Attached files

file filename
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-31.1 - 302 CERTIFICATION OF APPLETON CEO - APPVION, INC.exhibit31-1.htm
EX-31.4 - 302 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC.exhibit31-4.htm
EX-32.3 - 906 CERTIFICATION OF PAPERWEIGHT CEO - APPVION, INC.exhibit32-3.htm
EX-31.2 - 302 CERTIFICATION OF APPLETON CFO - APPVION, INC.exhibit31-2.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


 
 
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: July 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 August 1, 2010, 9,784,959 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 August 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
33
     
Item 3
Quantitative and Qualitative Disclosures About Market Risk
41
     
Item 4T
Controls and Procedures
41
     
PART II
OTHER INFORMATION
 
     
Item 1
Legal Proceedings
41
     
Item 1A
Risk Factors
41
     
Item 6
Exhibits
43
     
Signatures
 
44



 
 
 
 
 
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)
 
   
July 4, 2010
   
January 2, 2010
 
ASSETS
           
Current assets
           
  Cash and cash equivalents
 
$
3,919
   
$
9,963
 
  Accounts receivable, less allowance for doubtful accounts of $1,217 and $1,356, respectively
   
108,695
     
81,485
 
  Inventories
   
111,764
     
112,346
 
  Other current assets
   
51,845
     
54,758
 
  Assets of discontinued operations
   
20,977
     
17,772
 
       Total current assets
   
297,200
     
276,324
 
                 
Property, plant and equipment, net of accumulated depreciation of
  $453,830 and $431,225, respectively
   
367,691
     
385,129
 
Intangible assets, net
   
49,615
     
50,780
 
Environmental indemnification receivable
   
-
     
28,600
 
Other assets
   
27,217
     
16,815
 
Assets of discontinued operations
   
39,171
     
40,332
 
                 
       Total assets
 
$
780,894
   
$
797,980
 
                 
LIABILITIES, REDEEMABLE COMMON STOCK,
 ACCUMULATED DEFICIT AND
 ACCUMULATED OTHER COMPREHENSIVE LOSS
               
Current liabilities
               
  Current portion of long-term debt
 
$
21,280
   
$
5,955
 
  Accounts payable
   
51,407
     
55,384
 
  Accrued interest
   
3,168
     
5,218
 
  Other accrued liabilities
   
82,783
     
91,363
 
  Liabilities of discontinued operations
   
6,538
     
5,733
 
       Total current liabilities
   
165,176
     
163,653
 
                 
Long-term debt
   
582,026
     
544,113
 
Postretirement benefits other than pension
   
50,587
     
50,609
 
Accrued pension
   
103,317
     
101,312
 
Environmental liability
   
-
     
28,600
 
Other long-term liabilities
   
5,744
     
9,087
 
Commitments and contingencies (Note 12)
   
-
     
-
 
Redeemable common stock, $0.01 par value,
  shares authorized: 30,000,000,
  shares issued and outstanding:  9,785,058 and
  10,097,099, respectively
   
114,378
     
122,087
 
Accumulated deficit
   
(141,372
)
   
(121,764
)
Accumulated other comprehensive loss
   
(98,962
)
   
(99,717
)
 
      Total liabilities, redeemable common stock, accumulated
       deficit and accumulated other comprehensive loss
 
$
780,894
   
$
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
 
(unaudited)
 
(dollars in thousands)
 
 
   
Three Months Ended
July 4, 2010
   
Three Months
Ended
July 5, 2009
   
Six Months
Ended
July 4, 2010
   
Six Months
Ended
July 5, 2009
 
                         
Net sales
  $ 220,784     $ 195,940     $ 430,792     $ 391,712  
                                 
Cost of sales
    184,126       148,540       354,326       305,034  
                                 
  Gross profit
    36,658       47,400       76,466       86,678  
                                 
Selling, general and administrative expenses
    35,318       29,842       70,131       61,964  
Environmental expense insurance recovery
    -       -       (8,181     -  
                                 
Operating income
    1,340       17,558       14,516       24,714  
                                 
Other expense (income)
                               
  Interest expense
    16,746       12,830       33,668       24,222  
  Debt extinguishment expense (income), net
    -       -       5,532       (5,380 )
  Interest income
    (35 )     (21 )     (45 )     (37 )
  Foreign exchange loss (gain)
    1,623       (881 )     1,360       (602 )
  Other income
    -       (820 )     -       (820 )
                                 
(Loss) income before income taxes
    (16,994 )     6,450       (25,999     7,331  
                                 
Provision (benefit) for income taxes
    45       (72 )     (46 )     (98 )
                                 
(Loss) income from continuing operations
    (17,039 )     6,522       (25,953     7,429  
                                 
Discontinued operations
                               
   Income from discontinued operations, net
   of income taxes
    1,302       722       2,854       978  
                                 
Net (loss) income
  $ (15,737 )   $ 7,244     $ (23,099 )   $ 8,407  
                                 
                                 
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 SIX MONTHS ENDED
 
(unaudited)
 
(dollars in thousands)
 
   
July 4, 2010
   
July 5, 2009
 
Cash flows from operating activities:
           
Net (loss) income
 
$
(23,099
)
 
$
8,407
 
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
               
Depreciation
   
24,698
     
28,987
 
Amortization of intangible assets
   
1,742
     
1,921
 
Amortization of financing fees
   
1,965
     
1,315
 
Amortization of bond discount
   
302
     
-
 
Employer 401(k) noncash matching contributions
   
1,838
     
2,111
 
Foreign exchange loss (gain)
   
1,366
     
(694)
 
Loss on disposals of equipment
   
83
     
123
 
Accretion of capital lease obligation
   
23
     
40
 
Loss (gain) on debt extinguishment
   
5,437
     
(5,380
)
Fox River insurance recoveries (including accretion)
   
(8,214
)
   
-
 
(Increase)/decrease in assets and increase/(decrease) in liabilities:
               
Accounts receivable
   
(31,062
)
   
(15,708
)
Inventories
   
(117
)
   
7,982
 
Other current assets
   
573
     
(14,404
)
Accounts payable and other accrued liabilities
   
(2,616
)
   
2,175
 
Restructuring reserve
   
-
     
(1,924
)
Accrued pension
   
3,581
     
2,670
 
Other, net
   
(5,545
)
   
(5,077
)
                 
Net cash (used) provided by operating activities
   
(29,045
)
   
12,544
 
                 
Cash flows from investing activities:
               
        Proceeds from sale of equipment
   
57
     
27
 
Additions to property, plant and equipment
   
(6,799
)
   
(11,524
)
                 
Net cash used by investing activities
   
(6,742
)
   
(11,497
)
                 
Cash flows from financing activities:
               
Payments of senior secured notes payable
   
(211,225
)
   
(1,125
)
Payments of senior subordinated secured notes payable
   
-
     
(1,687
)
Proceeds from senior secured first lien notes payable
   
299,007
     
-
 
Debt acquisition costs
   
(10,712
)
   
(3,124
)
Payments relating to capital lease obligations
   
(389
)
   
(366
)
Proceeds from old revolving line of credit
   
21,350
     
119,450
 
Payments of old revolving line of credit
   
(109,575
)
   
(91,450
)
Proceeds from new revolving line of credit
   
154,793
     
-
 
Payments of new revolving line of credit
   
(99,350
)
   
-
 
Proceeds from State of Ohio loan
   
-
     
3,000
 
Payments of State of Ohio loan
   
(570
)
   
(400
)
Payments of secured financing
   
(1,494
)
   
(1,125
)
Proceeds from issuance of redeemable common stock
   
1,924
     
2,075
 
Payments to redeem common stock
   
(7,736
)
   
(12,550
)
Decrease in cash overdraft
   
(6,274
)
   
(14,928
)
                 
Net cash provided (used) by financing activities
   
29,749
     
(2,230
)
                 
Effect of foreign exchange rate changes on cash and cash equivalents
   
(6
)
   
92
 
Change in cash and cash equivalents
   
(6,044
)
   
(1,091
)
Cash and cash equivalents at beginning of period
   
9,963
     
4,180
 
                 
Cash and cash equivalents at end of period
 
$
3,919
   
$
3,089
 
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 SIX 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      -        -        (23,099      -     $  (23,099
  Changes in retiree plans, net      -        -        -        596       596  
  Realized and unrealized gain on derivatives
   
-
     
-
     
-
     
159
     
159
 
    Total comprehensive loss
                                 
$
(22,344
)
Issuance of redeemable common stock
   
292,333
     
3,518
     
-
     
-
         
Redemption of redeemable common stock
   
(604,374
)
   
(7,736
)
   
-
     
-
         
Accretion of redeemable common stock
   
-
     
(3,491
)
   
3,491
     
-
         
                                         
Balance, July 4, 2010
   
9,785,058
   
$
114,378
   
$
(141,372
)
 
$
(98,962
)
       
                                         
Balance, January 3, 2009
   
10,643,894
   
$
147,874
   
$
(159,650
)
 
$
(95,169
)
       
                                         
Comprehensive income:
                                       
  Net income
   
-
     
-
     
8,407
     
-
   
$
8,407
 
  Changes in retiree plans, net
   
-
     
-
     
-
     
(575
)
   
(575
)
  Realized and unrealized gain on derivatives
   
-
     
-
     
-
     
251
     
251
 
    Total comprehensive income
                                 
$
8,083
 
Issuance of redeemable common stock
   
213,730
 
   
4,033
     
-
     
-
         
Redemption of redeemable common stock
   
(612,205
)
   
(12,550
)
   
-
     
-
         
Accretion of redeemable common stock
   
-
     
(3,778
)
   
3,778
     
-
         
                                         
Balance, July 5, 2009
   
10,245,419
   
$
135,579
   
$
(147,465
)
 
$
(95,493
)
       

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 and six months ended July 4, 2010 and July 5, 2009, the cash flows for the six months ended July 4, 2010 and July 5, 2009 and financial position at July 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 prior year financial statement amounts have been reclassified to conform to their current year presentation. See note 2, Discontinued Operations.

2.        DISCONTINUED OPERATIONS
 
    On July 2, 2010, Appleton entered into a stock purchase agreement with NEX Performance Films Inc. (“Films”), an entity affiliated with Mason Wells Buyout Fund II, Limited Partnership, whereby Appleton agreed to sell all of the outstanding capital stock of American Plastics Company, Inc. (“APC”) and New England Extrusion Inc. (“NEX”) for a cash purchase price of $58 million. This transaction closed on July 22, 2010, with Appleton receiving $56 million at the time of closing and $2 million held in escrow, on behalf of Appleton, for the next 12 months to satisfy potential claims under the stock purchase agreement with Films. The cash proceeds of the sale were used to reduce debt. APC was acquired in 2003 and is located in Rhinelander, Wisconsin. NEX was acquired in 2005 and has manufacturing operations in Turners Falls, Massachusetts and Milton, Wisconsin. Together they comprised the performance packaging business segment. Since APC and NEX engage in the manufacture, marketing and sale of high-quality single and multilayer polyethylene films for packaging applications, their operations did not align with Appleton's strategic, long-term focus on its core competencies of specialty papers and microencapsulation. The operating results for this business for the three and six months ended July 4, 2010, and July 5, 2009, have been reclassified and are now reported separately as discontinued operations.
 
    The following table presents the net sales and operating income before income taxes with respect to APC and NEX (dollars in thousands):
 
   
For the Three
   
For the Three
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
   
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
                         
Net sales
  $ 25,105     $ 17,471     $ 47,264     $ 34,249  
                                 
Operating income before
  income taxes
  $ 1,305     $ 732     $ 2,869     $ 999  


 
 

 
 
 
 
 
7

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 
In addition, the assets and liabilities of APC and NEX have been reclassified at July 4, 2010, and January 2, 2010, as discontinued operations in the accompanying balance sheets, the major classes of which are detailed in the following table (dollars in thousands):
 
   
July 4, 2010
   
January 2, 2010
 
Current assets, excluding cash
  $ 20,977     $ 17,772  
Property, plant and equipment, net
    19,885       20,469  
Other long-term assets
    19,286       19,863  
Current liabilities
    (6,538 )     (5,733 )
      Net assets of discontinued operations 
  $ 53,610     $ 52,371  

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. All goodwill of the Company was assigned to the performance packaging segment. As discussed above, in early July, the Company entered into a stock purchase agreement to sell all of the outstanding capital stock of APC and NEX. As a result, the goodwill assigned to this portion of the performance packaging segment was reclassified at July 4, 2010, and January 2, 2010, as discontinued operations. Changes in the carrying value of goodwill are as follows (dollars in thousands):
 
   
July 4, 2010
   
January 2, 2010
 
Beginning of year 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
Goodwill related to discontinued operations     (2,910      (2,910
End of year balance                 
Goodwill      45,986        45,986  
Accumulated impairment losses       (45,986      (45,986 )
    $ -     $  -  


 
 
 
 
 
 
8

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The Company’s other intangible assets consist of the following (dollars in thousands):

   
As of July 4, 2010
   
As of January 2, 2010
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Gross Carrying Amount
   
Accumulated Amortization
 
Amortizable intangible assets:
                       
    Trademarks
 
$
44,665
   
$
21,030
   
$
44,665
   
$
19,981
 
     Patents
   
14,013
     
14,013
     
14,013
     
14,013
 
     Customer relationships
   
5,365
     
2,250
     
5,365
     
2,134
 
            Subtotal
   
64,043
   
$
37,293
     
64,043
   
$
36,128
 
Unamortizable intangible assets:
                               
   Trademarks
   
22,865
             
22,865
         
            Total
 
$
86,908
           
$
86,908
         

Of the $86.9 million of acquired intangible assets, $67.5 million was assigned to registered trademarks. Trademarks of $44.6 million related to carbonless paper 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.

Amortization expense for the three and six months ended July 4, 2010 was $0.6 million and $1.2 million, respectively. Amortization expense for the three and six months ended July 5, 2009 was $0.6 million and $1.2 million, respectively.
 
4.        INVENTORIES
 
Inventories consist of the following (dollars in thousands):
 
   
July 4, 2010
   
January 2, 2010
 
             
Finished goods
 
$
59,348
   
$
65,575
 
Raw materials, work in process and supplies
   
64,019
     
59,019
 
     
123,367
     
124,594
 
Inventory reserve
   
(3,122
)
   
(3,767
)
     
120,245
     
120,827
 
Last-in, first-out ("LIFO") reserve
   
(8,481
)
   
(8,481
)
   
$
111,764
   
$
112,346
 
 
 
Stores and spare parts inventory balances of $23.4 million and $24.1 million at July 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 2% of the Company’s total inventory balance at July 4, 2010 and at January 2, 2010.
 

 
 
 
9

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5.        PROPERTY, PLANT AND EQUIPMENT

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

   
July 4, 2010
   
January 2, 2010
 
Land and improvements
 
$
8,617
   
$
8,617
 
Buildings and improvements
   
130,256
     
129,758
 
Machinery and equipment
   
636,979
     
634,502
 
Software
   
31,799
     
31,779
 
Capital leases
   
4,929
     
4,764
 
Construction in progress
   
8,941
     
6,934
 
     
821,521
     
816,354
 
Accumulated depreciation/amortization
   
(453,830
)
   
(431,225
)
   
$
367,691
   
$
385,129
 

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

   
For the Three
   
For the Three
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
Depreciation Expense
 
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
                         
Cost of sales
  $ 10,246     $ 11,960     $ 20,386     $ 23,790  
Selling, general and
                               
  administrative expenses
    1,582       1,642       3,163       3,283  
    $ 11,828     $ 13,602     $ 23,549     $ 27,073  


6.        OTHER CURRENT AND NONCURRENT ASSETS

Other current assets consist of the following (dollars in thousands):
 
   
July 4, 2010
   
January 2, 2010
 
Environmental indemnification receivable
 
$
42,506
   
$
47,100
 
Alternative fuels tax credit receivable
   
-
     
925
 
Environmental expense insurance recovery
   
2,238
     
-
 
Other
   
7,101
     
6,733
 
   
$
51,845
   
$
54,758
 
 
Other noncurrent assets consist of the following (dollars in thousands):
 
   
July 4, 2010
   
January 2, 2010
 
Deferred debt issuance costs
 
$
16,096
   
$
12,786
 
Environmental expense insurance recovery
   
5,976
     
-
 
Other
   
5,145
     
4,029
 
   
$
27,217
   
$
16,815
 
 
 
 
 
10

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

7.        OTHER ACCRUED LIABILITIES

Other accrued liabilities, as presented in the current liabilities section of the balance sheet, consist of the following (dollars in thousands):
 
   
July 4, 2010
   
January 2, 2010
 
Compensation
 
$
7,155
   
$
10,137
 
Trade discounts
   
15,320
     
16,472
 
Workers’ compensation
   
3,971
     
4,460
 
Accrued insurance
   
2,215
     
1,864
 
Other accrued taxes
   
1,278
     
1,519
 
Postretirement benefits other than pension
   
3,609
     
3,609
 
Fox River Liabilities
   
42,506
     
47,100
 
Other
   
6,729
     
6,202
 
   
$
82,783
   
$
91,363
 
 
8.        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 14 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.

 
 
 
 
 
11

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

9.        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
July 4, 2010
   
For the Three
Months Ended
July 5, 2009
   
For the Six
Months Ended
July 4, 2010
   
For the Six
Months Ended
July 5, 2009
 
Net periodic benefit cost
                       
  Service cost
  $ 1,516     $ 1,458     $ 3,033     $ 2,916  
  Interest cost
    4,901       4,908       9,801       9,817  
  Expected return on plan assets
    (5,318 )     (5,199 )     (10,636 )     (10,399 )
  Amortization of prior service cost
    135       135       270       270  
  Amortization of actuarial loss
    654       123       1,307       245  
Net periodic benefit cost
  $ 1,888     $ 1,425     $ 3,775     $ 2,849  

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 the first half of 2010.

10.      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
July 4, 2010
   
For the Three
Months Ended
July 5, 2009
   
For the Six
Months Ended
July 4, 2010
   
For the Six
Months Ended
July 5, 2009
 
Net periodic benefit cost
                       
  Service cost
  $ 196     $ 185     $ 392     $ 370  
  Interest cost
    760       767       1,520       1,534  
  Amortization of prior service credit
    (538 )     (545 )     (1,076 )     (1,090 )
  Amortization of actuarial loss
    48       -       96       -  
Net periodic benefit cost
  $ 466     $ 407     $ 932     $ 814  

11.      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 July 4, 2010, the fair market value of one share of PDC common stock was $12.03. The Compensation Committee of the board resolved to discontinue future awards under the LTIP and SAR plans beginning in 2010. Due to the reduction in share price, no expense was recorded for these plans during the three and six months ended July 4, 2010 and July 5, 2009.

 
12

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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 July 4, 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 and $0.4 million of expense, related to this plan, was recorded during the three and six months ended July 4, 2010.
 
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. There was no expense recorded for this plan during the three months ended July 4, 2010 and July 5, 2009. Approximately $0.1 million was recorded as expense, related to this plan, for each of the six-month periods ended July 4, 2010 and July 5, 2009.

12.      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.
 

 
 
 
 
 
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. 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.

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 the first half of 2010, $33.2 million of payments were made from the reserve. This resulted in a remaining reserve of $42.5 million as of July 4, 2010, all of which is recorded in other accrued liabilities.

 
 
 
 
 
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 $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 $203.5 million in connection with Fox River Liabilities through the first half of 2010. At July 4, 2010, the total indemnification receivable from AWA was $42.5 million, all of which is recorded in other current assets.
 
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 July 4, 2010, the policy had $46.5 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 period ended July 4, 2010.
 
 
 
15

 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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, and the insurers appealed the final judgment. On June 8, 2010, the Wisconsin Court of Appeals upheld the final judgment. Settlements have been negotiated between most of the 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 July 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 six months ended July 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.

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.
 
 
 
 
 
 
16

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
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.
 
13.      EMPLOYEE STOCK OWNERSHIP PLAN

Appleton’s matching contributions charged to expense were $0.9 million and $1.0 million for the three months ended July 4, 2010 and July 5, 2009, respectively. Appleton’s matching contributions charged to expense were $1.8 million and $2.1 million for the six months ended July 4, 2010 and July 5, 2009, respectively. As a result of hardship withdrawals, required diversifications and employee terminations, 604,374 shares of PDC redeemable common stock were repurchased during the first six months of 2010 at an aggregate price of approximately $7.7 million. During the same period, the ESOP trustee purchased 159,941 shares of PDC redeemable common stock for an aggregate price of $1.9 million using pre-tax deferrals, rollovers and loan payments made by employees, while Appleton’s matching contribution for this same period resulted in an additional 132,392 shares of redeemable common stock being issued. During the first six months of 2009, as a result of hardship withdrawals, required diversifications and employee terminations, 612,205 shares of PDC redeemable common stock were repurchased at an aggregate piece 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 using 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 common stock being issued.

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 July 4, 2010. Due to a reduction to the share price on June 30, 2010, the Company reduced the redeemable common stock accretion by $3.5 million for the six months ended July 4, 2010. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $118 million has been determined. The recorded book value of the redeemable common stock as of July 4, 2010, was $114 million.
 
Due to a reduction in the June 30, 2009 share price, redeemable common stock accretion was reduced by $3.8 million for the six months ended July 5, 2009. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $193 million was determined. The recorded book value of the redeemable common stock as of July 5, 2009 was $136 million.

14.      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.

 

 
 
 
 
 
17

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
(unaudited)
 
    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 or if it becomes probable the forecasted transaction will not occur. 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 $5.0 million as of July 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 15, 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.

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
 
July 4, 2010
   
January 2, 2010
 
Foreign currency exchange derivatives
 
Other current assets
 
$
535
   
$
-
 
Foreign currency exchange derivatives
 
Accounts receivable
   
-
     
308
 
Foreign currency exchange derivatives
 
Other current liabilities
   
-
     
(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 on derivative instruments and related hedge items included in the Company’s condensed consolidated statement of operations for the three and six months ended July 4, 2010 and July 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
 
For the Three
Months Ended
July 4, 2010
   
For the Three
Months Ended
July 5, 2009
   
For the Six
Months Ended
July 4, 2010
   
For the Six
Months Ended
July 5, 2009
 
Foreign currency exchange derivatives
 
Net sales
  $ (43 )   $ (172 )   $ (96 )   $ (140 )
                                     
(Gains) losses recognized in accumulated other comprehensive loss as presented on the balance sheet
                        (406 )     54  
                                     
Not Designated as a Hedge
                                   
Interest rate swap contract
 
Interest expense
    -       712       961       916  
 
For a discussion of the fair value of financial instruments, see Note 16, Fair Value of Financial Instruments.
 
 
 
 
 
18

 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
(unaudited)

15.      LONG-TERM OBLIGATIONS

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

   
July 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
 
18,200
     
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%
 
 55,443
     
-
 
Unsecured variable rate industrial development bonds, 0.5% average interest rate at July 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
 
7,540
     
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
 
2,712
     
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
 
(5,691
 
 
-
 
Second lien notes payable at 11.25%, due December 2015
 
161,766
     
161,766
 
   
603,306
     
550,068
 
Less obligations due within one year
 
(21,280
 
 
(5,955
)
   $
582,026
     $
                                     544,113
 
               
 
During the first six months of 2010, Appleton made mandatory debt repayments of $2.1 million, plus interest, on its secured term note payable and State of Ohio loans. As discussed below, in February 2010, Appleton entered into a new five-year, asset-backed $100 million revolving credit facility. Initial borrowing on this revolving credit facility was $20.6 million. During first quarter 2010, Appleton borrowed an additional $17.9 million, net, on this facility. During second quarter 2010, the Company borrowed an additional $16.9 million, net. At July 4, 2010, the outstanding revolving credit facility balance was $55.4 million. Approximately $16.9 million of the revolving credit facility was used to support outstanding letters of credit. At July 4, 2010, there was approximately $27.7 million of unused borrowing capacity for working capital and other corporate purposes. A commitment fee of 0.50% per annum is assessed on the unused borrowing capacity.



 
 
 
19

 
 

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 $10.7 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 and Appleton Papers Canada Ltd. as well as American Plastics Company, Inc. and New England Extrusion Inc. until their July 22, 2010 divestiture.
 
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. until their July 22, 2010 divestiture. 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.

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.

 
 
 
20

 
 


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 and Rose Holdings Limited as well as American Plastics Company, Inc. and New England Extrusion Inc. until their July 22, 2010 divestiture. 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 and, American Plastics Company, Inc. and New England Extrusion Inc. until their July 22, 2010 divestiture. 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.

As of July 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.

 
 
 
 
 
21

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
  
16.      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):

   
July 4, 2010
   
January 2, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
Financial Instruments
 
Amount
   
Value
   
Amount
   
Value
 
Senior subordinated notes payable
 
$
32,195
   
$
17,707
   
$
32,195
   
$
19,317
 
Senior notes payable
   
17,491
     
17,141
     
17,491
     
17,491
 
Senior secured first lien notes payable
 
299,309
     
285,840
     
-
     
-
 
Second lien notes payable
 
161,766
     
134,266
     
161,766
     
161,766
 
Senior credit facility
 
-
     
-
     
211,225
     
211,225
 
Secured term note payable
 
18,200
     
18,200
     
19,695
     
19,695
 
Revolving credit facility
55,443
55,443
88,225
88,225
State of Ohio loans
10,252
10,949
10,821
10,941
Industrial development bonds
   
8,650
     
8,650
     
8,650
     
8,650
 
   
$
603,306
   
$
548,196
   
$
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.

17.      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 for Appleton’s 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 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. All prior period financial information has been restated to conform to this new segment presentation.
 
    On July 2, 2010, Appleton entered into a stock purchase agreement with NEX Performance Films Inc. (“Films”), an entity affiliated with Mason Wells Buyout Fund II, Limited Partnership, whereby Appleton agreed to sell all of the outstanding capital stock of APC and NEX. This transaction closed on July 22, 2010. The operating results for this business for the three and six months ended July 4, 2010, and July 5, 2009, have been reclassified and are now reported separately as discontinued operations and, therefore, are not included in the segment presentation below.
 


 
 
 
 
 
22

 
 
 

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 (income), foreign exchange loss (gain) 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 (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
July 4, 2010
   
For the Three
Months Ended
July 5, 2009
 
For the Six
Months Ended
July 4, 2010
   
For the Six
Months Ended
July 5, 2009
 
Net sales
                     
Carbonless papers
$
                    128,001
  $
                    115,383
 
$
252,625
   
$
235,901
 
Thermal papers
 
87,151
   
70,455
   
167,376
     
135,485
 
   
215,152
   
185,838
   
420,001
     
371,386
 
                           
Encapsys 
 
  11,887
   
  9,510
   
  23,355
     
  18,719
 
Performance packaging (A)
 
-
   
6,464
   
-
     
13,630
 
Intersegment (B)
 
(6,255
 
(5,872
 
(12,564
)
   
(12,023
)
Total
$
                    220,784
   $
                    195,940
 
$
430,792
   
$
391,712
 
Operating income (loss)
                         
Carbonless papers
$
                        4,440
   $
                      20,314
 
$
12,725
   
$
31,875
 
Thermal papers
 
(2,306
 
(2,227
)
 
(4,361
)
   
(5,743
)
   
2,134
   
18,087
   
8,364
     
26,132
 
 
Encapsys
 
1,614
   
  828
   
  3,147
     
  1,170
 
Performance packaging (A)
 
-
   
108
   
-
     
185
 
Unallocated corporate charges and business development costs
 
(1,329
 
(569
 
5,232
     
(1,103
)
Intersegment (B)
 
(1,079
 
(896
 
(2,227
)
   
(1,670
)
Total
                        1,340
   $
                      17,558
 
$
14,516
   
$
24,714
 
Depreciation and amortization
                         
Carbonless papers
                        6,883
   $
                        8,141
 
$
13,739
   
$
16,490
 
Thermal papers
 
4,931
   
5,117
   
9,869
     
10,004
 
   
11,814
   
13,258
   
23,608
     
26,494
 
                           
Encapsys 
 
 548
   
  645
   
  1,009
     
  1,156
 
Performance packaging (A)
 
-
   
281
   
-
     
589
 
Unallocated corporate charges
 
49
   
42
   
97
     
82
 
Total
                      12,411
   $
                      14,226
 
$
24,714
   
$
28,321
 

(A) C&H Packaging Company, Inc. 
(B) Intersegment represents the portion of the Encapsys segment financial results relating to encapsulated products provided internally for the production of carbonless papers.

 
 
 
 
23

 
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

During the six months ended July 4, 2010, the Company recorded an $8.2 million environmental expense insurance recovery within unallocated corporate charges and business development costs.
 
18.      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. (prior to its July 22, 2010 sale), Rose Holdings Limited and New England Extrusion Inc. (prior to its July 22, 2010 sale), 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 July 4, 2010 and January 2, 2010, and for the three and six months ended July 4, 2010 and July 5, 2009. This financial information should be read in conjunction with the condensed consolidated financial statements and other notes related thereto.
 
    While preparing the Form 10-Q for the first quarter ended April 4, 2010, it was discovered that $2.8 million was not appropriately classified between the Issuer and the Subsidiary Guarantor as it relates to cash flows from operating and financing activities within the 2009 and first quarter ended April 4, 2010 Guarantor Condensed Consolidated Financial Statements.  The errors are not deemed material and the prior year and quarter financial information, and related disclosures presented, have been revised.

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.

 
 
 
 
 
24

 
 
 


PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 4, 2010
(unaudited)
(dollars in thousands)
 
   
Parent
Guarantor
   
Issuer
   
Subsidiary
Guarantors
   
Non-Guarantor
 Subsidiary
   
Eliminations
   
Consolidated
                                   
ASSETS
                                 
Current assets
                                 
   Cash and cash equivalents
 
$
-
   
$
2,869
   
$
-
   
$
1,050
   
$
-
   
$
3,919
   Accounts receivable, net
   
-
     
102,472
     
433
     
5,790
     
-
     
108,695
   Inventories
   
-
     
110,044
     
-
     
1,720
     
-
     
111,764
   Other current assets
   
42,506
     
9,217
     
-
     
122
     
-
     
51,845
   Assets of discontinued operations
   
-
     
-
     
20,977
     
-
     
-
     
20,977
      Total current assets
   
42,506
     
224,602
     
21,410
     
8,682
     
-
     
297,200