UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

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

Commission File Number: 333-130353-04

Pregis Holding II Corporation

(Exact name of registrant as specified in its charter)

Delaware		20-3321581
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)
1650 Lake Cook Road, Deerfield, IL		60015
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (847) 597-2200

     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 þ     No o

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

     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 o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(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 o     No þ

     There were 149.0035 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding as of September 30, 2009.

 

 

PREGIS HOLDING II CORPORATION

QUARTERLY REPORT ON FORM 10-Q

INDEX

				Page No.
		PART I — FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets, September 30, 2009 (Unaudited) and December 31, 2008			3
		Consolidated Statements of Operations, Three and Nine Months Ended September 30, 2009 and 2008- (Unaudited)			4
		Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2009 and 2008 — (Unaudited)			5
		Notes to Unaudited Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			42
Item 4.		Controls and Procedures			42
		PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			42
Item 1A.		Risk Factors			42
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3.		Defaults Upon Senior Securities			42
Item 4.		Submission of Matters to a Vote of Security Holders			43
Item 5.		Other Information			43
Item 6.		Exhibits			43
		SIGNATURES			44
EX-31.1
EX-31.2

Item 1.		Financial Statements

Pregis Holding II Corporation

Consolidated Balance Sheets
(dollars in thousands, except shares and per share data)

		September 30, 2009				December 31, 2008
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	100,202			$	41,179
Accounts receivable
Trade, net of allowances of $6,205 and $5,357 respectively			123,250				121,736
Other			7,944				13,829
Inventories, net			85,751				87,867
Deferred income taxes			4,867				4,336
Due from Pactiv			1,166				1,399
Prepayments and other current assets			8,788				8,435
Total current assets			331,968				278,781
Property, plant and equipment, net			238,193				245,124
Other assets
Goodwill			128,015				127,395
Intangible assets, net			39,540				41,254
Deferred financing costs, net			4,506				7,734
Due from Pactiv, long-term			10,025				13,234
Pension and related assets			25,973				22,430
Other			406				424
Total other assets			208,465				212,471
Total assets		$	778,626			$	736,376
Liabilities and stockholder’s equity
Current liabilities
Current portion of long-term debt		$	258			$	4,902
Accounts payable			89,401				79,092
Accrued income taxes			4,672				6,964
Accrued payroll and benefits			15,994				11,653
Accrued interest			10,337				6,905
Other			19,067				21,740
Total current liabilities			139,729				131,256
Long-term debt			510,531				460,714
Deferred income taxes			23,915				24,913
Long-term income tax liabilities			8,281				11,310
Pension and related liabilities			4,831				6,119
Other			13,409				11,963
Stockholder’s equity:
Common stock — $0.01 par value; 1,000 shares authorized, 149.0035 shares issued and outstanding at September 30, 2009 and December 31, 2008			—				—
Additional paid-in capital			151,671				150,610
Accumulated deficit			(75,004	)			(64,318	)
Accumulated other comprehensive income			1,263				3,809
Total stockholder’s equity			77,930				90,101
Total liabilities and stockholder’s equity		$	778,626			$	736,376

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

Pregis Holding II Corporation

Consolidated Statements of Operations
(Unaudited)
(dollars in thousands)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Net Sales		$	207,047			$	265,188			$	588,594			$	799,726
Operating costs and expenses:
Cost of sales, excluding depreciation and amortization			156,088				205,673				444,144				624,443
Selling, general and administrative			28,660				31,232				83,059				100,407
Depreciation and amortization			12,607				13,584				35,383				40,734
Other operating expense, net			2,267				4,601				13,602				8,500
Total operating costs and expenses			199,622				255,090				576,188				774,084
Operating income			7,425				10,098				12,406				25,642
Interest expense			9,192				13,392				28,072				37,293
Interest income			(54	)			(92	)			(176	)			(518	)
Foreign exchange loss (gain), net			(886	)			9,562				(5,817	)			6,641
Loss before income taxes			(827	)			(12,764	)			(9,673	)			(17,774	)
Income tax expense (benefit)			2,514				(802	)			1,013				3,029
Net loss		$	(3,341	)		$	(11,962	)		$	(10,686	)		$	(20,803	)

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

Pregis Holding II Corporation

Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)

		Nine Months Ended September 30,
		2009				2008
Operating activities
Net loss		$	(10,686	)		$	(20,803	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization			35,383				40,734
Deferred income taxes			(1,483	)			(1,419	)
Unrealized foreign exchange loss (gain)			(5,552	)			6,814
Amortization of deferred financing costs			1,781				1,781
Gain on disposal of property, plant and equipment			(249	)			(246	)
Stock compensation expense			1,061				678
Impairment of interest rate swap asset			—				1,299
Changes in operating assets and liabilities
Accounts and other receivables, net			9,874				(12,024	)
Due from Pactiv			3,792				6,630
Inventories, net			5,364				(9,738	)
Prepayments and other current assets			1,961				(143	)
Accounts payable			6,771				7,568
Accrued taxes			(5,637	)			(4,778	)
Accrued interest			3,547				4,577
Other current liabilities			856				1,871
Pension and related assets and liabilities, net			(2,931	)			(2,815	)
Other, net			(2,395	)			177
Cash provided by operating activities			41,457				20,163
Investing activities
Capital expenditures			(17,644	)			(25,270	)
Proceeds from sale of assets			692				1,042
Insurance proceeds			—				1,868
Other, net			—				(593	)
Cash used in investing activities			(16,952	)			(22,953	)
Financing activities
Proceeds from revolving credit facility			38,700				—
Financing fees			(1,284	)			—
Repayment of debt			(4,312	)			(1,435	)
Other, net			(125	)			62
Cash provided (used in) financing activities			32,979				(1,373	)
Effect of exchange rate changes on cash and cash equivalents			1,539				(788	)
Increase (decrease) in cash and cash equivalents			59,023				(4,951	)
Cash and cash equivalents, beginning of period			41,179				34,989
Cash and cash equivalents, end of period		$	100,202			$	30,038

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

Pregis Holding II Corporation

1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

     Pregis Corporation (“Pregis”) is an international manufacturer, marketer and supplier of protective packaging products and specialty packaging solutions. Pregis operates through two reportable segments — Protective Packaging and Specialty Packaging.

     Pregis Corporation is 100%-owned by Pregis Holding II Corporation (“Pregis Holding II” or the “Company”) which is 100%-owned by Pregis Holding I Corporation (“Pregis Holding I”). AEA Investors LP and its affiliates (the “Sponsors”) own approximately 98% of the issued and outstanding equity of Pregis Holding I, with the remainder held by management. AEA Investors LP is a New York-based private equity investment firm.

Basis of Presentation

     The consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Management believes these financial statements include all normal recurring adjustments considered necessary for a fair presentation of the financial position and results of operations of the Company. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the operating results for the full year.

     These unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

     Separate financial statements of Pregis Corporation are not presented since the floating rate senior secured notes due April 2013 and the 12.375% senior subordinated notes due October 2013 issued by Pregis Corporation are fully and unconditionally guaranteed on a senior secured and senior subordinated basis, respectively, by Pregis Holding II and all existing domestic subsidiaries of Pregis Corporation and since Pregis Holding II has no operations or assets separate from its investment in Pregis Corporation (see Note 16).

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 or Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement. This standard defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The Company adopted this standard for all financial assets and liabilities as of January 1, 2008. FASB Staff Position No. 157-2 or ASC Topic 820, Partial Deferral of the Effective Date of Statement No. 157, deferred the effective date of SFAS No. 157 or ASC Topic 820 for all non-financial assets and liabilities to fiscal years beginning after November 15, 2008. The Company adopted FASB Staff Position No. 157-2 or ASC Topic 820 on January 1, 2009 for all non-financial assets and liabilities. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 141(R) or ASC 805-10-65-1, Business Combinations, which revised SFAS No. 141, Business Combinations. This standard requires an acquiror to measure the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard will also impact the accounting for transaction costs and restructuring costs as well as the initial recognition of contingent assets and liabilities assumed during a business combination. In addition, under this standard, adjustments to the acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period are recorded as a component of income tax expense, rather than goodwill. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. The provisions of this standard are applied prospectively and will impact all acquisitions consummated subsequent to adoption. The guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to January 1, 2009. Adoption of this standard did not have a material impact on the Company’s financial statements.

     In March 2008, the FASB issued SFAS No. 161 or ASC 815-10-65-1, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. This standard expands quarterly disclosure requirements about an entity’s derivative instruments and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the provisions of this standard effective January 1, 2009. See Note 6 for the Company’s disclosures about its derivative instruments and hedging activities.

     In April 2009, the FASB issued FSP FAS 107-1 or ASC 825-10-65-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, for the interium periods ending after March 15, 2009. This standard expands the fair value disclosures required for all financial instruments within the scope of FAS 107 or ASC 825-10-65-1 to include interim periods. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

     In May 2009, the FASB issued SFAS No. 165 or ASC Topic 855, Subsequent Events. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and is effective for interim or annual periods ending after June 15, 2009. The Company has evaluated subsequent events through November 13, 2009, the date on which the Company’s Form 10-Q for the quarterly period ended September 30, 2009 is filed with the Securities and Exchange Commission.

     In June 2009, the FASB issued the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”). The Codification became the single official source of authoritative nongovernmental U.S. generally accepted accounting priciples (“GAAP”). The Codification did not change GAAP but reorganized the literature. The Codification is effective for interim and annual periods ending after September 15, 2009, and the Company adopted the Codification during the three months ended September 30, 2009.

     Pregis adopted the provisions of FASB Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair Value, for interim peiods ending after August 28, 2009. ASU No. 2009-05 provides guidance on measuring liabilities at fair value when a quoted price in an active market for the identical liability is not available. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

     Pregis adopted the provisions of FASB Staff Position No. FAS 132R-1 or ASC Topic 715, Employers’Discolsures about Postretirement Benefit Plan Assets, on January 1, 2009. This standard requires more detailed disclosures about Pregis’s plan assets, including investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. Additional disclosures are required beginning with the year ended 2009 consolidated financial statements. There was no impact to Pregis’s condensed consolidated financial statements.

3. INVENTORIES

     The major components of net inventories are as follows:

		September 30,				December 31,
		2009				2008
Finished goods		$	43,137			$	43,338
Work-in-process			14,428				13,793
Raw materials			25,496				27,489
Other materials and supplies			2,690				3,247
		$	85,751			$	87,867

4. GOODWILL AND OTHER INTANGIBLE ASSETS

     The changes in goodwill by reportable segment for the nine months ended September 30, 2009 are as follows:

		December 31,				Foreign Currency				September 30,
Segment		2008				Translation				2009
Protective Packaging		$	97,159			$	(1,164	)		$	95,995
Specialty Packaging			30,236				1,784				32,020
Total		$	127,395			$	620			$	128,015

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

		Average				September 30, 2009								December 31, 2008
		Life				Gross Carrying				Accumulated				Gross Carrying				Accumulated
		(Years)				Amount				Amortization				Amount				Amortization
Intangible assets subject to amortization:
Customer relationships			12			$	46,669			$	14,992			$	45,646			$	11,863
Patents			10				1,072				358				1,036				261
Non-compete agreements			2				3,047				3,047				3,002				2,908
Software			3				3,254				1,907				2,469				1,224
Land use rights and other			32				1,518				565				1,447				474
Intangible assets not subject to amortization:
Trademarks and trade names							4,849				—				4,384				—
Total						$	60,409			$	20,869			$	57,984			$	16,730

     Amortization expense related to intangible assets totaled $1,192 and $1,149 for the three months ended September 30, 2009 and 2008, respectively, and $3,433 and $3,662 for the nine months ended September 30, 2009 and 2008, respectively.

5. DEBT

The Company’s long-term debt consists of the following:

		September 30,				December 31,
		2009				2008
Senior secured credit facilities:
Term B-1 facility, due October, 2012		$	83,057			$	85,140
Term B-2 facility, due October, 2012			93,813				91,902
Revolving Credit Facility			38,700				—
Senior secured notes, due April, 2013			146,340				139,690
Senior subordinated notes, due October, 2013, net of discount of $1,724 at September 30, 2009 and $1,962 at December 31, 2008			148,276				148,038
Other			603				846
Total debt			510,789				465,616
Less: current portion			(258	)			(4,902	)
Long-term debt		$	510,531			$	460,714

     For the nine months ended September 30, 2009 and 2008, the revaluation of the Company’s euro-denominated senior secured notes and Term B-2 facility resulted in unrealized foreign exchange losses and (gains) of $10,790 and $(8,632), respectively. These unrealized losses and (gains) have been offset by unrealized (gains) and losses of $(13,738) and $10,784 relating to the revaluation of the Company’s euro-denominated inter-company notes receivable for the nine months ended September 30, 2009 and 2008, respectively. These amounts are included net within foreign exchange loss (gain), net in the Company’s consolidated statements of operations.

     As a component of its senior secured credit facility, the Company is party to a revolving credit facility. The revolving credit facility matures in October 2011 and provides for borrowings of up to $50 million, a portion of which may be made available to the Company’s non-U.S. subsidiary borrowers in euros and/or pounds sterling. The revolving credit facility also includes a swing-line loan sub-facility and a letter of credit sub-facility. The revolving credit facility bears interest at a rate equal to, at the Company’s option, (1) an alternate base rate or (2) LIBOR or EURIBOR, plus an applicable margin of 0.375% to 1.00% for base rate advances and 1.375% to 2.00% for LIBOR or EURIBOR advances, depending on the leverage ratio of the Company, as defined in the credit agreement.

     Lehman Commercial Paper Inc. (Lehman) was a participating lender in this facility for $5 million. As a result of the bankruptcy of Lehman’s parent company, as of September 30, 2009, the revolving credit facility has been effectively reduced by the majority of Lehman’s $5 million commitment. In October 2009 the Company regained this liquidity as a result of Barclays Capital new participation.

     On July 14, 2009 the Company drew $38.7 million, the full amount available under the revolving credit facility after reduction for amounts outstanding under letters of credit. This amount remains outstanding as of September 30, 2009. As of September 30, 2009, the Company also had $6.7 million of outstanding letters of credit outstanding under the revolving credit facility. Revolving credit facility interest expense totaled $112 for the quarter ended September 30, 2009.

On October 5, 2009 we amended our senior secured credit facilities. The amendment, among other things:

	•		permits our company to engage in certain specified sale leaseback transactions in 2009 and up to $35.0 million of additional sale leaseback transactions through the maturity of the senior secured credit facilities;
	•		replaces the maximum leverage ratio covenant of 5.0x under the senior secured credit facilities with the first lien leverage covenant of 2.0x;
	•		eliminates the minimum cash interest coverage ratio covenant under the senior secured credit facilities;
	•		increases the accordion feature of the term loan portion of the senior secured credit facilities by $100.0 million, allowing our company to borrow up to $200.0 million under the term loan portion of the senior secured credit facilities, subject to certain conditions including receipt of commitments therefore;
	•		provides for additional subordinated debt issuances subject to a 2.0x interest coverage ratio; and
	•		modifies several other covenants in the senior secured credit facilities to provide our company with more flexibility.

     On October 5, 2009 Pregis issued €125.0 million aggregate principal amount of additional second priority senior secured floating rate notes due 2013 (the “notes”). The notes bear interest at a floating rate of EURIBOR plus 5.00% per year. Interest on the notes will be reset quarterly and is payable on January 15, April 15, July 15, and October 15 of each year, beginning on October 15, 2009. The notes mature on April 15, 2013. The notes are treated as a single class under the indenture with the €100.0 million principal amount of our existing second priority senior secured floating rate notes due 2013, originally issued on October 12, 2005. However, the notes do not have the same Common Code or ISIN number as the existing notes, are not fungible with the existing notes and will not trade together as a single class with the existing notes. The notes are treated as issued with more than de minimis original issue discount for United States federal income tax purposes, whereas the existing notes were not issued with original issue discount for such purposes.

     The notes and the related guarantees are second priority secured senior obligations. Accordingly, they are effectively junior to our and the guarantors’ obligations under our senior secured credit facilities and any other obligations that are secured by first priority liens on the collateral securing the notes or that are secured by a lien on assets that are not part of the collateral securing the notes, in each case, to the extent of the value of such collateral or assets; structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables) of our subsidiaries that are not guarantors; equal in right of payment with the senior secured floating rate notes issued by us in 2005 (the “2005 notes” and, together with the notes, the “senior secured floating rate notes”); equal in right of payment with all of our and the guarantors’ existing and future unsecured and unsubordinated indebtedness, and effectively senior to such indebtedness to the extent of the value of the collateral; and senior in right of payment to all of our and the guarantors’ existing and future subordinated indebtedness, including the senior subordinated notes issued by us in 2005 (the “senior subordinated notes”) and the related guarantees.

     The proceeds from the October 2009 offering were used to repay the Term B-1 and Term B-2 indebtedness under our senior secured credit facilities. As the long-term loans were refinanced by the

new long-term senior secured floating rate notes, the term loans have been presented as non-current on the consolidated balance sheet as of September 30, 2009.

6. FAIR VALUE MEASUREMENTS

     The Company adopted SFAS No. 157 or ASC 820 on January 1, 2008. Under generally accepted accounting principles in the U.S., certain assets and liabilities must be measured at fair value, and SFAS No. 157 or ASC 820 details the disclosures that are required for items measured at fair value.

     SFAS No. 157 or ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, as follows:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

     In order to maintain its interest rate risk and to achieve a targeted ratio of variable-rate versus fixed-rate debt, the Company established an interest rate swap arrangement in the notional amount of 65 million euro from EURIBOR-based floating rates to a fixed rate over the period of October 1, 2008 to April 15, 2011. This swap arrangement was designated as a cash flow hedge and changes in the fair value of this instrument are expected to be highly effective in offsetting the fluctuations in the floating interest rate and are, therefore, being recorded in other comprehensive income until the underlying transaction is recorded.

     The accounting for the cash flow impact of the swap is recorded as an adjustment to interest expense. For the three and nine months ended September 30, 2009, the swap resulted in an increase to interest expense of $756 and $1,088, respectively. For the three and nine months ended September 30, 2008, the swap resulted in a reduction to interest expense of $346 and $1,015, respectively.

     At September 30, 2009, this interest rate swap contract was the Company’s only derivative instrument and only financial instrument requiring measurement at fair value. The swap is an over-the-counter contract and the inputs utilized to determine its fair value are obtained in quoted public markets. Therefore, the Company has categorized this swap agreement as Level 2 within the fair value hierarchy. At September 30, 2009, the fair value of this instrument was estimated to be a liability of $5,825, which is reported within other liabilities in the Company’s consolidated balance sheet.

     The carrying values of other financial instruments included in current assets and current liabilities approximate fair values due to the short-term maturities of these instruments. The carrying value of amounts outstanding under the Company’s senior secured credit facilities is considered to approximate fair value as interest rates vary, based on prevailing market rates. At September 30, 2009, the fair values of the Company’s senior secured notes and senior subordinated notes were estimated to be $137,560 and $139,500, respectively, based on quoted market prices. Under SFAS No. 159 or ASC 825, entities are permitted to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value measurement option under this standard for any of its financial assets or liabilities.

7. PENSION PLANS

     The Company sponsors three defined benefit pension plans covering the majority of its employees located in the United Kingdom and the Netherlands.

     The components of net periodic pension cost related to these plans for the three and nine months ended September 30, 2009 and 2008 are as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Service cost of benefits earned		$	707			$	525			$	1,234			$	1,682
Interest cost on benefit obligations			1,166				1,432				3,343				4,295
Expected return on plan assets			(2,132	)			(1,918	)			(5,315	)			(5,756	)
Amortization of unrecognized net gain			(61	)			(66	)			(173	)			(197	)
Net periodic pension cost (benefit)		$	(320	)		$	(27	)		$	(911	)		$	24

8. OTHER OPERATING EXPENSE, NET

     A summary of the items comprising other operating expense, net is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
(Gain) loss on disposal of property, plant and equipment		$	408			$	(673	)		$	151			$	(246	)
Royalty expense			51				16				27				154
Rental income			(10	)			(9	)			(22	)			(30	)
Restructuring expense			2,050				5,194				13,921				7,814
Other (income) expense, net			(232	)			73				(475	)			808
Other operating expense, net		$	2,267			$	4,601			$	13,602			$	8,500

     During the nine months ended September 30, 2009, the Company recorded restructuring charges of $13,921. Restructuring activities are discussed further in Note 9 below.

9. RESTRUCTURING ACTIVITY

     In 2008, management approved a company-wide restructuring program to further streamline the Company’s operations and reduce its overall cost structure. Activities included headcount reductions and other overhead cost savings initiatives. Management also approved a cost reduction plan that involved closure of a protective packaging facility located in Eerbeek, the Netherlands. The plan included relocation of the Eerbeek production lines to other existing company facilities located within Western Europe and reduction of related headcount.

     In 2009, as part of the Company’s continued efforts to reduce its overall cost structure, management implemented additional headcount reductions and engaged outside consultants to assist in further restructuring of its manufacturing operations. Restructuring plans associated with those consulting activities are not yet complete. Consulting costs for restructuring totaling $4.2 million were expensed as incurred and are presented in “other” in the table below. Also included in “other” are costs associated with the discontinuance of a product line at one of the Company’s North American protective packaging plants of approximately $0.6 million.

     Following is a reconciliation of the restructuring liability for the nine months ended September 30, 2009. The company expects to have substantially satisfied the restructuring liability by June 2010.

		December 31,												Cash				Foreign Currency				September 30,
Segment		2008				Severance				Other				Paid Out				Translation				2009
Protective Packaging		$	4,178			$	4,339			$	3,688			$	(11,741	)			—			$	464
Specialty Packaging			592				1,301				—				(1,429	)			18				482
Corporate			83				574				4,019				(2,854	)			30				1,852
Total		$	4,853			$	6,214			$	7,707			$	(16,024	)		$	48			$	2,798

     Amounts recorded for restructuring liabilities are included in other current liabilities on the Company’s consolidated balance sheets. As of September 30, 2009, our restructuring initiatives are substantially complete.

10. INCOME TAXES

     The Company’s effective tax rate was 10.47% and 17.04% for the nine months ended September 30, 2009 and 2008, respectively. Reconciliation of the Company’s effective tax rate to the U.S. federal statutory rate is shown in the following table:

		Nine Months Ended September 30,
		2009				2008
U.S. federal income tax rate			(35.00	)%			(35.00	)%
Changes in income tax rate resulting from:
Valuation allowances			21.35				38.26
State and local taxes on income, net of U.S. federal income tax benefit			6.94				(0.68	)
Foreign rate differential			7.45				7.74
Return to provision calculation			—				(1.98	)
Non-deductible interest expense			2.79				5.42
Permanent differences			5.27				3.28
Other			1.67				—
Income tax expense			10.47	%			17.04	%

11. RELATED PARTY TRANSACTIONS

     The Company is party to a management agreement with its sponsors, AEA Investors LP and its affiliates, who provide various advisory and consulting services. Fees and expenses incurred under this agreement totaled $472 and $324 for the three months ended September 30, 2009 and 2008, respectively, and $1,563 and $1,248 for the nine months ended September 30, 2009 and 2008, respectively. These amounts are recorded in selling, general and administrative expenses in the Company’s consolidated statements of operations.

     The Company had sales to affiliates of AEA Investors LP totaling $280 and $636 for the three months and nine months ended September 30, 2009 compared to $167 and $388 for the same periods of 2008, respectively. The Company made purchases from affiliates of AEA Investors LP totaling $3,153 and $8,627 for the three and nine months ended September 30, 2009 compared to $2,889 and $7,987 for the same periods of 2008, respectively.

12. SEGMENT AND GEOGRAPHIC INFORMATION

     The Company’s segments are determined on the basis of its organization and internal reporting to the chief operating decision maker. The Company’s segments are as follows:

     Protective Packaging — This segment manufactures, markets, sells and distributes protective packaging products in North America and Europe. Its protective mailers, air-encapsulated bubble products, sheet foam, engineered foam, inflatable airbag systems, honeycomb products and other protective packaging products are manufactured and sold for use in cushioning, void-fill, surface-protection, containment and blocking & bracing applications.

     Specialty Packaging — This segment provides innovative packaging solutions for food, medical, and other specialty packaging applications, primarily in Europe.

     Net sales by reportable segment for the three and nine months ended September 30, 2009 and 2008 are as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Protective Packaging		$	128,930			$	172,088			$	363,107			$	520,226
Specialty Packaging			78,117				93,100				225,487				279,500
		$	207,047			$	265,188			$	588,594			$	799,726

     The Company evaluates performance and allocates resources to its segments based on segment EBITDA, which is calculated internally as net income before interest, taxes, depreciation, amortization, and restructuring expense and adjusted for other non-cash activity. Segment EBITDA is a measure of segment profit or loss which is reported to the Company’s chief operating decision maker for purposes of making decisions about allocating resources to the Company’s segments and evaluating segment performance. In addition, segment EBITDA is included herein in conformity with SFAS No. 131 or ASC 280, “Disclosures about Segments of an Enterprise and Related Information.” Management believes that segment EBITDA provides useful information for analyzing and evaluating the underlying operating results of each segment. However, segment EBITDA should not be considered in isolation or as a substitute for net income (loss) before income taxes or other measures of financial performance prepared in accordance with generally accepted accounting principles in the United States. Additionally, the Company’s computation of segment EBITDA may not be comparable to other similarly titled measures computed by other companies.

     The following table presents EBITDA by reportable segment and reconciles the total segment EBITDA to loss before income taxes:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Segment EBITDA
Protective Packaging		$	15,462			$	20,271			$	42,201			$	49,813
Specialty Packaging			11,363				11,147				30,792				33,574
Total segment EBITDA			26,825				31,418				72,993				83,387
Corporate expenses			(4,390	)			(1,614	)			(10,210	)			(8,346	)
Restructuring expense			(2,050	)			(5,194	)			(13,921	)			(7,814	)
Depreciation and amortization			(12,607	)			(13,584	)			(35,383	)			(40,734	)
Interest expense			(9,192	)			(13,392	)			(28,072	)			(37,293	)
Interest income			54				92				176				518
Unrealized foreign exchange gain (loss), net			859				(10,246	)			5,552				(6,814	)
Non-cash stock compensation			(327	)			(244	)			(1,061	)			(678	)
Other			1				—				253				—
Loss before income taxes		$	(827	)		$	(12,764	)		$	(9,673	)		$	(17,774	)

     Corporate expenses include the costs of corporate support functions, such as information technology, finance, human resources, legal and executive management which have not been allocated to the segments. Additionally, corporate expenses may include other non-recurring or non-operational activity that the chief operating decision maker excludes in assessing business unit performance. These expenses, along with depreciation and amortization, other operating income/expense and other non-operating activity such as interest expense/income, restructuring, and foreign exchange gains/losses, are not considered in the measure of the segments’ operating performance, but are shown herein as reconciling items to the Company’s consolidated loss before income taxes.

13. COMPREHENSIVE LOSS

     Total comprehensive loss and its components for the three and nine months ended September 30, 2009 and 2008 are as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Net loss		$	(3,341	)		$	(11,962	)		$	(10,686	)		$	(20,803	)
Other comprehensive income loss, net of tax:
Foreign currency translation adjustment			(971	)			(4,796	)			(982	)			(1,721	)
Net change in fair value of hedging instrument			(195	)			(763	)			(1,564	)			(221	)
Comprehensive loss		$	(4,507	)		$	(17,521	)		$	(13,232	)		$	(22,745	)

14. COMMITMENTS AND CONTINGENCIES

Legal matters

     The Company is party to legal proceedings arising from its operations. Related reserves are recorded when it is probable that liabilities exist and where reasonable estimates of such liabilities can be made. While it is not possible to predict the outcome of any of these proceedings, the Company’s management, based on its assessment of the facts and circumstances now known, does not believe that any of these proceedings, individually or in the aggregate, will have a material adverse effect on the Company’s financial position. The Company does not believe that, with respect to any pending legal matters, it is reasonably possible that a loss exceeding amounts already recognized may be material. However, actual outcomes may be different than expected and could have a material effect on the company’s results of operations or cash flows in a particular period.

Environmental matters

     The Company is subject to a variety of environmental and pollution-control laws and regulations in all jurisdictions in which it operates. Where it is probable that related liabilities exist and where reasonable estimates of such liabilities can be made, associated reserves are established. Estimated liabilities are subject to change as additional information becomes available regarding the magnitude of possible clean-up costs, the expense and effectiveness of alternative clean-up methods, and other possible liabilities associated with such situations. The Company does not believe that, with respect to any pending environmental matters, it is reasonably possible that a loss exceeding amounts already recognized may be material. However, actual outcomes may be different than expected and could have a material effect on the company’s results of operations or cash flows in a particular period.

Financing commitments

     As of September 30, 2009, the Company also had $6.7 million of outstanding letters of credit outstanding under the revolving credit facility. In addition, the Company also had outstanding guarantees and letters of credit issued under other financing lines with local banks totaling $5,786.

15. SUBSEQUENT EVENTS

     On October 5, 2009 Pregis issued €125.0 million aggregate principal amount of additional second priority senior secured floating rate notes due 2013. See footnote 5 for additional information.

     On October 29, 2009 the Company entered into an agreement to sell and leaseback real property consisting of land and buildings at one of its subsidiaries located in the United Kingdom. The net sale proceeds totaled approximately $10.6 million (6.6 million British Pounds). The Company anticipates this transaction to qualify for sales leaseback accounting treatment, resulting in a $2.7 million gain on disposal of assets. The lease term is 25 years with annual rents totaling approximately $1.2 million (750 thousand British Pounds).

16. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION

     Pregis Holdings II (presented as Parent in the following schedules), through its 100%-owned subsidiary, Pregis Corporation (presented as Issuer in the following schedules), issued senior secured notes and senior subordinated notes in connection with its acquisition by AEA Investors LP and its affiliates. The senior notes are fully, unconditionally and jointly and severally guaranteed on a senior secured basis and the senior subordinated notes are fully, unconditionally and jointly and severally guaranteed on an unsecured senior subordinated basis, in each case, by Pregis Holdings II and substantially all existing and future 100%- owned domestic restricted subsidiaries of Pregis Corporation (collectively, the “Guarantors”). All other subsidiaries of Pregis Corporation, whether direct or indirect, do not guarantee the senior secured notes and senior subordinated notes (the “Non-Guarantors”). The Guarantors also unconditionally guarantee the Company’s borrowings under its senior secured credit facilities on a senior secured basis.

     Additionally, the senior secured notes are secured on a second priority basis by liens on all of the collateral (subject to certain exceptions) securing Pregis Corporation’s senior secured credit facilities. In the event that secured creditors exercise remedies with respect to Pregis and its guarantors’ pledged assets, the proceeds of the liquidation of those assets will first be applied to repay obligations secured by the first priority liens under the senior secured credit facilities and any other first priority obligations.

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

Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
September 30, 2009
(Unaudited)

														Non-
										Guarantor				Guarantor
		Parent				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets
Cash and cash equivalents		$	—			$	59,049			$	—			$	41,153			$	—			$	100,202
Accounts receivable
Trade, net of allowances			—				—				29,868				93,382				—				123,250
Affiliates			—				69,300				75,094				2,813				(147,207	)			—
Other			—				—				8				7,936				—				7,944
Inventories, net			—				—				20,077				65,674				—				85,751
Deferred income taxes			—				134				2,589				2,144				—				4,867
Due from Pactiv			—				—				—				1,166				—				1,166
Prepayments and other current assets			—				5,404				414				2,970				—				8,788
Total current assets			—				133,887				128,050				217,238				(147,207	)			331,968
Investment in subsidiaries / intercompany balances			77,930				510,407				—				—				(588,337	)			—
Property, plant and equipment, net			—				1,396				68,384				168,413				—				238,193
Other assets
Goodwill			—				—				85,597				42,418				—				128,015
Intangible assets, net			—				—				16,104				23,436				—				39,540
Other			—				4,526				4,015				32,369				—				40,910
Total other assets			—				4,526				105,716				98,223				—				208,465
Total assets		$	77,930			$	650,216			$	302,150			$	483,874			$	(735,544	)		$	778,626
Liabilities and stockholder’s equity
Current liabilities
Current portion of long-term debt		$	—			$	—			$	—			$	258			$	—			$	258
Accounts payable			—				3,818				20,822				64,761				—				89,401
Accounts payable, affiliate			—				46,142				50,466				50,582				(147,190	)			—
Accrued income taxes			—				(3,613	)			4,619				3,666				—				4,672
Accrued payroll and benefits			—				26				4,312				11,656				—				15,994
Accrued interest			—				10,336				—				1				—				10,337
Other			—				1,855				5,531				11,681				—				19,067
Total current liabilities			—				58,564				85,750				142,605				(147,190	)			139,729
Long-term debt			—				510,186				—				345				—				510,531
Intercompany balances			—				—				116,111				302,317				(418,428	)			—
Deferred income taxes			—				(5,237	)			20,331				8,821				—				23,915
Other			—				8,773				6,616				11,132				—				26,521
Total Stockholder’s equity			77,930				77,930				73,342				18,654				(169,926	)			77,930
Total liabilities and stockholder’s equity		$	77,930			$	650,216			$	302,150			$	483,874			$	(735,544	)		$	778,626

Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
December 31, 2008

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

Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
(Unaudited)

														Non-
										Guarantor				Guarantor
		Parent				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net Sales		$	—			$	—			$	74,543			$	134,480			$	(1,976	)		$	207,047
Operating costs and expenses:
Cost of sales, excluding depreciation and amortization			—				—				52,172				105,892				(1,976	)			156,088
Selling, general and administrative			—				4,262				8,776				15,622				—				28,660
Depreciation and amortization			—				157				3,540				8,910				—				12,607
Other operating expense, net			—				1,077				109				1,081				—				2,267
Total operating costs and expenses			—				5,496				64,597				131,505				(1,976	)			199,622
Operating income (loss)			—				(5,496	)			9,946				2,975				—				7,425
Interest expense			—				(140	)			3,677				5,655				—				9,192
Interest income			—				(29	)			—				(25	)			—				(54	)
Foreign exchange loss (gain), net			—				(3,964	)			(10	)			3,088				—				(886	)
Equity in loss of subsidiaries			3,341				2,093				—				—				(5,434	)			—
Income (loss) before income taxes			(3,341	)			(3,456	)			6,279				(5,743	)			5,434				(827	)
Income tax expense			—				(115	)			2,487				142				—				2,514
Net income (loss)		$	(3,341	)		$	(3,341	)		$	3,792			$	(5,885	)		$	5,434			$	(3,341	)