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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

For the quarterly period ended March 31, 2010

 

For the transition period from _____________ to _______________

Commission File No. 333-136559

EXOPACK HOLDING CORP.

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code: (864) 596-7140

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 for 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¨ Nox*

*The registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 or 15(d) of the Securities and Exchange Act of 1934 and has filed all reports that would have been required to be filed by the registrant during the preceding 12 months had it been subject to such filing requirements.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes¨ No¨(Not yet applicable to registrant)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes¨ Nox

The registrant is a privately held corporation and has no voting or non-voting common equity held by non-affiliates. As of May 12, 2010, one share of the registrant’s common stock was outstanding.

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EXOPACK HOLDING CORP. TABLE OF CONTENTS

FORM 10-Q

 

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXOPACK HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars, except for share and per share data)

 

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EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands of dollars)

 

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EXOPACK HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY (unaudited)

(in thousands of dollars, except share data)

 

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EXOPACK HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

 

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Exopack Holding Corp. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Organization, Acquisitions and Basis of Presentation

Exopack Holding Corp. and subsidiaries (the “Company”) was formed in October of 2005 through the acquisition and consolidation of three flexible packaging businesses, including Exopack Holding Corporation (“Exopack”), Cello-Foil Products, Inc. (“Cello-Foil”), and The Packaging Group (“TPG”). Following this acquisition and consolidation, the Company is wholly-owned by Exopack Key Holdings, LLC, which is a wholly-owned subsidiary of CPG Finance, Inc. (“CPG”), an affiliate of Sun Capital Partners, Inc. (“Sun Capital”).

On August 6, 2007, the Company acquired 100% of the membership interests of InteliCoat Technologies Image Products Matthews, LLC and 100% of the outstanding shares of its affiliate, InteliCoat Technologies EF Holdco, Ltd. (collectively, “Electronic and Engineered Films Business” or “EEF”), and also acquired certain assets and assumed certain liabilities of other EEF entities (the “EEF Acquisition”). EEF, through its parent companies prior to the EEF Acquisition, was previously controlled by an affiliate of Sun Capital. The Company subsequently renamed this acquired EEF business Exopack Advanced Coatings (“EAC”).

On November 28, 2007, the Company acquired certain assets and assumed certain liabilities of DuPont Liquid Packaging System’s performance films business segment (“Liqui-Box”), including its Whitby, Ontario, Canada operating facility. Prior to the acquisition, the Company used Liqui-Box as a vendor for one of its Canadian facilities. The Company subsequently renamed this acquired Liqui-Box business Exopack Performance Films (“EPF”).

The Company operates 17 manufacturing facilities located throughout the United States, United Kingdom and Canada. The Company operates four manufacturing facilities in the pet food and specialty packaging segment, all of which are owned properties. The Company operates five manufacturing facilities in the food and specialty packaging segment, of which the Company leases one (the Ontario, Canada facility) and owns the remaining four facilities. The Company operates six facilities in the performance packaging segment, of which the Company leases two and owns the remaining four facilities. The Company operates two manufacturing facilities in the coated products segment, both of which the Company leases, including one manufacturing facility in North Wales, United Kingdom.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report. It is management’s opinion, however, that all material adjustments (consisting only of normal recurring adjustments, unless otherwise noted) have been made which are necessary for a fair statement of the Company’s financial position, results of operations and cash flows. The results for the interim periods are not necessarily indicative of the results to be expected for any other interim period, for the fiscal year or for any future period.

The consolidated balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Certain revisions have been made to the prior period consolidated financial statements to correct the amounts of certain direct and indirect costs capitalized into inventory for one plant located in Canada, as discussed in Note 15 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Variable Interest Entity

During the year ended December 31, 2009, the Company entered into a joint venture with a third party. The Company determined that the joint venture is a variable interest entity (“VIE”) under Financial Accounting Standards Board (“FASB”) guidance related to accounting for variable interest entities and that the Company is not the primary beneficiary of the VIE. The VIE consists of a manufacturing operation, located within an existing manufacturing facility owned by the joint venture partner in Lebanon, used to co-extrude polyethylene film for use in flexible packaging. The VIE is in the process of purchasing and installing the necessary extrusion equipment and currently anticipates production to commence in the second quarter of 2010. The Company’s maximum exposure to loss as a result of its involvement with the unconsolidated VIE is limited to the Company’s recorded investment in this VIE, which was approximately $825,000 at March 31, 2010, of which approximately $425,000 was invested during the three months ended March 31, 2010. The Company may be subject to additional losses to the extent of any financial support that the Company provides in the future.

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2. Recent Accounting Pronouncements

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R), a grandfathered standard under the FASB Accounting Standards Codification, to amend the consolidation guidance that applies to variable interest entities to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. The standard requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and for interim periods within that first annual reporting period. The adoption of this guidance in 2010 did not have an impact on the Company’s consolidated financial statements.

3. Inventories

The Company’s inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method.  Inventories are summarized as follows:

 

4.  Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in purchase business combinations. The Company had total goodwill of approximately $64.4 million at both March 31, 2010 and December 31, 2009.

At March 31, 2010, approximately $26.2 million, $14.0 million, $21.6 million and $2.6 million of goodwill was assigned to the pet food and specialty packaging segment, the food and specialty packaging segment, the performance packaging segment and the coated products segment, respectively, which are aligned with the Company’s four reporting units. Goodwill, with the exception of approximately $1.9 million assigned to the Company’s coated products segment, is not deductible for tax purposes.

The Company’s other intangible assets are summarized as follows:

 

The decrease in gross intangible assets during the three months ended March 31, 2010 was due solely to the change in the exchange rate between the United States dollar and the British pound during the period. Amortization expense for definite-lived intangible assets for the three months ended March 31, 2010 and 2009 was approximately $477,000 and $504,000, respectively. Estimated future annual amortization for definite-lived customer lists, patents and trademarks and trade names is approximately $1.5 million for the remainder of 2010, approximately $1.9 million for each of the years 2011 through 2014 and approximately $1.7 million for 2015.

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5. Financing Arrangements

Issuance of Senior Notes

On January 31, 2006, the Company completed an unregistered private offering of $220.0 million aggregate principal amount of 11.25% senior notes due 2014. Pursuant to an exchange offer, effective December 22, 2006, the Company exchanged all of the unregistered 11.25% senior notes due 2014 for new 11.25% senior notes due 2014 registered under the Securities Act of 1933 (the “Notes”). Interest on the Notes is payable semi-annually in arrears on February 1 and August 1.

The Notes mature on February 1, 2014, unless previously redeemed, and the Company will not be required to make any mandatory redemption or sinking fund payment prior to maturity except in connection with a change in ownership or in the event of a sale of certain assets. The Company may redeem all or a portion of the Notes at a redemption price equal to 100.0% of the principal amount of the Notes, plus a premium declining ratably to par (as defined in the indenture), plus accrued and unpaid interest to the date of redemption. The Company has no plans to redeem the Notes at this time.

The Company and all of its domestic restricted subsidiaries have jointly, severally, fully and unconditionally guaranteed the Notes, which guarantees are fully secured by the assets of such guarantors. See Note 13 for consolidating financial information required by Rule 3-10 of Regulation S-X. The Notes place certain restrictions on the Company including, but not limited to, the Company’s ability to incur additional indebtedness, incur liens, pay dividends, make investments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person or sell or otherwise dispose of the assets of the Company and its subsidiaries.

Senior Credit Facility

On January 31, 2006, the Company entered into a senior secured revolving credit facility with a syndicate of financial institutions. On August 6, 2007, the Company amended this facility to provide for an increase in the maximum credit facility to $75.0 million, which includes a Canadian dollar sub-facility available to the Company’s Canadian subsidiaries for up to $15.0 million (or the Canadian dollar equivalent). A reserve is established in the U.S. for the U.S. dollar equivalent of amounts outstanding under the Canadian sub-facility. On October 31, 2007, the Company amended this facility to provide for an increase in the maximum credit facility to $110.0 million and amended certain borrowing base limitations (the “Senior Credit Facility”). The Senior Credit Facility also provides the Company’s domestic and Canadian subsidiaries with letter of credit sub-facilities. Availability under the Senior Credit Facility is subject to borrowing base limitations for both the U.S. and the Canadian subsidiaries, as defined in the loan agreement. The Senior Credit Facility matures on January 31, 2011. Under the terms of the Company’s lock box arrangement, remittances automatically reduce the revolving debt outstanding on a daily basis and therefore the Senior Credit Facility is classified as a current liability on the accompanying consolidated balance sheet at December 31, 2009. At March 31, 2010, approximately $75.5 million was outstanding and approximately $24.2 million was available for borrowings under the Senior Credit Facility.

Interest on the Senior Credit Facility will accrue on amounts outstanding under the U.S. facility at a variable annual rate equal to the U.S. Index Rate (as defined in the loan agreement) plus 0.5% or, upon the Company’s prior notice, at an annual rate equal to LIBOR plus 1.5%. Interest will accrue on amounts outstanding under the Canadian facility at a variable annual rate equal to the Canadian Index Rate (as defined in the loan agreement) plus 0.5% or, upon the Company’s prior notice, at an annual rate equal to the BA Rate (as defined in the loan agreement) plus 1.5%. The weighted average interest rate on borrowings outstanding under the Senior Credit Facility at March 31, 2010 was approximately 1.8%. The Senior Credit Facility also includes unused facility and letter-of-credit fees which are reflected in interest expense in the accompanying consolidated statements of operations.

The Senior Credit Facility is collateralized by substantially all of the Company’s tangible and intangible property (other than real property and equipment). In addition, all of the Company’s equity interests in its domestic subsidiaries and a portion of the equity interests in its foreign subsidiaries are pledged to collateralize the Senior Credit Facility.

The Senior Credit Facility places certain restrictions on the Company including, but not limited to, the Company’s ability to incur additional indebtedness, incur liens, pay dividends, make investments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person or sell or otherwise dispose of the assets of the Company and its subsidiaries. At March 31, 2010, the Company was in compliance with these restrictions.

At March 31, 2010, there were outstanding letters of credit of approximately $3.2 million under the Senior Credit Facility.

Subordinated Term Loan

On August 3, 2006, the Company entered into a subordinated term loan agreement with respect to a loan in the amount of approximately $238,000 and requiring monthly payments of principal and interest of approximately $4,000 for a five-year period. The Company has determined interest on the loan using the lender’s annual implicit rate of 2.0%. The loan is collateralized by certain machinery and equipment of the Company. At March 31, 2010, approximately $70,000 is outstanding under this agreement.

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6. Stock Option Plan

In December 2005, CPG’s Board of Directors approved the establishment of the 2005 Stock Option Plan of CPG Finance, Inc. (the “2005 Stock Option Plan”), in which officers and certain key employees of the Company are able to participate, and reserved 100,000 shares of CPG’s non-voting common shares for the 2005 Stock Option Plan. Under the 2005 Stock Option Plan, options have a term of no longer than ten years and vest ratably over a five year period.

The FASB revised guidance related to share based payments in December of 2004. This guidance requires nonpublic companies that have used the “minimum value method” under the previous guidance for either recognition or pro forma purposes to use the prospective method of the new guidance for transition. The prospective method allows companies to continue to account for previously issued awards that remain outstanding at the date of adopting the new guidance using pre-existing accounting standards and, accordingly, there will be no future material compensation expense related to the options issued in December 2005. The pro forma impact of the December 2005 options would be immaterial for disclosure purposes during 2010 and 2009. The prospective method also requires nonpublic companies to record compensation costs in accordance with the new guidance only for awards issued, modified, repurchased, or cancelled after the effective date. Compensation expense related to options issued subsequent to the adoption of the new guidance is being recorded ratably over the vesting period of five years. CPG did not issue any options during the three months ended March 31, 2010 or 2009. The Company recorded stock compensation expense of approximately $123,000 and $145,000 during the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, the total compensation cost related to non-vested awards not yet recognized was approximately $1.1 million. This compensation cost is expected to be recognized over the remaining weighted-average period of 2.3 years.

The following tables summarize information about stock options outstanding at March 31, 2010 (there were 800 shares exercisable at an exercise price of $72 per share at March 31, 2010).

 

 

There were 23,600 options available for grant at March 31, 2010 under the 2005 Stock Option Plan.

7. Employee Benefit Plans and Other Programs Defined Benefit Plans

The pension assets and obligations of the Retirement Plan of Exopack, LLC (the “Retirement Plan”) and the pension obligations of the Exopack, LLC Pension Restoration Plan for Salaried Employees (the “Restoration Plan”) (collectively, the “Pension Plans”) were transferred to and assumed by the Company in connection with the acquisition of Exopack in 2005. Substantially all full-time employees of Exopack, LLC hired prior to June 30, 2003 were eligible to participate in the Retirement Plan. The Pension Plans were frozen prior to the acquisition of Exopack in 2005. Accordingly, the employees’ final benefit calculation under the Pension Plans was the benefit they had earned under the Pension Plans as of the date the Pension Plans were frozen. This benefit will not be diminished, subject to the terms and conditions of the Pension Plans, which will remain in effect. The Company also sponsors a postretirement benefit plan covering, on a restricted basis, certain Exopack employees pursuant to a collective bargaining agreement.

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The components of the net periodic benefit cost for the Pension Plans and the postretirement benefit plan are as follows for the three months ended March 31, 2010 and 2009:

 

The Company contributed approximately $275,000 and $247,000 to the Retirement Plan during the three months ended March 31, 2010 and 2009, respectively. Contributions of approximately $1.1 million are expected to be made to the Retirement Plan during the remainder of 2010. At March 31 2010, the fair value of the assets of our Pension Plans was estimated at $43.3 million, up from $42.2 million at December 31, 2009.

Retirement Plan for Employees of Exopack Performance Films, Inc.

On January 29, 2008, the Company adopted the Retirement Plan for employees of Exopack Performance Films, Inc., retroactive to December 1, 2007. Exopack Performance Films’ employees at the Whitby location are eligible to participate in the plan. There are two portions of the plan, a Defined Contribution Plan and a Savings Plan. In the Defined Contribution Plan, contributions are made by the Company only, and are based on an age and service formula. The supplemental employer contribution to the Defined Contribution Plan was guaranteed for a two-year period that began on December 1, 2007 and ended on November 30, 2009. The Company contributed approximately $99,000 and $211,000 to the Defined Contribution Plan during the three months ended March 31, 2010 and 2009, respectively. None of the amount contributed to the Defined Contribution Plan during the three months ended March 31, 2010 was related to the supplemental employer contribution as the supplemental portion of the Defined Contribution Plan ended on November 30, 2009. Of the amount contributed in 2009, approximately $132,000 was related to the supplemental employer contribution. In addition, employees can contribute to the Savings Plan and receive a match of 50% on the first 4% the employee defers into the plan. The total expense related to the Savings Plan was approximately $28,000 and $36,000 for the three months ended March 31, 2010 and 2009, respectively. During the two year transitional period, which ended November 30, 2009, the employees received a contribution of 2% in the Savings Plan regardless of their Savings Plan contribution. Total expense for employees who did not participate in the plan was zero for the three month period ended March 31, 2010 and approximately $11,000 for the three month period ended March 31, 2009. Employer contributions to the Savings Plan were discontinued as of March 1, 2010 and no further employer contributions will be made to the plan.

Exopack, LLC Savings Plan

The Company has a 401(k) plan, which is a defined contribution plan that covers all full-time employees in the United States. The Company partially matches employee contributions which vest immediately. Expense totaled approximately $383,000 and $719,000 for the three months ended March 31, 2010 and 2009, respectively. This significant decrease period over period is related to a decrease in the employer matching contribution from 4% to 2% effective January 1, 2010.

Deferred Compensation Agreements

The Company has unfunded deferred compensation agreements, assumed in connection with the acquisition of Cello-Foil in 2005. The Company is obligated to provide certain deferred compensation for these Cello-Foil employees over specified periods beginning at age 62. In addition, the Company has agreed to provide certain death benefits for the employees to be paid over a specified period. The Company is accruing its obligations over the estimated period of employment of the individuals to age 62. As of March 31, 2010, the Company had two individuals receiving benefits under the agreements. The deferred compensation liability for these agreements was approximately $364,000 and $377,000 at March 31, 2010 and December 31, 2009, respectively (recorded in “other liabilities” in the accompanying consolidated balance sheets). Deferred compensation expense for each of the three month periods ended March 31, 2010 and 2009 was insignificant.

Other Benefit Plans

The Company maintains a management incentive compensation plan that provides annual cash awards to eligible management personnel based on both Company and individual performance against pre-defined goals. The Company recognized charges of approximately $658,000 and $2.7 million for benefits under the management incentive compensation plan for the three months ended March 31, 2010 and 2009, respectively.

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8. Severance Expenses and Exit and Disposal Activities Severance Expenses

During the three months ended March 31, 2010 and 2009, the Company terminated certain employees and eliminated their positions. In connection with these terminations, the Company recorded termination costs of approximately $831,000 and $401,000 for the three months ended March 31, 2010 and 2009, respectively, which were included in “Selling, general and administrative expenses” in the consolidated statements of operations. Of approximately $2.0 million in severance accrued at December 31, 2009 and approximately $831,000 in costs incurred during the three months ended March 31, 2010, the Company paid approximately $1.4 million through March 31, 2010, so that approximately $1.4 million remained accrued for employee terminations benefits at March 31, 2010.

Exit and Disposal Activities

During the year ended December 31, 2008, the Company consolidated the operations of one of its Canadian food and specialty packaging facilities from two buildings to one building. In conjunction with the consolidation and subsequent sublease of the building to a third party, the Company recorded a discounted lease obligation of approximately $567,000 during the year ended December 31, 2008. There were no exit costs incurred related to this facility during the three months ended March 31, 2010 or 2009. The Company remains obligated to make payments under a facility lease through August 2015 and, in April 2009, the Company began receiving sublease income to help mitigate the cost of the remaining lease obligation. The remaining lease obligation related to this facility reflected in the accompanying consolidated balance sheet as of March 31, 2010 was approximately $498,000.

During the year ended December 31, 2007, the Company ceased using a significant portion of one of its leased Canadian food and specialty packaging facilities and recorded a charge to pre-tax earnings of approximately $699,000 for the pro-rata portion of the remaining lease payments to be made through the lease term ending December 2009 for the unused area of the facility. The Company did not renew the lease on this facility upon its expiration in December of 2009 and there was no remaining lease obligation related to this facility as of December 31, 2009. During the year ended December 31, 2009, the Company recorded $831,000 in closure costs, of which $378,000 was recorded in the fourth quarter, including $404,000 in severance costs related to the closure of this facility. There were no exit costs incurred related to this facility during the three months ended March 31, 2010 or 2009. The remaining severance liability related to this closed facility of approximately $107,000 is reflected in the accompanying consolidated balance sheet as of March 31, 2010.

In August 2006, the Company ceased production at the pouch production facility of one of its food and specialty packaging operations and transferred pouch production and certain assets of this facility to other facilities. The Company remains obligated to make payments under a facility lease through June 2010 and executed a sublease in August of 2008 to sublet the facility to help mitigate the cost of the remaining lease obligation. There were no exit costs related to this facility incurred during the three months ended March 31, 2010 or 2009. The remaining lease obligation related to this facility of approximately $62,000 is reflected in the accompanying consolidated balance sheet as of March 31, 2010.

9. Contingencies

From time to time, the Company becomes party to legal proceedings and administrative actions, which are of an ordinary or routine nature, incidental to the operations of the Company. Although it is difficult to predict the outcome of any legal proceeding, in the opinion of the Company’s management, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

10. Comprehensive (Loss) Income

The components of comprehensive (loss) income are as follows for the three months ended March 31, 2010 and 2009:

 

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The following table summarizes the components of accumulated other comprehensive loss and the changes in accumulated other comprehensive loss for the three months ended March 31, 2010:

 

11. Related Party Transactions

Transactions with Affiliates of Sun Capital

In 2005, the Company entered into a management services agreement with Sun Capital Partners Management IV, LLC, an affiliate of Sun Capital (“Sun Capital Management”). The management services agreement was amended on January 31, 2006 and terminates on October 13, 2015. Pursuant to the terms of the agreement, as amended, Sun Capital Management has provided and will provide the Company with certain financial and management consulting services, subject to the supervision of the Company’s Board of Directors. In exchange for these services, the Company will pay Sun Capital Management an annual management fee equal to the greater of $1.0 million or 2% of EBITDA (as defined in the agreement).

In addition to this general management fee, in connection with any management services provided to the Company, its subsidiaries, or its stockholders with respect to certain corporate events, including, without limitation, refinancing, restructurings, equity or debt offerings, acquisitions, mergers, consolidations, business combinations, sales and divestitures, Sun Capital Management is entitled to 1.0% of the aggregate consideration paid in connection with the applicable corporate event as well as any customary and reasonable fees. No such expenses were incurred during the three months ended March 31, 2010 or 2009 under this portion of the agreement. The Company will also reimburse Sun Capital Management for all out-of-pocket expenses incurred in the performance of the services under the agreement.

The Company incurred management fees and other related expenses under the management services agreement of approximately $366,000 and $397,000 during the three months ended March 31, 2010 and 2009, respectively. Such fees are reflected in “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.

The Company incurred approximately $15,000 and $17,000 for certain consulting fees from Sun Capital Management during the three month periods ended March 31, 2010 and 2009, respectively.

12. Segments and Significant Customers Segments

Prior to the Company’s fourth quarter of 2008, the Company determined that it operated in two reportable segments. After the 2007 acquisitions of EAC and EPF, the Company began integration of these acquired businesses and during 2008 reassessed its segment reporting. As of the fourth quarter of 2008, the Company determined that its operations consisted of three reportable segments: (i) paper packaging, (ii) plastic packaging and films, and (iii) coated products. Effective July 1, 2009, the Company implemented an internal organizational change to move from a concentration on product lines to a concentration on markets. As a result of this change, the Company reassessed its segment reporting in the third quarter of 2009 and determined that its operations consist of four reportable segments: (i) pet food and specialty packaging, (ii) food and specialty packaging, (iii) performance packaging and (iv) coated products. The pet food and specialty packaging segment produces products used in applications such as pet food, lawn and garden, charcoal, and popcorn packaging. The food and specialty packaging segment produces products used in applications such as beverage, personal care, frozen foods, confectionary, breakfast foods, and films. The performance packaging segment produces products used in applications such as building materials, chemicals, agricultural products and food ingredient packaging. The coated products segment produces precision coated films and specialty substrates for imaging, electronics, medical and optical technologies. Certain amounts in the prior year have been restated to present this four-segment approach.

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The Company evaluates performance based on profit or loss from operations. For the three months ended March 31, 2010 and 2009 segment data includes a charge allocating certain corporate costs to each of its operating segments, as summarized in the table below:

 

Due to the autonomy of the coated products segment in relation to the other segments, no corporate costs were allocated to this segment during the three months ended March 31, 2010 or 2009.

While sales and transfers between segments are recorded at cost plus a reasonable profit, the effects of intersegment sales are excluded from the computations of segment operating income. Intercompany profit is eliminated in consolidation and is not significant for the periods presented.

Corporate operating losses consist principally of certain unallocated corporate costs.

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The table below presents information about the Company’s reportable segments for the three months ended March 31, 2010 and 2009.

 

Significant Customers

No customers accounted for more than 10% of the Company’s net sales during the three months ended March 31, 2010. As a result of the consolidation of two previously existing customers during 2007 within the Company’s pet food and specialty segment, one customer accounted for 12.7% of the Company’s net sales during the three months ended March 31, 2009. In addition, as a result of the consolidation of the two previously existing customers into one in 2007, one customer accounted for 11.9% and 12.0% of total accounts receivable as of March 31, 2010 and December 31, 2009.

13. Consolidating Financial Information

The Notes are jointly, severally, fully and unconditionally guaranteed by the Company’s domestic restricted subsidiaries. Each guarantor subsidiary is 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10(h) of Regulation S-X. Following are consolidating financial statements of the Company, including the guarantors, provided pursuant to Rule 3-10 of Regulation S-X in lieu of separate financial statements of each subsidiary guaranteeing the Notes.

The following consolidating financial statements present the balance sheets as of March 31, 2010 and December 31, 2009, the statements of operations for the three months ended March 31, 2010 and 2009, and the statements of cash flows for the three months ended March 31, 2010 and 2009, of (i) Exopack Holding Corp. (the “Parent”), (ii) the domestic subsidiaries of Exopack Holding Corp. (the “Guarantor Subsidiaries”), (iii) the foreign subsidiaries of Exopack Holding Corp. (the “Nonguarantor Subsidiaries”), and (iv) the eliminations necessary to arrive at the information for the Company on a consolidated basis. The Parent and the Guarantor Subsidiaries have each reflected investments in their respective subsidiaries under the equity method of accounting. There are no restrictions limiting transfers of cash from Guarantor Subsidiaries and Nonguarantor Subsidiaries to the Parent. The consolidating financial statements should be read in conjunction with the accompanying consolidated financial statements of the Company. Certain revisions have been made to the prior period consolidating financial statements to correct the amounts of certain direct and indirect costs capitalized into inventory for one plant located in Canada, as discussed in Note 15 to the consolidating financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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14. Income Taxes

Income taxes are recorded under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company’s effective income tax rate was approximately -158% and 51% for the three months ended March 31, 2010 and 2009, respectively. The effective rate for the 2010 and 2009 periods reflect certain foreign losses which we do not believe will result in a tax benefit. The jurisdiction in which earnings or deductions are realized may differ from our current estimates. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

     This quarterly report of Exopack Holding Corp. (the “Company”) for the quarterly period ended March 31, 2010, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. These forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include but are not limited to the following:

• intense competition in the flexible packaging markets may adversely affect our operating results;

• the profitability of our business depends on the price and availability of polyethylene and paper, two of our principal raw materials, and our ability to pass on polyethylene and paper price increases to customers;

• our business is affected by global economic factors including risks associated with a recession and our customers’ access to credit;

• we are subject to the risk of loss resulting from nonpayment or nonperformance by our customers;

• financial difficulties and related problems at our vendors, suppliers and other business partners could result in a disruption to our operations and have a material adverse effect on our business;

• fluctuations in the equity market may adversely affect our pension plan assets and our future cash flows;

• energy price increases could adversely affect the results of our operations;

• we must adapt to technological advances in the packaging industry;

• we may be unable to protect our proprietary technology from infringement;

• our operations could expose us to substantial environmental costs and liabilities;

• although we believe we currently have sufficient liquidity, we may not be able to obtain funding if needed because of the deterioration of the capital and credit markets;

• we are subject to risks related to our international operations, including changes in foreign currency exchange rates;

• we may, from time to time, experience problems in our labor relations;

• loss of third-party transportation providers upon whom we depend or increases in fuel prices could increase our costs or cause a disruption in our operations;

• unexpected equipment failures may lead to production curtailments or shutdowns;

• an affiliate of Sun Capital controls us and may have conflicts of interest with us in the future;

• we are required to comply with Section 404 of the Sarbanes-Oxley Act, and there can be no assurance that we will be able to establish, maintain and apply effective internal control over financial reporting under applicable SEC rules promulgated under Section 404;

• loss of key individuals could disrupt our operations and harm our business;

• we may be adversely affected by changes in interest rates;

• numerous other factors over which we may have limited or no control may affect our performance and profitability;

• our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our outstanding Notes;

• despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt;

• to service our indebtedness, we will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control;

• the indenture governing the Notes and our Senior Credit Facility will restrict our operations.

     You can identify these and other forward-looking statements by the use of the words such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “estimates,” “intends,” “potential,” “projected,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

     These statements are based on current expectations and assumptions regarding future events and business performance and involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.

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     The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our risk factors in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

     Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will assume no obligation to update any of the forward-looking statements after the date of this report to conform these statements to actual results or changes in our expectations, except as required by law. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. You should carefully review the risk factors described in other documents that we file from time to time with the U.S. Securities and Exchange Commission.

Overview

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this report, and with the audited consolidated financial statements, including the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

     We generate revenues, earnings and cash flows from the sale of flexible packaging, film and coated products primarily in the United States, Canada, and Europe. Management views net sales and operating income as the primary indicators of our financial performance.

Reportable Segments

     Through 2007, we reported in two operating segments; however, as a result of the 2007 acquisitions of EAC and EPF being integrated during 2008, we began reporting in three segments effective October 1, 2008. Effective July 1, 2009, we implemented an internal organizational change to move from a concentration on product lines to a concentration on markets. As a result of this change, we reassessed our segment reporting in the third quarter of 2009 and determined that our operations consist of four reportable segments: (i) pet food and specialty packaging, (ii) food and specialty packaging, (iii) performance packaging and (iv) coated products. The pet food and specialty packaging segment produces products used in applications such as pet food, lawn and garden, charcoal, and popcorn packaging. The food and specialty packaging segment produces products used in applications such as beverages, personal care, frozen foods, confectionary, breakfast foods, and films. The performance packaging segment produces products used in applications such as building materials, chemicals, agricultural products and food ingredient packaging. The coated products segment produces precision coated films and specialty substrates for imaging, electronics, medical and optical technologies. We evaluate segment performance based on operating income or loss. Segment data for prior periods have been restated to conform to this change.

Severance Expenses

     During the three months ended March 31, 2010 and 2009, we terminated certain employees and eliminated their positions. In connection with these terminations, we recorded termination costs of approximately $831,000 and $401,000 for the three months ended March 31, 2010 and 2009, respectively, which were included in “Selling, general and administrative expenses” in the consolidated statements of operations. Of approximately $2.0 million in severance accrued at December 31, 2009 and approximately $831,000 in costs incurred during the three months ended March 31, 2010, we paid approximately $1.4 million through March 31, 2010, so that approximately $1.4 million remained accrued for employee terminations benefits at March 31, 2010.

Exit and Disposal Activities

     During the year ended December 31, 2008, we consolidated the operations of one of our Canadian food and specialty packaging facilities from two buildings to one building. In conjunction with the consolidation and subsequent sublease of the building to a third party, we recorded a discounted lease obligation of approximately $567,000 during the year ended December 31, 2008. There were no exit costs incurred related to this facility during the three months ended March 31, 2010 or 2009. We remain obligated to make payments under a facility lease through August 2015 and, in April 2009, we began receiving sublease income to help mitigate the cost of the remaining lease obligation. The remaining lease obligation related to this facility reflected in the accompanying consolidated balance sheet as of March 31, 2010 was approximately $498,000.

     During the year ended December 31, 2007, we ceased using a significant portion of one of our leased Canadian food and specialty packaging facilities and recorded a charge to pre-tax earnings of approximately $699,000 for the pro-rata portion of the remaining lease payments to be made through the lease term ending December 2009 for the unused area of the facility. We did not renew the lease on this facility upon its expiration in December of 2009 and there was no remaining lease obligation related to this facility as of December 31, 2009. During the year ended December 31, 2009, we recorded $831,000 in closure costs, of which $378,000 was recorded in the fourth quarter, including $404,000 in severance costs related to the closure of this facility. There were no exit costs incurred related to this facility during the three months ended March 31, 2010 or 2009. The remaining severance liability related to this closed facility of approximately $107,000 is reflected in the accompanying consolidated balance sheet as of March 31, 2010.

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     In August 2006, we ceased production at the pouch production facility of one of our food and specialty packaging operations and transferred pouch production and certain assets of this facility to other facilities. We remain obligated to make payments under a facility lease through June 2010 and executed a sublease in August of 2008 to sublet the facility to help mitigate the cost of the remaining lease obligation. There were no exit costs related to this facility incurred during the three months ended March 31, 2010 or 2009. The remaining lease obligation related to this facility of approximately $62,000 is reflected in the accompanying consolidated balance sheet as of March 31, 2010.

Results of Operations

     The following presents an overview of our results of operations for the three months ended March 31, 2010 compared with the three months ended March 31, 2009.

 

     Net Sales. Net sales for the three months ended March 31, 2010 decreased by approximately $6.5 million, or 3.6%, compared with the same period in 2009. This decrease in net sales from 2009 is largely attributable to a decrease in average selling price of approximately 3.7%.  The unfavorable pricing is related to the $0.48/lb decrease in resin pricing that occurred at the end of 2008.  Due to the contractual pass-through lag of lower resin costs, the full impact of the reduced prices to our customers did not take effect until the second quarter of 2009.

     Cost of Sales. Cost of sales for the three months ended March 31, 2010 decreased by approximately $4.3 million, or 2.8%, compared with the same period in 2009. Cost of sales as a percentage of net sales increased to 87.9% of net sales, or $152.0 million for the three months ended March 31, 2010, as compared with 87.1% of net sales, or $156.3 million for the three months ended March 31, 2009. We have recently experienced significant volatility with respect to our raw materials, especially polyethylene resin, as evidenced by the $0.18/lb increase in resin prices during the three months ended March 31, 2010, which unfavorably impacted material margins, as we typically experience a lag in time before we can pass any raw material price increases/decreases on to our customers. Conversely, our material margins for the three months ended March 31, 2009 were favorably impacted as a result of the $0.48/lb decrease in resin prices that occurred during the period from September 2008 through December 2008, which given the typical lag in time before raw material price decreases are passed on to our customers, we had not realized the full benefit of the resin price decreases at the end of 2008. During the first quarter of 2009, we were able to realize the full benefit of these price decreases.  In addition, cost of sales was unfavorably impacted by increased depreciation expense, partially offset by favorable incentive compensation under the management incentive compensation plan and headcount reductions.

     Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses for the three months ended March 31, 2010 decreased by approximately $128,000, or 1%, compared with the same period in 2009. The significant components of the total decrease in SG&A expense were attributable to a $1.6 million decrease in incentive compensation under the management incentive compensation plan, a decrease of $249,000 in bad debt expense and lesser decreases totaling $229,000, and these components were partially offset by an increase of $873,000 in professional services, primarily related to process improvement consulting, an increase in severance of $430,000, an increase in loss on sales and disposition of property, plant and equipment of $279,000 and other lesser increases totaling $364,000.

     Interest Expense. Interest expense for the three months ended March 31, 2010 decreased by approximately $149,000, or approximately 2.1%, compared with the same period in 2009 primarily due to a reduction in average borrowings during the period as well as a reduction in the average interest rate under our existing senior credit facility described in Note 5 to the consolidated financial statements included in this report (the “Senior Credit Facility”).

     Other (Income) Expense. Other expense for the three months ended March 31, 2010 decreased by approximately $33,000 compared to the same period in 2009. Other expense is comprised primarily of foreign exchange gains and losses related to our Canadian and United Kingdom operations.

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     Income Tax Expense. We recorded income tax expense of $523,000 for the three months ended March 31, 2010, on a loss before income taxes of approximately $330,000. The income tax expense of $813,000 recorded for the same period in 2009 was based on income before income taxes of $1.6 million. Our effective income tax rate was approximately -158% in 2010 and 51% in 2009. The effective rates for the three month periods ended March 31, 2010 and 2009 reflected certain foreign losses which we do not believe will result in a tax benefit. The jurisdictions in which earnings or deductions are realized may differ from our current estimates.

     Reportable Segments. Our pet food and specialty packaging segment had net sales of $56.9 million and $66.6 million, and operating income of $6.5 million and $8.2 million, for the three months ended March 31, 2010 and 2009, respectively. The decrease in net sales was largely the result of unfavorable sales volume of 12.9%, primarily within the pet food and sewn feed bags product lines and a 2% decrease in the average selling price. The decrease in operating income of $1.8 million, or 21.6%, was largely related to the decrease in net sales and also due to an increase in selling, general and administrative expenses, driven by increased losses on sales and disposition of property, plant and equipment.

     Our food and specialty packaging segment had net sales of $55.5 million and $56.0 million, and operating income of $2.1 million and $3.2 million, for the three months ended March 31, 2010 and 2009, respectively. The decrease in net sales from 2009 was primarily due to a 2.7% decrease in the average selling price.  The decrease in average selling price would have been greater if not for the favorable foreign exchange rate impact. The decrease in operating income of approximately $1.1 million, or 34.1%, was driven by an increase in the cost of the primary raw material item, polyethylene resin, of $0.18/lb during the three months ended March 31, 2010 and increased depreciation expense. We typically experience a lag in time before we can pass any raw material price increases/decreases on to our customers and therefore our material margins were unfavorably impacted in the first quarter of 2010. See discussion of cost of sales above.

     Our performance packaging segment had net sales of $42.8 million for each of the three month periods ended March 31, 2010 and 2009 and operating income of $3.1 million and $2.9 million, for the three months ended March 31, 2010 and 2009, respectively. The increase in operating income is primarily attributable to reduced selling, general and administrative expenses.

     Our coated products segment had net sales of $17.8 million and $13.9 million, and operating income of $1.9 million and $670,000 for the three months ended March 31, 2010 and 2009, respectively. The increase in net sales was primarily a result of increased volume, particularly in the electronics market, and to a lesser extent the impact of favorable exchange rates. The increase in operating income was primarily the result of increased sales, and to a lesser extent favorable selling general and administrative expenses and the impact of favorable exchange rates.

     Corporate operating loss, which includes certain unallocated corporate costs, increased approximately $605,000 for the three months ended March 31, 2010 as compared with the same period in 2009. The increase in corporate operating loss is attributable to increased professional services, primarily related to process improvement consulting, and increased severance, partially offset by reduced incentive compensation under the management incentive program.

Liquidity and Capital Resources

Cash Flows for the Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

     Cash flows provided by operating activities for the three months ended March 31, 2010 of $82,000 were primarily due to cash provided by earnings, which were mostly offset by net unfavorable working capital. Cash provided by earnings were $6.3 million (net loss of $853,000 adjusted to exclude the effect of non-cash charges for depreciation and amortization of $6.8 million plus other non-cash items that net to approximately $374,000, including stock compensation expense, deferred income tax provision, recovery of bad debts and loss on sales and disposition of property, plant and equipment).  The net unfavorable working capital resulted from an increase in inventories of $4.6 million due largely to increased raw material costs, an increase in trade accounts receivables of $3.1 million due to increased sales volume, partially offset by a decrease of $1.1 million in prepaid expenses, other receivables and other assets due to the collection of foreign goods and services tax receivables and an increase in accounts payable and accrued liabilities of $405,000 due primarily to an increase in accounts payable due to rising raw material costs, largely offset by the $12.4 million semi-annual interest payment on our 11.25% senior notes due 2014 (the "Notes").

     Cash flows used in investing activities for the three months ended March 31, 2010 and 2009 were $6.7 million and $3.5 million, respectively, primarily comprised of costs associated with capital expenditures for property, plant and equipment for both periods and investment in our joint venture during the three months ended March 31, 2010, partially offset by proceeds from sales of property, plant and equipment for both periods.

     Cash flows provided by financing activities for the three months ended March 31, 2010 and 2009 were $6.8 million and $5.8 million, respectively, primarily comprised of net borrowings made on our Senior Credit Facility to fund our $12.4 million semi-annual interest payment on the Notes, and capital expenditures for both periods.

     The effect of exchange rate changes on assets and liabilities of our foreign subsidiaries used approximately $6,000 in cash for the three months ended March 31, 2010 and provided approximately $66,000 for the three months ended March 31, 2009.

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Financing Arrangements as of March 31, 2010

     Information about our financing arrangements as of March 31, 2010, including the Notes, our Senior Credit Facility, and our term loan, is disclosed in Note 5 of the consolidated financial statements included in this report, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

     As of March 31, 2010, $220.0 million of the Notes remained outstanding. In addition, for the three months ended March 31, 2010, we incurred approximately $6.5 million in interest expense related to the Notes, including amortization of related deferred financing costs and fees. As of March 31, 2010, approximately $75.5 million was outstanding under our Senior Credit Facility and accruing interest at a weighted average interest rate of approximately 1.8% per annum, with approximately $24.2 million available for borrowings. For the three months ended March 31, 2010, we incurred approximately $450,000 in interest expense related to the Senior Credit Facility, including amortization of related deferred financing costs and fees. The term loan had a principal balance of approximately $70,000 at March 31, 2010.

Liquidity and Capital Outlook

     We fund our liquidity needs for capital expenditures, working capital and scheduled interest and principal payments through cash flow from operations and borrowings under our Senior Credit Facility. Since the second half of 2008 global financial markets have experienced a liquidity crisis. Despite certain government intervention, capital market financing has become less available and more expensive. Notwithstanding the disruption of the capital and credit markets, we believe we have sufficient liquidity to meet our needs for the foreseeable future, although continued market disruption may result in increased borrowing costs associated with our Senior Credit Facility. Management continues to monitor events and the financial institutions associated with our Senior Credit Facility, including monitoring credit ratings and outlooks. In the event that we require additional liquidity beyond our cash flows from operations and borrowings available under our Senior Credit Facility due to market conditions, unexpected actions by our lenders, changes to our growth strategy, or other factors, our ability to obtain any additional financing on favorable terms, if at all, could be severely limited due to the current liquidity crisis. We plan to replace the Senior Credit Facility prior to its maturity on January 31, 2011, however, there can be no assurance that we will be able to secure replacement financing on terms that are favorable to us, or at all.

     We expect to incur a total of approximately $25.9 million in interest expense related to the Notes in 2010, including amortization of related deferred financing costs and fees. In addition, we currently anticipate that our capital expenditures for 2010 will be approximately $20.0 million. To pay for the interest expense on the Notes and anticipated capital expenditures, we plan to utilize internally generated funds, cash on hand, funds available under our Senior Credit Facility and proceeds from equipment sales/leaseback transactions. Approximately $75.5 million of borrowings were outstanding and approximately $24.2 million was available for borrowings under our Senior Credit Facility as of March 31, 2010. Management believes that, based on current and anticipated financial performance, cash flows from operations and borrowings under our Senior Credit Facility will be adequate to meet anticipated requirements for capital expenditures, working capital and scheduled interest and principal payments for the coming year.

     Both the indenture governing the Notes and the credit agreement governing our Senior Credit Facility contain certain covenants that, among other things, restrict our ability to borrow additional money, pay dividends, make investments, create liens, enter into transactions with affiliates and sell assets or enter into mergers with others. The Senior Credit Facility matures on January 31, 2011, and the Notes mature in 2014. We may not generate sufficient cash flow from operations or may not be able to obtain sufficient funding to satisfy all of our obligations, including those noted above. If we are unable to pay our obligations, we may be required to pursue one or more alternative strategies, such as selling assets, or refinancing or restructuring our indebtedness. Such alternative strategies may not be feasible or may not be adequate to satisfy our obligations.

     One of our potential growth strategies is growth through acquisitions, which may require additional funding. In such case, although we believe that we would be able to borrow additional funds beyond our current credit lines, there can be no assurance that such financing would be available or, if so, on terms that are acceptable to us.

     Our ability to pay dividends is subject to the terms of the indenture governing the Notes, the terms of our Senior Credit Facility and the discretion of our Board of Directors. We currently have no plans to pay dividends.

Off-Balance Sheet Arrangements

     During 2009 we entered into a joint venture agreement with a third party. We determined that the joint venture is a variable interest entity (“VIE”) under FASB guidance related to accounting for variable interest entities and that the we are not the primary beneficiary of the VIE. The VIE consists of a manufacturing operation, located within an existing manufacturing facility owned by the joint venture partner in Lebanon, used to co-extrude polyethylene film for use in flexible packaging. The VIE is in the process of purchasing and installing the necessary extrusion equipment and currently anticipates production to commence in the second quarter of 2010. Our maximum exposure to loss as a result of our involvement with the unconsolidated VIE is limited to our recorded investment in this VIE, which was approximately $825,000 at March 31, 2010, of which approximately $425,000 was invested during the three months ended March 31, 2010. We may be subject to additional losses to the extent of any financial support that we provide in the future.

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Contractual Obligations

     The following table summarizes the scheduled payments and obligations under our contractual and other commitments at March 31, 2010:

 

(1)	Under the terms of a lockbox arrangement, remittances automatically reduce the revolving debt outstanding on a daily basis and therefore the entire amount outstanding under our Senior Credit Facility is classified as a current liability. As a result, the entire amount is presented as a payment due in 2010, even though the Senior Credit Facility does not mature until January 31, 2011.
(2)	Represents currently estimated amounts.
(3)	Includes interest payments on outstanding fixed-rate, long term debt obligations.

Recent Accounting Pronouncements

     See Note 2 to our consolidated financial statements included elsewhere in this quarterly report for information regarding recently issued accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to various market risks. Market risk is the potential loss arising from adverse changes in market prices and rates. We do not enter into derivative or other financial instruments for trading or speculative purposes.

     Interest Rates. We are exposed to market risk in the form of interest rate risk relating to borrowings under our Senior Credit Facility. Borrowings under our Senior Credit Facility accrue interest at a floating rate per annum equal to the U.S. Index Rate (the higher of either the prime rate as published in The Wall Street Journal or the Federal Funds Rate plus 50 basis points per annum as determined in accordance with the credit agreement) plus 0.5%, or, upon our prior notice, at a per annum rate equal to LIBOR plus 1.5% for loans under the U.S. portion of our Senior Credit Facility. Interest accrues on amounts outstanding under our Senior Credit Facility’s Canadian sub-facility at a floating rate per annum equal to the Canadian Index Rate (the higher of either the reference rate used for Canadian Dollar denominated commercial loans made by commercial banks in Canada or the BA Rate as determined in accordance with the credit agreement) plus 0.5%, or, upon our prior notice, at a per annum rate equal to the BA Rate (the average Canadian interbank bid rate as determined in accordance with the credit agreement) plus 1.5%. Because these rates may increase or decrease at any time, we are subject to the risk that they may increase, thereby increasing the interest rates applicable to our borrowings under the Senior Credit Facility. Increases in the applicable interest rates would increase our interest expense and reduce our net income or increase our net loss. We do not currently have any instruments in place, such as interest rate swaps or caps, which would mitigate our exposure to interest rate risk related to these borrowings. As of March 31, 2010, $75.5 million was outstanding under the Senior Credit Facility and accruing interest at a rate of approximately 1.8% per annum. Based on this amount of borrowings under the Senior Credit Facility, the effect of a hypothetical one percent increase in interest rates would increase our annual interest expense by approximately $755,000.

     Commodity Prices. We purchase commodities, such as paper, resin, films, energy, and various fuels which are subject to price fluctuations. We do not currently engage in the hedging of commodities. Commodities are generally purchased at market or fixed prices that are established by the vendor as part of the purchase process for quantities expected to be consumed in the ordinary course of business. Although the average selling prices of resin-based products in our food and specialty packaging and performance packaging segments generally increase or decrease as the cost of resins increases or decreases, the impact of a change in resin prices is more immediately reflected in our raw material costs than in our selling prices. We monitor the correlation between commodity prices and our selling prices and we may consider hedging alternatives in the future to potentially reduce the effect of price fluctuations.

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     Currency and Exchange Rates. The majority of our revenues, operating expenses and significant capital expenditures are denominated in U.S. dollars; however we do have some exposure to foreign currency risk related to our operations in the United Kingdom and Canada, our Canadian sub-facility and interactions with our foreign subsidiaries. Transactions in other currencies are translated into U.S. dollars using the rates in effect as of the date of such transactions. We have not entered into any foreign currency forward contracts or similar arrangements to limit our exposure to foreign exchange rate fluctuations, but we may consider such arrangements in the future.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     The Company’s management has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission’s rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management to allow timely decisions regarding required disclosure.

     Based on management’s evaluation as of the end of the period covered by this quarterly report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control Over Financial Reporting

     There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).

PART II

ITEM 1.

LEGAL PROCEEDINGS

     From time to time, the Company becomes party to legal proceedings and administrative actions, which are of an ordinary or routine nature, incidental to the operations of the Company. Although it is difficult to predict the outcome of any legal proceeding, in the opinion of the Company’s management, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

ITEM 1A.

RISK FACTORS

     Information about certain risk factors and other uncertainties that could materially adversely affect our business, financial condition, results of operations and cash flows was disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes in those risk factors since the date of that filing.

ITEM 6.

EXHIBITS

The list of exhibits in the Exhibit Index to this quarterly report is incorporated herein by reference.

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SIGNATURES

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

 

Date: May 12, 2010

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EXHIBIT INDEX

 

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