,” “we,” “our” or “us” (or similar terms) refer to Pregis Holding II Corporation, together with its consolidated subsidiaries, (2) references to “Pregis Holding II” or “the registrant” refer to Pregis Holding II Corporation only, (3) references to “Pregis” refer only to Pregis Corporation, a wholly-owned subsidiary of Pregis Holding II Corporation, and (4) references to “Pregis Holding I” refers to Pregis Holding I Corporation, which owns all of the capital stock of Pregis Holding II Corporation.
ITEM 1.   BUSINESS
The Company
     We are an international manufacturer, marketer and supplier of protective packaging products and specialty packaging solutions. In the fourth quarter of 2008, we began reporting the operations of our flexible packaging, hospital supplies and rigid packaging businesses as one reportable segment, Specialty Packaging, to be aligned with changes in our internal management structure. As a result of this change, we now report two reportable segments:
    Protective Packaging, which manufactures, markets, sells and distributes protective packaging products in North America and Europe; and
 
    Specialty Packaging, which focuses on the development, production and marketing of innovative packaging solutions for food, medical, and other specialty packaging applications, primarily in Europe.
     Additional quantitative disclosures with respect to our reportable segments and further discussion regarding our 2008 change in reportable segments is presented in Note 18 to the audited financial statements included within this report, and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of this Report and incorporated herein by reference.
Competitive Strengths
     We believe we are distinguished by the following competitive strengths:
    Leading Positions in Fragmented Markets. As one of the leading providers of protective packaging products as well as a leading competitor in our target markets in European specialty packaging solutions, we benefit from our broad product offering, scale, expertise in innovation, long standing customer relationships and diverse end-markets. Our specialty packaging businesses focus on non-commodity, specialized niche market segments with deep, collaborative customer relationships, high service expectations and exacting product requirements.
 
    Broad Product Offering Combined with Customer-Focused Service. We believe we offer one of the broadest product lines in the packaging industry. Many of our customers tend to purchase multiple packaging products from manufacturers and our ability to bundle products reduces customer cost and simplifies procurement requirements. We also offer highly customized, value-added packaging solutions to attractive markets. Examples of these tailored solutions include customized shapes, customized laminates and other design services. In addition to our broad product line and customized solutions, we provide our customers with levels of quality, lead times, logistics and design services that we believe are among the most competitive in the packaging industry.
 
    Advanced, Low-Cost Manufacturing. We benefit from a number of competitive advantages that help us compete effectively in our markets. For example:
    Manufacturing technologies and capabilities for our products depend on advanced technological know-how. Our advanced manufacturing capabilities allow us to produce unique and compelling products to

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      meet our customers’ needs. For example, our ability to manufacture co-extruded cushioning packaging, polypropylene and polyethylene sheet foam, extruded plank and paper-based products is a significant advantage relative to our competitors, who generally have more limited product offerings. We also believe we are the sole producer of low density polypropylene sheet foam products and one of only two producers of co-extruded bubble cushioning products.
 
    We continue to make significant investments in our manufacturing facilities, enabling us to produce higher-value added products, further broaden our product offering and improve profitability. Since the beginning of 2006, Pregis has invested over $100 million in capital expenditures in order to launch new products, restructure our operations, implement advanced manufacturing techniques and make other process improvements. We believe that our facilities are well-capitalized in comparison to many of our competitors
 
    Many of the products in our industry are lightweight with an estimated cost-effective shipping radius in the industry of approximately 200 to 400 miles. In addition, many of our customers seek broad geographic coverage and timely, often overnight, deliveries. Our expansive manufacturing and distribution network, which included a network of 45 facilities in 18 countries as of December 31, 2009, allows us to provide our customers with the geographic scale and service levels required to meet their needs. For example, we are the only manufacturer of kraft honeycomb products that can offer a national presence throughout the United States and much of Western Europe.
 
    Our ability to procure lower cost raw materials due to our scale, coupled with our efficient manufacturing assets, enables us to maintain a cost structure which we believe to be lower than that of many of our competitors, which helps drive revenue growth and improve profitability.
    Significant Diversification. Our business is well balanced with a diversified range of product offerings, geographical markets, end-markets and customers. We believe we offer one of the broadest product lines in the packaging industry. Geographically, we primarily serve markets in North America, Europe and, to a lesser extent, other regions of the world. We also benefit from serving a diverse set of end-markets and diverse customer base, with our largest customer representing less than 2% of sales in 2009. We believe this diversity helps reduce overall business risk, enhances our revenue stability and provides us with opportunities for growth resulting from changing customer needs and market trends.
 
    Track Record of Customization and Innovation. Our focus on customized solutions is a key factor in our ability to grow by satisfying our customers’ changing needs. Examples of customization include surgical and procedure kits tailored to the needs of a hospital or an individual physician; custom print, decoration and barrier properties in flexible films; custom thermoformed container shapes and closure designs for the foodservice market; and die-cut and application-specific customized products for Protective Packaging’s Hexacomb® product line. The ability to innovate is a key factor in our ability to expand our product lines and meet shifts in market demand. For example, the Protective Packaging segment recently introduced a new family of “green” products to address the growing need for sustainable packaging alternatives. These products include Astro-Bubble® Green, the first air cushioning bubble product made with recycled content. Also included in our sustainable product portfolio are Astro-Bubble® Renew, Absolute EZ-Seam Renew (recycled content floor underlayment), Hefty Express® mailers and Jiffy Green bubble rolls and mailer products. In addition, we believe our Protective Packaging business is one of only two manufacturers of extruded engineered foam in both North America and Europe and the only producer of polypropylene sheet foam in North America. We believe that our customized and innovative products provide additional value to our customers.
 
    Experienced Management Team and Strong Equity Sponsorship. Our senior managers have extensive commercial, manufacturing and finance backgrounds. Our management team has demonstrated its ability to improve our competitive position by successfully developing and executing our global business strategy. Our management team has led the implementation of lean and other productivity programs and

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      significant cost savings initiatives, as well as internal and acquisitive expansion efforts, which position us for future growth and margin expansion. We also benefit from our equity sponsor’s relationships, knowledge of the packaging, specialty chemicals and consumer products industries, and significant investment experience in separating and optimizing carve-out divisions of larger organizations.
Business Strategy
     We are pursuing a business strategy developed to increase revenue and cash flow. The key components of this strategy are:
    Capitalize on Our Market Position to Grow Sales. We are continuing to use our broad product offering, expansive geographic coverage, advanced manufacturing technologies and leading service levels to drive our growth. We also plan to continue to pursue initiatives that further broaden our product lines in the packaging industry. Our diversity of end-markets and customers, as well as our knowledge of trends and customer preferences, help us identify new business and product opportunities. Our product development teams continue to seek to enhance and expand the use of existing products as well as work collaboratively with our customers to design new products. We are also continuing to focus our efforts on the development of products that can provide immediate value to our customers and meet their performance requirements and quality expectations.
 
    Continue Customer-Focused Service. We have successfully differentiated ourselves through a reputation for customer-focused, high quality service. We intend to further enhance our service levels by using our strong relationships with customers and end-users to gain industry and consumer insight into emerging trends and customer preferences. We implement our customer-focused strategy through a regional sales and distribution infrastructure, tailored to fit the needs of our customers and end-markets. The key elements of this strategy require us to develop and maintain long-standing relationships and partnerships with our customers. We have an average relationship of 20 years with our top 10 customer. We intend to continue to use this strategy to capture increased value for our products and services.
 
    Maintain Technological Know-How and Low-Cost Manufacturing Position. We have made substantial investments to develop advanced packaging manufacturing technologies, and as a result we have a significant portfolio of industry-leading products and technologies. We continue to invest in advanced manufacturing capabilities and low-cost facilities in order to enable us to produce higher value-added products, further broaden our product offering and improve profitability. Beginning in 2008, through restructuring actions and process redesign, we believe we have permanently lowered our cost position and have removed approximately $78 million of fixed costs from our company
 
    Continue to Use Our International Platform. We intend to continue to share products, technologies, manufacturing processes and best practices, and research and development resources across our protective packaging operations in North America and Europe. In addition, we are using this international platform to introduce new products and technologies more efficiently, obtain information on distribution channels and end-markets, and re-deploy manufacturing assets and sales personnel as needed to capitalize on emerging trends in the markets we serve.
History
     Pregis Holding II is a Delaware corporation formed in 2005. AEA Investors LP and certain of its affiliates (the “Sponsors” or “AEA Investors”), formed Pregis, Pregis Holding I, and Pregis Holding II for the purpose of acquiring all of the outstanding shares of capital stock of the global protective packaging and European specialty packaging businesses of Pactiv Corporation (the “Acquisition”). AEA Investors entered into a stock purchase agreement on June 23, 2005 with respect to the Acquisition, and the Acquisition was consummated on October 13, 2005. The adjusted purchase price for the Acquisition was $559.7 million, after giving effect to direct costs of the Acquisition, pension

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plan funding of $20.1 million, and post-closing working capital and indebtedness adjustments. The Stock Purchase Agreement also indemnifies the Company for payment of certain liabilities relating to the pre-Acquisition period.
     The Acquisition was financed with the proceeds from the offering of Pregis’s Second Priority Senior Secured Floating Rate Notes due 2013 and 123/8% Senior Subordinated Notes due 2013, borrowings under Pregis’s senior secured credit facilities and an equity contribution to Pregis Holding I by AEA Investors.

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Products and Services
     Our broad, industry-leading product offerings include protective packaging, flexible packaging, rigid packaging, and medical supplies and packaging and serve a diversified range of end-markets. Our products are primarily plastic resin- and plastic film-based but also include products derived from kraft paper and other raw materials. Our protective packaging products are used for cushioning, void-fill, surface protection, containment and blocking and bracing. Our Protective Packaging business also acts as a distributor of protective packaging products in certain European markets, including the United Kingdom and Central Europe. Our specialty packaging products serve niche market segments with customized, value-added packaging solutions. The table below provides an overview of products and end-markets served within our segments.
         
    Protective Packaging   Specialty Packaging
         
Products  
Protective mailers
  Flexible packaging:
   
Air-encapsulated cushion products
       Bags
   
Inflatable airbag systems
       Pouches
   
Sheet foam
       Labels
   
Engineered foam
   
   
Honeycomb
  Rigid packaging:
   
Paper packaging systems
       Thermoformed foodservice containers
   
Foam-in-place
       Custom packaging
   
 
   
   
 
  Medical supplies and packaging:
   
 
       Operating drapes and gowns
   
 
       Surgical procedure packs
   
 
       Medical packaging
   
 
   
End-Markets Served  
General industrial
  Fresh food
   
High tech electronics
  Dry food
   
Furniture manufacturing
  Consumer products
   
Building products
  Foodservice
   
Retail
  Hospitals
   
Agriculture
  Healthcare
     We manufacture protective packaging products in North America and Europe. We currently manufacture our specialty packaging products in Germany, the United Kingdom, Egypt, and Bulgaria.

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     Protective Packaging Products
     Protective Mailers. Protective mailers are a lightweight, economical, pre-constructed means of protecting a wide variety of small items from damage during shipping. Types of protective mailers include cushion-lined, padded, foam-lined, rigid board and all-plastic mailers. Protective Packaging markets its line of protective mailers under the Hefty Express® brand name in North America and Jiffy brand name in Europe.
     Air-Encapsulated Cushion Products. Introduced in the 1960s, cushion products are made from extruded polyethylene or co-extruded polyethylene and nylon film with pockets of air encapsulated between the top and bottom layers of the film. Each cell acts as a mini-shock absorber to protect products during shipping. The primary functions of cushion products are cushion and void fill. Protective Packaging’s range of cushion products is sold primarily under the Astro-Cell® and Astro-SupraBubble® brand names. Based on customer preferences, Protective Packaging can customize its cushion products by laminating them with kraft paper, aluminum foil or other film. Co-extruded multi-layer cushion products retain air over extended periods of time and are generally viewed by customers as higher value-added alternatives to monolayer products. We believe that Protective Packaging is one of only two manufacturers of co-extruded bubble cushioning products.
     Inflatable Airbag Systems. Inflatable airbag systems consist of a dispenser which produces inflatable airbags on-demand at the end-user location. This inflated airbag is designed for void-fill and blocking and bracing applications. The competitive advantages of inflatable airbags compared to loose-fill, wadded paper and other substitute packaging materials are price, reduced freight costs, lower weight, lower inventory space and improved protection. Since inflatable airbags are produced on-demand, often at the customer’s on-site location, inventory, freight and warehousing requirements are significantly reduced for the customer.
     Sheet Foam. Sheet foams are extruded foamed plastics with thicknesses not exceeding 5 millimeters (approximately 3/16-inches). This product is primarily used as surface and light-cushioning protection in packaging applications, and as thermal and sound insulation in non-packaging applications, such as flooring underlayment and concrete curing blankets. Protective Packaging’s sheet foam is sold primarily under the Astro-Foam, Prop-X and Microfoam® brand names, while its laminated or custom sheet foams are sold under the Micro-Tuff and Rhino brand names. Protective Packaging differentiates and custom tailors sheet foam by laminating it with aluminum foil, high density polyethylene resin, kraft paper, non-woven materials and other substrates.
     Engineered Foam. Engineered foams are extruded foamed plastics with thicknesses greater than 5 millimeters (approximately 3/16-inches). This product provides a variety of functions, including cushioning and blocking and bracing. In packaging applications, engineered foam is fabricated into a wide range of protective packaging shapes, forms and die cuts for designed packages in which a clean, attractive appearance is required. Unlike other protective packaging products, engineered foam is typically sold to fabricators, who convert the material based on precise specifications required by end-users. Engineered foam’s characteristics include high impact strength, elasticity and chemical resistance. These characteristics make the product a preferred substrate in protective packaging applications for electronic and medical equipment, automotive parts and machine tools, as well as in certain non-packaging applications, particularly recreational uses.
     Honeycomb. Honeycomb is a protective packaging material made from kraft paper that is sliced into strips and glued together to form a pattern of nested hexagonal cells. Formed honeycomb is similar in appearance to a beehive honeycomb and is custom-designed to meet the needs of each end-user. Specific functional applications of honeycomb include spacing, cushioning and blocking and bracing, as well as structural support for doors and tabletops. Honeycomb demonstrates excellent protective qualities by minimizing the transfer of road-shock to products during shipping and by providing a combination of cushioning, and blocking and bracing functions. Honeycomb offers excellent performance due to its strength-to-weight ratio. As a result, honeycomb tends to be preferred to corrugated packaging given its lower cost and better performance in its targeted application. Select end-users value the product’s environmentally friendly characteristics compared to molded resin-based alternatives. Protective Packaging manufactures honeycomb under the Hexacomb® brand name in both North America and Europe.

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     Paper Packaging Systems. Our paper systems offer an additional solution to the void-fill portfolio of protective packaging products, using a flexible and eco-friendly packaging material. The systems deliver crumpled, recyclable, renewable and biodegradable kraft paper used for void-fill, cushioning, wrapping and blocking, and bracing applications. This packaging solution broadens and compliments the existing void-fill inflatable solutions portfolio, offering a wider selection of void-fill options to be placed at end-user sites, saving customers inventory, freight and packaging costs.
     Specialty Packaging Products
     Flexible Packaging Products
     Films. Films include film-on-the-reel consisting of high quality mono and co-extruded laminated polyethylene films for the fresh, dry and frozen foods, confectionery, hygiene, medical and consumer goods markets, as well as mono, modified atmospheric packaging base and top web clear and colored films with easy peel or fusion seal.
     Bags. Bag products include printed polyethylene bags for the household, personal care, horticultural and medical markets and reclosable bags.
     Pouches. Pouch products include laminated stand-up pouches, printed in up to ten colors, for food, hygienic and medical markets.
     Labels. Labels include shrink, stretch and wrap-around labels for glass and plastic bottles, printed in up to ten colors.
     Rigid Packaging Products
     Custom packaging. Custom packaging consists of individually customized packaging for food and foodservice products, including snacks, salads, confectionery, biscuits and prepared meals. A dedicated design and technology facility in Stanley, United Kingdom offers a full range of services covering the product development process from drafting of initial concepts in three dimensions through to the creation of prototype samples and final tool production. Custom solutions include trays for chocolates and biscuit inserts for biscuits and confectionery products.
     Foodservice. Foodservice products include standard thermoformed packaging produced internally, which are sold alongside third-party foodservice products purchased for resale. Products offered include containers and bowls, trays, tableware cups and cup carriers.
     Medical Supplies and Packaging
     Operating drapes. Operating drapes include a complete range of disposable drapes such as back table covers, small drapes, universal patient drapes, customized drape systems and drapes that are specific to particular operations. Products are sold under the Secu-Drape brand as well as under private label brands.
     Procedure packs. Procedure packs consist of standard and highly customized drapes and other products (such as tubes, compresses, and scalpels) purchased from third-party suppliers that are used for numerous surgical disciplines.
     Medical packaging. Medical packaging includes transparent pouches and tubes and reels with or without indicators suitable for different sterilization processes and sold under the Medipeel and Flexopeel brands; transparent or colored pouches suitable for vacuum packaging and irradiation and sold under the Cleerpeel brand; and wrapping materials and other accessories sold under the Steriflex brand.

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Customers
     For the year ended December 31, 2009, on a corporate-wide basis, our top ten customers accounted for approximately 11% of our net sales, with no single customer accounting for more than 2%.
     Protective Packaging
     We sell our protective packaging products to over 10,000 customers across North America and Europe, consisting primarily of distributors, fabricators and direct end-users. The majority of our protective packaging sales are to national and regional distributors who sell a variety of packaging and other industrial products to end-user customers. Our sales to fabricators are driven by engineered foam products, which are converted by fabricators into a wide range of protective packaging shapes, forms and die cuts for designed packages with the precise specifications required by end-users. We believe that packaging is critical to our customers’ packaged goods but accounts for only approximately 3% of our customers’ total product costs.
     Specialty Packaging
     Our specialty packaging products are sold to a wide range of end-user customers, both directly and through distributors, in the various markets the businesses serve, including major international food, consumer products and healthcare companies, regional producers and distributors and retailers, many with whom we have long-standing relationships.
Sales, Marketing and Distribution
     Because of our broad range of products and customers, our sales and marketing efforts are generally specific to a particular product, customer or geographic region. We market in various ways, depending on both the customer and the product. We have differentiated ourselves from our competitors by building a reputation for a customer-focused sales approach, quality service, product and service innovation and product quality. The key elements of this strategy require us to develop and maintain strong relationships with our customers, including direct end-users as well as distributors and fabricators.
     Our Protective Packaging sales and marketing is organized primarily on a regional basis in North America and a country basis in Europe. In North America, several specialty end-markets, such as agriculture, building products, furniture manufacturing and retail, as well as a small number of key accounts, are covered on a national basis. Our honeycomb products are sold by a dedicated sales force due to the specialized nature of the product offering. In Europe, specialists cover several key accounts in the protective mailer, engineered foam, and inflatable airbag systems product segments. Protective Packaging has also established an extensive distribution network and dedicated sales force in Central and Eastern Europe, as there are currently no other significant distribution networks in the region that provide adequate market access. Our Specialty Packaging businesses address the specialized market segments they serve with both a direct sales force and distributors, utilizing the most effective channels to address their customers’ needs. These businesses’ marketing efforts are led by their sales force and customer service staff and also include an international sales network through dedicated agents in various countries, including the United Kingdom, The Netherlands, Poland and Spain.
Research and Development
     Our product development efforts are an important part of our commitment to customer-focused service and innovative products and technology. Our research and development personnel work closely with customers to enhance existing products and develop new products, as well as to gain insights into emerging trends and customer preferences. We aim to launch a number of new products and applications each year. Our development efforts are focused on new and existing product development, design and enhancement, manufacturing process optimization and material development, all of which reinforce our strong customer relationships and provide support to our sales

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and marketing teams. For the years ended December 31, 2009, 2008 and 2007, we spent $5.4 million, $5.8 million, and $5.9 million, respectively, on our research and development efforts.
Suppliers and Raw Materials
     Polyethylene, polypropylene, and other plastic resins constitute the primary raw materials used to make our products. We also purchase various other materials, including plastic film, nylon, kraft paper, corrugated products and inks. These materials are generally available from a number of suppliers. Our businesses purchase raw materials in coordination with one another, and we sometimes buy and sell additional quantities of resin, in order to take advantage of volume discounts. In line with industry practice, we have historically attempted to mitigate a portion of the impact of plastic resin price fluctuations by passing through changes in resin prices to customers through a combination of product selling price adjustments, contractual cost pass through mechanisms and/or commercial discussion and negotiation with customers. We cannot give any assurance as to whether we will be able to recover from customers all or any portion of these changes in resin prices. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A, “Risk Factors—Risks Related to Our Business—Our financial performance is dependent on the cost of plastic resin, the continued availability of resin, and energy costs.”
Backlog
     We did not have a significant manufacturing backlog at December 31, 2009 or 2008. We do not have material long-term contracts with our customers, and the significant majority of our sales orders are filled within a month of receipt. While our backlog is not significantly impacted by any seasonal factors, it is subject to fluctuation given the size and timing of outstanding orders at any point in time. Therefore, our backlog level is not necessarily indicative of the level of future sales.
Competition
     The markets in which we operate are highly competitive on the basis of service, product quality and performance, product innovation and price. There are other companies producing competing products that are substantially larger, are well established and have greater financial resources than we have.
     Our protective packaging products compete with similar products made by other manufacturers and with a number of other packaging products that provide protection against damage to customers’ products during shipment and storage. Through our Protective Packaging segment, we are one of the few suppliers with a broad offering of protective packaging products and a presence in both North America and Europe. The majority of competing producers focus on a specific geography or a narrow product range. For example, our ability to manufacture co-extruded cushioning packaging, polypropylene and polyethylene sheet foam, extruded plank and paper-based products is a significant competitive advantage. Additionally, we are the sole producer of low density polypropylene sheet foam products and the only manufacturer of kraft honeycomb products with a national presence in North America. With a strategic footprint of 22 manufacturing facilities in North America and 14 in Europe as of December 31, 2009, the Protective Packaging segment benefits significantly from an estimated cost-effective shipping radius in the industry of approximately 200 to 400 miles. Our primary competitor in protective packaging is Sealed Air, while we also selectively compete with companies such as Poly Air, FP International and Storopack in North America and Fagerdala, Sansetsu and BFI in Europe.
     Our Specialty Packaging segment has strong positions in its particular areas of focus. For example, our flexible barrier packaging products have strong positions in detergent packaging, fresh food laminates and secondary medical packaging films in Germany. Additionally, we believe we are the second largest producer of disposable operating drapes in Germany and the third largest in Europe (by volume), while we are also a leading supplier of rigid packaging products to the foodservice market in the United Kingdom. The businesses comprising the Specialty Packaging segment compete with a number of national and regional suppliers in each of their key products

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and end-markets, and there are additional competitive pressures in some markets due to increasing consolidation among our customers.
Employees
     As of December 31, 2009, we had approximately 4,000 total employees worldwide. Our Protective Packaging segment employed approximately 2,390 employees, the majority of which are non-union. There are six collective bargaining agreements in the United States, covering less than 200 employees. Our Specialty Packaging segment employed approximately 1,610 people, substantially all of whom are unionized or otherwise covered by company works councils. In the last three years, we have had no material work stoppages or strikes. We believe our employee relations are good.
Intellectual Property
     We have selectively pursued protection afforded by patents and trademarks whenever deemed critical. Our businesses also rely upon unregistered trademarks and copyrights, proprietary know-how and trade secrets. We do not believe, however, that any individual item of our intellectual property portfolio is material to our current business.
     The major trademarks of the protective packaging businesses are registered in the geographies where they operate. Selected trademarks include Astro-Foam, Astro-Cell®, Astro-Bubble®, Air Kraft®, Furniture GUARD®, Hexacomb®, Jiffy, Microfoam®, Nopaplank, Polylam and Polyplank®.
     The major trademarks of the specialty packaging businesses are registered in the markets where they operate. Major trademarks include Propyflex, Secu-Drape, Cleerpeel, Steriflex, Mediwell Super, Mediwell Super Plus, Medipeel, Flexopeel, and Secu-Tray.
     We also manufacture, distribute and sell shipping mailers, including protective bags comprised of paper or plastic and air cellular cushion material, under the Hefty Express® brand name, pursuant to a trademark license agreement with Pactiv Corporation. The license is an exclusive, royalty-free license that terminates in October 2015. Pactiv has agreed that, following the expiration of the license, Pactiv will not use, or permit others to use, the Hefty Express® mark in connection with the manufacture, marketing, distribution and sale of shipping mailers. In turn, we entered into a license agreement to grant Pactiv a perpetual, royalty-free license that allows Pactiv to continue to use certain patents that are owned by us in the manufacture and sale of certain products, including the manufacture of tamper-evident packaging containers in the United States.
Seasonality
     Primarily due to the impact of our customer buying patterns and production activity, our sales tend to be stronger in the second half of the year and weaker in the first half. In addition, our cash flow from operations tends to be weaker in the first half of the year and stronger in the second half due to seasonal working capital needs.
Environmental Matters
     We are subject to extensive federal, state, municipal, local and foreign laws and regulations relating to the protection of human health and the environment, including those limiting the discharge of pollutants into the air and water and those regulating the treatment, storage, disposal and remediation of, and exposure to, solid and hazardous wastes and hazardous materials. Certain environmental laws and regulations impose joint and several liability on past and present owners and operators of sites, to clean up, or contribute to the cost of cleaning up sites at which contaminants were disposed or released without regard to whether the owner or operator knew of or caused the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred. In addition, under certain of these laws and regulations, a party that disposes of

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contaminants at a third party disposal site may also become a responsible party required to share in the costs of the investigation or cleanup of the site.
     Our estimated expenditures for environmental compliance are incorporated into our annual operating budgets and we do not expect the cost of compliance with current environmental laws and regulations and liabilities associated with claims or known environmental conditions to be material to us. However, future events, such as new or more stringent environmental laws and regulations, any related damage claims, the discovery of previously unknown environmental conditions requiring response action, or more vigorous enforcement or new interpretations of existing environmental laws and regulations may require us to incur additional costs that could be material.
Available Information
We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports on our website as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the Securities and Exchange Commission. These reports are available, free of charge, at www.pregis.com. These reports may also be obtained at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. The SEC also maintains a web site at www.sec.gov that contains reports and other information regarding SEC registrants, including Pregis.
ITEM 1A. RISK FACTORS
     You should carefully consider the risk factors set forth below as well as the other information contained in this report, including our consolidated financial statements and related notes. Any of the following risks could materially adversely affect our business, financial condition or results of operations. Information contained in this section may be considered “forward-looking statements.” See “Cautionary Note Regarding Forward-Looking Statements” for a discussion of certain qualifications regarding such statements.
Risks Related to Our Business
Our financial performance is dependent on the cost of plastic resin, the continued availability of resin, and energy costs.
     The primary raw materials we use in the manufacture of some of our products are various plastic resins, primarily polyethylene, which represented approximately 47% of our 2009 material costs. Our financial performance therefore is dependent to a substantial extent on the plastic resin market.
     The capacity, supply and demand for plastic resins and the petrochemical intermediates from which they are produced are subject to cyclical price fluctuations and other market disturbances, including supply shortages. The majority of the plastic resins used in our U.S. operations are currently supplied by a single source, and the majority of the plastic resins used in our European operations are currently supplied by a different single source. If our primary plastic resin suppliers in the U.S. and Europe were to become unavailable to us, we believe we would be able to obtain plastic resins from other suppliers, though there are a limited number of suppliers who manufacture plastic resins suitable for us. In the event of an industry-wide general shortage of resins used by us, or a shortage or discontinuation of certain types or grades of resin purchased from one or more of our suppliers, we may not be able to arrange for alternative sources of resin. Any such shortage may negatively impact our sales and financial condition and our competitive position versus companies that are able to better or more cheaply source resin. Furthermore, we currently purchase many of our other (non-resin) raw materials from a few key strategic suppliers. In the event of a shortage or discontinuation of such raw materials, we could experience effects similar to those caused by a resin shortage or discontinuation.
     Additionally, we may be subject to significant increases in resin costs that may materially impact our financial condition. Resin costs have fluctuated significantly in recent years and may continue to fluctuate as a result of changes in natural gas and crude oil prices. For full year 2009, resin costs in North America and Europe decreased

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16% and 26% respectively compared to the prior year period, as measured by the Chemical Market Associates, Inc. (“CMAI”) index and PLATTS’s index, their respective market indices. However, in the fourth quarter of 2009 these costs were approximately 40% higher compared to the prior year’s quarter. The instability in the world markets for petroleum and in North America for natural gas could quickly affect the prices and general availability of raw materials, which could have a materially adverse impact to us. Due to the uncertain extent and rapid nature of cost increases, we cannot reasonably estimate our ability to successfully recover any cost increases. To the extent that cost increases cannot be passed on to our customers, or the duration of time lags associated with a pass-through becomes significant, such increases may have a material adverse effect on our profitability.
     Freight costs are also a meaningful part of our cost structure. Over the past several years, we have experienced increased freight costs as a result of rising energy costs. Such cost increases, to the extent that they cannot be passed on to our customers or minimized through our productivity programs, may have a material adverse effect on our profitability.
We face competition in each of our businesses and our customers may not continue to purchase our products.
     We face significant competition in the sale of our products. We compete with multiple companies with respect to each of our products, including divisions or subsidiaries of larger companies and foreign competitors. Certain of our competitors are substantially larger, are well established and have financial and other resources that are greater than ours and may be better able to withstand more challenging economic conditions. Specifically, our protective packaging products compete with similar products made by other manufacturers and with a number of other packaging products that provide protection against damage to customers’ products during shipment and storage. Our primary competitor in the Protective Packaging segment is Sealed Air, while we also selectively compete with companies such as Poly Air, FP International and Storopack in North America and Fagerdala, Sansetsu and BFI in Europe. Our Specialty Packaging segment competes with a number of national and regional suppliers in each of their key products and end-markets, and there are additional competitive pressures in certain markets due to increasing consolidation among our customers.
     We compete on the basis of a number of considerations, including price (on a price-to-value basis), service, quality, performance, product characteristics, brand recognition and loyalty, marketing, product development, sales and distribution, and ability to supply products to customers in a timely manner. Increases in our prices as compared to those of our competitors could materially adversely affect us.
     The competition we face involves the following key risks:
    loss of market share;
 
    failure to anticipate and respond to changing consumer preferences and demographics;
 
    failure to develop new and improved products;
 
    failure of consumers to accept our brands and exhibit brand loyalty and pay premium prices; and
 
    aggressive pricing by competitors.
     In addition, our competitors may develop products that are superior to our products or may adapt more quickly to new technologies or evolving customer requirements. Technological advances by our competitors may lead to new manufacturing techniques and make it more difficult for us to compete. In addition, since we do not have long-term arrangements with most of our customers, these competitive factors could cause our customers to cease purchasing our products.
If we are unable to meet future capital requirements, our businesses may be adversely affected.
     We have made significant capital expenditures in our businesses in recent years to improve productivity, quality and service. We spent approximately $25.0 million, $30.9 million, and $34.6 million in capital expenditures

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in fiscal years 2009, 2008 and 2007. As we grow our businesses, we may have to incur significant additional capital expenditures. We cannot assure you that we will have, or be able to obtain, adequate funds to make all necessary capital expenditures when required, or that the amount of future capital expenditures will not be materially in excess of our anticipated or current expenditures. If we are unable to make necessary capital expenditures, our product offerings may become dated, our productivity may decrease and the quality of our products may be adversely affected, which, in turn, could reduce our sales and profitability. In addition, even if we are able to invest sufficient resources, these investments may not generate net sales that exceed our expenses, generate any net sales at all or result in any commercially acceptable products.
Our business could be materially hurt by economic downturns.
     Our business is affected by a number of economic factors, including the level of economic activity in the markets in which we operate, including, for the Protective Packaging segment, the general industrial, high tech electronics, furniture manufacturing, building products, retail, and agriculture end-markets, and for our Specialty Packaging segment, the fresh food, consumer products, dry food, medical, foodservice, convenience foods, bakery, and confectionery end-markets. The demand for our products by our customers in these end-markets depends, in part, on general economic conditions and business confidence levels. A decline in economic activity in the United States and/or Europe could materially adversely affect our financial condition and results of operations.
Difficult conditions and extreme volatility in capital, credit and commodities markets and in the global economy could have a material adverse effect on our business, financial condition and results of operations, and we do not know if these conditions will improve in the near future.
     Our business, financial condition and results of operations could be materially adversely affected by the difficult conditions and extreme volatility in the capital, credit and commodities markets and in the global economy. These factors, combined with rising energy prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and fears of a continuing recession in the United States and globally. The difficult conditions in these markets and the overall U.S. and global economy affect us in a number of ways. For example:
    Although we believe we have sufficient liquidity through existing cash and equivalents and our revolving credit facility to run our business, under extreme market conditions there can be no assurance that such funds would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on favorable terms, or at all.
 
    Market conditions could cause the counterparties to the derivative financial instruments we use to hedge our exposure to interest rate fluctuations to experience financial difficulties and, as a result, our efforts to hedge these exposures could prove unsuccessful and, furthermore, our ability to engage in additional hedging activities may decrease or become even more costly as a result of these conditions.
 
    Recent market volatility could make it difficult for us to raise capital in the public markets, if we needed to do so.
 
    In July 2008, Moody’s revised its ratings on our senior secured floating rate notes from B2 to B3, senior subordinated notes from Caa1 to Caa2, and loans from Ba2 to Ba3. These are our current ratings as of December 2009. If our credit ratings are further downgraded, there could be a negative impact on our ability to access capital markets and borrowing costs would increase.
 
    The economic slowdown has decreased demand for our products, resulting in decreased sales volumes. These volume decreases have reduced our revenues and have impacted earnings. There can be no assurance that our sales volumes will increase or stabilize in the future.
 
    Market conditions could result in our significant customers experiencing financial difficulties. We are exposed to the credit risk of our customers, and their failure to meet their financial obligations when due

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      because of bankruptcy, lack of liquidity, operational failure or other reasons could result in decreased sales and earnings for us.
     The turmoil in the global economy may also impact our business, financial condition and results of operations in ways we cannot currently predict. We do not know if market conditions or the state of the overall U.S. or global economy will improve in the near future.
Our business is subject to risks associated with manufacturing processes.
     As of December 31, 2009, our Protective Packaging segment operated 22 manufacturing facilities in North America and 14 in Europe and our Specialty Packaging segment operated 9 manufacturing facilities in Germany, Bulgaria, the United Kingdom and Egypt. We produce substantially all of our products in these facilities, including medical supplies and foodservice products, which require special care to avoid contamination during manufacturing. Unexpected failures of our equipment and machinery, as well as contamination in the clean rooms used to manufacture our hospital supplies and foodservice products, may result in production delays, revenue loss, third party lawsuits and significant repair costs, as well as injuries to our employees. Any interruption in production capability may require us to make large capital expenditures to remedy the situation, which could have a negative impact on our profitability and cash flows.
     While we maintain insurance covering our manufacturing and production facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of our facilities due to accident, fire, explosion, labor issues, weather conditions, other natural disaster or otherwise, whether short or long-term, could have a material adverse effect on us. Moreover, our business interruption and general liability insurance may not be sufficient to offset the lost revenues or increased costs that we may experience during a disruption of our operations. Furthermore, we cannot assure you that we will maintain our insurance on comparable terms in the future.
We may make acquisitions or divestitures that may be unsuccessful.
     We have made, and may in the future opportunistically consider, the acquisition of other manufacturers or product lines of other businesses that either complement or expand our existing business, or the divestiture of some of our businesses. We may consider and make acquisitions both in countries that we currently operate in and in other geographies. We cannot assure you that we will be able to consummate any acquisitions or divestitures or that any future acquisitions or divestitures will be able to be consummated at acceptable prices and terms. Acquisitions or divestitures involve a number of special risks, including some or all of the following:
    the diversion of management’s attention from our core businesses;
 
    the disruption of our ongoing business;
 
    entry into markets in which we have limited or no experience, including other geographies that we have not previously operated in;
 
    the ability to integrate our acquisitions without substantial costs, delays or other problems, which would be complicated by the breadth of our international operations;
 
    inaccurate assessment of undisclosed liabilities;
 
    the incorporation of acquired product lines into our business;
 
    the failure to realize expected synergies and cost savings;
 
    the loss of key employees or customers of the acquired or divested business;
 
    increasing demands on our operational systems;
 
    the integration of information system and internal controls; and
 
    possible adverse effects on our reported operating results, particularly during the first several reporting periods after the acquisition is completed.

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A small number of stockholders own all of our common stock and control all major corporate decisions.
     AEA Investors controls substantially all of our common stock and has the power to control our affairs and policies. AEA Investors also controls the election of our directors, the appointment of our management and the entering into of business combinations or dispositions and other extraordinary transactions. The directors so elected have the authority, subject to the terms of our indentures and our senior secured credit facilities, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions with respect to our company.
     The interests of AEA Investors could conflict with the interests of our noteholders. Moreover, affiliates of AEA Investors may also have an interest in pursuing acquisitions, divestitures, financings and other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to our noteholders.
We may be unable to respond effectively to technological changes in our industry.
     We have made substantial investments to develop advanced packaging manufacturing technologies, and as a result we have a significant portfolio of industry-leading products and technologies. For instance, we believe Protective Packaging is one of only two major manufacturers of extruded engineered foam in both North America and Europe, the only producer of polypropylene sheet foam in North America and the first producer of inflatable engineered cushioning with individual cells. Our future business success will continue to depend upon our ability to maintain and enhance our technological capabilities, develop and market products and applications that meet changing customer needs and successfully anticipate or respond to technological changes on a cost-effective and timely basis. Our inability to anticipate, respond to or utilize changing technologies could have an adverse effect on our business, financial condition or results of operations.
Our business operations could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights.
     We currently rely on a combination of registered and unregistered trademarks, patents, copyrights, domain names, proprietary know-how, trade secrets and other intellectual property rights throughout the world to protect certain aspects of our business. We employ various methods to protect our intellectual property, including confidentiality and non-disclosure agreements with third parties.
     While we attempt to ensure that our intellectual property and similar proprietary rights are protected, despite the steps we have taken to prevent unauthorized use of our intellectual property, third parties and current and former employees and contractors may take actions that affect our rights or the value of our intellectual property, similar proprietary rights or reputation. We have relied on, and in the future we may continue to rely on litigation to enforce our intellectual property rights and contractual rights, and, if such enforcement measures are not successful, we may not be able to protect the value of our intellectual property. Regardless of its outcome, any litigation could be protracted and costly and could have a material adverse effect on our business and results of operations.
     In addition, we face the risk of claims that we are infringing third parties’ intellectual property rights. We believe that our intellectual property rights are sufficient to allow us to conduct our business without incurring liability to third parties. However, we have received, and from time to time, may receive in the future, claims from third parties by which such third parties assert infringement claims against us and can give no assurance that claims or litigation asserting infringement by us of third parties’ intellectual property rights will not be initiated in the future. Any such claim, even if it is without merit, could be expensive and time-consuming; could cause us to cease making, using or selling certain products that incorporate the disputed intellectual property; could require us to redesign our products, if feasible; could divert management time and attention; and could require us to enter into costly royalty or licensing arrangements, to the extent such arrangements are available.

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We are subject to government regulation.
     We are subject to government regulation by many U.S. and non-U.S. supranational, national, federal, state and local governmental authorities. For instance, certain of our protective and specialty packaging products are subject to the U.S. Clean Air Act, U.S. Food, Drug and Cosmetic Act, U.S. Consumer Product Safety Act, U.S. Meat Products Inspection Acts, Canada Food and Drug regulations and various E.U. directives. In some circumstances, before we may sell some of our products these authorities must approve these products, our manufacturing processes and facilities. We are also subject to ongoing reviews of our products and manufacturing processes.
     In order to obtain regulatory approval of various new products, we must, among other things, demonstrate to the relevant authority that the product is safe and effective for its intended uses and that we are capable of manufacturing the product in accordance with current regulations. The process of seeking approvals can be costly, time consuming and subject to unanticipated and significant delays. There can be no assurance that approvals will be granted to us on a timely basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate revenue from those products.
     New laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscation, recall or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as criminal penalties, which could have an adverse effect on our business, financial condition or results of operations.
The cost of complying with laws relating to the protection of the environment may be significant.
     We are subject to extensive federal, state, municipal, local and foreign laws and regulations relating to the protection of human health and the environment, including those limiting the discharge of pollutants into the air and water and those regulating the treatment, storage, disposal and remediation of, and exposure to, solid and hazardous wastes and hazardous materials. Certain environmental laws and regulations impose joint and several liability on past and present owners and operators of sites, to clean up, or contribute to the cost of cleaning up sites at which contaminants were disposed or released without regard to whether the owner or operator knew of or caused the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred. In addition, under certain of these laws and regulations, a party that disposes of contaminants at a third party disposal site may also become a responsible party required to share in the costs of the investigation or cleanup of the site.
     We believe that the future cost of compliance with current environmental laws and regulations and liabilities associated with claims or known environmental conditions will not have a material adverse effect on our business. We believe our costs for compliance with environmental laws and regulations have historically averaged $1 to $2 million, annually. However, future events, such as new or more stringent environmental laws and regulations, any related damage claims, the discovery of previously unknown environmental conditions requiring response action, or more vigorous enforcement or new interpretations of existing environmental laws and regulations may require us to incur additional costs that could be material.
Our international operations expose us to risks related to conducting business in multiple jurisdictions outside the United States.
     The international scope of our operations may lead to volatile financial results and difficulties in managing our business. We generated approximately 66% of our sales outside the United States for the year ended December 31, 2009; and we may expand our international operations in the future. International sales and operations are subject to a number of risks, including:
    exchange rate fluctuations;

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    restrictive governmental actions such as the imposition of trade quotas and restrictions on transfers of funds;
 
    changes in non-U.S. labor laws and regulations affecting our ability to hire, retain or dismiss employees;
 
    the need to comply with multiple and potentially conflicting laws and regulations;
 
    difficulties and costs of staffing, managing and accounting for foreign operations;
 
    unfavorable business conditions or economic instability in any particular country or region; and
 
    difficulty in obtaining distribution and support.
Any of these factors, by itself or in combination with others, could materially and adversely affect our business, results of operations or financial condition.
     Our exposure to currency exchange rate fluctuations results primarily from the translation exposure associated with the preparation of our consolidated financial statements, as well as from transaction exposure associated with generating revenues and incurring expenses in different currencies. While our consolidated financial statements are reported in U.S. dollars, the financial statements of our subsidiaries outside the United States are prepared using the local currency as the functional currency and translated into U.S. dollars by applying an appropriate exchange rate. As a result, fluctuations in the exchange rate of the U.S. dollar relative to the local currencies in which our subsidiaries outside the United States report could cause significant fluctuations in our results. Our sales and expenses are recorded in a variety of currencies. During periods of a strengthening U.S. dollar, our reported international sales and earnings could be reduced because foreign currencies may translate into fewer U. S. dollars. Also, while we generally incur expenses in the same geographic markets in which our products are sold, certain corporate overhead expenses are relatively concentrated in the United States as compared with sales, so that in a time of strengthening of the U.S. dollar, our profit margins could be reduced.
     While our expenses with respect to foreign operations are generally denominated in the same currency as the corresponding sales, we have transaction exposure to the extent our receipts and expenditures are not offsetting in any currency. Moreover, the costs of doing business abroad may increase as a result of adverse exchange rate fluctuations.
If we are unable to improve existing products and develop new products, our sales and industry position may suffer.
     We believe that our future success will continue to depend, in part, upon our ability to make innovations in our existing products and to develop, manufacture and market new products. This will depend, in part, on the success of our research and development and engineering efforts, our ability to expand or modify our manufacturing capacity and the extent to which we convince customers and consumers to accept our new products. Historically, our ability to innovate has been a key factor in our ability to expand our product line and grow our revenue base. For example, the Protective Packaging segment recently introduced a new family of “green” products to address the growing need for sustainable packaging alternatives. These products include Astro-Bubble® Green, the first introduction of recycled-content bubble. Also included in our sustainable product portfolio are Astro-Bubble® Renew, Absolute EZ-Seam Renew™ (recycled content floor underlayment), Hefty Express® mailers and Jiffy™ Green bubble rolls and mailer products. If we fail to successfully introduce, market and manufacture new products or product innovations and differentiate our products from those of our competitors, our ability to maintain or expand our sales and to maintain or enhance our industry position could be adversely affected, which in turn could materially adversely affect our business, financial condition or results of operations.
Our business may be interrupted due to focus on our productivity and cost reduction, and we may not be able to achieve additional significant cost savings as a result of such initiatives.
     Near the end of 2007, we have began implementing productivity and cost reduction initiatives. However, there can be no assurance that we will be able to achieve additional savings from these efforts, at meaningful levels

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or at all and there can be no assurance that nay projections we make regarding potential cost savings will be accurate.. There are many factors which affect our ability to achieve savings as a result of productivity and cost reduction initiatives, such as difficult economic conditions, increased costs in other areas, the effects of and costs related to newly acquired entities, and mistaken assumptions. In addition, any actual savings may be balanced by incremental costs that were not foreseen at the time of the productivity or cost reduction initiatives. As a result, anticipated savings may not be achieved on the timetable desired or at all. Additionally, while we execute these initiatives to achieve these savings, it is possible that our attention may be diverted from our ongoing operations which may have a negative impact on our ongoing operations.
Under the current SEC rules, our auditors will be required to report for the first time on the effectiveness of the internal controls over financial reporting of our business in our annual report on Form 10-K for 2010.
     Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) and the rules of the Securities and Exchange Commission promulgated thereunder require subject companies’ annual reports to contain a report of management’s assessment of the effectiveness of internal control over financial reporting and an attestation of our independent registered public accounting firm as to that management report. Under the current SEC rules, our management internal controls report is included within this Form 10-K. Based on current rules set forth by the SEC, our first auditor attestation of the effectiveness of our internal control over financial reporting will be required commencing with our annual report on Form 10-K for 2010.
     Once our auditors are required to report on our internal controls, if our auditors are unable to we could lose investor confidence in the accuracy and completeness of our financial reports.
Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the instruments governing our indebtedness.
     We have a significant amount of indebtedness. As of December 31, 2009, we had total indebtedness of $502.8 million, which does not include up to an additional $0.6 million that may be borrowed under Pregis’s senior secured revolving credit facility (after giving consideration to $7.4 million in letters of credit outstanding) and $200.0 million that may be borrowed under Pregis’s term loan facilities subject to certain conditions.
     Our substantial indebtedness could have important consequences. For example, it could:
    make it more difficult for us to satisfy our obligations under the instruments governing our indebtedness;
 
    increase our vulnerability to general adverse economic and industry conditions;
 
    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;
 
    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
    place us at a competitive disadvantage compared to our competitors that have less debt; and
 
    limit our ability to borrow additional funds for capital expenditures, acquisitions, working capital or other purposes.
     At December 31, 2009, we had $353.9 million of variable rate debt. If market interest rates increase, such variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow. We expect our 2010 cash interest expense to be approximately $42.0 million, calculated based on the interest rates and foreign currency exchange rates in effect at December 31, 2009. Each one point increase or decrease in the applicable variable interest rates on Pregis’s senior secured credit facilities and senior secured floating rate notes would correspondingly change our 2010 interest expense by approximately $3.6 million (based on rates in effect at

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December 31, 2009). While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.
The agreements governing our debt, including the notes and our senior secured credit facilities, contain various covenants that impose restrictions on us that may affect our ability to operate our business.
     Our existing agreements impose and future financing agreements are likely to impose operating and financial restrictions on our activities. These restrictions require us to comply with or maintain certain financial tests and ratios, including a first lien leverage ratio, and limit or prohibit our ability to, among other things:
    incur, assume or permit to exist additional indebtedness, guaranty obligations or hedging arrangements;
 
    incur liens or agree to negative pledges in other agreements;
 
    make capital expenditures;
 
    make loans and investments;
 
    declare dividends, make payments or redeem or repurchase capital stock;
 
    limit the ability of our subsidiaries to enter into agreements restricting dividends and distributions;
 
    with respect to the senior secured floating rate notes, engage in sale-leaseback transactions;
 
    engage in mergers, acquisitions and other business combinations;
 
    prepay, redeem or purchase certain indebtedness;
 
    amend or otherwise alter the terms of our organizational documents, our indebtedness and other material agreements;
 
    sell assets or engage in receivables securitizations;
 
    transact with affiliates; and
 
    alter the business that we conduct.
     These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities.
     Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and maintain these financial tests and ratios. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt or prohibit the incurrence of additional indebtedness. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We cannot assure you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements, or that we will be able to refinance our debt on terms acceptable to us, or at all.
We may not generate sufficient cash flow to enable us to fund our liquidity needs.
     We believe that cash flow generated from operations and our existing cash balances will be adequate to meet our obligations and business requirements for the next twelve months. However, there can be no assurance that our business will generate sufficient cash flow from operations, that anticipated net sales growth and operating improvements will be realized, that existing cash balances will be sufficient, or that future borrowings will be available under Pregis’s senior secured credit facilities in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. Our ability to meet our debt service obligations and other capital

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requirements, including capital expenditures, will depend upon our future performance which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. Some other risks that could materially adversely affect our ability to meet our debt service obligations include, but are not limited to, risks related to increases in the cost of resin, our ability to protect our intellectual property, rising interest rates, further decline in the overall U.S. and European economies, weakening in our end-markets, the loss of key personnel, our ability to continue to invest in equipment, and a decline in relations with our key distributors and dealers.
Cautionary Note Regarding Forward-Looking Statements
     This report contains 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. You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should,” or “will,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, including growth of our various markets and growth in the use of our products, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this report under Item 1, “Business,” Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. In addition, the forward-looking statements contained herein regarding market share, market sizes and changes in markets are subject to various estimations, uncertainties and risks.
     We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this report under Item 1, “Business,” Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:
    risks associated with our substantial indebtedness and debt service;
 
    increases in prices and availability of resin and other raw materials and our ability to pass these increased costs on to our customers and our ability to raise our prices generally with respect to our products;
 
    risks of increasing competition in our existing and future markets, including competition from new products introduced by competitors;
 
    our ability to meet future capital requirements;
 
    general economic or business conditions, including the possibility of a recession in the U.S. and a worldwide economic slowdown, as well as recent disruptions to the credit and financial markets in the U.S. and worldwide;
 
    risks related to our acquisition or divestiture strategy;
 
    our ability to retain management;
 
    our ability to protect our intellectual property rights;
 
    changes in governmental laws and regulations, including environmental laws and regulations;
 
    changes in foreign currency exchange rates; and
 
    other risks and uncertainties, including those listed under Item 1A, “Risk Factors.”

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     Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
     Not applicable.
ITEM 2. PROPERTIES
     Our international corporate headquarters is located in Deerfield, Illinois in a leased facility. We position our manufacturing locations and warehouses in order to optimize access to our customers and distributors. Our Protective Packaging segment operates 22 manufacturing facilities in North America (United States, Canada and Mexico) and 14 in Europe. We have broad reach within Europe, through key facilities located in Belgium, Germany, the Netherlands, Italy, England, Poland and the Czech Republic. We own approximately half of our Protective Packaging facilities, while the rest are leased. Our Specialty Packaging segment produces flexible packaging products at two manufacturing facilities in Germany and one in Egypt, each of which are owned, while its rigid packaging products are produced in three leased facilities within the United Kingdom (one each in England, Scotland and Wales). Its medical supply products are manufactured at owned facilities in Germany and Bulgaria. We also lease other warehouse and administrative space at other locations. We believe the plants, warehouses, and other properties owned or leased by us are well maintained and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
     We are party to various lawsuits, legal proceedings and administrative actions arising out of the normal course of our business. While it is not possible to predict the outcome of any of these lawsuits, proceedings and actions, management, based on its assessment of the facts and circumstances now known, does not believe that any of these lawsuits, proceedings and actions, individually or in the aggregate, will have a material adverse effect on our financial position or that it is reasonably possible that a loss exceeding amount already recognized may be material. However, actual outcomes may be different than expected and could have a material effect on our results of operations or cash flows in a particular period.
ITEM 4. RESERVED
PART II
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
     There is no established public trading market for the registrant’s common stock. All of the registrant’s issued and outstanding common stock is held by Pregis Holding I.
     The registrant has not paid any cash dividends in the past. We anticipate that any earnings will be retained for development of our business and we do not anticipate paying any cash dividends in the foreseeable future. Pregis’s senior secured credit facilities, senior subordinated notes and senior secured notes all restrict our ability to issue cash dividends. Any future dividends declared would be at the discretion of our board of directors and would depend on our financial condition, results of operations, contractual obligations, the terms of our financing agreements at the time a dividend is considered, and other relevant factors.

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ITEM 6. SELECTED FINANCIAL DATA
     The historical financial information as of December 31, 2009, 2008, 2007, 2006 and 2005, and for the years ended December 31, 2009, 2008, 2007 and 2006 and the period from October 13, 2005 to December 31, 2005 has been derived from the audited consolidated financial statements of Pregis Holding II following the Acquisition (the “Successor”). The historical financial data set forth below for the period from January 1, 2005 to October 12, 2005 has been derived from the audited combined financial statements of the business comprising Pregis prior to the Acquisition (the “Predecessor”). You should read this data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this report.
                                                 
      Successor       Predeccessor  
                                    October 13 to     January 1 To  
      Year ended December 31,       December 31,     October 12,    
(dollars in thousands)   2009     2008     2007     2006     2005     2005  
Statement of Operations:
                                               
 
                                               
Net Sales
  $ 801,224     $ 1,019,364     $ 979,399     $ 925,499     $ 191,602     $ 678,034  
 
                                               
Operating costs and expenses:
                                               
Cost of sales, excluding depreciation and amortization
    609,515       798,690       740,235       713,550       155,716       535,409  
Selling, general and administrative
    117,048       127,800       137,180       125,944       24,172       87,973  
Depreciation and amortization
    44,783       52,344       55,799       53,179       10,947       25,195  
Goodwill impairment
          19,057                         35,654  
Other operating expense, net
    14,980       8,146       190       234       (122 )     460  
 
                                   
Total operating costs and expenses
    786,326       1,006,037       933,404       892,907       190,713       684,691  
 
                                   
 
                                               
Operating income (loss)
    14,898       13,327       45,995       32,592       889       (6,657 )
Interest expense
    42,604       49,069       46,730       42,535       10,524       2,195  
Interest income
    (394 )     (875 )     (1,325 )     (246 )     (153 )     (150 )
Foreign exchange loss (gain), net
    (6,303 )     14,728       (2,339 )     (6,139 )     (4,787 )     (521 )
Gain on sale of securities
                                  (1,228 )
 
                                   
Income (loss) before income taxes
    (21,009 )     (49,595 )     2,929       (3,558 )     (4,695 )     (6,953 )
Income tax expense (benefit)
    (2,999 )     (1,865 )     7,708       4,842       (1,286 )     1,356  
 
                                   
Net loss
  $ (18,010 )   $ (47,730 )   $ (4,779 )   $ (8,400 )   $ (3,409 )   $ (8,309 )
 
                                   
 
                                               
Other Data:
                                               
Capital expenditures
  $ 25,045     $ 30,882     $ 34,626     $ 28,063     $ 3,910     $ 21,906  

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    Successor  
    As of December 31,  
(dollars in thousands)   2009     2008     2007     2006     2005  
Balance Sheet Data (at end of years):
                                       
Cash and cash equivalents
  $ 80,435     $ 41,179     $ 34,989     $ 45,667     $ 54,141  
Working capital (1)
    103,828       106,346       129,370       121,851       102,752  
Property, plant and equipment, net
    226,882       245,124       277,398       270,646       265,970  
Total assets
    730,547       736,376       855,319       797,032       744,206  
Total debt (2)
    502,834       465,616       477,724       455,317       434,136  
Total stockholder’s / owner’s equity
    58,792       90,101       153,657       144,260       144,828  
 
(1)   Working capital in the Successor period is defined as current assets, excluding cash, less current liabilities.
 
(2)   Total debt includes short-term and long-term debt.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this report. In addition to historical information, this discussion may contain forward-looking statements that involve risks and uncertainties, including, but not limited to, those described in this report under Item 1A, “Risk Factors.” Future results could differ materially from those discussed below. See “Cautionary Note Regarding Forward-Looking Statements” in Item 1A above.
BASIS OF PRESENTATION
     We commenced operations as Pregis Corporation on October 13, 2005, at which time Pregis acquired all of the outstanding shares of capital stock of Pactiv Corporation’s subsidiaries operating its global protective packaging and European specialty packaging businesses.
     In the fourth quarter of 2008, we began reporting the operations of our flexible packaging, hospital supplies and rigid packaging businesses as one reportable segment, Specialty Packaging, to be aligned with changes in our internal management structure. See Note 18 to the consolidated financial statements for further discussion. As a result of this change, we now report two reportable segments:
     Protective Packaging — This segment manufactures, markets, sells and distributes protective packaging products in North America and Europe. Its protective mailers, air-encapsulated bubble products, sheet foam, engineered foam, inflatable airbag systems, honeycomb products and other protective packaging products are manufactured and sold for use in cushioning, void-fill, surface-protection, containment and blocking & bracing applications.
     Specialty Packaging — This segment provides innovative packaging solutions for food, medical, and other specialty packaging applications, primarily in Europe. This segment includes the activities that had previously been reported as the Flexible Packaging, Rigid Packaging, and Hospital Supplies reportable segments.
     All significant intercompany transactions have been eliminated in the consolidated financial statements.
EXECUTIVE OVERVIEW
     We are an international manufacturer, marketer and supplier of protective packaging products and specialty packaging solutions. We currently operate 45 facilities in 18 countries, with approximately 4,000 employees world-wide. We sell our products to a wide array of customers, including retailers, distributors, packer processors, hospitals, fabricators and directly to the end-users. Approximately 66% of our 2009 net sales were generated outside of the U.S.,

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so we are sensitive to fluctuations in foreign currency exchange rates, primarily between the euro and pound sterling with the U.S. dollar.
     Demand for protective packaging products has historically grown at a higher rate than the broader economy. Although both the North American and European economies, our primary markets, weakened significantly throughout 2009, we expect the trend of growth rates in excess of the broader economy to continue once the economy recovers prompted by further expansion of internet commerce and mail order catalog sales as well as the increased customization of protective packaging applications in the general industrial, electronics, medical and other industries. Demand for our flexible and rigid packaging products is influenced by increases in consumer demand for convenience products and disposable packaging. Similarly, we expect to see continued growth in the demand for pre-packaged surgical procedure packs and disposable medical products, such as drapes and gowns.
     Our 2009 financial performance was below our initial expectations due to decreased volumes, resulting from the recessionary economic environment in North America and Europe, lower year-over-year selling prices resulting from the weak market conditions as well as lower key raw material costs, and unfavorable foreign currency translation. Despite these challenging conditions, we still generated solid earnings and positive cash flow and implemented a number of cost reduction initiatives which will continue to benefit our business going forward. We generated 2009 net sales totaling $801.2 million, representing a decrease of $218.1 million, or 21.4%, from our 2008 net sales of $1,019.4 million. Excluding the impact of unfavorable foreign currency translation, resulting from a stronger euro and pound sterling to the U.S. dollar on average during the year, our 2009 net sales declined by 16.1% compared to 2008.
     Our 2009 gross margin (defined as net sales less cost of sales, excluding depreciation and amortization) as a percentage of net sales was 23.9% compared to 21.6% for 2008. The improvement in our 2009 margin percentage was driven by the impact of our aggressive cost reduction initiatives, continued disciplined pricing, and the impact of lower raw material costs, partially offset by the impact of lower year-over-year selling prices. Approximately 77% of our annual sales come from products made from various types of plastic resins, principally polyethylene and polypropylene. As a result, our operations are highly sensitive to fluctuations in the costs of plastic resins.
     In 2009 average resin costs declined approximately 16% in North America and 26% in Europe, as measured by the CMAI index and PLATTS’s index, their respective market indices, compared to 2008. Our average selling prices decreased in 2009 as a result of downward pressure associated with decreases in average resin costs. The period over period net benefit resulting from lower average resin costs offset by average lower selling prices resulted in a 57 basis point improvement in gross margin as a percentage of net sales for the year ended December 31, 2009 as compared to the equivalent period of 2008.
     Although we did realize a modest year-over-year benefit from lower resin costs in 2009, these costs steadily increased throughout the year. Resin costs have continued to increase in the first quarter of 2010 and are expected to continue to increase. As of December 31, 2009, resin costs rose approximately 40% in both North America and Europe since December 31, 2008. These increases were driven primarily by supplier capacity reductions in response to lower demand as well as increased input costs.
     While both of our segments experienced sales declines due to the overall weak economic climate, the declines in the specialty packaging segment have not been as significant as those experienced in the protective packaging segment. The Specialty Packaging segment serves the consumer food and medical markets, which to date have experienced less sensitivity to the economic weakness than the industrial markets that the Protective Packaging segment serves.
     We have implemented a number of initiatives to generate sustainable improvements in profitability and to respond to the economic weakness that began in 2008 and has continued into 2009. In 2008, we implemented a number of company-wide restructuring programs focused on improving profitability. These programs, which were substantially completed in 2008, included headcount reductions, plant consolidations, and numerous productivity programs to maximize our operating effectiveness. In the first quarter of 2009, we commenced additional restructuring initiatives to further reduce our cost structure by optimizing our organizational structure and our

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operating processes. As of December 31, 2009, our restructuring initiatives are substantially complete. In 2009, we realized year-over-year cost savings of approximately $46 million relating to our 2009 and 2008 cost reduction initiatives.
RESULTS OF OPERATIONS
Net Sales
                                                                                                 
                                                    Change Attributable to the                
                                      Following Factors    
    Year ended December 31,                     Price /                                     Currency  
    2009     2008     $ Change     % Change     Mix     Volume     Acquisitions     Translation  
2009 versus 2008
  $ 801,224     $ 1,019,364     $ (218,140 )     (21.4 )%   $ (33,354 )     (3.2 )%   $ (131,055 )     (12.9 )%   $       0.0 %   $ (53,731 )     (5.3 )%
 
    2008     2007                                                                                  
2008 versus 2007
  $ 1,019,364     $ 979,399     $ 39,965       4.1 %   $ 16,079       1.6 %   $ (27,215 )     (2.7 )%   $ 28,869       2.9 %   $ 22,232       2.3 %
     Our 2009 net sales decreased by 21.4% compared to 2008, driven by decreased volumes resulting from the recessionary economic environment in North America and Europe, lower year-over-year selling prices resulting primarily from lower key raw material costs, and unfavorable foreign currency translation.
     Our 2008 net sales increased by 4.1% compared to 2007, driven by the benefit of selling price increases, favorable foreign currency, and incremental sales from acquisitions, offset in part by lower volumes.
     A discussion of net sales by reportable segment is included in the Review of Business Segments section of this Management’s Discussion and Analysis.
Cost of sales, excluding depreciation and amortization
                         
    2009     2008     2007  
Cost of sales, excluding depreciation and amortization
  $ 609,515     $ 798,690     $ 740,235  
Gross margin %
    23.9 %     21.6 %     24.4 %
     Gross margin (defined as net sales less cost of sales, excluding depreciation and amortization) as a percentage of net sales increased by 230 basis points to 23.9% in 2009 compared to 2008. The improvement in our 2009 margin percentage was driven by the impact of our aggressive cost reduction initiatives, continued disciplined pricing, and the impact of lower raw material costs, partially offset by the impact of lower year-over-year selling prices.
     Gross margin as a percentage of net sales decreased by 280 basis points to 21.6% in 2008 compared to 2007. Our 2008 gross margin was impacted by increased costs of resin, fuel, and other raw materials, as well as significant volume declines in the Protective Packaging segment, particularly in the fourth quarter. Although resin prices declined in the fourth quarter of 2008, our underlying raw material costs steadily increased through September 2008, which narrowed the spread between our year-over-year sales prices and material costs, causing our gross margin as a percentage of net sales to decrease on a year-over-year basis. Our margins benefitted from selling price increases implemented in the third quarter and cost savings from our various cost reduction and productivity initiatives; however, these benefits were not sufficient to offset the increased costs of raw materials and the impact of reduced sales volumes.

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Selling, general and administrative
                         
    2009     2008     2007  
Selling, general and administrative
  $ 117,048     $ 127,800     $ 137,180  
As a percent of net sales
    14.6 %     12.5 %     14.0 %
     Selling, general and administrative expenses (SG&A) decreased by $10.8 million, or 8.4%, in 2009 compared to 2008. Excluding the impact of favorable foreign currency translation, SG&A expenses decreased by approximately $6.6 million. These decreases were primarily driven by cost savings from our cost reduction program. As a percent of net sales, SG&A increased by 210 basis points to 14.6% driven by lower sale volumes.
     SG&A decreased by $9.4 million, or 6.8%, in 2008 compared to 2007. Adjusting 2008 SG&A for the impact of unfavorable foreign currency translation (approximately $2.8 million) and incremental expenses from recent acquisitions (approximately $4.0 million), and adjusting 2007 SG&A by $3.1 million for the write-off of third party due diligence and legal costs related to a potential acquisition that was ultimately not consummated, our 2008 SG&A decreased $13.1 million compared to 2007. As a percent of net sales, SG&A declined by 150 basis points to 12.5%, reflecting cost savings from headcount reductions and other expense reductions resulting from our cost reduction initiatives.
Depreciation and Amortization
                         
    2009     2008     2007  
Depreciation and Amortization
  $ 44,783     $ 52,344     $ 55,799  
Change compared to prior year
    (7,561 )     (3,455 )      
 
    (14.4 )%     (6.2 )%        
     Depreciation and amortization expense (D&A) declined $7.6 million, or 14.4%, in 2009 compared to 2008. The decrease in depreciation and amortization expense is due to favorable foreign currency translation resulting from a stronger U.S. dollar in 2009 compared to the same period of 2008 as well as the impact of lower average depreciation rates related to recent capital expenditure additions.
     D&A declined $3.5 million, or 6.2%, in 2008 compared to 2007. This decrease was the result of longer lives associated with recent additions which more than offset the increases resulting from foreign currency translation.
Goodwill Impairment
     We performed our annual goodwill impairment test during the fourth quarter 2009 and determined that no impairment to goodwill exists.
     In 2008, the initial step of our impairment test indicated the potential for impairment in one of the reporting units included within our Specialty Packaging segment, due to the anticipation of a significant reduction in future revenue from a customer that had historically comprised a material portion of the reporting unit’s annual revenues. We performed the second step of the goodwill impairment test and determined that an impairment of goodwill existed. Accordingly, we recorded a non-cash goodwill impairment charge of $19.1 million in the fourth quarter of 2008.

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Other Operating Expense, Net
                         
    2009     2008     2007  
Severance and restructuring
  $ 15,207     $ 9,321     $ 2,926  
Curtailment gain
          (3,736 )      
Trademark impairment
    194       1,297       403  
Insurance settlement
    (53 )           (2,873 )
Other, net
    (368 )     1,264       (266 )
 
                 
 
  $ 14,980     $ 8,146     $ 190  
 
                 
     Other operating expense, net includes other activity incidental to our operations, such as restructuring expenses, impairment losses, and gains or losses on sale of operating fixed assets.
     In 2009, other operating expense includes restructuring charges of $15.2 million, primarily for severance charges relating to headcount reductions and consulting expenses. See Note 15 to the consolidated financial statements for details regarding our restructuring activities.
     In 2008, other operating expense (income) includes restructuring charges of $9.3 million, primarily for severance charges relating to headcount reductions driven by our cost reduction initiatives, including a plan approved in the third quarter to close one of our European plants and consolidate its operations into other existing facilities. In 2007, other operating expense (income) includes a reserve of $2.9 million established primarily within the Specialty Packaging segment for severance and related costs arising from a plan to restructure its Warburg, Germany workforce which was implemented in 2008. See Note 15 to the audited consolidated financial statements contained in Pregis Holding II’s Form 10-K for the year ended December 31, 2008 incorporated herein by reference for details regarding our restructuring activities.
Operating Income
                         
    2009     2008     2007  
Operating income
  $ 14,898     $ 13,327     $ 45,995  
Change compared to prior year
    1,571       (32,668 )      
 
    11.8 %     (71.0 )%        
     Operating income in 2009 increased $1.6 million compared to 2008. For the full year, 2009 operating income, adjusted for restructuring charges and unfavorable foreign currency translation, was $31.2 million. This compares to adjusted operating income of $38.0 million for 2008. The 2008 adjustments are for goodwill impairment charge of $19.1 million, restructuring activity of $9.3 million, and a related curtailment gain of $3.7 million. For the year, the decrease in adjusted operating income was primarily the result of lower year-over-year sales volumes, partially offset by the Company’s aggressive cost reduction initiatives and lower material costs.
     Operating income in 2008 decreased $32.7 million, or 71.0%, compared to 2007. The decline in operating income is due to the impact of higher raw material costs and lower sales volumes, as well as the goodwill impairment charge and additional restructuring charges, partially offset by the benefits of our cost reduction initiatives and lower selling, general and administrative expenses and depreciation and amortization.

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Interest Expense
                         
    2009     2008     2007  
Interest expense
  $ 42,604     $ 49,069     $ 46,730  
Change compared to prior year
    (6,465 )     2,339        
 
    (13.2 )%     5.0 %        
     Interest expense in 2009 decreased $6.5 million, or 13.2%, compared to 2008. The 2009 interest expense reflects the impact of lower U.S. dollar equivalent interest on our euro-denominated debt due to a stronger U.S. dollar in the 2009 period and lower LIBOR and EURIBOR-based rates underlying a portion of our floating rate debt. This was partially offset by the write-off of the deferred financing fees related to the refinancing of the Term B1 and B2 notes of $2.7 million. The interest rate swap had a negative impact to interest expense. The Company established an interest rate swap arrangement in order to maintain its targeted ratio of variable-rate versus fixed rate debt in the notional amount of 65 million euro. It exchanged EURIBOR-based floating rates to a fixed rate over the period of October 1, 2008 to April 15, 2011. For the year ended December 31, 2009, our interest expense increased by $2.0 million on the basis of settlements from the swap arrangements, compared to a reduction of $1.0 million for the year ended December 31, 2008.
     Interest expense in 2008 increased $2.3 million, or 5%, compared to interest expense in 2007. In the third quarter, we terminated an interest rate swap arrangement due to counterparty default, as discussed in Note 9 to the financial statements. Given the uncertainty of collecting the amount owed to us from the counterparty of approximately $1.3 million, a reserve was established for this amount against interest expense. In addition, 2008 interest expense reflects the impacts of higher U.S. dollar equivalent interest on our euro-denominated debt due to a stronger euro relative to the U.S. dollar on average during 2008 and higher EURIBOR-based rates underlying a portion of our floating rate debt, partially offset by the positive impact from the interest rate swap agreement received prior to its termination. For the year ended December 31, 2008, we reduced our interest expense by $1.0 million on the basis of settlements from the swap arrangements, compared to a reduction of $0.6 million for the year ended December 31, 2007.
Foreign Exchange Loss (Gain), Net
                         
    2009     2008     2007  
Foreign exchange loss (gain), net
  $ (6,303 )   $ 14,728     $ (2,339 )
     A portion of our third-party debt is denominated in euro and revalued to U.S. dollars at our month-end reporting periods. We also maintain an intercompany debt structure, whereby Pregis Corporation has provided euro-denominated loans to certain of its foreign subsidiaries and these and other foreign subsidiaries have provided euro-denominated loans to certain U.K. based subsidiaries. At each month-end reporting period we recognize unrealized gains and losses on the revaluation of these instruments, resulting from the fluctuations between the U.S. dollar and euro exchange rate, as well as the pound sterling and euro exchange rate.
     In 2009, we recognized net foreign exchange gain of $6.3 million, reflecting the strengthening of the U.S. dollar on the revaluation of our euro-denominated third-party debt and inter-company loans, as well as the strengthening of the pound sterling compared to the euro as it relates to that portion of the intercompany debt.
     This compares to the years ended December 31, 2008 and 2007, in which we recognized net foreign exchange losses of $14.7 million and gains of $2.3 million, respectively.

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Income Tax Expense (Benefit)
                         
    2009     2008     2007  
Income tax expense (benefit)
  $ (2,999 )   $ (1,865 )   $ 7,708  
Effective tax rate
    14.3 %     3.8 %     263.2 %
     In 2009, although we generated a $21.0 million pre-tax loss for book purposes, our effective rate was increased from a benefit at the U.S. statutory rate of 35% to a benefit of 14.3%, primarily due to the establishment of additional valuation allowances taken against losses in certain countries that are not certain to result in future tax benefits, and foreign tax rate differentials.
     In 2008, although we generated a significant net loss for book purposes, our effective tax rate was increased from a benefit at the U.S. federal statutory rate of 35% to a benefit of only3.8% primarily due to the establishment of additional valuation allowances taken against losses in certain countries that are not certain to result in future tax benefits (20 percentage point increase) and foreign tax rate differentials (8 percentage point increase).
     Our effective tax rate for 2007 was 263.2%. The key factors driving up our effective tax rate in 2007 were interest expense incurred in certain foreign businesses that is not deductible for statutory tax purposes (resulting in a 44-percentage point increase) and the establishment of additional valuation allowances taken against losses in certain countries that are not certain to result in future tax benefits (which increased the effective rate by 163-percentage points).
Net Loss
     As a result of the factors discussed previously, we generated a net loss of $18.0 million in 2009, compared to a net loss $47.7 million in 2008 and a net loss of $4.8 million 2007.
REVIEW OF BUSINESS SEGMENTS
     Net Sales – 2009 vs. 2008
     The key factors that contributed to the decrease in 2009 net sales were as follows:
                                                                                 
                                    Change Attributable to the  
                                    Following Factors  
    Year ended December 31,                     Price /                     Currency  
    2009     2008     $ Change     % Change     Mix     Volume     Translation  
    (dollars in thousands)                                                                  
Segment:
                                                                               
Protective Packaging
  $ 497,144     $ 661,976     $ (164,832 )     (24.9 )%   $ (28,154 )     (4.3 )%   $ (110,567 )     (16.7 )%   $ (26,111 )     (3.9 )%
Specialty Packaging
    304,080       357,388       (53,308 )     (14.9 )%     (5,200 )     (1.5 )%     (20,488 )     (5.7 )%     (27,620 )     (7.7 )%
                             
 
                                                                               
Total
  $ 801,224     $ 1,019,364     $ (218,140 )     (21.4 )%   $ (33,354 )     (3.2 )%   $ (131,055 )     (12.9 )%   $ (53,731 )     (5.3 )%
                             
     For the year ended December 31, 2009, net sales of our Protective Packaging segment totaled $497.1 million, representing a decrease of $164.8 million, or 24.9%, compared to net sales of $662.0 million for the year ended December 31, 2008. The decrease in net sales was primarily due to lower sales volumes. Sales volume in the Company’s Protective Packaging segment declined by 16.7% for the year ended December 31, 2009 compared to the same period in 2008, as depicted in the table above. The volume decrease was driven by economic weakness in

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both the North American and European markets, particularly within the industrial, housing and automotive sectors, key markets which are served by this segment.
     Price/mix for the Company’s Protective Packaging segment reduced net sales by 4.3% for the year ended December 31, 2009 compared to the same period in 2008. Price/mix was unfavorable year-over-year due to reduced market pricing resulting from year-over-year declines in resin costs in the first nine months of 2009.
     Volume in the Company’s Specialty Packaging segment decreased by 5.7% for the year ended December 31, 2009 compared to the same periods of 2008. The volume decline was primarily the result of the termination of a contract with a significant medical products customer. Excluding volume related to this one customer, volume for the year ended December 31, 2009 would have decreased $1.1 million compared to 2008.
     While the Specialty Packaging segment experienced minor volume decreases compared to 2008, after adjusting for the loss of the significant customer discussed above, these decreases have been less significant as compared to those experienced in the Protective Packaging segment. This is primarily due to the different end-markets the two segments serve. Protective Packaging primarily serves the industrial, housing, and automotive sectors, while the Specialty Packaging segment primarily serves the consumer food and medical sectors. The consumer food and medical sectors have experienced less sensitivity to the overall economic weakness as compared to the industrial, housing, and automotive sectors.
     Price/mix for the Company’s Specialty Packaging segment reduced net sales by 1.5% for the year ended December 31, 2009 compared to the same period in 2008. Price/mix was unfavorable year-over-year due primarily to reduced market pricing driven by increased market competitiveness as a result of the weak economic conditions.
Net Sales – 2008 vs. 2007
     The key factors that contributed to the increase in 2008 net sales were as follows:
                                                                                                 
                                    Change Attributable to the  
                                    Following Factors  
    Year ended December 31,                     Price /                                     Currency  
    2008     2007     $ Change     % Change     Mix     Volume     Acquisitions     Translation  
    (dollars in thousands)                                                                                  
Segment:
                                                                                               
Protective Packaging
  $ 661,976     $ 636,939     $ 25,037       3.9 %   $ 17,111       2.7 %   $ (32,719 )     (5.1 )%   $ 28,869       4.5 %   $ 11,776       1.8 %
Specialty Packaging
    357,388       342,460       14,928       4.4 %     (1,032 )     (0.3 )%     5,504       1.5 %           0.0 %     10,456       3.2 %
                                 
 
                                                                                               
Total
  $ 1,019,364     $ 979,399     $ 39,965       4.1 %   $ 16,079       1.6 %   $ (27,215 )     (2.8 )%   $ 28,869       2.9 %   $ 22,232       2.3 %
                                 

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     For the year ended December 31, 2008, net sales of our Protective Packaging segment totaled $662.0 million, representing an increase of $25.0 million, or 3.9%, compared to net sales of $636.9 million for the year ended December 31, 2007. The improvement reflects the benefit of selling price increases implemented principally in the third quarter in response to the escalating raw material and energy-related costs, as well as volume growth within its inflatable protective packaging systems and related materials; however, these were more than offset by volume declines in the U.S. and Europe due to weakened economic conditions. The segment’s net sales also reflect incremental revenue totaling $28.9 million from the Petroflax and Besin entities acquired in the second half of 2007, as well as favorable foreign currency translation. Excluding the impact of favorable foreign currency and revenue from acquisitions, 2008 net sales of the Protective Packaging segment decreased 2.4% compared to 2007.
     For the year ended December 31, 2008, net sales of our Specialty Packaging segment were $357.4 million, representing an increase of $14.9 million, or 4.4%, compared to net sales of $342.5 million for the year ended December 31, 2007. The improvement was driven by favorable foreign currency and volume growth in films and surgical procedure packs, offset in part by competitive pricing pressures. Our Specialty Packaging segment has not been as impacted by the economic downturn due to the nature of its packaging products. Its flexible and rigid packaging products serve consumer food, non-food and foodservice markets which, to date, have demonstrated less sensitivity to the economic weakness than the industrial sector, and the medical supplies and packaging products serve hospitals, which are also more insulated from the economic weakness. Excluding the impact of favorable foreign currency, 2008 net sales of the Specialty Packaging segment increased 1.2% compared to 2007.
Segment Income
     We measure our segment’s operating performance on the basis of segment EBITDA, which is calculated internally as net income before interest, taxes, depreciation, amortization, restructuring expense and adjustments for other non-cash charges and benefits. See Note 18 to the consolidated financial statements for a reconciliation of total segment EBITDA to consolidated income (loss) before income taxes. Segment EBITDA for the relevant periods is as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
            (dollars in thousands)          
Segment:
                       
Protective Packaging
  $ 52,561     $ 61,166     $ 80,328  
Specialty Packaging
    41,339       42,523       48,608  
 
                 
Total segment EBITDA
  $ 93,900     $ 103,689     $ 128,936  
 
                 
     On a consolidated basis, approximately $(6.8) million and $2.0 million of the segment EBITDA growth in 2009 and 2008 in relation to the prior years was due to the favorable/(unfavorable) foreign currency impact from translating our foreign operations.
Segment Income – 2009 vs. 2008
     For the year ended December 31, 2009, the Protective Packaging segment’s EBITDA totaled $52.6 million, representing a decrease of $8.6 million, or 14.1%, compared to EBITDA of $61.2 million for the year ended December 31, 2008. The decline was driven by lower sales volumes due to the weakened U.S. and European economic environments, unfavorable year-over-year selling prices, and unfavorable currency. This was partially offset by the results of our cost reduction efforts, which totaled approximately $33.0 million for the year ended December 31, 2009.

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     For the year ended December 31, 2009, the Specialty Packaging segment’s EBITDA totaled $41.3 million, representing a decrease of $1.2 million, or 2.8%, compared to EBITDA of $42.5 million for the year ended December 31, 2008. Excluding the impact associated with the loss of a significant medical customer we estimate EBITDA for this segment would have increased $5.3 million, or 12.5%, driven by the impact of our cost reduction initiatives.
Segment Income – 2008 vs. 2007
     For the year ended December 31, 2008, the Protective Packaging segment’s EBITDA totaled $62.8 million, representing a decrease of $19.2 million, or 23.9%, compared to EBITDA of $80.3 million for the year ended December 31, 2007. The decline was due to increased resin and other raw material costs as well as lower sales volumes due to the weakened U.S. and European economic environments. These declines were partially offset by the benefits realized from our cost reduction initiatives and our selling price increases. Due to the typical lag in achieving selling price increases in response to higher raw material costs, we were not able to fully recover the higher raw material costs by the end of 2008.
     For the year ended December 31, 2008, the Specialty Packaging segment’s EBITDA totaled $42.5 million, representing a decrease of $6.1 million, or 12.5%, compared to EBITDA of $48.6 million for the year ended December 31, 2007. The segment’s EBITDA declined principally due to higher raw material costs and a competitive pricing environment which made it difficult to recover the higher costs. The segment also achieved significant benefit from cost savings initiatives which helped to mitigate the higher raw material costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Summary
     Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows for the years ended December 31, 2009, 2008 and 2007, are summarized as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
            (dollars in thousands)          
Cash provided by operating activities
  $ 25,617     $ 39,654     $ 51,175  
Cash used in investing activities
    (13,429 )     (28,541 )     (61,978 )
Cash provided by (used in) financing activities
    26,135       (2,008 )     (2,847 )
Effect of foreign exchange rate changes
    933       (2,915 )     2,972  
 
                 
Increase (decrease) in cash and cash equivalents
  $ 39,256     $ 6,190     $ (10,678 )
 
                 
     Cash generated by operating activities totaled $25.6 million, $39.7 million and $51.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. Cash provided by operating activities decreased by $14.0 million in 2009 compared to 2008. This decrease is driven primarily by cash payments for restructuring, $18.8 million in 2009 versus $6.9 million in 2008. This was partially offset by lower levels of accounts receivable and reduced investment in inventories resulting from lower volumes as well as our initiatives to reduce overall working capital levels.
     Cash from operating activities is sensitive to raw material costs and the Company’s ability to recover increases in these costs from its customers. Although price increases have typically lagged the underlying change in raw

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material costs, the Company has historically been able to recover significant increases in underlying raw material costs from its customers over a twelve to twenty-four month period. Future cash from operations are dependent upon the Company’s continued ability to recover increases in underlying raw material increases from its customers.
     The Company has not experienced any significant changes in year-over-year days sales outstanding, days inventory on-hand or days payable outstanding. The Company has not identified any trends in key working capital investments that would have a material impact on its liquidity or ability to satisfy its debt obligations or fund capital expenditures. The Company does not currently expect that raw material price increases will have a material effect on liquidity in future periods, but significant shifts in resin pricing could affect our cash generated from operating activities in future periods.
     Cash provided by operating activities decreased $11.5 million in 2008 compared to 2007 primarily due to the lower earnings generated in 2008. Additionally, while we generated more cash through the reduction of working capital in 2008, this was somewhat offset by higher payouts of 2007 bonuses which were paid in 2008. Cash provided by operating activities in 2007 increased $28.5 million compared to 2006, primarily due to the higher earnings generated in 2007. Additionally, cash generated by operating activities in 2006 was reduced by approximately $9.0 million, which we paid to Pactiv and other vendors to settle amounts which had accumulated at 2005 year-end for payroll administered by Pactiv and other services related to the Acquisition.
     Cash used in investing activities totaled $13.4 million, $28.5 million and $62.0 million for the years ended December 31, 2009, 2008 and 2007. In 2009, cash used in investing activities totaled $13.4 million primarily for capital expenditures, which totaled $25.0 million which was partially offset by proceeds from a sales leaseback transaction of $11.6 million. In 2008, cash used in investing activities was used primarily to fund capital expenditures of $30.9 million, offset by proceeds on minor disposals of fixed assets and insurance proceeds of $3.2 million used to replace a printing machine which had been destroyed by a fire. Additionally, in 2008 we funded final purchase price adjustments and acquisition costs of approximately $1.0 million relating to the Besin acquisition made in 2007. We spent $28.8 million in 2007 for both the Besin and Petroflax acquisitions. The 2007 cash used for investing activities also included $34.6 million for capital expenditures. In both 2008 and 2007, we made significant investments in inflatable machines within our protective packaging businesses. In 2007 we also converted a portion of our rigid packaging extrusion capacity to APET from PVC and expanded of our flexible packaging capacity with new printing and laminating equipment.
     Cash provided by (used in) financing activities totaled $26.1 million, $(2.0) million and $(2.8) million for the years ended December 31, 2009, 2008 and 2007. In these years, the primary financing use of cash has been to fund the scheduled principal payments under our debt obligations. In 2009, cash provided by financing activities included proceeds from the revolving credit facility draw of $42.0 million , the issuance of the 2009 senior secured floating rate notes of $172.2 million , offset by the retirement of our Term B1 and B2 notes of $(177.0) million. In 2007, we also paid financing costs related to the registration of our 2005 senior secured floating rate notes and subordinated notes and a technical amendment to our debt agreements.

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Contractual Obligations
     Our primary contractual cash obligations as of December 31, 2009 are summarized in the table below.
                                                         
                                                    2015 and  
    Total     2010     2011     2012     2013     2014     beyond  
Debt obligations:
                                                       
Principal
  $ 514,110     $     $ 42,000     $     $ 472,110     $     $  
Interest (1)
    136,758       37,895       37,895       37,790       23,178              
 
                                         
Total debt obligations
    650,868       37,895       79,895       37,790       495,288              
 
                                                       
Operating lease obligations
    79,408       14,169       10,805       7,778       5,992       5,451       35,213  
Capital lease obligations
    578       300       278                                  
Purchase obligations (2)
                                         
 
                                         
 
                                                       
Total
  $ 730,854     $ 52,364     $ 90,978     $ 45,568     $ 501,280     $ 5,451     $ 35,213  
 
                                         
 
(1)   Represents estimated cash interest expense on borrowings outstanding as of December 31, 2009, without giving effect to any interest rate hedge arrangements. Interest on floating rate debt was estimated using the index rates in effect as of December 31, 2009.
 
(2)   This table does not include information on our recurring purchases of materials for use in production, as our raw material purchase contracts typically do not require fixed or minimum quantities.
     Due to the uncertainty of the timing of settlement with taxing authorities, we are unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits. Therefore, $5.5 million of unrecognized tax benefits as of December 31, 2009 has been excluded from the table above. Of this amount, $3.4 million is subject to indemnification under the Stock Purchase Agreement with Pactiv and would therefore be reimbursed if the Company is required to settle these amounts in cash. See Note 13 to the consolidated financial statements included elsewhere within this report.
     Our contractual obligations and commitments over the next several years are significant. In addition to our contractual obligations noted above, we will also require cash to make capital expenditures, pay taxes, and make contributions under the defined benefit pension plans covering certain of our European employees. We incur capital expenditures for the purpose of maintaining and replacing existing equipment and facilities, and from time to time, for facility expansion. Our capital expenditures totaled $25.0 million, $30.9 million and $34.6 million for the years ended December 31, 2009, 2008 and 2007, respectively, and we expect our 2010 capital expenditures to total approximately $25 to $30 million. We paid taxes of $4.3 million, $1.4 million and $3.8 million during 2009, 2008 and 2007, respectively, net of amounts repaid by Pactiv under the terms of the indemnity agreement. We contributed approximately $3.0 million annually to our defined benefit plans in each of the last three years and expect to contribute approximately $2.0 million during 2010, which is reduced due to the curtailment within our Netherlands pension plan. We are also paying an annual management fee of $1.5 million, plus reasonable out-of-pocket expenses, to AEA Investors LP for advisory and consulting services provided to us under the terms of a management agreement.
     Our principal source of liquidity will continue to be cash flows from operations, existing cash balances, as well as borrowings available to us under a $50 million revolving credit facility. As of December 31, 2009, the Company had drawn $42.0 million under the revolving credit facility after reduction for $7.4 million in outstanding letters of credit.
     To the extent that we generate cash in excess of that needed to fund our requirements as discussed above, we presently expect that such excess cash would be used to invest in the business with any additional excess used to pay down principal on our credit facilities.

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     Long-term Liquidity. We believe that cash flow generated from operations, existing cash balances, and our borrowing capacity will be adequate to meet our obligations and business requirements for the next twelve months. There can be no assurance, however, that our business will generate sufficient cash flows from operations, that anticipated operating improvements will be realized or that future borrowings will be available under Pregis’s senior secured credit facilities in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. Our ability to meet our debt service obligations and other capital requirements, including capital expenditures, will depend upon our future performance which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. Some other risks that could materially adversely affect our ability to meet our debt service obligations include, but are not limited to, risks related to increases in the cost of resin, our ability to protect our intellectual property, rising interest rates, a further decline in the overall U.S. and European economies, weakening demand in our end-markets, the loss of key personnel, our ability to continue to invest in equipment, and a decline in relations with our key distributors and dealers. In addition, any of the other items discussed in detail under Item 1A, “Risk Factors” may also significantly impact our liquidity.
     Senior Secured Credit Facilities. In connection with the Acquisition on October 13, 2005, Pregis entered into senior secured credit facilities which provided for a revolving credit facility and two term loans: an $88.0 million term B-1 facility and a 68.0 million term loan B-2 facility. The term loans were repaid in full in October 2009. The revolving credit facility matures in October 2011 and provides for borrowings of up to $50.0 million, a portion of which may be made available to the Company’s non-U.S. subsidiary borrowers in euros and/or pounds sterling. The revolving credit facility also includes a swing-line loan sub-facility and a letter of credit sub-facility. The revolving credit facility bears interest at a rate equal to, at the Company’s option, (1) an alternate base rate or (2) LIBOR or EURIBOR, plus an applicable margin of 0.375% to 1.00% for base rate advances and 1.375% to 2.00% for LIBOR or EURIBOR advances, depending on the leverage ratio of the Company, as defined in the credit agreement. In addition, the Company is required to pay an annual commitment fee of 0.375% to 0.50% on the revolving credit facility depending on the leverage ratio of the Company, as well as customary letter of credit fees.
     Our senior secured credit facilities also permit us, subject to certain conditions, including the receipt of commitments from lenders, to incur up to $200.0 million (or euro equivalent thereof) of additional term loans (originally $100.0 million prior to the October 5, 2009 senior secured credit facility amendment).
     Subject to exceptions and, in the case of asset sale proceeds, reinvestment options, Pregis’s senior secured credit facilities require mandatory prepayments of the loans from excess cash flows, asset sales and dispositions (including insurance and condemnation proceeds), issuances of debt and issuances of equity. On October 5, 2009, the Company prepaid the term loans in full with proceeds of a 125.0 million note offering and cash on hand. Mandatory prepayments under our senior secured credit facilities do not result in the permanent reduction of the revolving credit commitments under such facilities, i.e., the prepaid revolving borrowings may be reborrowed immediately thereafter, so long as the conditions to the revolving borrowings have been met.
     Pregis’s senior secured credit facilities and related hedging arrangements are guaranteed by Pregis Holding II, the direct holding parent company of Pregis, all of Pregis’s current and future domestic subsidiaries and, if no material tax consequences would result, Pregis’s future foreign subsidiaries and, subject to certain exceptions, are secured by a first priority security interest in substantially all of Pregis’s and its current and future domestic subsidiaries’ existing and future assets (subject to certain exceptions), and a first priority pledge of the capital stock of Pregis and the guarantor subsidiaries and an aggregate of 66% of the capital stock of Pregis’s first-tier foreign subsidiary.
     Pregis’s senior secured credit facilities require that it comply on a quarterly basis with a First Lien Leverage Ratio test. In connection with the October 5, 2009 amendment to our senior secured credit facilities, the Maximum Leverage Ratio and Minimum Cash Interest Coverage Ratio covenants were eliminated, and the First Lien Leverage Ratio covenant of 2.0x replaced the Maximum Leverage Ratio covenant. The First Lien Leverage Ratio is calculated as the ratio of (1) net debt that is secured by a first priority lien to (2) Consolidated EBITDA.

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     The following table sets forth the First Lien Leverage Ratio as of December 31, 2009 and 2008:
                         
            Ratios  
(unaudited)   Covenant     Calculated at December 31,  
(dollars in thousands)   Measure     2009     2008  
First Lien Leverage Ratio
  Maximum of 2.0x           1.44x  
 
                       
Consolidated EBITDA
        $ 85,359     $ 98,100  
Net Debt Secured by First Priority Lien
        $ (32,857 )*   $ 140,863  
 
*   Net Debt is negative as cash on hand exceeds first lien secured debt.
     As used in the calculation of First Lien Leverage Ratio, Consolidated EBITDA is calculated by adding Consolidated Net Income (as defined by the facility), income taxes, interest expense, depreciation and amortization, other non-cash items reducing Consolidated Net Income that do not represent a reserve against a future cash charge, costs and expenses incurred with business acquisitions, issuance of equity interests permitted by the terms of the loan documents, the amount of management, consulting, monitoring, transaction, and advisory fees and related expenses paid to AEA, and unusual and non-recurring charges (including, without limitation, expenses in connection with actual and proposed acquisitions, equity offerings, issuances and retirements of debt and divestitures of assets, whether or not any such acquisition, equity offering, issuance or retirement or divestiture is actually consummated during such period that do not exceed, in the aggregate, 5% of EBITDA for such period).
     Consolidated EBITDA is calculated under the senior secured credit facility for the twelve months ended December 31, 2009 and 2008 as follows:
                 
(unaudited)   Twelve Months Ended December 31,  
(dollars in thousands)   2009     2008  
Net Income
  $ (18,010 )   $ (47,730 )
 
               
Senior Secured Credit Facility Consolidated Net Income definition add backs:
               
Non-cash compensation charges
    1,363       951  
Net after tax extraordinary gains or losses (incl. severance and restructuring charges)
    16,138       6,117  
Non-cash unrealized currency gains or losses
    (6,125 )     14,736  
Any FAS 142, 144, 141 impairment charge or asset write off
    (59 )     20,354  
 
           
Consolidated Net Income
  $ (6,693 )   $ (5,572 )
 
           
 
               
Senior Secured Credit Facility Consolidated EBITDA definition add backs:
               
Interest expense
    42,210       48,194  
Income tax expense
    (2,999 )     (1,865 )
Depreciation expense and amortization
    44,783       52,344  
Fees payable to AEA Investors LP
    2,045       1,724  
Unusual and non-recurring charges
    6,013       2,848  
Other
          427  
 
           
Consolidated EBITDA
  $ 85,359     $ 98,100  
 
           

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     As of December 31, 2009, Pregis was in compliance with all covenants contained in its senior secured credit facilities.
     On October 5, 2009 we amended our senior secured credit facilities. The amendment, among other things:
    permits our company to engage in certain specified sale leaseback transactions in 2009 and up to $35.0 million of additional sale leaseback transactions through the maturity of the senior secured credit facilities;
 
    replaces the maximum leverage ratio covenant of 5.0x under the senior secured credit facilities with the first lien leverage covenant of 2.0x;
 
    eliminates the minimum cash interest coverage ratio covenant under the senior secured credit facilities;
 
    increases the accordion feature of the term loan portion of the senior secured credit facilities by $100.0 million, allowing our company to borrow up to $200.0 million under the term loan portion of the senior secured credit facilities, subject to certain conditions including receipt of commitments therefore;
 
    provides for additional subordinated debt issuances subject to a 2.0x interest coverage ratio; and
 
    modifies several other covenants in the senior secured credit facilities to provide our company with more flexibility.
     In October 2009 we used the proceeds of the offering of the unregistered 2009 senior secured notes (defined below), together with cash on hand, to repay in full amounts outstanding under the term loans under our senior secured credit facilities. However, following the issuance of the unregistered 2009 senior secured notes and the use of proceeds thereof and subject to compliance with out senior secured credit facilities, the indenture governing the senior secured floating rate notes continues to allow us to incur at least $220 million (less amounts then outstanding under the senior secured credit facilities) of debt. If such debt is incurred under the $220.0 million credit facility basket or in compliance with a 3:1 senior secured leverage ratio, plus an additional $50.0 million, it would constitute first priority lien obligations and could be secured on a first priority basis.
     Senior Secured Floating Rate Notes and Senior Subordinated Notes. In connection with the Acquisition on October 13, 2005, Pregis issued 100.0 million aggregate principal amount of second priority senior secured floating rate notes due 2013 (the “2005 senior secured notes”) and $150.0 million aggregate principal amount of 12⅔% senior subordinated notes due 2013 (the “senior subordinated notes”).
     The 2005 senior secured notes mature on April 15, 2013. Interest accrues at a floating rate equal to EURIBOR plus 5.00% per year and is payable quarterly on January 15, April 15, July 15 and October 15 of each year. The 2005 senior secured notes are guaranteed on a senior secured basis by Pregis Holding II, Pregis’s immediate parent, and each of Pregis’s current and future domestic subsidiaries. Pregis may redeem some or all of the 2005 senior secured notes at redemption prices equal to 100% of their principal amount. Upon the occurrence of a change of control, Pregis will be required to make an offer to repurchase each holder’s notes at a repurchase price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase.
     The senior subordinated notes mature on October 15, 2013. Interest accrues at a rate of 12.375% and is payable semi-annually on April 15 and October 15 of each year. The notes are senior subordinated obligations and rank junior in right of payment to all of Pregis’s senior indebtedness. The senior subordinated notes are guaranteed on a senior subordinated basis by Pregis Holding II and each of Pregis’s current and future domestic subsidiaries. Pregis may redeem some or all of the senior subordinated notes at any time prior to October 15, 2009 at a redemption price equal to par plus a make-whole premium. Pregis may redeem some or all of the senior

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subordinated notes on or after October 15, 2009 at redemption prices equal to 106.188% of their principal amount (in the 12 months beginning October 15, 2009), 103.094% of their principal amount (in the 12 months beginning October 15, 2010) and 100% of their principal amount (beginning October 15, 2011).
     On October 5, 2009 Pregis issued 125.0 million aggregate principal amount of additional second priority senior secured floating rate notes due 2013 (the “unregistered 2009 senior secured notes”). On March 5, 2010, Pregis exchanged all of the outstanding unregistered 2009 senior secured notes for registered senior secured notes (the “2009 senior secured notes”) pursuant to an exchange offer. The 2009 senior secured notes bear interest at a floating rate of EURIBOR plus 5.00% per year. Interest on the 2009 senior secured notes is reset quarterly and payable on January 15, April 15, July 15, and October 15 of each year. The 2009 senior secured notes mature on April 15, 2013. The 2009 senior secured notes are treated as a single class under the indenture with the 100.0 million principal amount of 2005 second priority senior secured floating rate notes. However, the 2009 senior secured notes do not have the same Common Code or ISIN numbers as the 2005 senior secured notes, are not fungible with the 2005 senior secured notes and will not trade together as a single class with the 2005 senior secured notes. The 2009 senior secured notes are treated as issued with more than de minimis original issue discount for United States federal income tax purposes, whereas the 2005 senior secured notes were not issued with original issue discount for such purposes. Together the 2005 senior secured notes and the 2009 senior secured notes are referred to herein as the senior secured notes.
     The indentures governing the senior secured notes and the senior subordinated notes contain covenants that limit or prohibit Pregis’s ability and the ability of its restricted subsidiaries, subject to certain exceptions, to incur additional indebtedness, pay dividends or make other equity distributions, make investments, create liens, incur obligations that restrict the ability of Pregis’s restricted subsidiaries to make dividends or other payments to Pregis, sell assets, engage in transactions with affiliates, create unrestricted subsidiaries, and merge or consolidate with other companies or sell substantially all of Pregis’s assets. The indentures also contain reporting covenants regarding delivery of annual and quarterly financial information. The indenture governing the senior secured notes limits Pregis’s ability to incur first priority secured debt to an amount which results in its secured debt leverage ratio being equal to 3:1, plus $50 million, and prohibits it from incurring additional second priority secured debt other than by issuing additional senior secured notes. The indenture governing the senior secured notes also limits Pregis’s ability to enter into sale and leaseback transactions. The indenture governing the senior subordinated notes prohibits Pregis from incurring debt that is senior to such notes and subordinate to any other debt.
     The senior secured notes and senior subordinated notes are not listed on any national securities exchange in the United States. The 2005 senior secured notes were listed on the Irish Stock Exchange in June 2007. However, there can be no assurance that the senior secured notes will remain listed. Application has been made to list the 2009 senior secured notes on the Irish Stock Exchange. However, there can be no assurance the 2009 senior secured notes will become or remain listed.
     The proceeds from the sale of the 2009 senior secured notes on October 5, 2009 were used to repay the Term B-1 and Term B-2 indebtedness under our senior secured credit facilities.
     Collateral for the Senior Secured Floating Rate Notes. The senior secured floating rate notes are secured by a second priority lien, subject to permitted liens, on all of the following assets owned by Pregis or the guarantors, to the extent such assets secure Pregis’s senior secured credit facilities on a first priority basis (subject to exceptions):
  (1)   substantially all of Pregis’s and each guarantor’s existing and future property and assets, including, without limitation, real estate, receivables, contracts, inventory, cash and cash accounts, equipment, documents, instruments, intellectual property, chattel paper, investment property, supporting obligations and general intangibles, with minor exceptions; and
 
  (2)   all of the capital stock or other securities of Pregis’s and each guarantor’s existing or future direct or indirect domestic subsidiaries and 66% of the capital stock or other securities of Pregis’s and each guarantor’s existing or future direct foreign subsidiaries, but only to the extent that the inclusion of such

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      capital stock or other securities will mean that the par value, book value as carried by us, or market value (whichever is greatest) of such capital stock or other securities of any subsidiary is not equal to or greater than 20% of the aggregate principal amount of the senior secured floating rate notes outstanding.
     As of December 31, 2009, the capital stock of the following subsidiaries of Pregis constitutes collateral for the senior secured floating rate notes:
                         
    As of December 31, 2009
    Amount of Collateral        
    (Maximum of Book        
    Value and Market        
    Value, Subject to   Book Value of   Market Value of
Name of Subsidiary   20% Cap)   Capital Stock   Capital Stock
Pregis Innovative Packaging Inc.
  $ 64,422,000     $ 38,900,000     $ 138,100,000  
Hexacomb Corporation
  $ 36,400,000     $ 36,400,000     $ 21,900,000  
Pregis (Luxembourg) Holding S.àr.l. (66%)
  $ 16,600,000     $ 16,600,000     $  
Pregis Management Corporation
  $ 100     $ 100     $ 100  
     As described above, under the collateral agreement, the capital stock pledged to the senior secured floating rate noteholders constitutes collateral only to the extent that the par value or market value or book value (whichever is greatest) of the capital stock does not exceed 20% of the aggregate principal amount of the senior secured floating rate notes. This threshold is 45,000,000, or, at the December 31, 2009 exchange rate of U.S. dollars to euro of 1.4316:1.00, approximately $64.4 million. As of December 31, 2009, the book value and the market value of the shares of capital stock of Pregis Innovative Packaging Inc. were approximately $38.9 million and $138.1 million, respectively; the book value and the market value of the shares of capital stock of Hexacomb Corporation were approximately $36.4 million and $21.9 million respectively; and the book value and the market value of 66% of the shares of capital stock of Pregis (Luxembourg) Holding S.àr.l. were approximately $16.6 million and $ — million, respectively. Therefore, in accordance with the collateral agreement, the collateral pool for the senior secured floating rate notes includes approximately $64.4 million with respect to the shares of capital stock of Pregis Innovative Packaging Inc.. Since the book value and market value of the shares of capital stock of our other domestic subsidiaries and Pregis (Luxemburg) Holdings S.ar.l are each less than the $64.4 million threshold, they are not effected by the 20% clause of the collateral agreement.
     For the year ended December 31, 2009, certain historical equity relating to corporate expenses incurred by Pregis Management Corporation were allocated to each of the three entities, Pregis Innovative Packaging Inc., Hexacomb Corporation, and Pregis (Luxembourg) Holding S.àr.l, in order to better reflect their current book values for presentation herein on a fully-allocated basis.
     The market value of the capital stock of the guarantors and subsidiaries constituting collateral for the senior secured floating rate notes has been estimated by us on an annual basis, using a market approach. At the time of the Acquisition, the purchase price paid for these entities was determined based on a multiple of EBITDA, as was contractually agreed in the stock purchase agreement. Since that time, we have followed a similar methodology, using a multiple of EBITDA, based on that of recent transactions of comparable companies, to determine the enterprise value of these entities. To arrive at an estimate of the market value of the entities’ capital stock, we have subtracted from the enterprise value the existing debt, net of cash on hand, and have also made adjustments for the businesses’ relative portion of corporate expenses. We have determined that this methodology is a reasonable and appropriate means for determining the market value of the capital stock pledged as collateral. We intend to complete these estimates of value of the capital stock of these subsidiaries for so long necessary to determine our compliance with the collateral arrangement governing the notes.

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     The value of the collateral for the senior secured floating rate notes at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. As of December 31, 2009, the value of the collateral for the senior secured floating rate notes totaled approximately $541.3 million, estimated as the sum of (1) the book value of the total assets of Pregis and each guarantor, excluding intercompany activity (which amount totaled $423.9 million), and (2) the collateral value of the capital stock, as outlined above (which amount totaled $117.4 million). Any proceeds received upon the sale of collateral would be paid first to the lenders under our senior secured credit facilities, who have a first lien security interest in the collateral, before any payment could be made to holders of the senior secured floating rate notes. There is no assurance that any collateral value would remain for the holders of the senior secured floating rate notes after payment in full to the lenders under our senior secured credit facilities.
     Covenant Ratios Contained in the Senior Secured Floating Rate Notes and Senior Subordinated Notes. The indentures governing the senior secured floating rate notes and senior subordinated notes contain two material covenants which utilize financial ratios. Non-compliance with these covenants could result in an event of default under the indentures and, under certain circumstances, a requirement to immediately repay all amounts outstanding under the notes and could trigger a cross-default under Pregis’s senior secured credit facilities or other indebtedness we may incur in the future. First, Pregis is permitted to incur indebtedness under the indentures if the ratio of Consolidated Cash Flow to Fixed Charges on a pro forma basis (referred to in the indentures as the “Fixed Charge Coverage Ratio”) is greater than 2:1 or, if the ratio is less, only if the indebtedness falls into specified debt baskets, including, for example, a credit agreement debt basket, an existing debt basket, a capital lease and purchase money debt basket, an intercompany debt basket, a permitted guarantee debt basket, a hedging debt basket, a receivables transaction debt basket and a general debt basket. In addition, under the senior secured floating rate notes indenture, Pregis is permitted to incur first priority secured debt only if the ratio of Secured Indebtedness to Consolidated Cash Flow on a pro forma basis (referred to in the senior secured floating rate notes indenture as the “Secured Indebtedness Leverage Ratio”) is equal to or less than 3:1, plus $50 million. Second, the restricted payment covenant provides that Pregis may declare certain dividends, or repurchase equity securities, in certain circumstances only if Pregis’s Fixed Charge Coverage Ratio is greater than 2:1.
     As used in the calculation of the Fixed Charge Coverage Ratio and the Secured Indebtedness Leverage Ratio, Consolidated Cash Flow, commonly referred to as Adjusted EBITDA, is calculated by adding Consolidated Net Income, income taxes, interest expense, depreciation and amortization and other non-cash expenses, amounts paid pursuant to the management agreement with AEA Investors LP, and the amount of any restructuring charge or reserve (including, without limitation, retention, severance, excess pension costs, contract termination costs and cost to consolidate facilities and relocate employees). In calculating the ratios, Consolidated Cash Flow is further adjusted by giving pro forma effect to acquisitions and dispositions that occurred in the prior four quarters, including certain cost savings and synergies expected to be obtained in the succeeding twelve months. In addition, the term Net Income is adjusted to exclude any gain or loss from the disposition of securities, and the term Consolidated Net Income is adjusted to exclude, among other things, the non-cash impact attributable to the application of the purchase method of accounting in accordance with GAAP, the cumulative effect of a change in accounting principles, and other extraordinary, unusual or nonrecurring gains or losses. While the determination of appropriate adjustments is subject to interpretation and requires judgment, we believe the adjustments listed below are in accordance with the covenants discussed above. The credit agreement governing our senior secured credit facilities calculates Adjusted EBITDA (referred to therein as “Consolidated EBITDA”) in a similar manner.
     The following table sets forth the Fixed Charge Coverage Ratio, Consolidated Cash Flow (“Adjusted EBITDA”), Secured Indebtedness Leverage Ratio, Fixed Charges and Secured Indebtedness as of and for the years ended December 31, 2009 and 2008:

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          Ratios  
(unaudited)   Covenant   Calculated at December 31,  
(dollars in thousands)   Measure   2009     2008  
Fixed Charge Coverage Ratio (after giving pro forma effect to acquisitions and/or dispositions occurring in the reporting period)
    Minimum of 2.0   2.2     2.2
Secured Indebtedness Leverage Ratio
    Maximum of 3.0   0.5     1.8
Consolidated Cash Flow (“Adjusted EBITDA”)
      $ 85,359     $ 98,100  
Fixed Charges (after giving pro forma effect to acquisitions and/or dispositions occurring in the reporting period)
      $ 38,834     $ 44,239  
Secured Indebtedness
      $ 42,578     $ 177,889  
     Adjusted EBITDA is calculated under the indentures governing our senior secured floating rate notes and senior subordinated notes for the years ended December 31, 2009 and 2008 as follows:
                 
(unaudited)   Twelve Months Ended December 31,  
(dollars in thousands)   2009     2008  
Net loss of Pregis Holding II Corporation
  $ (18,010 )   $ (47,730 )
Interest expense, net of interest income
    42,210       48,194  
Income tax (benefit) expense
    (2,999 )     (1,865 )
Depreciation and amortization
    44,783       52,344  
 
           
EBITDA
    65,984       50,943  
 
               
Other non-cash charges (income): (1)
               
Unrealized foreign currency transaction losses (gains), net
    (6,125 )     14,736  
Non-cash stock based compensation expense
    1,363       951  
Non-cash asset impairment charge
    (59 )     20,354  
Other non-cash expenses, primarily fixed asset disposals and write-offs
          427  
Net unusual or nonrecurring gains or losses: (2)
               
Restructuring, severance and related expenses
    16,138       11,418  
Curtailment gain
          (3,736 )
Other unusual or nonrecurring gains or losses
    6,013       1,283  
Other adjustments: (3)
               
Amounts paid pursuant to management agreement with Sponsor
    2,045       1,724  
 
               
 
           
Adjusted EBITDA (“Consolidated Cash Flow”)
  $ 85,359     $ 98,100  
 
           
 
(1)   Other non-cash charges (income) include (a) net unrealized foreign currency transaction losses and gains, (b) non-cash compensation expense resulting from the grant of Pregis Holding I options, (c) a non-cash goodwill impairment charge of $19.1 million recognized in 2008 and trademark impairment charges of $0.2 million and $1.3 million determined pursuant to the Company’s 2009 and 2008 annual impairment tests, respectively, and (d) other non-cash charges that will result in future cash settlement, such as losses on fixed asset disposals.
 
(2)   As provided by our indentures, we adjusted for gains or losses deemed to be unusual or nonrecurring, including (a) restructuring, severance and related expenses due to our various cost reduction restructuring initiatives, (b) the unusual gain resulting from the curtailment of the Netherlands pension plan, (c) adjustments for costs and

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    expenses related to acquisition, disposition or equity offering activities, and (d) other unusual and nonrecurring charges.
 
(3)   Our indentures also require us to make adjustments for fees, and reasonable out-of-pocket expenses, paid under the management agreement with AEA Investors LP.
     Local lines of credit. From time to time, certain of the foreign businesses utilize various lines of credit in their operations. These lines of credit are generally used as overdraft facilities or for issuance of trade letters of credit and are in effect until cancelled by one or both parties. Amounts available under these lines of credit were $14.8 million and $14.9 million at December 31, 2009 and 2008, respectively. At December 31, 2009, no borrowings were drawn under these lines, but trade letters of credit totaling $5.5 million were issued and outstanding.
     Credit Ratings. Our credit ratings as of the date of this Report are summarized below. In July 2008, Moody’s revised its ratings on our senior secured floating rate notes from B2 to B3, senior subordinated notes from Caa1 to Caa2, and loans from Ba2 to Ba3 due to the current weak economic environment in the U.S. This downgrade has not impacted our borrowing costs.
         
    Moody’s   S&P
Senior Secured Floating Rate Notes (2005)
  B3   B+
Senior Secured Floating Rate Notes (2009)
  B3   B+
Senior Subordinated Notes
  Caa2   CCC+
Revolver
  Ba3   BB-
     Factors that can affect our credit ratings include changes in our operating performance, the economic environment, our financial position, and changes in our business strategy. Any future ratings downgrade could adversely impact, among other things, our future borrowing costs and access to the credit and capital markets.
OFF BALANCE SHEET ARRANGEMENTS
     We have no special purpose entities or off balance sheet arrangements, other than operating leases in the ordinary course of business, which are disclosed in Note 11 to the consolidated financial statements.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
     Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, which require management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. The Notes to our annual audited consolidated financial statements contain a summary of our significant accounting policies. We believe the following discussion addresses our most critical accounting policies, which are those that require our most subjective or complex judgments that could materially impact our reported results if actual outcomes differed significantly from estimates.
     Revenue Recognition. Our principal business is the manufacture and supply of protective and specialty packaging products. We recognize net sales of our products when the risks and rewards of ownership have transferred to the customer, which is generally upon shipment (but in some cases may be upon delivery), based on specific terms of sale. In arriving at net sales, we estimate the amount of deductions from sales that are likely to be earned or taken by customers in conjunction with incentive programs, such as volume rebates and early payment discounts, and record such estimates as sales are recorded. Our deduction estimates are based on historical experience.

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     In recent years, we began participating in programs in certain of our European protective packaging and flexible packaging businesses whereby the businesses purchase resin quantities in excess of their internal requirements and resell the surplus to other customers at a nominal profit. These “resin resale programs” enable the businesses to benefit from improved quantity discounts and volume rebates, as well as increased flexibility in their resin purchasing. This activity is presented on a net basis within net sales, in accordance with EITF No. 99-19 or ASC Topic 605, Reporting Revenue Gross as a Principal versus Net as an Agent, on the basis that the third-party resin supplier is responsible for fulfillment of the order to the customer’s specifications, ships the resin directly to the customer, and maintains general inventory risk and risk of physical loss during shipment. We recognize revenue related to resin resale activity upon delivery to the customer.
     Pension. Predominantly in our U.K. and Netherlands based businesses, we provide defined benefit pension plan coverage for salaried and hourly employees. We use several statistical and other models which attempt to anticipate future events in calculating the expenses and liabilities related to the plans. These factors include actuarial assumptions about discount rates, long-term return on assets, salary increases, mortality rates, and other factors. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, or longer or shorter life spans of participants. Such differences may result in a significant impact on the recognized pension expense and recorded liability.
     Goodwill and Other Indefinite Lived Intangible Assets. Carrying values of goodwill and other intangible assets with indefinite lives are reviewed for possible impairment annually on the first day of our fourth quarter, October 1, or when events or changes in business circumstances indicate that the carrying value may not be recoverable.
     The goodwill impairment test is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component is considered a reporting unit for purposes of goodwill testing if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. As such, we have tested for goodwill impairment at the component level within our Specialty Packaging reporting segment, represented by each of the businesses included within this segment. We also tested goodwill for impairment at each of the operating segments which have been aggregated to comprise our Protective Packaging reporting segment.
     We use a two-step process to test goodwill for impairment. First, the reporting unit’s fair value is compared to its carrying value. Fair value is estimated using primarily a combination of the income approach, based on the present value of expected future cash flows and the market approach. If a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and the second step of the impairment test would be performed. The second step of the goodwill impairment test is used to measure the amount of the impairment loss, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge would be recorded for the difference if the carrying value exceeds the implied fair value of the goodwill.
     We performed the annual goodwill impairment test during the fourth quarter of 2009. The fair value of our reporting units was estimated primarily using a combination of the income approach and the market approach. We used discount rates ranging from 13% to 14.5% in determining the discounted cash flows for each of our reporting units under the income approach, corresponding to our cost of capital, adjusted for risk where appropriate. In determining estimated future cash flows, current and future levels of income were considered that reflected business trends and market conditions. Under the market approach, we estimated the fair value of the reporting units based on peer company multiples of earnings before interest, taxes, depreciation and amortization (EBITDA). We also considered the multiples at which businesses similar to the reporting units have been sold or offered for sale.
     The estimates and assumptions we use are consistent with the business plans and estimates we use to manage operations and to make acquisition and divestiture decisions. The use of different assumptions could impact whether an impairment charge is required and, if so, the amount of such impairment. Future outcomes may also differ. If we

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fail to achieve estimated volume and pricing targets, experience unfavorable market conditions or achieve results that differ from our estimates, then revenue and cost forecasts may not be achieved, and we may be required to recognize impairment charges.
     The initial step of our impairment test indicated no impairment. All of the reporting units had estimated fair values exceeding their carrying values. The range by which the fair values of the reporting units exceeded their carrying values was 3% — 110% as of October 1, 2009. The corresponding carrying values of goodwill for these reporting units ranged from $6.0 million to $62.0 million as of October 1, 2009.
     We test the carrying value of other intangible assets with indefinite lives by comparing the fair value of the intangible assets to the carrying value. Fair value is estimated using a relief of royalty approach, a discounted cash flow methodology. Our 2009 and 2008 annual tests for impairment of trade names, our only other intangible assets not subject to amortization, resulted in impairment write-downs of approximately $0.2 million and $1.3 million, respectively, due primarily to reduced near-term net sales projections for the respective product.
     Impairment of Long-Lived Assets. The Company reviews long-lived assets held for use for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. We use estimates of undiscounted cash flows from long-lived assets to determine whether the book value of such assets is recoverable over the assets’ remaining useful lives. If an asset is determined to be impaired, the impairment is measured as the amount by which the carrying value of the asset exceeds its fair value. An impairment charge would have a negative impact on net income.
     Income Taxes. Our overall tax position is complex and requires careful analysis by management to estimate the expected realization of income tax assets and liabilities. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which we have already recorded the tax benefit in the financial statements. We regularly review our deferred tax assets for recoverability and establish a valuation allowance to reduce such assets to amounts expected to be realized. In determining the required level of valuation allowance, we consider whether it is more likely than not that all or some portion of deferred tax assets will not be realized. This assessment is based on management’s expectations as to whether sufficient taxable income of an appropriate character will be realized within the tax carryback and carryforward periods. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates. Should we change our estimate of the amount of deferred tax assets that we would be able realize, an adjustment to the valuation allowance would result in an increase or decrease to the provision for income taxes in the period such a change in estimate was made.
     We record liabilities for uncertain tax positions in accordance with FASB Interpretation No. 48 or Accounting Standards Codification (“ASC”) Topic 740, Accounting for Uncertainty in Income Taxes (FIN 48). The tax positions we take are based on our interpretations of tax laws and regulations in the applicable federal, state and international jurisdictions. We believe that our tax returns properly reflect the tax consequences of our operations, and that our reserves for tax contingencies are appropriate and sufficient for the positions taken. However, these positions are subject to audit and review by the tax authorities, which may result in future taxes, interest and penalties. Because of the uncertainty of the final outcome of these examinations, we have reserved for potential reductions of tax benefits (including related interest) for amounts that do not meet the more-likely-than-not thresholds for recognition and measurement as required by FIN 48 or ASC Topic 740. The tax reserves are reevaluated throughout the year, taking into account new legislation, regulations, case law and audit results.
     The Company does not provide for U.S. federal income taxes on unremitted earnings of foreign subsidiaries since it is management’s present intention to reinvest those earnings in foreign operations. Positive unremitted earnings of foreign subsidiaries totaled $66,662 at December 31, 2009. If such amounts were repatriated, determination of the amount of U.S. income taxes that would be incurred is not practical due to the complexities associated with this calculation.

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RECENT ACCOUNTING PRONOUNCEMENTS
     Pregis adopted the provisions of FASB Staff Position No. FAS 132R-1 or ASC Topic 715, Employers’Discolsures about Postretirement Benefit Plan Assets, on January 1, 2009. This standard requires more detailed disclosures about Pregis’s plan assets, including investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets in the Company’s consolidated financial statements. The Company has included the required additional disclosures in Note 16.
     In June 2009, the FASB issued the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”). The Codification became the single official source of authoritative nongovernmental U.S. generally accepted accounting priciples (“GAAP”). The Codification did not change GAAP but reorganized the literature. The Codification is effective for interim and annual periods ending after September 15, 2009, and the Company adopted the Codification during the three months ended September 30, 2009.
     In May 2009, the FASB issued SFAS No. 165 or ASC Topic 855, Subsequent Events. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and is effective for interim or annual periods ending after June 15, 2009. In February 2010, the FASB issued an accounting standard update to ASC 855 which applies with immediate effect and removed the requirement to disclose the date through which subsequent events were evaluated.
     In April 2009, the FASB issued FSP FAS 107-1 or ASC 825-10-65-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, for the interium periods ending after March 15, 2009. This standard expands the fair value disclosures required for all financial instruments within the scope of FAS 107 or ASC 825-10-65-1 to include interim periods. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements
     In March 2008, the FASB issued SFAS No. 161 or ASC 815-10-65-1, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. This standard expands quarterly disclosure requirements about an entity’s derivative instruments and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the provisions of this standard effective January 1, 2009. See Note 6 for the Company’s disclosures about its derivative instruments and hedging activities
     In December 2007, the FASB issued SFAS No. 141(R) or ASC 805-10-65-1, Business Combinations, which revised SFAS No. 141, Business Combinations. This standard requires an acquiror to measure the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard will also impact the accounting for transaction costs and restructuring costs as well as the initial recognition of contingent assets and liabilities assumed during a business combination. In addition, under this standard, adjustments to the acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period are recorded as a component of income tax expense, rather than goodwill. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. The provisions of this standard are applied prospectively and will impact all acquisitions consummated subsequent to adoption. The guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to January 1, 2009. Adoption of this standard did not have a material impact on the Company’s financial statements.
     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157 or ASC Topic 820, Fair Value Measurement. This standard defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The Company adopted this standard for all financial assets and liabilities as of January 1, 2008. FASB Staff Position No. 157-2 or ASC Topic 820, Partial Deferral of the Effective Date of Statement No. 157, deferred the effective date of SFAS No. 157 or ASC Topic 820 for all non-financial assets and liabilities to fiscal years beginning after November 15, 2008. The Company adopted FASB

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Staff Position No. 157-2 or ASC Topic 820 on January 1, 2009 for all non-financial assets and liabilities. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     We are exposed to market risks related to changes in interest rates, foreign currency exchange rates and commodity prices. To manage these risks, we may enter into various hedging contracts in accordance with established policies and procedures. We do not use hedging instruments for trading purposes.
     Interest Rate Risk. We are subject to interest rate market risk in connection with our long-term debt. Our principal interest rate exposure relates to outstanding amounts under our senior secured floating rate notes. At December 31, 2009, we had $353.9 million of variable rate debt. A one percentage point increase or decrease in the average interest rates would correspondingly change our interest expense by approximately $3.6 million per year. This excludes the impact of the interest rate swap arrangement currently in place to balance the fixed and variable rate debt components of our capital structure. At December 31, 2009 and 2008, the carrying value of our 2005 senior secured floating rate notes was $143.2 million and $139.7 million, respectively, which compares to fair value, based upon quoted market prices, of $130.3 million and $109.0 million for the respective periods. At December 31, 2009, the carrying value of our 2009 senior secured floating rate notes was $168.7, which compares to fair value, based upon quoted market prices, of $153.5.
     The fair value of our fixed rate senior subordinated notes is exposed to market risk of interest rate changes. The carrying value of the senior subordinated notes was $148.4 and $148.0 million at December 31, 2009 and 2008, respectively. The estimated fair value of such notes was $145.5 and $75.0 million at December 31, 2009 and 2008, based upon quoted market prices.
     Raw Material; Commodity Price Risk. We rely upon the supply of certain raw materials and commodities in our production processes. The primary raw materials we use in the manufacture of our products are various plastic resins, primarily polyethylene and polypropylene. Approximately 77% of our 2009 net sales were from products made with plastic resins. We manage the exposures associated with these costs primarily through terms of the sales and by maintaining relationships with multiple vendors. We acquire these materials at market prices, which are negotiated on a continuous basis, and we do not typically buy forward beyond two or three months or enter into guaranteed supply or fixed price contracts with our suppliers. Additionally, we have not entered into hedges with respect to our raw material costs. We seek to mitigate the market risk related to commodity pricing by passing the increases in raw material costs through to our customers in the form of price increases.
     Foreign Currency Exchange Rate Risk. Our results of operations are affected by changes in foreign currency exchange rates. Approximately 66% of our 2009 net sales were made in currencies other than the U.S. dollar, principally the euro and the pound sterling. We have a natural hedge in our operations, as we typically produce, buy raw materials, and sell our products in the same currency. We are exposed to translational currency risk, however, in converting our operating results in Europe, the United Kingdom and to a lesser extent Egypt, Poland, the Czech Republic, Hungary, Bulgaria, Romania, Canada, and Mexico at the end of each reporting period. The strengthening of the U.S. dollar relative to the euro and the pound sterling in 2009 had an unfavorable impact on our financial results in U.S. dollars, compared to fiscal 2008 results. In contrast, the weakening of the U.S. dollar relative to the euro and the pound sterling in 2008 and 2007 had a favorable impact on our financial results in U.S. dollars, as compared to fiscal 2006 results. The translational currency impact of a plus/minus swing of 10% in the U.S. dollar exchange rate on our 2009 operating income would have been approximately $1.1 million.

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder of Pregis Holding II Corporation
We have audited the accompanying consolidated balance sheets of Pregis Holding II Corporation as of December 31, 2009 and 2008 and the related consolidated statements of operations, equity and comprehensive loss, and cash flows for the years ended December 31, 2009, 2008 and 2007. Our audits also included the financial statement schedule listed in the index to the financial statements as “Schedule II – Valuation and Qualifying Accounts”. These financial statements and schedule are the responsibility of Pregis Holding II Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pregis Holding II Corporation at December 31, 2009 and 2008 and the consolidated results of its operations and its cash flows for the years ended December 31, 2009, 2008 and 2007 in conformity with accounting principles generally accepted in the United States. Also in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
         
     
  /s/ Ernst & Young LLP    
 
Chicago, Illinois
March 25, 2010

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Pregis Holding II Corporation
Consolidated Balance Sheets
(dollars in thousands, except shares and per share data)
                 
    December 31,  
    2009     2008  
Assets
               
Current assets
               
Cash and cash equivalents
  $ 80,435     $ 41,179  
Accounts receivable
               
Trade, net of allowances of $6,015 and $5,357 respectively
    120,812       121,736  
Other
    12,035       13,829  
Inventories, net
    81,024       87,867  
Deferred income taxes
    5,079       4,336  
Due from Pactiv
    1,169       1,399  
Prepayments and other current assets
    7,929       8,435  
 
           
Total current assets
    308,483       278,781  
Property, plant and equipment, net
    226,882       245,124  
Other assets
               
Goodwill
    126,250       127,395  
Intangible assets, net
    38,054       41,254  
Deferred financing costs, net
    8,092       7,734  
Due from Pactiv, long-term
    8,429       13,234  
Pension and related assets
    13,953       22,430  
Other
    404       424  
 
           
Total other assets
    195,182       212,471  
 
           
Total assets
  $ 730,547     $ 736,376  
 
           
Liabilities and stockholder’s equity
               
Current liabilities
               
Current portion of long-term debt
  $ 300     $ 4,902  
Accounts payable
    78,708       79,092  
Accrued income taxes
    5,236       6,964  
Accrued payroll and benefits
    14,242       11,653  
Accrued interest
    7,722       6,905  
Other
    18,011       21,740  
 
           
Total current liabilities
    124,219       131,256  
Long-term debt
    502,534       460,714  
Deferred income taxes
    19,721       24,913  
Long-term income tax liabilities
    5,463       11,310  
Pension and related liabilities
    4,451       6,119  
Other
    15,367       11,963  
Stockholder’s equity:
               
Common stock — $0.01 par value; 1,000 shares authorized, 149.0035 shares issued and outstanding at December 31, 2009 and 2008
           
Additional paid-in capital
    151,963       150,610  
Accumulated deficit
    (82,328 )     (64,318 )
Accumulated other comprehensive income (loss)
    (10,843 )     3,809  
 
           
Total stockholder’s equity
    58,792       90,101  
 
           
Total liabilities and stockholder’s equity
  $ 730,547     $ 736,376  
 
           
The accompanying notes are an integral part of these financial statements

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Pregis Holding II Corporation
Consolidated Statements of Operations
(dollars in thousands)
                         
    Year ended December 31,  
    2009     2008     2007  
Net Sales
  $ 801,224     $ 1,019,364     $ 979,399  
Operating costs and expenses:
                       
Cost of sales, excluding depreciation and amortization
    609,515       798,690       740,235  
Selling, general and administrative
    117,048       127,800       137,180  
Depreciation and amortization
    44,783       52,344       55,799  
Goodwill impairment
          19,057        
Other operating expense, net
    14,980       8,146       190  
 
                 
Total operating costs and expenses
    786,326       1,006,037       933,404  
 
                 
Operating income
    14,898       13,327       45,995  
Interest expense
    42,604       49,069       46,730  
Interest income
    (394 )     (875 )     (1,325 )
Foreign exchange loss (gain), net
    (6,303 )     14,728       (2,339 )
 
                 
Income (loss) before income taxes
    (21,009 )     (49,595 )     2,929  
Income tax expense (benefit)
    (2,999 )     (1,865 )     7,708  
 
                 
Net loss
  $ (18,010 )   $ (47,730 )   $ (4,779 )
 
                 
The accompanying notes are an integral part of these financial statements

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Pregis Holding II Corporation
Consolidated Statements of Equity 
and Comprehensive Loss
(dollars in thousands)
                                                 
                            Accumulated              
            Additional             Other     Total     Total  
    Common     Paid-in     Accumulated     Comprehensive     Stockholder’s     Comprehensive  
    Stock     Capital     Deficit     Income (Loss)     Equity     Gain (Loss)  
Balance at January 1, 2007
          149,101       (11,809 )     6,968       144,260          
 
                                               
Stock-based compensation
            558                       558          
Net loss
                    (4,779 )             (4,779 )   $ (4,779 )
Other comprehensive income (loss):
                                               
Foreign currency translation adjustment
                            2,320       2,320       2,320  
Adoption of SFAS No. 158, net of tax of $4,266
                            11,058       11,058       11,058  
Increase in fair value of derivatives qualifying as cash flow hedges, net of tax of $140
                            240       240       240  
 
                                             
Total comprehensive loss
                                          $ 8,839  
 
                                   
Balance at December 31, 2007
  $     $ 149,659     $ (16,588 )   $ 20,586     $ 153,657          
 
                                               
Stock-based compensation
            951                       951          
Net loss
                    (47,730 )             (47,730 )   $ (47,730 )
Other comprehensive income (loss):
                                               
Foreign currency translation adjustment
                            (13,573 )     (13,573 )     (13,573 )
Pension liability adjustment, net of tax of $65
                            (154 )     (154 )     (154 )
Decrease in fair value of derivatives qualifying as cash flow hedges, net of tax of $1,798
                            (3,050 )     (3,050 )     (3,050 )
 
                                             
Total comprehensive loss
                                          $ (64,507 )
 
                                   
Balance at December 31, 2008
  $     $ 150,610     $ (64,318 )   $ 3,809     $ 90,101          
 
                                               
Stock-based compensation
            1,353                       1,353          
Net loss
                    (18,010 )             (18,010 )   $ (18,010 )
Other comprehensive income (loss):
                                               
Foreign currency translation adjustment
                            327       327       327  
Pension liability adjustment
                            (13,784 )     (13,784 )     (13,784 )
Decrease in fair value of derivatives qualifying as cash flow hedges, net of tax of $703
                            (1,195 )     (1,195 )     (1,195 )
 
                                             
Total comprehensive loss
                                          $ (32,662 )
 
                                   
Balance at December 31, 2009
  $     $ 151,963     $ (82,328 )   $ (10,843 )   $ 58,792          
 
                                     
The accompanying notes are an integral part of these financial statements

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Pregis Holding II Corporation Consolidated
Statement of Cash Flow
(dollars in thousands)
                         
    Year ended December 31,  
    2009     2008     2007  
Operating activities
                       
Net loss
  $ (18,010 )   $ (47,730 )   $ (4,779 )
Adjustments to reconcile net loss to cash provided by operating activities:
                       
Depreciation and amortization
    44,783       52,344       55,799  
Deferred income taxes
    (1,060 )     (7,769 )     (2,110 )
Unrealized foreign exchange loss (gain)
    (6,126 )     14,022       (2,692 )
Amortization of deferred financing costs
    5,247       2,374       2,194  
Gain on disposal of property, plant and equipment
    (270 )     (313 )     (332 )
Stock compensation expense
    1,353       951       558  
Defined benefit pension plan expense (income)
    (1,189 )     (187 )     2,256  
Curtailment gain on defined benefit pension plan
          (3,736 )      
Gain on insurance settlement
                (2,873 )
Goodwill impairment
          19,057        
Trademark impairment
    194       1,297       403  
Impairment of interest rate swap asset
          1,299        
Changes in operating assets and liabilities:
                       
Accounts and other receivables, net
    7,283       13,907       (5,444 )
Due from Pactiv
    5,195       6,630       11,542  
Inventories, net
    9,153       13,597       (8,186 )
Prepayments and other current assets
    17       79       (279 )
Accounts payable
    (2,944 )     (13,121 )     12,269  
Accrued taxes
    (7,876 )     (6,373 )     (5,695 )
Accrued interest
    1,043       68       467  
Other current liabilities
    (1,829 )     (7,014 )     (382 )
Pension and other
    (9,347 )     272       (1,541 )
 
                 
Cash provided by operating activities
    25,617       39,654       51,175  
 
                 
 
                       
Investing activities
                       
Capital expenditures
    (25,045 )     (30,882 )     (34,626 )
Proceeds from sale of assets
    1,766       1,063       775  
Proceeds from sale and leaseback of property
    9,850              
Other business acquisitions, net of cash acquired
          (958 )     (28,785 )
Insurance proceeds
          3,205       884  
Other, net
          (969 )     (226 )
 
                 
Cash used in investing activities
    (13,429 )     (28,541 )     (61,978 )
 
                 
 
                       
Financing activities
                       
Proceeds from 2009 note issuance, net of discount
    172,173              
Proceeds from revolving credit facility
    42,000       (115 )     218  
Repayment of term B1 & B2 notes
    (176,991 )            
Deferred financing costs
    (6,466 )           (1,237 )
Repayment of debt
    (4,312 )     (1,893 )     (1,828 )
Other, net
    (269 )            
 
                 
Cash provided (used in) financing activities
    26,135       (2,008 )     (2,847 )
Effect of exchange rate changes on cash and cash equivalents
    933       (2,915 )     2,972  
 
                 
Increase (decrease) in cash and cash equivalents
    39,256       6,190       (10,678 )
Cash and cash equivalents, beginning of period
    41,179       34,989       45,667  
 
                 
 
                       
Cash and cash equivalents, end of period
  $ 80,435     $ 41,179     $ 34,989  
 
                 
 
                       
Supplemental cash flow disclosures
                       
Cash paid for income taxes, net of Pactiv reimbursement
    4,248       1,394       3,846  
Cash paid for interest — third party
    36,547       44,984       44,054  

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Pregis Holding II Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, unless otherwise noted)
1. DESCRIPTION OF THE BUSINESS AND CHANGE IN OWNERSHIP
Description of the Business
     Pregis Corporation (“Pregis”) is an international manufacturer, marketer and supplier of protective packaging products and specialty packaging solutions.
     In the fourth quarter of 2008, Pregis realigned its segment reporting to conform to its current operating and management structure. With this change, Pregis now reports two reportable segments, Protective Packaging and Specialty Packaging. See Note 18, “Segment and Geographic Information,” for further discussion of Pregis’s new segment reporting.
Ownership
     On October 13, 2005, Pregis, pursuant to a Stock Purchase Agreement (as amended, the “Stock Purchase Agreement”) with Pactiv Corporation (“Pactiv”) and certain of its affiliates, acquired the outstanding shares of capital stock of Pactiv’s subsidiaries comprising its global protective packaging and European specialty packaging businesses (the “Acquisition”). Pregis, along with Pregis Holding II Corporation (“Pregis Holding II” or the “Company”) and Pregis Holding I Corporation (“Pregis Holding I”), were formed by AEA Investors LP and its affiliates (the “Sponsors”) for the purpose of consummating the Acquisition. The adjusted purchase price for the Acquisition was $559.7 million, which included direct costs of the acquisition of $15.7 million, pension plan funding of $20.1 million, and certain post-closing adjustments.
     Funding for the Acquisition included equity investments from the Sponsors totaling $149.0 million, along with proceeds from the issuance of senior secured notes and senior subordinated notes in a private offering, and borrowings under new term loan facilities. The equity investments were made to Pregis Holding I, which is the direct parent company of Pregis Holding II, which in turn is the direct parent company of Pregis. Therefore, immediately following the Acquisition, AEA Investors LP, through its indirect ownership, owned 100% of the outstanding common stock of the Company.
     The Stock Purchase Agreement indemnified the Company for payment of certain liabilities relating to the pre-acquisition period. Indemnification amounts for recorded liabilities, which primarily relate to pre-acquisition income tax liabilities, are reflected in the balance sheet as amounts Due from Pactiv.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
     The consolidated financial statements include the accounts of Pregis Holding II and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
     Separate financial statements of Pregis are not presented since the floating rate senior secured notes due April 2013 and the 12.375% senior subordinated notes due October 2013 issued by Pregis are fully and unconditionally guaranteed on a senior secured and senior subordinated basis, respectively, by Pregis Holding II and all existing domestic subsidiaries of Pregis and since Pregis Holding II has no operations or assets separate from its investment in Pregis (see Note 23).

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Reclassifications
     Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition
     The Company’s principal business is the manufacture and supply of protective and specialty packaging products. Pregis recognizes net sales of these products when the risks and rewards of ownership have transferred to the customer, which is generally upon shipment (but in some cases may be upon delivery), based on specific terms of sale. In arriving at net sales, Pregis estimates the amount of deductions from sales that are likely to be earned or taken by customers in conjunction with incentive programs, such as volume rebates and early payment discounts and records such estimates as sales are recorded. The Company bases its deduction estimates on historical experience.
     In recent years, the Company began participating in programs in certain of its European protective and specialty packaging businesses whereby the businesses purchase resin quantities in excess of their internal requirements and resells the surplus to other customers at a nominal profit. These “resin resale programs” enable the businesses to benefit from improved quantity discounts and volume rebates, as well as increased flexibility in their resin purchasing. The Company presents this activity on a net basis within net sales on the basis that the third-party resin supplier is responsible for fulfillment of the order to the customer’s specifications, ships the resin directly to the customer, and maintains general inventory risk and risk of physical loss during shipment. The Company recognizes revenue related to resin resale activity upon delivery to the customer. Net resin resale revenue totaled $3,388, $5,249 and $5,004 for the years ended December 31, 2009, 2008 and 2007, respectively.
Foreign Currency Translation
     Local currencies are the functional currencies for all foreign operations. Financial statements of foreign subsidiaries are translated into U.S. dollars using end-of-period exchange rates for assets and liabilities and the periods’ weighted average exchange rates for revenue and expense components, with any resulting translation adjustments included as a component of stockholder’s equity. Foreign currency transaction gains and losses resulting from transactions executed in non-functional currencies are included in results of operations.
Cash and Cash Equivalents
     The Company defines cash and cash equivalents as checking accounts, money-market accounts, certificates of deposit, and U.S. Treasury notes having an original maturity of 90 days or less when purchased.
Accounts Receivable
     Trade accounts receivable are classified as current assets and are reported net of allowances for doubtful accounts and other deductions. Pregis reserves for amounts determined to be uncollectible based on a number of factors, including historical trends and specific customer liquidity. The determination of the amount of the allowance for doubtful accounts is subject to significant levels of judgment and estimation by management. If circumstances change or economic conditions deteriorate or improve, the allowance for doubtful accounts could increase or decrease.

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     Management believes that the allowances at December 31, 2009 are adequate to cover potential credit risk loss and that the Company is unlikely to incur a material loss due to concentration of credit risk. Pregis has a large number of customers in diverse industries and geographies, as well as a practice of establishing reasonable credit limits, which limits credit risk.
Inventories
     Inventories include costs of material, direct labor and related manufacturing overheads. Inventories are stated at the lower of cost or market. Cost is determined for substantially all inventories using the first-in, first-out (FIFO) or average-cost methods.
Property, Plant, and Equipment
     Property, plant and equipment are stated at cost. Maintenance and repairs that do not improve efficiency or extend economic life are expensed as incurred. Depreciation is computed using the straight-line method over the remaining estimated useful lives of assets. Remaining useful lives range from 15 to 40 years for buildings and improvements and from 5 to 20 years for machinery and equipment. Depreciation expense totaled $40,155, $47,314 and $50,374 for the years ended December 31, 2009, 2008 and 2007, respectively.
Goodwill and Other Intangible Assets
     In accordance with SFAS No. 142 or ASC Topic 350, Goodwill and Other Intangible Assets, the Company assesses the recoverability of goodwill and other intangible assets with indefinite lives annually, as of October 1, or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable.
     The Company tests its goodwill at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component is considered a reporting unit for purposes of goodwill testing if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. As such, the Company tests for goodwill impairment at the component level within its Specialty Packaging reporting segment, represented by each of the businesses included within this segment. The Company also tests goodwill for impairment at each of the operating segments which have been aggregated to comprise its Protective Packaging reporting segment.
     The Company uses a two-step process to test goodwill for impairment. First, the reporting unit’s fair value is compared to its carrying value. Fair value is estimated using primarily a combination of the income approach, based on the present value of expected future cash flows and the market approach. If a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and the second step of the impairment test would be performed. The second step of the goodwill impairment test is used to measure the amount of the impairment loss, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge would be recorded for the difference if the carrying value exceeds the implied fair value of the goodwill.
     The Company tests the carrying value of other intangible assets with indefinite lives by comparing the fair value of the intangible assets to the carrying value. Fair value is estimated using a relief of royalty approach, which is a discounted cash flow methodology.
     The Company’s other intangible assets, consisting primarily of customer relationships, patents, licenses, and non-compete agreements, are being amortized over their respective estimated useful lives.

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Impairment of Other Long-Lived Assets
     The Company reviews long-lived assets held for use for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. We use estimates of undiscounted cash flows from long-lived assets to determine whether the book value of such assets is recoverable over the assets’ remaining useful lives. If an asset is determined to be impaired, the impairment is measured as the amount by which the carrying value of the asset exceeds its fair value. An impairment charge would have a negative impact on net income.
Deferred Financing Costs
     The Company incurred financing costs to put in place the long-term debt used to finance the Acquisition and to subsequently amend portions of such debt agreements. These costs have been deferred and are being amortized over the terms of the related debt. The amortization of deferred financing costs is classified as interest expense in the statement of operations and totaled $5,247, $2,374 and $2,194 for the years ended December 31, 2009, 2008 and 2007, respectively. The amortization expense for the year ended December 31, 2009 also includes the write-off of deferred financing costs of $2,731 due to the repayment of the Term B1 and B2 notes.
Income Taxes
     In accordance with the provisions of SFAS No. 109 or ASC Topic 740, Accounting for Income Taxes, the Company utilizes the asset and liability method of accounting for income taxes, which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
     Effective January 1, 2007, the Company adopted the provisions of FIN 48 or ASC Topic 740, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 or ASC Topic 740 provides guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to uncertainty in income taxes. The Company’s adoption of FIN 48 or ASC Topic 740 resulted in reclassification of certain tax liabilities from current to non-current and no impact to retained earnings.
     The Company does not provide for U.S. federal income taxes on unremitted earnings of foreign subsidiaries since it is management’s present intention to reinvest those earnings in the foreign operations. Positive unremitted earnings of foreign subsidiaries totaled $66,662 at December 31, 2009. If such amounts were repatriated, determination of the amount of U.S. income taxes that would be incurred is not practicable due to the complexities associated with this calculation.
Financial Instruments
     The Company may use derivative financial instruments to minimize risks from interest and foreign currency exchange rate fluctuations. The Company does not use derivative instruments for trading or other speculative purposes. Derivative financial instruments used for hedging purposes must be designated as such and must be effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in the fair value of the derivative contract must be highly correlated with changes in fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
     The Company records derivative instruments on the balance sheet as either assets or liabilities, measured at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction, and, if so, the type of hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income are subsequently recognized in earnings when the hedged item impacts earnings. Cash flows of such derivative instruments are classified consistent with the underlying hedged item. The ineffective portion of all hedges is recognized in earnings in the current period. See Note 9 for additional information.

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Freight
     Pregis records amounts billed to customers for shipping and handling as sales, and records shipping and handling expense as cost of sales.
Research and Development
     Research and development costs, which are expensed as incurred, were $5,384, $5,840 and $5,869 for the years ended December 31, 2009, 2008 and 2007, respectively.
Stock-Based Compensation
     Effective January 1, 2006, the Company adopted SFAS No. 123R or ASC Topic 715, Share-Based Payment, which was issued in December 2004 and amended SFAS No. 123, Accounting for Stock Based Compensation. The Company used the prospective transition method upon adoption, which requires that nonpublic companies that had previously measured compensation cost using the minimum value method continue to account for non-vested equity awards outstanding at the date of adoption in the same manner as they had been accounted for prior to adoption. For all awards granted, modified or settled after the date of adoption, the Company recognizes compensation cost based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R or ASC Topic 715.
     Prior to the adoption of SFAS No. 123R or ASC Topic 715, the Company applied the fair value disclosure provisions of SFAS No. 123 applicable to nonpublic companies (including public debt issuers).
Recent Accounting Pronouncements
     Pregis adopted the provisions of FASB Staff Position No. FAS 132R-1 or ASC Topic 715, Employers’Discolsures about Postretirement Benefit Plan Assets, on January 1, 2009. This standard requires more detailed disclosures about Pregis’s plan assets, including investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets in the Company’s consolidated financial statements. The Company has included the required additional disclosures in Note 16.
     In June 2009, the FASB issued the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”). The Codification became the single official source of authoritative nongovernmental U.S. generally accepted accounting priciples (“GAAP”). The Codification did not change GAAP but reorganized the literature. The Codification is effective for interim and annual periods ending after September 15, 2009, and the Company adopted the Codification during the three months ended September 30, 2009.
     In May 2009, the FASB issued SFAS No. 165 or ASC Topic 855, Subsequent Events. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and is effective for interim or annual periods ending after June 15, 2009. In February 2010, the FASB issued an accounting standard update to ASC 855 which applies with immediate effect and removed the requirement to disclose the date through which subsequent events were evaluated.
     In April 2009, the FASB issued FSP FAS 107-1 or ASC 825-10-65-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, for the interium periods ending after March 15, 2009. This standard expands the fair value disclosures required for all financial instruments within the scope of FAS 107 or ASC 825-10-65-1 to include interim periods. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements
     In March 2008, the FASB issued SFAS No. 161 or ASC 815-10-65-1, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. This standard expands quarterly disclosure requirements about an entity’s derivative instruments and hedging activities and is effective for fiscal

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years and interim periods beginning after November 15, 2008. The Company adopted the provisions of this standard effective January 1, 2009. See Note 9 for the Company’s disclosures about its derivative instruments and hedging activities.
     In December 2007, the FASB issued SFAS No. 141(R) or ASC 805-10-65-1, Business Combinations, which revised SFAS No. 141, Business Combinations. This standard requires an acquiror to measure the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard will also impact the accounting for transaction costs and restructuring costs as well as the initial recognition of contingent assets and liabilities assumed during a business combination. In addition, under this standard, adjustments to the acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period are recorded as a component of income tax expense, rather than goodwill. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. The provisions of this standard are applied prospectively and will impact all acquisitions consummated subsequent to adoption. The guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to January 1, 2009. Adoption of this standard did not have a material impact on the Company’s financial statements.
     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157 or ASC Topic 820, Fair Value Measurement. This standard defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The Company adopted this standard for all financial assets and liabilities as of January 1, 2008. FASB Staff Position No. 157-2 or ASC Topic 820, Partial Deferral of the Effective Date of Statement No. 157, deferred the effective date of SFAS No. 157 or ASC Topic 820 for all non-financial assets and liabilities to fiscal years beginning after November 15, 2008. The Company adopted FASB Staff Position No. 157-2 or ASC Topic 820 on January 1, 2009 for all non-financial assets and liabilities. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements.
3. ACQUISITIONS
     Each of the transactions discussed below was accounted for using the purchase method of accounting. Accordingly, in each instance, the purchase price was allocated to the assets acquired, liabilities assumed, and identifiable intangible assets as applicable based on their fair market values at the date of acquisition. Any excess of purchase price over the fair value of net assets acquired was recorded as goodwill. The results of operations of each business combination is included in the Company’s consolidated financial statements since the date of acquisition. None of the goodwill related to these acquisitions is tax-deductible.
     On December 3, 2007, the Company acquired all of the outstanding share capital of Besin International B.V., a European honeycomb manufacturer. The purchase price totaled $18,314, including direct costs of the acquisition. The purchase price was financed with cash-on-hand, and was allocated as follows: $7,369 to net tangible assets, $1,349 to customer relationship and patent intangible assets, and $9,596 to goodwill.
     On July 4, 2007, the Company acquired all of the outstanding share capital of Petroflax S.A., a leading producer and distributor of foam-based products, located in Romania. The purchase price totaled $11,976, including direct costs of the acquisition, and was also financed with cash-on-hand. The purchase price was allocated as follows: $4,195 million to net tangible assets, $4,434 to customer relationship-related intangibles, and $3,347 to goodwill.

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     The following unaudited pro forma data summarizes the results of operations for the years ended December 31, 2007 as if the aforementioned acquisitions had taken place at the beginning of the year. The pro forma information is not necessarily indicative of the results that actually would have been attained if the acquisitions had occurred as of the beginning of the period presented or that may be attained in the future.
         
    Year Ended  
    December 31,  
    2007  
Net sales
  $ 1,007,923  
Operating income
    46,699  
Net loss
    (4,367 )
4. INVENTORIES
     The major components of net inventories are as follows:
                 
    December 31,     December 31,  
    2009     2008  
Finished goods
  $ 40,941     $ 43,338  
Work-in-process
    14,216       13,793  
Raw materials
    23,339       27,489  
Other materials and supplies
    2,528       3,247  
       
 
  $ 81,024     $ 87,867  
 
           
     Inventories at December 31, 2009 and 2008 were stated net of reserves of $1.9 million and $2.5 million respectively.
5. PROPERTY, PLANT AND EQUIPMENT
     Property, plant and equipment consists of the following:
                 
    December 31,     December 31,  
    2009     2008  
Land, building, and improvements
  $ 115,766     $ 121,514  
Machinery and equipment
    270,131       254,686  
Other, including construction in progress
    21,044       16,829  
 
           
 
    406,941       393,029  
 
               
Less: Accumulated depreciation
    (180,059 )     (147,905 )
       
 
  $ 226,882     $ 245,124  
 
           
     In 2009, the Company entered into an agreement to sell and leaseback real property consisting of land and buildings at one of its subsidiaries located in the United Kingdom. The net sale proceeds totaled approximately $9.9 million. The lease term is 25 years with annual rents totaling approximately $1.2 million. The sale resulted in a gain of approximately $3.1 million. In accordance with ASC Topic 840, the gain is deferred and will be amortized over the term of the underlying lease.

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6. GOODWILL
     Changes in the Company’s carrying value of goodwill from January 1, 2007 to December 31, 2009 are summarized below:
                         
    Protective     Specialty        
    Packaging     Packaging     Total  
Balance at January 1, 2007
    83,112       52,120       135,232  
Business acquisitions
    13,575             13,575  
Other adjustments
    (484 )     (2,114 )     (2,598 )
Foreign currency translation
    (1,048 )     4,839       3,791  
 
                 
Balance at December 31, 2007
    95,155       54,845       150,000  
Goodwill impairment
          (19,057 )     (19,057 )
Fair value and purchase price adjustments related to 2007 acquisitions
    (632 )           (632 )
Other adjustments
    (1,101 )     (838 )     (1,939 )
Foreign currency translation
    3,737       (4,714 )     (977 )
 
                 
Balance at December 31, 2008
    97,159       30,236       127,395  
Other adjustments
    (1,068 )     183       (885 )
Foreign currency translation
    (1,541 )     1,281       (260 )
 
                 
Balance at December 31, 2009
  $ 94,550     $ 31,700     $ 126,250  
 
                 
     The Company performed its annual goodwill impairment test during the fourth quarter of 2009. The fair value of the Company’s reporting units was estimated primarily using a combination of the income approach and the market approach. The Company used discount rates ranging from 13% to 14.5% in determining the discounted cash flows for each of our reporting units under the income approach, corresponding to our cost of capital, adjusted for risk where appropriate. In determining estimated future cash flows, current and future levels of income were considered that reflected business trends and market conditions. Under the market approach, the Company estimated the fair value of the reporting units based on peer company multiples of earnings before interest, taxes, depreciation and amortization (EBITDA). The Company also considered the multiples at which businesses similar to the reporting units have been sold or offered for sale.
     The initial step of the Company’s impairment test indicated no impairment. All of the reporting units had estimated fair values exceeding their carrying values. The range by which the fair values of the reporting units exceeded their carrying values was 3% — 110% as of October 1, 2009. The corresponding carrying values of goodwill for these reporting units ranged from $6.0 million to $62.0 million as of October 1, 2009.
     Other adjustments to goodwill relate primarily to the reversal of valuation allowances established against deferred tax assets in purchase accounting.
     In 2008, the initial step of the Company’s impairment test indicated the potential for impairment in one of the reporting units included within our Specialty Packaging segment, due to the anticipation of a significant reduction in future revenue from a customer that had historically comprised a material portion of the reporting unit’s annual revenues. The Company performed the second step of the goodwill impairment test and determined that an impairment of goodwill existed. Accordingly, the Company recorded a non-cash goodwill impairment charge of $19.1 million in the fourth quarter of 2008.
7. OTHER INTANGIBLE ASSETS
     The Company’s other intangible assets are summarized as follows:

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    Average     December 31, 2009     December 31, 2008  
    Life     Gross Carrying     Accumulated     Gross Carrying     Accumulated  
    (Years)     Amount     Amortization     Amount     Amortization  
Intangible assets subject to amortization:
                                       
Customer relationships
    12     $ 46,231     $ 15,739     $ 45,646     $ 11,863  
Patents
    10       1,055       372       1,036       261  
Non-compete agreements
    2       3,041       3,041       3,002       2,908  
Software
    3       3,470       2,125       2,469       1,224  
Land use rights and other
    32       1,486       582       1,447       474  
Intangible assets not subject to amortization:
                                       
Trademarks and trade names
            4,630             4,384        
 
                               
Total
          $ 59,913     $ 21,859     $ 57,984     $ 16,730  
 
                               
     Amortization expense related to intangible assets totaled $4,628, $5,030 and $5,425 for the years ended December 31, 2009, 2008 and 2007, respectively. Amortization expense for each of the five years ending December 31, 2010 through December 31, 2014 is estimated to be $4,893, $4,461, $4,005, $4,005, and $4,005, respectively.
     During its annual tests in 2009 and 2008 for impairment of the intangible assets not subject to amortization, the Company determined that a trade name associated with its protective packaging business was impaired, due to the projected near-term reduced sales levels. Using a discounted cash flow methodology, the Company calculated impairment of $194 and $1,297, which is reflected in other operating expense, net within the Company’s statement of operations for the years ended December 31, 2009 and 2008, respectively.
8. DEBT
     The Company’s long-term debt consists of the following:
                 
    December 31,     December 31,  
    2009     2008  
Senior secured credit facilities:
               
Term B-1 facility, due October, 2012
  $     $ 85,140  
Term B-2 facility, due October, 2012
          91,902  
Revolving Credit Facility, due October, 2011
    42,000        
Senior secured 2005 notes, due April, 2013
    143,160       139,690  
Senior secured 2009 notes, due April, 2013 net of discount of $10,216 at December 31, 2009
    168,734        
Senior subordinated notes, due October, 2013, net of discount of $1,638 at December 31, 2009 and $1,962 at December 31, 2008
    148,362       148,038  
Other
    578       846  
 
           
Total debt
    502,834       465,616  
Less: current portion
    (300 )     (4,902 )
 
           
Long-term debt
  $ 502,534     $ 460,714  
 
           
     In connection with the Acquisition, on October 13, 2005, Pregis issued senior secured notes and senior subordinated notes in a private offering and entered into new senior secured credit facilities.

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     The senior secured 2005 and 2009 notes were issued in the principal amount of 100.0 million and 125.0 million, respectively, and bear interest at a floating rate equal to EURIBOR (as defined) plus 5.00% per year (for a total rate of 5.742% as of December 31, 2009). Interest resets quarterly and is payable quarterly on January 15, April 15, July 15 and October 15. The senior subordinated notes were issued in the principal amount of $150.0 million and bear interest at the rate of 12.375% annually. Interest on the senior subordinated notes is payable semi-annually on April 15 and October 15. The senior subordinated notes were issued at 98.149%, resulting in an initial discount of $2.8 million, which is being amortized using the effective interest method over the term of the notes. The senior secured 2009 notes were issued at 94%, resulting in an initial discount of $11.0 million, (7.5million euro), which is being amortized using the effective interest method over the term of the notes. The senior secured notes and senior subordinated notes do not have required principal payments prior to maturity.
     Pregis Holding II and Pregis’s domestic subsidiaries have guaranteed the obligations under the senior secured notes and the senior subordinated notes on a senior secured basis and senior subordinated basis, respectively. Additionally, the senior secured notes are secured on a second priority basis by liens on all of the collateral (subject to certain exceptions) securing Pregis’s senior secured credit facilities. In the event that secured creditors exercise remedies with respect to Pregis and its guarantors’ pledged assets, the proceeds of the liquidation of those assets will first be applied to repay obligations secured by the first priority liens under the new senior secured credit facilities and any other first priority obligations.
     At its option, the Company may currently redeem some or all of the senior secured notes at 100% of the principal amount of the notes. In addition, at its option, the Company will be able to redeem some or all of the senior subordinated notes on or after October 15, 2009, at the redemption prices set forth below (expressed as percentages of principal amount), plus accrued interest, if any, if redeemed during the twelve-month period beginning on October 15 of the years indicated below:
                   
 
  Senior subordinated notes:   2010       103.094
 
      2011 and thereafter   100.000 %
     To date, the Company has not redeemed any of its senior secured or senior subordinated notes.
     In connection with the Acquisition, Pregis entered into senior secured credit facilities which provided for a revolving credit facility and two term loans: an $88.0 million term B-1 facility and a 68.0 million term loan B-2 facility. The revolving credit facility provides for borrowings of up to $50.0 million, a portion of which may be made available to the Company’s non-U.S. subsidiary borrowers in euros and/or pounds sterling. The revolving credit facility also includes a swing-line loan sub-facility and a letter of credit sub-facility. The revolving credit facility bears interest at a rate equal to, at the Company’s option (1) an alternate base rate or (2) LIBOR or EURIBOR, plus an applicable margin of 0.375% to 1.00% for base rate advances and 1.375% to 2.00% for LIBOR or EURIBOR advances, depending on the leverage ratio of the Company, as defined in the credit agreement. In addition, the Company is required to pay an annual commitment fee of 0.375% to 0.50% on the revolving credit facility depending on the leverage ratio of the Company, as well as customary letter of credit fees.
On October 5, 2009 the Company amended its senior secured credit facilities. The amendment, among other things:
    permits the company to engage in certain specified sale leaseback transactions in 2009 and up to $35.0 million of additional sale leaseback transactions through the maturity of the senior secured credit facilities;
 
    replaces the maximum leverage ratio covenant of 5.0x under the senior secured credit facilities with the first lien leverage covenant of 2.0x;
 
    eliminates the minimum cash interest coverage ratio covenant under the senior secured credit facilities;

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    increases the accordion feature of the term loan portion of the senior secured credit facilities by $100.0 million, allowing the company to borrow up to $200.0 million under the term loan portion of the senior secured credit facilities, subject to certain conditions including receipt of commitments therefore;
 
    provides for additional subordinated debt issuances subject to a 2.0x interest coverage ratio; and
 
    modifies several other covenants in the senior secured credit facilities to provide the Company with more flexibility.
     In addition to the amendment on October 5, 2009, Pregis issued 125.0 million aggregate principal amount of additional second priority senior secured floating rate notes due 2013 (the “notes”). The notes bear interest at a floating rate of EURIBOR plus 5.00% per year. Interest on the notes will be reset quarterly and is payable on January 15, April 15, July 15, and October 15 of each year, beginning on October 15, 2009. The notes mature on April 15, 2013. The notes are treated as a single class under the indenture with the 100.0 million principal amount of the Company’s existing second priority senior secured floating rate notes due 2013, originally issued on October 12, 2005. However, the notes do not have the same Common Code or International Securities Identification Number as the existing notes, are not fungible with the existing notes and will not trade together as a single class with the existing notes. The notes are treated as issued with more than de minimis original issue discount for United States federal income tax purposes, whereas the existing notes were not issued with original issue discount for such purposes.
     The notes and the related guarantees are second priority secured senior obligations. Accordingly, they are effectively junior to the Company’s and the guarantors’ obligations under the Company’s senior secured credit facilities and any other obligations that are secured by first priority liens on the collateral securing the notes or that are secured by a lien on assets that are not part of the collateral securing the notes, in each case, to the extent of the value of such collateral or assets; structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries that are not guarantors; equal in right of payment with the senior secured floating rate notes issued by us in 2005 (the “2005 notes” and, together with the notes, the “senior secured floating rate notes”); equal in right of payment with all of the Company’s and the guarantors’ existing and future unsecured and unsubordinated indebtedness, and effectively senior to such indebtedness to the extent of the value of the collateral; and senior in right of payment to all of the Company’s and the guarantors’ existing and future subordinated indebtedness, including the senior subordinated notes issued by the Company in 2005 (the “senior subordinated notes”) and the related guarantees.
     The proceeds from the October 2009 offering were used to repay the Term B-1 and Term B-2 indebtedness under the Company’s senior secured credit facilities.
     As of December 31, 2009, the Company has drawn $42.0 million under the revolving credit facility after reduction for amounts outstanding under letters of credit of $7.4 million. Revolving credit facility interest expense totaled $417 for the year ended December 31, 2009. It is the current intent of the Company to hold the debt until its maturity, resulting in the debt’s classification as long-term as of December 31, 2009.
     Pregis’s senior secured credit facilities are guaranteed by Pregis Holding II Corporation and all of Pregis’s current and future domestic subsidiaries (collectively, the “Guarantors”). The repayment of these facilities is secured by a first priority security interest in substantially all of the assets of the Guarantors, and a first priority pledge of their capital stock and 66% of the capital stock of the Pregis’s first tier foreign subsidiary.
     Subject to certain exceptions, the senior secured credit facilities require mandatory prepayments of the loans from excess cash flows, asset sales and dispositions and issuances of debt and equity. Additionally, the loans may be prepaid at the election of the Company.
     From time to time, certain of the foreign businesses utilize various lines of credit in their operations. These lines of credit are generally used as overdraft facilities or for issuance of trade letters of credit and are in effect until

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cancelled by one or both parties. Amounts available under these lines of credit were $14,762 and $14,860 at December 31, 2009 and 2008, respectively. At December 31, 2009, there were no borrowings under these lines, but trade letters of credit totaling $5,472 were issued and outstanding.
     The senior secured credit facilities, senior secured notes and subordinated notes contain a number of covenants that, among other things, restrict or limit, subject to certain exceptions, Pregis’s ability and the ability of its subsidiaries, to incur, assume or permit to exist additional indebtedness, guaranty obligations or hedging arrangements; incur liens or agree to negative pledges in other agreements; engage in sale and leaseback transactions; make capital expenditures; make loans and investments; declare dividends, make payments or redeem or repurchase capital stock; in the case of subsidiaries, enter into agreements restricting dividends and distributions; engage in mergers, acquisitions and other business combinations; prepay, redeem or purchase certain indebtedness including the notes; amend or otherwise alter the terms of its organizational documents, or its indebtedness including the notes and other material agreements; sell assets or engage in receivables securitization; transact with affiliates; and alter the business that it conducts. In addition, the senior secured credit facilities require that Pregis complies on a quarterly basis with certain financial covenants, including a maximum leverage ratio test and minimum cash interest coverage ratio test. As of December 31, 2009, Pregis was in compliance with all of these covenants.
     Furthermore, the senior secured notes and subordinated notes limit Pregis’s ability to incur additional indebtedness beyond that allowed within certain defined debt baskets and the Company’s ability to declare certain dividends or repurchase equity securities, unless Pregis meets a minimum fixed charge coverage ratio and a maximum senior secured indebtedness leverage ratio, both determined on a pro forma basis.
     The following table presents the future scheduled annual maturities of the Company’s long-term debt:
         
2010
  $ 300  
2011
    42,278  
2012
     
2013 (including discount)
    472,110  
 
     
 
  $ 514,688  
 
     
     As outlined above, a portion of Pregis’s third-party debt is denominated in euro and revalued to U.S. dollars at month-end reporting periods. The Company also maintains an intercompany debt structure, whereby it has provided euro-denominated loans to certain of its foreign subsidiaries and these and other foreign subsidiaries have provided euro-denominated loans to certain U.K. based subsidiaries. At each month-end reporting period, the Company recognizes unrealized gains and losses on the revaluation of these instruments, resulting from the fluctuations between the U.S. dollar and euro exchange rate, as well as the pound sterling and euro exchange rate.
     At December 31, 2009 and 2008, the revaluation of the Company’s euro-denominated third party debt resulted in unrealized foreign exchange losses and (gains) of $3,567 and $(10,408), respectively. These unrealized losses and (gains) have been offset by unrealized (gains) and losses of $(10,833) and $25,428 relating to revaluation of the Company’s euro-denominated intercompany notes at December 31, 2009 and 2008, respectively. These amounts are reported net within the foreign exchange loss (gain) in the Company’s statement of operations.
9. DERIVATIVE INSTRUMENTS
     In order to maintain a targeted ratio of variable-rate versus fixed-rate debt, the Company established an interest rate swap arrangement in the notional amount of 65 million euro from EURIBOR-based floating rates to a fixed rate over the period of October 1, 2008 to April 15, 2011. This swap arrangement was designated as a cash flow hedge, resulting in a loss of $3,114 and $2,647, each net of tax, being recorded in other comprehensive income (loss) for the years ended December 31, 2009 and period ended October 1, 2008 to December 31, 2008, respectively. The

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corresponding liability is included within other non-current liabilities in the consolidated balance sheet. There was no ineffective portion of the hedge recognized in earnings. At December 31, 2009 and 2008, the Company had no other derivative instruments outstanding.
     The Company remains exposed to credit risk in the event of nonperformance by the current counterparty on its interest rate swap contract. However, the Company believes it has minimized its credit risk by dealing with a leading, credit-worthy financial institution and, therefore, does not anticipate nonperformance.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
     Under generally accepted accounting principles in the U.S., certain assets and liabilities must be measured at fair value, and SFAS No. 157 or ASC Topic 820 details the disclosures that are required for items measured at fair value.
     SFAS No. 157 or ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, as follows:
     Level 1 – Quoted prices in active markets for identical assets and liabilities.
     Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
    Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
     At December 31, 2009, the interest rate swap contract was the Company’s only financial instrument requiring measurement at fair value. The swap is an over-the-counter contract and the inputs utilized to determine its fair value are obtained in quoted public markets. Therefore, the Company has categorized this swap agreement as Level 2 within the fair value hierarchy. At December 31, 2009, the fair value of this instrument was estimated to be a liability of $4,950, which is reported within other noncurrent liabilities in the Company’s consolidated balance sheet.
     The carrying values of other financial instruments included in current assets and current liabilities approximate fair values due to the short-term maturities of these instruments. The carrying value of amounts outstanding under the Company’s senior secured credit facilities is considered to approximate fair value as interest rates vary, based on prevailing market rates. The fair value of the Company’s senior secured notes and senior subordinated notes are based on quoted market prices (Level 1 within the fair value hierarchy). Under SFAS No. 159 or ASC Topic 825, entities are permitted to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value measurement option under SFAS No. 159 or ASC Topic 825 for any of its financial assets or liabilities.

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     The carrying values and estimated fair values of the Company’s financial instruments at December 31, 2009 and 2008 are as follows:
                                 
    2009     2008  
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
Long-term debt:
                               
Senior secured variable-rate credit facilites
  $ 42,000     $ 42,000     $ 177,042     $ 177,042  
Senior secured floating rate notes (2005)
    143,160       130,276       139,690       108,958  
Senior secured floating rate notes (2009)
    168,734       162,845              
12.375% senior subordinated notes
    148,362       145,500       148,038       75,000  
Other debt
    578       578       846       846  
 
                       
 
                               
Total long-term debt
  $ 502,834     $ 481,198     $ 465,616     $ 361,846  
 
                       
 
                               
Derivative financial instruments
                               
Interest rate swap liability
  $ (4,950 )   $ (4,950 )   $ (4,208 )   $ (4,208 )
 
                       
     The carrying value of the Company’s senior secured floating-rate notes (2005), which is euro-denominated, increased $3,470 during 2009 primarily due to the strengthening of the euro to the U.S. dollar. The senior secured variable-rate credit facilities decreased due to the debt refinancing in October 2009.
     The Company is contingently liable under letters of credit (see Note 8). It is not practicable to estimate the fair value of these financial instruments; however, the Company does not expect any material losses to result from these financial instruments since performance is not likely to be required.
11. LEASES
     The Company leases certain facilities, equipment, and other assets under non-cancelable long-term operating leases. Rent expense totaled $18,103, $19,556 and $19,073 for the years ended December 31, 2009, 2008 and 2007, respectively, including short-term rentals.
     Future minimum rental payments for operating leases with remaining terms in excess of one year are as follows:
         
2010
  $ 14,169  
2011
    10,805  
2012
    7,778  
2013
    5,992  
2014
    5,451  
Thereafter
    35,213  
 
     
 
  $ 79,408  
 
     
12. RELATED PARTY TRANSACTIONS
     The Company is party to a management agreement with its Sponsors, for the provision of various advisory and consulting services. Fees and expenses incurred under this agreement totaled $2,047, $1,724 and $1,894 for the years ended December 31, 2009, 2008 and 2007, respectively. Such amounts are included within selling, general and administrative expenses.

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     The Company had sales to affiliates of AEA Investors LP totaling $964, $379 and $3,531for the years ended December 31, 2009, 2008 and 2007, respectively. For the same periods, the Company made purchases from affiliates of AEA Investors LP totaling $11,204, $11,879 and $8,022, respectively.
     Certain members of the Company’s management purchased shares in Pregis Holding I through the Pregis Holding I Corporation Employee Stock Purchase Plan. Shares were purchased at estimated fair value at the date of purchase. As of December 31, 2009, management held approximately 375 shares in Pregis Holding I, representing approximately 2.0% of Pregis Holding I’s issued and outstanding equity.
13. INCOME TAXES
     The Company files a consolidated federal income tax return with Pregis Holding I Corporation, its ultimate parent. The provision for income taxes in the consolidated financial statements reflects income taxes as if the businesses were stand-alone entities and filed separate income tax returns.
     The domestic and foreign components of income (loss) before income taxes were as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
U.S. income (loss) before income taxes
  $ (8,406 )   $ (2,852 )   $ 1,911  
Foreign income (loss) before income taxes
    (12,603 )     (46,743 )     1,018  
 
                 
Total income (loss) before income taxes
  $ (21,009 )   $ (49,595 )   $ 2,929  
 
                 
     The components of the Company’s income tax expense (benefit) are as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
Current
                       
Federal
  $ (316 )   $     $  
State and local
    140       383       809  
Foreign
    (1,763 )     3,981       6,851  
 
                 
 
    (1,939 )     4,364       7,660  
 
                 
 
                       
Deferred
                       
Federal
  $ (4,002 )   $ (414 )   $ 1,978  
State and local
          (99 )     (935 )
Foreign
    2,942       (5,716 )     (995 )
 
                 
 
    (1,060 )     (6,229 )     48  
 
                 
 
                       
Income tax expense (benefit)
  $ (2,999 )   $ (1,865 )   $ 7,708  
 
                 

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     Reconciliation of the difference between the effective rate of the expense (benefit) and the U.S. federal statutory rate is shown in the following table:
                         
    Year Ended December 31,  
    2009     2008     2007  
U.S. federal income tax rate
    (35.00) %     (35.00) %     35.00 %
Changes in income tax rate resulting from:
                       
Valuation allowances
    17.53       20.19       162.60  
Non-deductible interest expense
    2.33       1.25       44.24  
Prior period items
    (6.46 )            
Foreign rate differential
    4.52       8.26       20.47  
State rate change
                (16.91 )
Foreign rate change
    (0.04 )           (31.22 )
State and local taxes on income , net of U.S. federal income tax benefit
    0.52       0.07       12.83  
Permanent differences
    3.62       1.04       25.79  
Other
    (1.29 )     0.43       10.36  
 
                 
Income tax expense (benefit)
    (14.27) %     (3.76) %     263.16 %
 
                 
     Prior period items relate to non-deductable interest adjustments in certain jurisdictions totaling approximately $1.4 million.
     Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement basis and the tax basis of assets and liabilities using enacted statutory tax rates applicable to future years. The Company’s net deferred income tax assets (liabilities) are as follows:
                 
    December 31,     December 31,  
    2009     2008  
Deferred tax assets
               
Tax-loss carryforwards:
               
U.S. State and local
  $ 9,204     $ 3,839  
Foreign
    28,406       23,790  
Deferred Charges
          1,447  
Bad debt reserves
    882       426  
Inventory reserves
    1,155       1,162  
Other items
    8,922       6,281  
Valuation allowance
    (33,698 )     (25,911 )
 
           
Net deferred tax assets
    14,871       11,034  
 
           
Deferred tax liabilities
               
Property and equipment
    (10,981 )     (13,170 )
Goodwill and intangibles
    (10,640 )     (10,402 )
Pensions and other employee benefits
    (2,614 )     (4,531 )
Unrealized foreign exchange gain
    (4,631 )     (3,188 )
Other items
    (647 )     (320 )
 
           
Total deferred tax liabilities
    (29,513 )     (31,611 )
 
           
 
               
Net deferred tax liabilities
  $ (14,642 )   $ (20,577 )
 
           

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          These deferred tax assets and liabilities are classified in the consolidated balance sheets based on the balance sheet classification of the related assets and liabilities.
     Management believes it is more likely than not that certain current and long-term deferred tax assets, with the exception of certain foreign tax-loss carryforwards and pension assets, will be realized through the reduction of future taxable income. Although realization is not assured, management has concluded that other deferred tax assets, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on scheduling of deferred tax liabilities.
     U.S. federal net operating loss carryforwards at December 31, 2009 and 2008 were $8,486 and $9,764, respectively. State tax-loss carryforwards, net of federal benefit, at December 31, 2009 and 2008, were $718 and $421, respectively, and will expire at various dates from 2010 to 2016. Foreign tax-loss carryforwards at December 31, 2009 and 2008 were $104,566 and $88,090, respectively, of which $56,882 will expire at various dates from 2010 to 2019, with the remainder having unlimited lives. The valuation allowance above includes unrecognized tax benefits related to both state and foreign tax-loss carryforwards.
     Tax Contingencies
     Effective January 1, 2007, the Company adopted FIN 48 or ASC Topic 740, Accounting for Uncertainty in Income Taxes. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company established reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite the Company’s belief that its tax return positions are fully supportable. The reserves are adjusted in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for tax contingencies are provided in accordance with the requirements of FIN 48 or ASC Topic 740.
     As of December 31, 2009, the Company had non-current liabilities totaling $5,463 for unrecognized tax benefits including interest and net of indirect benefits, of which $1,816 would affect the effective tax rate, if recognized. Included within the Company’s liabilities for unrecognized tax benefits at December 31, 2009 is $3,647 subject to indemnification under the Stock Purchase Agreement with Pactiv. The indemnified amounts are included within the amounts due from Pactiv in the consolidated balance sheet. The reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
                 
    2009     2008  
Unrecognized tax benefit — January 1
  $ 12,127     $ 8,886  
Additions based on tax positions related to the prior year
    963       371  
Reductions based on tax positions related to the prior year
    (2,114 )     (324 )
Additions based on tax positions related to the current year
    1,686       3,194  
Reductions due to settlements
    (2,538 )      
Reductions due to lapse of applicable statute of limitations
    (1,245 )      
 
           
 
               
Unrecognized tax benefit — December 31
  $ 8,879     $ 12,127  
 
           
     The Company is subject to U.S. federal income tax as well as income tax in multiple state and non-U.S. jurisdictions. The U.S. federal income tax return for the year 2007 and 2008 are subject to potential examination by the Internal Revenue Service. The Company is currently subject to examination in Germany for the years 2002 to 2005 and Egypt for the year 2004. The Company remains subject to potential examination in Germany for the years 2006 to 2008, Belgium for the years 2007 and 2008, the United Kingdom for the year 2008, Hungary for years 2005 to 2008, Poland for years 2005 to 2008, the Czech Republic for years 2007 and 2008, Italy for the years 2005 to 2008, France for years 2007 and 2008, the Netherlands for years 2006 to 2008, Spain for years 2005 to 2008, and Egypt for years

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2005 to 2008. The Company is fully indemnified by Pactiv for pre-Acquisition liabilities and has received reimbursements for all amounts paid against such liabilities thus far.
     The Company accounts for interest and penalties related to income tax matters in income tax expense. For the year ended December 31, 2007, the amount of interest and penalties recorded in income tax expense was insignificant. As of December 31, 2009 and 2008, the total amount of accrued interest and penalties recorded in the Company’s balance sheet was $794 and $2,045 respectively, of which $701 and $1,761, respectively, are subject to indemnification under the Stock Purchase Agreement.
     It is reasonably possible that the total amounts of unrecognized tax benefits will increase or decrease within the next twelve months; however, the Company does not expect such increases or decreases to be significant.
14. OTHER OPERATING EXPENSE, NET
     A summary of the items comprising other operating expense, net is as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
Restructuring expense
  $ 15,207     $ 9,321     $ 2,926  
Curtailment gain
          (3,736 )      
Trademark impairment
    194       1,297       403  
Insurance settlement
    (53 )           (2,873 )
Royalty expense
    52       222       164  
Rental income
    (38 )     (37 )     (43 )
Other (income) expense, net
    (382 )     1,079       (387 )
 
                 
 
                       
Other operating expense, net
  $ 14,980     $ 8,146     $ 190  
 
                 
     The significant items included within other operating expense, net are as follows:
    The Company recorded restructuring charges of $15,207, $9,321 and $2,926 in 2009, 2008 and 2007, respectively, related to its cost-reduction initiatives, which are discussed further in Note 15.
 
    In the fourth quarter of 2008, the Company recognized a curtailment gain of $3,736 relating to a pension plan covering employees of its Eerbeek, Netherlands facility, which is being closed in connection with the Company’s restructuring activities. See also Note 16.
 
    In 2009 and 2008 when conducting its annual impairment test of goodwill and intangible assets with indefinite lives, the Company determined that a trademark intangible asset associated with its protective packaging segment was impaired, due to near-term reduced sales levels. The Company recorded impairment charges of $194 and $1,297 in 2009 and 2008, respectively.
 
    During the first quarter of 2007, a printing machine utilized by the Company’s flexible packaging business in Egypt was destroyed by a fire. The net book value of the equipment was negligible. During 2007, the Company recorded a gain of $2,873 on the insurance settlement. The Company purchased a replacement printer, which was commissioned in mid-2008.
 
    In 2008, the Company incurred a loss of $708 relating to storm damage at one of its European protective packaging facilities. This charge is included within in other expense (income), net above.

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15. RESTRUCTURING ACTIVITIES
     During the fourth quarter of 2007, the Company established a reserve totaling $2,926, representing mostly employee severance and related costs, pursuant to a plan to restructure the workforce within its Specialty Packaging segment. The activities under the Specialty Packaging restructuring plan were completed by the end of 2008 with remaining severance of approximately $600 to be paid in 2009.
     During the second quarter of 2008, management approved a company-wide restructuring program to further streamline the Company’s operations and reduce its overall cost structure. Activities included headcount reductions and other overhead cost savings initiatives. For the year ended December 31, 2008, the Company recorded charges for severance and other activities totaling $3,572 and $1,075, respectively, relating to these initiatives.
     During the third quarter of 2008, management approved a cost reduction plan that involves closure of a protective packaging facility located in Eerbeek, The Netherlands. The plan includes relocation of the Eerbeek production lines to other existing company facilities located within Western Europe and reduction of related headcount. Through December 31, 2008, the Company has recorded additional severance charges totaling $3,880 relating to headcount reduction, as well as other charges of $794 relating primarily to site preparation and relocation of the equipment lines.
     The other restructuring expenses in 2008 relate primarily to the establishment of a European shared service center and other third-party consulting fees relating to restructuring activities.
     In 2009, as part of the Company’s continued efforts to reduce its overall cost structure, management implemented additional headcount reductions and engaged outside consultants to assist in further restructuring of its manufacturing operations. Restructuring plans associated with those consulting activities are not yet complete. Consulting costs for restructuring totaling $3.3 million were expensed as incurred and are presented in “other” in the table below. Also included in “other” are costs of approximately $0.6 million associated with the discontinuance of a product line at one of the Company’s North American protective packaging plants.
     Following is a reconciliation of the restructuring liability for the years ended December 31, 2009, 2008, and 2007:
                         
    Severance     Other        
    Charges     Charges     Total  
Balance, January 1, 2007
  $     $     $  
Restructuring charges
    2,926             2,926  
Amount Paid
    (258 )           (258 )
 
                 
 
                       
Balance, December 31, 2007
    2,668             2,668  
Restructuring charges
    7,452       1,869       9,321  
Amount Paid
    (5,055 )     (1,869 )     (6,924 )
Foreign currency translation
    (212 )           (212 )
 
                 
 
                       
Balance, December 31, 2008
    4,853             4,853  
Restructuring charges
    7,138       8,069       15,207  
Amount Paid
    (10,685 )     (8,069 )     (18,754 )
Foreign currency translation
    97               97  
 
                 
 
                       
Balance, December 31, 2009
  $ 1,403     $     $ 1,403  
 
                 

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     The pretax restructuring charges by reportable segment are as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
Protective Packaging
    9,650       8,639       113  
Specialty Packaging
    2,157       34       2,813  
Corporate
    3,400       648        
 
                 
 
                       
Total
  $ 15,207     $ 9,321     $ 2,926  
 
                 
     The restructuring costs recorded to date have been included as a component of other operating expense, net within the consolidated statement of operations, as reflected in Note 14. The restructuring liability is included in other current liabilities within the consolidated balance sheet.
     The Company expects to make cash payments for severance against the remaining liability through the first half of 2010.
16. RETIREMENT BENEFITS
Pension Benefits
     The Company has three defined benefit pension plans covering the majority of its employees located in the United Kingdom and the Netherlands. Plan benefits are generally based upon age at retirement, years of service and the level of compensation. The trustees of these plans, in consultation with their respective actuaries, recommend annual funding to be made to the plans at a level they believe to be appropriate for the plans to meet their long-term obligations. The employees also make contributions based on a percentage of eligible salary. The Company also has three small, unfunded defined benefit pension plans covering certain current or former employees of its German businesses. The Company funds the obligations for these plans with insurance contracts. For the years ended December 31, 2009 and 2008, the Company has excluded these small German plans from its pension disclosure herein, since the plans are not material.
     In accordance with SFAS No. 158 or ASC Topic 715, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158) the Company reflects the funded status of its pension plans in its consolidated balance sheets. Effective December 31, 2008, SFAS No. 158 or ASC Topic 715 also requires measurement of plan assets and benefit obligations at December 31, the date of the Company’s year end. The Company already used a December 31 measurement date so adoption of this provision had no impact.

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     Components of net periodic benefit cost are as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
Service cost of benefits earned
  $ 1,058     $ 2,041     $ 3,526  
Interest cost on benefit obligations
    4,367       5,195       5,427  
Expected return on plan assets
    (6,388 )     (7,180 )     (6,697 )
Curtailment Gain
          (3,736 )      
Amortization of net loss
    (226 )     (243 )      
 
                       
 
                 
Net periodic pension cost (income)
  $ (1,189 )   $ (3,923 )   $ 2,256  
 
                 
     In 2008, as a result of the closure and job reductions related to the Company’s facility in Eerbeek, Netherlands, the Company recognized a $3,736 curtailment gain attributable to the decrease in liability associated with the reduction in pension benefits. The curtailment gain was recognized in 2008, consistent with the timing of the related employees’ terminations. See Note 15 for more information on the facility closure.
     The following tables show the changes in the benefit obligation, plan assets and funded status of the Company’s benefit plans:

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    December 31,     December 31,  
    2009     2008  
Change in projected benefit obligation
               
Benefit obligation at beginning of year
  $ 65,532     $ 96,153  
Service cost of benefits earned
    1,058       2,041  
Interest cost on benefit obligation
    4,367       5,195  
Participant contributions
    488       701  
Curtailment gain
          (3,736 )
Actuarial losses (gains)
    16,385       (10,888 )
Benefit payments
    (3,406 )     (3,255 )
Exchange rate (gain) loss
    6,762       (20,679 )
 
           
 
               
Benefit obligation at end of year
    91,186       65,532  
 
           
 
               
Change in fair value of plan assets
               
Fair value of plan assets at beginning of year
    86,414       117,374  
Actual return on plan assets
    9,637       (3,517 )
Employer contributions
    1,980       2,809  
Participant contributions
    488       701  
Benefit payments
    (3,406 )     (3,255 )
Exchange rate gain (loss)
    8,568       (27,698 )
 
           
 
               
Fair value of plan assets at end of year
    103,681       86,414  
 
           
 
               
Funded status at end of year
  $ (12,495 )   $ (20,882 )
 
           
 
               
Amounts recognized on the balance sheet
               
Other noncurrent assets
  $ 12,495     $ 20,882  
Other noncurrent liabilities
           
 
           
 
               
Net amount recognized
  $ 12,495     $ 20,882  
 
           
 
               
Amounts recognized in accumulated other comprehensive income
               
Net actuarial gain
  $ (1,420 )   $ (15,080 )
Income tax provision related to the net actuarial gain
    4,300       4,176  
 
           
 
               
Net amount recognized
  $ 2,880     $ (10,904 )
 
           
     In 2010, the Company expects to amortize net actuarial gains totaling $41 from accumulated other comprehensive income into net periodic benefit cost.
     The accumulated benefit obligation for the defined benefit pension plans was $89,725 and $63,119 at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, the fair value of plan assets for each of the pension plans exceeded the projected benefit obligations and accumulated benefit obligations.

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Plan Assumptions
     The weighted average assumptions used to determine the Company’s defined benefit obligations were as follows:
                 
    December 31,     December 31,  
    2009     2008  
Discount rate
    5.60 %     6.42 %
Compensation increase
    3.52 %     3.42 %
The weighted average assumptions used to determine net periodic benefit costs were as follows:
                         
    December 31,     December 31,     December 31,  
    2009     2008     2007  
Discount rate
    6.43 %     5.63 %     4.92 %
Expected return on plan assets
    6.96 %     6.30 %     5.89 %
Compensation increases
    3.43 %     3.42 %     3.56 %
     The discount rate assumption for each country is based on an index of high-quality corporate bonds with maturities in excess of ten years. In developing assumptions regarding the expected rate of return on pension plan assets, the Company receives independent input in each of the relevant countries in which the trust assets are invested on asset-allocation strategies and projections of long-term rates of return on various asset classes, risk-free rates of return and long-term inflation projections.
     The weighted average asset allocations by asset category for the Company’s pension plan assets were as follow as of the end of the last two years:
                 
    December 31,     December 31,  
    2009     2008  
Equity securities
    27 %     22 %
Fixed — income securities
    70 %     75 %
Other
    3 %     3 %
 
           
 
               
 
    100 %     100 %
 
           
     The Company employs a total return investment approach whereby a mixture of equity and fixed-income investments are used to maximize the long-term return on plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and business financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments.
     Pregis’s long-term objectives for plan investments are to ensure that (a) there is an adequate level of assets to support benefit obligations to participants over the life of the plans, (b) there is sufficient liquidity in plan assets to cover current benefit obligations, and (c) there is a high level of investment return consistent with a prudent level of investment risk. The investment strategy is focused on a stable return, weighted more towards a fixed income strategy, with modest investment return opportunity related to a lesser extent on equity securities. To accomplish this objective, the Company causes assets to be invested in a mix of fixed income and equity investments. Management expects investment mix to be consistent with prior year mix which has typically ranged from 65% — 70% in fixed income securities and 25% — 35% in equity securities.

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     The Company expects to contribute $2,090 to its pension plans in 2010.
     Following are the estimated future benefit payments to be made in the years indicated:
         
Year   Amount
2010
  $ 3,423  
2011
    3,522  
2012
    3,387  
2013
    3,356  
2014
    3,380  
2015 — 2019
    18,278  
     The fair values of the Company’s pension plan assets at December 31, 2009 by asset category are as follows:
                         
            Quoted Prices        
            in Active        
            Markets for     Significant  
            Identical     Observable  
          Assets     Inputs  
    Total     Level 1     Level 2  
Asset Category
                       
 
                       
Cash
  $ 243     $ 243     $  
 
                       
Fixed Income Securities
                       
Government Treasuries
    5,282       5,282        
Corporate Bonds
    53,247             53,247  
 
                       
Other Types of Investments
                       
L&G Consensus Index 1
    30,732             30,732  
Insurance Contracts 2
    14,177              
 
                 
 
                       
Total December 31, 2009
  $ 103,681     $ 5,525     $ 83,979  
 
                 
 
1     — This category contains investments in equity securities (approximately 80.4%), fixed income securities (approximately 14.0%), and cash (approximately 5.6%).
 
2     — This represent the estimated contract value with the insurer of the plan. The company uses the contract value as a practical expedient in measuring fair value.
     

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Defined Contribution Plans
     The Company sponsors two 401(k) defined contribution plans, one for salaried and hourly nonunion employees and one for hourly union employees, in which its U.S. employees are eligible to participate. Under these plans, employees may contribute a percentage of compensation and the Company will match a portion of the employees’ contributions. Additionally, under the salaried and hourly nonunion plan, the Company may make a discretionary profit sharing contribution, if Company performance objectives are achieved. The Company’s contributions to these plans in the years ended December 31, 2009, 2008 and 2007 totaled $1,270, $2,540 and $2,431, respectively.
     The Company also sponsors several small, defined contribution plans at certain of its foreign operating units. The Company contribution is a defined percentage of eligible salary and in certain of the plans the employees also make contributions. The total expense for these plans was $233, $260 and $358 for the years ended December 31, 2009, 2008 and 2007, respectively.
Pension and Related Assets and Liabilities in the Balance Sheet
     Pension and related assets, as reflected in the consolidated balance sheets, also include the insurance investment contracts relating to the unfunded German pension plans which are excluded from the pension disclosure herein. The asset values totaled $1,458 and $1,548 at December 31, 2009 and 2008, respectively.
     Pension and related liabilities, as reflected in the consolidated balance sheets, include the obligations for the German pension plans, totaling $3,321 and $3,192 at December 31, 2009 and 2008, respectively, and for termination liabilities and other benefit-related liabilities established at certain of the Company’s foreign subsidiaries. The termination amounts are payable to the employees when they separate from the company. The liabilities are calculated in accordance with civil and labor laws based on each employee’s length of service, employment category and remuneration, and are calculated at the amount that the employee would be entitled to, if the employee terminated immediately. The liabilities related to these arrangements totaled $1,130 and $2,927 at December 31, 2009 and 2008, respectively.
17. STOCK-BASED COMPENSATION
     In October 2005, Pregis Holding I Corporation, the Company’s ultimate parent company, established the Pregis Holding I Corporation 2005 Stock Option Plan (the “Pregis Plan”) to provide for the grant of nonqualified and incentive stock options to key employees, consultants and directors of the Company. At December 31, 2009, the number of shares available for grant under the Pregis Plan was 2,091.62, of which approximately 201.11 remain available for grant.
     The majority of the options issued pursuant to the Pregis Plan vest equally over a five-year period as service is rendered. The Company recognizes the compensation cost of all share-based awards, other than those with performance conditions, on a straight-line basis over the vesting period of the award. In 2007 and 2008, certain management employees were awarded performance-based options, which may vest in three equal installments if

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defined performance objectives are met for each or any of the three years to which they relate. Vesting may be accelerated at any time as determined by the committee administering the Pregis Plan. The options expire if not exercised within ten years of the date of grant. Additionally, vested options will generally terminate 45 days after termination of employment.
     The fair value of each option award granted after adoption of SFAS No. 123R or ASC Topic 718 has been estimated on the date of grant using the Black-Scholes option-valuation model, using the following assumptions:
             
    Year Ended December 31,
    2009   2008   2007
Expected term (in years)
  3.0 - 5.0   3.0 - 5.0   3.0 - 5.0
Volatility
  35.0%   30.0%   30.0%
Risk — free interes rate
  1.3% - 2.5%   1.4% - 3.5%   3.4% - 4.6%
Dividend yield
     
     The expected terms of the option grants were estimated, based on the vesting periods for the grants. Since the Company has minimal historical experience with respect to exercise behavior for its options, this was considered to be a reasonable estimate in relation to exercise behavior experienced by similar private-equity owned entities. The risk-free interest rate assumption is based on U.S. Treasury security yields for issues with a remaining term equal to the option’s expected life at the time of grant. The Company does not have publicly traded equity, so it does not have historical data regarding the volatility of its common stock. Therefore, the expected volatility used for 2009, 2008, and 2007 was based on volatility of similar entities, referred to as “guideline” companies. In determining similarity, the Company considered industry, stage of life cycle, size and financial leverage. The dividend yield on the Company’s stock is assumed to be zero since the Company has not paid dividends and has no current plans to do so in the future. Based on its minimal historical experience of pre-vesting cancellations, the Company has assumed an annual forfeiture rate of 5% for the majority of its option grants. These assumptions are evaluated, and revised as necessary, based on changes in market conditions and historical experience.
     The Company’s stock option activity for the years ended December 31, 2009, 2008 and 2007 under the Pregis Plan is as follows:

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                    Weighted  
            Weighted     Average  
    Number of     Average     Remaining  
    Options     Exercise Price     Contractual Life  
Outstanding at January 1, 2007
    1,435.29     $ 13,000.00          
Granted
    665.58       17,968.00          
Exercised
                   
Forfeited
    (305.21 )     13,000.00          
Expired
    (86.91 )     13,000.00          
 
                   
 
                       
Outstanding at December 31, 2007
    1,708.75     $ 14,935.00          
Granted (1)
    342.76       20,000.00          
Exercised
    (21.85 )     13,000.00          
Forfeited
    (184.84 )     16,230.00          
Expired
    (35.65 )     13,000.00          
 
                   
 
                       
Outstanding at December 31, 2008 (1)
    1,809.17     $ 15,782.00          
Granted
    346.70       19,610.00          
Exercised
    (45.00 )     13,000.00          
Forfeited
    (233.39 )     16,346.00          
Expired
    (64.20 )     15,307.00          
 
                   
 
                       
Outstanding at December 31, 2009
    1,813.28       16,524.00     7.14 years
 
                   
 
                       
Exercisable at December 31, 2009
    865.75       14,868.00     6.20 years
 
                   
 
(1)   Amounts granted in 2009 and outstanding at December 31, 2009 do not include 65.73 of performance-based options for which fair value will be calculated when the 2010, 2011, and 2012 performance objectives are determined and are deemed probable.
     The weighted average grant-date fair value of options granted was $5,204, $5,989 and $6,147 per share for the years ended December 31, 2009, 2008 and 2007, respectively. The total grant-date fair of options that vested during 2009 and 2008 was $3,834 and $3,092, respectively.
     As of December 31, 2009, there was $3,777 of unrecognized compensation cost related to non-vested options granted in 2006 through 2009 under the plans. This cost is expected to be amortized over a weighted-average service period of approximately 3.0 years. For the years ended December 31, 2009, 2008 and 2007, the Company recognized share-based compensation expense of $1,353 ($851, net of tax), $951 ($598, net of tax) and $558 ($381, net of tax), respectively.
     In December 2005, Pregis Holding I Corporation also adopted the Pregis Holding I Corporation Employee Stock Purchase Plan (the “Stock Purchase Plan”) to provide key employees of the Company the opportunity to purchase shares at an initial price of $10,000 per share, equal to the per share price paid by the Sponsors in the Acquisition. New executives joining the Company have also been given the opportunity to purchase shares at the then-current fair market value. The Company has recognized no compensation expense related to shares sold under this plan, since the price paid by management approximates fair value.

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18. SEGMENT AND GEOGRAPHIC INFORMATION
     The Company reports its segment information in accordance with SFAS No. 131 or ASC Topic 280, Disclosures About Segments of an Enterprise and Related Information. Through the third quarter of 2008, the Company classified its operations into four reportable segments, known as Protective Packaging, Flexible Packaging, Hospital Supplies and Rigid Packaging.
     The Protective Packaging segment represents an aggregation of the Company’s North American and European protective packaging businesses and its Hexacomb operating segments. These businesses have comparable economic characteristics and similarities in their product offerings, production processes, marketing and distribution channels, and end-users.
     In the fourth quarter of 2008, the Company hired a new executive to manage the operations of the flexible packaging, hospital supplies and rigid packaging businesses as an integrated specialty packaging segment, in support of the Company’s strategy to drive synergies across these businesses. This new executive reports directly to the chief operating decision maker, with each of the business managers reporting up to him. He is responsible for executing the growth strategy of these businesses, including acquisition/divestiture, restructuring, and capital investment decisions, and provides integrated specialty packaging information to the chief operating decision maker. In the fourth quarter of 2008, the Company began reporting the operations of its flexible packaging, hospital supplies and rigid packaging businesses as one reportable segment, Specialty Packaging, to be aligned with the aforementioned changes in its internal management structure and related changes in information provided to the chief operating decision maker. As a result, the Company now reports two reportable segments:
     Protective Packaging – This segment manufactures, markets, sells and distributes protective packaging products in North America and Europe. Its protective mailers, air-encapsulated bubble products, sheet foam, engineered foam, inflatable airbag systems, honeycomb products and other protective packaging products are manufactured and sold for use in cushioning, void-fill, surface-protection, containment and blocking & bracing applications.
     Specialty Packaging – This segment provides innovative packaging solutions for food, medical, and other specialty packaging applications, primarily in Europe.
     In accordance with the requirements of SFAS No. 131 or ASC Topic 280, the segment information presented for the year ended December 31, 2007 has been restated to conform to the Company’s new reportable segment structure.
          The Company evaluates performance and allocates resources to each segment based on segment EBITDA, which is calculated internally as net income before interest, taxes, depreciation, amortization, and restructuring expense and adjusted for other non-cash activity. Management believes that segment EBITDA provides useful information for analyzing and evaluating the underlying operating results of each segment. However, segment EBITDA should not be considered in isolation or as a substitute for net income or other measures of financial performance prepared in accordance with generally accepted accounting principles in the United States. Additionally, the Company’s computation of segment EBITDA may not be comparable to other similarly titled measures computed by other companies.

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     Information regarding the Company’s reportable segments is as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
Net Sales:
                       
Protective Packaging
  $ 497,144     $ 661,976     $ 636,939  
Specialty Packaging
    304,080       357,388       342,460  
 
                 
 
  $ 801,224     $ 1,019,364     $ 979,399  
 
                 
                         
    Year ended December 31,  
    2009     2008     2007  
Segment EBITDA:
                       
Protective Packaging
  $ 52,561     $ 61,166     $ 80,328  
Specialty Packaging
    41,339       42,523       48,608  
 
                 
Total segment EBITDA
    93,900       103,689       128,936  
Corporate expenses (1)
    (17,539 )     (11,525 )     (23,611 )
Restructuring expense
    (15,207 )     (9,321 )     (2,926 )
Curtailment
          3,736        
Depreciation and amortization
    (44,783 )     (52,344 )     (55,799 )
Interest expense
    (42,604 )     (49,069 )     (46,730 )
Interest income
    394       875       1,325  
Unrealized foreign exchange gain (loss), net
    6,126       (14,022 )     2,692  
Non-cash stock compensation
    (1,353 )     (951 )     (558 )
Goodwill Impairment
          (19,057 )     (403 )
Other
    57       (1,606 )     3  
 
                 
Income (loss) before income taxes
  $ (21,009 )   $ (49,595 )   $ 2,929  
 
                 
 
                       
Depreciation and Amortization
                       
Protective Packaging
  $ 28,214     $ 32,082     $ 32,792  
Specialty Packaging
    15,944       19,680       23,007  
Corporate
    625       582        
 
                 
 
                       
Total depreciation and amortization
  $ 44,783     $ 52,344     $ 55,799  
 
                 
 
                       
Capital Spending
                       
Protective Packaging
  $ 12,605     $ 18,239     $ 18,887  
Specialty Packaging
    12,440       12,643       15,739  
 
                 
 
                       
 
  $ 25,045     $ 30,882     $ 34,626  
 
                 
                 
    As of December 31,  
    2009     2008  
Assets:
               
Protective Packaging
  $ 305,723     $ 357,943  
Specialty Packaging
    228,812       230,556  
Corporate (2)
    196,012       147,877  
 
           
Total assets
  $ 730,547     $ 736,376  
 
           

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(1)   Corporate expenses include the costs of corporate support functions, such as information technology, finance, human resources, legal and executive management which have not been allocated to the segments. Additionally, corporate expenses may include other non-recurring or non-operational activity that the chief operating decision maker excludes in assessing business unit performance. These expenses, along with depreciation and amortization and other non-operating activity such as interest expense/income and foreign exchange gains/losses are not considered in the measure of the segments’ operating performance, but are shown herein as reconciling items to the Company’s consolidated income (loss) before income taxes.
 
(2)   Corporate assets include goodwill, deferred financing costs, and other assets attributed to the corporate support functions.
Net Sales by Major Product Line
                         
    Year ended December 31,  
    2009     2008     2007  
Protective packaging
  $ 497,144     $ 661,976     $ 636,939  
Flexible packaging
    167,540       188,160       170,617  
Rigid packaging
    54,698       63,651       71,805  
Medical supplies and packaging
    81,842       105,577       100,038  
 
                 
 
                       
Total net sales
  $ 801,224     $ 1,019,364     $ 979,399  
 
                 
     The Company’s flexible packaging product line includes films that had been previously reported within the rigid packaging segment, prior to the Company’s revision to its reportable segments. Similarly, the Company’s medical supplies and packaging product line includes certain medical packaging that had previously been reported within the flexible packaging segment.
Net Sales by Geographic Area
     The following table provides certain geographic-area information, as determined based on the country from which the sales originate and in which the assets are based:
                                         
    Net Sales     Total Long-Lived Assets (e)  
    Year ended December 31,     Year ended December 31,  
    2009     2008     2007     2009     2008  
United States
  $ 273,846     $ 341,543     $ 340,876     $ 196,524     $ 207,170  
Germany
    209,792       254,629       237,208       104,631       107,380  
United Kingdom
    134,827       164,737       177,808       22,984       38,413  
Western Europe ( a )
    65,350       88,742       70,701       31,606       33,439  
Southern Europe ( b )
    38,657       64,450       60,996       23,302       25,171  
Central Europe ( c )
    36,802       58,993       50,835       28,070       29,492  
Accumulated Other ( d )
    41,950       46,270       40,975       14,947       16,530  
 
                             
Total
  $ 801,224     $ 1,019,364     $ 979,399     $ 422,064     $ 457,595  
 
                             
 
(a)   Includes Belgium and the Netherlands.
 
(b)   Includes Spain, Italy, and France.
 
(c)   Includes Poland, Hungary, the Czech Republic, Bulgaria, and Romania.
 
(d)   Includes Canada, Mexico, and Egypt.
 
(e)   Total long-lived assets are total assets, excluding intercompany notes and investments, less current assets.

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19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
     The components of accumulated other comprehensive income (loss), net of taxes, are as follows:
                         
    Year ended December 31,  
    2009     2008     2007  
Cummulative foreign currency translation adjustment
  $ (4,879 )   $ (5,206 )   $ 8,367  
Net unrealized gains (losses) on derivative instruments
    (3,084 )     (1,889 )     1,161  
Defined benefit pension adjustments
    (2,880 )     10,904       11,058  
 
                 
 
  $ (10,843 )   $ 3,809     $ 20,586  
 
                 
20. COMMITMENTS AND CONTINGENCIES
Financing commitments
     At December 31, 2009, the Company had letters of credit outstanding under its credit facility and foreign lines of credit totaling $12,863.
Legal matters
     The Company is party to legal proceedings arising from its operations. Related reserves are recorded when it is probable that liabilities exist and where reasonable estimates of such liabilities can be made. While it is not possible to predict the outcome of any of these proceedings, the Company’s management, based on its assessment of the facts and circumstances now known, does not believe that any of these proceedings, individually or in the aggregate, will have a material adverse effect on the Company’s financial position. The Company does not believe that, with respect to any pending legal matters, it is reasonably possible that a loss exceeding amounts already recognized may be material. However, actual outcomes may be different than expected and could have a material effect on the company’s results of operations or cash flows in a particular period.
Environmental matters
     The Company is subject to a variety of environmental and pollution-control laws and regulations in all jurisdictions in which it operates. Where it is probable that related liabilities exist and where reasonable estimates of such liabilities can be made, associated reserves are established. Estimated liabilities are subject to change as additional information becomes available regarding the magnitude of possible clean-up costs, the expense and effectiveness of alternative clean-up methods, and other possible liabilities associated with such situations. However, management believes that any additional costs that may be incurred as more information becomes available will not have a material adverse effect on the Company’s financial position, although such costs could have a material effect on the Company’s results of operations or cash flows in a particular period.

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21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
                                 
    First   Second   Third   Fourth
    Quarter   Quarter   Quarter   Quarter
Year Ended December 31, 2009:
                               
 
                               
Net Sales
  $ 185,544     $ 196,003     $ 207,047     $ 212,630  
Cost of sales, excluding depreciation and amortization
    141,007       147,049       156,088       165,371  
Depreciation and amortization
    11,471       11,305       12,607       9,400  
Operating income (loss)
    (1,531 )     6,512       7,425       2,492  
Income (loss) before income taxes
    (14,076 )     5,230       (827 )     (11,336 )
Net income (loss)
    (10,408 )     3,063       (3,341 )     (7,324 )
 
                               
Year Ended December 31, 2008:
                               
 
                               
Net Sales
  $ 259,322     $ 275,216     $ 265,188     $ 219,638  
Cost of sales, excluding depreciation and amortization
    202,494       216,276       205,673       174,247  
Depreciation and amortization
    13,540       13,610       13,584       11,610  
Operating income (loss)
    8,278       7,266       10,098       (12,315 )
Loss before income taxes
    (562 )     (4,448 )     (12,764 )     (31,821 )
Net loss
    (3,272 )     (5,569 )     (11,962 )     (26,927 )
22. SUBSEQUENT EVENTS
     On February 19, 2010 Pregis acquired all of the outstanding stock of IntelliPack, Inc. through one of its wholly owned subsidiaries, Pregis Management Corporation. The initial purchase price of $31.5 million was funded with cash-on-hand. In accordance with the terms of the agreement, additional future consideration may be payable by Pregis if certain future performance targets are achieved by IntelliPack.
23. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION
     In connection with the Acquisition, Pregis Holding II (presented as Parent in the following tables), through its 100%-owned subsidiary, Pregis Corporation (presented as Issuer in the following tables), issued senior secured notes and senior subordinated notes. The senior notes are fully, unconditionally and jointly and severally guaranteed on a senior secured basis and the senior subordinated notes are fully, unconditionally and jointly and severally guaranteed on an unsecured senior subordinated basis, in each case, by Pregis Holding II and substantially all existing and future 100%-owned domestic restricted subsidiaries of Pregis Corporation (collectively, the “Guarantors”). All other subsidiaries of Pregis Corporation, whether direct or indirect, do not guarantee the senior secured notes and senior subordinated notes (the “Non-Guarantors”). The Guarantors also unconditionally guarantee the Company’s borrowings under its senior secured credit facilities on a senior secured basis.
     Additionally, the senior secured notes are secured on a second priority basis by liens on all of the collateral (subject to certain exceptions) securing Pregis Corporation’s new senior secured credit facilities. In the event that secured creditors exercise remedies with respect to Pregis and its guarantors’ pledged assets, the proceeds of the liquidation of those assets will first be applied to repay obligations secured by the first priority liens under the new senior secured credit facilities and any other first priority obligations.

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     The following condensed consolidating financial statements present the results of operations, financial position and cash flows of (1) the Parent, (2) the Issuer, (3) the Guarantors, (4) the Non-Guarantors, and (5) eliminations to arrive at the information for Pregis Holding II on a consolidated basis. Separate financial statements and other disclosures concerning the Guarantors are not presented because management does not believe such information is material to investors. Therefore, each of the Guarantors is combined in the presentation below.

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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
December 31, 2009
                                                 
                    Guarantor     Non-Guarantor              
    Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Assets
                                               
Current assets
                                               
Cash and cash equivalents
  $     $ 40,883     $     $ 39,552     $     $ 80,435  
Accounts receivable
                                               
Trade, net of allowances
                30,394       90,418             120,812  
Affiliates
          64,072       62,382       3,963       (130,417 )      
Other
                10       12,025             12,035  
Inventories, net
                20,051       60,973             81,024  
Deferred income taxes
          134       2,507       2,438             5,079  
Due from Pactiv
                      1,169             1,169  
Prepayments and other current assets
          3,492       1,063       3,374             7,929  
 
                                   
Total current assets
          108,581       116,407       213,912       (130,417 )     308,483  
Investment in subsidiaries / intercompany balances
    58,792       484,778                   (543,570 )      
Property, plant and equipment, net
          1,239       66,525       159,118             226,882  
Other assets
                                               
Goodwill
                85,176       41,074             126,250  
Intangible assets, net
                15,763       22,291             38,054  
Other
          8,092       3,381       19,405             30,878  
 
                                   
Total other assets
          8,092       104,320       82,770             195,182  
 
                                   
Total assets
  $ 58,792     $ 602,690     $ 287,252     $ 455,800     $ (673,987 )   $ 730,547  
 
                                   
 
                                               
Liabilities and stockholder’s equity
                                               
Current liabilities
                                               
Current portion of long-term debt
  $     $     $     $ 300     $     $ 300  
Accounts payable
          4,972       16,820       56,916             78,708  
Accounts payable, affiliate
          32,152       46,676       51,595       (130,423 )      
Accrued income taxes
          (1,365 )     1,188       5,413             5,236  
Accrued payroll and benefits
          16       4,148       10,078             14,242  
Accrued interest
          7,720             2             7,722  
Other
          1       6,297       11,713             18,011  
 
                                   
Total current liabilities
          43,496       75,129       136,017       (130,423 )     124,219  
Long-term debt
          502,256             278             502,534  
Intercompany balances
                106,933       295,747       (402,680 )      
Deferred income taxes
          (8,485 )     20,287       7,919             19,721  
Other
          6,631       5,820       12,830             25,281  
Total Stockholder’s equity
    58,792       58,792       79,083       3,009       (140,884 )     58,792  
 
                                   
Total liabilities and stockholder’s equity
  $ 58,792     $ 602,690     $ 287,252     $ 455,000     $ (673,987 )   $ 730,547  
 
                                   

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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
December 31, 2008
                                                 
                    Guarantor     Non-Guarantor              
    Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Assets
                                               
Current assets
                                               
Cash and cash equivalents
  $     $     $ 9,764     $ 31,415     $     $ 41,179  
Accounts receivable
                                               
Trade, net of allowances
                30,338       91,398             121,736  
Affiliates
          75,907       70,569       1,864       (148,340 )      
Other
                57       13,772             13,829  
Inventories, net
                23,829       64,038             87,867  
Deferred income taxes
          134       2,589       1,613             4,336  
Due from Pactiv
                      1,399             1,399  
Prepayments and other current assets
          2,457       1,316       4,662             8,435  
 
                                   
Total current assets
          78,498       138,462       210,161       (148,340 )     278,781  
Investment in subsidiaries and intercompany balances
    90,101       524,168                   (614,269 )      
Property, plant and equipment, net
          1,704       74,590       168,830             245,124  
Other assets
                                               
Goodwill
                85,597       41,798             127,395  
Intangible assets, net
                17,150       24,104             41,254  
Other
          7,734       4,046       32,042             43,822  
 
                                   
Total other assets
          7,734       106,793       97,944             212,471  
 
                                   
Total assets
  $ 90,101     $ 612,104     $ 319,845     $ 476,935     $ (762,609 )   $ 736,376  
 
                                   
 
                                               
Liabilities and stockholder’s equity
                                               
Current liabilities
                                               
Current portion of long-term debt
  $     $ 4,641     $     $ 261     $     $ 4,902  
Accounts payable
          1,257       15,081       62,754             79,092  
Accounts payable, affiliates
          46,698       61,668       39,974       (148,340 )      
Accrued taxes
          (374 )     1,217       6,121             6,964  
Accrued payroll and benefits
          114       3,616       7,923             11,653  
Accrued interest
          6,905                         6,905  
Other
          84       5,663       15,993             21,740  
 
                                   
Total current liabilities
          59,325       87,245       133,026       (148,340 )     131,256  
Long-term debt
          460,128             586             460,714  
Intercompany balances
                137,778       288,577       (426,355 )      
Deferred income taxes
          (4,315 )     20,331       8,897             24,913  
Other
          6,865       6,907       15,620             29,392  
 
                                               
Total stockholder’s equity
    90,101       90,101       67,584       30,229       (187,914 )     90,101  
 
                                   
Total liabilities and stockholder’s equity
  $ 90,101     $ 612,104     $ 319,845     $ 476,935     $ (762,609 )   $ 736,376  
 
                                   

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Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2009
                                                 
                    Guarantor     Non-Guarantor              
    Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net Sales
  $     $     $ 281,361     $ 527,871     $ (8,008 )   $ 801,224  
 
                                               
Operating costs and expenses:
                                               
Cost of sales, excluding depreciation and amortization
                200,639       416,884       (8,008 )     609,515  
Selling, general and administrative
          18,424       34,629       63,995             117,048  
Depreciation and amortization
          624       15,125       29,034             44,783  
Other operating expense, net
          3,830       2,905       8,245             14,980  
 
                                   
Total operating costs and expenses
          22,878       253,298       518,158       (8,008 )     786,326  
 
                                   
Operating income (loss)
          (22,878 )     28,063       9,713             14,898  
Interest expense
          2,148       15,328       25,128             42,604  
Interest income
          (85 )           (309 )           (394 )
Foreign exchange loss (gain), net
          (3,820 )     20       (2,503 )           (6,303 )
Equity in loss of subsidiaries
    18,010       2,338                   (20,348 )      
 
                                   
Income (loss) before income taxes
    (18,010 )     (23,459 )     12,715       (12,603 )     20,348       (21,009 )
Income tax expense (benefit)
          (5,449 )     1,272       1,178             (2,999 )
 
                                   
Net income (loss)
  $ (18,010 )   $ (18,010 )   $ 11,443     $ (13,781 )   $ 20,348     $ (18,010 )
 
                                   
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2008
                                                 
                    Guarantor     Non-Guarantor              
    Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net Sales
  $     $     $ 351,564     $ 678,643     $ (10,843 )   $ 1,019,364  
 
                                               
Operating costs and expenses:
                                               
Cost of sales, excluding depreciation and amortization
                265,568       543,965       (10,843 )     798,690  
Selling, general and administrative
          11,946       41,591       74,263             127,800  
Depreciation and amortization
          577       16,378       35,389             52,344  
Goodwill Impairment
                      19,057               19,057  
Other operating expense, net
          648       923       6,575             8,146  
 
                                   
Total operating costs and expenses
          13,171       324,460       679,249       (10,843 )     1,006,037  
 
                                   
Operating income (loss)
          (13,171 )     27,104       (606 )           13,327  
Interest expense
          (4,482 )     18,018       35,533             49,069  
Interest income
          (190 )           (685 )           (875 )
Foreign exchange loss
          3,452             11,276             14,728  
Equity in loss of subsidiaries
    47,730       34,876                   (82,606 )      
 
                                   
Income (loss) before income taxes
    (47,730 )     (46,827 )     9,086       (46,730 )     82,606       (49,595 )
Income tax expense (benefit)
          903       (1,033 )     (1,735 )           (1,865 )
 
                                   
Net income (loss)
  $ (47,730 )   $ (47,730 )   $ 10,119     $ (44,995 )   $ 82,606     $ (47,730 )
 
                                   

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Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2007
                                                 
                    Guarantor     Non-Guarantor              
    Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $     $ 348,230     $ 639,262     $ (8,093 )   $ 979,399  
Operating costs and expenses:
                                               
Cost of sales, excluding depreciation and amortization
                254,409       493,919       (8,093 )     740,235  
Selling, general and administrative
          23,754       41,457       71,969             137,180  
Depreciation and amortization
                18,564       37,235             55,799  
Other operating expense, net
                  (96 )     286             190  
 
                                   
Total operating costs and expenses
          23,754       314,334       603,409       (8,093 )     933,404  
 
                                   
Operating income (loss)
          (23,754 )     33,896       35,853             45,995  
Interest expense
          (4,334 )     20,607       30,457             46,730  
Interest income
          (817 )           (508 )           (1,325 )
Foreign exchange (gain) loss
          (7,224 )     (2 )     4,887             (2,339 )
Equity in loss (income) of subsidiaries
    4,779       (8,014 )                 3,235        
 
                                   
Income (loss) before income taxes
    (4,779 )     (3,365 )     13,291       1,017       (3,235 )     2,929  
Income tax expense (benefit)
          1,414       11       6,283             7,708  
 
                                   
Net income (loss)
  $ (4,779 )   $ (4,779 )   $ 13,280     $ (5,266 )   $ (3,235 )   $ (4,779 )
 
                                   

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Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2009
                                                 
                    Guarantor     Non-Guarantor              
    Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Operating activities
                                               
Net income (loss)
  $ (18,010 )   $ (18,010 )   $ 11,443     $ (13,781 )   $ 20,348     $ (18,010 )
Non-cash adjustments
    18,010       1,294       15,766       26,435       (20,348 )     41,157  
Changes in operating assets and liabilities, net of effects of acquisitions
          699       (41 )     1,812             2,470  
 
                                   
Cash provided by operating activities
          (16,017 )     27,168       14,466             25,617  
 
                                   
Investing activities
                                               
Capital expenditures
          (159 )     (8,220 )     (16,666 )           (25,045 )
Sales leaseback proceeds
                      9,850             9,850  
Proceeds from sale of assets
                2,132       (366 )           1,766  
 
                                   
Cash used in investing activities
          (159 )     (6,088 )     (7,182 )           (13,429 )
 
                                   
Financing activities
                                               
Intercompany activity
          30,844       (30,844 )                  
Proceeds from 2009 note issuance, net of discount
          172,173                         172,173  
Procees from revolving credit facility
          42,000                         42,000  
Retirement of term B1 & B2 notes
          (176,991 )                       (176,991 )
Deferred finaning costs
          (6,466 )                       (6,466 )
Repayment of long-term debt
          (4,312 )                       (4,312 )
Other, net
                        (269 )           (269 )
 
                                   
Cash provided by (used in) financing activities
          57,248       (30,844 )     (269 )           26,135  
Effect of exchange rate changes on cash and cash equivalents
          (189 )           1,122             933  
 
                                   
Increase (decrease) in cash and cash equivalents
          40,883       (9,764 )     8,137             39,256  
Cash and cash equivalents, beginning of period
                9,764       31,415             41,179  
 
                                   
Cash and cash equivalents, end of period
  $     $ 40,883     $     $ 39,552     $     $ 80,435  
 
                                   

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Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2008
                                                 
                    Guarantor     Non-Guarantor              
    Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Operating activities
                                               
Net income (loss)
  $ (47,730 )   $ (47,730 )   $ 10,119     $ (44,995 )   $ 82,606     $ (47,730 )
Non-cash adjustments
    47,730       44,239       14,257       55,719       (82,606 )     79,339  
Changes in operating assets and liabilities, net of effects of acquisitions
          (15,328 )     4,750       18,623             8,045  
 
                                   
Cash (used in) provided by operating activities
          (18,819 )     29,126       29,347             39,654  
 
                                   
Investing activities
                                               
Capital expenditures
                (7,408 )     (23,474 )           (30,882 )
Proceeds from sale of assets
                7       1,056             1,063  
Business acquisitions, net of cash acquired
                      (958 )           (958 )
Insurance proceeds
                            3,205               3,205  
Other, net
                      (969 )           (969 )
 
                                   
Cash used in investing activities
                (7,401 )     (21,140 )           (28,541 )
 
                                   
Financing activities
                                               
Intercompany activity
          11,961       (11,961 )                  
Repayment of long-term debt
          (1,893 )                       (1,893 )
Other, net
                      (115 )           (115 )
 
                                   
Cash (used in) provided by financing activities
          10,068       (11,961 )     (115 )           (2,008 )
Effect of exchange rate changes on cash and cash equivalents
          110             (3,025 )           (2,915 )