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EX-32.1 - SECTION 906 CEO CERTIFICATION - EXOPACK HOLDING CORPexo-6302011xex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - EXOPACK HOLDING CORPexo-6302011xex311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - EXOPACK HOLDING CORPexo-6302011xex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - EXOPACK HOLDING CORPexo-6302011xex312.htm

 
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 June 30, 2011
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 333-136559
 
 
EXOPACK HOLDING CORP.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
76-0678893
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3070 Southport Rd.,
Spartanburg, SC
 
29302
(Address of principal executive offices)
 
(Zip Code)
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  ¨    No  ý*
*
The registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required to be filed by the registrant during the preceding 12 months had it been subject to such filing requirements.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨ (Not yet applicable to registrant)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
  o
Accelerated filer
  o
Non-accelerated filer
  x  (Do not check if a smaller reporting company)
Smaller reporting company
  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The registrant is a privately held corporation and has no voting or non-voting common equity held by non-affiliates. As of August 12, 2011, one share of the registrant’s common stock was outstanding.
 


EXOPACK HOLDING CORP.
TABLE OF CONTENTS
FORM 10-Q
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands of dollars, except for share and per share data)
 
June 30,
2011
 
December 31,
2010
Assets
 
 
 
Current assets
 
 
 
Cash
$
2,536

 
$
2,508

Trade accounts receivable (net of allowance for uncollectible accounts of $1,467 and $1,550 for 2011 and 2010, respectively)
96,118

 
94,951

Other receivables
2,482

 
3,463

Inventories
112,485

 
103,728

Deferred income taxes
3,689

 
3,703

Prepaid expenses and other current assets
3,936

 
3,240

Total current assets
221,246

 
211,593

Property, plant, and equipment, net
223,209

 
214,293

Deferred financing costs, net
18,560

 
14,998

Intangible assets, net
91,094

 
92,984

Goodwill
69,667

 
69,642

Other assets
6,134

 
6,298

Total assets
$
629,910

 
$
609,808

Liabilities and Stockholder’s (Deficit) Equity
 
 
 
Current liabilities
 
 
 
Revolving credit facility and current portion of long-term debt
$
1,785

 
$
58,815

Accounts payable
84,099

 
83,607

Accrued liabilities
33,542

 
46,868

Income taxes payable
975

 
972

Total current liabilities
120,401

 
190,262

Long-term liabilities
 
 
 
Long-term debt, less current portion
585,000

 
320,000

Capital lease obligations, less current portion
9,595

 
10,501

Deferred income taxes
23,294

 
32,878

Other liabilities
15,181

 
16,172

Total long-term liabilities
633,070

 
379,551

Commitments and contingencies

 

Stockholder’s (deficit) equity
 
 
 
Preferred stock, par value, $0.001 per share - 100,000 shares authorized, no shares issued and outstanding at June 30, 2011 and December 31, 2010

 

Common stock, par value, $0.001 per share - 2,900,000 shares authorized, 1 share issued and outstanding at June 30, 2011 and December 31, 2010

 

(Distributions in excess of) Additional paid-in capital
(76,322
)
 
73,521

Accumulated other comprehensive loss, net
(6,321
)
 
(7,095
)
Accumulated deficit
(40,918
)
 
(26,431
)
Total stockholder’s (deficit) equity
(123,561
)
 
39,995

Total liabilities and stockholder’s (deficit) equity
$
629,910

 
$
609,808

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

1


EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands of dollars)
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Net sales
$
219,767

 
$
179,630

 
$
444,248

 
$
352,518

Cost of sales
189,307

 
159,417

 
383,763

 
311,403

Gross margin
30,460

 
20,213

 
60,485

 
41,115

Selling, general and administrative expenses
21,048

 
15,455

 
38,220

 
29,620

Operating income
9,412

 
4,758

 
22,265

 
11,495

Other expenses
 
 
 
 
 
 
 
Interest expense
12,262

 
7,113

 
23,596

 
14,131

Loss on early extinguishment of debt
22,051

 

 
22,051

 

Other income, net
(139
)
 
(850
)
 
(54
)
 
(801
)
Net other expenses
34,174

 
6,263

 
45,593

 
13,330

Loss before income taxes
(24,762
)
 
(1,505
)
 
(23,328
)
 
(1,835
)
(Benefit from) provision for income taxes
(9,426
)
 
519

 
(8,841
)
 
1,042

Net loss
$
(15,336
)
 
$
(2,024
)
 
$
(14,487
)
 
$
(2,877
)

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


2


EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S (DEFICIT) EQUITY (unaudited)
(in thousands of dollars, except share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
(Distributions in excess of) Additional
Paid-in
 
Accumulated Other
Comprehensive
 
Accumulated
 
 
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Deficit
 
Total
Balances at December 31, 2010
1

 
$

 
$
73,521

 
$
(7,095
)
 
$
(26,431
)
 
$
39,995

Stock compensation expense

 

 
157

 

 

 
157

Net loss

 

 

 

 
(14,487
)
 
(14,487
)
Dividend to parent

 

 
(150,000
)
 

 

 
(150,000
)
Translation adjustment

 

 

 
774

 

 
774

Balances at June 30, 2011
1

 
$

 
$
(76,322
)
 
$
(6,321
)
 
$
(40,918
)
 
$
(123,561
)

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


3


EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands of dollars)
 
 
Six Months Ended
 
Six Months Ended
 
June 30, 2011
 
June 30, 2010
Cash flows from operating activities
 
 
 
Net loss
$
(14,487
)
 
$
(2,877
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
21,002

 
13,409

Deferred income tax (benefit) provision
(9,611
)
 
348

Stock compensation expense
157

 
219

Loss on early extinguishment of debt
11,883

 

Loss on sale and disposition of property, plant and equipment
247

 
478

Changes in operating assets and liabilities:
 
 
 
Receivables
(736
)
 
(4,295
)
Inventories
(8,394
)
 
(8,112
)
Prepaid expenses and other assets
291

 
941

Accounts payable and accrued and other liabilities
(15,738
)
 
8,358

Income tax receivable/payable
(32
)
 
(100
)
Net cash (used in) provided by operating activities
(15,418
)
 
8,369

Cash flows from investing activities
 
 
 
Investment in joint venture

 
(425
)
Purchases of property, plant and equipment, including capitalized software
(24,900
)
 
(12,536
)
Proceeds from sales of property, plant and equipment
277

 
419

Net cash used in investing activities
(24,623
)
 
(12,542
)
Cash flows from financing activities
 
 
 
Repayment of subordinated term loan
(24
)
 
(24
)
Issuance of term loan
350,000

 

Repayment of capital lease obligations
(1,006
)
 

Deferred loan costs paid
(16,738
)
 
(950
)
Dividend to parent
(150,000
)
 

Issuance of senior notes
235,000

 

Repayment of former senior notes
(320,000
)
 

Borrowings under revolving credit facility
571,718

 
414,101

Repayments of revolving credit facility
(628,847
)
 
(408,805
)
Net cash provided by financing activities
40,103

 
4,322

Effect of exchange rate changes on cash
(34
)
 
148

Increase in cash
28

 
297

Cash
 
 
 
Beginning of period
2,508

 
633

End of period
$
2,536

 
$
930


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


4


Exopack Holding Corp. and Subsidiaries
Notes to Condensed 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 and operates one distribution warehouse in China. 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 consumer 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 and one distribution warehouse in the coated products segment, all of which the Company leases, including one manufacturing facility in North Wales, United Kingdom and one warehouse in Guangzhou, China. Subsequent to June 30, 2011, the Company closed its manufacturing facility located in Longview, Texas, and the Company is currently in negotiations to sell this facility.
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”).
Exopack Meat, Cheese and Specialty 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 the Company’s consumer 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 consumer food and specialty packaging segment. The purchase price paid by the Company was approximately $82.1 million. The Company expensed approximately $4.6 million of acquisition costs related to the EMCS acquisition during the year ended December 31, 2010.
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 $36.0 million and $2.5 million for the three months ended June 30, 2011. Third party net sales and operating income related to EMCS were approximately $73.4 million and $4.2 million for the six months ended June 30, 2011.
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:
 

5


 
EMCS
(in thousands of dollars)
Acquisition
Assets acquired:
 
Trade accounts receivable
$
10,927

Other receivables
220

Inventories
12,909

Other current assets
122

Property, plant and equipment
43,894

Intangible assets
30,550

Goodwill
5,226

Total assets acquired
103,848

Liabilities assumed:
 
Accounts payable
(8,141
)
Accrued liabilities
(4,359
)
Capital lease obligations
(9,224
)
Total liabilities assumed
(21,724
)
Purchase price paid
$
82,124


Proforma net sales and operating income/loss have been calculated as though the EMCS acquisition date was January 1, 2010. Pro forma net sales and net loss for the three months ended June 30, 2010 were approximately $216.3 million and$2.4 million, respectively. Pro forma net sales and net loss for the six months ended June 30, 2010 were approximately $426.4 million and $2.1 million, respectively.
The unaudited pro forma financial information presented above does not purport to be indicative of the future results of operations of the combined businesses.
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, 2010 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, 2010.

6


Variable Interest Entity
During 2009, the Company entered into a joint venture with INDEVCO Group, a Lebanese-based manufacturer (“INDEVCO”). 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 INDEVCO in Lebanon, used to co-extrude polyethylene film for use in flexible packaging. During 2010, the VIE purchased and installed the necessary equipment and production commenced. 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 $639,000 at June 30, 2011. For the three month period ending June 30, 2011, the Company recognized approximately $32,000 as its share of income from the joint venture's operations and received loan payments of approximately $63,000. For the six month period ending June 30, 2011, the Company recognized approximately $44,000 as its share of the loss of the joint venture’s operations and received loan payments of approximately $85,000. The Company may be subject to additional losses to the extent of any financial support that the Company provides in the future.

2.
Recent Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income, requiring most entities to present items of net income and other comprehensive income either in one continuous statement - referred to as the statement of comprehensive income - or in two separate, but consecutive, statements of net income and other comprehensive income. The new requirements are effective from the beginning of 2012 for calendar year-end public entities with full retrospective application required. The Company does not expect this guidance to have a significant 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:
 
(in thousands of dollars)
June 30, 2011
 
December 31, 2010
Inventories
 
 
 
Raw materials and supplies
$
44,359

 
$
42,812

Work in progress
13,628

 
12,275

Finished goods
54,498

 
48,641

Total inventories
$
112,485

 
$
103,728

 
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 $69.7 million at June 30, 2011 and $69.6 million at December 31, 2010. The increase in goodwill at June 30, 2011 was due solely to the change in the exchange rate between the United States dollar and the British pound during the period.
At June 30, 2011, approximately $26.2 million, $19.2 million, $21.6 million and $2.7 million of goodwill was assigned to the pet food and specialty packaging segment, the consumer 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 $3.3 million and $1.9 million assigned to the Company’s consumer food and specialty packaging and coated products segments, respectively, is not deductible for tax purposes.

7


The Company’s other intangible assets are summarized as follows:
 
(in thousands of dollars)
June 30, 2011
 
December 31, 2010
Intangible assets
 
 
 
Definite-lived intangible assets:
 
 
 
Customer lists (amortized over 10-21 years)
$
43,296

 
$
43,276

Patents (amortized over 2-15 years)
7,163

 
7,163

Trademarks and tradenames (amortized over 20 years)
2,627

 
2,618

 
53,086

 
53,057

Accumulated amortization
(12,992
)
 
(11,073
)
Net definite-lived intangible assets
40,094

 
41,984

Indefinite-lived intangible assets - trademarks and trade names
51,000

 
51,000

Net intangible assets
$
91,094

 
$
92,984

The increase in gross intangible assets during the six months ended June 30, 2011 was due solely to the change in the exchange rate between the United States dollar and the British pound during the period. Amortization expense for definite-lived intangible assets for the three months ended June 30, 2011 and 2010 was approximately $948,000 and $477,000, respectively, and for the six months ended June 30, 2011 and 2010 was approximately $1.9 million and $1.0 million, respectively. Estimated future annual amortization for definite-lived customer lists, patents and trademarks and trade names is approximately $1.9 million for the remainder of 2011, approximately $3.8 million for each of the years 2012 through 2014 and approximately $3.5 million for 2015.
 
5.
Financing Arrangements

2011 Recapitalization Transactions

On May 31, 2011, the Company completed a series of transactions (the "Recapitalization Transactions") that recapitalized the Company's indebtedness. These transactions include:

The entry into a six-year $350.0 million senior secured term loan facility;
The amendment and restatement of the Company's existing revolving credit facility;
The private placement of $235.0 million principal amount of 10% Senior Notes due 2018; and
The repayment of all of the Company's outstanding 11.25% senior notes due 2014 (the "Former Senior Notes").

The Recapitalization Transactions and the Company's current financing arrangements are further described below.
Issuance of Senior Notes
On May 31, 2011, the Company issued $235.0 million aggregate principal amount of 10% senior notes due 2018 (the “Senior Notes”) in a private placement pursuant to Rule 144A and Regulation S. The Company issued the Senior Notes under an indenture entered into among the Company, the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Indenture”). The initial aggregate principal amount of the Senior Notes issued was $235.0 million.
The Senior Notes mature on June 1, 2018. Interest on the Senior Notes accrues at the rate of 10% per annum and is payable on a semi-annual basis on each June 1 and December 1, commencing December 1, 2011. Before June 1, 2014, the Company may redeem the Senior Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest, if any, to the date of redemption. In addition, at any time before June 1, 2014, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net proceeds of certain equity offerings at a price equal to 110% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, provided at least 65% of the aggregate principal amount of the Senior Notes remains outstanding immediately after such redemption. The Company may also redeem the Senior Notes at any time, in part or in whole, on or after June 1, 2014 at the redemption prices set forth in the Indenture plus accrued and unpaid interest, if any, to the date of redemption.

8


The Company and all of its domestic restricted subsidiaries have fully and unconditionally guaranteed the Senior 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 Senior Notes place certain restrictions on the Company including, but not limited to, the Company’s ability to incur additional indebtedness or issue preferred stock, pay dividends or make other distributions or repurchase or redeem the Company’s stock or subordinated indebtedness, make investments, sell assets and issue capital stock of restricted subsidiaries, incur liens, enter into agreements restricting the ability of the Company’s subsidiaries to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell all or substantially all of the Company’s assets.
The Company incurred approximately $6.7 million in deferred financing costs related to the Senior Notes for the period ended June 30, 2011, which will be amortized over the term of the Senior Notes.
New Term Loan Facility
On May 31, 2011, the Company, its parent company and certain of the Company’s subsidiaries entered into a new $350.0 million senior secured term loan B facility (the “New Term Loan Facility”). The New Term Loan Facility also provides for an uncommitted incremental term loan facility of up to $75.0 million that will be available subject to certain conditions. In general, in the absence of an event of default, the New Term Loan Facility matures on May 31, 2017.
The Company is required to repay installments on the New Term Loan Facility in quarterly principal amounts of $875,000 beginning on September 30, 2011, with any remaining outstanding amounts payable at maturity in 2017. Borrowings under the New Term Loan Facility accrue interest at (i) for base rate loans, a rate per annum equal to the highest of (a) the federal funds rate in effect on such date plus 0.5% per annum, (b) the variable annual rate of interest then announced by Bank of America as its “prime rate,” and (c) the Eurodollar Rate (as defined in the New Term Loan Facility) plus 1.00%, plus, in each case, an applicable margin of 4.0% to 5.0% as set forth in the New Term Loan Facility; and (ii) for Eurodollar Rate Loans (as defined in the New Term Loan Facility) for any interest period, the rate per annum equal to the British Bankers Association LIBOR Rate published by Reuters two business days before such interest period for dollar deposits with a term equivalent to such interest period, subject to a minimum interest rate and a substitute rate in certain circumstances, plus an applicable margin set forth in the New Term Loan Facility. The interest rate at June 30, 2011 was 6.5%.
The New Term Loan Facility is collateralized by (i) a first priority lien on substantially all of the Company’s assets, other than the first priority lien collateral securing indebtedness under the Senior Credit Facility described below and assets of the Company’s foreign subsidiaries, and (ii) a second priority lien on the first priority lien collateral securing indebtedness under the Senior Credit Facility. In addition, obligations under the New Term Loan Facility are secured by a first priority lien on the Company’s equity interests in its domestic subsidiaries and a portion of the Company’s equity interests in its foreign subsidiaries. All obligations under the New Term Loan Facility are fully and unconditionally guaranteed by, subject to certain exceptions, each of the Company’s existing and future domestic subsidiaries.
The New Term Loan Facility contains customary events of default, including, but not limited to, for failure to make payments under the New Term Loan Facility, materially incorrect representations, breaches of covenants (subject to a 30-day grace period after notice in the case of certain covenants), cross-default to other material indebtedness, material unstayed judgments, certain ERISA, bankruptcy and insolvency events, failure of guarantees or security to remain in full force and effect, and changes of control. At June 30, 2011, the Company was in compliance with these restrictions.
The Company incurred approximately $10.1 million in deferred financing costs related to the New Term Loan Facility which will be amortized over the term of the New Term Loan Facility.

9


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). 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.
On May 31, 2011, as part of the Recapitalization Transactions, the loan agreement related to this facility was amended and restated to provide for a decrease in the maximum credit facility to $75.0 million and to provide for a decrease in the Canadian dollar sub-facility to $15.0 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 on May 31, 2016. 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 June 30, 2011 and December 31, 2010. At June 30, 2011, there were no borrowings outstanding and approximately $70.9 million was available for additional borrowings under the Senior Credit Facility.
Under the Senior Credit Facility, in general, interest subsequent to May 31, 2011 accrues on amounts outstanding under the U.S facility at a variable annual rate equal to the U.S. Index Rate (as defined therein) plus 1.25% to 2.0%, depending on the Company’s utilization of the Senior Credit Facility, or at the Company’s election, at an annual rate equal to the LIBOR Rate (as defined therein) plus 2.25% to 3.0%, depending upon utilization. In general, interest accrues on amounts outstanding under the Canadian sub-facility at a variable rate equal to the Canadian Index Rate (as defined therein) plus 1.25% to 2.0%, depending upon utilization, or at the Company’s election, at an annual rate equal to the BA Rate (as defined therein) plus 2.25% to 3.0%, depending upon utilization. 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 for the period from January 1, 2011 through May 31, 2011 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 2.0%, or at the Company’s election, at an annual rate equal to the LIBOR Rate (as defined in the prior loan agreement) 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 prior loan agreement) plus 2.0%, or at the Company’s election, at an annual rate equal to the BA Rate (as defined in the prior loan agreement) plus 3.0%.
Under the Senior Credit Facility, in general, interest for the three and six months ended June 30, 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, at the Company’s election, 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, at the Company’s election, 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 contains certain customary affirmative and negative covenants that restrict 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, incur contingent obligations, prepay certain subordinated indebtedness, make loans, certain payments and investments and enter into transactions with affiliates.
The Company incurred approximately $0.9 million in additional deferred financing costs related to the amendment of the Senior Credit Facility during the period ended June 30, 2011, which will be amortized over the term of the Senior Credit Facility.
At June 30, 2011, there were outstanding letters of credit of approximately $4.1 million under the Senior Credit Facility.

10


Loss on Early Extinguishment of Debt
During the three months ended June 30, 2011, the Company entered into the New Term Loan Facility and issued the Senior Notes and used a portion of the proceeds to repay the Former Senior Notes and all amounts outstanding under the Senior Credit Facility. In connection with the refinancing transaction, the Company wrote-off deferred financing costs of approximately $11.9 million and paid approximately $10.2 million in early redemption and consent costs related to the Former Senior Notes.
Former 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 “Former 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 “Former Additional Notes”). The Company used the proceeds from the offering of the Former 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 Former Additional Notes were issued as additional notes under the indenture pursuant to which the Company issued the Former Existing Notes. The Former Additional Notes were treated as a single series with the Former Existing Notes under the indenture and had the same terms as the Former Existing Notes. The Company completed an offer to exchange registered notes for the Former Additional Notes as required by the terms of a registration rights agreement related to the Former Additional Notes on November 30, 2010. Approximately $1.0 million in principal amount of 11.25% senior notes due 2014 were not tendered for exchange and remained private unregistered notes. The Former Existing Notes, together with the Former Additional Notes and the private unregistered notes are referred to in this report as the “Former Senior Notes.” The Former Senior Notes were repaid during the three months ended June 30, 2011.
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.
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 Company paid $11.6 million in deferred financing fees related to the Credit Agreement and the Additional Notes during the year ended December 31, 2010. These deferred financing fees were transferred to the Former Additional Notes and were written off with the repayment of the Former Senior Notes during the three months ended June 30, 2011. The Term Loan and related accrued interest was repaid on September 24, 2010 using proceeds received from the Company’s issuance of the Former Additional Notes.

11



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 2011 and 2010. The prospective method also requires nonpublic companies to record compensation costs in accordance with the new guidance only for awards issued, modified, repurchased, or cancelled after the effective date. Compensation expense related to options issued subsequent to the adoption of the new guidance is being recorded ratably over the vesting period of five years. CPG did not issue any options during the six months ended June 30, 2011 or 2010. The Company recorded stock compensation expense of approximately $64,000 and $96,000 during the three months ended June 30, 2011 and 2010, respectively, and approximately $157,000 and $219,000 during the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, the total compensation cost related to non-vested awards not yet recognized was approximately $1.1 million. This compensation cost is expected to be recognized over the remaining weighted-average period of 2.1 years.
The following tables summarize information about stock options outstanding at June 30, 2011 (there were no stock options exercisable at June 30, 2011).
 
 
 
Options Outstanding
Exercise Price
 
Number
Outstanding
 
Weighted-average
Remaining
Contractual Life
$
72

 
43,000

 
4.3 years
$
130

 
1,500

 
5.0 years
$
140

 
4,200

 
5.6 years
$
184

 
1,550

 
5.9 years
$
163

 
10,850

 
6.2 years
$
140

 
5,000

 
6.6 years
$
139

 
11,000

 
9.1 years
$
198

 
600

 
9.2 years
 
 
77,700

 
6.0 years
 
 
Options
Outstanding
 
Weighted-average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Weighted-average
Remaining
Contractual
Life
Options outstanding at December 31, 2010
80,600

 
$
107.19

 
 
 
 
Granted

 
$

 
 
 
 
Forfeited
(2,900
)
 
$
123.69

 
 
 
 
Options outstanding at June 30, 2011
77,700

 
$
106.57

 
34,000
 
6.0 years
There were 22,300 options available for grant at June 30, 2011 under the 2005 Stock Option Plan.
 

12




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.
In conjunction with the EMCS acquisition, the Company assumed a defined benefit pension plan for certain employees at the Menasha, Wisconsin facility. Employees hired prior to March 1, 2010 were eligible to participate in the plan upon completion of 1,000 service hours. This plan was subsequently incorporated into the Retirement Plan of Exopack, LLC.
The components of the net periodic benefit cost for the Pension Plans and the postretirement benefit plan are as follows for the three and six months ended June 30, 2011 and 2010:
 
Pension plans
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Service cost
$
109

 
$

 
$
218

 
$

Interest cost
797

 
823

 
1,594

 
1,646

Expected return on plan assets
(778
)
 
(839
)
 
(1,556
)
 
(1,678
)
Amortization of net actuarial losses (gains)
(86
)
 
30

 
197

 
60

Net periodic benefit cost
$
42

 
$
14

 
$
453

 
$
28



Postretirement benefit plan
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Service cost
$
6

 
$
6

 
$
12

 
$
12

Interest cost
8

 
8

 
16

 
16

Amortization of net actuarial gains
(4
)
 
(4
)
 
(8
)
 
(8
)
Net periodic benefit cost
$
10

 
$
10

 
$
20

 
$
20



The Company contributed approximately $538,000 and $307,000, to the Retirement Plan during the three months ended June 30, 2011 and 2010, respectively and approximately $845,000 and $582,000 during the six months ended June 30, 2011 and 2010, respectively. Contributions of approximately $2.2 million are expected to be made to the Retirement Plan during the remainder of 2011. At June 30, 2011, the fair value of the assets of the Pension Plans was estimated at $49.0 million, up from $47.1 million at December 31, 2010.


13


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 Company contributed approximately $78,000 and $84,000 to the defined contribution plan during the three months ended June 30, 2011 and 2010, respectively, and approximately $159,000 and $183,000 during the six months ended June 30, 2011 and 2010, respectively. 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 June 30, 2011 and 2010, and zero and $30,000 for the six months ended June 30, 2011 and 2010, 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 $517,000 and $420,000 for the three months ended June 30, 2011 and 2010, respectively and approximately $1.1 million and $803,000 for the six months ended June 30, 2011 and 2010, respectively. This significant increase period over period is primarily related to an increase in the employer matching contribution to 3% from 2% effective January 1, 2011.
Deferred Compensation Agreements
The Company has unfunded deferred compensation agreements, assumed in connection with the acquisition of Cello-Foil in 2005. The Company is obligated to provide certain deferred compensation for these Cello-Foil employees over specified periods beginning at age 62. In addition, the Company has agreed to provide certain death benefits for the employees to be paid over a specified period. The Company is accruing its obligations over the estimated period of employment of the individuals to age 62. As of June 30, 2011, the Company had two individuals receiving benefits under the agreements. The deferred compensation liability for these agreements was approximately $292,000 and $321,000 at June 30, 2011 and December 31, 2010, respectively (recorded in “other liabilities” in the accompanying consolidated balance sheets). Deferred compensation expense for each of the three and six months ended June 30, 2011 and 2010 was insignificant.
Management Incentive Compensation Plan
The Company maintains a management incentive compensation plan for eligible management personnel based on both Company and individual performance against pre-defined goals. The plan provides for quarterly cash payments of 66.7% of the quarterly amount earned and 33.3% is accrued and held back for payment once the annual audit is finalized. The Company recognized charges of approximately $633,000 and $612,000 for the three months ended June 30, 2011 and 2010, respectively, and approximately $1.6 million and $1.3 million for the six months ended June 30, 2011 and 2010, respectively, for benefits under the management incentive compensation plan.
Option Holder Bonus Agreements
During June 2011, CPG entered into bonus agreements (the “Bonus Agreements”) with the employees of the Company who hold options to purchase shares of CPG’s common stock. The Bonus Agreements provide for the payment to each employee holding options an amount equal to the dividend amount per share minus the exercise price per share. Following entry into the Bonus Agreements, CPG made cash payments to employees holding vested in-the-money options. Additional payments will be made as the options vest, expire, and upon certain events of termination of the applicable employee’s employment or the occurrence of certain change of control events. The Company recognized charges related to these bonus agreements of approximately $3.6 million during the three and six months ended June 30, 2011.

14



8.
Severance Expenses
During the three and six months ended June 30, 2011 and 2010, the Company terminated the employment of certain employees and eliminated their positions. During the three months ended March 31, 2010, the Company also extended a voluntary early retirement option to certain salaried employees and a voluntary separation option to certain hourly employees at one of its consumer food and specialty packaging segment facilities. In connection with these terminations, the Company recorded employee termination costs of approximately $411,000 and $1.3 million for the three months ended June 30, 2011 and 2010, respectively, and approximately $455,000 and $2.1 million for the six months ended June 30, 2011 and 2010, respectively. The amounts were included in “Selling, general and administrative expenses” in the consolidated statements of operations. Approximately $419,000 in severance was accrued at December 31, 2010. Of these amounts, the Company paid approximately $448,000 through June 30, 2011, and approximately $426,000 remained accrued for employee termination benefits at June 30, 2011, which the Company expects will primarily be paid in 2011.

9.
Contingencies
From time to time, the Company becomes party to legal proceedings and administrative actions, which are of an ordinary or routine nature, incidental to the operations of the Company. Although it is difficult to predict the outcome of any legal proceeding, in the opinion of the Company’s management, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
 
10.
Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows for the three and six months ended June 30, 2011 and 2010:
 
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Net Loss
$
(15,336
)
 
$
(2,024
)
 
$
(14,487
)
 
$
(2,877
)
Translation adjustment
(168
)
 
(430
)
 
774

 
(476
)
Comprehensive Loss
$
(15,504
)
 
$
(2,454
)
 
$
(13,713
)
 
$
(3,353
)

The following table summarizes the components of accumulated other comprehensive loss and the changes in accumulated other comprehensive loss for the six months ended June 30, 2011:
 
(in thousands of dollars)
Foreign
Currency
Translation
Adjustments
 
Pension and
Post Retirement
Plans Liability
 
Cumulative Tax
Effect on Liability
 
Accumulated
Comprehensive
Income (Loss)
Balances at December 31, 2010
$
(315
)
 
$
(10,556
)
 
$
3,776

 
$
(7,095
)
Year-to date net change
774

 

 

 
774

Balances at June 30, 2011
$
459

 
$
(10,556
)
 
$
3,776

 
$
(6,321
)
 


15




11.
Related Party Transactions
Fees Related to Management and Consulting Services
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. 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 management services agreement). On May 31, 2011, the management services agreement was replaced with a new consulting agreement (the "consulting agreement"), which will terminate on May 31, 2021. Pursuant to the terms of the consulting agreement, 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 consulting fee equal to the greater of $3.0 million or 6% of EBITDA (as defined in the consulting agreement), not to exceed $6.0 million annually.
The Company incurred management and consultant fees and other related expenses under the management services and the consulting agreements of approximately $888,000 and $390,000 during the three months ended June 30, 2011 and 2010, respectively, and approximately $1.5 million and $756,000 during the six months ended June 30, 2011 and 2010, respectively. Such fees are reflected in “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.
The Company incurred approximately $10,000 and $11,000 for certain additional consulting fees from Sun Capital Management during the three months ended June 30, 2011 and 2010, respectively, and approximately $29,000 and $26,000 during the six months ended June 30, 2011 and 2010, respectively.
Fees Related to Transactions
In addition to the above fees, in connection with any consulting 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. The Company will also reimburse Sun Capital Management for all out-of-pocket expenses incurred in the performance of the services under this agreement. The Company incurred management fees and other related expenses under the management services agreement of approximately $1.6 million associated with the Recapitalization Transactions during the three and six months ended June 30, 2011. These fees are included in "deferred finance costs" in the accompanying consolidated balance sheet. The Company incurred management fees and other related expenses under the management services agreement of approximately $234,000 associated with the 2010 acquisition of EMCS during the three and six months ended June 30, 2010. These fees are reflected in "selling, general, and administrative expenses" in the accompanying consolidated statements of operations.
Dividends Paid
As a result of the Recapitalization Transactions, a dividend of $150.0 million was paid to an affiliate of Sun Capital.

16




12.
Segments and Significant Customers
Segments
The Company identifies its reportable segments in accordance with FASB guidance for disclosures about segments of an enterprise and related information, by reviewing the nature of products sold, nature of the production processes, type and class of customer, methods to distribute product and nature of regulatory environment. While all of these factors were reviewed, the Company believes that the most significant factors for the Company are the nature of its products, the nature of the production process and the type of customers served.
The Company’s operations consist of four reportable segments: (i) pet food and specialty packaging, (ii) consumer 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 consumer food and specialty packaging segment produces products used in applications such as fresh meat, natural cheese and dairy foods, beverages, personal care, frozen foods, confectionary, breakfast foods, and films. The performance packaging segment produces products used in applications such as building materials, chemicals, agricultural products and food ingredient packaging. The coated products segment produces precision coated films, foils, fabrics and other substrates for imaging, electronics, medical and optical technologies.
The EMCS acquisition, which primarily includes meat and cheese packaging products, is included in the consumer food and specialty packaging segment for the three and six months ended June 30, 2011.
The Company evaluates performance based on profit or loss from operations. During the three and six months ended June 30, 2011 and 2010, segment data includes a charge allocating certain corporate costs to each of its segments, as summarized in the table below:
 
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Pet food and specialty packaging
$
1,366

 
$
1,596

 
2,861

 
3,215

Consumer food and specialty packaging
2,215

 
1,292

 
4,679

 
2,607

Performance packaging
1,326

 
1,238

 
2,769

 
2,506

Total allocations
$
4,907

 
$
4,126

 
10,309

 
8,328


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 six months ended June 30, 2011 or 2010.
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.

17


The table below presents information about the Company’s reportable segments for the three and six months ended June 30, 2011 and 2010.
 
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Revenues from external customers:
 
 
 
 
 
 
 
Pet food and specialty packaging
$
54,893

 
$
55,535

 
$
116,379

 
$
112,437

Consumer food and specialty packaging
99,762

 
59,880

 
198,323

 
115,345

Performance packaging
44,078

 
45,119

 
88,570

 
87,877

Coated products
21,034

 
19,096

 
40,976

 
36,859

Total
$
219,767

 
$
179,630

 
$
444,248

 
$
352,518

Intersegment revenues:
 
 
 
 
 
 
 
Pet food and specialty packaging
$
1,031

 
$
73

 
$
1,660

 
$
110

Consumer food and specialty packaging
5,648

 
6,134

 
10,381

 
10,589

Performance packaging
81

 
97

 
430

 
230

Coated products

 

 

 

Total
$
6,760

 
$
6,304

 
$
12,471

 
$
10,929

Operating income:
 
 
 
 
 
 
 
Pet food and specialty packaging
$
6,455

 
$
4,891

 
$
14,757

 
$
11,346

Consumer food and specialty packaging
9,716

 
1,862

 
17,709

 
3,951

Performance packaging
2,375

 
3,512

 
4,322

 
6,604

Coated products
3,251

 
2,912

 
6,375

 
4,768

Corporate
(12,385
)
 
(8,419
)
 
(20,898
)
 
(15,174
)
Total
9,412

 
4,758

 
22,265

 
11,495

Interest expense - Corporate
12,262

 
7,113

 
23,596

 
14,131

Loss on early extinguishment of debt
22,051

 

 
22,051

 

Other income, net
(139
)
 
(850
)
 
(54
)
 
(801
)
Loss before income taxes
$
(24,762
)
 
$
(1,505
)
 
$
(23,328
)
 
$
(1,835
)

Significant Customers
No customer accounted for more than 10% of the Company’s net sales during the six months ended June 30, 2011 and 2010. No customer accounted for more than 10% of the Company's total accounts receivable at June 30, 2011. One customer, primarily within the Company’s pet food and specialty segment, accounted for 10.9% of the Company’s total accounts receivable at December 31, 2010.

13.
Consolidating Financial Information
The Senior 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 Senior Notes.
The following consolidating financial statements present the balance sheets as of June 30, 2011 and December 31, 2010, the statements of operations for the three and six months ended June 30, 2011 and 2010, and the statements of cash flows for the six months ended June 30, 2011 and 2010, 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.


18


CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2011
 
(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash
$

 
$
370

 
$
2,166

 
$

 
$
2,536

Trade accounts receivable (net of allowance for uncollectible accounts of $1,467)

 
79,471

 
16,647

 

 
96,118

Other receivables

 
1,962

 
520

 

 
2,482

Inventories

 
98,918

 
13,567

 

 
112,485

Deferred income taxes

 
3,628

 
61

 

 
3,689

Prepaid expenses and other current assets

 
2,590

 
1,346

 

 
3,936

Total current assets

 
186,939

 
34,307

 

 
221,246

Property, plant, and equipment, net

 
196,928

 
26,281

 

 
223,209

Deferred financing costs, net
6,664

 
11,896

 

 

 
18,560

Intangible assets, net

 
90,499

 
595

 

 
91,094

Goodwill

 
68,943

 
724

 

 
69,667

Investment in subsidiaries
(11,703
)
 
13,120

 

 
(1,417
)
 

Intercompany receivables
35,640

 
31,660

 
(5,786
)
 
(61,514
)
 

Other assets

 
5,901

 
233

 

 
6,134

Total assets
$
30,601

 
$
605,886

 
$
56,354

 
$
(62,931
)
 
$
629,910

Liabilities and Stockholder’s (Deficit) Equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Revolving credit facility and current portion of long-term debt
$

 
$
1,785

 
$

 
$

 
$
1,785

Accounts payable

 
71,686

 
12,413

 

 
84,099

Accrued liabilities
1,959

 
29,408

 
2,175

 

 
33,542

Income taxes payable

 
(91
)
 
1,066

 

 
975

Total current liabilities
1,959

 
102,788

 
15,654

 

 
120,401

Long-term liabilities
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion
235,000

 
350,000

 

 

 
585,000

Capital lease obligations, less current portion

 
9,595

 

 

 
9,595

Deferred income taxes
(63,212
)
 
85,258

 
1,248

 

 
23,294

Intercompany payables
(19,585
)
 
55,361

 
25,738

 
(61,514
)
 

Other liabilities

 
14,587

 
594

 

 
15,181

Total long-term liabilities
152,203

 
514,801

 
27,580

 
(61,514
)
 
633,070

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholder’s (deficit) equity
 
 
 
 
 
 
 
 
 
Preferred stock, par value, $0.001 per share - 100,000 shares authorized, no shares issued and outstanding

 

 

 

 

Common stock, par value, $0.001 per share - 2,900,000 shares authorized, 1 share issued and outstanding

 

 

 

 

(Distributions in excess of) Additional paid-in capital
(76,322
)
 
(76,322
)
 
30,095

 
46,227

 
(76,322
)
Accumulated other comprehensive (loss) income, net
(6,321
)
 
(6,321
)
 
(1,798
)
 
8,119

 
(6,321
)
Accumulated deficit
(40,918
)
 
70,940

 
(15,177
)
 
(55,763
)
 
(40,918
)
Total stockholder’s (deficit) equity
(123,561
)
 
(11,703
)
 
13,120

 
(1,417
)
 
(123,561
)
Total liabilities and stockholder’s equity (deficit)
$
30,601

 
$
605,886

 
$
56,354

 
$
(62,931
)
 
$
629,910





19


CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2010
 
 
 
 
Guarantor
 
Nonguarantor
 
 
 
 
(in thousands of dollars)
Parent
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash
$

 
$
48

 
$
2,460

 
$

 
$
2,508

Trade accounts receivable (net of allowance for uncollectible accounts of $1,550)

 
80,979

 
13,972

 

 
94,951

Other receivables

 
2,914

 
549

 

 
3,463

Inventories

 
91,727

 
12,001

 

 
103,728

Deferred income taxes

 
3,643

 
60

 

 
3,703

Prepaid expenses and other current assets

 
2,196

 
1,044

 

 
3,240

Total current assets

 
181,507

 
30,086

 

 
211,593

Property, plant, and equipment, net

 
191,646

 
22,647

 

 
214,293

Deferred financing costs, net
13,760

 
1,238

 

 

 
14,998

Intangible assets, net

 
92,383

 
601

 

 
92,984

Goodwill

 
68,943

 
699

 

 
69,642

Investment in subsidiaries
127,036

 
5,392

 

 
(132,428
)
 

Intercompany receivables
35,640

 
24,817

 
(363
)
 
(60,094
)
 

Other assets

 
5,962

 
336

 

 
6,298

Total assets
$
176,436

 
$
571,888

 
$
54,006

 
$
(192,522
)
 
$
609,808

Liabilities and Stockholder’s Equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Revolving credit facility and current portion of long-term debt
$

 
$
51,624

 
$
7,191

 
$

 
$
58,815

Accounts payable

 
71,828

 
11,779

 

 
83,607

Accrued liabilities
15,000

 
29,363

 
2,505

 

 
46,868

Income taxes payable

 
16

 
956

 

 
972

Total current liabilities
15,000

 
152,831

 
22,431

 

 
190,262

Long-term liabilities
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion
320,000

 

 

 

 
320,000

Capital lease obligations, less current portion

 
10,501

 

 

 
10,501

Deferred income taxes
(47,965
)
 
79,616

 
1,227

 

 
32,878

Intercompany payables
(150,594
)
 
186,368

 
24,320

 
(60,094
)
 

Other liabilities

 
15,536

 
636

 

 
16,172

Total long-term liabilities
121,441

 
292,021

 
26,183

 
(60,094
)
 
379,551

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholder’s equity
 
 
 
 
 
 
 
 
 
Preferred stock, par value, $0.001 per share - 100,000 shares authorized, no shares issued and outstanding

 

 

 

 

Common stock, par value, $0.001 per share - 2,900,000 shares authorized, 1 share issued and outstanding

 

 

 

 

Additional paid-in capital
73,521

 
73,521

 
23,897

 
(97,418
)
 
73,521

Accumulated other comprehensive (loss) income, net
(7,095
)
 
(7,095
)
 
(1,988
)
 
9,083

 
(7,095
)
Accumulated deficit
(26,431
)
 
60,610

 
(16,517
)
 
(44,093
)
 
(26,431
)
Total stockholder’s equity
39,995

 
127,036

 
5,392

 
(132,428
)
 
39,995

Total liabilities and stockholder’s equity
$
176,436

 
$
571,888

 
$
54,006

 
$
(192,522
)
 
$
609,808




20


CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011
 
(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
193,199

 
$
32,189

 
$
(5,621
)
 
$
219,767

Cost of sales

 
166,550

 
28,378

 
(5,621
)
 
189,307

Gross margin

 
26,649

 
3,811

 

 
30,460

Selling, general and administrative expenses
65

 
19,392

 
1,591

 

 
21,048

Operating (loss) income
(65
)
 
7,257

 
2,220

 

 
9,412

Other expenses (income)
 
 
 
 
 
 
 
 
 
Interest expense
8,397

 
3,400

 
465

 

 
12,262

Loss on early extinguisment of debt
22,051

 

 

 

 
22,051

Other (income) expense, net

 
(240
)
 
101

 

 
(139
)
Net other expense
30,448

 
3,160

 
566

 

 
34,174

(Loss) income before income taxes
(30,513
)
 
4,097

 
1,654

 

 
(24,762
)
(Benefit from) provision for income taxes
(11,905
)
 
2,110

 
369

 

 
(9,426
)
Net (loss) income before equity in earnings of affiliates
(18,608
)
 
1,987

 
1,285

 

 
(15,336
)
Equity in earnings (loss) of affiliates
3,272

 
1,285

 

 
(4,557
)
 

Net (loss) income
$
(15,336
)
 
$
3,272

 
$
1,285

 
$
(4,557
)
 
$
(15,336
)

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2010

(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
149,452

 
$
33,688

 
$
(3,510
)
 
$
179,630

Cost of sales

 
130,801

 
32,126

 
(3,510
)
 
159,417

Gross margin

 
18,651

 
1,562

 

 
20,213

Selling, general and administrative expenses
96

 
12,728

 
2,631

 

 
15,455

Operating (loss)income
(96
)
 
5,923

 
(1,069
)
 

 
4,758

Other expenses (income)
 
 
 
 
 
 
 
 
 
Interest expense
5,830

 
885

 
398

 

 
7,113

Other (income)expense, net

 
(1,075
)
 
225

 

 
(850
)
Net other expense
5,830

 
(190
)
 
623

 

 
6,263

(Loss) income before income taxes
(5,926
)
 
6,113

 
(1,692
)
 

 
(1,505
)
(Benefit from) provision for income taxes
(2,052
)
 
2,208

 
363

 

 
519

Net (loss) income before equity in earnings of affiliates
(3,874
)
 
3,905

 
(2,055
)
 

 
(2,024
)
Equity in earnings (loss) of affiliates
1,850

 
(2,055
)
 

 
205

 

Net (loss) income
$
(2,024
)
 
$
1,850

 
$
(2,055
)
 
$
205

 
$
(2,024
)



21


CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011

(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
391,540

 
$
62,793

 
$
(10,085
)
 
$
444,248

Cost of sales

 
338,353

 
55,495

 
(10,085
)
 
383,763

Gross margin

 
53,187

 
7,298

 

 
60,485

Selling, general and administrative expenses
157

 
35,068

 
2,995

 

 
38,220

Operating (loss) income
(157
)
 
18,119

 
4,303

 

 
22,265

Other expenses (income)
 
 
 
 
 
 
 
 
 
Interest expense
17,856

 
4,794

 
946

 

 
23,596

Loss on early extinguishment of debt
22,051

 

 

 

 
22,051

Other (income) expense, net

 
(1,324
)
 
270

 
1,000

 
(54
)
Net other expense
39,907

 
3,470

 
1,216

 
1,000

 
45,593

(Loss) income before income taxes
(40,064
)
 
14,649

 
3,087

 
(1,000
)
 
(23,328
)
(Benefit from) provision for income taxes
(15,247
)
 
5,659

 
747

 

 
(8,841
)
Net (loss) income before equity in earnings of affiliates
(24,817
)
 
8,990

 
2,340

 
(1,000
)
 
(14,487
)
Equity in earnings (loss) of affiliates
10,330

 
1,340

 

 
(11,670
)
 

Net (loss) income
$
(14,487
)
 
$
10,330

 
$
2,340

 
$
(12,670
)
 
$
(14,487
)

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2010

(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
294,445

 
$
65,467

 
$
(7,394
)
 
$
352,518

Cost of sales

 
256,873

 
61,924

 
(7,394
)
 
311,403

Gross margin

 
37,572

 
3,543

 

 
41,115

Selling, general and administrative expenses
219

 
24,491

 
4,910

 

 
29,620

Operating (loss) income
(219
)
 
13,081

 
(1,367
)
 

 
11,495

Other expenses (income)
 
 
 
 
 
 
 
 
 
Interest expense
11,662

 
1,665

 
804

 

 
14,131

Other (income) expense, net

 
(1,772
)
 
377

 
594

 
(801
)
Net other expense
11,662

 
(107
)
 
1,181

 
594

 
13,330

(Loss) income before income taxes
(11,881
)
 
13,188

 
(2,548
)