UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K/A
(Amendment
No. 1)
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number: 333-130353-04
PREGIS HOLDING II CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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20-3321581
(I.R.S. Employer Identification No.) |
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1650 Lake Cook Road
Deerfield, Illinois
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60015 |
(Address of Principal Executive Offices)
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(Zip Code) |
(847) 597-2200
(Registrants Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
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Name of each exchange |
Title of each class
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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
registrants 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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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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 Companys common stock. There were 149.0035 shares of the
registrants 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 registrants registration statement on Form S-4, as amended, are
incorporated by reference into Item 15 of this report.
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.
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:
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Protective Packaging, which manufactures, markets, sells and distributes protective
packaging products in North America and Europe; and |
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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 Managements 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:
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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. |
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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. |
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Advanced, Low-Cost Manufacturing. We benefit from a number of competitive
advantages that help us compete effectively in our markets. For example: |
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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. |
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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 |
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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. |
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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. |
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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. |
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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
Packagings 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. |
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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 sponsors 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:
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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. |
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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. |
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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 |
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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 Pregiss Second Priority
Senior Secured Floating Rate Notes due 2013 and 123/8% Senior Subordinated Notes due 2013, borrowings
under Pregiss 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.
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Protective Packaging |
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Specialty Packaging |
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Products
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Protective mailers
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Flexible packaging: |
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Air-encapsulated cushion products
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Bags |
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Inflatable airbag systems
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Pouches |
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Sheet foam
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Labels |
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Engineered foam |
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Honeycomb
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Rigid packaging: |
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Paper packaging systems
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Thermoformed foodservice containers |
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Foam-in-place
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Custom packaging |
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Medical supplies and packaging: |
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Operating drapes and gowns |
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Surgical procedure packs |
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Medical packaging |
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End-Markets Served
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General industrial
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Fresh food |
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High tech electronics
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Dry food |
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Furniture manufacturing
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Consumer products |
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Building products
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Foodservice |
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Retail
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Hospitals |
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Agriculture
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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 Packagings 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 customers 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
Packagings 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 foams 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 products 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, Managements Discussion and Analysis of Financial Condition
and Results of Operations and Item 1A, Risk FactorsRisks Related to Our BusinessOur 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 SECs 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 PLATTSs index, their respective market indices. However, in
the fourth quarter of 2009 these costs were approximately 40% higher compared to the prior years
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:
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loss of market share; |
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failure to anticipate and respond to changing consumer preferences and demographics; |
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failure to develop new and improved products; |
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failure of consumers to accept our brands and exhibit brand loyalty and pay premium
prices; and |
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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:
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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. |
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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. |
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Recent market volatility could make it difficult for us to raise capital in the public
markets, if we needed to do so. |
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In July 2008, Moodys 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. |
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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. |
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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:
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the diversion of managements attention from our core businesses; |
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the disruption of our ongoing business; |
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entry into markets in which we have limited or no experience, including other
geographies that we have not previously operated in; |
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the ability to integrate our acquisitions without substantial costs, delays or other
problems, which would be complicated by the breadth of our international operations; |
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inaccurate assessment of undisclosed liabilities; |
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the incorporation of acquired product lines into our business; |
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the failure to realize expected synergies and cost savings; |
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the loss of key employees or customers of the acquired or divested business; |
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increasing demands on our operational systems; |
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the integration of information system and internal controls; and |
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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:
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exchange rate fluctuations; |
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restrictive governmental actions such as the imposition of trade quotas and
restrictions on transfers of funds; |
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changes in non-U.S. labor laws and regulations affecting our ability to
hire, retain or dismiss employees; |
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the need to comply with multiple and potentially conflicting laws and
regulations; |
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difficulties and costs of staffing, managing and accounting for foreign
operations; |
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unfavorable business conditions or economic instability in any particular
country or region; and |
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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 managements 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 Pregiss 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
Pregiss term loan facilities subject to certain conditions.
Our substantial indebtedness could have important consequences. For example, it could:
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make it more difficult for us to satisfy our obligations under the instruments
governing our indebtedness; |
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increase our vulnerability to general adverse economic and industry conditions; |
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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; |
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limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate; |
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place us at a competitive disadvantage compared to our competitors that have less debt;
and |
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|
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 Pregiss 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
18
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:
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incur, assume or permit to exist additional indebtedness, guaranty obligations or
hedging arrangements; |
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|
incur liens or agree to negative pledges in other agreements; |
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|
make capital expenditures; |
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|
make loans and investments; |
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declare dividends, make payments or redeem or repurchase capital stock; |
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|
limit the ability of our subsidiaries to enter into agreements restricting dividends
and distributions; |
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|
with respect to the senior secured floating rate notes, engage in sale-leaseback
transactions; |
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|
engage in mergers, acquisitions and other business combinations; |
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|
prepay, redeem or purchase certain indebtedness; |
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|
amend or otherwise alter the terms of our organizational documents, our indebtedness
and other material agreements; |
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|
sell assets or engage in receivables securitizations; |
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transact with affiliates; and |
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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 Pregiss 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
19
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,
Managements 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, Managements 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:
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risks associated with our substantial indebtedness and debt service; |
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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; |
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risks of increasing competition in our existing and future markets, including
competition from new products introduced by competitors; |
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our ability to meet future capital requirements; |
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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; |
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risks related to our acquisition or divestiture strategy; |
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our ability to retain management; |
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our ability to protect our intellectual property rights; |
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changes in governmental laws and regulations, including environmental laws and
regulations; |
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changes in foreign currency exchange rates; and |
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other risks and uncertainties, including those listed under Item 1A, Risk Factors. |
20
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.
21
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 REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
There is no established public trading market for the registrants common stock. All of the
registrants 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. Pregiss 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.
22
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 Managements Discussion and
Analysis of Financial Condition and Results of Operations and our consolidated financial
statements and the related notes included elsewhere in this report.
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Successor |
|
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|
Predeccessor |
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|
|
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|
October 13 to |
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January 1 To |
|
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|
Year ended December 31, |
|
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December 31, |
|
|
October 12, |
|
|
(dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Net Sales |
|
$ |
801,224 |
|
|
$ |
1,019,364 |
|
|
$ |
979,399 |
|
|
$ |
925,499 |
|
|
$ |
191,602 |
|
|
$ |
678,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
25,045 |
|
|
$ |
30,882 |
|
|
$ |
34,626 |
|
|
$ |
28,063 |
|
|
$ |
3,910 |
|
|
$ |
21,906 |
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 stockholders / owners 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. MANAGEMENTS 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 Corporations 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.,
24
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 PLATTSs 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
25
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
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Managements 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.
26
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 units 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.
27
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 IIs 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 Companys 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.
28
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.
29
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 Companys 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
30
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 Companys 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 Companys 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 Companys 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 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
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 segments 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 segments 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 segments 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.
32
For the year ended December 31, 2009, the Specialty Packaging segments 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 segments 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 segments 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 segments 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 Companys ability to
recover increases in these costs from its customers. Although price increases have typically
lagged the underlying change in raw
33
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 Companys 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.
34
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.
35
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 Pregiss 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 Companys 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 Companys
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, Pregiss
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.
Pregiss senior secured credit facilities and related hedging arrangements are guaranteed by
Pregis Holding II, the direct holding parent company of Pregis, all of Pregiss current and future
domestic subsidiaries and, if no material tax consequences would result, Pregiss future foreign
subsidiaries and, subject to certain exceptions, are secured by a first priority security interest
in substantially all of Pregiss 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 Pregiss
first-tier foreign subsidiary.
Pregiss 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.
36
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 |
|
|
|
|
|
|
|
|
37
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, Pregiss immediate parent, and each of Pregiss 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 holders 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 Pregiss senior
indebtedness. The senior subordinated notes are guaranteed on a senior subordinated basis by
Pregis Holding II and each of Pregiss 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
38
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 Pregiss 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 Pregiss 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 Pregiss
assets. The indentures also contain reporting covenants regarding delivery of annual and quarterly
financial information. The indenture governing the senior secured notes limits Pregiss 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 Pregiss 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 Pregiss senior secured credit
facilities on a first priority basis (subject to exceptions):
|
(1) |
|
substantially all of Pregiss and each guarantors 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 Pregiss and each guarantors
existing or future direct or indirect domestic subsidiaries and 66% of the capital stock
or other securities of Pregiss and each guarantors existing or future direct foreign
subsidiaries, but only to the extent that the inclusion of such |
39
|
|
|
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.
40
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 Pregiss 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 Pregiss 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:
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
x |
|
2.2 |
x |
|
|
2.2 |
x |
Secured Indebtedness Leverage Ratio |
|
|
Maximum of 3.0 |
x |
|
0.5 |
x |
|
|
1.8 |
x |
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
Companys 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 |
42
|
|
|
|
|
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, Moodys 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.
|
|
|
|
|
|
|
Moodys |
|
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.
43
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 customers
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 units 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 units carrying amount exceeds its fair value, an indication exists that
the reporting units 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 units
goodwill is determined by allocating the reporting units 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
44
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 managements 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 managements 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.
45
RECENT ACCOUNTING PRONOUNCEMENTS
Pregis adopted the provisions of FASB Staff Position No. FAS 132R-1 or ASC Topic 715,
EmployersDiscolsures about Postretirement Benefit Plan Assets, on January 1, 2009. This standard
requires more detailed disclosures about Pregiss 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 Companys 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 Companys 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 entitys 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
Companys 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 entitys 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 Companys 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
46
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 Companys
consolidated financial statements.
47
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.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
49
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 Corporations 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 Companys 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 Companys 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.
Chicago, Illinois
March 25, 2010
50
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 stockholders 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 |
|
Stockholders 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 stockholders equity |
|
|
58,792 |
|
|
|
90,101 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
730,547 |
|
|
$ |
736,376 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
51
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
52
Pregis Holding II Corporation
Consolidated Statements of Equity
and Comprehensive Loss
(dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
Total |
|
|
|
Common |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
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
53
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 |
|
54
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 Pregiss 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 Pactivs 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).
55
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 Companys 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 customers 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
stockholders 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.
56
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
units 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 units carrying amount exceeds its fair value, an indication
exists that the reporting units 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
units goodwill is determined by allocating the reporting units 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 Companys other intangible assets, consisting primarily of customer relationships,
patents, licenses, and non-compete agreements, are being amortized over their respective estimated
useful lives.
57
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 Companys 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 managements 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.
58
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,
EmployersDiscolsures about Postretirement Benefit Plan Assets, on January 1, 2009. This standard
requires more detailed disclosures about Pregiss 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 Companys 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 Companys 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 entitys derivative instruments and hedging activities
and is effective for fiscal
59
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
Companys 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 entitys 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 Companys 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 Companys
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 Companys 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.
60
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.
61
6. GOODWILL
Changes in the Companys 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 Companys 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 Companys 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 Companys 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 units 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 Companys other intangible assets are summarized as follows:
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys statement of operations for the years ended
December 31, 2009 and 2008, respectively.
8. DEBT
The Companys 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.
63
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 Pregiss 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 Pregiss
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 Companys 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 Companys 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;
|
64
|
|
|
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
Companys 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 Companys and the guarantors obligations under
the Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 debts
classification as long-term as of December 31, 2009.
Pregiss senior secured credit facilities are guaranteed by Pregis Holding II Corporation and
all of Pregiss 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 Pregiss 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
65
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,
Pregiss 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 Pregiss ability to incur
additional indebtedness beyond that allowed within certain defined debt baskets and the Companys
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 Companys long-term
debt:
|
|
|
|
|
2010 |
|
$ |
300 |
|
2011 |
|
|
42,278 |
|
2012 |
|
|
|
|
2013 (including discount) |
|
|
472,110 |
|
|
|
|
|
|
|
$ |
514,688 |
|
|
|
|
|
As outlined above, a portion of Pregiss 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 Companys 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 Companys euro-denominated
intercompany notes at December 31, 2009 and 2008, respectively. These amounts are reported net
within the foreign exchange loss (gain) in the Companys 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
66
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 Companys 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 Companys 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 Companys senior secured credit facilities is
considered to approximate fair value as interest rates vary, based on prevailing market rates. The
fair value of the Companys 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.
67
The carrying values and estimated fair values of the Companys 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 Companys 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.
68
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 Companys 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 Is 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 Companys 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 |
|
|
|
|
|
|
|
|
|
|
|
69
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 Companys 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 |
) |
|
|
|
|
|
|
|
70
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 Companys 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 Companys 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 Companys 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
71
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 Companys 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 Companys 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 Companys 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. |
72
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 Companys 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 Companys 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 Companys 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 |
|
|
|
|
|
|
|
|
|
|
|
73
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
Companys year end. The Company already used a December 31 measurement date so adoption of this
provision had no impact.
74
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 Companys 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 Companys benefit plans:
75
|
|
|
|
|
|
|
|
|
|
|
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.
76
Plan Assumptions
The weighted average assumptions used to determine the Companys 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 Companys 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.
Pregiss 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.
77
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 Companys 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. |
78
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 Companys 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 Companys 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 employees 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 Companys 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
79
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 options
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 Companys 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 Companys stock option activity for the years ended December 31, 2009, 2008 and 2007 under
the Pregis Plan is as follows:
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
81
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 Companys 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 Companys 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 Companys 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 Companys computation of segment EBITDA may not be comparable to other similarly titled
measures computed by other companies.
82
Information regarding the Companys 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 |
|
|
|
|
|
|
|
|
83
|
|
|
(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 Companys 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 Companys flexible packaging product line includes films that had been previously reported
within the rigid packaging segment, prior to the Companys revision to its reportable segments.
Similarly, the Companys 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. |
84
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 Companys 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 Companys 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 companys 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 Companys financial position,
although such costs could have a material effect on the Companys results of operations or cash
flows in a particular period.
85
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 Companys 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 Corporations 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.
86
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.
87
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 stockholders 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 Stockholders equity |
|
|
58,792 |
|
|
|
58,792 |
|
|
|
79,083 |
|
|
|
3,009 |
|
|
|
(140,884 |
) |
|
|
58,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
58,792 |
|
|
$ |
602,690 |
|
|
$ |
287,252 |
|
|
$ |
455,000 |
|
|
$ |
(673,987 |
) |
|
$ |
730,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
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 stockholders 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 stockholders equity |
|
|
90,101 |
|
|
|
90,101 |
|
|
|
67,584 |
|
|
|
30,229 |
|
|
|
(187,914 |
) |
|
|
90,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders equity |
|
$ |
90,101 |
|
|
$ |
612,104 |
|
|
$ |
319,845 |
|
|
$ |
476,935 |
|
|
$ |
(762,609 |
) |
|
$ |
736,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
(8,641 |
) |
|
|
9,764 |
|
|
|
5,067 |
|
|
|
|
|
|
|
6,190 |
|
Cash and cash equivalents,
beginning of year |
|
|
|
|
|
|
8,641 |
|
|
|
|
|
|
|
26,348 |
|
|
|
|
|
|
|
34,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
end of year |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,764 |
|
|
$ |
31,415 |
|
|
$ |
|
|
|
$ |
41,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,779 |
) |
|
$ |
(4,779 |
) |
|
$ |
13,280 |
|
|
$ |
(5,266 |
) |
|
$ |
(3,235 |
) |
|
$ |
(4,779 |
) |
Non-cash adjustments |
|
|
4,779 |
|
|
|
(11,483 |
) |
|
|
17,562 |
|
|
|
37,186 |
|
|
|
3,235 |
|
|
|
51,279 |
|
Changes in operating assets and liabilities, net of effects of acquisitions |
|
|
|
|
|
|
14,115 |
|
|
|
(16,488 |
) |
|
|
7,048 |
|
|
|
|
|
|
|
4,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities |
|
|
|
|
|
|
(2,147 |
) |
|
|
14,354 |
|
|
|
38,968 |
|
|
|
|
|
|
|
51,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
(10,161 |
) |
|
|
(24,465 |
) |
|
|
|
|
|
|
(34,626 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
|
|
|
|
513 |
|
|
|
262 |
|
|
|
|
|
|
|
775 |
|
Business acquisitions, net of cash
acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,785 |
) |
|
|
|
|
|
|
(28,785 |
) |
Insurance proceeds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
884 |
|
|
|
|
|
|
|
884 |
|
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226 |
) |
|
|
|
|
|
|
(226 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
|
|
|
|
|
|
|
|
(9,648 |
) |
|
|
(52,330 |
) |
|
|
|
|
|
|
(61,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany activity |
|
|
|
|
|
|
13,069 |
|
|
|
(12,655 |
) |
|
|
(414 |
) |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
|
|
|
|
(1,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,237 |
) |
Repayment of long-term debt |
|
|
|
|
|
|
(1,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,828 |
) |
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218 |
|
|
|
|
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in (provided by)
financing activities |
|
|
|
|
|
|
10,004 |
|
|
|
(12,655 |
) |
|
|
(196 |
) |
|
|
|
|
|
|
(2,847 |
) |
Effect of exchange rate changes on
cash and cash equivalents |
|
|
|
|
|
|
784 |
|
|
|
|
|
|
|
2,188 |
|
|
|
|
|
|
|
2,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents |
|
|
|
|
|
|
8,641 |
|
|
|
(7,949 |
) |
|
|
(11,370 |
) |
|
|
|
|
|
|
(10,678 |
) |
Cash and cash equivalents,
beginning of year |
|
|
|
|
|
|
|
|
|
|
7,949 |
|
|
|
37,718 |
|
|
|
|
|
|
|
45,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
end of year |
|
$ |
|
|
|
$ |
8,641 |
|
|
$ |
|
|
|
$ |
26,348 |
|
|
$ |
|
|
|
$ |
34,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
Schedule II Valuation and Qualifying Accounts
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
Balance at |
|
|
Additions |
|
|
|
|
|
|
foreign |
|
|
|
|
|
|
beginning of |
|
|
charged to |
|
|
Deductions/ |
|
|
currency |
|
|
Balance at end |
|
Description |
|
period |
|
|
income |
|
|
Other |
|
|
exchange rates |
|
|
of period |
|
Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
$ |
5,357 |
|
|
$ |
1,928 |
|
|
$ |
(1,614 |
) |
|
$ |
344 |
|
|
$ |
6,015 |
|
Year ended December 31, 2008 |
|
|
5,313 |
|
|
|
1,562 |
|
|
|
(1,126 |
) |
|
|
(392 |
) |
|
|
5,357 |
|
Year ended December 31, 2007 |
|
|
4,055 |
|
|
|
973 |
|
|
|
(111 |
) |
|
|
396 |
|
|
|
5,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation
reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
$ |
25,911 |
|
|
$ |
3,684 |
|
|
$ |
3,252 |
|
|
$ |
851 |
|
|
$ |
33,698 |
|
Year ended December 31, 2008 |
|
|
17,068 |
|
|
|
10,011 |
|
|
|
(893 |
) |
|
|
(275 |
) |
|
|
25,911 |
|
Year ended December 31, 2007 |
|
|
18,055 |
|
|
|
4,706 |
|
|
|
(6,314 |
) |
|
|
621 |
|
|
|
17,068 |
|
95
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive
Officer (our principal executive officer) and our Chief Financial Officer (our principal financial
officer), we conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report
(the Evaluation Date). Based on this evaluation, the principal executive officer and principal
financial officer concluded as of the Evaluation Date that the disclosure controls and procedures
were
effective such that information relating to us that is required to be disclosed in reports
filed with the SEC: (i) is recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including
our principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Managements Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with generally accepted accounting
principals. In designing and evaluating our disclosure controls and procedures, management
recognizes that disclosure controls and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and
procedures are met. Additionally, in designing disclosure controls and procedures, our management
necessarily is required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control Integrated Framework. The assessment included extensive documenting,
evaluating and testing the design and operating effectiveness of our internal control over
financial reporting. Management concluded that based on its assessment, our internal control over
financial reporting was effective as of December 31, 2009.
This annual report on Form 10-K does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public accounting
firm pursuant to temporary rules of the SEC that permit the Company to provide only managements
report in this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
For the quarter ended December 31, 2009, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
96
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table provides information about the current directors of Pregis Holding II and the
executive officers of Pregis Holding II and Pregis Corporation. The biographies of each of our
directors contain a description of the experience, qualifications, attributes or skills that caused
the Board to determine that the person should serve as a director for the Company.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position with our Company |
Michael T. McDonnell
|
|
|
52 |
|
|
President, Chief Executive Officer and Director |
D. Keith LaVanway
|
|
|
45 |
|
|
Vice President and Chief Financial Officer |
Kevin J. Baudhuin
|
|
|
47 |
|
|
President, Protective Packaging North America |
Jeff Kellar
|
|
|
54 |
|
|
President, Hexacomb |
Borge Kvamme
|
|
|
57 |
|
|
President, Specialty Packaging |
Thomas ONeill
|
|
|
58 |
|
|
Vice President, Human Resources |
Paul Pak
|
|
|
50 |
|
|
Vice President, Procurement |
Peter Rijneveldshoek
|
|
|
58 |
|
|
President, Protective Packaging Europe |
Hartmut Scherf
|
|
|
60 |
|
|
General Manager, Flexibles |
John L. Garcia
|
|
|
53 |
|
|
Chairman of the Board |
Glenn Fischer
|
|
|
59 |
|
|
Director |
Brian R. Hoesterey
|
|
|
42 |
|
|
Director |
James W. Leng
|
|
|
64 |
|
|
Director |
James D. Morris
|
|
|
56 |
|
|
Director |
John P. OLeary, Jr.
|
|
|
63 |
|
|
Director |
Thomas J. Pryma
|
|
|
36 |
|
|
Director |
James E. Rogers
|
|
|
64 |
|
|
Director |
Michael T. McDonnell became our President and Chief Executive Officer and a director of our
company and our parent companies on October 6, 2006. Prior to that, Mr. McDonnell served as Group
Vice President of the Environment Technologies Group of Engelhard Corporation, a surface and
materials science company that was acquired by BASF Aktiengesellschaft in June 2006. Mr. McDonnell
joined Engelhard in 2002 as Vice President, Enterprise Technologies. Previously, from 1998 to 2002,
Mr. McDonnell was with Cytec Industries, a specialty chemicals and materials company, as Vice
President, Coating and Performance Chemicals and Vice President, Specialty Resins. Mr. McDonnell
has extensive executive experience in operations and strategic planning in the consumer and
industrial product sectors. He is also uniquely qualified to serve as one of our directors due to
his detailed knowledge of our operations.
D. Keith LaVanway became our Vice President and Chief Financial Officer on September 19, 2007.
Prior to joining Pregis, Mr. LaVanway held the position of Chief Financial Officer at Associated
Materials Incorporated (AMI), an Ohio-based building materials company, since 2001. Prior to
AMI, Mr. LaVanway served as Vice President, Finance at various operating divisions of Nortek, Inc.
and also held financial management roles at Abbott Laboratories and Ernst & Young.
Thomas E. ONeill became our Vice President, Human Resources, effective August 15, 2007.
Prior to joining Pregis, Mr. ONeill worked with The BOC Group plc for over 25 years, most recently
serving as Global Human Resource Director, Industrial Products from 2000 to 2007 and previous to
that as Vice President Human Resources from 1995 to 2000, and Vice President Distribution, for BOC
Gases Americas.
97
Paul Pak became our Vice President, Procurement, effective September 1, 2008. Prior to
joining Pregis, Mr. Pak worked with Chrysler LLC where he held positions of increasing
responsibility in the procurement and supply chain functions, including his most recent assignment
as Executive Director, Chrysler Global Sourcing. Prior to this position, he led the procurement,
quality and logistics activities of DaimlerChrysler in Northeast Asia based in Beijing, China as a
Vice President of DaimlerChryslers Global procurement & Supply organization.
Kevin J. Baudhuin became Pregiss President, Protective Packaging North America, effective
December 10, 2007. Prior to joining Pregis, Mr. Baudhuin worked with The BOC Group plc for over 20
years, most recently serving as President, Industrial & Special Projects, North America from March
2004 to February 2007 and previous to that as Global Market Director, Special Products from
February 2002 to March 2004 and other positions of general management, sales and marketing.
Peter Rijneveldshoek became Pregiss President, Protective Packaging Europe, effective August
1, 2009. Mr. Rijneveldshoek worked with Ashland Inc. for over 30 years. He held positions of
increasing responsibility in sales, marketing and general management, including serving as
President, Ashland Performance and President, Ashland Europe.
Jeff Kellar became Pregiss President, Hexacomb, effective January 5, 2009. Prior to joining
Pregis, Mr. Kellar was President of the flexible packaging division of Alcoa / Reynolds Packaging
Group from 2006 to 2008. Previous to this, Mr. Kellar held senior strategy and business
development roles with Tetra Pak Inc. for 12 years, and worked for 18 years in the brewing industry
at Molson Breweries and Miller Brewing Company.
Borge Kvamme became Pregiss President, Specialty Packaging effective January 4, 2010. Prior
to joining Pregis, Mr. Kvamme worked with Elopak for 25 years, most recently serving as Executive
Vice President EMEA division. Mr. Kvamme also held the position of Chief Marketing Officer for
Elopak. Throughout his career with Elopak, Mr. Kvamme held positions of increasing responsibility
in sales, marketing and general management and was responsible for leading the innovation process
within the company.
John L. Garcia became the Chairman of the board of directors of Pregis Holding II on May 18,
2005. Mr. Garcia has been Chief Executive Officer of AEA Investors LP since 2006 and President of
AEA Investors LP and its predecessor since 2002 and was a Managing Director of AEA Investors Inc.
from 1999 through 2002. From 1994 to 1999, Mr. Garcia was a Managing Director with Credit Suisse
First Boston LLC, formerly known as Credit Suisse First Boston Corporation, where he served as
Global Head of the Chemicals Investment Banking Group and Head of the European Acquisition and
Leveraged Finance and Financial Sponsor Groups. Before joining Credit Suisse First Boston, Mr.
Garcia worked at Wertheim Schroder in New York as an investment banker and at ARCO Chemicals in
research, strategic planning and commercial development. Mr. Garcia is currently a director of AEA
Investors LP and Convenience Food Systems B.V. Mr. Garcia has extensive experience in investment
banking, corporate finance and strategic planning, including in the value-added industrial and
specialty chemical products industries.
Glenn Fischer became a director of Pregis Holding II in October 2005 upon consummation of the
Acquisition and served as our Interim Chief Executive Officer from December 1, 2005 to February 28,
2006. Mr. Fischer is an operating partner with AEA Investors LP, which he joined in 2005. From 2000
to 2005 he was President and Chief Operating Officer of Airgas, Inc., the largest U.S. distributor
of industrial, medical and specialty gases, welding, safety and related products. Mr. Fischer
joined Airgas after spending 19 years with The BOC Group in a wide range of positions leading to
his appointment in 1997 as President of BOC Gases, North America. In addition to his responsibility
for all North American operations, Mr. Fischer served on The BOC Group Executive Management Board.
Prior to joining BOC in 1981, Mr. Fischer served at W.R. Grace in a variety of finance, planning
and management roles. He is currently a director of Henry Corporation, Behavioral Interventions,
and SRS Roofing
Supply Corporation. Mr. Fischer has extensive experience in finance, planning and management
and industrial operations and significant executive experience in the industrial sector.
Brian R. Hoesterey became a director of Pregis Holding II on May 18, 2005. Mr. Hoesterey is a
partner with AEA Investors LP, which he joined in 1999. Prior to joining AEA Investors, he was with
BT Capital Partners, the private equity investment vehicle of Bankers Trust. Mr. Hoesterey has also
previously worked for McKinsey & Co.
98
and the investment banking division of Morgan Stanley. He is
currently a director of Henry Corporation, CPG International Inc., Unifrax Corporation, Houghton
International, and SRS Roofing Supply Corporation. Mr. Hoesterey has extensive experience with
industrial manufacturing operations, corporate finance and strategic planning. He also has
significant experience serving as a director of other large companies in the industrial sector.
James W. Leng became a director of Pregis Holding II in October 2005 upon consummation of the
Acquisition. Mr. Leng currently serves as on the boards of TNK-BP Limited, Tata Steel Limited
(India), Alstom SA (France), and Doncasters Group Limited. Mr. Lengs past appointments include
Corus Group plc, Pilkington plc, Hanson plc, Laporte plc, and Low & Bonar plc. Mr. Leng has
extensive experience in corporate governance and strategic planning including in the consumer and
industrial products sectors.
James D. Morris became a director of Pregis Holding II in October 2005 upon consummation of
the Acquisition and served as our Chief Executive Officer from October 12, 2005 to December 31,
2005. Mr. Morris served as Senior Vice President and General Manager, Protective and Flexible
Packaging for Pactiv from January 2000 until becoming our Chief Executive Officer. Prior to 2000,
and since he joined Pactiv in 1995, Mr. Morris was Vice President, Manufacturing and Engineering of
Pactivs Consumer and North American Foodservice divisions. In 1993, he became Vice President of
Operations for Plastics Packaging at Mobil Corporation and served in that role until that business
was acquired by Tenneco in 1995. He began his career as an engineer at Mobil Corporation in 1975.
Mr. Morris has extensive experience in corporate operations and executive leadership. He is
uniquely qualified to serve on our board, having previously worked in the senior management of our
Company for five years before joining our board.
John P. OLeary, Jr. became a director of Pregis Holding II in October 2005 upon consummation
of the Acquisition. Mr. OLeary has served as President and Chairman of Kenson Plastics Inc., a
specialty plastic converting company, since November 2008. Mr. OLeary served as Senior Vice
President, SCA North America, a packaging supplier, from 2002 through 2004. From 2001 through
2004, he was President and Chief Executive Officer of Tuscarora Incorporated, a wholly-owned
subsidiary of SCA Packaging International B.V. and a division of SCA North America. Tuscarora is a
producer and manufacturer of custom design protective packaging. Prior to SCAs acquisition of
Tuscarora, Mr. OLeary was Tuscaroras CEO, President, from 1989 to 2001, and its Chairman of the
Board from 1992 through 2001. Mr. OLeary currently serves on the Board of Directors of Matthews
International Corp. Mr. OLeary has extensive experience in strategic planning and corporate
operations including in the plastic and packaging industries.
Thomas J. Pryma became a director of Pregis Holding II on May 18, 2005. Mr. Pryma is a partner
with AEA Investors LP, which he joined in 1999. Prior to joining AEA, Mr. Pryma worked in the
Financial Sponsors and Corporate Banking Groups in the investment banking division of Merrill
Lynch. He is currently a director of Unifrax Corporation, Houghton International, and Behavioral
Interventions. Mr. Pryma has extensive experience in investment banking, corporate finance and
strategic planning in the consumer and industrial products sectors, including within the
value-added industrial products sector. He also has significant experience in the area of
corporate governance.
James E. Rogers became a director of Pregis Holding II in October 2005 upon consummation of
the Acquisition. Since 1993, Mr. Rogers has served as president of SCI Investors Inc., a private
equity investment firm. From 1993 to 1996, Mr. Rogers served as Chairman of Custom Papers Group,
Inc., a paper manufacturing company. From 1991 to 1993, he was President and Chief Executive
Officer of Specialty Coatings International, Inc., a manufacturer of specialty paper and film
products. Prior to 1991, Mr. Rogers was Senior Vice President, Group Executive of James River
Corporation, a paper and packaging manufacturer. Mr. Rogers also serves as a director of Caraustar
Industries, Inc., Owens & Minor, Inc., and New Market Corporation. Mr. Rogers has extensive
experience in investment banking, strategic planning and corporate operations, as well as
experience with executive compensation.
On August 3, 2009, we announced that Peter Rijneveldshoek was appointed as our new President,
Protective Packaging Europe, effective August 1, 2009. Mr. Rijneveldshoek replaced Fernando
DeMiguel, who left Pregis effective August 1, 2009.
99
Leadership Structure of the Board
Michael Mc Donnell is our Chief Executive Officer, and John Garcia is our Chairman of the
Board. The Chairman of the Board is responsible for chairing board meetings, setting the agendas
for the Board meetings and providing information to the Board members in advance of meetings. We
believe that the leadership structure of the Board is appropriate for our company. Given the
nature of our ownership structure, the Board elected John Garcia who is Chief Executive Officer and
President of AEA investors, as Chairman of the Board. The Board believes that the Companys
administration of risk management has not affected the Boards leadership structure, as described
above. For more information see Committees of the Board of Directors below.
Committees of the Board of Directors
The board of directors of Pregis Holding II has formed an audit committee and a compensation
committee. The members of the audit committee are Thomas J. Pryma, Brian R. Hoesterey, and Glenn
Fischer. The board of directors has determined that Messrs. Pryma and Hoesterey are audit committee
financial experts, based on their education and professional experience. Neither Mr. Pryma nor Mr.
Hoesterey is an independent director as such term is defined by the rules of the New York Stock
Exchange and The Nasdaq Stock Market.
The audit committee recommends the annual appointment and reviews the independence of auditors
and reviews the scope of audit and non-audit assignments and related fees, the results of the
annual audit, accounting principals used in financial reporting, internal auditing procedures, the
adequacy of our internal control procedures, related party transactions, and investigations into
matters related to audit functions. The audit committee is responsible for overseeing risk
management on behalf of the Board. Our audit committee meets at least quarterly with the Chief
Financial Officer and the independent auditors where it receives
regular updates regarding our
managements assessment of risk exposures including liquidity, credit and operational risk and the
process in place to monitor such risks and review results of operations, financial reporting and
assessments of internal controls over financial reporting.
The members of the compensation committee are Thomas J. Pryma, Chairman, John L. Garcia, Brian
R. Hoesterey and John P. OLeary, Jr. The compensation committee reviews and approves the
compensation and benefits of our senior employees and directors, authorizes and ratifies equity and
other incentive arrangements, and authorized employment and related agreements.
Code of Ethics
Pregis Corporation has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller and persons
performing similar functions. A copy of the code of ethics has been posted on our website at
www.pregis.com. In the event that we amend or waive provisions of this code of ethics with respect
to such officers, we intend to also disclose the same on our website.
100
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Compensation Discussion and Analysis
General Philosophy. Our primary objectives with respect to executive compensation are to
attract and retain the best possible executive talent, to tie annual and long-term cash
compensation and stock option awards to achievement of measurable corporate, business unit and
individual performance objectives, and to align executives incentives with shareholder value
creation. To achieve these objectives, we maintain compensation plans that tie a substantial
portion of executives overall compensation to our financial performance and the value of our
common stock. Overall, the total compensation opportunity is intended to create an executive
compensation program that is set at competitive levels to comparable employers. Hiring and
compensation decisions for our executives were approved by the compensation committee of Pregis
Holding II. The compensation committee also considered compensation programs at AEAs other
portfolio companies.
Overall compensation for our executives is established based on the scope of their
responsibilities, taking into account competitive market compensation paid by other companies for
similar positions. Compensation is reviewed annually, and may be adjusted from time to time to
realign total compensation with market levels after taking into account inflation and individual
responsibilities, performance and experience.
Our senior management compensation programs consist of three primary components:
1. Annual cash compensation. The annual cash compensation component is comprised of base
salary and at-risk, performance based cash bonuses and is intended to motivate annual performance.
Base salary. Base salaries for our executives are established based on the scope of their
responsibilities, taking into account competitive market compensation paid by other companies for
similar positions. Base salaries are reviewed annually, and may be adjusted from time to time to
realign salaries with market levels after taking into account inflation and individual
responsibilities, performance and experience.
As we developed compensation programs for new executives hired in 2009, we gave consideration
to the competitive marketplace (although we do not engage in formal benchmarking against a specific
list of peer companies) and the compensation for these executives relative to that of their
individual compensation histories and other members of our senior management.
Annual cash bonus. Depending on our performance, a significant portion of cash compensation
can be in the form of an annual cash incentive bonus based on the achievement of objective
performance metrics established soon after the beginning of the year. For 2009, the performance
goals for all of our senior executives, including the chief executive officer and chief financial
officer, were achievement of target levels of EBITDA and of working capital as a percentage of
sales. EBITDA under the annual cash incentive bonus plan is calculated as gross margin (defined as
net sales, less cost of sales, excluding depreciation and amortization) less selling, general and
administrative expenses. Extraordinary and non-recurring items may be added back or deducted at
the discretion of the compensation committee. Working capital as used in the target performance
metric is defined as trade receivables, plus inventories, less trade payables. The working capital
metric uses a thirteen-month average working capital, divided by net sales for the respective
fiscal year.
Under the annual cash incentive bonus plan, the compensation committee approves a target award
level and performance objectives for each executive officer. The target award level for each
executive officer is generally stated as a percentage of base annual salary. The following table
outlines the 2009 target bonus opportunity for our named executive officers:
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Bonus |
|
|
2009 Cash |
|
Name |
|
2009 Salary |
|
|
Award |
|
|
Incentive Target |
|
Michael T. McDonnell |
|
$ |
500,000 |
|
|
|
100 |
% |
|
$ |
500,000 |
|
D. Keith LaVanway |
|
|
360,000 |
|
|
|
60 |
% |
|
|
216,000 |
|
Kevin J. Baudhuin |
|
|
325,000 |
|
|
|
40 |
% |
|
|
130,000 |
|
Hartmut Scherf |
|
|
313,560 |
|
|
|
44.5 |
% |
|
|
139,360 |
1 |
Paul Pak |
|
|
300,000 |
|
|
|
40 |
% |
|
|
120,000 |
|
Fernando DeMiguel |
|
|
348,400 |
|
|
|
40 |
% |
|
|
139,360 |
|
|
|
|
(1) |
|
Mr. Scherfs annual cash bonus target is 100,000 euro (reflected herin based on an
average 2009 exchange rate of euro to U.S. dollars of 1:1.3936. |
Each annual performance goal is assigned a percentage of the target award, so that attainment
of the target amount of all performance objectives would entitle the executive to receive an award
equal to his target level. For the chief executive officer and chief financial officer, these
performance objectives were weighted 80% on the EBITDA performance of our company as a whole, and
20% based on the companys average working capital as a percentage of consolidated net sales. For
our senior divisional managers, these targets were weighted 60% based on the EBITDA performance of
their division, 15% based on their divisions average working capital as a percentage of net sales,
20% based on the EBITDA performance of the company as a whole, and 5% based on the companys
average working capital as a percentage of consolidated net sales.
Our executives target cash incentive bonus awards for 2009 were based on achievement of the
following 2009 financial targets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Performance |
|
|
Division Performance |
|
|
|
|
|
|
|
Target |
|
|
|
|
|
|
Target |
|
|
|
Full Year |
|
|
working capital |
|
|
Full Year |
|
|
working capital |
|
|
|
Target |
|
|
as a percentage |
|
|
Target |
|
|
as a percentage |
|
Name |
|
EBITDA |
|
|
of net sales |
|
|
EBITDA |
|
|
of net sales |
|
Michael T. McDonnell |
|
$ |
101,043 |
|
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
D. Keith LaVanway |
|
|
101,043 |
|
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
Kevin J. Baudhuin |
|
|
101,043 |
|
|
|
14.9 |
% |
|
$ |
37,232 |
|
|
|
14.4 |
% |
Hartmut Scherf |
|
|
101,043 |
|
|
|
14.9 |
% |
|
|
24,630 |
|
|
|
15.6 |
% |
Paul Pak |
|
|
101,043 |
|
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
Fernando De Miguel |
|
|
101,043 |
|
|
|
14.9 |
% |
|
|
19,251 |
|
|
|
15.3 |
% |
For the year ended December 31, 2009, only Mr. Baudhuin achieved his target bonus award, on
the basis of the performance of his respective division. The target levels of performance are
intended to be achievable when established. Our executives and divisional managers work closely
with the compensation committee and board of directors to determine performance targets. In order
to enhance our annual performance, the annual bonus opportunity increases as the performance
targets are exceeded. For example, if actual performance is less than 85% of budget, no bonus is
payable. If actual performance equals budget, 100% of the target bonus is payable, and if actual
performance exceeds budget, the bonus is increased by two percent for every one percent increase in
performance over budget. Within each target threshold,
the bonus amount is interpolated based on the actual target level achieved.
102
2. Pregis stock option plan. Participation in our 2005 Stock Option Plan has been offered to
executives to align their interests with the long-term growth objectives of our shareholders.
Under the standard option agreement, participants vest in their option awards equally over a
five-year period, so the maximum value from the options cannot be achieved until five years of
service has been provided, other than in the event of a change in control of our company as
described below. The exercise price of options has typically been set at or above the fair market
value of the underlying shares as of the date of grant. Accordingly, management is rewarded based
only on the appreciation in the value of our common stock.
As a result of external factors such as the global economic slowdown and escalating raw
material and energy costs which significantly impacted the companys 2008 results, the compensation
committee in 2009 approved a one-time change to approve vesting of one-half of the 2008
performance-based options, with the second half of the 2008 performance-based options being
combined with the performance-based options eligible for vesting based on 2009 EBITDA performance
objectives. In 2009, Mr. Baudhuin was granted additional performance based options eligible for
vesting based on 2009, 2010, and 2011 EBITDA performance objectives. Mr. Baudhuins 2009
performance based option grant was a result of the continued high level financial performance of
his division. EBITDA performance objectives for subsequent years are established upon approval of
the Companys annual operating plan for the respective years.
3. Pregis share purchase plan. Similar to the Stock Option Plan, the Employee Stock Purchase
Plan is intended to serve as a long-term incentive to drive growth. Shares of our common stock
were offered for purchase for a limited period of time subsequent to the Acquisition to a broad
group of our employees in an effort to encourage employee performance, and therefore our
performance, through share ownership. The shares were offered for purchase at $10,000 per share,
the fair market value per share paid at the time of the Acquisition, so that employee participants
would be given the opportunity to participate on equal terms with non-employee shareholders in the
growth of our company. We continue to offer new executives joining the company the opportunity to
purchase shares at the then-current fair market value. See Benefit PlansEmployee Stock Purchase
Plan for the terms of this plan.
Our senior executives are each party to an employment agreement. These agreements were
individually negotiated and will continue in their current forms until such time as the
compensation committee determines in its discretion that revisions are advisable. In addition,
consistent with our pay-for-performance compensation philosophy, we intend to continue to maintain
modest executive benefits and perquisites for officers; however, the compensation committee in its
discretion may revise, amend or add to an officers executive benefits and perquisites if it deems
it advisable. We believe these benefits and perquisites are currently competitive with levels
established by comparable companies. We have no current plans to make changes to either the
employment agreements or levels of benefits and perquisites provided. See Employment Agreements
for terms of the employment agreements.
We provide standard employee health and reimbursement benefits to our senior management which
we believe is industry competitive and necessary to attract and retain key individuals. Our
domestic executive officers participate in a company-sponsored 401(k) plan. The company-sponsored
401(k) plan currently matches 100% of employee contributions up to the first 1% of eligible
compensation and 50% of employee contributions up to the next 5% of eligible compensation. Additionally, the company may make a discretionary profit
sharing contribution of up to 4% of the executive officers eligible compensation, depending on our
performance. Our foreign division executives participate in private pension plans to which our
company makes an annual contribution, as was individually negotiated with the respective
executives.
103
Compensation Committee Report
The compensation committee of the Company has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on
such review and discussions, the compensation committee recommended to the board of directors that
the Compensation Discussion and Analysis be included in this report.
|
|
|
|
|
THE COMPENSATION COMMITTEE |
|
|
|
|
|
Thomas J. Pryma, Chairman |
|
|
John L. Garcia |
|
|
Brian R. Hoesterey |
|
|
John P. OLeary, Jr. |
104
SUMMARY COMPENSATION TABLE
The table below summarizes compensation information for each individual who served as our
chief executive officer or our chief financial officer during 2009, our next three most highly
compensated executive officers serving as of December 31, 2009, and any executive officer that
would have been included as one of the three most highly compensated except for the fact that he
was not serving as an executive officer as of December 31, 2009.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity Incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Compensation |
|
|
All Other |
|
|
|
|
Name and Principal Position |
|
Year |
|
Salary |
|
|
Bonus |
|
|
Option Awards (1) |
|
|
(2) |
|
|
Compensation |
|
|
Total |
|
Michael T. McDonnell |
|
2009 |
|
$ |
500,000 |
|
|
|
|
|
|
$ |
14,310 |
(8) |
|
$ |
|
|
|
$ |
8,225 |
(4) |
|
$ |
522,535 |
|
President
and Chief Executive Officer |
|
2008 |
|
$ |
500,000 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,952 |
|
|
$ |
511,952 |
|
|
|
2007 |
|
$ |
500,000 |
|
|
|
|
|
|
$ |
52,751 |
|
|
$ |
491,640 |
|
|
$ |
4,782 |
|
|
$ |
1,049,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. Keith LaVanway |
|
2009 |
|
$ |
360,000 |
|
|
|
|
|
|
$ |
5,317 |
(9) |
|
$ |
|
|
|
$ |
8,575 |
(4) |
|
$ |
373,892 |
|
Vice
President and Chief Financial Officer |
|
2008 |
|
$ |
360,000 |
|
|
|
|
|
|
$ |
14,498 |
|
|
$ |
|
|
|
$ |
71,335 |
|
|
$ |
445,833 |
|
|
|
2007 |
|
$ |
105,000 |
|
|
$ |
250,000 |
(3) |
|
$ |
1,386,329 |
|
|
$ |
|
|
|
$ |
69,180 |
|
|
$ |
1,810,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin J. Baudhuin |
|
2009 |
|
$ |
325,000 |
|
|
|
|
|
|
$ |
9,573 |
(10) |
|
$ |
116,267 |
|
|
$ |
8,275 |
(4) |
|
$ |
459,115 |
|
President,
Protective Packaging |
|
2008 |
|
$ |
325,000 |
|
|
|
|
|
|
$ |
866,816 |
|
|
$ |
24,980 |
|
|
$ |
270,080 |
|
|
$ |
1,486,876 |
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Pak |
|
2009 |
|
$ |
300,000 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,188 |
(4) |
|
$ |
306,188 |
|
Vice President, Procurement |
|
2008 |
|
$ |
100,000 |
|
|
|
|
|
|
$ |
223,917 |
|
|
$ |
|
|
|
$ |
16,047 |
|
|
$ |
339,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hartmut Scherf (6) |
|
2009 |
|
$ |
313,560 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
61,337 |
(5) |
|
$ |
374,897 |
|
General Manager, Flexibles |
|
2008 |
|
$ |
330,750 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
64,235 |
|
|
$ |
394,985 |
|
|
|
2007 |
|
$ |
306,503 |
|
|
|
|
|
|
$ |
30,852 |
|
|
$ |
163,327 |
|
|
$ |
56,865 |
|
|
$ |
557,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fernando De Miguel (6) |
|
2009 |
|
$ |
249,687 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
382,284 |
(7) |
|
$ |
631,971 |
|
Former President, Protective Packaging, Europe |
|
2008 |
|
$ |
367,500 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
46,993 |
|
|
$ |
414,493 |
|
|
|
2007 |
|
$ |
199,791 |
|
|
|
|
|
|
$ |
34,286 |
|
|
$ |
67,644 |
|
|
$ |
27,930 |
|
|
$ |
329,650 |
|
|
|
|
(1) |
|
Represents the fair value of the equity awards granted during applicable fiscal year. A
discussion of the assumptions underlying the valuation is provided in Note 17 to the audited
financial statements included within this report. |
|
(2) |
|
Represents amounts paid pursuant to non-equity incentive plans for the fiscal years
presented. See Grants of Plan-Based Awards in Fiscal Year 2009. |
|
(3) |
|
Amount includes (i) a one-time signing bonus of $100,000 and (ii) a bonus of $150,000 which
represents the minimum incentive bonus to be paid to Mr. LaVanway for 2007, pursuant to the
terms of his employment agreement. |
|
(4) |
|
Amount represents 2009 matching and profit sharing contributions under the Companys 401(k)
plan. |
|
(5) |
|
Amount includes (i) 2009 company contribution of $30,844 to a nonqualified defined
contribution plan for the benefit of Mr. Scherf, (ii) supplemental life and occupational
disability insurance premiums of $4,437, and (iii) use of company car at a cost of $26,056. |
|
(6) |
|
All 2009 compensation amounts have been determined based on an average 2009 exchange rate of
euro to U.S. Dollars of 1:1.3936. All 2008 compensation amounts have been determined based on
an average 2008 exchange rate of euro to U.S. |
105
|
|
|
|
|
Dollars of 1:1.47. All 2007 compensation amounts have been determined based on an average 2007
exchange rate of euro to U.S. dollars exchange rate of 1:1.37. |
|
(7) |
|
Amount includes (i) $348,400 payable for severance in accordance with the terms of Mr. De
Miguels employment agreement (ii) company contributions to group defined contribution plan of
$18,258, and (iii) use of company car cost of $15,626. |
|
(8) |
|
Amount represents the fair value of a portion of
Mr. McDonnells 2007 performance based option grant. These
performance based options may vest in three equal installments if defined performance
objectives are met for each or any of the three years to which they relate. Compensation
expense related to these performance based option shares is recorded when the company
determines it is probable that performance objectives will be met.
Although Mr. McDonnells objectives were not met for 2008
and 2009, in 2009 the compensation committee discretionarily vested
one half of one years potential vesting under this agreement. |
|
(9) |
|
Amount represents the fair value of a portion of
Mr. LaVanways 2008 performance based option grant. These
performance based options may vest in three equal installments if defined performance
objectives are met for each or any of the three years to which they relate. Compensation
expense related to these performance based option shares is recorded when the company
determines it is probable that performance objectives will be met.
Although Mr. LaVanways objectives were not met for 2008
and 2009, in 2009 the compensation committee discretionarily vested
one half of one years potential vesting under this agreement. |
|
(10) |
|
Amount represents one third of Mr. Baudhuins 2009 performance based option grant. These
performance based options may vest in three equal installments if defined performance
objectives are met for each or any of the three years to which they relate. Compensation
expense related to these performance based option shares is recorded when the company
determines it is probable that performance objectives will be met. |
The following table provides information about plan-based awards made to the named executive
officers during fiscal 2009.
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2009
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
All Other Option |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
Awards: Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Possible Payouts Under |
|
|
Estimated Future Payouts Under |
|
|
of Securities |
|
|
|
|
|
|
Grant Date Fair |
|
|
|
|
|
|
|
Non-Equity Incentive Plan Awards |
|
|
Equity Incentive Plan Awards (4)
|
|
|
Underlying |
|
|
Exercise or Base |
|
|
Value of Options |
|
|
|
Grant Date |
|
|
Threshold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Price of Option |
|
|
Awards |
|
Name |
|
(1) |
|
|
(2) |
|
|
Target |
|
|
Maximum
(3) |
|
|
Threshold |
|
|
Target |
|
|
Maximum |
|
|
(5) |
|
|
Awards ($/Sh) |
|
|
(6) |
|
Michael T. McDonnell |
|
|
|
|
|
$ |
37,700 |
|
|
$ |
500,000 |
|
|
$ |
750,000 |
|
|
|
2.161 |
|
|
|
12.967 |
|
|
|
12.967 |
|
|
|
|
|
|
$ |
13,000 |
|
|
$ |
14,310 |
(8) |
D. Keith LaVanway |
|
|
|
|
|
$ |
16,286 |
|
|
$ |
216,000 |
|
|
$ |
324,000 |
|
|
|
1.482 |
|
|
|
8.890 |
|
|
|
8.890 |
|
|
|
|
|
|
|
20,000 |
|
|
|
5,317 |
(9) |
Kevin J. Baudhuin |
|
|
5/29/2009 |
|
|
$ |
9,802 |
|
|
|
130,000 |
|
|
$ |
195,000 |
|
|
|
2.673 |
|
|
|
8.019 |
|
|
|
8.019 |
|
|
|
|
|
|
|
20,000 |
|
|
|
9,573 |
(10) |
Paul Pak |
|
|
|
|
|
$ |
9,048 |
|
|
|
120,000 |
|
|
$ |
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hartmut Scherf (7) |
|
|
|
|
|
$ |
10,508 |
|
|
|
139,360 |
|
|
$ |
209,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fernando De Miguel (7) |
|
|
|
|
|
$ |
10,508 |
|
|
|
139,360 |
|
|
$ |
209,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These are the grant dates for the equity based awards. |
|
(2) |
|
Represents amount of payout if threshold of 85% of target is attained with respect to both
EBITDA and ratio of working capital to sales. |
|
(3) |
|
If actual performance equals budget, 100% of target bonus is payable and if actual
performance exceeds budget, the bonus is increased by two percent for every one percent
increase in performance over budget. The amounts set forth in this column are the amounts
payable upon achievement of 125% of budget. |
|
(4) |
|
These options were granted pursuant to the Pregis Holding I Corporation 2005 Stock Option
Plan, with performance-based vesting requirements. See Benefit Plans 2005 Stock Option
Plan. One-third of these option grants will vest at the beginning of 2010, 2011 and 2012 if
performance criteria (described in our Compensation Discussion and Analysis above) are met for
any of the years 2009, 2010 and 2011, respectively. If performance criteria are not met for
one year, the options for that year will be cancelled, but the options for the subsequent
years may still vest, if performance criteria are met for either or both of those years. If
performance criteria are not met for any year, no options will vest. The threshold includes
the amount of options to vest if performance objectives are achieved for the 2009 year.
Target and maximum amounts are based on performance being met for each of the three respective
years. As discussed in the Compensation
Discussion and Analysis, the Companys compensation committee modified the portion of these
option awards relating to 2009 performance, to approve vesting of one-half of the 2009
performance-based options, with the second half of the 2009 performance-based options being
combined with the performance-based options |
106
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eligible for vesting based on 2010 performance objectives. The exercise price per share of these options was greater than or equal to the per
share fair market value of the common stock of Pregis Holding I on the date of the initial grant
in 2009. |
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(5) |
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During 2009, there were no options granted to the named executive officers pursuant to the
Pregis Holding I Corporation 2005 Stock Option Plan with time vesting requirements. |
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(6) |
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These amounts represent the grant date fair value, computed in accordance with SFAS No. 123R
or ASC Topic 718, of options granted to the named executive officers in 2009. The grant date
fair value was determined using a Black-Scholes valuation model in accordance with FAS 123R or
ASC Topic 718. A discussion of the assumptions underlying the valuation is provided in Note 17
to the audited financial statements included within this report. The fair value for
performance-based options is calculated for all of the performance-based options granted in
2009 based on assumptions relevant at the date of initial grant. |
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(7) |
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All amounts for Messrs. Scherf and De Miguel have been determined based on an average 2009
exchange rate of euro to U.S. Dollars of 1:1.3936. |
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(8) |
|
Amount represents the fair value of a portion of
Mr. McDonnells 2007 performance based option grant. These
performance based options may vest in three equal installments if defined performance
objectives are met for each or any of the three years to which they relate. Compensation
expense related to these performance based option shares is recorded when the company
determines it is probable that performance objectives will be met.
Although Mr. McDonnells objectives were not met for 2008
and 2009, in 2009 the compensation committee discretionarily vested
one half of one years potential vesting under this agreement. |
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(9) |
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Amount represents the fair value of a portion of
Mr. LaVanways 2008 performance based option grant. These
performance based options may vest in three equal installments if defined performance
objectives are met for each or any of the three years to which they relate. Compensation
expense related to these performance based option shares is recorded when the company
determines it is probable that performance objectives will be met.
Although Mr. LaVanways objectives were not met for 2008
and 2009, in 2009 the compensation committee discretionarily vested
one half of one years potential vesting under this agreement. |
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(10) |
|
Amount represents one third of Mr. Baudhuins 2009 performance based option grant. These
performance based options may vest in three equal installments if defined performance
objectives are met for each or any of the three years to which they relate. Compensation
expense related to these performance based option shares is recorded when the company
determines it is probable that performance objectives will be met. |
Employment Agreements
The compensation paid to our executive officers derives substantially from their individually
negotiated employment agreements.
Michael T. McDonnell
On October 2, 2006, Michael T. McDonnell, our President and Chief Executive Officer, entered
into an employment agreement, providing for a three-year term at an annual base salary of $500,000.
Commencing with the fiscal year beginning January 1, 2007, Mr. McDonnell is eligible to receive an
annual incentive bonus upon achievement of performance goals, consistent with the terms of the
annual cash bonus plan described previously. Mr. McDonnells target annual bonus is 100% of his
base salary. He participates in our standard benefit programs, including health, dental, life
insurance and vision programs. Mr. McDonnell is entitled to severance benefits in connection with
certain terminations of his employment (see Potential Payments Upon Termination or Change in
Control). Pursuant to his employment agreement, Mr. McDonnell was granted an option to purchase
382.36 shares of Pregis Holding I common stock at a purchase price of $13,000 per share. The stock
option grant was made pursuant to our 2005 Stock Option Plan and vests equally over five years,
subject to accelerated vesting upon a change in control of our company. Under the terms of his
employment agreement, Mr. McDonnell also purchased 30 shares of the common stock of Pregis Holding
I Corporation, pursuant to the terms of the Employee Stock Purchase Plan. Mr. McDonnell is also a
party to a noncompetition agreement that restricts him for one year following his termination of
employment from rendering any services to a competitor or soliciting our customers or employees.
D. Keith LaVanway
On August 15, 2007, D. Keith LaVanway, our Chief Financial Officer, entered into an employment
agreement providing for a three-year term at an annual base salary of $360,000, with employment to
commence no later than September 4, 2007. Commencing with the fiscal year beginning January 1,
2008, Mr. LaVanway is eligible to receive an annual incentive bonus upon achievement of performance
goals, consistent with the terms of the annual
cash bonus plan described previously. Mr. LaVanways target annual bonus is 60% of his base
salary. In addition, Mr. LaVanway was eligible to receive a temporary housing allowance of $5,000
per month and reimbursement of
107
reasonable related costs until he relocated to the Chicago, Illinois
area. He participates in our standard benefit programs, including health, dental, life insurance
and vision programs. Mr. LaVanway is entitled to severance benefits in connection with certain
terminations of his employment (see Potential Payments Upon Termination or Change in Control).
Pursuant to his employment agreement, Mr. LaVanway was granted an option to purchase 200.00 shares
of Pregis Holding I common stock at a purchase price of $20,000 per share. The stock option grant
was made pursuant to our 2005 Stock Option Plan and vests equally over five years, subject to
accelerated vesting upon a change in control of our company. Under the terms of his employment
agreement, Mr. LaVanway also purchased 25 shares of the common stock of Pregis Holding I
Corporation, pursuant to the terms of the Employee Stock Purchase Plan. Mr. LaVanway is also a
party to a noncompetition agreement that restricts him for one year following his termination of
employment from rendering any services to a competitor or soliciting our customers or employees.
Hartmut Scherf
Hartmut Scherf, General Manager, Flexibles, entered into an employment agreement providing for
an annual salary of 225,000. Mr. Scherf is eligible to receive an annual incentive bonus upon
achievement of performance goals, consistent with the terms of the annual cash bonus plan described
previously. Mr. Scherfs target annual bonus is 100,000. Mr. Scherf is provided with the use of
an automobile and an accident insurance policy. Mr. Scherfs agreement requires six months notice
(or our payment of six months of base salary in lieu thereof) prior to a termination and he is
subject to a noncompetition covenant for a period of twelve months following termination of his
employment. In 2008, Mr. Scherf deferred compensation pursuant to a noncontributory nonqualified
defined contribution benefit plan (see Nonqualified Deferred Compensation). Pursuant to his
employment agreement, Mr. Scherf was granted an option to purchase 82.77 shares of Pregis Holding I
common stock at a purchase price of $13,000 per share. The stock option grant was made pursuant to
our 2005 Stock Option Plan and vests equally over five years, subject to accelerated vesting upon a
change in control of our company.
Kevin J. Baudhuin
On December 11, 2007, Kevin J. Baudhuin, President, Protective Packaging North America,
entered into an employment agreement providing for a three-year term, under which his current
annual base salary is $325,000. Mr. Baudhuin is also eligible to receive an annual incentive bonus
upon achievement of performance goals, consistent with the terms of the annual cash bonus plan
described previously. Mr. Baudhuins target annual bonus is 40% of his base salary. Mr. Baudhuin
is entitled to severance benefits in connection with certain terminations of his employment (see
Potential Payments Upon Termination or Change in Control). In addition, Mr. Baudhuin was
eligible to receive a temporary housing allowance of $5,000 per month for six months and
reimbursement of reasonable related costs until he relocated to the Chicago, Illinois area. He
participates in our companys benefit programs, including health, dental, life insurance and vision
programs. Pursuant to his employment agreement, Mr. Baudhuin was granted an option to purchase
132.16 shares of Pregis Holding I common stock at a purchase price of $20,000 per share. The stock
option grant was made pursuant to our 2005 Stock Option Plan, and vests equally over five years,
subject to accelerated vesting upon a change in control of our company. Mr. Baudhuin is also a
party to a noncompetition agreement that restricts him for one year following his termination of
employment from rendering any services to a competitor or soliciting our customers or employees.
Paul Pak
On September 1, 2008, Paul Pak, President, Procurement, entered into an employment agreement
providing for a three-year term, under which his current annual base salary is $300,000. Mr. Pak
is also eligible to receive an annual incentive bonus upon achievement of performance goals,
consistent with the terms of the annual cash bonus plan described previously. Mr. Paks target
annual bonus is 40% of his base salary. Mr. Pak is entitled to severance benefits in connection
with certain terminations of his employment (see Potential Payments Upon Termination or Change in
Control). He participates in our companys benefit programs, including health, dental, life
insurance and vision programs. Pursuant to his employment agreement, Mr. Pak was granted an option
to purchase 50 shares of
Pregis Holding I common stock at a purchase price of $20,000 per share. The stock option
grant was made pursuant to our 2005 Stock Option Plan, and vests equally over five years, subject
to accelerated vesting upon a change in
108
control of our company. Mr. Pak is also a party to a
noncompetition agreement that restricts him for one year following his termination of employment
from rendering any services to a competitor or soliciting our customers or employees.
Separation Agreements
Fernando De Miguel, our former President, Protective Packaging Europe, separated from Pregis
effective August 1, 2009. According to the terms of his employment agreement, Mr. De Miguel will
receive an amount equal to his base salary of 250,000, payable over a twelve-month period
following his date of separation. In consideration of his separation benefits, Mr. De Miguel
executed a standard release in favor of our company and continues to be subject to a noncompetition
agreement which restricts him for one year following his termination of employment from rendering
any services to a competitor or soliciting our customers or employees.
Benefit Plans
2005 Stock Option Plan
On December 20, 2005, Pregis Holding I ratified the Pregis Holding I Corporation 2005 Stock
Option Plan to provide for the grant of nonqualified and incentive stock options to key employees,
consultants and directors of Pregis Holding I and its subsidiaries (including Pregis) and
affiliates. The maximum number of shares of Pregis Holding I common stock underlying the options
that are available for award under the stock option plan is 2,091.62. If any options terminate or
expire unexercised, the shares subject to such unexercised options will again be available for
grant.
The stock option plan is administered by a committee of the board of directors of Pregis
Holding I. The committee interprets and implements the stock option plan, grants options,
exercises all powers, authority and discretion of the board under the stock option plan, and
determines the terms and conditions of option grants, including vesting provisions, exercise price
and termination date of options.
Each option is evidenced by an agreement between an optionee and Pregis Holding I containing
such terms as the committee determines. Unless determined otherwise by the committee, 20% of the
shares subject to the option vest on each of the first five anniversaries of the grant date subject
to continued employment. In 2007, the committee modified the vesting terms for certain option
grants to require vesting equally over three years, dependant upon achieving certain
performance-based targets. The committee may accelerate the vesting of options at any time.
Unless determined otherwise by the committee, the option price will not be less than the fair
market value of the underlying shares on the grant date. Unless otherwise set forth in an
agreement or as determined by the committee, vested options will terminate forty-five days after
termination of employment (180 days in the event of termination by reason of death or disability).
In the event of a transaction that constitutes a change in control of Pregis Holding I as
described in the stock option plan, unless otherwise set forth in an agreement or as determined by
the committee, each outstanding option will vest immediately prior to the occurrence of the
transaction, and Pregis Holding I will have the right to cancel any options which have not been
exercised as of the date of the transaction, subject to payment of the fair market value of the
common stock underlying the option less the aggregate exercise price of the option.
The stock option plan provides that the aggregate number of shares subject to the stock option
plan and any option, the purchase price to be paid upon exercise of an option, and the amount to be
received in connection with the exercise of any option may be appropriately adjusted to reflect any
stock splits, reverse stock splits or dividends paid in the form of Pregis Holding I common stock,
and equitably adjusted as determined by the committee for any other increase or decrease in the
number of issued shares of Pregis Holding I common stock resulting from the subdivision or
combination of shares or other capital adjustments, or the payment of any other stock dividend or
other extraordinary dividend, or any other increase or decrease in the number of shares of
Pregis Holding I common stock.
109
The Pregis Holding I board of directors may amend, alter, or terminate the stock option
plan. Any board action may not adversely alter outstanding options without the consent of the
optionee. The stock option plan will terminate ten years from its effective date, but all
outstanding options will remain effective until satisfied or terminated under the terms of the
stock option plan.
Employee Stock Purchase Plan
On December 20, 2005, Pregis Holding I adopted the Pregis Holding I Corporation Employee Stock
Purchase Plan to provide key employees of Pregis Holding I and its subsidiaries (including Pregis)
an opportunity to purchase shares of Pregis Holding I common stock. The purchase price per share
of stock sold under the plan when it was initiated was $10,000, which is the price per share that
AEA Investors LP and its affiliates paid when they purchased Pregis Holding I. We have continued
to offer new executives joining the company the opportunity to purchase shares at the then-current
fair market value. Employees who desire to participate in the plan are required to purchase at
least 0.25 shares.
Shares of stock sold under the plan are evidenced by a subscription agreement between a
subscriber and Pregis Holding I which contains terms and conditions regarding the ownership of
shares sold under the plan. The subscription agreement contains standard transfer restrictions.
In addition, if a subscribers employment with our company is terminated, Pregis Holding I
generally has the opportunity to purchase all of the subscribers shares purchased under the plan
at the then-current fair market value of the shares, or at cost in certain circumstances.
The following table sets forth information concerning outstanding awards of options to
purchase shares of common stock of Pregis Holding I which have been granted to the named executive
officers as of December 31, 2009.
OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR END
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Equity Incentive Plan |
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Number of Securities |
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Awards: Number of |
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Number of Securities |
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Underlying |
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Securities Underlying |
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Underlying Unexercised |
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Unexercised Options |
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Unexercised Unearned |
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Option Exercise |
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Option Expiration |
Name |
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Options (#) Exercisable |
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(#) Unexercisable (1) |
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Options (#) |
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Price |
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Date |
Michael T. McDonnell |
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229.4160 |
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152.944 |
(5) |
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$ |
13,000 |
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10/2/2016 |
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Michael T. McDonnell |
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2.1612 |
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15.1281 |
(2) |
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13,000 |
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2/27/2017 |
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D. Keith LaVanway |
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80.00 |
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120.00 |
(6) |
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20,000 |
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8/15/2017 |
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D. Keith LaVanway |
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1.4817 |
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7.4083 |
(3) |
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20,000 |
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3/4/2018 |
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Kevin J. Baudhuin |
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52.8640 |
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79.2960 |
(7) |
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20,000 |
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12/12/2017 |
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Kevin J. Baudhuin |
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2.6730 |
(8) |
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20,000 |
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1/1/2020 |
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Hartmut Scherf |
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66.2160 |
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16.554 |
(9) |
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13,000 |
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8/15/2017 |
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Hartmut Scherf |
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3.7920 |
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3.7920 |
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2.528 |
(2) |
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13,000 |
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2/27/2017 |
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Paul Pak |
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7.0000 |
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28.0000 |
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20,000 |
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9/1/2018 |
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Paul Pak |
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5.0000 |
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20,000 |
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5/14/2019 |
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Fernando De Miguel |
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(4) |
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13,000 |
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6/1/2017 |
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(1) |
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Unvested stock options vest fully upon a change in control of our company. |
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(2) |
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Represents the outstanding unearned portion of performance-based options granted in 2007,
which may vest one-half at the beginning of 2009 or 2010, if the performance objectives
established for 2008 and/or 2009, respectively, are achieved. As discussed in the
Compensation Discussion and Analysis, the Companys |
110
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compensation committee modified the
portion of these option awards relating to 2008 performance, to approve vesting of one-half of
the 2008 performance-based options, with the second half of the 2008 performance-based options
being combined with the performance-based options eligible for vesting based on 2009
performance objectives. |
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(3) |
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Represents the number of performance-based options granted in 2008, which may vest one-third
at the beginning of 2009, 2010 and/or 2011, if the performance objectives established for
2008, 2009, and/or 2010, respectively, are achieved. As discussed in the Compensation
Discussion and Analysis, the Companys compensation committee modified the portion of these
option awards relating to 2008 performance, to approve
vesting of one-half of the 2008 performance-based options, with the second half of the 2008
performance-based options being combined with the performance-based options eligible for vesting
based on 2009 performance objectives. |
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(4) |
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Fernando De Miguels shares were cancelled in 2009 due to the terms of his agreement. |
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(5) |
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Vest in equal installments on each of the next three anniversaries of October 6, 2008. |
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(6) |
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Vest in equal installments on each of the next four anniversaries of September 19, 2008. |
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(7) |
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Vest in equal installments on each of the next four anniversaries of June 1, 2008. |
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(8) |
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Vest in equal installments on each of the next three anniversaries of January 1, 2010. |
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(9) |
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Vest in equal installments on each of the next three anniversaries of October 12, 2008. |
111
Pension Benefits
None of our named executive officers participate in Company-sponsored defined benefit plans or
post-retirement benefit plans.
Nonqualified Deferred Compensation
Mr. Scherf participates in a noncontributory, nonqualified defined contribution plan
exclusively for his benefit. The company makes a fixed annual contribution of 25,000 euros to fund
the plan as well as pays supplemental life insurance and occupational disability insurance
premiums. Annual contributions are to be made until Mr. Scherf reaches normal retirement age of 65
or his employment with our company ceases, whichever occurs sooner, at which time he has the option
to receive a lump-sum distribution or monthly payments.
NONQUALIFIED DEFERRED COMPENSATION
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Executive |
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Registrant |
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Aggregate |
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Aggregate |
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Aggregate |
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Contributions |
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Contributions in |
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Earnings in Last |
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Withdrawals / |
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Balance at Last |
Name |
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in Last FY ($) |
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Last FY ($) |
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FY ($) |
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Distributions ($) |
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FYE ($) |
Hartmut Scherf (1) |
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$ |
26,118 |
(2) |
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$ |
(31,820 |
) (3) |
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$ |
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$ |
164,585 |
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(1) |
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Calculated based on an average 2009 exchange rate of euro to U.S. dollars of 1:1.3936. |
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(2) |
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Amount is included within all other compensation in the Summary Compensation Table. |
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(3) |
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Amount includes foreign currency translation loss of $8,850. |
Potential Payments Upon Termination or Change in Control
The following sets forth potential payments to our named executive officers upon termination
of employment or upon a change in control under their employment agreements and our other
compensation programs. All payments assume a termination and change in control date of December
31, 2009 and an estimated value per share of approximately $17,500 as of December 31, 2009. The
estimated value per share is based on an estimated enterprise value of the Company determined using
an EBITDA multiple of approximately 6.50 times, which approximates a current comparable market
multiple of EBITDA.
Michael T. McDonnell
Pursuant to his employment agreement, if Mr. McDonnell were terminated without cause (as
defined in the employment agreement), if he were to terminate his employment for good reason (as
defined in the employment agreement), or if the term of his employment were not renewed, Mr.
McDonnell would be entitled to (A) a cash payment of $500,000, payable over twelve months, (B) an
incentive bonus for the year of termination, which at target performance would equal $500,000, (C)
all accrued but unpaid amounts payable under his employment agreement and any other employee
benefit plan and (D) the continuation of medical benefits until the earlier of one year following
termination at a cost of $7,261and the date Mr. McDonnell becomes eligible for medical benefits
from a subsequent employer. Pursuant to his employment agreement, if Mr. McDonnell were terminated
as a result of his death or disability (as defined in the employment agreement), Mr. McDonnell, his
estate or legal representative, as the case may be, would be entitled to all amounts accrued to the
date of termination and payable to Mr. McDonnell per the terms of the employment agreement and
under any other bonus, incentive or other plan, at
the same time such payments would be made if he had terminated without cause or for good
reason. Our obligation to provide the termination payment, the incentive bonus and the continued
medical benefits is conditioned
112
upon Mr. McDonnells continued compliance with his obligations
under a noncompetition agreement and the execution by Mr. McDonnell of a release of claims. The
provisions of the noncompetition agreement pertaining to noncompetition and nonsolicitation apply
for one year following Mr. McDonnells termination of employment. Assuming that a change in
control took place on December 31, 2009 and vesting of all of Mr. McDonnells outstanding unvested
option grants accelerated, the excess of the estimated value of the company shares over the
exercise price of the options would be approximately $690,000.
D. Keith LaVanway
Pursuant to his employment agreement, if Mr. LaVanway were terminated without cause (as
defined in the employment agreement), or if the term of his employment were not renewed, Mr.
LaVanway would be entitled to (A) a cash payment of $360,000, payable over twelve months, (B) an
incentive bonus for the year of termination, which at target performance would equal $216,000, (C)
all accrued but unpaid amounts payable under his employment agreement and any other employee
benefit plan and (D) the continuation of medical benefits until the earlier of one year following
termination at a cost of $7,261 and the date Mr. LaVanway becomes eligible for medical benefits
from a subsequent employer. Pursuant to his employment agreement, if Mr. LaVanway were terminated
as a result of his death or disability (as defined in the employment agreement), Mr. LaVanway, his
estate or legal representative, as the case may be, would be entitled to all amounts accrued to the
date of termination and payable to Mr. LaVanway per the terms of the employment agreement and under
any other bonus, incentive or other plan. Our obligation to provide the termination payment, the
incentive bonus and the continued medical benefits is conditioned upon Mr. LaVanways continued
compliance with his obligations under a noncompetition agreement and the execution by Mr. LaVanway
of a release of claims. The provisions of the noncompetition agreement pertaining to
noncompetition and nonsolicitation apply for one year following Mr. LaVanways termination of
employment. In addition, Mr. LaVanway holds options to acquire our common stock that vest upon a
change in control as defined in the 2005 Stock Option Plan. Assuming that a change in control took
place on December 31, 2009, these options would not be in the money.
Hartmut Scherf
If Mr. Scherf is terminated by us without six months prior written notice, he will receive a
lump-sum payment equal to six months of his base salary, equal to $165,375. Assuming that a
change in control took place on December 31, 2009 and vesting of all of Mr. Scherfs outstanding
unvested option grants accelerated, the excess of the estimated value of the company shares over
the exercise price of the options would be approximately $75,000.
Kevin J. Baudhuin
Pursuant to his employment agreement, if Mr. Baudhuin were terminated without cause (as
defined in the employment agreement), he would be entitled to (A) a cash payment of $325,000,
payable over twelve months, (B) an incentive bonus for the year of termination, which at target
performance would equal $130,000 and (C) all accrued but unpaid amounts payable under his
employment agreement and any other employee benefit plan. Pursuant to his employment agreement, if
Mr. Baudhuin were terminated as a result of his death or disability (as defined in the employment
agreement), Mr. Baudhuin, his estate or legal representative, as the case may be, would be entitled
to all amounts accrued to the date of termination and payable to Mr. Baudhuin per the terms of the
employment agreement and under any other bonus, incentive or other plan. Our obligation to provide
the termination payment and the incentive bonus is conditioned upon Mr. Baudhuins continued
compliance with his obligations under a noncompetition agreement and the execution by Mr. Baudhuin
of a release of claims. The provisions of the noncompetition agreement pertaining to
noncompetition and nonsolicitation apply for one year following Mr. Baudhuins termination of
employment. In addition, Mr. Baudhuin holds options to acquire our common stock that vest upon a
change in control as defined in the 2005 Stock Option Plan. Assuming that a change in control took
place on December 31, 2009, these options would not be in the money.
113
Paul Pak
Pursuant to his employment agreement, if Mr. Pak were terminated without cause (as defined
in the employment agreement), he would be entitled to (A) a cash payment of $300,000, payable over
twelve months, (B) an incentive bonus for the year of termination, which at target performance
would equal $120,000 and (C) all accrued but unpaid amounts payable under his employment agreement
and any other employee benefit plan. Pursuant to his employment agreement, if Mr. Pak were
terminated as a result of his death or disability (as defined in the employment agreement), Mr.
Pak, his estate or legal representative, as the case may be, would be entitled to all amounts
accrued to the date of termination and payable to Mr. Pak per the terms of the employment agreement
and under any other bonus, incentive or other plan. Our obligation to provide the termination
payment and the incentive bonus is conditioned upon Mr. Paks continued compliance with his
obligations under a noncompetition agreement and the execution by Mr. Pak of a release of claims.
The provisions of the noncompetition agreement pertaining to noncompetition and nonsolicitation
apply for one year following Mr. Paks termination of employment. In addition, Mr. Pak holds
options to acquire our common stock that vest upon a change in control as defined in the 2005 Stock
Option Plan. Assuming that a change in control took place on December 31, 2009, these options
would not be in the money.
Director Compensation
DIRECTOR COMPENSATION FOR 2009
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Non-Equity |
|
|
|
|
|
|
|
|
Fees Earned or |
|
|
|
|
|
Incentive Plan |
|
Change in |
|
All Other |
|
|
Name |
|
Paid in Cash |
|
Option Awards (1) |
|
Compensation |
|
Pension Value |
|
Compensation |
|
Total |
James W. Leng |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
James D. Morris |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John P. OLeary, Jr. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Rogers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn Fischer, Brian R. Hoesterey,
Thomas J. Pryma, John L. Garcia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael T. McDonnell (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During 2005, each of Messrs. Leng, Morris, OLeary, Jr. and Rogers were granted an option
to acquire 41.380 shares of Pregis Holding I common stock at an exercise price of $13,000 per
share vesting in equal installments over five years. The grant date fair value for each grant
totaled $100,283, computed in accordance with SFAS No. 123R or ASC Topic 718. Compensation
relative to the grant of stock option awards to directors is based on the fair market value at
the date of grant. The options related to our directors were all granted in 2005. As such
all compensation expense relates to 2005. Fair value at the date of grant for each of Mr.
Leng, Mr. Morris, Mr. OLeary, Jr., and Mr. Rogers was $100,140. |
|
(2) |
|
Mr. McDonnell received no compensation for serving as a director. See the Summary
Compensation Table for amounts paid to him as compensation for serving as President and Chief
Executive Officer. |
None of our directors currently receive any cash compensation for their services on the
board of directors or any committee of the board of directors. The Company currently reimburses
them for all out-of-pocket expenses incurred in the performance of their duties as directors.
114
Compensation Committee Interlocks and Insider Participation
The board of directors of Pregis Holding II has formed a compensation committee. The members
of the committee are Messrs. Pryma, Garcia, Hoesterey, and OLeary. During fiscal 2009 none of the
members of the compensation committee was an officer or employee of Pregis Holding II or any of its
subsidiaries. Messrs. Pryma, Garcia and Hoesterey are partners of AEA Investors LP. See Item 13,
Certain Relationships and Related Transactions, and Director Independence AEA Investors.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS |
All of our issued and outstanding common stock is held by Pregis Holding I Corporation. The
following table sets forth information, as of December 31, 2009, with respect to the beneficial
ownership of Pregis Holding I by (a) any person or group who will beneficially own more than five
percent of the outstanding common stock of Pregis Holding I, (b) each of the directors of Pregis
and Pregis Holding II and the executive officers of Pregis and Pregis Holding II named in Item 11,
Executive Compensation and (c) all of the directors of Pregis and Pregis Holding II and the
executive officers of Pregis and Pregis Holding II as a group.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of |
|
Percent of |
|
|
Common Stock |
|
Outstanding |
Name of Beneficial Owner: |
|
Beneficially Owned (1) |
|
Common Stock |
|
Directors and named executive officers: |
|
|
|
|
|
|
|
|
AEA Investors (2)
|
|
|
14,900 |
|
|
|
98.0 |
% |
Michael T. McDonnell (3)
|
|
|
30 |
|
|
|
* |
|
D. Keith LaVanway (4)
|
|
|
25 |
|
|
|
* |
|
Kevin J. Baudhuin (5)
|
|
|
30 |
|
|
|
* |
|
Fernando De Miguel (6)
|
|
|
75 |
|
|
|
* |
|
Hartmut Scherf (7)
|
|
|
5 |
|
|
|
* |
|
Paul Pak (8)
|
|
|
5 |
|
|
|
* |
|
John L. Garcia (9)
|
|
|
|
|
|
|
|
|
Glenn Fischer (9)
|
|
|
|
|
|
|
|
|
Brian R. Hoesterey (9)
|
|
|
|
|
|
|
|
|
James W. Leng (10)
|
|
|
|
|
|
|
|
|
John P. OLeary, Jr. (10)
|
|
|
|
|
|
|
|
|
James D. Morris (10)
|
|
|
15 |
|
|
|
* |
|
Thomas J. Pryma (9)
|
|
|
|
|
|
|
|
|
James E. Rogers (10)
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (17 persons) (11)
|
|
|
225 |
|
|
|
1.3 |
% |
|
|
|
* |
|
Represents ownership of less than one percent. |
|
(1) |
|
As used in this table, each person or entity with the power to vote or direct the
disposition of shares of common stock is deemed to be a beneficial owner. |
115
|
|
|
(2) |
|
Consists of shares of common stock held by investment vehicles managed by AEA Investors LP
and AEA Management (Cayman) Ltd. The address for AEA Investors LP is 55 East 52nd
Street, New York, New York 10055. The address for AEA Management (Cayman) Ltd. is c/o Walkers
SPV Limited, P.O. Box 908GT, George Town, Grand Cayman, Cayman Islands. |
|
(3) |
|
Does not include approximately 400 shares of common stock subject to options which have been
granted, of which 232 are exercisable. |
|
(4) |
|
Does not include approximately 209 shares of common stock subject to options which have been
granted, of which 82 are exercisable. |
|
(5) |
|
Does not include approximately 135 shares of common stock subject to options which have been
granted, of which 53 are exercisable. |
|
(6) |
|
Does not include approximately 143 shares of common stock subject to options which have been
granted, of which none are exercisable. |
|
(7) |
|
Does not include approximately 93 shares of common stock subject to options which have been
granted, of which 70 are exercisable. |
|
(8) |
|
Does not include approximately 40 shares of common stock subject to options which have been
granted, of which 12 are exercisable. |
|
(9) |
|
Messrs. Garcia, Fischer, Hoesterey and Pryma serve on the board of directors of Pregis
Holding II as representatives of AEA Investors LP. Mr. Garcia is President of AEA Investors
LP, Messrs. Hoesterey and Pryma are partners of AEA Investors LP and Mr. Fischer is an
operating partner of AEA Investors LP. Messrs. Garcia, Fischer, Hoesterey and Pryma disclaim
beneficial ownership of common stock owned by investment vehicles managed by AEA Investors LP
and AEA Management (Cayman) Ltd., except to the extent of their respective pecuniary interests
therein. |
|
(10) |
|
Does not include approximately 41 shares of common stock subject to options which have been
granted, of which 41 are exercisable. |
|
(11) |
|
Does not include approximately 1,466 shares of common stock subject to options which have
been granted, of which 676 are exercisable. Also excludes shares held by investment vehicles
managed by AEA Investors LP and AEA Management (Cayman) Ltd. Messrs. Garcia, Fischer,
Hoesterey and Pryma serve on the board of directors of Pregis Holding II as representatives of
AEA Investors LP. Mr. Garcia is President of AEA Investors LP, Messrs. Hoesterey and Pryma
are partners of AEA Investors LP and Mr. Fischer is an operating partner of AEA Investors LP.
Messrs. Garcia, Fischer, Hoesterey and Pryma disclaim beneficial ownership of common stock
owned by investment vehicles managed by AEA Investors LP and AEA Management (Cayman) Ltd.,
except to the extent of their respective pecuniary interests therein. |
The following table summarizes information, as of December 31, 2009, relating to equity
compensation plans of Pregis Holding I pursuant to which grants of options, restricted stock, or
certain other rights to acquire shares of Pregis Holding I may be granted from time to time.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
|
Number of securities to |
|
|
Weighted-average |
|
|
equity compensation |
|
|
|
be issued upon exercise of |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
outstanding options, |
|
|
outstanding options, |
|
|
securities reflected in |
|
Plan category |
|
warrants and rights |
|
|
warrants and rights |
|
|
column (a)) |
|
Equity compensation
plans approved by
security holders |
|
|
2,091.62 |
|
|
$16,524/share |
|
|
201.11 |
|
Equity compensation
plans not approved
by security holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,091.62 |
|
|
$16,524/share |
|
|
201.11 |
|
|
|
|
|
|
|
|
|
|
|
116
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Policies for Review and Approval of Related Party Transactions
We have adopted a formal written policy regarding the review and approval of related party
transactions. In accordance with this policy, our audit committee must review all such
transactions, and may approve related party transactions if the audit committee determines that
they are on terms, including levels of service and quality, that are at least as favorable to our
company as could be obtained from unaffiliated parties.
AEA Investors
We are party to a management agreement with AEA Investors LP relating to the provision of
advisory and consulting services. Under the management agreement, we pay AEA Investors LP an
annual fee of $1.5 million, plus reasonable out-of-pocket expenses. We also agreed to indemnify
AEA Investors LP and its affiliates for liabilities arising from their actions under the management
agreement. For the years ended December 31, 2009, 2008 and 2007, we paid fees, and related
expenses, to AEA Investors of $2.1 million, $1.7 million and $1.9 million, respectively, pursuant
to this agreement. We believe that the management agreement and the services above mentioned are
or were on terms at least as favorable to us as we would expect to negotiate with unrelated third
parties.
Other Related Party Transactions
The Company had sales to affiliates of AEA Investors LP totaling $1.0 million, $0.4 million
and $3.5 million for 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 $11.2 million,
$11.9 million and $8.0 million, respectively.
Board of Directors
The board of directors of Pregis Holding II consists of 9 members, including four members who
are representatives of AEA Investors, Messrs. Garcia, Fischer, Hoesterey and Pryma, and three
members who are investors in AEA Investors funds, Messrs. Leng, OLeary, Jr., and Rogers.
As a private company, whose securities are not listed on any national securities exchange,
Pregis Holding II is not required to have a majority of, or any, independent directors. Further,
even if Pregis Holding II were listed on a national securities exchange, because AEA Investors owns
more than 50% of the common stock of Pregis Holding I, and Pregis Holding I owns all of the common
stock of Pregis Holding II, Pregis Holding II would be deemed a controlled company under the
rules of the NYSE and Nasdaq, and, therefore, would not need to have a majority of independent
directors or all-independent compensation and nominating committees. However, the rules of the SEC
require us to disclose in this Form 10-K which of our directors would be considered independent
within the meaning of the rules of a national securities exchange that we may choose. Pregis
Holding II currently has four directors who would be considered independent within the definitions
of either the NYSE or Nasdaq: Messrs. Leng, OLeary, Rogers, and Morris. Four of our directors
are partners of AEA Investors: Messrs. Garcia, Fischer, Hoesterey and Pryma. One of our directors
is our CEO (Michael McDonnell).
117
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents by category of service the total fees for services rendered by
Ernst & Young LLP, the Companys principal accountant, for the years ended December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in thousands) |
|
Audit Fees (1) |
|
$ |
3,095 |
|
|
$ |
2,601 |
|
Audit-Related
Fees (2) |
|
|
28 |
|
|
|
|
|
Tax Fees (3) |
|
|
14 |
|
|
|
26 |
|
All Other Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,137 |
|
|
$ |
2,627 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes fees and out-of-pocket expenses for professional services rendered in connection with the audit of the
Companys annual consolidated financial statements, as well as other statutory
audit services. Amount also includes fees for reviews of quarterly financial statements,
comfort letters, consents and assistance with and review of documents filed with the Securities and
Exchange Commission. |
|
(2) |
|
Includes fees and out-of-pocket expenses for professional
services rendered in connection with due diligence to acquisitions. |
|
(3) |
|
Includes tax compliance services in certain foreign locations. |
Pre-Approval Policies and Procedures
The Audit Committee annually engages and pre-approves the audit and audit-related services
provided by the independent registered public accounting firm, for the following year, to assure
that the provision of such services does not impair the auditors independence. All allowable
non-audit services are regularly required to be specifically identified and submitted to the Audit
Committee for approval during regularly scheduled meetings.
For 2009, the Audit Committee discussed the non-audit services with Ernst & Young LLP and
management to determine that they are permitted under the rules and regulations concerning auditor
independence promulgated by the SEC and Public Accounting Oversight Board. Following such
discussions, the Audit Committee determined that the provision of such non-audit services by Ernst
& Young LLP was compatible with maintaining their independence.
118
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a) |
|
Documents Filed as Part of this Annual Report: |
|
1. |
|
Financial Statements. |
|
|
|
|
See Index to Financial Statements on page 49 of this report. |
|
|
2. |
|
Financial Statement Schedules. |
|
|
|
|
See Schedule II Valuation and Qualifying Allowances on page 95 of this report.
All other schedules are not required under the relevant instructions or are
inapplicable and therefore have been omitted. |
|
|
3. |
|
List of Exhibits. |
|
|
|
|
See Exhibit Index beginning on page 122 of this report. |
119
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
PREGIS HOLDING II CORPORATION
|
|
|
By: |
/s/ Michael T. McDonnell
|
|
|
|
Michael T. McDonnell |
|
|
|
President, Chief Executive Officer |
|
|
Date: March 25, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacity and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Michael T. McDonnell
Michael T. McDonnell
|
|
President, Chief
Executive Officer
and Director
(principal
executive officer)
|
|
March 25, 2010 |
|
|
|
|
|
/s/ D. Keith LaVanway
D. Keith LaVanway
|
|
Vice President and
Chief Financial
Officer (principal
financial officer
and principal
accounting officer)
|
|
March 25, 2010 |
|
|
|
|
|
/s/ John L. Garcia
John L. Garcia
|
|
Director
|
|
March 25, 2010 |
|
|
|
|
|
/s/ Glenn Fischer
Glenn Fischer
|
|
Director
|
|
March 25, 2010 |
|
|
|
|
|
/s/ Brian R. Hoesterey
Brian R. Hoesterey
|
|
Director
|
|
March 25, 2010 |
|
|
|
|
|
/s/ James W. Leng
James W. Leng
|
|
Director
|
|
March 25, 2010 |
|
|
|
|
|
/s/ John P. OLeary, Jr.
John P. OLeary, Jr.
|
|
Director
|
|
March 25, 2010 |
|
|
|
|
|
/s/ James D. Morris
James D. Morris
|
|
Director
|
|
March 25, 2010 |
|
|
|
|
|
/s/ Thomas J. Pryma
Thomas J. Pryma
|
|
Director
|
|
March 25, 2010 |
|
|
|
|
|
/s/ James E. Rogers
James E. Rogers
|
|
Director
|
|
March 25, 2010 |
120
EXHIBIT INDEX
|
|
|
Exhibit Number |
|
Description |
2.1
|
|
Stock Purchase Agreement, dated as of June 23, 2005, as amended,
among Pactiv Corporation and certain of its affiliates, as
sellers, and PFP Holding II Corporation, as purchaser. (1) |
|
|
|
2.2
|
|
Sale and Purchase Agreement dated as of July 4, 2007 between Mirto
Trading LTD, Mr. Birliba Mihai, Ms. Olariu Angelica, Mr. Mitrea
Florin, Pro Logistics S.R.L, and Pregis GmbH. (6) |
|
|
|
3.1
|
|
Certificate of Incorporation of Pregis Holding II Corporation. (1) |
|
|
|
3.2
|
|
By-laws of Pregis Holding II Corporation. (1) |
|
|
|
4.1
|
|
Indenture, dated October 12, 2005, among Pregis Corporation,
Pregis Holding II Corporation, Pregis Management Corporation,
Pregis Innovative Packaging Inc., Hexacomb Corporation, The Bank
of New York, as trustee and collateral agent, The Bank of New
York, as registrar and paying agent, and RSM Robson Rhodes LLP, as
Irish paying agent. (1) |
|
|
|
4.1 (a)
|
|
Supplemental Indenture, dated as of October 5, 2009, among Pregis
Corporation, Pregis Holding II Corporation, Pregis Management
Corporation, Pregis Innovative Packaging Inc., Hexacomb
Corporation, The Bank of New York Mellon Trust Company, N.A., as
trustee and collateral agent, The Bank of New York Mellon
(Luxembourg) S.A., as successor registrar to The Bank of New York,
The Bank of New York Mellon, as paying agent, and Grant Thornton,
as Irish paying agent. (8) |
|
|
|
4.2
|
|
Indenture, dated October 12, 2005, among Pregis Corporation,
Pregis Holding II Corporation, Pregis Management Corporation,
Pregis Innovative Packaging Inc., Hexacomb Corporation, and The
Bank of New York, as trustee. (1) |
|
|
|
4.3
|
|
Form of Initial Notes and Form of Exchange Notes (included within
the Indentures filed as Exhibit 4.1 and Exhibit 4.2). (1) |
|
|
|
4.3 (a)
|
|
Form of Initial Notes and Form of Exchange Notes (including within
the Supplemental Indenture filed as Exhibit 4.1 (a)). |
|
|
|
10.1
|
|
Credit Agreement, dated October 12, 2005, among Pregis
Corporation, Pregis Holding II Corporation, Pregis Management
Corporation, Pregis Innovative Packaging Inc., Hexacomb
Corporation, the several banks, other financial institutions and
related funds as may from time to time become parties thereto,
Credit Suisse, as collateral agent and administrative agent,
Lehman Brothers Inc., as syndication agent, and CIT Lending
Services, Inc. and JPMorgan Chase Bank, N.A., as co-documentation
agents. (1) |
|
|
|
10.1(a)
|
|
Waiver Letter No. 2 and Amendment No. 1, dated as of May 31, 2006,
to Credit Agreement, dated October 12, 2005, among Pregis
Corporation and Credit Suisse, Cayman Islands Branch, as Agent and
as a Lender. (2) |
|
|
|
10.1 (b)
|
|
Amendment No. 2, dated as of December 20, 2007, among Pregis
Corporation, Pregis Holding II Corporation and other parties
signatory thereto, amending the Credit Agreement, dated as of
October 12, 2005, among the Company, Pregis Holding II
Corporation, Credit Suisse, Cayman Island Branch, as
administrative agent and collateral agent, and the other parties
thereto. |
121
|
|
|
Exhibit Number |
|
Description |
10.1 (c)
|
|
Amendment No. 3, dated as of October 5, 2009, among Pregis
Corporation, Pregis Holding II Corporation and the other parties
signatory thereto, amending the Credit Agreement, dated as of
October 12, 2005, among the Company, Pregis Holding II
Corporation, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and the other parties
thereto. (8) |
|
|
|
10.2
|
|
First Lien Security Agreement, dated October 12, 2005, by Pregis
Corporation, Pregis Holding II Corporation, Pregis Management
Corporation, Pregis Innovative Packaging Inc., and Hexacomb
Corporation, to Credit Suisse, as collateral agent. (1) |
|
|
|
10.3
|
|
Second Lien Security Agreement, dated October 12, 2005, by Pregis
Corporation, Pregis Holding II Corporation, Pregis Management
Corporation, Pregis Innovative Packaging Inc., and Hexacomb
Corporation, to The Bank of New York, as trustee and collateral
agent. (1) |
|
|
|
10.3 (a)
|
|
Amendment No. 1 to the Second Lien Security Agreement, dated as of
October 5, 2009, among the Company, each of the other grantors
signatory thereto and The Bank of New York Mellon Trust company,
N.A., as trustee collateral agent. (8) |
|
|
|
10.4
|
|
Senior Pledge Agreement, dated October 12, 2005, between Pregis
Corporation, as pledgor, and Credit Suisse, as security agent. (1) |
|
|
|
10.5
|
|
Subordinated Pledge Agreement, dated October 12, 2005, between
Pregis Corporation, as pledgor, and The Bank of New York, as
security agent. (1) |
|
|
|
10.5 (a)
|
|
Amendment No. 1 to the Subordinated Pledge Agreement, dated as of
October 5, 2009, among the Company, The Bank of New York Mellon
Trust Company, N.A. and Pregis (Luxembourg) Holding S.à r.l. (8) |
|
|
|
10.6
|
|
First Lien Intellectual Property Security Agreement, dated October
12, 2005, by Pregis Corporation, Pregis Holding II Corporation,
Pregis Management Corporation, Pregis Innovative Packaging Inc.,
Hexacomb Corporation, to Credit Suisse, as collateral agent. (1) |
|
|
|
10.7
|
|
Amended and Restated Second Lien Intellectual Property Security
Agreement, dated as of October 5, 2009, among the Company, The
Bank of New York Mellon Trust Company, N.A. and the other parties
thereto. (8) |
|
|
|
10.8
|
|
Management Agreement, dated October 12, 2005, by and between
Pregis Corporation and AEA Investors LLC. (1) |
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10.9
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Pregis Holding I Corporation 2005 Stock Option Plan. (1) |
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10.10
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Form of Time-Vesting Nonqualified Stock Option Agreement. (1) |
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10.11
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Form of Performance-Vesting Nonqualified Stock Option Agreement (5) |
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10.12
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Pregis Holding I Corporation Employee Stock Purchase Plan. (1) |
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10.13
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Form of Pregis Holding I Corporation Employee Stock Purchase Plan
Employee Subscription Agreement. (1) |
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10.14
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Employment Agreement, dated October 2, 2006, by and among Pregis
Holding I Corporation and Pregis Holding II Corporation and Pregis
Corporation and Michael T. McDonnell, Noncompetition Agreement,
dated October 2, 2006, by and between Pregis Holding I Corporation
and Michael T. McDonnell, Nonqualified Stock Option Agreement,
dated |
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Exhibit Number |
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Description |
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October 2, 2006, between Pregis Holding I Corporation and
Michael T. McDonnell, and Executive Subscription Agreement, dated
October 2, 2006, between Pregis Holding I Corporation and Michael
T. McDonnell. (2) |
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10.15
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Employment Agreement of a Managing Director, dated March 8, 2004,
between Kobusch Folien Verwaltungsgesellschaft mbH and Hartmut
Scherf (translation from German language). (1) |
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|
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10.16
|
|
Nonqualified Stock Option Agreements, dated February 6, 2006,
between Pregis Holding I Corporation and Vincent P. Langone,
Nonqualified Stock Option Agreement, dated November 30, 2005,
between Pregis Holding I Corporation and James D. Morris and
Nonqualified Stock Option Agreements, dated January 23, 2006,
between Pregis Holding I Corporation and each of Andy Brewer,
Dieter Eberle, Peter Lewis, and Hartmut Scherf. (1) |
|
|
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10.17
|
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Employment Agreement, dated August 15, 2007, by and among Pregis
Holding I Corporation and Pregis Holding II Corporation and Pregis
Corporation and D. Keith LaVanway. (7) |
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|
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10.18
|
|
Management Agreement between Pregis NV and Fernando De Miguel,
dated May 15, 2007. (7) |
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|
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10.19
|
|
Employment Agreement, dated December 11, 2007, by and among Pregis
Holding I Corporation and Pregis Holding II Corporation and Pregis
Corporation and Kevin J. Baudhuin. |
|
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10.20
|
|
Separation Agreement and Release, dated September 30, 2009, by and
between Fernando De Miguel and Pregis NV. |
|
|
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12.1
|
|
Computation of Ratio of Earnings to Fixed Charges. * |
|
|
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21.1
|
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List of Subsidiaries. * |
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31.1
|
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Rule 13a-14(a)/15d-14(a) Certification of Pregis Holding II
Corporations Chief Executive Officer. * |
|
|
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31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Pregis Holding II
Corporations Chief Financial Officer. * |
|
|
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32.1
|
|
Certification of Pregis Holding II Corporations Chief Executive
Officer pursuant to Section 906 of The Sarbanes Oxley Act of 2002. * |
|
|
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32.2
|
|
Certification of Pregis Holding II Corporations Chief Financial
Officer pursuant to Section 906 of The Sarbanes Oxley Act of 2002. * |
|
|
|
(1) |
|
Incorporated by reference to Amendment No. 1 to the registrants registration statement on
Form S-4/A, (No. 333-130353), filed with the Commission on February 14, 2006. |
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(2) |
|
Incorporated by reference to Amendment No. 2 to the registrants registration statement on
Form S-4/A, as amended (No. 333-130353), filed with the Commission on November 9, 2006. |
|
(3) |
|
Incorporated by reference to Amendment No. 3 to the registrants registration statement on
Form S-4/A, as amended (No. 333-130353), filed with the Commission on January 12, 2007. |
|
(4) |
|
Incorporated by reference to Amendment No. 4 to the registrants registration statement on
Form S-4/A, as amended (No. 333-130353), filed with the Commission on April 16, 2007. |
123
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|
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(5) |
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Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the
Commission on February 28, 2008. |
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(6) |
|
Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the
Commission on July 9, 2007. |
|
(7) |
|
Incorporated by reference to Exhibits 10.30, 10.31, 10.32 and 10.33 to the Annual Report on
Form 10-K, filed with the Commission on March 24, 2008. |
|
(8) |
|
Incorporated by reference to Exhibits 4.1, 4.2, 10.1, 10.3,
and 10.4 to the Current Report on
Form 8-K of Pregis Holding II Corporation, filed with the Commission
on October 5, 2009. |
|
|
|
Management contract or compensatory plan or arrangement required to be filed as an exhibit to
this report. |
|
* |
|
Filed herewith. |
124