UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

¨         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _______________

Commission File 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 x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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):

                                              Large accelerated filer ¨          Accelerated filer  ¨             Non-accelerated filer  x             Smaller reporting company  ¨                                                                                                     

                                                                                             (Do not check if a smaller reporting company)

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

Yes ¨    No  x

The registrant is a privately held corporation and has no voting or non-voting common equity held by non-affiliates.   As of November 15, 2010, one share of the registrant’s common stock was outstanding.

EXOPACK HOLDING CORP.

TABLE OF CONTENTS

FORM 10-Q

PART II

OTHER INFORMATION

PART I

FINANCIAL INFORMATION

ITEM 1.        FINANCIAL STATEMENTS

EXOPACK HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

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

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EXOPACK HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands of dollars)

The accompanying notes are an integral part of these consolidated financial statements.

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EXOPACK HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY (unaudited)

(in thousands of dollars, except share data)

The accompanying notes are an integral part of these consolidated financial statements.

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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”).

The Company operates 19 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 seven manufacturing facilities in the food and specialty packaging segment, of which the Company leases two, including one manufacturing facility in Ontario, Canada, and owns the remaining five 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.

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”).

EMCS Acquisition

On July 13, 2010, the Company completed the acquisition of certain assets and liabilities of a packaging business previously operated by Bemis Company, Inc.  The acquired business, which is referred to in this report as Exopack Meat, Cheese and Specialty (“EMCS”) involves the manufacture and sale of certain packaging products in the United States and Canada, including flexible-packaging rollstock used for chunk, sliced or shredded natural cheeses packaged for retail sale and flexible-packaging shrink bags used for fresh meat.  EMCS is included within our food and specialty packaging segment (see Note 12).  The acquisition of EMCS provided the Company the unique opportunity to gain a position in the meat and cheese packaging sector and expand the Company’s product offerings in the food and specialty packaging segment.  The purchase price paid by the Company was approximately $82.1 million.  The Company expensed approximately $3.1 million and $4.5 million of acquisition costs related to the EMCS acquisition during the three and nine months ended September 30, 2010, respectively.

The Company funded the purchase price with proceeds from a term loan that was repaid on September 24, 2010 using proceeds from the issuance of additional 11.25% senior notes due 2014 (see Note 5).

Third party net sales and operating income related to EMCS were approximately $34.1 million and $2.5 million, respectively, for the three and nine months ended September 30, 2010.

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The net acquisition cost of $82.1 million has been accounted for under the provisions of the Financial Accounting Standards Board (“FASB”) guidance related to the purchase method of accounting and includes the following allocations:

Pro forma net sales and operating income have been calculated as though the EMCS acquisition date was at the beginning of the years presented.  Pro forma net sales were approximately $221.6 million and $648.0 million for the three and nine months ended September 30, 2010. Pro forma net loss was approximately $462,000 and $2.5 million for the three and nine months ended September 30, 2010. Pro forma net sales were approximately $204.0 million and $624.4 million for the three and nine months ended September 30, 2009. Pro forma net loss was approximately $1.8 million and zero for the three and nine months ended September 30, 2009. 

The unaudited pro forma financial information presented above does not purport to be indicative of the future results of operations of the combined businesses.

The allocation of the purchase price for the EMCS acquisition is subject to adjustment as additional information becomes available.  The fair value of the acquired assets and assumed liabilities recognized at the acquisition date as well as the fair value of the acquired identifiable intangible assets is provisional pending the receipt of the final valuation for those assets and liabilities.

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 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.  During the nine months ended September 30, 2010, the VIE purchased and installed the necessary extrusion equipment and production commenced in the third 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 $811,000 at September 30, 2010, of which approximately $425,000 was invested during the nine months ended September 30, 2010. The Company recognized approximately $14,000 as its share of the loss of the joint venture during the three and nine months ended September 30, 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 $69.4 million at September 30, 2010 and $64.4 million at December 31, 2009.  The increase in goodwill at September 30, 2010 was entirely related to the EMCS acquisition, which is part of the food and specialty packaging segment.  The goodwill associated with EMCS includes synergies expected from combining the operations of EMCS with the Company’s existing operations. 

At September 30, 2010, approximately $26.2 million, $19.0 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 $5.0 million and $1.9 million assigned to the Company’s food and specialty and coated products segments, respectively, is not deductible for tax purposes.

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

The increase in gross intangible assets during the nine months ended September 30, 2010 was due solely to the EMCS acquisition. Amortization expense for definite-lived intangible assets for the three months ended September 30, 2010 and 2009 was approximately $806,000 and $486,000, respectively, and for the nine months ended September 30, 2010 and 2009 was approximately $1.8 million and $1.5 million, respectively.  Estimated future annual amortization for definite-lived customer lists, patents and trademarks and trade names is approximately $948,000 for the remainder of 2010, approximately $3.8 million for each of the years 2011 through 2014 and approximately $3.5 million for 2015.

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 “Existing Notes”).

On September 24, 2010, the Company completed the private placement of $100.0 million in principal amount of 11.25% Senior Notes due 2014 (the “Additional Notes”).  The Company used the proceeds from the offering of the Additional Notes and cash on hand to repay a $100.0 million term loan the Company incurred to fund the purchase price of the EMCS acquisition and to pay certain transaction and integration costs related thereto, as described in more detail below under “Credit and Guaranty Agreement.”  The Additional Notes were issued as additional notes under the indenture pursuant to which the Company issued the Existing Notes.  The Additional Notes will be treated as a single series with the Existing Notes under the indenture and will have the same terms as the Existing Notes.  On October 20, 2010, the Company commenced an offer to exchange registered notes for the Additional Notes as required by the terms of a registration rights agreement related to the Additional Notes.  Holders of the Additional Notes have until November 19, 2010 to tender their Additional Notes for registered notes, unless the Company decides to extend such expiration date.  Together, the Existing Notes and the Additional Notes are referred to in this report as 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 100% owned 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.  In connection with the acquisition of EMCS, the Company assumed indebtedness relating to acquired assets, including certain capital lease obligations in the amount of $9.1 million at September 30, 2010.

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 included a Canadian dollar sub-facility available to the Company’s Canadian subsidiaries for up to $15.0 million (or the Canadian dollar equivalent).

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A reserve has been 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, to provide for an increase in the Canadian dollar sub-facility to $25.0 million and to amend certain borrowing base limitations.  On July 2, 2010, the loan agreement related to this facility was amended and restated to provide for an increase in the maximum credit facility to $125.0 million (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.  In general, in the absence of an event of default, the Senior Credit Facility matures at the earliest of (a) July 2, 2014 and (b) ninety (90) days prior to the stated maturity of the Notes.  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 sheets at September 30, 2010 and December 31, 2009.  At September 30, 2010, approximately $68.6 million was outstanding and approximately $52.4 million was available for borrowings under the Senior Credit Facility.

Under the Senior Credit Facility, in general, interest subsequent to July 2, 2010 accrues 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 related to the Company’s Senior Credit Facility) plus 2.0%, or at the Company’s election, at an annual rate equal to the LIBOR Rate (as defined in the loan agreement related to the Company’s Senior Credit Facility) plus 3.0%.  In general, interest accrues on amounts outstanding under the Canadian sub-facility at a variable rate equal to the Canadian Index Rate (as defined in the loan agreement related to the Company’s Senior Credit Facility) plus 2.0%, or at the Company’s election, at an annual rate equal to the BA Rate (as defined in the loan agreement related to the Company’s Senior Credit Facility) plus 3.0%. The weighted average interest rate on borrowings outstanding under the Senior Credit Facility at September 30, 2010 was approximately 3.4%. 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.

Under the Senior Credit Facility, in general, interest prior to July 2, 2010 accrued on amounts outstanding under the U.S facility at a variable annual rate equal to the U.S. Index Rate (as defined in the prior loan agreement) plus 0.5% or, upon the Company’s prior notice, at an annual rate equal to LIBOR plus 1.5% (as defined in the prior loan agreement).  Interest accrued on amounts outstanding under the Canadian facility at a variable annual rate equal to the Canadian Index Rate (as defined in the prior 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 prior loan agreement) plus 1.5%.

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 September 30, 2010, the Company was in compliance with these restrictions.

The Company incurred approximately $1.3 million in deferred financing costs related to the amendment of the Senior Credit Facility during the three and nine months ended September 30, 2010, which will be amortized over the term of the Senior Credit Facility.

At September 30, 2010, there were outstanding letters of credit of approximately $3.5 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 September 30, 2010, approximately $45,000 is outstanding under this agreement.

Credit and Guaranty Agreement

On July 13, 2010, in connection with the EMCS acquisition, the Company, Exopack Key Holdings, LLC, and certain subsidiaries of the Company, as guarantors, entered into a Credit and Guaranty Agreement (the “Credit Agreement”) with Goldman Sachs Lending Partners LLC (“GS Lending Partners”), as Sole Lead Arranger, Sole Lead Bookrunner, Administrative Agent, Syndication Agent and Documentation Agent.  The Credit Agreement provided for a term loan in an amount of up to $100.0 million (the “Term Loan”).  Immediately prior to the closing of the EMCS acquisition, the Company borrowed the full amount of the Term Loan to be used for (i) consideration in respect of the EMCS acquisition, (ii) certain transaction costs related to the EMCS acquisition and (iii) certain integration costs in connection with the EMCS acquisition in an amount not to exceed $5.0 million.  The Company’s obligations under the Credit Agreement were guaranteed by the Company’s parent and certain subsidiaries of the Company set forth in the Credit Agreement.

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The Term Loan was initially funded as a Base Rate Loan (as such term is defined in the Credit Agreement).  As a Base Rate Loan, the Term Loan initially bore interest at a rate per annum equal to the Base Rate (as such term is defined in the Credit Agreement), which could not be less than 3.00% per annum, plus a margin of 8.25% per annum.  The Company generally had the option under the Credit Agreement to convert all or part of the Term Loan to a Eurodollar Rate Loan.  Any Eurodollar Rate Loan would bear interest at a rate per annum equal to the Adjusted Eurodollar Rate (as such term is defined in the Credit Agreement), which would not be less than 2.00% per annum, plus a margin of 9.25% per annum.  In each case, interest on the unpaid principal amount of the Term Loan was at no time less than 12.00% per annum.

The Credit Agreement contained certain customary affirmative and negative covenants that restricted the Company’s and its subsidiaries’ ability to, among other things, incur additional indebtedness, grant liens, engage in mergers, acquisitions and asset sales, declare dividends and distributions, redeem or repurchase equity interests, make loans, certain payments and investments and enter into transactions with affiliates.

Under the Credit Agreement, the Company paid customary closing fees and other fees for a credit facility of this size and type.

The Company paid $11.0 million in deferred financing fees related to this agreement during the nine months ended September 30, 2010.  These deferred financing fees were transferred to the Additional Notes and will be amortized over the term of the Additional Notes described above.  The Term Loan and related accrued interest was repaid on September 24, 2010 using proceeds received from the Company’s issuance of the Additional Notes.

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 issued 11,000 options during the nine months ended September 30, 2010.  CPG did not issue any options during the nine months ended September 30, 2009.  The Company recorded net stock compensation income of approximately $13,000 during the three months ended September 30, 2010 due to the forfeiture of options previously granted.  The Company recorded stock compensation expense of approximately $148,000 during the three months ended September 30, 2009, and approximately $206,000 and $440,000 during the nine months ended September 30, 2010 and 2009, respectively.  As of September 30, 2010, the total compensation cost related to non-vested awards not yet recognized was approximately $1.6 million.  This compensation cost is expected to be recognized over the remaining weighted-average period of 2.7 years.

The fair value of options granted during the three and nine months ended September 30, 2010 were estimated using the Black-Scholes option pricing model.  The estimated fair value of $75.00 was based on a 10 year weighted average expected life, a risk-free interest rate of 2.61% and volatility of 40.0%.

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The following tables summarize information about stock options outstanding at September 30, 2010 (there were no stock options exercisable at September 30, 2010).

There were 17,700 options available for grant at September 30, 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 and nine months ended September 30, 2010 and 2009:

The Company contributed approximately $518,000 and $439,000, to the Retirement Plan during the three months ended September 30, 2010 and 2009, respectively, and approximately $1.1 million and $961,000 during the nine months ended September 30, 2010 and 2009, respectively.  Contributions of approximately $307,000 are expected to be made to the Retirement Plan during the remainder of 2010.  At September 30, 2010, the fair value of the assets of our Pension Plans was estimated at $44.1 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 $91,000 and $247,000 to the Defined Contribution Plan during the three months ended September 30, 2010 and 2009, respectively, and approximately $274,000 and $700,000 during the nine months ended September 30, 2010 and 2009, respectively.  None of the amount contributed to the Defined Contribution Plan during the three and nine months ended September 30, 2010 was related to the supplemental employer contribution as the supplemental portion of the Defined Contribution Plan ended on November 30, 2009.  Of the amounts contributed during the three and nine months ended September 30, 2009, approximately $151,000 and $438,000, respectively, 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.  Employer contributions to the Savings Plan were discontinued as of March 1, 2010 and no further employer contributions will be made to the plan.  Accordingly, total expense related to the Savings Plan was zero for the three months ended September 30, 2010 and was approximately $41,000 for the three months ended September 30, 2009, and approximately $30,000 and $118,000 for the nine months ended September 30, 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 and nine months ended September 30, 2010, and approximately $11,000 and $35,000 for the three and nine months ended September 30, 2009, respectively. 

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 $421,000 and $653,000 for the three months ended September 30, 2010 and 2009, respectively, and approximately $1.2 million and $2.1 million for the nine months ended September 30, 2010 and 2009, respectively.  This significant decrease period over period is primarily related to a decrease in the employer matching contribution from 4% to 2% effective January 1, 2010, partially offset by the matching contribution related to employees from the EMCS acquisition.

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.

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The Company is accruing its obligations over the estimated period of employment of the individuals to age 62.  As of September 30, 2010, the Company had two individuals receiving benefits under the agreements.  The deferred compensation liability for these agreements was approximately $336,000 and $377,000 at September 30, 2010 and December 31, 2009, respectively (recorded in “other liabilities” in the accompanying consolidated balance sheets). Deferred compensation expense for each of the three and nine month periods ended September 30, 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 $941,000 and $508,000 for the three months ended September 30, 2010 and 2009, respectively, and approximately $2.2 million and $3.8 million for the nine months ended September 30, 2010 and 2009, respectively, for benefits under the management incentive compensation plan.

In conjunction with the EMCS acquisition, the Company assumed a management incentive compensation plan that will remain in place through the end of 2010. The Company recognized charges of approximately $322,000 for the three and nine months ended September 30, 2010 for benefits under this management incentive compensation plan.

8.        Severance Expenses and Exit and Disposal Activities

           Severance Expenses

           During the three and nine months ended September 30, 2010 and 2009, the Company terminated certain employees and eliminated their positions.  In connection with these terminations, the Company recorded termination costs of approximately $292,000 and $141,000 for the three months ended September 30, 2010 and 2009, respectively, and approximately $2.5 million and $813,000 for the nine months ended September 30, 2010 and 2009, respectively, which were included in “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.  Of approximately $2.0 million in severance accrued at December 31, 2009 and approximately $2.5 million in costs incurred during the nine months ended September 30, 2010, the Company paid approximately $3.7 million through September 30, 2010.   Approximately $830,000 of costs remained accrued for employee termination benefits as of September 30, 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 and nine months ended September 30, 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 September 30, 2010 was approximately $436,000.

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 three and nine months ended September 30, 2009, the Company recorded $453,000 in closure costs, including $320,000 in severance costs, related to the closure of this facility.  There were no exit costs incurred related to this facility during the three and nine months ended September 30, 2010.  The remaining severance liability related to this closed facility of approximately $17,000 is reflected in the accompanying consolidated balance sheet as of September 30, 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 remained 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 and nine months ended September 30, 2010 or 2009.  There was no remaining lease obligation related to this facility as of September 30, 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.

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10.     Comprehensive (Loss) Income

The components of comprehensive (loss) income are as follows for the three and nine months ended September 30, 2010 and 2009:

The following table summarizes the components of accumulated other comprehensive loss and the changes in accumulated other comprehensive loss for the nine months ended September 30, 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 (including liabilities assumed) in connection with the applicable corporate event as well as any customary and reasonable fees.  During the three and nine months ended September 30, 2010, the Company incurred approximately $938,000 in management services under the agreement for management services related to the EMCS acquisition.  The Company will also reimburse Sun Capital Management for all out-of-pocket expenses incurred in the performance of the services under the agreement.    During the nine months ended September 30, 2010, the Company incurred approximately $234,000 in reimbursable expenses related to the EMCS acquisition.  These fees are reflected in “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.  No such expenses were incurred during the three or nine months ended September 30, 2009 under this portion of the agreement. 

The Company incurred management fees and other related expenses under the management services agreement of approximately $576,000 and $320,000 during the three months ended September 30, 2010 and 2009, respectively, and approximately $1.3 million and $1.1 million during the nine months ended September 30, 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 $12,000 and $10,000 for certain consulting fees from Sun Capital Management during the three months ended September 30, 2010 and 2009, respectively, and approximately $38,000 and $39,000 during the nine months ended September 30, 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.

The EMCS acquisition, which primarily includes meat and cheese packaging products, is included in the food and specialty packaging segment for the three and nine months ended September 30, 2010.

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The Company evaluates performance based on profit or loss from operations. For the three and nine months ended September 30, 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 or nine months ended September 30, 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 and nine months ended September 30, 2010 and 2009.

Significant Customers

No customers accounted for more than 10% of the Company’s net sales during the nine months ended September 30, 2010.  One customer accounted for 11.6% of the Company’s net sales during the nine months ended September 30, 2009.   There were no customers that accounted for more than 10% of total trade receivables as of September 30, 2010.  One customer accounted for 14.1% of total trade accounts receivable as of 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 September 30, 2010 and December 31, 2009, the statements of operations for the three and nine months ended September 30, 2010 and 2009, and the statements of cash flows for the nine months ended September 30, 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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