Attached files
file | filename |
---|---|
EX-32.2 - 906 CERTIFICATION OF APPLETON CFO - APPVION, INC. | exhibit32-2.htm |
EX-31.4 - 302 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC. | exhibit31-4.htm |
EX-31.3 - 302 CERTIFICATION OF PAPERWEIGHT CEO - APPVION, INC. | exhibit31-3.htm |
EX-32.4 - 906 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC. | exhibit32-4.htm |
EX-31.2 - 302 CERTIFICATION OF APPLETON CFO - APPVION, INC. | exhibit31-2.htm |
EX-31.1 - 302 CERTIFICATION OF APPLETON CEO - APPVION, INC. | exhibit31-1.htm |
EX-32.3 - 906 CERTIFICATION OF PAPERWEIGHT CEO - APPVION, INC. | exhibit32-3.htm |
EX-32.1 - 906 CERTIFICATION OF APPLETON CEO - APPVION, INC. | exhibit32-1.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: October 4, 2009
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
The Transition Period
From To
.
Commission
file numbers: 333-82084-01
333-82084
PAPERWEIGHT
DEVELOPMENT CORP.
|
APPLETON
PAPERS INC.
|
(Exact
Name of Registrant as Specified in Its Charter)
|
(Exact
Name of Registrant as Specified in Its Charter)
|
Wisconsin
|
Delaware
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
39-2014992
|
36-2556469
|
(I.R.S.
Employer
Identification
No.)
|
(I.R.S.
Employer
Identification
No.)
|
825
East Wisconsin Avenue, P.O. Box 359,
Appleton,
Wisconsin
|
54912-0359
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrants'
telephone number, including area code: (920) 734-9841
Indicate
by check mark whether each registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether each 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 ¨ No ¨
Indicate
by check mark whether either of the registrants is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definition of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
one).
Large
Accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x Smaller
reporting company ¨
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): Yes ¨ No x
As of
November 1, 2009, 9,806,435 shares of Paperweight Development Corp.'s
common stock, $.01 par value, were outstanding. There is no trading market for
the common stock of Paperweight Development Corp. As of November 1, 2009,
100 shares of Appleton Papers Inc.’s common stock, $100.00 par value, were
outstanding. There is no trading market for the common stock of Appleton Papers
Inc. No shares of Paperweight Development Corp. or Appleton Papers Inc. were
held by non-affiliates.
Documents
incorporated by reference: None.
Appleton
Papers Inc. meets the conditions set forth in General Instruction -H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
INDEX
Page
Number
|
|||
PART I
|
FINANCIAL
INFORMATION
|
||
Item 1
|
Financial
Statements (unaudited)
|
||
a)
Condensed Consolidated Balance Sheets
|
3
|
||
b)
Condensed Consolidated Statements of Operations
|
4
|
||
c)
Condensed Consolidated Statements of Cash Flows
|
5
|
||
d)
Consolidated Statements of Redeemable Common Stock,
Accumulated
Deficit, Accumulated Other Comprehensive (Loss)
Income
and Comprehensive Income (Loss)
|
6
|
||
e)
Notes to Condensed Consolidated Financial Statements
|
7
|
||
Item 2
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
34
|
|
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 43 | |
Item 4T
|
Controls
and Procedures
|
44
|
|
PART II
|
OTHER
INFORMATION
|
||
Item
1
|
Legal
Proceedings
|
44
|
|
Item 1A
|
Risk
Factors
|
44
|
|
Item 6
|
Exhibits
|
46
|
|
Signatures | 47 |
PART 1 – FINANCIAL
INFORMATION
Item 1 – Financial
Statements (unaudited)
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||
(unaudited)
|
||||||||
(dollars
in thousands, except share data)
|
||||||||
October 4,
2009
|
January 3, 2009
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$
|
3,539
|
$
|
4,180
|
||||
Accounts
receivable, less allowance for doubtful accounts of $3,068 and $1,715,
respectively
|
103,235
|
88,218
|
||||||
Inventories
|
112,471
|
124,856
|
||||||
Other
current assets
|
46,723
|
45,920
|
||||||
Assets
held for sale
|
9,073
|
9,327
|
||||||
Total
current assets
|
275,041
|
272,501
|
||||||
Property,
plant and equipment, net of accumulated depreciation of
$435,696
and $394,075, respectively
|
412,918
|
439,301
|
||||||
Goodwill
|
9,251
|
9,251
|
||||||
Intangible
assets, net
|
68,648
|
71,404
|
||||||
Environmental
indemnification receivable
|
38,113
|
114,300
|
||||||
Other
assets
|
17,357
|
13,909
|
||||||
Assets
held for sale
|
8,806
|
9,255
|
||||||
Total
assets
|
$
|
830,134
|
$
|
929,921
|
||||
LIABILITIES,
REDEEMABLE COMMON STOCK,
ACCUMULATED
DEFICIT AND
ACCUMULATED
OTHER COMPREHENSIVE LOSS
|
||||||||
Current
liabilities
|
||||||||
Current
portion of long-term debt
|
$
|
5,967
|
$
|
5,455
|
||||
Accounts
payable
|
56,823
|
61,093
|
||||||
Accrued
interest
|
3,661
|
3,628
|
||||||
Other
accrued liabilities
|
82,469
|
83,502
|
||||||
Liabilities
held for sale
|
2,198
|
2,085
|
||||||
Total
current liabilities
|
151,118
|
155,763
|
||||||
Long-term
debt
|
558,900
|
598,598
|
||||||
Postretirement
benefits other than pension
|
45,784
|
45,364
|
||||||
Accrued
pension
|
102,791
|
109,532
|
||||||
Environmental
liability
|
38,113
|
114,300
|
||||||
Other
long-term liabilities
|
9,819
|
13,309
|
||||||
Commitments
and contingencies (Note 13)
|
-
|
-
|
||||||
Redeemable
common stock, $0.01 par value,
shares
authorized: 30,000,000,
shares
issued and outstanding: 10,243,478 and 10,643,894,
respectively
|
133,653
|
147,874
|
||||||
Accumulated
deficit
|
(114,133
|
)
|
(159,650
|
)
|
||||
Accumulated
other comprehensive loss
|
(95,911
|
)
|
(95,169
|
)
|
||||
Total
liabilities, redeemable common stock, accumulated
deficit
and accumulated other comprehensive loss
|
$
|
830,134
|
$
|
929,921
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||||
(unaudited)
|
||||||||||||||||
(dollars in thousands)
|
||||||||||||||||
Three
Months
Ended
October 4,
2009
|
Three
Months
Ended
September 28,
2008
|
Nine
Months
Ended
October 4,
2009
|
Nine
Months
Ended
September 28,
2008
|
|||||||||||||
Net
sales
|
$ | 222,347 | $ | 255,675 | $ | 648,308 | $ | 742,400 | ||||||||
Cost
of sales
|
175,582 | 211,173 | 509,582 | 592,022 | ||||||||||||
Gross
profit
|
46,765 | 44,502 | 138,726 | 150,378 | ||||||||||||
Selling,
general and administrative expenses
|
38,874 | 40,146 | 105,122 | 125,280 | ||||||||||||
Goodwill
impairment
|
- | 17,684 | - | 17,684 | ||||||||||||
Operating
income (loss)
|
7,891 | (13,328 | ) | 33,604 | 7,414 | |||||||||||
Other
expense (income)
|
||||||||||||||||
Interest
expense
|
13,987 | 10,748 | 38,209 | 32,034 | ||||||||||||
Debt
extinguishment income, net
|
(37,366 | ) | - | (42,746 | ) | - | ||||||||||
Interest
income
|
(10 | ) | (128 | ) | (47 | ) | (365 | ) | ||||||||
Litigation
settlement, net (Note 13)
|
- | - | - | (22,274 | ) | |||||||||||
Foreign
exchange (gain) loss
|
(403 | ) | 1,774 | (1,005 | ) | 2,000 | ||||||||||
Other
income
|
- | - | (820 | ) | - | |||||||||||
Income
(loss) from continuing operations before income
taxes
|
31,683 | (25,722 | ) | 40,013 | (3,981 | ) | ||||||||||
Provision
for income taxes
|
240 | 85 | 163 | 177 | ||||||||||||
Income
(loss) from continuing operations
|
31,443 | (25,807 | ) | 39,850 | (4,158 | ) | ||||||||||
Discontinued
operations
|
||||||||||||||||
Loss
from discontinued operations,
net
of income taxes
|
- | (4,224 | ) | - | (47,149 | ) | ||||||||||
Net
income (loss)
|
$ | 31,443 | $ | (30,031 | ) | $ | 39,850 | $ | (51,307 | ) | ||||||
The accompanying notes are an integral part of these condensed
consolidated financial statements.
|
4
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
FOR
THE NINE MONTHS ENDED
|
||||||||
(unaudited)
|
||||||||
(dollars
in thousands)
|
||||||||
October 4, 2009 | September 28, 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net
income (loss)
|
$ | 39,850 | $ | (51,307 | ) | |||
Adjustments
to reconcile net income (loss) to net cash
provided
(used) by operating activities:
|
||||||||
Depreciation
|
43,597 | 40,893 | ||||||
Amortization
of intangible assets
|
2,840 | 3,430 | ||||||
Impairment
of continuing operations goodwill
|
- | 17,684 | ||||||
Impairment
of discontinued operations goodwill and long-lived
assets
|
- | 42,207 | ||||||
Amortization
of financing fees
|
2,100 | 1,765 | ||||||
Employer
401(k) noncash matching contributions
|
2,979 | 4,400 | ||||||
Foreign
exchange (gain) loss
|
(1,005 | ) | 2,399 | |||||
Loss
on disposals of equipment
|
175 | 1,298 | ||||||
Accretion
of capital lease obligation
|
55 | 87 | ||||||
Gain
on debt extinguishment
|
(42,746 | ) | - | |||||
(Increase)/decrease
in assets and increase/(decrease) in liabilities:
|
||||||||
Accounts
receivable
|
(13,956 | ) | (396 | ) | ||||
Inventories
|
12,390 | (18,978 | ) | |||||
Other
current assets
|
(749 | ) | (63 | ) | ||||
Accounts
payable and other accrued liabilities
|
11,439 | (20,363 | ) | |||||
Restructuring
reserve
|
(2,115 | ) | (239 | ) | ||||
Accrued
pension
|
(5,970 | ) | (6,992 | ) | ||||
Fox
River liabilities
|
- | (19,662 | ) | |||||
Other,
net
|
(4,775 | ) | (1,249 | ) | ||||
Net
cash provided (used) by operating activities
|
44,109 | (5,086 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Proceeds
from sale of equipment
|
27 | 8 | ||||||
Net
change in cash due to sale of Bemrose Group Limited
|
- | (2,892 | ) | |||||
Additions
to property, plant and equipment
|
(16,051 | ) | (74,638 | ) | ||||
Net
cash used by investing activities
|
(16,024 | ) | (77,522 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
of senior secured notes payable
|
(1,687 | ) | (1,687 | ) | ||||
Payments
of senior subordinated notes payable
|
(1,687 | ) | - | |||||
Debt
acquisition costs
|
(8,282 | ) | - | |||||
Payments
relating to capital lease obligation
|
(548 | ) | (548 | ) | ||||
Proceeds
from revolving credit facility
|
185,341 | 272,607 | ||||||
Payments
of revolving credit facility
|
(175,450 | ) | (214,272 | ) | ||||
Proceeds
from State of Ohio loan
|
3,000 | - | ||||||
Payments
of State of Ohio loan
|
(677 | ) | (130 | ) | ||||
Payments
of secured financing
|
(1,715 | ) | - | |||||
Proceeds
from issuance of redeemable common stock
|
2,075 | 3,721 | ||||||
Payments
to redeem common stock
|
(12,586 | ) | (17,491 | ) | ||||
(Decrease)
increase in cash overdraft
|
(16,510 | ) | 3,083 | |||||
Net
cash (used) provided by financing activities
|
(28,726 | ) | 45,283 | |||||
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
- | 321 | ||||||
Change
in cash and cash equivalents
|
(641 | ) | (37,004 | ) | ||||
Cash
and cash equivalents at beginning of period
|
4,180 | 44,838 | ||||||
Cash
and cash equivalents at end of period
|
$ | 3,539 | $ | 7,834 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||
CONSOLIDATED
STATEMENTS OF REDEEMABLE COMMON STOCK,
|
||||||||||||||||||||
ACCUMULATED
DEFICIT, ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
AND
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||||||||||
FOR
THE NINE MONTHS ENDED
|
||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||
(dollars
in thousands, except share data)
|
||||||||||||||||||||
Redeemable
Common Stock
|
||||||||||||||||||||
Shares
Outstanding
|
Amount
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
(Loss)
Income
|
Comprehensive
Income
(Loss)
|
||||||||||||||||
Balance,
January 3, 2009
|
10,643,894
|
$
|
147,874
|
$
|
(159,650
|
)
|
$
|
(95,169
|
)
|
|||||||||||
Comprehensive
income
|
||||||||||||||||||||
Net
income
|
-
|
-
|
39,850
|
-
|
$
|
39,850
|
||||||||||||||
Changes
in retiree plans, net
|
-
|
-
|
-
|
(862
|
)
|
(862
|
)
|
|||||||||||||
Realized
and unrealized gain on derivatives
|
-
|
-
|
-
|
120
|
120
|
|||||||||||||||
Total
comprehensive income
|
$
|
39,108
|
||||||||||||||||||
Issuance
of redeemable common stock
|
213,730
|
4,032
|
-
|
-
|
||||||||||||||||
Redemption
of redeemable common stock
|
(614,146
|
)
|
(12,586
|
)
|
-
|
-
|
||||||||||||||
Accretion
of redeemable common stock
|
-
|
(5,667
|
)
|
5,667
|
-
|
|||||||||||||||
Balance,
October 4, 2009
|
10,243,478
|
$
|
133,653
|
$
|
(114,133
|
)
|
$
|
(95,911
|
)
|
|||||||||||
Balance,
December 29, 2007
|
11,116,751
|
$
|
182,040
|
$
|
(80,086
|
)
|
$
|
3,679
|
||||||||||||
Comprehensive
loss
|
||||||||||||||||||||
Net
loss
|
-
|
-
|
(51,307
|
)
|
-
|
$
|
(51,307
|
)
|
||||||||||||
Change
in retiree plans, net
|
-
|
-
|
-
|
7,975
|
7,975
|
|||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
(8,112
|
)
|
(8,112
|
)
|
|||||||||||||
Realized
and unrealized gain on derivatives
|
-
|
-
|
-
|
1,504
|
1,504
|
|||||||||||||||
Total
comprehensive loss
|
$
|
(49,940
|
)
|
|||||||||||||||||
Issuance
of redeemable common stock
|
253,936
|
6,813
|
-
|
-
|
||||||||||||||||
Redemption
of redeemable common stock
|
(577,566
|
)
|
(17,491
|
)
|
-
|
-
|
||||||||||||||
Accretion
of redeemable common stock
|
-
|
(2,018
|
)
|
2,018
|
-
|
|||||||||||||||
Balance,
September 28, 2008
|
10,793,121
|
$
|
169,344
|
$
|
(129,375
|
)
|
$
|
5,046
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS
OF PRESENTATION
In the
opinion of management, all adjustments necessary for the fair presentation of
the results of operations for the three and nine months ended October 4,
2009 and September 28, 2008, the cash flows for the nine months ended
October 4, 2009 and September 28, 2008 and financial position at
October 4, 2009 and January 3, 2009 have been made. All adjustments made
were of a normal recurring nature.
These
condensed financial statements should be read in conjunction with the audited
consolidated financial statements and notes of Paperweight Development Corp.
(“PDC”) and its wholly-owned subsidiaries (collectively the “Company”) for each
of the three years in the period ended January 3, 2009, which are included
in the annual report on Form 10-K for the year ended January 3, 2009. The
consolidated balance sheet data as of January 3, 2009, contained within
these condensed financial statements was derived from the audited financial
statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America. Appleton Papers
Inc. (“Appleton”) is a wholly-owned subsidiary of PDC.
The
results of operations for any interim period are not necessarily indicative of
the results to be expected for the full year. The Company has performed an
evaluation of subsequent events through November 6, 2009, the date the
financial statements were issued. Certain immaterial prior year financial
statement amounts have been reclassified to conform to their current year
presentation.
2. DISPOSITIONS
During
second quarter 2009, Appleton committed to a formal plan to sell C&H
Packaging Company, Inc. (“C&H”). C&H, located in Merrill, Wisconsin, was
acquired in 2003 and prints and converts flexible plastic packaging materials
for companies in the food processing, household and industrial products
industries. The assets and liabilities of C&H are reported as held for
sale for the periods ended October 4, 2009 and January 3,
2009. As of the end of second quarter 2009, depreciation and
amortization expense was suspended, resulting in a $0.2 million reduction in
expense. The sale is expected to be completed prior to the end of 2009. C&H
is included within the performance packaging business segment.
Net
assets held for sale consist of the following (dollars in
thousands):
October 4,
2009
|
January 3,
2009
|
|||||||
Accounts
receivable
|
$
|
3,480
|
$
|
3,811
|
||||
Inventories
|
5,304
|
5,197
|
||||||
Other
current assets
|
289
|
319
|
||||||
Property,
plant and equipment, net
|
6,005
|
6,370
|
||||||
Goodwill
|
1,350
|
1,350
|
||||||
Intangible
assets, net
|
1,451
|
1,535
|
||||||
Accounts
payable
|
(1,604
|
)
|
(1,445
|
)
|
||||
Other
accrued liabilities
|
(594
|
)
|
(640
|
)
|
||||
Net
assets held for sale
|
$
|
15,681
|
$
|
16,497
|
Late in
2007, Appleton committed to a formal plan to sell Bemrose Group Limited
(“Bemrose”), its secure and specialized print services business based in Derby,
England. After conducting a strategic review in the fourth quarter of 2007,
Appleton decided to focus its attention and expand its leadership positions in
its core businesses. The operating results of Bemrose for the three and nine
months ended September 28, 2008 are reported separately as discontinued
operations. For the three and nine months ended September 28, 2008, Bemrose
recorded net sales of $8.5 million and $55.7 million, respectively, and losses
before income taxes of $4.2 million and $47.1 million,
respectively.
7
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
On
August 1, 2008, Appleton completed the sale of Bemrose receiving £2.0
million ($3.9 million) of cash and £3.2 million ($6.4 million) of notes
receivable to be settled within 75 and 180 days after closing. The first tranche
of notes receivable was paid in November 2008, however, due to continuing
difficult business conditions in Bemrose markets, Appleton established a £1.0
million ($1.5 million) reserve against the £2.0 million ($3.0 million) remaining
principal and interest due at year-end 2008. During second quarter 2009,
Appleton and Bemrose negotiated an amendment to the original sales agreement
related to the second tranche of the note receivable. Bemrose agreed to pay
Appleton £1.5 million ($2.5 million). In return, Appleton agreed to release
Bemrose from the remaining £0.5 million ($0.8 million). During July 2009, £1.0
million ($1.6 million) was received from Bemrose. Interest will accrue on the
unpaid balance and will be paid in addition to the remaining principal in
January 2012. These renegotiated terms resulted in a partial recovery of the
reserve established at year-end 2008 and the recording of a £0.5 million ($0.8
million) gain during second quarter 2009. This gain is included in other income
from continuing operations in the Condensed Consolidated Statement of Operations
for the nine months ended October 4, 2009. The note receivable has been
recorded within other long-term assets.
3.
GOODWILL AND OTHER INTANGIBLE
ASSETS
The
Company reviews the carrying value of goodwill and intangible assets with
indefinite lives for impairment annually or more frequently if events or changes
in circumstances indicate that an asset might be impaired. The carrying amount
of goodwill as of October 4, 2009 and January 3, 2009 was $9.3 million
and was assigned entirely to the performance packaging segment.
The
Company’s other intangible assets consist of the following (dollars in
thousands):
As
of October 4, 2009
|
As
of January 3, 2009
|
|||||||||||||||
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||||||
Amortizable
intangible assets:
|
||||||||||||||||
Trademarks
|
$
|
47,835
|
$
|
20,283
|
$
|
47,835
|
$
|
18,590
|
||||||||
Patents
|
30,778
|
30,720
|
30,778
|
30,570
|
||||||||||||
Customer
relationships
|
25,064
|
6,896
|
25,064
|
5,983
|
||||||||||||
Non-compete
agreements
|
691
|
686
|
691
|
686
|
||||||||||||
Subtotal
|
104,368
|
$
|
58,585
|
104,368
|
$
|
55,829
|
||||||||||
Unamortizable
intangible assets:
|
||||||||||||||||
Trademarks
|
22,865
|
22,865
|
||||||||||||||
Total
|
$
|
127,233
|
$
|
127,233
|
Of the
$127.2 million of acquired intangible assets, $70.7 million was assigned to
registered trademarks. Trademarks of $44.6 million related to carbonless paper
and $3.2 million related to the Company’s 2003 and 2005 acquisitions are being
amortized over their estimated useful life of 20 years, while the remaining
$22.9 million are considered to have an indefinite life and are not subject to
amortization. The remaining acquired intangible assets are being amortized over
their estimated useful lives ranging from 3 to 25 years for patents and customer
relationships and 1 to 5 years for non-compete agreements.
Total
amortization expense for the three and nine months ended October 4,
2009 was $0.9 million and $2.8 million, respectively. Of these amounts, C&H
reported amortization expense of $0.1 million for the six months ended
July 5, 2009. Amortization expense for the three and nine months ended
September 29, 2008 was $0.9 million and $3.4 million, respectively. Of
these amounts, C&H recorded amortization expense of $0.2 million
for the nine months ended September 28, 2008.
Estimated
future amortization expense as of October 4, 2009, consists of the following
(dollars in millions):
2009
|
$
|
0.9
|
||
2010
|
3.5
|
|||
2011
|
3.5
|
|||
2012
|
3.4
|
|||
2013
|
3.4
|
|||
2014
|
3.4
|
8
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
4. RESTRUCTURING
AND OTHER CHARGES
Due to
the impact of the economic downturn on the business, salaried headcount was
reduced by 72 during December 2008. In addition, due to a shift of production
from the Appleton, Wisconsin, plant to the West Carrollton, Ohio, paper mill and
the impact of the economic downturn on the business, production headcount was
reduced by 127. As a result, the Company recorded $2.6 million of restructuring
and other charges, for employee termination benefits, during 2008.
The table
below summarizes the restructuring reserve included in the consolidated balance
sheets at October 4, 2009 and January 3, 2009 (dollars in
thousands):
January 3, 2009
|
2009
Additions
|
2009
|
October 4, 2009 |
|
|||||||||||||||||
Reserve
|
to
Reserve
|
Utilization
|
Reserve |
|
|||||||||||||||||
U.S.
employee termination benefits
|
$ | 2,138 | $ | - | $ | (2,115 | ) | $ | 23 |
5. INVENTORIES
Inventories
consist of the following (dollars in thousands):
October 4,
2009
|
January 3,
2009
|
|||||||
Finished
goods
|
$
|
66,301
|
$
|
70,448
|
||||
Raw
materials, work in process and supplies
|
60,868
|
69,255
|
||||||
127,169
|
139,703
|
|||||||
Inventory
reserve
|
(3,510
|
)
|
(4,330
|
)
|
||||
123,659
|
135,373
|
|||||||
LIFO
reserve
|
(11,188
|
)
|
(10,517
|
)
|
||||
$
|
112,471
|
$
|
124,856
|
Stores
and spare parts inventory balances of $23.4 million and $23.1 million at
October 4, 2009 and January 3, 2009, respectively, are valued at
average cost and are included in raw materials, work in process and supplies.
Inventories valued using the FIFO method approximate 10% and 9% of the Company’s
total inventory balance at October 4, 2009, and January 3, 2009,
respectively.
6. PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment balances consist of the following (dollars in
thousands):
October 4,
2009
|
January 3,
2009
|
|||||||
Land
and improvements
|
$
|
9,693
|
$
|
9,880
|
||||
Buildings
and improvements
|
134,353
|
132,110
|
||||||
Machinery
and equipment
|
658,824
|
646,294
|
||||||
Software
|
32,744
|
32,112
|
||||||
Capital
lease
|
4,764
|
4,764
|
||||||
Construction
in progress
|
8,236
|
8,216
|
||||||
848,614
|
833,376
|
|||||||
Accumulated
depreciation/amortization
|
(435,696
|
)
|
(394,075
|
)
|
||||
$
|
412,918
|
$
|
439,301
|
9
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Depreciation expense for
the three and nine months ended October 4, 2009 and September 28,
2008, consists of the following (dollars in thousands):
For
the Three
|
For
the Three
|
For
the Nine
|
For
the Nine
|
|||||||||||||
Months
Ended
|
Months
Ended
|
Months
Ended
|
Months
Ended
|
|||||||||||||
Depreciation
Expense
|
October 4,
2009
|
September 28,
2008
|
October 4,
2009
|
September 28,
2008
|
||||||||||||
Cost
of sales
|
$
|
12,961
|
$
|
12,062
|
$
|
38,612
|
$
|
35,366
|
||||||||
Selling,
general and administrative expenses
|
1,649
|
1,731
|
4,985
|
5,527
|
||||||||||||
$
|
14,610
|
$
|
13,793
|
$
|
43,597
|
$
|
40,893
|
Included
in the amounts above, C&H recorded depreciation of $0.4 million for the six
months ended July 5, 2009. Also included in the above table, C&H
recorded depreciation of $0.2 million and $0.6 million for the three and nine
months ended September 28, 2008, respectively.
7. OTHER
CURRENT AND NONCURRENT ASSETS
Other
current assets consist of the following (dollars in thousands):
October 4,
2009
|
January 3,
2009
|
|||||||
Environmental
indemnification receivable
|
$ | 37,700 | $ | 37,700 | ||||
Alternative
fuels tax credit receivable
|
1,167 | - | ||||||
Note receivable from Bemrose | - | 1,449 | ||||||
Other
|
7,856 | 6,771 | ||||||
$ | 46,723 | $ | 45,920 |
Other
noncurrent assets consist of the following (dollars in thousands):
October 4,
2009
|
January 3,
2009
|
|||||||
Deferred
debt issuance costs
|
$ | 13,809 | $ | 10,968 | ||||
Other
|
3,548 | 2,941 | ||||||
$ | 17,357 | $ | 13,909 |
8. OTHER
ACCRUED LIABILITIES
Other
accrued liabilities, as presented in the current liabilities section of the
balance sheet, consist of the following (dollars in thousands):
October 4,
2009
|
January 3,
2009
|
|||||||
Compensation
|
$
|
8,660
|
$
|
4,776
|
||||
Trade
discounts
|
17,333
|
18,537
|
||||||
Workers’
compensation
|
4,017
|
4,489
|
||||||
Accrued
insurance
|
1,850
|
1,744
|
||||||
Other
accrued taxes
|
1,251
|
1,787
|
||||||
Postretirement
benefits other than pension
|
3,329
|
3,329
|
||||||
Fox
River Liabilities
|
37,700
|
37,700
|
||||||
Restructuring
reserve
|
23
|
2,138
|
||||||
Other
|
8,306
|
9,002
|
||||||
$
|
82,469
|
$
|
83,502
|
10
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
9. NEW
ACCOUNTING PRONOUNCEMENTS
In August
2009, the FASB issued ASU No. 2009-05, "Measuring Liabilities at Fair Value,"
which amends ASC 820, "Fair Value Measurements and
Disclosures." ASU 2009-05 provides clarification and guidance
regarding how to value a liability when a quoted price in an active market is
not available for that liability. The changes to the ASC as a result
of this update are effective for the first reporting period (including interim
periods) beginning after issuance, which for the Company, is fourth quarter
2009. Adoption is not expected to have a material impact on its
consolidated financial statements.
In June 2009, the Financial Accounting Standards Board (“FASB”)
issued the Accounting Standards Codification (“ASC”). The ASC became
the single source for all authoritative generally accepted accounting principles
(“GAAP”) recognized by the FASB to be applied for financial statements issued
for periods ending after September 15, 2009. The ASC does not change GAAP
but was intended to simplify user access to all authoritative GAAP by providing
all the authoritative literature related to a particular topic in one place. All
previously existing accounting standard documents were superseded and all other
accounting literature not included in the ASC is considered non-authoritative.
Throughout the notes to the condensed consolidated financial statements,
references that were previously made to various former authoritative GAAP
pronouncements have been changed to coincide with the appropriate section of the
ASC.
In May
2009, the FASB issued ASC 855, “Subsequent Events.” This
statement is applicable to the accounting for and disclosure of subsequent
events not addressed in other GAAP. It provides a definition of subsequent
events and guidance as to when subsequent events are recognized or not
recognized. It requires the disclosure of the date through which subsequent
events have been evaluated, as well as whether the date is the date the
financial statements were issued or the date the financial statements were
available to be issued. These provisions were effective for interim or annual
financial periods ending after June 15, 2009, and are applied
prospectively. These provisions were adopted by the Company during its
second quarter ended July 5, 2009 and additional disclosures required by
this standard are included in Note 1, Basis of Presentation.
In April
2009, the FASB issued ASC 820, “Fair Value Measurements and Disclosures.” Based
on the guidance, if an entity determines that the level of activity for an asset
or liability has significantly decreased and that a transaction is not orderly,
further analysis of transactions or quoted prices is needed, and a significant
adjustment to the transaction or quoted prices may be necessary to estimate fair
value in accordance with ASC 820, “Fair Value Measurements.” These
provisions were adopted by the Company during its second quarter ended
July 5, 2009. There was no current period impact on its financial
statements.
In April
2009, the FASB issued ASC 825, “Financial Instruments.” It requires an
entity to provide disclosures about fair value of financial instruments in
interim financial information. These provisions were adopted by the Company
during its second quarter ended July 5, 2009. Additional disclosures
required by this standard are addressed in Note 17, Fair Value of Financial
Instruments.
In
December 2008, the FASB issued ASC 715, “Compensation - Retirement
Benefits,” to provide guidance on an employers’ disclosures about plan assets of
a defined benefit pension or other postretirement plan. This pronouncement is
effective for fiscal years ending after December 15, 2009. Upon initial
application, the provisions are not required to be adopted for earlier periods
as presented for comparative purposes. Earlier application of the provisions is
permitted. The Company does not believe adoption will have a material impact on
its consolidated financial statements.
In
March 2008, the FASB issued ASC 815, “Derivatives and
Hedging.” This statement changes the disclosure requirements for derivative
instruments and hedging activities. It requires enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under ASC
815 and its related interpretations and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance and cash flows. These provisions were effective for financial
statements issued for fiscal years beginning after November 15, 2008. The
Company adopted these provisions during its first quarter 2009. The
principal impact to the Company was to require the expansion of its disclosures
regarding derivative instruments.
In
December 2007, the FASB issued ASC 805, “Business Combinations.” It
requires that an acquiring entity recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition date fair value with
limited exceptions. It changes the accounting treatment for acquisition costs,
non-controlling interests, contingent liabilities, in-process research and
development, restructuring costs and income taxes. In addition, it also requires
a substantial number of new disclosure requirements. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company adopted ASC 805 during the first
quarter of 2009. The adoption did not have a material impact on its consolidated
financial statements.
11
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
10. EMPLOYEE
BENEFITS
The
Company has various defined benefit pension plans and defined contribution
pension plans. This includes a Supplemental Executive Retirement Plan (“SERP”)
to provide retirement benefits for management and other highly compensated
employees whose benefits are reduced by the tax-qualified plan limitations of
the pension plan for eligible salaried employees. The components of net periodic
pension cost include the following (dollars in thousands):
For
the
|
For
the
|
For
the
|
For
the
|
|||||||||||||
Three
Months
|
Three
Months
|
Nine
Months
|
Nine
Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
Pension
Benefits
|
October 4,
2009
|
September 28,
2008
|
October 4,
2009
|
September 28,
2008
|
||||||||||||
Net
periodic benefit cost
|
||||||||||||||||
Service
cost
|
$
|
1,458
|
$
|
1,539
|
$
|
4,374
|
$
|
4,616
|
||||||||
Interest
cost
|
4,909
|
4,488
|
14,726
|
13,464
|
||||||||||||
Expected
return on plan assets
|
(5,200
|
)
|
(5,187
|
)
|
(15,599
|
)
|
(15,559
|
)
|
||||||||
Amortization
of
|
||||||||||||||||
Prior
service cost
|
134
|
48
|
404
|
144
|
||||||||||||
Actuarial
loss
|
123
|
-
|
368
|
-
|
||||||||||||
Net
periodic benefit cost
|
$
|
1,424
|
$
|
888
|
$
|
4,273
|
$
|
2,665
|
Effective
January 1, 2008, the Company amended the Appleton Papers Inc. Retirement
Plan (the “Plan”) to provide that no individuals hired or re-hired on or after
January 1, 2008, shall be eligible to participate in the Plan. Also, plan
benefits accrued under the Plan were frozen as of April 1, 2008, with
respect to Plan participants who elected to participate effective April 1,
2008, in a “Mandatory Profit Sharing Contribution” under the Appleton Papers
Inc. Retirement Savings and Employee Stock Ownership Plan (the “KSOP”) or will
be frozen as of January 1, 2015, in the case of any other Plan
participants.
The
Company contributed $10.0 million to its pension plan in fiscal 2009 for
plan year 2008. This payment was made during the three months ended
October 4, 2009.
11. POSTRETIREMENT
BENEFIT PLANS OTHER THAN PENSIONS
The
Company has defined postretirement benefit plans that provide medical, dental
and life insurance for certain retirees and eligible dependents. The components
of other postretirement benefit cost include the following (dollars in
thousands):
For
the
|
For
the
|
For
the
|
For
the
|
|||||||||||||
Three
Months
|
Three
Months
|
Nine
Months
|
Nine
Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
Other
Postretirement Benefits
|
October 4,
2009
|
September 28,
2008
|
October 4,
2009
|
September 28,
2008
|
||||||||||||
Net
periodic benefit cost
|
||||||||||||||||
Service
cost
|
$
|
186
|
$
|
233
|
$
|
556
|
$
|
698
|
||||||||
Interest
cost
|
767
|
769
|
2,301
|
2,309
|
||||||||||||
Amortization
of
|
||||||||||||||||
Prior
service cost
|
(545
|
)
|
(539
|
)
|
(1,635
|
)
|
(1,617
|
)
|
||||||||
Actuarial
loss
|
-
|
1
|
-
|
3
|
||||||||||||
Net
periodic benefit cost
|
$
|
408
|
$
|
464
|
$
|
1,222
|
$
|
1,393
|
12
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
12. LONG-TERM
INCENTIVE COMPENSATION
In
December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive
Plan. In July 2002, the Company adopted the Appleton Papers Canada Ltd. Share
Appreciation Rights Plan. These plans provide officers and key employees the
opportunity to be awarded phantom units, the value of which is based on the
change in the fair market value of PDC’s common stock under the terms of the
employee stock ownership plan (the “ESOP”) prior to the grant date or the
exercise date, as applicable. During the first quarter of 2009, 463,000 new
phantom units were issued under the Appleton Papers Inc. Long-Term Incentive
Plan at a share price of $21.43 which was the fair market value of one share of
PDC common stock as of January 3, 2009. During third quarter 2009, 14,000
new phantom units were issued under the Appleton Papers Inc. Long-Term Incentive
Plan at a share price of $18.87 which was the fair market value of one share of
PDC common stock as of July 5, 2009. There was no expense recorded for this
plan during the three and nine months ended October 4, 2009. There was no
expense recorded for this plan during the three months ended
September 28, 2008; however, as a result of a decline in share price during
the first nine months of 2008, the Company recorded a reduction to compensation
expense of $2.7 million within selling, general and administrative
expenses.
Beginning
in 2006, the Company established a nonqualified deferred compensation agreement
with each of its non-employee directors. Deferred compensation is in the form of
phantom units and is earned over the course of six-month calendar periods of
service beginning January 1 and July 1. The number of units to be
earned is calculated using the established dollar value of the compensation
divided by the fair market value of one share of PDC common stock as established
under the terms of the ESOP as of the prior December 31 and June 30,
respectively. This deferred compensation vests coincidental with the board
member’s continued service on the board. Upon cessation of service as a
director, the deferred compensation will be paid in five equal annual cash
installments. On July 1, 2009, 5,564 share units were issued to the
non-employee directors. There was no expense recorded for this plan during the
three months ended October 4, 2009. Approximately $0.1 million was recorded
as expense, related to this plan, for the first nine months of 2009. During the
three and nine months ended September 28, 2008, the Company recorded $0.1
million of expense related to this arrangement.
13. COMMITMENTS
AND CONTINGENCIES
Lower
Fox River
Introduction.
Various federal and state government agencies and Native American tribes
have asserted claims against Appleton and others with respect to historic
discharges of polychlorinated biphenyls (“PCBs”) into the Lower Fox River in
Wisconsin. Carbonless paper containing PCBs was manufactured at what is
currently the Appleton plant from 1954 until 1971. During this period,
wastewater containing PCBs was discharged into the Lower Fox River from a
publicly-owned treatment works, from the Appleton Coated paper mill and from
other local industrial facilities. Wastewater from the Appleton plant was
processed through the publicly-owned treatment works. As a result, there are
allegedly eleven million cubic yards of PCB contaminated sediment spread over 39
miles of the Lower Fox River and Green Bay, which is part of Lake
Michigan.
The
United States Environmental Protection Agency (“EPA”) published a notice in 1997
that it intended to list the Lower Fox River on the National Priorities List of
Contaminated Sites pursuant to the federal Comprehensive Environmental Response,
Compensation, and Liability Act, (“CERCLA” or “Superfund”). The EPA identified
seven potentially responsible parties (“PRPs”) for PCB contamination in the
Lower Fox River, including NCR, Appleton, Georgia-Pacific, P.H. Glatfelter
Company, WTMI Co., owned by Chesapeake Corporation, Riverside Paper Corporation
and U.S. Paper Mills Corp., which is now owned by Sonoco Products
Company.
Remedial Action.
The EPA and the Wisconsin Department of Natural Resources (“DNR”) issued
two Records of Decision (“ROD”) in 2003, estimating the total costs for the
Lower Fox River remedial action at approximately $400 million. Other estimates
obtained by the PRPs range from a low of $450 million to as much as $1.6
billion. More recent estimates place the cost between $594 million and $900
million. In June 2007, the EPA and DNR issued an amended ROD which modified the
remedial action plan for the Lower Fox River.
The EPA
issued an administrative order in November 2007, directing the PRPs to implement
the remedial action of the Fox River. The PRPs have initiated remediation work
under a work plan and are negotiating to reach a funding arrangement to complete
the work plan.
13
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Appleton
and NCR filed a lawsuit in January 2008 in federal court against various
defendants, including other PRPs and certain municipalities in an effort to
require contribution to the cost of cleaning up PCB-contaminated sediment in the
Fox River.
Natural Resource
Damages. In 2000, the U.S. Fish & Wildlife Service (“FWS”)
released a proposed plan for restoring natural resources injured by PCBs. The
plan estimates that natural resource damages (“NRDs”) will fall in the range of
$176 million to $333 million for all PRPs. However, based on settlements of NRD
claims to date, which have been substantially less than original estimates, the
Company anticipates the actual costs of NRD claims will be less than the
original estimates provided by FWS.
Interim
Restoration and Remediation Consent Decree. Appleton and NCR collectively
paid $41.5 million for interim restoration and remediation efforts pursuant to a
2001 consent decree with various governmental agencies (the “Intergovernmental
Parties” or “IGP”). In addition, Appleton and NCR collectively paid
approximately $750,000 toward interim restoration efforts and the preparation of
a progress report pursuant to a 2006 consent decree with the IGP. Appleton and
NCR also paid $2.8 million in 2007 to fund a land acquisition in partial
settlement of NRD claims. Neither of the consent decrees nor the land
acquisition constitutes a final settlement or provides protection against future
claims; however, Appleton and NCR will receive full credit against remediation
costs and NRD claims for all monies expended.
Appleton’s
Liability. CERCLA imposes liability on parties responsible for, in
whole or in part, the presence of hazardous substances at a site.
Superfund-liable parties can include both current and prior owners and operators
of a facility. While any PRP may be held liable for the entire cleanup of a
site, the final allocation of liability among PRPs generally is determined by
negotiation, litigation or other dispute resolution processes.
Appleton
purchased the Appleton plant and the Combined Locks paper mill from NCR in 1978,
after the use of PCBs in the manufacturing process was discontinued.
Nonetheless, the EPA named both Appleton and NCR as PRPs in connection with
remediation of the Lower Fox River. Appleton’s and NCR’s obligations to share
defense and liability costs are defined by a 2006 arbitration
determination.
The 2000
FWS study offered a preliminary conclusion that the discharges from the Appleton
plant and the Combined Locks paper mill were responsible for 36% to 52% of the
total PCBs discharged. These estimates have not been finalized and are not
binding on the PRPs. Appleton has obtained its own historical and technical
analyses which suggest that the percentage of PCBs discharged from the Appleton
and Combined Locks facilities is less than 20% of the total PCBs
discharged.
A portion
of Appleton’s potential liability for the Lower Fox River may be joint and
several. If, in the future, one or more of the other PRPs were to become
insolvent or unable to pay its respective share(s) of the potential liability,
Appleton could be responsible for a portion of its share(s). Based on a review
of publicly available financial information, Appleton believes that other PRPs
will be required, and have adequate financial resources, to pay their shares of
the remediation and natural resource damage claims for the Lower Fox
River.
Estimates of
Liability.
Appleton cannot precisely estimate its ultimate share of liability due to
uncertainties regarding the scope and cost of implementing the final remediation
plan, the scope of restoration and final valuation of NRD assessments, the
evolving nature of remediation and restoration technologies and governmental
policies, and Appleton’s share of liability relative to other PRPs. However, the
issuance of the RODs, the receipt of bid proposals and the beginning of
remediation activities provide evidence to reasonably estimate a range of
Appleton’s potential liability.
Accordingly,
Appleton has recorded a reserve for its potential liability for the Lower Fox
River. At January 3, 2009, this reserve was $152.0 million. During the
first nine months of 2009, $76.2 million of payments were made from the reserve.
This resulted in a remaining reserve of $75.8 million as of October 4,
2009, of which $37.7 million is recorded in other accrued liabilities and $38.1
million is recorded as a long-term environmental liability.
14
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
The
following assumptions were used in evaluating Appleton’s potential Lower Fox
River liability and establishing a remediation reserve:
|
•
|
total
remediation costs of $654 million, based on the most recent bids received
with a range from $594 million to $900
million;
|
|
•
|
the
FWS preliminary estimate that discharges from the Appleton plant and the
Combined Locks mill represent 36% to 52% of the total PCBs
discharged by the PRPs, which is substantially greater than Appleton’s
estimate;
|
|
•
|
costs
to settle NRD claims against Appleton and NCR, estimated at $20 million or
less, based on the IGP’s settlement of other NRD
claims;
|
|
•
|
Appleton’s
responsibility for over half of the claims asserted against Appleton and
NCR, based on the Company’s interim settlement agreement with NCR and the
arbitration determination; and
|
|
•
|
$25
million in fees and expenses.
|
Although
Appleton believes its recorded environmental liability reflects a reasonable
estimate of its liabilities associated with the Lower Fox River, the actual
amount of liabilities associated with the Lower Fox River could prove to be
significantly larger than the recorded environmental liability.
AWA
Indemnification. Pursuant to two indemnification agreements entered in
2001, AWA agreed to indemnify PDC and PDC agreed to indemnify Appleton for
costs, expenses and liabilities related to certain governmental and third-party
environmental claims, which are defined in the agreements as the Fox River
Liabilities.
Under the
indemnification agreements, Appleton is indemnified for the first $75 million of
Fox River Liabilities and for amounts in excess of $100 million. During 2008,
Appleton paid $25 million in satisfaction of its unindemnified portion of the
Fox River Liabilities. Through October 4, 2009, AWA has paid $163.8 million
in connection with Fox River Liabilities. At October 4, 2009, the total
indemnification receivable from AWA was $75.8 million, of which $37.7 million is
recorded in other current assets and $38.1 million is recorded as an
environmental indemnification receivable.
In
connection with the indemnification agreements, AWA purchased and fully paid for
indemnity claim insurance from Commerce & Industry Insurance Company, an
affiliate of American International Group, Inc. The insurance policy provides up
to $250 million of coverage for Fox River Liabilities, subject to certain
limitations defined in the policy. At October 4, 2009, the policy had $86.2
million of remaining coverage which is sufficient to cover Appleton’s currently
estimated share of the Fox River Liabilities. AWA’s obligations to maintain
indemnity claim insurance covering the Fox River Liabilities are defined in and
limited by the terms of the Fox River AWA Environmental Indemnity Agreement, as
amended.
The
indemnification agreements negotiated with AWA and the Commerce & Industry
Insurance policy are designed to ensure that Appleton will not be required to
fund any of the indemnified costs and expenses in relation to the Fox River
Liabilities and to assure the ESOP Trustee and Appleton’s lenders and investors
that Appleton will not have to rely solely on AWA itself to make these payments.
This arrangement is working as designed and is expected to continue to protect
Appleton with respect to the indemnified costs and expenses, based on Appleton’s
review of the insurance policy and the financial condition of AWA and Commerce
& Industry Insurance Company. AWA, PDC, the special purpose subsidiaries and
the policyholder entered into a Relationship Agreement, which, among other
things and subject to certain limited exceptions, prohibits AWA and PDC from
taking any actions that would result in any change to this design
structure.
In
March 2008, Appleton received favorable jury verdicts in a state court
declaratory judgment relating to insurance coverage of its environmental claims
involving the Fox River. A final judgment and order was entered in January 2009.
The insurers have appealed the final judgment. Under the terms of the
indemnification agreement, recoveries from insurance are reimbursed to AWA to
the extent of its indemnification obligation.
15
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
West
Carrollton Mill
The West
Carrollton, Ohio mill operates pursuant to various state and federal permits for
discharges and emissions to air and water. As a result of the de-inking of
carbonless paper containing PCBs through the early 1970s, there have been
releases of PCBs and volatile organic compounds into the soil in the area of
the wastewater
impoundments at the West Carrollton facility and low levels of PCBs have been
detected in groundwater immediately under this area. In addition, PCB
contamination is present in sediment in the adjacent Great Miami River, but it
is believed that this contamination is from a source other than the West
Carrollton mill.
Based on
investigation and delineation of PCB contamination in soil and groundwater in
the area of the wastewater impoundments, Appleton believes that it could be
necessary to undertake remedial action in the future, although Appleton is
currently under no obligation to do so. Appleton has not had any discussions or
communications with any federal, state or local agencies or authorities
regarding remedial action to address PCB contamination at the West Carrollton
mill. The cost for remedial action, which could include installation of a cap,
long-term pumping, treating and/or monitoring of groundwater and removal of
sediment in the Great Miami River, was estimated in 2001 to range up to
approximately $10.5 million, with approximately $3 million in short-term capital
costs and the remainder to be incurred over a period of 30 years. However, costs
could exceed this amount if additional contamination is discovered, if
additional remedial action is necessary or if the remedial action costs are more
than expected.
Because
of the uncertainty surrounding the ultimate course of action for the West
Carrollton mill property, the Great Miami River remediation and Appleton’s share
of these remediation costs, if any, and since Appleton is currently under no
obligation to undertake remedial action in the future, no provision has been
recorded in its financial statements for estimated remediation costs. In
conjunction with the acquisition of PDC by the ESOP in 2001, and as limited by
the terms of the purchase agreement, AWA agreed to indemnify the Company for 50%
of all environmental liabilities at the West Carrollton mill up to $5.0 million
and 100% of all such environmental costs exceeding $5.0 million. In addition,
the former owners and operators of the West Carrollton mill may be liable for
all or part of the cost of remediation of historic PCB
contamination.
Litigation
Settlement
In 1996,
after being named as a defendant in a lawsuit, Appleton notified its insurance
carriers of a coverage claim under policies in effect at the time. The lawsuit
ultimately was resolved and Appleton recovered expenses from three of four
insurers. The fourth insurer disputed coverage for its share of previously
incurred costs. As a result, Appleton filed a lawsuit against the
insurer. In 2007, a Wisconsin state appellate court issued an
order estopping the insurer from denying its obligation to cover
Appleton. Pursuant to a judgment in favor of Appleton which was entered in
March 2008, and subsequent settlement negotiations with the insurer,
Appleton recorded $22.2 million of income, net of fees. These proceeds were
received in April 2008.
Other
Litigation
In
September, 2007, Appleton commenced litigation against Andritz BMB AG and
Andritz, Inc. The claims asserted included breach of obligations under a
February 2007 agreement to perform certain engineering services which also
granted Appleton an option to purchase certain equipment and services relating
to an off-machine paper coating line. This matter proceeded to trial and, on
May 14, 2009, Appleton received a favorable jury verdict. The defendant
filed post-trial motions in response to the verdict. On August 11, 2009, an
Outagamie County, Wisconsin judge denied the defendant’s post-trial motions
seeking to overturn the jury’s verdict and granted Appleton’s motion to enter
judgment in favor of Appleton in the amount of $29.1 million. The defendant has
appealed the final judgment. The case will be reviewed by the Wisconsin Court of
Appeals who will determine whether the judgment should stand. Ultimate
resolution of the litigation could have a material effect on Appleton’s
financial results.
Other
From time
to time, Appleton may be subject to various demands, claims, suits or other
legal proceedings arising in the ordinary course of business. A comprehensive
insurance program is maintained to provide a measure of financial protection
against such matters, though not all such exposures are, or can be, addressed by
insurance. Estimated costs are recorded for such demands, claims, suits or
proceedings of this nature when reasonably determinable. The Company has
successfully defended such claims, settling some for amounts which are not
material to the business and obtaining dismissals in others. While the Company
vigorously defends itself and expects to prevail in any similar cases that may
be brought against Appleton in the future, there can be no assurance that the
Company will be successful in its defense.
16
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Except as
described above, and assuming the Company’s expectations regarding defending
such demands, claims, suits or other legal or regulatory proceedings prove
accurate, Appleton does not believe that any pending or threatened demands,
claims, suits or other legal proceedings will have, individually or in the
aggregate, a materially adverse effect on its financial position, results of
operations or cash flows.
14. EMPLOYEE
STOCK OWNERSHIP PLAN
Appleton’s
matching contributions charged to expense were $0.9 million and $1.3 million for
the three months ended October 4, 2009 and September 28, 2008,
respectively. Appleton’s matching contributions charged to expense were $3.0
million and $4.4 million for the nine months ended October 4, 2009 and
September 28, 2008, respectively. As a result of hardship withdrawals,
required diversifications and employee terminations, 614,146 shares of PDC
redeemable common stock were repurchased during the first nine months of 2009 at
an aggregate price of approximately $12.6 million. During the same period, the
ESOP trustee purchased 109,964 shares of PDC redeemable common stock for an
aggregate price of $2.1 million from pre-tax deferrals, rollovers and loan
payments made by employees, while Appleton’s matching contribution for this same
period resulted in an additional 103,766 shares of PDC redeemable common stock
being issued. During the first nine months of 2008, the ESOP trustee purchased
PDC redeemable common stock for an aggregate price of $3.7 million, also from
pre-tax deferrals, rollovers and loan payments made by employees.
Redeemable
common stock is being accreted up to the earliest redemption date based upon the
estimated fair market value of the redeemable common stock as of October 4,
2009. Due to a reduction in the July 5, 2009 share price, redeemable common
stock accretion was reduced by $5.7 million for the nine months ended
October 4, 2009. Based upon the estimated fair value of the redeemable
common stock, an ultimate redemption liability of approximately $193 million was
determined. The redeemable common stock recorded book value as of
October 4, 2009 was $134 million, which leaves a remaining unrecognized
liability to be accreted of approximately $59 million.
15. DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES
The
Company selectively uses financial instruments to manage some market risk from
changes in interest rates or foreign currency exchange rates. The fair values of
all derivatives are recorded in the consolidated balance sheet. The change in a
derivative’s fair value is recorded each period in current earnings or
accumulated other comprehensive loss, depending on whether the derivative is
designated and qualifies as part of a hedge transaction and, if so, the type of
hedge transaction.
The
Company selectively hedges forecasted transactions that are subject to foreign
currency exchange exposure by using forward exchange contracts. These
instruments are designated as cash flow hedges and are recorded in the
consolidated balance sheet at fair value. The effective portion of the
contracts’ gains or losses due to changes in fair value are initially recorded
as a component of accumulated other comprehensive loss and are subsequently
reclassified into earnings when the underlying transactions occur and affect
earnings. These contracts are highly effective in hedging the variability in
future cash flows attributable to changes in currency exchange rates. The
notional amount of foreign exchange contracts used to hedge foreign currency
transactions was $6.2 million as of October 4, 2009.
In
February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of
its variable rate notes with a five-year interest rate swap contract. This
interest rate swap was being accounted for as a cash flow hedge. As discussed in
Note 16, Long-Term Obligations, the covenant violation at January 3, 2009
and subsequent waiver and amendment in March 2009, to the senior secured
credit facilities, changed the basis of the forecasted transactions for the
interest rate swap contract. As amended, the senior secured credit facilities
contain interest payments based on LIBOR with a 2% floor, whereas the forecasted
transactions assumed interest payments based on LIBOR. As a result, this
derivative is no longer designated as a hedging instrument.
17
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
The
following table presents the location and fair values of derivative instruments
included in the Company’s Condensed Consolidated Balance Sheet at
October 4, 2009 (dollars in thousands):
As
of October 4, 2009
|
||||||||
Derivatives
|
Derivatives
Not
|
|||||||
Designated
as
Hedging
Instruments
|
Designated
as
Hedging
Instruments
|
|||||||
Other
current liabilities:
|
||||||||
Foreign
currency exchange derivatives
|
$
|
277
|
$
|
-
|
||||
Other
long-term liabilities:
|
||||||||
Interest
rate swap contract
|
-
|
4,362
|
||||||
Total
liabilities
|
$
|
277
|
$
|
4,362
|
The
following table presents the location and amount of losses and/or gains on
derivative instruments and related hedge items included in the Company’s
Condensed Consolidated Statement of Operations for the three and nine months
ended October 4, 2009 and losses initially recognized in accumulated other
comprehensive loss in the Condensed Consolidated Balance Sheet at
October 4, 2009 (dollars in thousands):
Effective
Portion
|
|||||||||||||
Amount
of Loss Reclassified from
|
|||||||||||||
AOCI
into Income
|
|||||||||||||
Derivatives
in
Cash
Flow Hedging
Relationships
|
Amount
of Loss
Recognized
in
AOCI
on Derivatives
As
of October 4, 2009
|
Location
of Loss
Reclassified
from
AOCI
into Income
|
For
the Three Months
Ended
October 4, 2009
|
For
the Nine Months
Ended
October 4, 2009
|
|||||||||
Foreign
currency exchange derivatives
|
$
|
185
|
Net
sales
|
$
|
(339
|
)
|
$
|
(479
|
)
|
||||
Amount
of (Loss) Gain Recognized
|
|||||||||||||
in
Income on Derivative
|
|||||||||||||
Derivatives
Not Designated
|
Location
of (Loss) Gain
Recognized
in Income on
|
For
the Three Months
|
For
the Nine Months
|
||||||||||
as Hedging Instruments |
Derivative
|
Ended
October 4, 2009
|
Ended
October 4, 2009
|
||||||||||
Interest
rate swap contract
|
Interest
expense
|
$
|
(527)
|
$
|
389
|
For a
discussion of the fair value of financial instruments, see Note 17, Fair Value
of Financial Instruments.
18
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
16. LONG-TERM
OBLIGATIONS
Long-term
obligations, excluding the capital lease obligation, consist of the following
(dollars in thousands):
October 4,
2009
|
January 3,
2009
|
|||||||
At
October 4, 2009 the senior secured variable rate notes payable were at
6.625%, $563 due quarterly with $212,062 due June
2013.
At January 3, 2009 the notes were at approximately 4.5%, $563 due
quarterly with $209,812 due June 2014.
|
$ | 219,938 | $ | 221,625 | ||||
Secured
term note payable at 14.25%, approximately $300 due monthly with $6,831
due December 2013. At January 3,
2009
the note was at 12.5%, approximately $200 due monthly with $6,943 due
December 2013.
|
20,099 | 21,814 | ||||||
At
October 4, 2009 the revolving credit facility was at approximately 6.7%.
At January 3, 2009 the revolving credit
facility
was at approximately 4.0%.
|
93,625 | 83,734 | ||||||
333,662 | 327,173 | |||||||
Less
obligations due within one year
|
(4,828 | ) | (4,640 | ) | ||||
328,834 | 322,533 | |||||||
Unsecured
variable rate industrial development bonds, 0.7% average
interest rate at October 4, 2009,
$2,650
due in 2013 and $6,000 due in 2027
|
8,650 | 8,650 | ||||||
State
of Ohio assistance loan at 6%, approximately $100 due monthly
and final payment due May 2017
|
8,175 | 8,780 | ||||||
State
of Ohio loan at 1% until July 2011, then 3% until May 2019,
approximately $30 due monthly and final payment due May
2019
|
2,928 | - | ||||||
Less
obligations due within one year
|
(1,139 | ) | (815 | ) | ||||
9,964 | 7,965 | |||||||
Senior
notes payable at 8.125%, due June 2011
|
17,491 | 109,450 | ||||||
Senior
subordinated notes payable at 9.75%, due June 2014
|
32,195 | 150,000 | ||||||
Second
lien notes payable at 11.25%, due December 2015
|
161,766 | - |
On September 30, 2009, Appleton completed a voluntary debt-for-debt exchange of significant portions of its 8.125% senior notes payable due June 2011 and 9.75% senior subordinated notes payable due June 2014. Weak economic conditions and frozen credit markets caused many corporate bonds, including those issued by Appleton, to trade well below face value. Appleton took advantage of the opportunity to significantly reduce its total indebtedness, plus extend maturities and simplify its debt structure, by exchanging existing debt.
This
transaction exchanged $92.0 million of 8.125% senior notes for $92.0 million of
newly issued 11.25% second lien notes payable due December 2015. For accounting
purposes, this was considered a debt modification. As part of this transaction,
Appleton paid $1.2 million of fees to the bondholders which included $0.9
million of additional 11.25% second lien notes issued as in-kind consent fees to
the holders agreeing to the exchange. These debt issuance costs will be
amortized over the term of the second lien notes along with pre-existing
unamortized debt issuance costs of the exchanged 8.125% notes. As a result of
this transaction, $92.9 million of second lien notes were issued. Third-party
costs of $3.7 million were also incurred and recorded as selling, general and
administrative expenses.
Appleton
also exchanged $110.3 million of 9.75% senior subordinated notes for $66.2
million of newly issued 11.25% second lien notes payable due December 2015. This
resulted in a debt reduction of $44.1 million. For accounting purposes, this
exchange was considered a debt extinguishment and $3.5 million of previously
capitalized debt issuance costs related to the 9.75% notes were written off and
recorded as debt extinguishment expense. Transaction costs of $5.5 million were
paid and $0.2 million were accrued. Of this $5.7 million of costs, $3.0 million
was recorded as debt extinguishment expense and $2.7 million was capitalized and
will be amortized over the term of the second lien notes. The $3.0 million of
debt extinguishment expense included $2.7 million of additional 11.25% second
lien notes issued as in-kind consent fees to the holders agreeing to the
exchange. As a result of this transaction, $68.9 million of second lien notes
were issued. A $37.4 million net gain on debt extinguishment was recorded in the
Condensed Consolidated Statement of Operations for the three and nine months
ended October 4, 2009 related to the debt-for-debt exchange and the Second
Amendment to the senior secured credit facilities (discussed
below).
19
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
The
11.25% second lien notes due 2015 will accrue interest from the issue date at a
rate of 11.25% per year and interest will be payable semi-annually in arrears on
each June 15 and December 15, commencing on December 15, 2009.
These notes are guaranteed by PDC and certain of present and future domestic and
foreign subsidiaries that guarantee the senior secured credit facilities.
Guarantors include PDC, C&H, American Plastics Company, Inc.and New England
Extrusion Inc. The guarantees of these notes are second-priority senior secured
obligations of the guarantors. They rank equally in right of payment with all of
the guarantors’ existing and future senior debt, including guarantees of the
senior secured credit facilities, and rank senior in right of payment to all of
the guarantors’ existing and future subordinated debt. The guarantees of the
11.25% notes are effectively subordinated to all of the first priority senior
secured debt of the guarantors, to the extent of the collateral securing such
debt, including the guarantees of the senior secured credit facilities. These
notes contain covenants that restrict Appleton’s ability and the ability of
Appleton’s other guarantors to sell assets or merge or consolidate with or into
other companies; borrow money; incur liens; pay dividends or make other
distributions; make other restricted payments and investments; place
restrictions on the ability of certain subsidiaries to pay dividends or other
payments to Appleton; enter into sale and leaseback transactions; amend
particular agreements relating to the transaction with former parent Arjo
Wiggins Appleton Limited and the ESOP; and enter into transactions with certain
affiliates. These covenants are subject to important exceptions and
qualifications set forth in the indenture governing the 11.25% second lien notes
due 2015.
In order
to complete the debt-for-debt exchange, Appleton and its lenders under the
senior secured credit facilities entered into the Second Amendment to the senior
secured credit facilities on September 30, 2009. This Second Amendment
cleared the way for Appleton to issue the second lien notes. Under the Second
Amendment to the senior secured credit facilities, Appleton will pay interest
rates equal to LIBOR, but not less than 2 %, plus 462.5 basis points for any
amounts outstanding on the senior secured variable rate notes payable and,
interest rates initially equal to LIBOR, but not less than 2 %, plus 462.5 basis
points for any amounts outstanding on the revolving credit facility. The
Second Amendment to the senior secured credit facilities provides a grid under
which the interest rates payable, for amounts outstanding on the revolving
credit facility, may be reduced, based on measures of Appleton’s total leverage
as defined in the senior secured credit facilities. The Second Amendment also
provides that the revolving credit facility will be permanently reduced by
$5,000,000 on December 31, 2009, by another $10,000,000 on March 31,
2010 and by an additional $15,000,000 on June 30, 2010. For accounting
purposes, the amendment to the senior secured credit facilities was treated as a
debt modification. The Company paid $2.4 million of fees to the creditors in
conjunction with the amendment to the senior secured credit facilities. These
debt issuance costs will be amortized over the term of the modified agreement
along with pre-existing unamortized debt issuance costs as an adjustment to
interest expense over the remaining term of the modified
agreement. Unamortized debt issuance costs of $0.2 million, relating to the
revolving credit facility, were written off and recorded as debt extinguishment
expense. The unamortized debt issuance costs remaining will be deferred and
amortized over the term of the modified revolving credit facility. Third-party
costs of $0.5 million were also incurred and recorded as selling, general and
administrative expenses.
In
addition, on September 9, 2009, a third supplemental indenture to the
indenture dated as of June 11, 2004, and governing the remaining $17.5
million of 8.125% senior notes, and a third supplemental indenture to the
indenture dated as of June 11, 2004, and governing the remaining $32.2
million of 9.75% senior subordinated notes, became effective. The supplemental
indentures amend the original indentures to, among other things, eliminate
substantially all of the restrictive covenants and certain events of default and
related provisions.
In the
first nine months of 2009, Appleton made mandatory debt repayments of $4.1
million, plus interest, on its senior secured variable rate notes payable,
secured term note payable and State of Ohio loans. Also during the first nine
months of 2009, Appleton borrowed $185.3 million and repaid $175.4 million
against its revolving credit facility, leaving an outstanding balance of $93.6
million that the Company has the ability and intent to finance on a long-term
basis. Approximately $16.1 million of the revolving credit facility was
used to support outstanding letters of credit. At October 4, 2009,
there was approximately $40.3 million of unused borrowing capacity under the
$150 million revolving credit facility for working capital and other corporate
purposes. A commitment fee of 0.5% per annum is assessed on the unused borrowing
capacity.
During
July 2007, Appleton entered into a new $12.1 million Loan and Security Agreement
with the Director of Development of the State of Ohio, consisting of a $9.1
million State Assistance Loan and a $3.0 million State Loan (together “the Ohio
Loans”). The Company received the proceeds of the $3.0 million State Loan during
second quarter 2009. The proceeds of the $9.1 million State Assistance Loan were
received in 2007. All proceeds of these Ohio Loans were used to fund a portion
of the costs of acquiring and installing paper coating and production equipment
at the Company’s paper mill in West Carrollton, Ohio.
During
first quarter 2009, Appleton purchased $7.5 million, plus interest, of the 9.75%
senior subordinated notes payable due June 2014. As these senior
subordinated notes were purchased at a price less than face value, the Company
recorded a $5.8 million gain on this purchase. Also as a result of this
purchase, $0.3 million of deferred debt issuance costs were written off,
resulting in a net gain of $5.5 million.
20
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Appleton’s
senior secured credit facilities and senior secured term note payable contain
provisions that require Appleton to maintain specified financial ratios. Prior
to the waivers and amendments discussed below, the most restrictive limitations
were quarter-end debt to earnings before interest, taxes, depreciation and
amortization (EBITDA) of not more than a 4.50 to 1.00 ratio as such terms are
defined in the debt agreements. As a result of the significant downturn in
Appleton’s business markets and the resulting loss reported for the three months
ended January 3, 2009, Appleton was not in compliance with the leverage
ratio covenant at January 3, 2009, which constituted events of default
under the debt agreements. In order to waive the events of default existing at
January 3, 2009, under the senior secured credit facilities and the senior
secured term note payable, and to amend other provisions of the agreements,
Appleton and its lenders entered into the following agreements in
March 2009:
•
|
First
Amendment to the senior secured credit facilities
and
|
|
•
|
First
Amendment to the senior secured term note
payable.
|
Under the
First Amendment to the senior secured credit facilities, Appleton paid interest
rates equal to LIBOR, but not less than 2%, plus 450 basis points for any
amounts outstanding on the senior secured variable rate notes payable and,
interest rates initially equal to LIBOR, but not less than 2%, plus 450 basis
points for any amounts outstanding on the revolving credit facility. The
First Amendment to the senior secured credit facilities provides a grid under
which the interest rates payable, for amounts outstanding on the revolving
credit facility, may be reduced, based on measures of Appleton’s total leverage
as defined in the senior secured credit facilities. Under the First Amendment to
the senior secured term note payable, Appleton will pay an interest rate of
14.25 % on the senior secured term note payable. For accounting purposes,
the amendments to the senior secured credit facilities and the senior secured
term note payable were treated as debt modifications. The Company paid $2.8
million of fees to the creditors in conjunction with the amendment to the senior
secured credit facilities. These debt issuance costs will be amortized over the
term of the modified agreement along with pre-existing unamortized debt issuance
costs as an adjustment to interest expense over the remaining term of the
modified agreement. Unamortized debt issuance costs of $0.1 million,
relating to the revolving credit facility, were written off. The unamortized
debt issuance costs remaining after the writeoff will be deferred and amortized
over the term of the modified revolving credit facility.
Pursuant
to the terms of the First Amendment to the senior secured credit
facilities:
|
•
|
The
maturity date for the revolving credit facility will be June 5, 2012,
and the maturity date for the senior secured variable rate notes payable
will be June 5, 2013;
|
|
•
|
Appleton
will be permitted up to $35 million of capital expenditures in 2009 and up
to $40 million of capital expenditures in 2010, with no limit in 2011 or
thereafter;
|
|
•
|
Appleton
may not make acquisitions until December 31,
2010;
|
|
•
|
Other
restrictions are imposed on liens, indebtedness, investments, restricted
payments and note repurchases;
|
|
•
|
Mandatory
prepayments are increased from 50% to 75% of excess cash flow as defined
in the senior secured credit
facilities;
|
|
•
|
Financial
covenants are modified to increase the total leverage ratio, to eliminate
the interest coverage ratio, to add a senior secured leverage ratio, and
to add a fixed charge coverage ratio, all as defined in the senior secured
credit facilities and the First Amendment to the senior secured credit
facilities.
|
21
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
In
February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of
its variable rate notes with a five-year interest rate swap contract. Also
during first quarter 2008, Appleton fixed the interest rate, at 5.4%, on an
additional $75.0 million of its variable rate notes with a five-year interest
rate swap contract. As discussed below, one of the swap contracts was terminated
in February 2009. The covenant violation at January 3, 2009 and subsequent
waiver and amendment, in March 2009, to the senior secured credit
facilities, changed the basis of the forecasted transactions for the two
interest rate swap contracts that were placed in 2008. As amended, the senior
secured credit facilities contain interest payments based on LIBOR with a 2%
floor, whereas the forecasted transactions assumed interest payments based on
LIBOR. As a result, Appleton concluded it was remote that the original
forecasted transactions would occur as originally documented and reclassified as
a charge against 2008 earnings, within interest expense, $9.4 million of swap
losses originally classified in other comprehensive loss. The events of default
also triggered an event of default pursuant to a cross-default provision under
one of the interest rate swap contracts. As a result of the cross-default, the
counterparty elected to terminate the swap contract. In February 2009, Appleton
and the counterparty resolved Appleton’s obligation under the swap contract with
an agreement to pay $4.7 million over the nine-month period ending October 2009.
During the first nine months of 2009, Appleton paid $4.3 million in accordance
with the termination agreement thereby reducing its liability to $0.4 million as
of October 4, 2009. The remaining swap contract is expected to remain in
place and future fluctuations in market value will be reflected as adjustments
to interest expense. As of October 4, 2009, the remaining swap contract was
recorded as a long-term liability of $4.4 million based on a fair value
measurement using Level 2 inputs. The fair value of the interest rate swap
derivative is primarily based on models that utilize the appropriate
market-based forward swap curves and zero-coupon interest rates to determine the
discounted cash flows. In comparison to the fair value reported at fiscal
year-end 2008, the current fair value of this long-term liability is $0.4
million lower, with this change recorded in interest expense on the Condensed
Consolidated Statement of Operations for the nine months ended October 4,
2009.
The
senior secured credit facilities, as amended, senior secured term note payable,
as amended, and second lien notes contain affirmative and negative covenants. In
general, the covenants contained in the senior credit facilities, as amended,
are more restrictive than those of the second lien notes. Among other
restrictions, the covenants contained in the senior credit facilities, as
amended, and senior secured term note payable, as amended, require Appleton to
meet specified financial tests, including leverage and fixed charge coverage
ratios, which become more restrictive over the term of the debt.
The
senior secured credit facilities, as amended, and the senior secured term note
payable, as amended, also contain covenants which, among other things, restrict
Appleton’s ability and the ability of Appleton’s other guarantors of the senior
secured credit facilities, as amended, and senior secured term note payable, as
amended, to incur liens; engage in transactions with affiliates; incur or
guarantee additional indebtedness; declare dividends or redeem or repurchase
capital stock; make loans and investments; engage in mergers, acquisitions,
consolidations and asset sales; acquire assets, stock or debt securities of any
person; terminate the subchapter S corporation status of PDC or the qualified
subchapter S subsidiary status of its subsidiaries eligible to elect such
status; amend its debt instruments; amend or terminate the ESOP; amend other
agreements related to the transaction with AWA; repay other indebtedness; use
assets as security in other transactions; enter into sale and leaseback
transactions; sell equity interests in the Company’s subsidiaries; and engage in
new lines of business.
The
senior secured credit facilities, as amended, contain a provision that defines
an event of default to include defaults or events of default under other
indebtedness as defined in the senior secured credit facilities. The senior
secured term note payable, as amended, contains a provision which defines an
event of default to include defaults or events of default under the senior
secured credit facilities, as amended, the senior notes, as amended, and
the senior subordinated notes, as amended.
The
senior secured credit facilities, as amended, are unconditionally guaranteed by
PDC and by substantially all of Appleton’s subsidiaries, other than two small
foreign subsidiaries. In addition, they are secured by liens on substantially
all of Appleton’s, the subsidiary guarantors’ and certain of Appleton’s other
subsidiaries’ assets and by a pledge of Appleton’s and its subsidiaries’ capital
stock. The senior secured term note payable, as amended, is unconditionally
guaranteed by PDC and by substantially all of Appleton’s subsidiaries, other
than certain immaterial subsidiaries. In addition, it is secured by a lien on
specified manufacturing equipment located in Appleton’s paper mill in West
Carrollton, Ohio. The senior notes, as amended, and senior subordinated
notes, as amended, are unconditionally guaranteed by PDC, C&H, American
Plastics Company, Inc., Rose Holdings Limited and New England Extrusion
Inc.
22
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
As of
October 4, 2009, Appleton was in compliance with its various amended
covenants as disclosed in the 2008 Form 10-K. Based on Appleton’s forecasted
operating results and related debt reductions, Appleton has projected compliance
with all covenants for the next twelve-month period. Appleton’s ability to
comply with the financial covenants in the future depends on further debt
reduction and achieving forecasted operating results, which have become more
difficult to project in the current economic environment. Given the uncertain
global economic conditions, continued constraints in the credit markets and
other market uncertainties, there are various scenarios, including a reduction
from forecasted operating results, under which Appleton could violate its
financial covenants during 2009 and 2010. Appleton’s failure to comply with
such covenants or an assessment that it is likely to fail to comply with such
covenants, could also lead Appleton to seek amendments to or waivers of the
financial covenants contained in the senior secured credit facilities and senior
secured term note payable. Appleton cannot provide assurance that it would
be able to obtain any amendments to or waivers of the covenants contained in the
senior secured credit facilities and senior secured term note payable. Any
such amendment to or waiver of the covenants would likely involve upfront fees,
higher annual interest costs and other terms less favorable to the Company than
those currently in the senior secured credit facilities and senior secured term
note payable. In the event the lenders will not amend or waive the
covenants, the debt would be due and Appleton would need to seek alternative
financing. Appleton cannot provide assurance that it would be able to
obtain alternative financing. If Appleton were not able to secure
alternative financing, this would have a material adverse impact on the
Company.
17. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
carrying amount (including current portions) and estimated fair value of certain
of the Company’s recorded financial instruments are as follows (dollars in
thousands):
October 4,
2009
|
January 3,
2009
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Financial
Instruments
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
Senior
subordinated notes payable
|
$ | 32,195 | $ | 12,234 | $ | 150,000 | $ | 80,250 | ||||||||
Senior
notes payable
|
17,491 | 12,594 | 109,450 | 75,521 | ||||||||||||
Second
lien notes payable
|
161,766 | 161,766 | - | - | ||||||||||||
Senior
credit facility
|
219,938 | 195,195 | 221,625 | 162,894 | ||||||||||||
Senior
secured debt
|
20,099 | 20,099 | 21,814 | 21,814 | ||||||||||||
Revolving
credit facility
|
93,625 | 93,625 | 83,734 | 83,734 | ||||||||||||
State
of Ohio loans
|
11,103 | 10,980 | 8,780 | 7,978 | ||||||||||||
Industrial
development bonds
|
8,650 | 8,650 | 8,650 | 8,650 | ||||||||||||
$ | 564,867 | $ | 515,143 | $ | 604,053 | $ | 440,841 | |||||||||
Interest
rate swap derivatives
|
$ | 4,362 | $ | 4,362 | $ | 9,446 | $ | 9,446 |
The
senior subordinated notes payable, the senior notes payable and the second lien
notes payable are traded in public markets and therefore, the fair value was
determined based on quoted market prices. The senior credit facility is traded
in interbank markets and therefore, the fair value was determined based on
quoted market prices. The senior secured debt is not traded in public
markets though, based on discussions with market makers for similar debt
instruments, the fair value of this debt is equal to its carrying value. The
fair value of the State of Ohio loans was determined based on current rates for
similar financial instruments of the same remaining maturity and similar terms.
The industrial development bonds have a variable interest rate that reflects
current market terms and conditions. The fair value of interest rate swap
derivatives is primarily based on models that utilize the appropriate
market-based forward swap curves and zero-coupon interest rates to determine the
discounted cash flows that result in a measurement that is classified as Level
2.
23
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
18. SEGMENT
INFORMATION
The
Company’s four reportable segments are as follows: coated solutions, thermal
papers, security papers and performance packaging. Management evaluates the
performance of the segments based primarily on operating income. Items excluded
from the determination of segment operating income are unallocated corporate
charges, business development costs not associated with specific segments,
interest income, interest expense, debt extinguishment income and expense,
foreign currency gains and losses, the nonrecurring litigation settlement
and other income.
The
Company does not allocate total assets internally in assessing operating
performance and does not track capital expenditures by segment. Net sales,
operating income and depreciation and amortization, as determined by the Company
for its reportable segments, are as follows (dollars in thousands):
For
the Three
|
For
the Three
|
For
the Nine
|
For
the Nine
|
|||||||||||||
Months
Ended
|
Months
Ended
|
Months
Ended
|
Months
Ended
|
|||||||||||||
October 4,
2009
|
September 28,
2008
|
October 4,
2009
|
September 28,
2008
|
|||||||||||||
Net
sales
|
||||||||||||||||
Technical
Papers
|
||||||||||||||||
Coated
solutions
|
$
|
115,318
|
$
|
138,944
|
$
|
338,959
|
$
|
419,936
|
||||||||
Thermal
papers
|
71,139
|
78,793
|
206,624
|
212,577
|
||||||||||||
Security
papers
|
9,293
|
8,294
|
28,248
|
25,962
|
||||||||||||
195,750
|
226,031
|
573,831
|
658,475
|
|||||||||||||
Performance
packaging
|
26,597
|
29,644
|
74,477
|
83,925
|
||||||||||||
Total
|
$
|
222,347
|
$
|
255,675
|
$
|
648,308
|
$
|
742,400
|
||||||||
Operating
income (loss)
|
||||||||||||||||
Technical
Papers
|
||||||||||||||||
Coated
solutions
|
$
|
12,690
|
$
|
6,243
|
$
|
42,323
|
$
|
25,261
|
||||||||
Thermal
papers
|
(1,923
|
)
|
(2,862)
|
(7,666
|
)
|
870
|
||||||||||
Security
papers
|
2,840
|
1,194
|
7,242
|
2,966
|
||||||||||||
13,607
|
4,575
|
41,899
|
29,097
|
|||||||||||||
Performance
packaging
|
911
|
(15,157)
|
2,095
|
(11,936)
|
||||||||||||
Unallocated
corporate charges and business development costs
|
(6,627
|
)
|
(2,746
|
)
|
(10,390
|
)
|
(9,747
|
)
|
||||||||
Total
|
$
|
7,891
|
$
|
(13,328
|
)
|
$
|
33,604
|
$
|
7,414
|
|||||||
Depreciation
and amortization
|
||||||||||||||||
Technical
Papers
|
||||||||||||||||
Coated
solutions
|
$
|
8,397
|
$
|
8,558
|
$
|
24,523
|
$
|
26,900
|
||||||||
Thermal
papers
|
5,013
|
3,944
|
15,017
|
10,239
|
||||||||||||
Security
papers
|
695
|
761
|
2,085
|
2,283
|
||||||||||||
14,105
|
13,263
|
41,625
|
39,422
|
|||||||||||||
Performance
packaging
|
1,318
|
19,163
|
4,494
|
22,537
|
||||||||||||
Unallocated
corporate charges
|
106
|
15
|
318
|
48
|
||||||||||||
Total
|
$
|
15,529
|
$
|
32,441
|
$
|
46,437
|
$
|
62,007
|
||||||||
During
third quarter 2009, the Company recorded a $5.0 million alternative fuels tax
credit as a reduction to cost of sales, of which, $4.0 million was allocated to
coated solutions and the remainder to security papers. For the first nine months
of 2009, this fuels tax credit was $13.0 million and allocated $10.5 million to
coated solutions and $2.5 million to security papers. During the three and nine
months ended October 4, 2009, the Company recorded $4.2 million of costs, within
unallocated corporate charges and business development costs, associated with
the debt-for-debt exchange. The Company recorded a $17.7 million goodwill
impairment charge for the three and nine months ended September 28, 2008.
This charge is also included above in the depreciation and amortization
presented for performance packaging. No restructuring expense was recorded
during the three- and nine-month periods ended October 4, 2009 and
September 28, 2008.
24
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
19. ALTERNATIVE
FUELS TAX CREDIT
The U.S.
Internal Revenue Code provides a tax credit for companies that use alternative
fuel mixtures to produce energy to operate their businesses. The credit, equal
to $0.50 per gallon of alternative fuel contained in the mixture, is refundable
to the taxpayer. In February 2009, Appleton began mixing black liquor with
diesel fuel and using the mixture at its mill in Roaring Spring, Pennsylvania.
The Company applied to the Internal Revenue Service to be registered as an
alternative fuel mixer and received its registration in May 2009. As of
October 4, 2009, Appleton filed for excise tax refunds totaling $12.6
million and accrued $0.4 million for eligible alternative fuel usage through
October 4, 2009 to be included in subsequent filings. As of the end of
third quarter 2009, $1.2 million is recorded as a receivable in other current
assets in the accompanying Condensed Consolidated Balance Sheet. Accordingly,
the Condensed Consolidated Statement of Operations for the three and nine months
ended October 4, 2009 includes a $5.0 million and a $13.0 million tax
credit, respectively, as a reduction to cost of sales. This tax credit is
allocated to the appropriate business segments using estimated full year 2009
production volumes as a measure. For the three and nine months ended October 4,
2009, $4.0 million and $10.5 million, respectively, was allocated to coated
solutions. The remaining $1.0 million and $2.5 million was allocated to security
papers for the three and nine months, respectively. Expenses related to this
excise tax refund total $0.1 million and $0.2 million for the three and nine
months ended October 4, 2009, respectively. As of November 6, 2009,
$13.3 million has been received in cash from the Internal Revenue
Service.
20. GUARANTOR
FINANCIAL INFORMATION
Appleton
(the “Issuer”) has issued senior notes, as amended, and senior subordinated
notes, as amended, which have been guaranteed by PDC (the “Parent Guarantor”),
C&H, American Plastics Company, Inc., Rose Holdings Limited and New England
Extrusion Inc., each of which is a wholly-owned subsidiary of Appleton (the
“Subsidiary Guarantors”), and second lien notes which have been guaranteed by
the Parent Guarantor, C&H, American Plastics Company, Inc. and New England
Extrusion Inc. These guarantees are full, unconditional and joint and several.
Bemrose Group Limited, The Henry Booth Group Limited, BemroseBooth Limited and
Bemrose Security & Promotional Printing Limited were Subsidiary Guarantors
that were classified as discontinued operations during 2008 and disposed of in
third quarter 2008 as discussed in Note 2 to the Condensed Consolidated
Financial Statements. As of July 5, 2009, C&H is classified as held for
sale.
Presented
below is condensed consolidating financial information for the Parent Guarantor,
the Issuer, the Subsidiary Guarantors and a wholly-owned non-guarantor
subsidiary (the “Non-Guarantor Subsidiary”) as of October 4, 2009 and
January 3, 2009, and for the three and nine months
ended October 4, 2009 and September 28, 2008. This financial
information should be read in conjunction with the condensed consolidated
financial statements and other notes related thereto.
Separate
financial statements for the Parent and Subsidiary Guarantors are not presented
based on management’s determination that they would not provide additional
information that is material to readers of these financial
statements.
The
senior secured credit facilities, as amended, and the senior secured term note
payable, as amended, as well as the second lien notes place restrictions on the
subsidiaries of the Issuer that would limit dividend distributions by these
subsidiaries.
The three and
nine months ending September 28, 2008 Guarantor Condensed Consolidating
Statement of Operations and the nine months ending September 28, 2008, Cash Flow
reflect the correction of an error in the third quarter in the loss from
discontinued operations. The Issuer forgave a $50.5 million intercompany
loan receivable and other intercompany balances from Rose Holdings Limited, a
Subsidiary Guarantor, which was not reflected as a loss to the Issuer and a gain
to the Subsidiary Guarantor in the Condensed Consolidating Statement of
Operations and Cash Flow. This error did not impact the combined results
of the Issuer and the Subsidiary Guarantor as a
whole.
25
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
|
||||||||||||||||||||||||
CONDENSED CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
OCTOBER 4, 2009
|
||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||
Parent
Guarantor
|
Issuer
|
Subsidiary
Guarantors
|
Non-Guarantor
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Current
assets
|
||||||||||||||||||||||||
Cash and cash equivalents
|
$
|
-
|
$
|
2,355
|
$
|
249
|
$
|
935
|
$
|
-
|
$
|
3,539
|
||||||||||||
Accounts receivable, net
|
-
|
89,948
|
8,230
|
5,057
|
-
|
103,235
|
||||||||||||||||||
Inventories
|
-
|
101,426
|
9,156
|
1,889
|
-
|
112,471
|
||||||||||||||||||
Other current assets
|
37,700
|
8,587
|
162
|
274
|
-
|
46,723
|
||||||||||||||||||
Assets held for sale
|
-
|
-
|
9,073
|
-
|
-
|
9,073
|
||||||||||||||||||
Total
current assets
|
37,700
|
202,316
|
26,870
|
8,155
|
-
|
275,041
|
||||||||||||||||||
Property, plant and equipment, net
|
-
|
392,284
|
20,624
|
10
|
-
|
412,918
|
||||||||||||||||||
Investment in subsidiaries
|
195,060
|
127,715
|
-
|
-
|
(322,775
|
)
|
-
|
|||||||||||||||||
Other assets
|
38,125
|
67,838
|
27,360
|
46
|
-
|
133,369
|
||||||||||||||||||
Assets held for sale
|
-
|
-
|
8,806
|
-
|
-
|
8,806
|
||||||||||||||||||
Total assets
|
$
|
270,885
|
$
|
790,153
|
$
|
83,660
|
$
|
8,211
|
$
|
(322,775
|
)
|
$
|
830,134
|
|||||||||||
LIABILITIES,
REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER
COMPREHENSIVE LOSS
|
||||||||||||||||||||||||
Current
liabilities
|
||||||||||||||||||||||||
Current portion of long-term debt
|
$
|
-
|
$
|
5,967
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
5,967
|
||||||||||||
Accounts payable
|
-
|
55,491
|
1,148
|
184
|
-
|
56,823
|
|
|||||||||||||||||
Due to (from) parent and affiliated companies
|
347,276
|
(304,984
|
)
|
(36,728
|
)
|
(5,564
|
)
|
-
|
-
|
|||||||||||||||
Other accrued liabilities
|
-
|
83,212
|
1,061
|
1,857
|
-
|
86,130
|
||||||||||||||||||
Liabilities held for sale
|
-
|
-
|
2,198
|
-
|
-
|
2,198
|
||||||||||||||||||
Total current liabilities
|
347,276
|
(160,314
|
)
|
(32,321
|
)
|
(3,523
|
)
|
-
|
151,118
|
|||||||||||||||
Long-term
debt
|
-
|
558,900
|
-
|
-
|
-
|
558,900
|
||||||||||||||||||
Other
long-term liabilities
|
-
|
196,507
|
-
|
-
|
-
|
196,507
|
||||||||||||||||||
Redeemable
common stock, accumulated deficit and accumulated other comprehensive
loss
|
(76,391
|
)
|
195,060
|
115,981
|
11,734
|
(322,775
|
)
|
(76,391
|
)
|
|||||||||||||||
Total
liabilities, redeemable common stock, accumulated deficit and accumulated
other comprehensive loss
|
$
|
270,885
|
$
|
790,153
|
$
|
83,660
|
$
|
8,211
|
$
|
(322,775
|
)
|
$
|
830,134
|
26
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
|
||||||||||||||||||||||||
CONDENSED CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
JANUARY 3, 2009
|
||||||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||
Parent
Guarantor
|
Issuer
|
Subsidiary
Guarantors
|
Non-Guarantor
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Current
assets
|
||||||||||||||||||||||||
Cash and cash equivalents
|
$
|
-
|
$
|
2,111
|
$
|
65
|
$
|
2,004
|
$
|
-
|
$
|
4,180
|
||||||||||||
Accounts receivable, net
|
-
|
73,738
|
9,057
|
5,423
|
-
|
88,218
|
||||||||||||||||||
Inventories
|
-
|
113,406
|
9,461
|
1,989
|
-
|
124,856
|
||||||||||||||||||
Other current assets
|
37,700
|
6,343
|
1,674
|
203
|
-
|
45,920
|
||||||||||||||||||
Assets held for sale
|
-
|
-
|
9,327
|
-
|
-
|
9,327
|
||||||||||||||||||
Total
current assets
|
37,700
|
195,598
|
29,584
|
9,619
|
-
|
272,501
|
||||||||||||||||||
Property, plant and equipment, net
|
-
|
416,630
|
22,658
|
13
|
-
|
439,301
|
||||||||||||||||||
Investment in subsidiaries
|
146,562
|
124,971
|
-
|
-
|
(271,533
|
)
|
-
|
|||||||||||||||||
Other assets
|
114,312
|
66,964
|
27,547
|
41
|
-
|
208,864
|
||||||||||||||||||
Assets held for sale
|
-
|
-
|
9,255
|
-
|
-
|
9,255
|
||||||||||||||||||
Total assets
|
$
|
298,574
|
$
|
804,163
|
$
|
89,044
|
$
|
9,673
|
$
|
(271,533
|
)
|
$
|
929,921
|
|||||||||||
LIABILITIES,
REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER
COMPREHENSIVE LOSS
|
||||||||||||||||||||||||
Current
liabilities
|
||||||||||||||||||||||||
Current portion of long-term debt
|
$
|
-
|
$
|
5,455
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
5,455
|
||||||||||||
Accounts payable
|
-
|
60,573
|
395
|
125
|
-
|
61,093
|
|
|||||||||||||||||
Due to (from) parent and affiliated companies
|
405,519
|
(373,446
|
)
|
(28,861
|
)
|
(3,212
|
)
|
-
|
-
|
|||||||||||||||
Other accrued liabilities
|
-
|
83,916
|
1,221
|
1,993
|
-
|
87,130
|
||||||||||||||||||
Liabilities held for sale
|
-
|
-
|
2,085
|
-
|
-
|
2,085
|
||||||||||||||||||
Total current liabilities
|
405,519
|
(223,502
|
)
|
(25,160
|
)
|
(1,094
|
)
|
-
|
155,763
|
|||||||||||||||
Long-term
debt
|
-
|
598,598
|
-
|
-
|
-
|
598,598
|
||||||||||||||||||
Other
long-term liabilities
|
-
|
282,505
|
-
|
-
|
-
|
282,505
|
||||||||||||||||||
Redeemable
common stock, accumulated deficit and accumulated other comprehensive
loss
|
(106,945
|
)
|
146,562
|
114,204
|
10,767
|
(271,533
|
)
|
(106,945
|
)
|
|||||||||||||||
Total
liabilities, redeemable common stock, accumulated deficit and accumulated
other comprehensive loss
|
$
|
298,574
|
$
|
804,163
|
$
|
89,044
|
$
|
9,673
|
$
|
(271,533
|
)
|
$
|
929,921
|
27
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
FOR
THE NINE MONTHS ENDED OCTOBER 4, 2009
|
||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||||||
Guarantor
|
Issuer
|
Guarantors
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Net
sales
|
$
|
-
|
$
|
572,605
|
$
|
74,477
|
$
|
33,428
|
$
|
(32,202
|
)
|
$
|
648,308
|
|||||||||||
Cost
of sales
|
-
|
447,303
|
62,017
|
32,761
|
(32,499
|
)
|
509,582
|
|||||||||||||||||
Gross
profit
|
-
|
125,302
|
12,460
|
667
|
297
|
138,726
|
||||||||||||||||||
Selling,
general and administrative expenses
|
-
|
93,335
|
10,653
|
1,134
|
-
|
105,122
|
||||||||||||||||||
Operating
income (loss)
|
-
|
31,967
|
1,807
|
(467
|
)
|
297
|
33,604
|
|||||||||||||||||
Interest
expense
|
9,378
|
38,209
|
25
|
-
|
(9,403
|
)
|
38,209
|
|||||||||||||||||
Debt
extinguishment income, net
|
-
|
(42,746
|
)
|
-
|
-
|
-
|
(42,746
|
)
|
||||||||||||||||
Interest
income
|
-
|
(9,423
|
)
|
(25
|
)
|
(2
|
)
|
9,403
|
(47
|
)
|
||||||||||||||
Income
in equity investments
|
(49,228
|
)
|
(2,913
|
)
|
-
|
-
|
52,141
|
-
|
||||||||||||||||
Other
income
|
-
|
(699
|
)
|
-
|
(1,254
|
)
|
128
|
(1,825
|
)
|
|||||||||||||||
Income
before income taxes
|
39,850
|
49,539
|
1,807
|
789
|
(51,972
|
)
|
40,013
|
|||||||||||||||||
Provision
(benefit) for income taxes
|
-
|
311
|
30
|
(178
|
)
|
-
|
163
|
|||||||||||||||||
Net
income
|
$
|
39,850
|
$
|
49,228
|
$
|
1,777
|
$
|
967
|
$
|
(51,972
|
)
|
$
|
39,850
|
28
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
FOR
THE NINE MONTHS ENDED SEPTEMBER 28, 2008
|
||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||||||
Guarantor
|
Issuer
|
Guarantors
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Net
sales
|
$
|
-
|
$
|
656,732
|
$
|
83,929
|
$
|
45,087
|
$
|
(43,348
|
)
|
$
|
742,400
|
|||||||||||
Cost
of sales
|
-
|
524,666
|
67,336
|
43,684
|
(43,664
|
)
|
592,022
|
|||||||||||||||||
Gross
profit
|
-
|
132,066
|
16,593
|
1,403
|
316
|
150,378
|
||||||||||||||||||
Selling,
general and administrative expenses
|
-
|
112,614
|
11,091
|
1,575
|
-
|
125,280
|
||||||||||||||||||
Goodwill
impairment
|
-
|
-
|
17,684
|
-
|
-
|
17,684
|
||||||||||||||||||
Operating
income (loss)
|
-
|
19,452
|
(12,182
|
)
|
(172
|
)
|
316
|
7,414
|
||||||||||||||||
Interest
expense
|
8,814
|
32,034
|
53
|
-
|
(8,867
|
)
|
32,034
|
|||||||||||||||||
Interest
income
|
-
|
(11,742
|
)
|
(78
|
)
|
(54
|
)
|
11,509
|
(365
|
)
|
||||||||||||||
Loss
in equity investments
|
42,493
|
9,471
|
-
|
-
|
(51,964
|
)
|
-
|
|||||||||||||||||
Litigation
settlement, net
|
-
|
(22,274
|
)
|
-
|
-
|
-
|
(22,274
|
)
|
||||||||||||||||
Other
expense
|
-
|
987
|
453
|
591
|
(31
|
)
|
2,000
|
|||||||||||||||||
(Loss)
income from continuing
operations
before income taxes
|
(51,307
|
)
|
10,976
|
(12,610
|
)
|
(709
|
)
|
49,669
|
(3,981
|
)
|
||||||||||||||
Provision
for income taxes
|
-
|
138
|
39
|
-
|
-
|
177
|
||||||||||||||||||
(Loss)
income from continuing
operations
|
(51,307
|
)
|
10,838
|
(12,649
|
)
|
(709
|
)
|
49,669
|
(4,158
|
)
|
||||||||||||||
(Loss)
income from discontinued operations,
net
of income taxes
|
-
|
(53,331
|
)
|
3,540
|
-
|
2,642
|
(47,149
|
)
|
||||||||||||||||
Net
loss
|
$
|
(51,307
|
)
|
$
|
(42,493
|
)
|
$
|
(9,109
|
)
|
$
|
(709
|
)
|
$
|
52,311
|
$
|
(51,307
|
)
|
29
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
FOR
THE THREE MONTHS ENDED OCTOBER 4, 2009
|
||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||||||
Guarantor
|
Issuer
|
Guarantors
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Net
sales
|
$
|
-
|
$
|
194,564
|
$
|
26,598
|
$
|
11,428
|
$
|
(10,243
|
)
|
$
|
222,347
|
|||||||||||
Cost
of sales
|
-
|
153,486
|
21,744
|
10,799
|
(10,447
|
)
|
175,582
|
|||||||||||||||||
Gross
profit
|
-
|
41,078
|
4,854
|
629
|
204
|
46,765
|
||||||||||||||||||
Selling,
general and administrative expenses
|
-
|
34,303
|
4,176
|
395
|
-
|
38,874
|
||||||||||||||||||
Operating
income
|
-
|
6,775
|
678
|
234
|
204
|
7,891
|
||||||||||||||||||
Interest
expense
|
3,194
|
13,987
|
8
|
-
|
(3,202
|
)
|
13,987
|
|||||||||||||||||
Debt
extinguishment income, net
|
-
|
(37,366
|
)
|
-
|
-
|
-
|
(37,366
|
)
|
||||||||||||||||
Interest
income
|
-
|
(3,203
|
)
|
(8
|
)
|
(1
|
)
|
3,202
|
(10
|
)
|
||||||||||||||
Income
in equity investments
|
(34,637
|
)
|
(1,591
|
)
|
-
|
-
|
36,228
|
-
|
||||||||||||||||
Other
expense (income)
|
-
|
160
|
-
|
(769
|
)
|
206
|
(403
|
)
|
||||||||||||||||
Income
before income taxes
|
31,443
|
34,788
|
678
|
1,004
|
(36,230
|
)
|
31,683
|
|||||||||||||||||
Provision
for income taxes
|
-
|
151
|
9
|
80
|
-
|
240
|
||||||||||||||||||
Net
income
|
$
|
31,443
|
$
|
34,637
|
$
|
669
|
$
|
924
|
$
|
(36,230
|
)
|
$
|
31,443
|
30
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
FOR
THE THREE MONTHS ENDED SEPTEMBER 28, 2008
|
||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||||||
Guarantor
|
Issuer
|
Guarantors
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Net
sales
|
$
|
-
|
$
|
222,662
|
$
|
29,700
|
$
|
15,237
|
$
|
(11,924
|
)
|
$
|
255,675
|
|||||||||||
Cost
of sales
|
-
|
185,193
|
23,588
|
14,247
|
(11,855
|
)
|
211,173
|
|||||||||||||||||
Gross
profit
|
-
|
37,469
|
6,112
|
990
|
(69
|
)
|
44,502
|
|||||||||||||||||
Selling,
general and administrative expenses
|
-
|
35,978
|
3,614
|
554
|
-
|
40,146
|
||||||||||||||||||
Goodwill
impairment
|
-
|
-
|
17,684
|
-
|
-
|
17,684
|
||||||||||||||||||
Operating
income (loss)
|
-
|
1,491
|
(15,186
|
)
|
436
|
(69
|
)
|
(13,328
|
)
|
|||||||||||||||
Interest
expense
|
2,985
|
10,748
|
53
|
-
|
(3,038
|
)
|
10,748
|
|||||||||||||||||
Interest
income
|
-
|
(3,455
|
)
|
(78
|
)
|
(21
|
)
|
3,426
|
(128
|
)
|
||||||||||||||
Loss
(income) in equity investments
|
27,046
|
(32,189
|
)
|
-
|
-
|
5,143
|
-
|
|||||||||||||||||
Other
expense
|
-
|
1,120
|
453
|
302
|
(101
|
)
|
1,774
|
|||||||||||||||||
(Loss)
income from
continuing
operations before income taxes
|
(30,031
|
)
|
25,267
|
(15,614
|
)
|
155
|
(5,499
|
)
|
(25,722
|
)
|
||||||||||||||
Provision
for income taxes
|
-
|
75
|
10
|
-
|
-
|
85
|
||||||||||||||||||
(Loss)
income from continuing
operations
|
(30,031
|
)
|
25,192
|
(15,624
|
)
|
155
|
(5,499
|
)
|
(25,807
|
)
|
||||||||||||||
(Loss)
income from discontinued operations, net of
income taxes
|
-
|
(52,238
|
)
|
47,626
|
-
|
388
|
(4,224
|
)
|
||||||||||||||||
Net
(loss) income
|
$
|
(30,031
|
)
|
$
|
(27,046
|
)
|
$
|
32,002
|
$
|
155
|
$
|
(5,111
|
)
|
$
|
(30,031
|
)
|
31
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
FOR
THE NINE MONTHS ENDED OCTOBER 4, 2009
|
||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||||||
Guarantor
|
Issuer
|
Guarantors
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||||||
Net
income
|
$
|
39,850
|
$
|
49,228
|
$
|
1,777
|
$
|
967
|
$
|
(51,972
|
)
|
$
|
39,850
|
|||||||||||
Adjustments
to reconcile net income to net cash provided (used) by operating
activities:
|
||||||||||||||||||||||||
Depreciation
and amortization
|
-
|
42,055
|
4,378
|
4
|
-
|
46,437
|
||||||||||||||||||
Other
|
-
|
(37,188
|
)
|
-
|
(1,254
|
)
|
-
|
(38,442
|
)
|
|||||||||||||||
Change
in assets and liabilities, net
|
28,904
|
(88,961
|
)
|
2,783
|
1,566
|
51,972
|
(3,736
|
)
|
||||||||||||||||
Net
cash provided (used) by operating activities
|
68,754
|
(34,866
|
)
|
8,938
|
1,283
|
-
|
44,109
|
|||||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||||||
Proceeds
from sale of equipment
|
-
|
27
|
-
|
-
|
-
|
27
|
||||||||||||||||||
Additions
to property, plant and equipment
|
-
|
(15,164
|
)
|
(887
|
)
|
-
|
-
|
(16,051
|
)
|
|||||||||||||||
Net
cash used by investing activities
|
-
|
(15,137
|
)
|
(887
|
)
|
-
|
-
|
(16,024
|
)
|
|||||||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||||||
Payments
of senior secured notes payable
|
-
|
(1,687
|
)
|
-
|
-
|
-
|
(1,687
|
)
|
||||||||||||||||
Payments
of senior subordinated notes payable
|
-
|
(1,687
|
)
|
-
|
-
|
-
|
(1,687
|
)
|
||||||||||||||||
Debt
acquisition costs
|
-
|
(8,282
|
)
|
-
|
-
|
-
|
(8,282
|
)
|
||||||||||||||||
Payments
relating to capital lease obligation
|
-
|
(548
|
)
|
-
|
-
|
-
|
(548
|
)
|
||||||||||||||||
Proceeds
from revolving line of credit
|
-
|
185,341
|
-
|
-
|
-
|
185,341
|
||||||||||||||||||
Payments
of revolving line of credit
|
-
|
(175,450
|
)
|
-
|
-
|
-
|
(175,450
|
)
|
||||||||||||||||
Proceeds
from State of Ohio loan
|
-
|
3,000
|
-
|
-
|
-
|
3,000
|
||||||||||||||||||
Payments
of State of Ohio loan
|
-
|
(677
|
)
|
-
|
-
|
-
|
(677
|
)
|
||||||||||||||||
Payments
of secured financing
|
-
|
(1,715
|
)
|
-
|
-
|
-
|
(1,715
|
)
|
||||||||||||||||
Due
to parent and affiliated companies, net
|
(58,243
|
)
|
68,462
|
(7,867
|
)
|
(2,352
|
)
|
-
|
-
|
|||||||||||||||
Proceeds
from issuance of redeemable common stock
|
2,075
|
-
|
-
|
-
|
2,075
|
|||||||||||||||||||
Payments
to redeem common stock
|
(12,586
|
)
|
-
|
-
|
-
|
-
|
(12,586
|
)
|
||||||||||||||||
Decrease
in cash overdraft
|
-
|
(16,510
|
)
|
-
|
-
|
-
|
(16,510
|
)
|
||||||||||||||||
Net
cash (used) provided by financing activities
|
(68,754
|
)
|
50,247
|
(7,867
|
)
|
(2,352
|
)
|
-
|
(28,726
|
)
|
||||||||||||||
-
|
||||||||||||||||||||||||
Change
in cash and cash equivalents
|
-
|
244
|
184
|
(1,069
|
)
|
-
|
(641
|
)
|
||||||||||||||||
Cash
and cash equivalents at beginning of period
|
-
|
2,111
|
65
|
2,004
|
-
|
4,180
|
||||||||||||||||||
Cash
and cash equivalents at end of period
|
$
|
-
|
$
|
2,355
|
$
|
249
|
$
|
935
|
$
|
-
|
$
|
3,539
|
32
PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
FOR
THE NINE MONTHS ENDED SEPTEMBER 28, 2008
|
||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||||||
Guarantor
|
Issuer
|
Guarantors
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||||||
Net
loss
|
$
|
(51,307
|
)
|
$
|
(42,493
|
)
|
$
|
(9,109
|
)
|
$
|
(709
|
)
|
$
|
52,311
|
$
|
(51,307
|
)
|
|||||||
Adjustments
to reconcile net loss to net cash (used) provided by operating
activities:
|
||||||||||||||||||||||||
Depreciation
and amortization
|
-
|
39,981
|
4,334
|
8
|
-
|
44,323
|
||||||||||||||||||
Impairment
of continuing operations
|
-
|
17,684
|
-
|
17,684
|
||||||||||||||||||||
Impairment
of discontinued operations
|
-
|
42,207
|
-
|
42,207
|
||||||||||||||||||||
Other
|
-
|
9,094
|
264
|
591
|
-
|
9,949
|
||||||||||||||||||
Change
in assets and liabilities, net
|
50,081
|
(68,338
|
)
|
1,096
|
1,530
|
(52,311
|
)
|
(67,942
|
)
|
|||||||||||||||
Net
cash (used) provided by operating activities
|
(1,226
|
)
|
(61,756
|
)
|
56,476
|
1,420
|
-
|
(5,086
|
)
|
|||||||||||||||
Cash
flows from investing activities:
|
-
|
-
|
||||||||||||||||||||||
Proceeds
from sale of equipment
|
-
|
8
|
-
|
-
|
-
|
8
|
||||||||||||||||||
Net
change in cash due to sale of Bemrose Group Limited
|
3,913
|
(6,805
|
)
|
(2,892
|
)
|
|||||||||||||||||||
Additions
to property, plant and equipment
|
-
|
(73,413
|
)
|
(1,225
|
)
|
-
|
-
|
(74,638
|
)
|
|||||||||||||||
Net
cash used by investing activities
|
-
|
(69,492
|
)
|
(8,030
|
)
|
-
|
-
|
(77,522
|
)
|
|||||||||||||||
Cash
flows from financing activities:
|
-
|
|||||||||||||||||||||||
Payments
of senior secured notes payable
|
-
|
(1,687
|
)
|
-
|
-
|
-
|
(1,687
|
)
|
||||||||||||||||
Payments
relating to capital lease obligation
|
-
|
(548
|
)
|
-
|
-
|
-
|
(548
|
)
|
||||||||||||||||
Proceeds
from revolving line of credit
|
-
|
272,607
|
-
|
-
|
-
|
272,607
|
||||||||||||||||||
Payments
of revolving line of credit
|
-
|
(214,272
|
)
|
-
|
-
|
-
|
(214,272
|
)
|
||||||||||||||||
Payments
of State of Ohio financing
|
-
|
(130
|
)
|
-
|
-
|
-
|
(130
|
)
|
||||||||||||||||
Due
to parent and affiliated companies, net
|
14,996
|
44,631
|
(57,394
|
)
|
(2,233
|
)
|
-
|
-
|
||||||||||||||||
Proceeds
from issuance of redeemable common stock
|
3,721
|
-
|
-
|
-
|
3,721
|
|||||||||||||||||||
Payments
to redeem common stock
|
(17,491
|
)
|
-
|
-
|
-
|
-
|
(17,491
|
)
|
||||||||||||||||
Increase
in cash overdraft
|
-
|
3,083
|
-
|
-
|
-
|
3,083
|
||||||||||||||||||
Net
cash provided (used) by financing activities
|
1,226
|
103,684
|
(57,394
|
)
|
(2,233
|
)
|
-
|
45,283
|
||||||||||||||||
-
|
||||||||||||||||||||||||
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
321
|
-
|
-
|
321
|
||||||||||||||||||||
Change
in cash and cash equivalents
|
-
|
(27,243
|
)
|
(8,948
|
)
|
(813
|
)
|
-
|
(37,004
|
)
|
||||||||||||||
Cash
and cash equivalents at beginning of period
|
-
|
33,567
|
9,247
|
2,024
|
-
|
44,838
|
||||||||||||||||||
Cash
and cash equivalents at end of period
|
$
|
-
|
$
|
6,324
|
$
|
299
|
$
|
1,211
|
$
|
-
|
$
|
7,834
|
33
Item 2—Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Unless
stated to the contrary or the context requires otherwise, all references to
“Paperweight Development,” “PDC” or “Company” refer to Paperweight Development
Corp. and its subsidiaries and predecessors. Appleton Papers Inc. is a
wholly-owned subsidiary of Paperweight Development, which is referred to as
“Appleton” in this report.
Overview
This
discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of PDC and Appleton for the
quarter ended October 4, 2009. This discussion should be read in
conjunction with the accompanying Condensed Consolidated Financial Statements
and related Notes.
Reference
should also be made to the Annual Report on Form 10-K for the year ended
January 3, 2009, the consolidated financial statements and related notes
included therein.
Financial
Highlights
Net sales
for third quarter 2009 totaled $222.3 million, compared to $255.7 million for
third quarter 2008. This 13.1% decrease in net sales was largely due to
continued weak demand and highly competitive pricing within the paper business.
Technical Papers third quarter 2009 net sales decreased by $30.3 million, or
13.4%, when compared to net sales during third quarter 2008. Third quarter 2009
net sales within the packaging business were $3.1 million, or 10.3%, lower than
net sales for the same quarter last year. This decrease in revenue was largely
due to lower selling prices to the customer in response to lower resin prices.
Net sales for the nine months ended October 4, 2009 totaled $648.3 million,
compared to $742.4 million for the nine months ended September 28,
2008.
Income
from continuing operations was $31.4 million for third quarter 2009 compared to
a loss from continuing operations of $25.8 million in third quarter 2008. Third
quarter 2009 results include a $37.4 million net gain on debt extinguishment
from the voluntary debt-for-debt exchange transaction that was completed on
September 30, 2009. This transaction exchanged $92.0 million of Appleton’s
8.125% senior notes payable due June 2011 and $110.3 million of 9.75% senior
subordinated notes payable due June 2014 for $158.2 million of newly issued
11.25% second lien notes payable due December 2015, and resulted in a debt
reduction of $44.1 million. As a result of this transaction, $3.7 million of
previously capitalized debt issuance costs were written off and $3.0 million of
debt extinguishment costs were recorded on the Condensed Consolidated Statement
of Operations for the period ended October 4, 2009. Total transaction fees
included $3.6 million of consent fees paid to the holders in-kind with
additional second lien notes. In total, $161.8 million of 11.25% second lien
notes were issued as a result of this debt exchange. A detailed discussion is
included in “Liquidity and Capital Resources.” Also during third quarter 2009,
the Company recorded a $5.0 million alternative fuels tax credit as a reduction
to cost of sales. During third quarter 2008, the Company recorded a $17.7
million goodwill impairment charge within its performance packaging business and
$5.2 million of start-up costs associated with the paper mill expansion project
in West Carrollton, Ohio. For the three months ended October 4, 2009, the
Company reported net income of $31.4 million compared to a net loss of $30.0
million for the three months ended September 28, 2008.
During
second quarter 2009, Appleton committed to a formal plan to sell C&H
Packaging Company, Inc. (“C&H”). C&H, located in Merrill, Wisconsin, was
acquired in 2003 and prints and converts flexible plastic packaging materials
for companies in the food processing, household and industrial products
industries. The assets and liabilities of C&H are reported as held for sale
for the periods ended October 4, 2009 and January 3, 2009. As of
the end of second quarter 2009, depreciation and amortization expense was
suspended, resulting in a $0.2 million reduction in expense. The sale is
expected to be completed prior to the end of 2009. C&H is included within
the performance packaging business segment.
34
Comparison
of Unaudited Results of Operations for the Quarters Ended October 4, 2009
and September 28, 2008
For
the Quarter Ended
|
||||||||||||
October 4,
|
September 28,
|
%
|
||||||||||
2009
|
2008
|
Chg
|
||||||||||
(dollars
in millions)
|
||||||||||||
Net
sales
|
$
|
222.3
|
$
|
255.7
|
-13.1
|
%
|
||||||
Cost
of sales
|
175.5
|
211.2
|
-16.9
|
%
|
||||||||
Gross
profit
|
46.8
|
44.5
|
5.2
|
%
|
||||||||
Selling,
general and administrative expenses
|
38.9
|
40.1
|
-3.0
|
%
|
||||||||
Goodwill
impairment
|
|
-
|
|
17.7
|
-100.0
|
%
|
||||||
Operating
income (loss)
|
7.9
|
(13.3)
|
159.4
|
%
|
||||||||
Interest
expense, net
|
14.0
|
10.6
|
32.1
|
%
|
||||||||
Debt
extinguishment income, net
|
|
(37.4)
|
-
|
100.0
|
%
|
|||||||
Other
non-operating (income) loss, net
|
(0.4)
|
1.8
|
122.2
|
%
|
||||||||
Income
(loss) from continuing operations before income
taxes
|
31.7
|
(25.7)
|
223.3
|
%
|
||||||||
Provision
for income taxes
|
0.3
|
0.1
|
200.0
|
%
|
||||||||
Income
(loss) from continuing operations
|
31.4
|
(25.8)
|
221.7
|
%
|
||||||||
Loss
from discontinued operations, net of income taxes
|
-
|
(4.2)
|
-100.0
|
%
|
||||||||
Net
income (loss)
|
$
|
31.4
|
$
|
(30.0)
|
204.7
|
%
|
||||||
Comparison
as a percentage of net sales
|
||||||||||||
Cost
of sales
|
78.9
|
%
|
82.6
|
%
|
-3.7
|
%
|
||||||
Gross
margin
|
21.1
|
%
|
17.4
|
%
|
3.7
|
%
|
||||||
Selling,
general and administrative expenses
|
17.5
|
%
|
15.7
|
%
|
1.8
|
%
|
||||||
Operating
margin
|
3.6
|
%
|
-5.2
|
%
|
8.8
|
%
|
||||||
Income
(loss) from continuing operations before income
taxes
|
14.3
|
%
|
-10.1
|
%
|
24.4
|
%
|
||||||
Income
(loss) from continuing operations
|
14.1
|
%
|
-10.1
|
%
|
24.2
|
%
|
||||||
Loss
from discontinued operations, net of income taxes
|
-
|
-1.6
|
%
|
1.6
|
%
|
|||||||
Net
income (loss)
|
14.1
|
%
|
-11.7
|
%
|
25.8
|
%
|
Net sales
for third quarter 2009 were $222.3 million, a decrease of $33.4 million, or
13.1%, compared to the prior year period. This reduction was largely due to
volume shortfalls and aggressive price competition.
Operating
income in third quarter 2009 was $7.9 million compared to a third quarter 2008
operating loss of $13.3 million. During third quarter 2009, the Company recorded
a $5.0 million alternative fuels tax credit as a reduction to cost of sales.
Though operating income was negatively impacted by volume shortfalls and
unfavorable pricing, this was partially offset by a 3.0% reduction in selling,
general and administrative expenses which included a year-on-year reduction in
distribution costs of $4.9 million due to lower volumes and rates. Third quarter
2009 selling, general and administrative expenses also included $4.2 million of
costs associated with the debt-for-debt exchange and higher bad debt expense.
The operating loss recorded during third quarter 2008 included a $17.7 million
goodwill impairment charge within the performance packaging business and $5.2
million of start-up costs associated with the paper mill expansion project in
West Carrollton, Ohio.
Third
quarter 2009 net interest expense of $14.0 million increased 32.1% compared to
third quarter 2008 as the result of increased utilization of the revolving
credit facility and increased interest rates.
Income
from continuing operations of $31.4 million was recorded in third quarter 2009
compared to a loss from continuing operations of $25.8 million recorded in third
quarter 2008. Third quarter 2009 results include a $37.4 million net gain on
debt extinguishment from the debt-for-debt exchange transaction that was
completed on September 30, 2009.
The third quarter 2008 loss from discontinued operations of $4.2
million was entirely related to Bemrose Group Limited, which was sold on August
1, 2008.
35
Comparison
of Unaudited Results of Operations for the Nine Months Ended October 4, 2009 and
September 28, 2008
For
the Nine Months Ended
|
||||||||||||
October 4,
|
September 28,
|
%
|
||||||||||
2009
|
2008
|
Chg
|
||||||||||
(dollars
in millions)
|
||||||||||||
Net
sales
|
$
|
648.3
|
$
|
742.4
|
-12.7
|
%
|
||||||
Cost
of sales
|
509.6
|
592.0
|
-13.9
|
%
|
||||||||
Gross
profit
|
138.7
|
150.4
|
-7.8
|
%
|
||||||||
Selling,
general and administrative expenses
|
105.1
|
125.3
|
-16.1
|
%
|
||||||||
Goodwill
impairment
|
-
|
17.7
|
-100.0
|
%
|
||||||||
Operating
income
|
33.6
|
7.4
|
354.1
|
%
|
||||||||
Interest
expense, net
|
38.1
|
31.7
|
20.2
|
%
|
||||||||
Debt
extinguishment income, net
|
(42.7)
|
-
|
100.0
|
%
|
||||||||
Other
non-operating income, net
|
(1.8)
|
(20.3)
|
-91.1
|
%
|
||||||||
Income
(loss) from continuing operations before income
taxes
|
40.0
|
(4.0)
|
nm
|
|||||||||
Provision
for income taxes
|
0.1
|
0.2
|
-50.0
|
%
|
||||||||
Income
(loss) from continuing operations
|
39.9
|
(4.2)
|
nm
|
|||||||||
Loss
from discontinued operations, net of income taxes
|
-
|
(47.1)
|
-100.0
|
%
|
||||||||
Net
income (loss)
|
$
|
39.9
|
$
|
(51.3)
|
177.8
|
%
|
||||||
Comparison
as a percentage of net sales
|
||||||||||||
Cost
of sales
|
78.6
|
%
|
79.7
|
%
|
-1.1
|
%
|
||||||
Gross
margin
|
21.4
|
%
|
20.3
|
%
|
1.1
|
%
|
||||||
Selling,
general and administrative expenses
|
16.2
|
%
|
16.9
|
%
|
-0.7
|
%
|
||||||
Operating
margin
|
5.2
|
%
|
1.0
|
%
|
4.2
|
%
|
||||||
Income
from continuing operations before income taxes
|
6.2
|
%
|
-0.5
|
%
|
6.7
|
%
|
||||||
Income
from continuing operations
|
6.2
|
%
|
-0.6
|
%
|
6.8
|
%
|
||||||
Loss
from discontinued operations, net of income taxes
|
-
|
-6.3
|
%
|
6.3
|
%
|
|||||||
Net
income (loss)
|
6.2
|
%
|
-6.9
|
%
|
13.1
|
%
|
Net sales
for the first nine months of 2009 were $648.3 million, a decrease of $94.1
million, or 12.7%, compared to the prior year period. The decrease in net sales
for the first nine months of 2009 was largely due to continued weak demand and
highly competitive pricing within the paper business and lower selling prices to
packaging customers in response to lower resin prices.
Operating
income in the first nine months of 2009 was $33.6 million compared to $7.4
million for the prior year period. Through the first three quarters of 2009,
Appleton recorded a $13.0 million alternative fuels tax credit as a reduction to
cost of sales. Though operating income was negatively impacted by volume
shortfalls and unfavorable pricing, this was partially offset by a 16.1%
reduction in selling, general and administrative expenses. Within selling,
general and administrative costs, distribution costs were $14.1 million lower
than the year earlier period due to lower volumes and rates. Salaries and
related expenses were approximately $7.2 million lower than such expenses for
the nine months ended September 28, 2008, as a result of the headcount
reductions made during 2008, furloughs taken during 2009, reduced severance
expense and curtailment of the company match on the 401(k). Other areas of
significantly reduced spending included legal fees and travel and entertainment.
The positive impact of this reduced spending was partially offset by higher
group health, pension and bad debt expense. Appleton also recorded $4.2 million
of costs associated with the debt-for-debt exchange. The first three quarters of
2008 also included a recovery of $3.0 million of incentive compensation expense
largely the result of a reduction in the June 2008 share price. Third quarter
2008 operating income also included a $17.7 million goodwill impairment charge
within the performance packaging business and $9.0 million of start-up costs
associated with the paper mill expansion project in West Carrollton,
Ohio.
Net interest expense of $38.1 million for the first three quarters of
2009 increased 20.2% compared to the same period in 2008 as the result of
increased utilization of the revolving credit facility and increased interest
rates.
36
Continuing
operations reported $39.9 million of income for the first nine months of 2009
compared to a loss from continuing operations of $4.2 million recorded during
the first nine months of 2008. Current year results include a $37.4 million net
gain on debt extinguishment from the debt-for-debt exchange transaction that was
completed on September 30, 2009. The nine months ended September 28,
2008, included a $22.3 million net litigation settlement gain as the result of
prevailing in a lawsuit to recover previously incurred costs from an insurance
carrier. There was also a $17.7 million goodwill impairment charge taken within
the performance packaging business.
The $47.1
million loss from discontinued operations, recorded during the first nine months
of 2008, was entirely related to Bemrose Group Limited.
Business
Segment Discussion
Technical
Papers
Third
quarter Technical Papers net sales of $195.7 million were $30.3 million lower
than third quarter 2008 net sales. Technical Papers net sales for the first nine
months of 2009 were $573.8 million. This was $84.6 million lower compared to the
first nine months of 2008. Third quarter operating income of $13.6 million was
$9.0 million higher than third quarter 2008 operating income. Operating income
for the nine months ended October 4, 2009 was $41.9 million or $12.8
million higher than the first nine months of 2008. The year-on-year operating
income variances were the result of the following.
For
the Three
Months
Ended October 4, 2009 v.
the
Three Months Ended
|
For
the Nine Months Ended October 4, 2009 v. the Nine Months
Ended
|
|||||||
September 28,
2008
|
September 28,
2008
|
|||||||
(dollars
in millions)
|
||||||||
Lower
shipment volumes
|
$
|
(4.3
|
)
|
$
|
(20.3
|
)
|
||
Mill
curtailments to match customer demand
|
(2.5
|
)
|
(11.3
|
)
|
||||
Start-up
costs of the thermal coater at the West Carrollton, Ohio paper
mill
|
(1.7
|
)
|
(7.1
|
)
|
||||
Reduced
manufacturing spending
|
6.2
|
15.8
|
||||||
Lower
distribution costs
|
4.8
|
13.9
|
||||||
Favorable
selling, general and administrative spending
|
1.5
|
8.8
|
||||||
Alternative
fuels tax credit
|
5.0
|
13.0
|
||||||
$
|
9.0
|
$
|
12.8
|
|
•
|
Third
quarter 2009 coated solutions net sales totaled $115.3 million, a decrease
of $23.6 million, or 17.0%, from prior year levels. Third quarter 2009
carbonless shipment volumes were 14.3% lower than third quarter 2008.
Volume shortfalls were recorded in all market channels with domestic
shipments declining more than international shipments. During the first
nine months of 2009, coated solutions net sales totaled $339.0 million, a
decrease of $81.0 million, or 19.3%, from prior year levels. Net sales for
the current year have also been negatively impacted by aggressive
competitive pricing.
|
Third
quarter 2009 coated solutions operating income of $12.7 million increased
$6.4 million compared to third quarter 2008. During the first nine months
of 2009, operating income of $42.3 million increased $17.0 million compared to
the same 2008 period. The adverse impact of lower shipment volumes and
unfavorable pricing on 2009 operating margins was more than offset by lower
distribution costs and favorable selling, general and administrative spending as
well as the alternative fuels tax credit recorded as a reduction to cost of
sales. The alternative fuels tax credit of $5.0 million and $13.0 million for
the three and nine months ended October 4, 2009, was allocated, using estimated
full year 2009 production volumes as a measure, between the coated
solutions and security papers segments. Tax credits totaling $4.0 million and
$10.5 million were allocated to coated solutions for the three and nine months
ended October 4, 2009.
|
•
|
Third
quarter 2009 thermal papers net sales of $71.1 million were $7.7 million
lower when compared to third quarter 2008. This was the case despite a
slight year-to-year increase in shipment volumes. During the first nine
months of 2009, thermal papers net sales totaled $206.6 million, a
decrease of $5.9 million, or 2.8%, when compared to the same prior year
period. Though year-to-date 2009 shipment volumes were 3.9% higher than
shipment volumes for the first nine months of 2008, 2009 revenue has been
negatively impacted by pressure within the market to lower
prices.
|
37
During
third quarter 2009, the thermal papers business reported an operating loss of
$1.9 million which was a $0.9 million decrease from the operating loss recorded
during third quarter 2008. A $7.7 million operating loss was recorded for this
business during the first nine months of 2009 which was a decrease in operating
income of $8.5 million as compared to the same 2008 period. Despite higher
shipment volumes and lower selling, general and administrative expenses,
competitive pricing, higher input costs and $7.1 million of start-up costs drove
operating income down when compared to 2008.
|
•
|
Third
quarter 2009 security papers segment net sales were $9.3 million. This was
$1.0 million higher than third quarter 2008 net sales of $8.3 million.
Security papers net sales for the first nine months of 2009 were $28.2
million, an increase of $2.3 million, or 8.8%, over the same period last
year. These increases were due to increased shipment volumes of 17.3% and
10.0% for the three and nine months ended October 4, 2009, respectively,
in comparison to the same prior year
periods.
|
Third
quarter 2009 operating income of $2.8 million was $1.7 million higher than third
quarter 2008 largely the result of increased net sales and reduced cost of
sales due to the $1.0 million alternative fuels tax credit allocated to this
business segment. Security papers operating income of $7.3 million for the first
nine months of the year was an increase of $4.3 million when compared to the
same period of 2008 due to increased shipment volumes, manufacturing gains, the
alternative fuels tax credit of $2.5 million and reduced selling, general and
administrative spending.
Performance
Packaging
|
•
|
Performance
packaging segment net sales totaled $26.6 million in third quarter 2009, a
decrease of $3.1 million, or 10.3%, from third quarter 2008. During the
first nine months of 2009, this segment recorded net sales of $74.5
million which was a decrease of $9.5 million, or 11.3%, from the first
nine months of 2008. The decrease in revenue was largely due to weaker
demand and lower selling prices to the customer in response to lower resin
prices.
|
|
Operating
income recorded during third quarter 2009 of $0.9 million was $16.1
million higher than third quarter 2008. Operating income recorded during
the first nine months of 2009, of $2.1 million, was $14.0 million higher
than the first nine months of 2008. Third quarter 2009 operating income
was reduced by a $1.0 million increase to the bad debt reserve related to
one major customer. The Company does not anticipate its risk to be higher
than $1.0 million. The operating loss reported for the three and nine
months ended September 28, 2008, included a $17.7 million goodwill
impairment charge. Despite year-on-year reductions in net sales and
operating income, diligent cost reduction efforts are in place to offset a
portion of the volume and margin
shortfall.
|
During
second quarter 2009, Appleton committed to a formal plan to sell C&H.
C&H, located in Merrill, Wisconsin, was acquired in 2003 and prints and
converts flexible plastic packaging materials for companies in the food
processing, household and industrial products industries. The assets and
liabilities of C&H are reported as held for sale for the periods ended
October 4, 2009 and January 3, 2009. As of the end of second
quarter 2009, depreciation and amortization expense was suspended,
resulting in a $0.2 million reduction in expense. The sale is expected to
be completed prior to the end of 2009. C&H is included within the
performance packaging business segment.
Unallocated Corporate
Charges and Business Development Costs
|
•
|
Unallocated
corporate charges and business development costs of $6.6 million for third
quarter 2009 increased by $3.9 million when compared to the same period
last year due to costs incurred as a result of the debt-for-debt exchange.
Year-to-date 2009 unallocated corporate charges and business development
costs were $10.4 million and increased by $0.7 million when compared to
the first nine months of 2008.
|
Liquidity
and Capital Resources
Overview. Appleton’s primary
sources of liquidity and capital resources are cash provided by operations and
available borrowings under its revolving credit facility. Appleton generally
expects that cash on hand, internally generated cash flow and available credit
from its revolving credit facility will provide the necessary funds for the
reasonably foreseeable operating and recurring cash needs (e.g., working
capital, debt service, other contractual obligations and capital expenditures).
At October 4, 2009, Appleton had $3.5 million of cash and approximately
$40.3 million of unused borrowing capacity under its revolving credit facility
and was in compliance with all of its debt covenants.
38
Cash Flows from Operating
Activities. Net cash provided by operating activities for the first nine
months of 2009, of $44.1 million, was a $49.2 million improvement when compared
to net cash used by operating activities for the first nine months of 2008 of
$5.1 million. Net income adjusted for non-cash charges provided $47.8 million in
operating cash for the period. Non-cash charges included $46.4 million in
depreciation and amortization, $3.0 million of non-cash employer matching
contributions to the KSOP and $1.2 million of other non-cash charges. A $42.7
million net gain on debt extinguishment, which is discussed below in Cash Flows from Financing Activities,
was also recorded during the first nine months of this year. The change in
working capital provided $7.0 million of cash. A net $10.7 million of other uses
was also recorded during 2009 which included a net change to the pension reserve
of $6.0 million as the result of a $10.0 million contribution made to the
pension fund, during third quarter 2009, for the 2008 plan
year.
The $7.0
million provided by changes to working capital was due to aggressive inventory
management resulting in a $12.4 million decrease in inventories. Accounts
payable and other accrued liabilities increased by $11.4 million. Other changes
to working capital were a $13.9 million increase in accounts receivable and $2.9
million of other working capital increases. Quarter-end receivables were at a
more normal level compared to year-end 2008 which was impacted by increased
collections due to the January 3, 2009 year-end date.
Cash Flows from Investing
Activities. Net cash used by investing activities during the first nine
months of 2009 totaled $16.0 million versus $77.5 million during the first nine
months of 2008. During 2008, Appleton was investing in its expansion project at
the West Carrollton, Ohio paper mill. This expansion project, which was funded
through cash flows from operations, special financing provided by the State of
Ohio and borrowings under Appleton’s revolving credit facility, accounted for
$67.8 million of the capital spending during the first three quarters of 2008.
This expansion was put into operation during the second half of
2008.
Cash Flows from Financing
Activities. Year-to-date through October 4, 2009, net cash used by
financing activities was $28.7 million. During the same period of 2008, $45.3
million of cash was provided by financing activities. During the first nine
months of 2009, Appleton borrowed a net $9.9 million on its revolving credit
facility. Proceeds from the issuance of PDC redeemable common stock totaled $2.1
million. Payments to redeem PDC common stock were $12.6 million. During first
quarter 2009, the Company made market purchases of $7.5 million face value of
its senior subordinated notes for a cash outlay of $1.7 million. As these notes
were purchased at a price significantly less than face value, the Company
recorded a $5.5 million net gain on these purchases. Appleton also made $4.6
million of mandatory debt and capital lease payments.
During
July 2007, Appleton entered into a new $12.1 million Loan and Security Agreement
with the Director of Development of the State of Ohio, consisting of a $9.1
million State Assistance Loan and a $3.0 million State Loan (together “the Ohio
Loans”). The Company received the proceeds of the $3.0 million State Loan during
second quarter 2009. The proceeds of the $9.1 million State Assistance Loan were
received in 2007. All proceeds of these Ohio Loans were used to fund a portion
of the costs of acquiring and installing paper coating and production equipment
at the Company’s paper mill in West Carrollton, Ohio.
Cash
overdrafts decreased $16.5 million during the first three quarters of 2009. Cash
overdrafts represent checks issued (thereby eliminating the corresponding
accounts payable) but not yet cleared through the banking system. Fluctuations
in the balance are a function of quarter-end payment patterns and the speed with
which the payees deposit the checks.
On
September 30, 2009, Appleton completed a voluntary debt-for-debt exchange
of significant portions of its 8.125% senior notes payable due June 2011
and 9.75% senior subordinated notes payable due June 2014. Weak economic
conditions and frozen credit markets caused many corporate bonds, including
those issued by Appleton, to trade well below face value. Appleton took
advantage of the opportunity to significantly reduce its total indebtedness,
plus extend maturities and simplify its debt structure, by exchanging existing
debt.
This
transaction exchanged $92.0 million of 8.125% senior notes for $92.0 million of
newly issued 11.25% second lien notes payable due December 2015. For accounting
purposes, this was considered a debt modification. As part of this transaction,
Appleton paid $1.2 million of fees to the bondholders which included $0.9
million of additional 11.25% second lien notes issued as in-kind consent fees to
the holders agreeing to the exchange. These debt issuance costs will be
amortized over the term of the second lien notes along with pre-existing
unamortized debt issuance costs of the exchanged 8.125% notes. As a result of
this transaction, $92.9 million of second lien notes were issued. Third-party
costs of $3.7 million were also incurred and recorded as selling, general and
administrative expenses.
Appleton
also exchanged $110.3 million of 9.75% senior subordinated notes for $66.2
million of newly issued 11.25% second lien notes payable due December 2015. This
resulted in a debt reduction of $44.1 million. For accounting purposes, this
exchange was considered a debt extinguishment and $3.5 million of previously
capitalized debt issuance costs related to the 9.75% notes were written off and
recorded as debt extinguishment expense. Transaction costs of $5.5 million were
paid and $0.2 million were accrued. Of this $5.7 million of costs, $3.0 million
was recorded as debt extinguishment expense and $2.7 million was capitalized and
will be amortized over the term of the second lien notes. The $3.0 million of
debt extinguishment expense included $2.7 million of additional 11.25% second
lien notes issued as in-kind consent fees to the holders agreeing to the
exchange. As a result of this transaction, $68.9 million of second lien notes
were issued. A $37.4 million net gain on debt extinguishment was recorded in the
Condensed Consolidated Statement of Operations for the three and nine months
ended October 4, 2009 related to the debt-for-debt exchange and the Second
Amendment to the senior secured credit facilities (discussed
below).
39
The
11.25% second lien notes due 2015 will accrue interest from the issue date at a
rate of 11.25% per year and interest will be payable semi-annually in arrears on
each June 15 and December 15, commencing on December 15, 2009.
These notes are guaranteed by PDC and certain of present and future domestic and
foreign subsidiaries that guarantee the senior secured credit facilities.
Guarantors include PDC, C&H, American Plastics Company, Inc. and New England
Extrusion Inc. The guarantees of these notes are second-priority senior secured
obligations of the guarantors. They rank equally in right of payment with all of
the guarantors’ existing and future senior debt, including guarantees of the
senior secured credit facilities, and rank senior in right of payment to all of
the guarantors’ existing and future subordinated debt. The guarantees of the
11.25% notes are effectively subordinated to all of the first priority senior
secured debt of the guarantors, to the extent of the collateral securing such
debt, including the guarantees of the senior secured credit facilities. These
notes contain covenants that restrict Appleton’s ability and the ability of
Appleton’s other guarantors to sell assets or merge or consolidate with or into
other companies; borrow money; incur liens; pay dividends or make other
distributions; make other restricted payments and investments; place
restrictions on the ability of certain subsidiaries to pay dividends or other
payments to Appleton; enter into sale and leaseback transactions; amend
particular agreements relating to the transaction with former parent Arjo
Wiggins Appleton Limited and the ESOP; and enter into transactions with certain
affiliates. These covenants are subject to important exceptions and
qualifications set forth in the indenture governing the 11.25% second lien notes
due 2015.
In order
to complete the debt-for-debt exchange, Appleton and its lenders under the
senior secured credit facilities entered into the Second Amendment to the senior
secured credit facilities on September 30, 2009. This Second Amendment
cleared the way for Appleton to issue the second lien notes. Under the Second
Amendment to the senior secured credit facilities, Appleton will pay interest
rates equal to LIBOR, but not less than 2 %, plus 462.5 basis points for any
amounts outstanding on the senior secured variable rate notes payable and,
interest rates initially equal to LIBOR, but not less than 2 %, plus 462.5 basis
points for any amounts outstanding on the revolving credit
facility. The Second Amendment to the senior secured credit facilities
provides a grid under which the interest rates payable, for amounts outstanding
on the revolving credit facility, may be reduced, based on measures of
Appleton’s total leverage as defined in the senior secured credit facilities.
The Second Amendment also provides that the revolving credit facility will be
permanently reduced by $5,000,000 on December 31, 2009, by another
$10,000,000 on March 31, 2010 and by an additional $15,000,000 on
June 30, 2010. For accounting purposes, the amendment to the senior secured
credit facilities was treated as a debt modification. The Company paid $2.4
million of fees to the creditors in conjunction with the amendment to the senior
secured credit facilities. These debt issuance costs will be amortized over the
term of the modified agreement along with pre-existing unamortized debt issuance
costs as an adjustment to interest expense over the remaining term of the
modified agreement. Unamortized debt issuance costs of $0.2 million,
relating to the revolving credit facility, were written off and recorded as debt
extinguishment expense. The unamortized debt issuance costs remaining will be
deferred and amortized over the term of the modified revolving credit facility.
Third-party costs of $0.5 million were also incurred and recorded as selling,
general and administrative expenses.
In
addition, on September 9, 2009, a third supplemental indenture to the
indenture dated as of June 11, 2004, and governing the remaining $17.5
million of 8.125% senior notes, and a third supplemental indenture to the
indenture dated as of June 11, 2004, and governing the remaining $32.2
million of 9.75% senior subordinated notes, became effective. The supplemental
indentures amend the original indentures to, among other things, eliminate
substantially all of the restrictive covenants and certain events of default and
related provisions.
Appleton’s
senior secured credit facilities and senior secured term note payable contain
provisions that require Appleton to maintain specified financial ratios. Prior
to the waivers and amendments discussed below, the most restrictive limitations
were quarter-end debt to earnings before interest, taxes, depreciation and
amortization (EBITDA) of not more than a 4.50 to 1.00 ratio as such terms are
defined in the debt agreements. As a result of the significant downturn in
Appleton’s business markets and the resulting loss reported for the three months
ended January 3, 2009, Appleton was not in compliance with the leverage
ratio covenant at January 3, 2009, which constituted events of default
under the debt agreements. In order to waive the events of default existing at
January 3, 2009, under the senior secured credit facilities and the senior
secured term note payable, and to amend other provisions of the agreements,
Appleton and its lenders entered into the following agreements in
March 2009:
•
|
First
Amendment to the senior secured credit facilities
and
|
|
•
|
First
Amendment to the senior secured term note
payable.
|
Under the
First Amendment to the senior secured credit facilities, Appleton paid interest
rates equal to LIBOR, but not less than 2%, plus 450 basis points for any
amounts outstanding on the senior secured variable rate notes payable and,
interest rates initially equal to LIBOR, but not less than 2%, plus 450 basis
points for any amounts outstanding on the revolving credit facility. The
First Amendment to the senior secured credit facilities provides a grid under
which the interest rates payable, for amounts outstanding on the revolving
credit facility, may be reduced, based on measures of Appleton’s total leverage
as defined in the senior secured credit facilities. Under the First Amendment to
the senior secured term note payable, Appleton will pay an interest rate of
14.25 % on the senior secured term note payable. For accounting purposes,
the amendments to the senior secured credit facilities and the senior secured
term note payable were treated as debt modifications. The Company paid $2.8
million of fees to the creditors in conjunction with the amendment to the senior
secured credit facilities. These debt issuance costs will be amortized over the
term of the modified agreement along with pre-existing unamortized debt issuance
costs as an adjustment to interest expense over the remaining term of the
modified agreement. Unamortized debt issuance costs of $0.1 million,
relating to the revolving credit facility, were written off. The unamortized
debt issuance costs remaining after the writeoff will be deferred and amortized
over the term of the modified revolving credit facility.
40
Pursuant
to the terms of the First Amendment to the senior secured credit
facilities:
|
•
|
The
maturity date for the revolving credit facility will be June 5, 2012,
and the maturity date for the senior secured variable rate notes payable
will be June 5, 2013;
|
|
•
|
Appleton
will be permitted up to $35 million of capital expenditures in 2009 and up
to $40 million of capital expenditures in 2010, with no limit in 2011 or
thereafter;
|
|
•
|
Appleton
may not make acquisitions until December 31,
2010;
|
|
•
|
Other
restrictions are imposed on liens, indebtedness, investments, restricted
payments and note repurchases;
|
|
•
|
Mandatory
prepayments are increased from 50% to 75% of excess cash flow as defined
in the senior secured credit
facilities;
|
|
•
|
Financial
covenants are modified to increase the total leverage ratio, to eliminate
the interest coverage ratio, to add a senior secured leverage ratio, and
to add a fixed charge coverage ratio, all as defined in the senior secured
credit facilities and the First Amendment to the senior secured credit
facilities.
|
In
February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of
its variable rate notes with a five-year interest rate swap contract. Also
during first quarter 2008, Appleton fixed the interest rate, at 5.4%, on an
additional $75.0 million of its variable rate notes with a five-year interest
rate swap contract. As discussed below, one of the swap contracts was terminated
in February 2009. The covenant violation at January 3, 2009 and subsequent
waiver and amendment, in March 2009, to the senior secured credit
facilities, changed the basis of the forecasted transactions for the two
interest rate swap contracts that were placed in 2008. As amended, the senior
secured credit facilities contain interest payments based on LIBOR with a 2%
floor, whereas the forecasted transactions assumed interest payments based on
LIBOR. As a result, Appleton concluded it was remote that the original
forecasted transactions would occur as originally documented and reclassified as
a charge against 2008 earnings, within interest expense, $9.4 million of swap
losses originally classified in other comprehensive loss. The events of default
also triggered an event of default pursuant to a cross-default provision under
one of the interest rate swap contracts. As a result of the cross-default, the
counterparty elected to terminate the swap contract. In February 2009, Appleton
and the counterparty resolved Appleton’s obligation under the swap contract with
an agreement to pay $4.7 million over the nine-month period ending October 2009.
During the first nine months of 2009, Appleton paid $4.3 million in accordance
with the termination agreement thereby reducing its liability to $0.4 million as
of October 4, 2009. The remaining swap contract is expected to remain in
place and future fluctuations in market value will be reflected as adjustments
to interest expense. As of October 4, 2009, the remaining swap contract was
recorded as a long-term liability of $4.4 million based on a fair value
measurement using Level 2 inputs. The fair value of the interest rate swap
derivative is primarily based on models that utilize the appropriate
market-based forward swap curves and zero-coupon interest rates to determine the
discounted cash flows. In comparison to the fair value reported at fiscal
year-end 2008, the current fair value of this long-term liability is $0.4
million lower, with this change recorded in interest expense on the Condensed
Consolidated Statement of Operations for the nine months ended October 4,
2009.
The
Company is subject to credit risk relative to the ability of counterparties to
meet their contractual payment obligations or the potential non-performance of
counterparties to deliver contracted commodities or services at the contracted
price. The recent unprecedented volatility in capital and credit markets may
create additional risks to the Company, directly or indirectly, because of its
potential to also impact major customers and suppliers in the upcoming months
and possibly years. The adverse effect of a sustained U.S. or international
economic downturn, including sustained periods of decreased consumer and
business spending, high unemployment levels or declining consumer or business
confidence, along with continued volatility and disruption in the credit and
capital markets, has and may continue to result in reduced demand for Appleton’s
products and, therefore, reduced sales and profitability.
The
senior secured credit facilities, as amended, senior secured term note payable,
as amended, and second lien notes contain affirmative and negative covenants. In
general, the covenants contained in the senior credit facilities, as amended,
are more restrictive than those of the second lien notes. Among other
restrictions, the covenants contained in the senior credit facilities, as
amended, and senior secured term note payable, as amended, require Appleton to
meet specified financial tests, including leverage and fixed charge coverage
ratios, which become more restrictive over the term of the debt.
The
senior secured credit facilities, as amended, and the senior secured term note
payable, as amended, also contain covenants which, among other things, restrict
Appleton’s ability and the ability of Appleton’s other guarantors of the senior
secured credit facilities, as amended, and senior secured term note payable, as
amended, to incur liens; engage in transactions with affiliates; incur or
guarantee additional indebtedness; declare dividends or redeem or repurchase
capital stock; make loans and investments; engage in mergers, acquisitions,
consolidations and asset sales; acquire assets, stock or debt securities of any
person; terminate the subchapter S corporation status of PDC or the qualified
subchapter S subsidiary status of its subsidiaries eligible to elect such
status; amend its debt instruments; amend or terminate the ESOP; amend other
agreements related to the transaction with AWA; repay other indebtedness; use
assets as security in other transactions; enter into sale and leaseback
transactions; sell equity interests in the Company’s subsidiaries; and engage in
new lines of business.
The
senior secured credit facilities, as amended, contain a provision that defines
an event of default to include defaults or events of default under other
indebtedness as defined in the senior secured credit facilities. The senior
secured term note payable, as amended, contains a provision which defines an
event of default to include defaults or events of default under the senior
secured credit facilities, as amended, the senior notes, as amended, and
the senior subordinated notes, as amended.
41
The senior secured
credit facilities, as amended, are unconditionally guaranteed by PDC and by
substantially all of Appleton’s subsidiaries, other than two small foreign
subsidiaries. In addition, they are secured by liens on substantially all of
Appleton’s, the subsidiary guarantors’ and certain of Appleton’s other
subsidiaries’ assets and by a pledge of Appleton’s and its subsidiaries’ capital
stock. The senior secured term note payable, as amended, is unconditionally
guaranteed by PDC and by substantially all of Appleton’s subsidiaries, other
than certain immaterial subsidiaries. In addition, it is secured by a lien on
specified manufacturing equipment located in Appleton’s paper mill in West
Carrollton, Ohio. The senior notes, as amended, and senior subordinated
notes, as amended, are unconditionally guaranteed by PDC, C&H, American
Plastics Company, Inc., Rose Holdings Limited and New England Extrusion
Inc.
As of
October 4, 2009, Appleton was in compliance with its various amended
covenants as disclosed in the 2008 Form 10-K. Based on Appleton’s forecasted
operating results and related debt reductions, Appleton has projected compliance
with all covenants for the next twelve-month period. Appleton’s ability to
comply with the financial covenants in the future depends on further debt
reduction and achieving forecasted operating results, which have become more
difficult to project in the current economic environment. Given the uncertain
global economic conditions, continued constraints in the credit markets and
other market uncertainties, there are various scenarios, including a reduction
from forecasted operating results, under which Appleton could violate its
financial covenants during 2009 and 2010. Appleton’s failure to comply with
such covenants or an assessment that it is likely to fail to comply with such
covenants, could also lead Appleton to seek amendments to or waivers of the
financial covenants contained in the senior secured credit facilities and senior
secured term note payable. Appleton cannot provide assurance that it would
be able to obtain any amendments to or waivers of the covenants contained in the
senior secured credit facilities and senior secured term note payable. Any
such amendment to or waiver of the covenants would likely involve upfront fees,
higher annual interest costs and other terms less favorable to the Company than
those currently in the senior secured credit facilities and senior secured term
note payable. In the event the lenders will not amend or waive the
covenants, the debt would be due and Appleton would need to seek alternative
financing. Appleton cannot provide assurance that it would be able to
obtain alternative financing. If Appleton were not able to secure
alternative financing, this would have a material adverse impact on the
Company.
Prior
Period Error Corrections
During
the preparation of the first quarter 2009 Form 10-Q, the Company identified an
error in classification of gain on debt extinguishment in its 2008 Consolidated
Statement of Cash Flows which affected cash flows from operating activities and
cash flows from financing activities. During fourth quarter 2008, Appleton
purchased $40.6 million, plus interest, of its 8.125% senior notes payable due
June 15, 2011. The actual cash outlay for these purchases totaled $28.0
million. As these senior notes were purchased at prices less than face value,
the Company appropriately recorded a $12.6 million gain. In accordance
with ASC 230, “Statement of Cash Flows,” gains or losses on extinguishment
of debt is a financing activity and should be adjusted from the net income of
the business to arrive at cash flows from operations. Appleton did not remove
the non-cash gain on the extinguishment of debt from cash flows from operating
activities resulting in an overstatement of cash flows from operations and cash
outflows from financing activities on the Company’s Consolidated Statement of
Cash Flows for the Twelve Months Ended January 3, 2009. This error had no
impact on the Consolidated Statement of Operations and Consolidated Balance
Sheet for 2008. After considering both quantitative and qualitative factors in
accordance with Staff Accounting Bulletin 99, "Materiality," the Company
determined that the errors were not material and the cash flow presentations
will be revised for these errors in the 2009 Form 10-K.
As a
result of researching the appropriate classification of the gain associated with
the Bemrose note receivable, as discussed in Note 2 to the Condensed
Consolidated Financial Statements contained in this report, it was determined
that the initial reserve of $1.5 million should have also been recorded within
continuing operations at year-end 2008, at which time the reserve was initially
recorded in (loss) income from discontinued operations in the 2008 Form 10-K.
Management assessed the error in accordance with Staff Accounting Bulletin 99,
“Materiality,” and concluded the error is immaterial to the consolidated
financial statements as of January 3, 2009, taken as a whole. The
Consolidated Statement of Operations will be revised for this error in the 2009
Form 10-K.
The three and nine months ending September 28, 2008 Guarantor
Condensed Consolidating Statement of Operations and the nine months ending
September 28, 2008, Cash Flow reflect the correction of an error in the third
quarter in the loss from discontinued operations. The Issuer forgave a
$50.5 million intercompany loan receivable and other intercompany balances from
Rose Holdings Limited, a Subsidiary Guarantor, which was not reflected as a loss
to the Issuer and a gain to the Subsidiary Guarantor in the Condensed
Consolidating Statement of Operations and Cash Flow. This error did not
impact the combined results of the Issuer and the Subsidiary Guarantor as a
whole.
Alternative
Fuels Tax Credit
The U.S.
Internal Revenue Code provides a tax credit for companies that use alternative
fuel mixtures to produce energy to operate their businesses. The credit, equal
to $0.50 per gallon of alternative fuel contained in the mixture, is refundable
to the taxpayer. In February 2009, Appleton began mixing black liquor with
diesel fuel and using the mixture at its mill in Roaring Spring, Pennsylvania.
The Company applied to the Internal Revenue Service to be registered as an
alternative fuel mixer and received its registration in May 2009. As of
October 4, 2009, Appleton filed for excise tax refunds totaling $12.6
million and accrued $0.4 million for eligible alternative fuel usage through
October 4, 2009 to be included in subsequent filings. As of the end of
third quarter 2009, $1.2 million is recorded as a receivable in other current
assets in the accompanying Condensed Consolidated Balance Sheet. Accordingly,
the Condensed Consolidated Statement of Operations for the three and nine months
ended October 4, 2009 includes a $5.0 million and a $13.0 million tax
credit, respectively, as a reduction to cost of sales. This tax credit is
allocated to the appropriate business segments using estimated full year 2009
production volumes as a measure. For the three and nine months ended October 4,
2009, $4.0 million and $10.5 million, respectively, was allocated to coated
solutions. The remaining $1.0 million and $2.5 million was allocated to security
papers for the three and nine months, respectively. Expenses related to this
excise tax refund total $0.1 million and $0.2 million for the three and nine
months ended October 4, 2009, respectively. As of November 6, 2009,
$13.3 million has been received in cash from the Internal Revenue
Service.
42
New
Accounting Pronouncements
In August
2009, the FASB issued ASU No. 2009-05, "Measuring Liabilities at Fair Value,"
which amends ASC 820, "Fair Value Measurements and
Disclosures." ASU 2009-05 provides clarification and guidance
regarding how to value a liability when a quoted price in an active market is
not available for that liability. The changes to the ASC as a result
of this update are effective for the first reporting period (including interim
periods) beginning after issuance, which for the Company, is fourth quarter
2009. Adoption is not expected to have a material impact on its consolidated
financial statements.
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
the Accounting Standards Codification (“ASC”). The ASC became the
single source for all authoritative generally accepted accounting principles
(“GAAP”) recognized by the FASB to be applied for financial statements issued
for periods ending after September 15, 2009. The ASC does not change GAAP
but was intended to simplify user access to all authoritative GAAP by providing
all the authoritative literature related to a particular topic in one place. All
previously existing accounting standard documents were superseded and all other
accounting literature not included in the ASC is considered non-authoritative.
Throughout the notes to the condensed consolidated financial statements,
references that were previously made to various former authoritative GAAP
pronouncements have been changed to coincide with the appropriate section of the
ASC.
In May
2009, the FASB issued ASC 855, “Subsequent Events.” This
statement is applicable to the accounting for and disclosure of subsequent
events not addressed in other GAAP. It provides a definition of subsequent
events and guidance as to when subsequent events are recognized or not
recognized. It requires the disclosure of the date through which subsequent
events have been evaluated, as well as whether the date is the date the
financial statements were issued or the date the financial statements were
available to be issued. These provisions were effective for interim or annual
financial periods ending after June 15, 2009, and are applied
prospectively. These provisions were adopted by the Company during its
second quarter ended July 5, 2009 and additional disclosures required by
this standard are included in Note 1, Basis of Presentation.
In April
2009, the FASB issued ASC 820, “Fair Value Measurements and Disclosures.” Based
on the guidance, if an entity determines that the level of activity for an asset
or liability has significantly decreased and that a transaction is not orderly,
further analysis of transactions or quoted prices is needed, and a significant
adjustment to the transaction or quoted prices may be necessary to estimate fair
value in accordance with ASC 820, “Fair Value Measurements.” These
provisions were adopted by the Company during its second quarter ended
July 5, 2009. There was no current period impact on its financial
statements.
In April
2009, the FASB issued ASC 825, “Financial Instruments.” It requires an
entity to provide disclosures about fair value of financial instruments in
interim financial information. These provisions were adopted by the Company
during its second quarter ended July 5, 2009. Additional disclosures
required by this standard are addressed in Note 17, Fair Value of Financial
Instruments.
In
December 2008, the FASB issued ASC 715, “Compensation - Retirement
Benefits,” to provide guidance on an employers’ disclosures about plan assets of
a defined benefit pension or other postretirement plan. This pronouncement is
effective for fiscal years ending after December 15, 2009. Upon initial
application, the provisions are not required to be adopted for earlier periods
as presented for comparative purposes. Earlier application of the provisions is
permitted. The Company does not believe adoption will have a material impact on
its consolidated financial statements.
In
March 2008, the FASB issued ASC 815, “Derivatives and
Hedging.” This statement changes the disclosure requirements for derivative
instruments and hedging activities. It requires enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under ASC
815 and its related interpretations and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance and cash flows. These provisions were effective for financial
statements issued for fiscal years beginning after November 15, 2008. The
Company adopted these provisions during its first quarter 2009. The
principal impact to the Company was to require the expansion of its disclosures
regarding derivative instruments.
In
December 2007, the FASB issued ASC 805, “Business Combinations.” It
requires that an acquiring entity recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition date fair value with
limited exceptions. It changes the accounting treatment for acquisition costs,
non-controlling interests, contingent liabilities, in-process research and
development, restructuring costs and income taxes. In addition, it also requires
a substantial number of new disclosure requirements. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company adopted ASC 805 during the first
quarter of 2009. The adoption did not have a material impact on its consolidated
financial statements.
Item 3—Quantitative and Qualitative Disclosures About Market Risk
For
information regarding quantitative and qualitative disclosures about market
risk, see the Annual Report on Form 10-K for the year ended January 3,
2009. There have been no other material changes in the quantitative or
qualitative exposure to market risk from that described in the Form
10-K.
43
Item 4T—Controls and
Procedures
Internal Controls Over
Financial Reporting
There
were no changes in the internal control over financial reporting of Appleton or
PDC, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange
Act, during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Registrants’
internal control over financial reporting.
Disclosure Controls
and Procedures
Appleton
and PDC carried out an evaluation, under the supervision and with the
participation of their management, including their respective principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of their disclosure controls and procedures as such terms
are defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Appleton and PDC maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed by Appleton and PDC in the reports filed or submitted by them under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. The disclosure controls and
procedures are also designed to ensure that the information is accumulated and
communicated to management, including their respective principal executive and
principal financial officers, to allow timely decisions regarding required
disclosures. Based on their evaluation, the Chief Executive Officer and Chief
Financial Officer of Appleton and PDC have concluded that their disclosure
controls and procedures are effective as of the end of the period covered by
this Form 10-Q.
PART
II – OTHER INFORMATION
Item
1 – Legal Proceedings
Information
regarding legal proceedings is contained in Note 13 to the Condensed
Consolidated Financial Statements contained in this report and is incorporated
herein by reference.
Item 1A
– Risk Factors
Other
than with respect to the risk factors set forth below, there have been no
material changes in the risk factors disclosed in the Annual Report on Form 10-K
for the year ended January 3, 2009.
Changes
in tax laws may have a material effect on Appleton’s future cash flows and
results of operations.
Earnings
in the three and nine months ended October 4, 2009, included an alternative
fuels tax credit of $5.0 million and $13.0 million, respectively, for
alternative fuel mixtures produced for use as a fuel in the business. The credit
is scheduled to expire December 31, 2009. Legislation has been proposed
that would terminate the credit for fuel used in the production of paper or pulp
prior to December 31, 2009. We cannot predict whether such legislation will
be enacted, or what its effective date would be. If the excise tax credit were
to be terminated or materially changed prior to December 31, 2009, this may
have a material effect on Appleton’s future cash flows and results of
operations.
Appleton
has competitors in its various markets and it may not be able to maintain prices
and margins for its products.
Appleton
faces strong competition in all of its business segments. Its competitors vary
in size and the breadth of their product offerings and some of its competitors
have significantly greater financial, technical and marketing resources than
Appleton does. Regardless of the continuing quality of our primary products,
Appleton may be unable to maintain its prices or margins due to:
|
•
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declining
overall carbonless market size;
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|
•
|
accelerating
decline in carbonless sheet sales;
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|
|
|
•
|
variations
in demand for, or pricing of, carbonless
products;
|
|
|
|
•
|
increasing
manufacturing costs;
|
|
|
|
•
|
increasing
competition in international markets or from domestic or foreign
producers; or
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|
|
|
•
|
declining
general economic conditions.
|
Appleton’s
inability to compete effectively or to maintain its prices and margins could
have a material adverse effect on its earnings and cash flow.
44
The
carbonless paper market is highly competitive. Appleton competes based on a
number of factors, including price, product availability, quality and customer
service. Additionally, Appleton competes with domestic production and imports
from Europe and Asia. In March 2009, the Mexican government began imposing
tariffs on 90 U.S. products sold into Mexico, including carbonless paper. All
U.S. sales of carbonless paper into Mexico are assessed a 10% tariff. Though the
tariff is paid by the customer, this automatically increases the price of
carbonless paper by 10% which could open the door for non-U.S. competitors to
enter the Mexican market with their carbonless products and take advantage of
the ability to offer customers more favorable pricing. Appleton may need to
adjust its carbonless pricing accordingly in reaction to competitive pressures
from both customers seeking more favorable pricing and foreign producers of
carbonless paper seeking market entry.
Future
greenhouse gas/carbon regulations or legislation could adversely affect
Appleton’s costs of compliance with environmental laws.
In 2009,
the U.S. Environmental Protection Agency (“EPA”) released a finding that
greenhouse gas (“GHG”) emissions endanger the public health and
welfare. Should the EPA finalize the findings, it may then begin developing
rules to regulate GHG emissions under the federal Clean Air Act. It is
uncertain whether such GHG emissions regulations will be issued, when they might
be issued or what form they may take. Also in 2009, several bills were
introduced in the U.S. Congress concerning climate change and the emission into
the environment of carbon dioxide and other GHGs. It is expected that
eventual legislation will take the form of a cap-and-trade program where
generators will be required to purchase allowances to emit carbon dioxide
and other GHGs,
although it is possible that legislation may take other forms, such as a carbon
tax on each unit of carbon dioxide and other GHGs emitted in excess of mandated
limits. As a result, Appleton could be required, among other things, to
purchase allowances or offsets to emit GHGs or other regulated pollutants or to
pay taxes on such emissions. At this time there is no basis for estimating
the effect of such legislation on the costs Appleton will incur to comply with
environmental laws, although the Company is investigating ways to reduce carbon
emissions.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements. The words “will,” “may,” “should,”
“believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,”
“plans,” “seek” or similar expressions are intended to identify forward-looking
statements. All statements in this report other than statements of historical
fact, including statements which address Appleton’s strategy, future operations,
future financial position, estimated revenues, projected costs, prospects, plans
and objectives of management and events or developments that Appleton expects or
anticipates will occur, are forward-looking statements. All forward-looking
statements speak only as of the date on which they are made. They rely on a
number of assumptions concerning future events and are subject to a number of
risks and uncertainties, many of which are outside the Company’s control that
could cause actual results to differ materially from such statements. These
risks and uncertainties include, but are not limited to, the factors listed
under “Item 1A – Risk Factors” in the Annual Report on Form 10-K for the year
ended January 3, 2009, as well as in the Quarterly Report on Form 10-Q for
the current quarter ended October 4, 2009, which factors are incorporated herein
by reference and as updated above. Many of these factors are beyond Appleton’s
ability to control or predict. Given these uncertainties, do not place undue
reliance on the forward-looking statements. Appleton disclaims any obligation to
update or revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
45
Item 6—Exhibits
4.1 | Indenture, dated as of September 30, 2009, among Appleton Papers Inc., as issuer, each of the guarantors identified therein and U.S. Bank National Association, as trustee and collateral agent, governing the 11.25% Second Lien Notes due 2015. Incorporated by reference to Exhibit 4.1 to Appleton’s current report on Form 8-K filed October 6, 2009. |
4.2 | Third Supplemental Indenture, dated as of September 9, 2009, among Appleton Papers Inc., as issuer, each of the guarantors identified therein and U.S. Bank National Association, as trustee to the indenture, dated as of June 11, 2004, governing the 8.125% Senior Notes due 2011. Incorporated by reference to Exhibit 4.2 to Appleton’s current report on Form 8-K filed October 6, 2009. |
4.3 | Third Supplemental Indenture, dated as of September 9, 2009, among Appleton Papers Inc., as issuer, each of the guarantors identified therein and U.S. Bank National Association, as trustee to the indenture, dated as of June 11, 2004, governing the 9.75% Senior Subordinated Notes due 2011. Incorporated by reference to Exhibit 4.3 to Appleton’s current report on Form 8-K filed October 6, 2009. |
4.4 | Second Lien Collateral Agreement, dated as of September 30, 2009, among Appleton Papers Inc., Paperweight Development Corp. and each other grantor identified therein. Incorporated by reference to Exhibit 4.4 to Appleton’s current report on Form 8-K filed October 6, 2009. |
4.5 | Second Amendment to Credit Agreement, dated as of September 30, 2009, among Appleton Papers Inc., as the U.S. Borrower, Paperweight Development Corp., certain guarantors identified therein, Bank of America, N.A. as administrative agent, swing line lender and L/C issuer, and the lenders as named on the signature pages thereof. Incorporated by reference to Exhibit 4.5 to Appleton’s current report on Form 8-K filed October 6, 2009. |
31.1
|
Certification
of Mark R. Richards, Chairman, President and Chief Executive Officer of
Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities
Exchange Act of 1934 as amended.
|
31.2
|
Certification
of Thomas J. Ferree, Vice President Finance, Chief Financial Officer and
Treasurer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the
Securities Exchange Act of 1934 as amended.
|
31.3
|
Certification
of Mark R. Richards, Chairman, President and Chief Executive Officer of
Paperweight Development Corp., pursuant to Rule 15d-14(a) of the
Securities Exchange Act of 1934 as amended.
|
31.4
|
Certification
of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight
Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange
Act of 1934 as amended.
|
32.1
|
Certification
of Mark R. Richards, Chairman, President and Chief Executive Officer of
Appleton Papers Inc., pursuant to 18 U.S.C. Section
1350.
|
32.2
|
Certification
of Thomas J. Ferree, Vice President Finance, Chief Financial Officer and
Treasurer of Appleton Papers Inc., pursuant to 18 U.S.C. Section
1350.
|
32.3
|
Certification
of Mark R. Richards, Chairman, President and Chief Executive Officer of
Paperweight Development Corp., pursuant to 18 U.S.C. Section
1350.
|
32.4
|
Certification
of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight
Development Corp., pursuant to 18 U.S.C. Section
1350.
|
46
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
APPLETON
PAPERS INC.
(Registrant)
|
|
Date:
November 6, 2009
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/s/
Thomas J. Ferree
|
Thomas
J. Ferree
|
|
Vice
President Finance, Chief Financial Officer and Treasurer (Signing on
behalf of the Registrant and as the Principal Financial
Officer)
|
47
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PAPERWEIGHT
DEVELOPMENT CORP.
(Registrant)
|
|
Date:
November 6, 2009
|
/s/
Thomas J. Ferree
|
Thomas
J. Ferree
|
|
Chief
Financial Officer and Treasurer (Signing on behalf of the Registrant and
as the Principal Financial Officer)
|
48