Attached files

file filename
EX-31.4 - 302 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC.exhibit31-4.htm
EX-32.1 - 906 CERTIFICATION OF APPLETON CEO - APPVION, INC.exhibit32-1.htm
EX-32.2 - 906 CERTIFICATION OF APPLETON CFO - APPVION, INC.exhibit32-2.htm
EX-31.3 - 302 CERTIFICATION OF PAPERWEIGHT CEO - APPVION, INC.exhibit31-3.htm
EX-31.2 - 302 CERTIFICATION OF APPLETON CFO - APPVION, INC.exhibit31-2.htm
EX-32.3 - 906 CERTIFICATION OF PAPERWEIGHT CEO - APPVION, INC.exhibit32-3.htm
EX-32.4 - 906 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC.exhibit32-4.htm
EX-31.1 - 302 CERTIFICATION OF APPLETON CEO - APPVION, INC.exhibit31-1.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: April 4, 2010

OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For The Transition Period From            To             .
 
Commission file 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)

Registrant’s 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 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 May 1, 2010, 9,514,059 shares of Paperweight Development Corp. common stock, $.01 par value, were outstanding. There is no trading market for the common stock of Paperweight Development Corp. As of May 1, 2010, 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.


 
 
 
1

 
 

 
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 and Comprehensive (Loss) Income
6
     
 
e) Notes to Condensed Consolidated Financial Statements
7
     
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
     
Item 3
Quantitative and Qualitative Disclosures About Market Risk
31
     
Item 4T
Controls and Procedures
31
     
PART II
OTHER INFORMATION
 
     
Item 1
Legal Proceedings
31
     
Item 1A
Risk Factors
31
     
Item 6
Exhibits
32
     
Signatures
 
33


 
 
 
2

 
 


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)
 
   
April 4, 2010
   
January 2, 2010
 
ASSETS
           
Current assets
           
  Cash and cash equivalents
 
$
3,238
   
$
9,963
 
  Accounts receivable, less allowance for doubtful accounts of $1,846 and $1,761, respectively
   
111,977
     
90,584
 
  Inventories
   
129,635
     
120,942
 
  Other current assets
   
54,529
     
54,835
 
       Total current assets
   
299,379
     
276,324
 
                 
Property, plant and equipment, net of accumulated depreciation of
  $460,126 and $448,531, respectively
   
395,602
     
405,598
 
Goodwill
   
2,910
     
2,910
 
Intangible assets, net
   
66,857
     
67,730
 
Environmental indemnification receivable
   
14,515
     
28,600
 
Other assets
   
27,140
     
16,818
 
                 
       Total assets
 
$
806,403
   
$
797,980
 
                 
LIABILITIES, REDEEMABLE COMMON STOCK,
 ACCUMULATED DEFICIT AND
 ACCUMULATED OTHER COMPREHENSIVE LOSS
               
Current liabilities
               
  Current portion of long-term debt
 
$
3,789
   
$
5,955
 
  Accounts payable
   
51,933
     
60,020
 
  Accrued interest
   
12,218
     
5,218
 
  Other accrued liabilities
   
88,384
     
92,460
 
       Total current liabilities
   
156,324
     
163,653
 
                 
Long-term debt
   
583,325
     
544,113
 
Postretirement benefits other than pension
   
50,598
     
50,609
 
Accrued pension
   
102,343
     
101,312
 
Environmental liability
   
14,515
     
28,600
 
Other long-term liabilities
   
5,623
     
9,087
 
Commitments and contingencies (Note 11)
   
-
     
-
 
Redeemable common stock, $0.01 par value,
  shares authorized: 30,000,000,
  shares issued and outstanding:  10,095,253 and
  10,097,099, respectively
   
120,320
     
122,087
 
Accumulated deficit
   
(127,383
)
   
(121,764
)
Accumulated other comprehensive loss
   
(99,262
)
   
(99,717
)
       Total liabilities, redeemable common stock, accumulated
       deficit and accumulated other comprehensive loss
 
$
806,403
   
$
797,980
 

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



 
 
 
3

 
 


PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
 
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE THREE MONTHS ENDED
 
(unaudited)
 
(dollars in thousands)
 
             
   
April 4, 2010
   
April 5, 2009
 
             
Net sales
 
$
232,168
   
$
212,550
 
                 
Cost of sales
   
188,418
     
170,809
 
                 
   Gross profit
   
43,750
     
41,741
 
                 
Selling, general and administrative expenses
   
37,191
     
34,318
 
Environmental expense insurance recovery
   
(8,181
)
   
-
 
                 
Operating income
   
14,740
     
7,423
 
                 
Other expense (income)
               
  Interest expense
   
16,922
     
11,392
 
  Debt extinguishment expense (gain), net
   
5,532
     
(5,380
)
  Interest income
   
(10
)
   
(16
)
  Foreign exchange (gain) loss
   
(263
)
   
279
 
                 
(Loss) income before income taxes
   
(7,441
)
   
1,148
 
                 
Benefit for income taxes
   
(79
)
   
(15
)
                 
Net (loss) income
 
$
(7,362
)
 
$
1,163
 

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 THREE MONTHS ENDED
 
(unaudited)
 
(dollars in thousands)
 
   
April 4, 2010
   
April 5, 2009
 
Cash flows from operating activities:
           
Net (loss) income
 
$
(7,362
)
 
$
1,163
 
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
               
Depreciation
   
12,295
     
14,429
 
Amortization of intangible assets
   
873
     
960
 
Amortization of financing fees
   
988
     
569
 
Amortization of bond discount
   
116
     
-
 
Employer 401(k) noncash matching contributions
   
906
     
1,147
 
Foreign exchange (gain) loss
   
(297
)
   
319
 
Loss on disposals of equipment
   
78
     
32
 
Accretion of capital lease obligations
   
13
     
21
 
Loss (gain) on debt extinguishment
   
5,437
     
(5,380
)
Fox River insurance recoveries
   
(8,181
)
   
-
 
(Increase)/decrease in assets and increase/(decrease) in liabilities:
               
Accounts receivable
   
(21,286
)
   
(9,468
)
Inventories
   
(8,711
)
   
862
 
Other current assets
   
2,544
     
(2,537
)
Accounts payable and other accrued liabilities
   
(151
)
   
3,549
 
Restructuring reserve
   
-
     
(1,468
)
Accrued pension
   
1,819
     
1,364
 
Other, net
   
(4,230
)
   
(5,214
)
                 
Net cash (used) provided by operating activities
   
(25,149
)
   
348
 
                 
Cash flows from investing activities:
               
        Proceeds from sale of equipment
   
57
     
9
 
Additions to property, plant and equipment
   
(2,366
)
   
(4,745
)
                 
Net cash used by investing activities
   
(2,309
)
   
(4,736
)
                 
Cash flows from financing activities:
               
Payments of senior secured notes payable
   
(211,225
)
   
(562
)
Proceeds from senior secured first lien notes payable
   
299,007
     
-
 
Payments of senior subordinated secured notes payable
   
-
     
(1,687
)
Debt acquisition costs
   
(10,576
)
   
(2,685
)
Payments relating to capital lease obligations
   
(195
)
   
(182
)
Proceeds from old revolving line of credit
   
21,350
     
43,850
 
Payments of old revolving line of credit
   
(109,575
)
   
(16,050
)
Proceeds from new revolving line of credit
   
74,693
     
-
 
Payments of new revolving line of credit
   
(36,200
)
   
-
 
Payments of State of Ohio loans
   
(282
)
   
(200
)
Payments of secured financing
   
(838
)
   
(557
)
Payments to redeem common stock
   
(24
)
   
(12
)
Decrease in cash overdraft
   
(5,436
)
   
(16,810
)
                 
Net cash provided by financing activities
   
20,699
     
5,105
 
                 
Effect of foreign exchange rate changes on cash and cash equivalents
   
34
     
(40
)
Change in cash and cash equivalents
   
(6,725
)
   
677
 
Cash and cash equivalents at beginning of period
   
9,963
     
4,180
 
                 
Cash and cash equivalents at end of period
 
$
3,238
   
$
4,857
 
 
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
 
AND COMPREHENSIVE (LOSS) INCOME
 
FOR THE THREE MONTHS ENDED
 
(unaudited)
 
(dollars in thousands, except share data)
 
   
   
Redeemable Common Stock
                   
   
Shares
Outstanding
   
Amount
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
   
Comprehensive
(Loss) Income
 
                               
Balance, January 2, 2010
   
10,097,099
   
$
122,087
   
$
(121,764
)
 
$
(99,717
)
     
                                       
Comprehensive loss:
                                     
  Net loss
   
-
     
-
     
(7,362
)
 
   
-
   
$
(7,362
)
  Changes in retiree plans, net
-
-
-
298
   
298
 
  Realized and unrealized gain on derivatives
   
-
     
-
     
-
     
157
     
157
 
    Total comprehensive loss
                                 
$
(6,907
)
Redemption of redeemable common stock
   
(1,846
)
   
(24
)
   
-
     
-
         
Accretion of redeemable common stock
   
-
     
(1,743
)
   
1,743
     
-
         
                                         
Balance, April 4, 2010
   
10,095,253
   
$
120,320
   
$
(127,383
)
 
$
(99,262
)
       
                                         
Balance, January 3, 2009
   
10,643,894
   
$
147,874
   
$
(159,650
)
 
$
(95,169
)
       
                                         
Comprehensive income:
                                       
  Net income
   
-
     
-
     
1,163
     
-
   
$
1,163
 
  Changes in retiree plans, net
   
-
     
-
     
-
     
(288
)
   
(288
)
  Realized and unrealized gain on derivatives
   
-
     
-
     
-
     
272
     
272
 
    Total comprehensive income
                                 
$
1,147
 
Redemption of redeemable common stock
   
(533
)
   
(12
)
   
-
     
-
         
Accretion of redeemable common stock
   
-
     
(470
)
   
470
     
-
         
                                         
Balance, April 5, 2009
   
10,643,361
   
$
147,392
   
$
(158,017
)
 
$
(95,185
)
       

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 statement of the results of operations for the three months ended April 4, 2010 and April 5, 2009, the cash flows for the three months ended April 4, 2010 and April 5, 2009 and financial position at April 4, 2010 and January 2, 2010 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 100%-owned subsidiaries (collectively the “Company”) for each of the three years in the period ended January 2, 2010, which are included in the annual report on Form 10-K for the year ended January 2, 2010. The consolidated balance sheet data as of January 2, 2010, 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 100%-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. Certain immaterial prior year financial statement amounts have been reclassified to conform to their current year presentation.

2.        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. Changes in the carrying amount of goodwill, which is assigned entirely to the performance packaging segment, are as follows (dollars in thousands):

   
April 4, 2010
   
January 2, 2010
 
             
Beginning of period balance
           
Goodwill
 
$
48,896
   
$
50,246
 
Accumulated impairment losses
   
(45,986
)
   
(39,645
)
     
2,910
     
10,601
 
Impairment losses
   
-
     
(6,341
)
Goodwill related to assets held for sale
   
-
     
(1,350
)
End of period balance
               
Goodwill
   
48,896
     
48,896
 
Accumulated impairment losses
   
(45,986
)
   
(45,986
)
   
$
2,910
   
$
2,910
 


The Company’s other intangible assets consist of the following (dollars in thousands):
   
As of April 4, 2010
   
As of January 2, 2010
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Gross Carrying Amount
   
Accumulated Amortization
 
Amortizable intangible assets:
                       
    Trademarks
 
$
47,835
   
$
21,408
 
 
$
47,835
   
$
20,847
 
     Patents
   
15,013
     
15,010
 
 
 
15,013
 
   
15,005
 
     Customer relationships
   
25,064
     
7,502
 
 
 
25,064
 
   
7,200
 
     Non-compete agreements
   
-
     
-
 
 
 
691
 
   
686
 
            Subtotal
   
87,912
   
$
43,920
 
 
 
88,603
 
 
$
43,738
 
Unamortizable intangible assets:
                               
   Trademarks
   
22,865
         
 
 
22,865
 
       
            Total
 
$
110,777
           
$
111,468
         

Of the $110.8 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. As of April 4, 2010, both the carrying amount and accumulated amortization of the non-compete agreements were reduced by $0.7 million, to zero, due to their expiration. The remaining acquired intangible assets are being amortized over their estimated useful lives ranging from 3 to 25 years for patents and customer relationships.

Amortization expense for the three months ended April 4, 2010 approximated $0.9 million. Amortization expense for the three months ended April 5, 2009 approximated $1.0 million.
 
 
 
 
7

 
 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

3.        INVENTORIES

Inventories consist of the following (dollars in thousands):

   
April 4, 2010
   
January 2, 2010
 
             
Finished goods
 
$
73,971
   
$
68,534
 
Raw materials, work in process and supplies
   
68,025
     
65,259
 
     
141,996
     
133,793
 
Inventory reserve
   
(3,880
)
   
(4,370
)
     
138,116
     
129,423
 
Last-in, first-out ("LIFO") reserve
   
(8,481
)
   
(8,481
)
   
$
129,635
   
$
120,942
 

Stores and spare parts inventory balances of $24.4 million and $24.1 million at April 4, 2010 and January 2, 2010, respectively, are valued at average cost and are included in raw materials, work in process and supplies. Certain other inventories valued using the first-in, first-out ("FIFO") method approximate 10% of the Company’s total inventory balance at April 4, 2010, and 9% at January 2, 2010.
 
4.        PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment balances consist of the following (dollars in thousands):

   
April 4, 2010
   
January 2, 2010
 
Land and improvements
 
$
9,753
   
$
9,753
 
Buildings and improvements
   
137,764
     
137,602
 
Machinery and equipment
   
661,052
     
660,691
 
Software
   
33,435
     
33,414
 
Capital leases
   
4,929
     
4,764
 
Construction in progress
   
8,795
     
7,905
 
     
855,728
     
854,129
 
Accumulated depreciation/amortization
   
(460,126
)
   
(448,531
)
   
$
395,602
   
$
405,598
 

Depreciation expense for the three months ended April 4, 2010 and April 5, 2009 consists of the following (dollars in thousands):

   
For the Three
Months Ended
April 4, 2010
   
For the Three
Months Ended
April 5, 2009
 
Cost of sales
 
$
10,673
   
$
12,761
 
Selling, general and administrative expenses
   
1,622
     
1,668
 
   
$
12,295
   
$
14,429
 

5.        OTHER CURRENT AND NONCURRENT ASSETS

Other current assets consist of the following (dollars in thousands):

   
April 4, 2010
   
January 2, 2010
 
Environmental indemnification receivable
 
$
47,100
   
$
47,100
 
Alternative fuels tax credit receivable
   
-
     
925
 
Environmental expense insurance recovery
   
2,228
     
-
 
Other
   
5,201
     
6,810
 
   
 $
54,529
   
 $
54,835
 

Other noncurrent assets consist of the following (dollars in thousands):
 
   
April 4, 2010
   
January 2, 2010
 
Deferred debt issuance costs
 
$
16,937
   
$
12,786
 
Environmental expense insurance recovery
   
5,953
     
-
 
Other
   
4,250
     
4,032
 
   
 $
27,140
   
 $
16,818
 
 
 
8

 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

6.        OTHER ACCRUED LIABILITIES

Other accrued liabilities, as presented in the current liabilities section of the balance sheet, consist of the following (dollars in thousands):
 
   
April 4, 2010
   
January 2, 2010
 
Compensation
 
$
9,057
   
$
10,288
 
Trade discounts
   
12,241
     
16,472
 
Workers’ compensation
   
4,302
     
4,460
 
Accrued insurance
   
1,745
     
1,864
 
Other accrued taxes
   
1,189
     
1,535
 
Postretirement benefits other than pension
   
3,609
     
3,609
 
Fox River Liabilities
   
47,100
     
47,100
 
Other
   
9,141
     
7,132
 
   
$
88,384
   
$
92,460
 
 
7.        NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures,” requiring new disclosures of significant transfers in and out of Levels 1 and 2 fair value measurements, the reasons for the transfers, and separate reporting of purchases, sales, issuances and settlements in the roll forward of Level 3 fair value measurement activity. The new ASU also clarifies that fair value measurement disclosures should be provided for each class of assets and liabilities and disclosures should also be provided about valuation techniques and inputs used to measure fair value for recurring and nonrecurring fair value measurements. The disclosures are required for either Level 2 or Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). During first quarter 2010, the Company adopted the portion of ASU No. 2010-06 relating to Level 2 fair value measurements and is currently evaluating the impact, if any, of the Level 3 disclosures on its financial statements. The disclosures required by adoption are included in Note 13 of Notes to Condensed Consolidated Financial Statements.
 
In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU amends previous accounting related to the consolidation of variable interest entities ("VIE") to require an enterprise to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Also, this ASU requires an ongoing reconsideration of the primary beneficiary and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. This ASU was effective as of the beginning of each reporting entity’s first annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company adopted ASU No. 2009-17 during first quarter 2010 and there was no material impact.

In December 2009, the FASB issued ASU No. 2009-16, “Accounting for Transfers of Financial Assets.” This ASU removes the concept of a qualifying special-purpose entity and establishes a new “participating interest” definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarifies and amends the derecognition criteria for a transfer to be accounted for as a sale and changes the amount that can be recognized as a gain or loss on a transfer accounted for as a sale when beneficial interests are received by the transferor. Enhanced disclosures are also required to provide information about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This ASU must be applied as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company adopted ASU No. 2009-16 during first quarter 2010 and there was no impact on its financial results for the quarter.

 
 
 
9

 
 
 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

8.        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):

Pension Benefits
 
For the Three
Months Ended
April 4, 2010
   
For the Three
Months Ended
April 5, 2009
 
Net periodic benefit cost
           
  Service cost
 
$
1,517
   
$
1,458
 
  Interest cost
   
4,900
     
4,909
 
  Expected return on plan assets
   
(5,318
)
   
(5,200
)
  Amortization of prior service cost
   
135
     
135
 
  Amortization of actuarial loss
   
653
     
122
 
Net periodic benefit cost
 
$
1,887
   
$
1,424
 

The Company expects to contribute approximately $15 million to its pension plan in 2010 for plan year 2009. No contributions were made to the pension plan during first quarter 2010.

9.         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):

Other Postretirement Benefits
 
For the Three
Months Ended
April 4, 2010
   
For the Three
Months Ended
April 5, 2009
 
Net periodic benefit cost
           
  Service cost
 
$
196
   
$
185
 
  Interest cost
   
760
     
767
 
  Amortization of prior service credit
   
(538
)
   
(545
)
  Amortization of actuarial loss
   
48
     
-
 
Net periodic benefit cost
 
$
466
   
$
407
 

10.      LONG-TERM INCENTIVE COMPENSATION

In December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive Plan (“LTIP”). In July 2002, the Company adopted the Appleton Papers Canada Ltd. Share Appreciation Rights Plan (“SAR”). 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. As of January 2, 2010, the fair market value of one share of PDC common stock was $13.26. The Compensation Committee of the board resolved to discontinue future awards under the LTIP and SAR plans beginning in 2010. There was no expense recorded for these plans during the three months ended April 4, 2010 and April 5, 2009.
 
Effective January 3, 2010, the Company adopted a long-term restricted stock unit plan ("RSU") to provide key management employees, who are in a position to make a significant contribution to the growth and profitability of Appleton, the opportunity to be rewarded for performance that aligns with long-term shareholder interests. The RSU provides for future cash payments based on the value of PDC common stock, as determined by the semi-annual valuation provided by the ESOP trustee. The Compensation Committee of the board will establish the number of units granted each year in accordance with the Compensation Committee’s stated goals and policies. The units are valued, as of the date of the grant, at the most recent PDC stock price as determined by the semi-annual ESOP valuation. All units are vested three years after the award date and paid at vesting. The cash payment upon vesting of a unit is equal to the value of PDC common stock at the most recent valuation date times the number of units granted. The Compensation Committee approved an aggregate total for the 2010 year of up to 219,000 units. Actual units granted, as of January 3, 2010, were 211,500. Recipients are required to enter into a non-compete and non-solicitation agreement in order to receive units under the RSU which, if violated following the receipt of units, results in forfeiture of any and all rights to receive payment relating to RSU units. Approximately $0.2 million of expense, related to this plan, was recorded during first quarter 2010.


 
 
 
10

 
 
 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
    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 determined by the semi-annual ESOP valuation. This deferred compensation vests coincidentally 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. Approximately $0.1 million was recorded as expense, related to this plan, for each of the three-month periods ended April 4, 2010 and April 5, 2009.

11.      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 Corporation (“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. Certain PRPs have initiated preliminary work under a work plan and are negotiating to reach a funding arrangement to complete the work plan.
 
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. In December 2009, the court granted the defendants’ motion for summary judgment, dismissing the claim. Appleton and NCR intend to appeal this decision.

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, Appleton 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.

 
 
 
11

 
 

 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
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. As of January 2, 2010, this reserve was $75.7 million. During first quarter 2010, $14.1 million of payments were made from the reserve. This resulted in a remaining reserve of $61.6 million as of April 4, 2010, of which $47.1 million is recorded in other accrued liabilities and $14.5 million is recorded as a long-term environmental liability.

The following assumptions were used in evaluating Appleton’s potential Lower Fox River liability and establishing a remediation reserve:
 
 
total remediation costs of $690 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. AWA has paid $184.4 million in connection with Fox River Liabilities through first quarter 2010. At April 4, 2010, the total indemnification receivable from AWA was $61.6 million, of which $47.1 million is recorded in other current assets and $14.5 million is recorded as an environmental indemnification receivable.
 


 
 
 
12

 
 
 

 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
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. As of April 4, 2010, the policy had $65.6 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.
 
The insurance policy discussed above is held by a special purpose entity in which the Company is a minority shareholder. An AWA affiliate is the only other shareholder in this entity. The Company adopted ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” as of January 3, 2010. The Company determined that this entity is not a VIE and there is no requirement to include this entity in its consolidated financial results for the quarter ended April 4, 2010.
 
In March 2008, Appleton received favorable jury verdicts in a state court declaratory judgment action relating to insurance coverage of its environmental claims involving the Fox River. A final judgment and order was entered in January 2009. Though the insurers have appealed the final judgment, settlements have been negotiated between certain insurers and Appleton. Under the terms of the AWA indemnification agreement, recoveries from insurance are reimbursed to AWA to the extent of its indemnification obligation. Appleton recorded an $8.2 million receivable, representing first quarter 2010 insurance settlements to be received in excess of amounts reimbursable to AWA, in the condensed consolidated balance sheet as of April 4, 2010. Of this amount, $2.2 million is included in other current assets and $6.0 million is classified as long-term and is included in other assets. An $8.2 million environmental expense insurance recovery was also recorded as a separate line within operating income on the condensed consolidated statement of operations for the period ended April 4, 2010.

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 the 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 may 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.
 
 

 
 
 
13

 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
Legal Proceedings

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 plus 12% interest annually beginning as of January 9, 2009. The defendant has appealed the final judgment. The case will be reviewed by the Wisconsin Court of Appeals, which will determine whether the judgment should stand. Due to the pending appeal, no gain has been recorded, though 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. Appleton has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While Appleton vigorously defends itself and expects to prevail in any similar cases that may be brought against it in the future, there can be no assurance that it will be successful.
 
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.

12.      EMPLOYEE STOCK OWNERSHIP PLAN

Appleton’s matching contributions charged to expense were $0.9 million and $1.1 million for the three months ended April 4, 2010 and April 5, 2009, respectively. As a result of hardship withdrawals, 1,846 shares of PDC redeemable common stock were repurchased at an aggregate price of approximately $24,000 during first quarter 2010. As a result of hardship withdrawals, 533 shares of PDC redeemable common stock were repurchased at an aggregate piece of approximately $12,000 during first quarter 2009.
 
In accordance with the ASC 480, “Distinguishing Liabilities from Equity,” redeemable equity securities are required to be accreted so the amount in the balance sheet reflects the estimated amount redeemable at the earliest redemption date based upon the redemption value at each period-end. All Company common stock stock is redeemable common stock. Redeemable common stock is being accreted up to the earliest redemption date, mandated by federal law, based upon the estimated fair market value of the redeemable common stock as of April 4, 2010. Due to a reduction to the share price on December 31, 2009, the Company reduced the redeemable common stock accretion by $1.7 million for the three months ended April 4, 2010. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $134 million has been determined. The recorded book value of the redeemable common stock as of April 4, 2010, was $120 million.
 
Due to a reduction in the December 31, 2008 share price, redeemable common stock accretion was reduced by $0.5 million for the three months ended April 5, 2009. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $228 million was determined. The recorded book value of the redeemable common stock as of April 5, 2009 was $147 million.

13.      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 condensed 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 condensed consolidated balance sheet at fair value using Level 2 observable market inputs. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward note, also deemed to be categorized as Level 2. 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 $9.5 million as of April 4, 2010.

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 14, 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 contained interest payments based on LIBOR with a 2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. Consequently, this derivative was no longer designated as a hedging instrument. As a result of the February 2010 voluntary refinancing, Appleton paid $5.0 million, including interest, to settle this derivative.
 
 
14

 

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 sheets (dollars in thousands):

Designated as a Hedge
 
Balance Sheet Location
 
April 4, 2010
   
January 2, 2010
 
Foreign currency exchange derivatives
 
Accounts receivable
 
$
575
   
$
308
 
Foreign currency exchange derivatives
 
Other current liabilities
   
(92
)
   
(35
)
                     
Not Designated as a Hedge
                   
Interest rate swap contract
 
Other long-term liabilities
   
-
     
(3,813
)

 
The following table presents the location and amount of (gains) losses on derivative instruments and related hedge items included in the Company’s condensed consolidated statement of operations for the three months ended April 4, 2010 and April 5, 2009 and (gains) losses initially recognized in accumulated other comprehensive loss in the condensed consolidated balance sheet at the period-ends presented (dollars in thousands):
 
Designated as a Hedge
 
Statement of Operations Location
 
April 4, 2010
   
April 5, 2009
 
Foreign currency exchange derivatives
 
Net sales
 
$
(53
 
$
(32
 
 
 
   
 
 
   
 
 
(Gains) losses recognized in accumulated other comprehensive loss          (404      33  
                     
Not Designated as a Hedge
                   
Interest rate swap contract
 
Interest expense
   
961
     
(204
)
 
For a discussion of the fair value of financial instruments, see Note 15, Fair Value of Financial Instruments.

14.      LONG-TERM OBLIGATIONS

Long-term obligations, excluding the capital lease obligations, consist of the following (dollars in thousands):

 
April 4, 2010
 
January 2, 2010
 
The senior secured variable rate notes payable were paid off, in full, and terminated on February 8, 2010. At January 2, 2010 the notes were at 6.625%, $542 due quarterly with $204,184 due June 2013.
$
-
   
$
211,225
 
Secured term note payable at 14.25%, approximately $200 due monthly with $6,831 due December 2013.
18,856
 
19,695
 
At January 2, 2010 the old revolving credit facility was at approximately 6.7%. On February 8, 2010, it was repaid in full and terminated.
 
-
     
88,225
 
New revolving credit facility at approximately 6.0%  38,493    -  
Unsecured variable rate industrial development bonds, 0.4% average interest rate at April 4, 2010, $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
7,755
 
7,965
 
State of Ohio loan at 1% until July 2011, then 3% until May 2019, approximately $30 due monthly and final payment due May 2019
2,784
 
2,856
 
Senior notes payable at 8.125%, due June 2011
17,491
 
17,491
 
Senior subordinated notes payable at 9.75%, due June 2014
32,195
 
32,195
 
Senior secured first lien notes payable at 10.5%, due June 2015
305,000
 
-
 
Unamortized discount on 10.5% senior secured first lien notes payable, due June 2015
(5,876
)
-
 
Second lien notes payable at 11.25%, due December 2015
161,766
 
161,766
 
 
587,114
 
550,068
 
Less obligations due within one year
(3,789
)
(5,955
)
 
$                    583,325
 
$                    544,113
 
         

 
 
 
15

 
 
 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

On February 8, 2010, Appleton completed a voluntary refinancing of its debt to extend debt maturities, increase liquidity, eliminate certain financial covenants and increase financial flexibility. The refinancing included the sale of $305.0 million of 10.5% senior secured first lien notes due June 2015 and a new five-year, asset-backed $100 million revolving credit facility. Proceeds from the sale of the senior secured notes, less expenses and discounts, were $292.2 million. The new revolving credit facility provides for up to $100 million of revolving loans including a letter of credit sub-facility of up to $25 million and a swing line sub-facility of up to $5 million. It also contains an uncommitted accordion feature that allows the Company to increase the size of the revolving credit facility by up to $25 million if the Company can obtain commitments for the incremental amount. Borrowings under the new revolving credit facility will be limited to the sum of (a) 85% of the net amount of eligible accounts receivable and (b) the lesser of (i) 70% of the net amount of eligible raw materials and finished goods inventory or (ii) 85% of the net orderly liquidation value of such inventory. The Company’s borrowings under the revolving credit facility will initially bear interest at the Company’s option at either base rate plus 3.00% or LIBOR plus 4.00% per annum. Thereafter, the interest rate may be reduced (and subsequently may be increased up to the foregoing levels or reduced from time to time) based on measures of Appleton’s average monthly unused availability as defined in the revolving credit facility. Initial borrowing totaled $20.6 million. A majority of the proceeds from this refinancing transaction were used to repay, and thus terminate, the senior secured credit facilities which included senior secured variable rate notes payable of $211.2 million, plus interest, and the revolving credit facility of $97.1 million, plus interest. Remaining proceeds were used to pay related transaction fees and expenses totaling $10.6 million.

The 10.5% senior secured first lien notes due June 2015 rank senior in right of payment to all existing and future subordinated indebtedness of Appleton and equally in right of payment with all existing and future senior indebtedness of Appleton. The notes are secured by security interests in substantially all of the property and assets of Appleton and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all of Appleton’s restricted subsidiaries (other than excluded restricted subsidiaries) and the parent entity. Initially, in addition to Appleton, this includes PDC, American Plastics Company, Inc., New England Extrusion Inc. and Appleton Papers Canada Ltd.
 
The revolving credit facility is guaranteed by PDC, each of PDC’s existing and future 100%-owned domestic and Canadian subsidiaries and each other subsidiary of PDC that guarantees the 10.5% senior secured first lien notes due June 2015 including American Plastics Company, Inc. and New England Extrusion Inc. Lenders hold a senior first-priority interest in (i) substantially all of the accounts, inventory, general intangibles, cash deposit accounts, business interruption insurance, investment property (including, without limitation, all issued and outstanding capital stock of the Company and each revolver guarantor (other than PDC) and all interests in any domestic or Canadian partnership, joint venture or similar arrangement), instruments (including all collateral security thereof), documents, chattel paper and records of the Company and each revolver guarantor now owned or hereafter acquired (except for certain general intangibles, instruments, documents, chattel paper and records of the Company or any revolver guarantor, to the extent arising directly in connection with or otherwise directly relating to equipment, fixtures or owned real property), (ii) all other assets and properties of the Company and each revolver guarantor now owned or hereafter acquired, and (iii) all proceeds of the foregoing. Lenders also hold a junior first-priority security interest in (i) substantially all equipment, fixtures and owned real property of the Company and each revolver guarantor now owned or hereafter acquired, (ii) in each case solely to the extent arising directly in connection with or otherwise directly related to any of the foregoing, certain general intangibles, instruments, documents, chattel paper and records of the Company and each revolver guarantor now owned or hereafter acquired, and (iii) all proceeds of the foregoing. This revolving credit facility contains affirmative and negative covenants customary for similar credit facilities, which among other things, require that the Company meet a minimum fixed charge coverage ratio under certain circumstances and restrict the Company’s ability and the ability of the Company’s subsidiaries, subject to certain exceptions, to incur liens, incur or guarantee additional indebtedness, make restricted payments, engage in transactions with affiliates and make investments.

During the first three months of 2010, Appleton made mandatory debt repayments of $1.1 million, plus interest, on its secured term note payable and State of Ohio loans. Prior to the refinancing, Appleton had borrowed an additional $8.9 million, net, from the old revolving credit facility. As discussed above, this was repaid in full. Subsequent to the refinancing, and in addition to the initial borrowing of $20.6 million on the new revolving credit facility, Appleton borrowed an additional $17.9 million, net, using the new revolving credit facility. The outstanding revolving credit facility balance was $38.5 million at quarter-end. Approximately $18.5 million of the new revolving credit facility was used to support outstanding letters of credit. At April 4, 2010, there was approximately $31.9 million of unused borrowing capacity under the five-year, asset-backed $100 million revolving credit facility for working capital and other corporate purposes. A commitment fee of 0.75% per annum is assessed on the unused borrowing capacity.

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. The covenant violation that occurred 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 these two interest rate swap contracts. As amended, the senior secured credit facilities contained 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, it reclassified swap losses, originally classified in other comprehensive loss, to interest expense as of year-end 2008. One of these swap contracts was terminated in February 2009. As of January 2, 2010, the remaining swap contract was recorded as a long-term liability of $3.8 million based on a fair value measurement using Level 2 inputs. As a result of the February 2010 voluntary refinancing, Appleton paid $5.0 million, including interest, to settle this derivative.

 
16

 
 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
The senior secured term note payable, as amended, and second lien notes, as amended, contain affirmative and negative covenants. Among other restrictions, the covenants contained in the 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. In February 2010, Appleton and the noteholder of the senior secured term note payable, further amended the terms of this debt to eliminate a financial covenant and adjust the levels of the remaining financial covenants. The senior secured term note payable, as amended, also contains covenants which, among other things, restrict Appleton’s ability and the ability of Appleton’s other guarantors of the 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; amend its debt instruments; 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 term note payable, as amended, also contains a provision which defines an event of default to include defaults or events of default under the senior notes, as amended, and the senior subordinated notes, as amended.
 
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, American Plastics Company, Inc., Rose Holdings Limited and New England Extrusion Inc. The 11.25% second lien notes due 2015, as amended, are guaranteed by PDC and certain of present and future domestic and foreign subsidiaries. Guarantors include PDC, 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 and rank senior in right of payment to all of the guarantors’ existing and future subordinated debt. The guarantees of these 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.

The first lien notes and the second lien notes, as amended, 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 10.5% first lien notes due 2015 and the 11.25% second lien notes due 2015, as amended. On January 29, 2010, Appleton received the requisite consents from the beneficial owners of the second lien notes to certain amendments to the indenture governing these notes in order to (i) permit a transaction pursuant to which the ESOP will cease to own at least 50% of PDC, without triggering a requirement on the part of the Company to make an offer to repurchase the second lien notes, as amended, and (ii) permit a capital contribution or operating lease of the black liquor assets located at the Company’s Roaring Spring, Pennsylvania facilities to a newly formed joint venture with a third-party in exchange for a minority equity interest in such joint venture.

 
 
 
17

 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
As of April 4, 2010, Appleton was in compliance with its various amended covenants and is forecasted to remain compliant throughout 2010. Appleton’s ability to comply with the financial covenants in the future depends on further debt reduction and achieving forecasted operating results. 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. Appleton cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of non-compliance with debt covenants, if 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.
 
15.      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):

   
April 4, 2010
   
January 2, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
Financial Instruments
 
Amount
   
Value
   
Amount
   
Value
 
Senior subordinated notes payable
 
$
32,195
   
$
10,785
   
$
32,195
   
$
19,317
 
Senior notes payable
   
17,491
     
16,879
     
17,491
     
17,491
 
Senior secured first lien notes payable
 
299,124
     
303,611
     
-
     
-
 
Second lien notes payable
 
161,766
     
144,781
     
161,766
     
161,766
 
Senior credit facility
 
-
     
-
     
211,225
     
211,225
 
Secured term note payable
 
18,856
     
18,856
     
19,695
     
19,695
 
Revolving credit facility
38,493
38,493
88,225
88,225
State of Ohio loans
10,539
10,928
10,821
10,941
Industrial development bonds
   
8,650
     
8,650
     
8,650
     
8,650
 
   
$
587,114
   
$
552,983
   
$
550,068
   
$
537,310
 
                                 
Interest rate swap derivative
 
$
-
   
$
-
   
$
3,813
   
$
3,813
 
 

The senior subordinated notes payable, the senior notes payable, the senior secured first lien 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 secured term note payable 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.

16.      SEGMENT INFORMATION

The Company’s four reportable segments are as follows: carbonless papers, thermal papers, Encapsys® and performance packaging. Prior to first quarter 2010, the reportable segments were coated solutions, thermal papers, security papers and performance packaging. The financial results of the Encapsys business had previously been included within the coated solutions segment. Encapsys provides encapsulation technologies and encapsulated products both internally within Appleton for the production of carbonless papers and commercially to external customers. It has grown to be an increasingly significant business and is forecasted to continue this trend. As a result of this growth, there is a specific management team in place to oversee the development, marketing and manufacturing of these products. With the breakout of Encapsys, the only remaining product line within coated solutions was carbonless papers. As the result of a business and management realignment of the Company’s core paper businesses, previously reported security papers has been combined with carbonless papers to become the carbonless papers reportable segment. The carbonless papers segment and the thermal papers segment each operate under separate management teams to encourage a singular focus on specific markets and customers and their respective needs. Both the carbonless papers segment and the thermal papers segment are included in the Technical Papers business unit. All prior period financial information has been restated to conform to this new segment presentation.

 
 
 
18

 
 
 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
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 expense (gain) and foreign currency (gain) loss. The Company does not allocate total assets internally in assessing operating performance and does not track capital expenditures by segment. Net sales, operating income (loss) and depreciation and amortization, as determined by the Company for its reportable segments, are as follows (dollars in thousands):

   
For the Three Months Ended
April 4, 2010
   
For the Three Months Ended
April 5, 2009
 
Net sales
           
Technical Papers
           
Carbonless papers
 
$
124,625
   
$
120,518
 
Thermal papers
   
80,225
     
65,030
 
     
204,850
     
185,548
 
                 
Encapsys 
   
  11,468
     
  9,209
 
Performance packaging
   
22,159
     
23,944
 
Intersegment (A)
   
(6,309
)
   
(6,151
)
Total
 
$
232,168
   
$
212,550
 
                 
Operating income (loss)
               
Technical Papers
               
Carbonless papers
 
$
8,285
   
$
11,561
 
Thermal papers
   
(2,055
)
   
(3,516
)
     
6,230
     
8,045
 
                 
Encapsys
   
  1,533
     
  342
 
Performance packaging
   
1,335
     
344
 
Unallocated corporate charges and business development costs
   
6,790
     
(534
)
Intersegment (A)
   
(1,148
)
   
(774
)
Total
 
$
14,740
   
$
7,423
 
                 
Depreciation and amortization
               
Technical Papers
               
Carbonless papers
 
$
6,856
   
$
8,349
 
Thermal papers
   
4,938
     
4,887
 
     
11,794
     
13,236
 
                 
Encapsys 
   
  461
     
  511
 
Performance packaging
   
913
     
1,602
 
Unallocated corporate charges
   
-
     
40
 
Total
 
$
13,168
   
$
15,389
 
(A) Intersegment represents the portion of the Encapsys segment financial results relating to encapsulated products provided internally for the production of carbonless papers. 

 
During the three months ended April 4, 2010, the Company recorded an $8.2 million environmental expense insurance recovery within unallocated corporate charges and business development costs.
 
17.      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 Packaging Company, Inc. (prior to its December 18, 2009 sale), American Plastics Company, Inc., Rose Holdings Limited and New England Extrusion Inc., each of which is a 100%-owned subsidiary of Appleton (the “Subsidiary Guarantors”).

Presented below is condensed consolidating financial information for the Parent Guarantor, the Issuer, the Subsidiary Guarantors and a 100%-owned non-guarantor subsidiary (the “Non-Guarantor Subsidiary”) as of April 4, 2010 and January 2, 2010, and for the three months ended April 4, 2010 and April 5, 2009. This financial information should be read in conjunction with the condensed consolidated financial statements and other notes related thereto.

The senior secured credit facilities, as amended (prior to the February 2010 voluntary refinancing), the senior secured term note payable, as amended, the first lien notes and the second lien notes, as amended, place restrictions on the subsidiaries of the Issuer that would limit dividend distributions by these subsidiaries.
 
19

 
 
 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 4, 2010
(unaudited)
(dollars in thousands)
 
   
Parent
Guarantor
   
Issuer
   
Subsidiary
Guarantors
   
Non-Guarantor
 Subsidiary
   
Eliminations
   
Consolidated
                                   
ASSETS
                                 
Current assets
                                 
   Cash and cash equivalents
 
$
-
   
$
1,915
   
$
-
   
$
1,323
   
$
-
   
$
3,238
   Accounts receivable, net
   
-
     
95,048
     
11,501
     
5,428
     
-
     
111,977
   Inventories
   
-
     
116,356
     
10,881
     
2,398
     
-
     
129,635
   Other current assets
   
47,100
     
7,282
     
-
     
147
     
-
     
54,529
      Total current assets
   
47,100
     
220,601
     
22,382
     
9,296
     
-
     
299,379
                                               
   Property, plant and equipment, net
   
-
     
375,468
     
20,126
     
8
     
-
     
395,602
   Investment in subsidiaries
   
176,179
     
98,426
     
-
     
-
     
(274,605)
 
   
-
   Other assets
   
14,527
     
77,202
     
19,573
     
120
     
-
     
111,422
       Total assets
 
$
237,806
   
$
771,697
   
$
62,081
   
$
9,424
   
$
(274,605)
 
 
$
806,403
                                               
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
                                       
Current liabilities
                                             
   Current portion of long-term debt
 
$
-
   
$
3,789
   
$
-
   
$
-
   
$
-
   
$
3,789
   Accounts payable
   
-
     
45,875
     
6,014
     
44
     
-
     
51,933
   Due to (from) parent and affiliated companies
   
344,131
     
(308,916
)
   
(30,535
)
   
(4,680
)
   
-
     
-
   Other accrued liabilities
   
-
     
98,469
     
945
     
1,188
     
-
     
100,602
       Total current liabilities
   
344,131
     
(160,783
)
   
(23,576
)
   
(3,448
)
   
-
     
156,324
                                               
Long-term debt
   
-
     
583,325
     
-
     
-
     
-
     
583,325
Other long-term liabilities
   
-
     
172,976
     
-
     
103
     
-
     
173,079
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss
   
(106,325)
 
   
176,179
     
85,657
     
 12,769
     
(274,605)
 
   
(106,325)
                                               
      Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss
 
$
237,806
   
$
771,697
   
$
62,081
   
$
9,424
   
$
(274,605)
 
 
$
806,403


 
 
 
20

 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
CONDENSED CONSOLIDATING BALANCE SHEET
 
JANUARY 2, 2010
 
(dollars in thousands)
 
   
Parent
Guarantor
   
Issuer
   
Subsidiary
Guarantors
   
Non-Guarantor
 Subsidiary
   
Eliminations
   
Consolidated
                                   
ASSETS
                                 
Current assets
                                 
   Cash and cash equivalents
 
$
-
   
$
9,161
   
$
1
   
$
801
   
$
-
   
$
9,963
   Accounts receivable, net
   
-
     
76,248
     
9,099
     
5,237
     
-
     
90,584
   Inventories
   
-
     
110,174
     
8,596
     
2,172
     
-
     
120,942
   Other current assets
   
47,100
     
7,518
     
77
     
140
     
-
     
54,835
      Total current assets
   
47,100
     
203,101
     
17,773
     
8,350
     
-
     
276,324
                                               
   Property, plant and equipment, net
   
-
     
385,120
     
20,469
     
9
     
-
     
405,598
   Investment in subsidiaries
   
179,787
     
96,505
     
-
     
-
     
(276,292)
 
   
-
   Other assets
   
28,612
     
67,430
     
19,863
     
153
     
-
     
116,058
       Total assets
 
$
255,499
   
$
752,156
   
$
58,105
   
$
8,512
   
$
(276,292)
 
 
$
797,980
                                               
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
                                       
Current liabilities
                                             
   Current portion of long-term debt
 
$
-
   
$
5,955
   
$
-
   
$
-
   
$
-
   
$
5,955