UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(AMENDMENT No. 1)

 

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

 

For the quarterly period ended: March 30, 2014

 

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

                                          

 

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  ☒    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  ☒    (Do not check if a smaller reporting company)

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  ☒

 

As of May 1, 2014,  7,658,429 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. No shares of Paperweight Development Corp. were held by non-affiliates.

 

Documents incorporated by reference: None.

  

 

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Paperweight Development Corp. meets the conditions set forth in General Instruction I(1)(a) and (b) and is therefore filing this form with the reduced disclosure format.

 

Explanatory Note

 

This Form 10-Q/A amends the Company’s quarterly report on Form 10-Q for the quarter ended March 30, 2014, which was filed on May 8, 2014 (the “Original Report”).

 

In this Quarterly Report on Form 10-Q/A for the three months ended March 30, 2014, Paperweight Development Corp. (the “Company” or “PDC”) is restating its previously issued condensed consolidated financial statements and the related disclosures as of December 28, 2013, and the previously issued condensed consolidated financial statements for the quarterly period ended March 31, 2013.  As discussed in further detail below and in Note 2 to the accompanying condensed consolidated financial statements, the restatement is the result of a misapplication in the guidance on accounting for redeemable equity.  We assessed the impact of this error on our prior interim and annual financial statements and concluded the impact was material to these financial statements.  Consequently, we are restating the prior period financial statements for the fiscal years ended December 28, 2013, December 29, 2012, and December 31, 2011, the unaudited condensed consolidated financial statements for the first three fiscal quarters in fiscal 2013, and the unaudited condensed consolidated financial statements for the first two fiscal quarters of fiscal year 2014.  All amounts in this Form 10-Q/A that were affected by the restatement have been restated, including the Condensed Consolidated Balance Sheet as of December 28, 2013 and the unaudited interim financial information for the quarter ended March 31, 2013.

 

All of the information in this Form 10-Q/A is as of the date of the Original Report and does not reflect any subsequent information or events other than the restatement discussed in Note 2 to the accompanying condensed consolidated financial statements appearing in this Form 10-Q/A. For the convenience of the reader, this Form 10-Q/A sets forth the Original Report in its entirety. However, the following items of this Form 10-Q/A have been amended solely as a result of, and to reflect, the restatement, and no other information in this Form 10-Q/A is amended hereby: (i) Part I, Item 1: Financial Statements (unaudited);  (ii) Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations, (iii) Part I, Item 4 – Controls and Procedures and (iv) Part II, Item 6 - Exhibits. The Company is also including currently dated Sarbanes-Oxley Section 302 and Section 906 certifications of the Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q/A.

 

For a more detailed explanation of these matters and resulting restatements, please see Part I, Item 1: Financial Statements (unaudited) – Note 2 to the Condensed Consolidated Financial Statements and Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Restatement of Previously Issued Consolidated Financial Statements.

 

In order to accomplish the restatements discussed above, we are also separately amending our previously filed (i) 2013 Annual Report on Form 10-K, which includes the years ended December 28, 2013, December 29, 2012, and December 31, 2011 and (ii) the 2014 Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2014, which includes the quarterly period ended June 30, 2013.

 

Background of Restatement

 

On November 11, 2014, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”), in connection with an internal review initiated by Company management, concluded that, because of a misapplication of the accounting guidance related to redeemable equity, the Company’s previously issued consolidated financial statements for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, and the financial statements for the quarters ended March 31, 2014 and June 30, 2014 should no longer be relied upon.  As such, the Company is restating its financial statements for the following periods: (i) the fiscal years ended December 28, 2013, December 29, 2012, and December 31, 2011, and (ii) the quarterly periods ended June 29, 2014, March 30, 2014, September 29, 2013, June 30, 2013, and March 31, 2013 (the “Restated Periods”).  These corrections result in restatements to the carrying amount of redeemable common stock and accumulated deficits for all periods and have no impact on the Company’s current or previously reported cash position, net income or loss, or statement of cash flows.

 

The guidance on accounting for redeemable equity requires a determination of whether the equity is currently redeemable or not currently redeemable.  Shares that are currently redeemable should be recorded at redemption value.  For shares that are not currently redeemable, the accounting guidance allows for changes in redemption value to be accreted from the initial issuance date to the earliest redemption date.  The Company originally determined that the redeemable common stock was not currently redeemable.  However, the original determination of the earliest redemption date did not consider that the common stock was redeemable at the option of employees upon termination.  In considering this fact, management determined that a significant portion of the common stock was currently redeemable and as a consequence those shares should have been carried at redemption value.

 

 

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The guidance on accounting for redeemable equity also specifies that if the redemption value is less than the original issuance cost, the carrying amount of the redeemable common stock should not be less than the original issuance cost.  The Company’s historical accounting did not appropriately consider this requirement, which resulted in certain shares of redeemable common stock being reported at a carrying amount below the original issuance cost.

 

The Audit Committee, together with management, determined that the financial statements in the Restated Periods should be restated to reflect the provisions above with an offsetting adjustment to the carrying amount of calculated deficit.

 

The restatement had no impact on the Company’s Consolidated Statements of Comprehensive Income (Loss) or Consolidated Statements of Cash Flows.  An explanation of the impact on our financial statements is contained in Note 2 to the condensed consolidated financial statements contained in Part I, Item 1: Financial Statements (unaudited).

 

Internal Control Considerations

 

Management has assessed the effect of the restatement on the Company’s internal control over financial reporting and believes that this restatement was the result of a material weakness in its internal controls over financial reporting for all periods under restatement because of a material weakness related to accounting for redeemable equity.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.  For a discussion of management’s consideration of the material weakness identified, see Part I, Item 4: Controls and Procedures included in this Quarterly Report.

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements (unaudited)

 

 

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

 

 

 

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

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

 

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1.       BASIS OF PRESENTATION

 

In the opinion of management, all adjustments necessary for the fair statement of comprehensive income for the three months ended March 30, 2014 and March 31, 2013, the cash flows for the three months ended March 30, 2014 and March 31, 2013 and financial position at March 30, 2014 and December 28, 2013 have been made.

 

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”), which includes Appvion, Inc., formally known as Appleton Papers Inc, and its 100%-owned subsidiaries (collectively “Appvion”) for each of the three years in the period ended December 28, 2013, which are included in the annual report on Form 10-K for the year ended December 28, 2013. The consolidated balance sheet data as of December 28, 2013, 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.

 

The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

 

2.     RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

 

On November 11, 2014, the Audit Committee of the Company’s Board of Directors, in connection with an internal review initiated by Company management, concluded that, because of a misapplication of the accounting guidance related to redeemable equity, the Company’s previously issued consolidated financial statements for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, and the financial statements for the quarters ended March 31, 2014 and June 30, 2014 should no longer be relied upon.  As such, the Company has restated its financial statements for the following periods: (i) the fiscal year ended December 28, 2013 and (ii) the quarterly periods ended March 30, 2014 and March 31, 2013 (the “Restated Periods”).  These corrections result in restatements to the carrying amount of redeemable common stock and accumulated deficits for all periods and have no impact on the Company’s current or previously reported cash position, net income or loss, or statement of cash flows.

 

Under Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, the appropriate accounting for redeemable equity first depends upon a determination of whether the equity is currently redeemable or not currently redeemable.  Shares that are currently redeemable should be recorded at redemption value.  For shares not currently redeemable, the accounting guidance allows for changes in redemption value to be accreted from the initial issuance date to the earliest redemption date.  The Company originally determined that the redeemable common stock was not currently redeemable.  However, the original determination of the earliest redemption date did not consider that the common stock was redeemable at the option of employees upon termination.  In considering this fact, management determined that a significant portion of the common stock was currently redeemable and as a consequence those shares should have been carried at redemption value.

 

The guidance on accounting for redeemable equity also specifies that if the redemption value is less than the original issuance cost, the carrying amount of the redeemable common stock should not be less than the original issuance cost.  The Company’s historical accounting did not appropriately consider this requirement, which resulted in certain shares of redeemable common stock being reported at a carrying amount below the original issuance cost.

 

The impact of the restatements on affected line items of the Condensed Consolidated Balance Sheets as of March 30, 2014 and December 28, 2013 and the Condensed Consolidated Statements of Redeemable Common Stock, Accumulated Deficit and Accumulated Other Comprehensive Income for the three months ended March 30, 2014 and March 31, 2013 are presented below. The restatements had no impact on the Company’s Consolidated Statements of Comprehensive Income (Loss) or Consolidated Statements of Cash Flows for any period.

 

 

 

 

 

 

 

 

 

 

 

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3.       OTHER INTANGIBLE ASSETS

 

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

 

 

 

Amortization expense for each of the three-month periods ended March 30, 2014 and March 31, 2013, was $0.6 million.

 

4.       INVENTORIES    

 

Inventories consist of the following (dollars in thousands):

 

 

 

The stores and spare parts inventory balance was $16.0 million and $15.9 million as of March 30, 2014 and December 28, 2013, respectively. It was valued at average cost and included in raw materials, work in process, stores and spare parts. All other inventories are valued using the first-in, first-out (“FIFO”) method.

 

 

 

 

 

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5.       PROPERTY, PLANT AND EQUIPMENT

 

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

 

 

 

Depreciation expense for the three months ended March 30, 2014 and March 31, 2013 consists of the following (dollars in thousands):

 

 

 

6.       OTHER CURRENT AND NONCURRENT ASSETS

 

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

 

 

 

The environmental indemnification receivables of $57.8 million and $59.3 million, noted above for the periods ended March 30, 2014 and December 28, 2013, respectively, represent an indemnification receivable from Windward Prospects Ltd (formerly Arjo Wiggins Appleton Limited, “AWA”) as recorded on the Condensed Consolidated Balance Sheet.

 

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

 

 

 

 

 

 

 

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7.      OTHER ACCRUED LIABILITIES

 

Other accrued liabilities, as presented in the current liabilities section of the Condensed Consolidated Balance Sheet, consist of the following (dollars in thousands):

 

 

8.       NEW ACCOUNTING PRONOUNCEMENTS

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." This guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: (a) The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) Any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation. ASU 2013-04 was effective for the Company's annual and interim periods beginning after December 15, 2013 and retrospective application is required for all prior periods presented. As required, the Company adopted this guidance beginning in the first quarter ended March 30, 2014 and there was no impact to the Company’s consolidated financial statements as a result of adoption.

 

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” It expands required disclosures related to the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. It requires disclosure of net and gross positions in covered financial instruments and derivative instruments which are either (1) offset in accordance with ASC Sections 210-20-45 or 815-10-45, or (2) subject to an enforceable netting or other similar arrangement. To clarify the guidance provided in ASU 2011-11, the FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities" in January 2013. It clarifies the scope of the guidance to include derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to master netting or similar arrangements. The amendments were effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. As required, the Company adopted this guidance for its fiscal year beginning December 29, 2013 and the first quarter interim period ended March 30, 2014. The impact to the Company’s consolidated financial statements, as a result of adoption, was not material.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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9.      EMPLOYEE BENEFITS

 

The components of net periodic pension cost associated with the defined benefit pension plans include the following (dollars in thousands):

 

The Company expects to contribute approximately $18.0 million to its funded pension plan in 2014. The Company contributed $6.6 million to the plan during the first three months of 2014.

 

Certain of the Company’s hourly employees participated in a multi-employer defined benefit plan, the Pace Industry Union-Management Pension Plan (EIN #11-6166763). Participants in this plan included the West Carrollton, Ohio represented manufacturing employees, where the collective bargaining agreement expired April 1, 2012. Participants also included the represented employees at the Kansas City, Kansas distribution center, where the collective bargaining agreement expired December 31, 2011. As a result of labor contracts ratified in June 2012 and September 2012, by the bargaining employees in Kansas City and West Carrollton, respectively, both groups elected to end their participation in this multi-employer plan and instead participate in the defined benefit pension plan sponsored by the Company. This resulted in a full withdrawal from the multi-employer plan, for which, the Company recorded a $7.0 million expense in third quarter 2012 representing its estimated cost to satisfy its complete withdrawal liability under the terms of the plan’s trust agreement. This was in addition to the $18.0 million partial withdrawal liability recorded as a restructuring reserve during first quarter 2012 due to the workforce reduction at West Carrollton resulting from the cessation of papermaking activities. Payments of $0.5 million were made during first quarter 2014, resulting in interest expense of $0.3 million and a $0.2 million reduction of the reserve. Of the total $24.8 million reserve, $0.8 million is classified as short-term and $24.0 million is classified as long-term within the Condensed Consolidated Balance Sheet as of March 30, 2014. The estimated obligation for the complete withdrawal liability was derived from available information, including but not limited to collective bargaining agreements, plan trust agreements, participation agreements, ERISA statutes, regulations and rulings, discussions with the plan trustee, and discussions with legal counsel. The recorded liability is the Company’s best estimate of the amount to satisfy the withdrawal liability, with a payment period that began January 2014 and could extend for up to 20 years, discounted in accordance with ASC Section 450-20-S99-1.

 

10.      POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS

 

The components of other postretirement benefit cost include the following (dollars in thousands):

 

 

 

 

 

 

 

 

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11.      LONG-TERM INCENTIVE COMPENSATION    

 

In December 2001, the Company adopted the Appvion, Inc. Long-Term Incentive Plan (“LTIP”). Effective January 3, 2010, the Company adopted a long-term restricted stock unit plan ("RSU"). Both plans utilize phantom units. The value of a unit in the LTIP 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”) between the grant date and the exercise date. The value of a unit in the RSU is based on the value of PDC common stock, as determined by the ESOP trustee. All units under both the LTIP and RSU plans will vest immediately, and cash payment will be made, upon a change in control as defined in the plans.

 

During first quarter 2014, 108,650 additional units were granted under the RSU plan. Due to terminations of employment, 925 unvested units were forfeited during the current year quarter. A balance of 323,850 RSU units remains as of March 30, 2014. Approximately $0.3 million of expense, related to this plan, was recorded during each of the three-month periods ended March 30, 2014 and March 31, 2013. During the first three months of 2014, 210,650 additional units were granted under the LTIP plan. Approximately $0.4 million of expense was recovered during the three-month period ending March 30, 2014. Expense of approximately $0.2 million was recorded during the three-month period ended March 31, 2013.

 

Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. There was no expense recorded for this plan during the three months ended March 30, 2014 and approximately $0.1 million was recorded as plan expense for the three-month period ended March 31, 2013.

 

12.      COMMITMENTS AND CONTINGENCIES

  

Lower Fox River

 

Appvion Removed as a Potentially Responsible Party (“PRP”). On April 10, 2012, the United States District Court for the Eastern District of Wisconsin granted Appvion’s motion for summary judgment and dismissed all claims against Appvion in the enforcement action. The decision establishes that Appvion is no longer a PRP, no longer liable under the federal Comprehensive Environmental Response, Compensation, and Liability Act, (“CERCLA” or “Superfund”), no longer considered a legal successor to NCR’s liabilities, and no longer required to comply with the 106 Order commanding remediation of the Lower Fox River. In addition, on July 3, 2012, the United States District Court for the Eastern District of Wisconsin determined that Appleton Coated Paper Company and NCR did not arrange for the disposal of hazardous waste within the meaning of CERCLA.

 

In January 2008, NCR and Appvion filed a lawsuit in federal court against various defendants, including PRPs and certain municipalities, to require contribution to the cost of remediating the Lower Fox River.  In December 2009, the court granted the defendants’ motion for summary judgment dismissing the claim.  The court also dismissed the counterclaims filed by the various defendants. NCR and Appvion have appealed the dismissal of the claims and the defendants have appealed the dismissal of the counterclaims.

 

The rulings do not affect Appvion’s rights or obligations to share defense and liability costs with NCR in accordance with the terms of a 1998 agreement and a 2005 arbitration determination (“the Arbitration”) arising out of Appvion’s acquisition of assets from NCR in 1978 while it was a subsidiary of B.A.T Industries Limited (“BAT”). Appvion and BAT have joint and several liability under the Arbitration for certain costs relating to the Lower Fox River and other potential future sites. Appvion initiated the dispute resolution procedures outlined in the 1998 agreement and arbitration commenced in March 2014. Issues in dispute include the scope of Appvion’s liability under the agreement, if any, as well as funding requests and supporting documentation from NCR (the “Dispute Resolution”). A decision on the Dispute Resolution is pending. The current carrying amount of Appvion’s liability under the Arbitration is $57.8 million, which represents Appvion’s best estimate of potential amounts to be paid.

 

On June 8, 2012, BAT served AWA with a claim filed in a United Kingdom court, seeking a declaration that BAT is indemnified by AWA from and against any losses relating to the Lower Fox River. On June 26, 2012, BAT served Appvion with the same claim, seeking a declaration that BAT is indemnified by Appvion. On February 10, 2014, Appvion filed a defense and counterclaim against BAT seeking a declaration that BAT is required to reimburse Appvion for damages in excess of $100 million representing BAT’s share of past liability costs paid by Appvion and that BAT is ordered to pay its share of future liability costs.

 

 

 

 

 

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Prior to the ruling in the above enforcement action, the United States Environmental Protection Agency (“EPA”) and Wisconsin Department of Natural Resources (“DNR”) claimed Appvion was a PRP 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 Combined Locks, Wisconsin paper mill and from other local industrial facilities. Wastewater from the Appleton plant was processed through the publicly-owned treatment works. Appvion purchased the Appleton plant and the Combined Locks, Wisconsin paper mill from NCR in 1978, long after the use of PCBs in the manufacturing process was discontinued. The EPA issued an administrative order in November 2007, directing the PRPs to implement the remedial action of the Fox River pursuant to which certain of the PRPs commenced remediation in 2008. The various PRPs, including NCR, the EPA and the DNR continue to contest the scope, extent and costs of the remediation as well as the appropriate bases for determining the parties’ relative shares of the remediation cost.

 

The rulings also do not affect either of the two indemnification agreements entered in 2001 wherein AWA agreed to indemnify PDC and PDC agreed to indemnify Appvion for costs, expenses and liabilities related to certain governmental and third-party environmental claims (including certain claims under the Arbitration), which are defined in the agreements as the Fox River Liabilities. Appvion has recorded a $57.8 million environmental indemnification receivable as of March 30, 2014.

 

Estimates of Liability. The accrued Arbitration liability is derived from available information, including consideration of uncertainties regarding the scope and cost of implementing the final remediation plan, the scope of restoration and final valuation of natural resource damage (“NRD”) assessments, the evolving nature of remediation and restoration technologies and governmental policies, NCR’s share of liability relative to other PRPs and the extent of BAT’s performance under the Arbitration. Appvion believes NCR has paid more than its estimated share of the liability based on the assumptions below. Based on the analysis of available information, it is reasonably possible that the Company’s costs to satisfy its Arbitration liability, when ultimately settled, could range from $6 million to $300 million, with a payment period extending beyond ten years. The Company has recorded a liability of $57.8 million at March 30, 2014, which is its best estimate of the probable loss within this range. The Company believes the likelihood of an outcome in the upper end of the range is significantly less than other possible outcomes within the range. Interim legal determinations may periodically obligate NCR (and BAT and Appvion pursuant to the Arbitration) to fund portions of the cleanup costs to extents greater than NCR’s share as finally determined, and in such instances, Appvion may reserve additional amounts (including appropriate reimbursement under its indemnification agreements as discussed below).

 

The following assumptions were used in evaluating Appvion’s Arbitration liability:

 

 

 

 

 

Appvion believes its recorded liability reflects its best estimate of potential payments under the Arbitration. While it is reasonably possible that Appvion may be responsible for payments in excess of the recorded liability under the Arbitration, additional payments are not deemed probable because ongoing litigation, continuing negotiation, and the Dispute Resolution process could significantly affect Appvion’s future obligation under the Arbitration.

 

AWA Indemnification. Pursuant to two indemnification agreements entered in 2001, AWA agreed to indemnify PDC and PDC agreed to indemnify Appvion 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 and other potential future sites. 

 

 

 

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Under the indemnification agreements, Appvion is indemnified for the first $75 million of Fox River Liabilities and for amounts in excess of $100 million. During 2008, Appvion paid $25 million to satisfy its portion of the Fox River Liabilities not covered by the indemnification agreement with AWA. As of March 30, 2014, AWA has paid $280.7 million in connection with Fox River Liabilities. At March 30, 2014, PDC’s total indemnification receivable from AWA was $57.8 million, all of which is recorded in other current assets.

 

In March 2008, Appvion received favorable jury verdicts in a state court declaratory judgment relating to insurance coverage of its environmental claims involving the Fox River. A final judgment and order was entered in January 2009 and upheld by the Wisconsin Court of Appeals in June 2010. Settlements have been negotiated between the insurers and Appvion. Under the terms of the indemnification agreement, recoveries from insurance are reimbursed to AWA to the extent of its indemnification obligation. During 2010, Appvion recorded an $8.9 million receivable, representing settlements to be received in excess of amounts reimbursable to AWA, in the Consolidated Balance Sheet as of January 1, 2011. During 2011, Appvion received $6.2 million of these funds. During third quarter 2012, an additional environmental expense insurance recovery of $2.2 million was recorded as a separate line item within operating loss on the Consolidated Statement of Comprehensive Income (Loss) and all remaining funds were received by Appvion in 2012.

 

The indemnification agreements negotiated with AWA are designed to ensure that Appvion will not be required to fund any of the indemnified costs and expenses in relation to the Fox River Liabilities. This arrangement is working as designed. However, based on Appvion’s review of the financial condition of AWA and estimates of Appvion’s potential liability, Appvion’s ultimate liability pursuant to the Arbitration could prove to be significantly larger than the current carrying amount. In that instance, the ultimate liability would likely exceed the financial capability of AWA. In the event Appvion is unable to secure payment from AWA or its former parent companies, Appvion would be liable for potential amounts determined pursuant to the Arbitration and these amounts may be material to Appvion.

 

West Carrollton

 

The West Carrollton, Ohio facility 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 may 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 facility.

 

Based on investigation and delineation of PCB contamination in soil and groundwater in the area of the wastewater impoundments, the Company believes that it may be necessary to undertake remedial action in the future, although the Company is currently under no obligation to do so. The Company 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 facility. 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 facility property, the Great Miami River remediation and the Company’s share of these remediation costs, if any, and since the Company 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 West Carrollton 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 facility may be liable for all or part of the cost of remediation of historic PCB contamination.

 

 

 

 

 

 

 

 

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Other

 

From time to time, the Company may be subject to various demands, claims, suits or other legal proceedings arising in the ordinary course of business. A comprehensive insurance program is maintained to provide a measure of financial protection against such matters, though not all such exposures are, or can be, addressed by insurance. Estimated costs are recorded for such demands, claims, suits or proceedings of this nature when reasonably determinable. The Company has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While the Company will vigorously defend 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, the Company 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 business, financial condition and results of operations or cash flows.

 

13.      EMPLOYEE STOCK OWNERSHIP PLAN

 

The Company’s matching contributions charged to expense were $0.6 million and $0.8 million in each of the three-month periods ended March 30, 2014 and March 31, 2013, respectively. As a result of hardship withdrawals, 695 shares of PDC redeemable common stock were repurchased during the first three months of 2014 at an aggregate price of approximately $11,000. During the first three months of 2013, as a result of hardship withdrawals, 562 shares of PDC redeemable common stock were repurchased at an aggregate price of approximately $10,000.

 

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” the appropriate accounting for redeemable equity first depends upon a determination of whether the equity is currently redeemable or not currently redeemable.  Shares that are currently redeemable should be recorded at redemption value.  For shares that are not currently redeemable, the accounting guidance allows for changes in redemption value to be accreted from the initial issuance date to the earliest redemption date.         This guidance also specifies that if the redemption value is less than the original issuance cost, the carrying amount of the redeemable common stock should not be less than the original issuance cost.

 

Based upon the estimated fair value of the redeemable common stock at March 30, 2014, a restated ultimate redemption liability of approximately $132 million was determined. The restated redeemable common stock recorded book value as of March 30, 2014, was $157 million. The change in fair value and accretion of redeemable common stock was $3,000 for the three months ended March 30, 2014.

 

Based upon the estimated fair value of the redeemable common stock as of March 31, 2013, an ultimate redemption liability of approximately $153 million was determined. The restated redeemable common stock recorded book value as of March 31, 2013 was $177 million. The change in fair value and accretion of redeemable common stock was $8,000 for the three months ended March 31,2013.

 

14.      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company selectively uses financial instruments to manage some market risks from changes in foreign currency exchange rates, commodity prices and interest 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 income, 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 is initially recorded as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transactions 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 $19.5 million as of March 30, 2014. These contracts have settlement dates extending through June 2015.

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The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using collar contracts to manage risks associated with market fluctuations in energy prices. These contracts are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs based on the New York Mercantile Exchange as measured on the last trading day of the accounting period and compared to the collar price. The contracts’ gains or losses due to changes in fair value are recorded in current period earnings. At March 30, 2014, the hedged volumes of these contracts totaled 917,112 MMBTU (Million British Thermal Units) of natural gas. All contracts were settled during April 2014.

 

The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks associated with market fluctuations in pulp prices. During 2012, there was one pulp swap contract designated as a cash flow hedge of forecasted pulp purchases, and therefore, the change in the effective portion of the fair value of the hedge was deferred in accumulated other comprehensive income until the inventory containing the pulp was sold. This pulp hedge was settled as of September 30, 2012. The remaining financial impact of this pulp hedge was recorded in the Company’s Condensed Consolidated Statement of Comprehensive Income during first quarter 2013.  As of March 30, 2014, there were no pulp swap contracts in place.

 

On July 30, 2013, Appvion entered into an interest rate swap contract on $100 million of its variable rate first lien term loan with a forward start date of September 14, 2014 and a maturity date of June 28, 2019.  This interest rate swap pays the Company variable interest at the three-month LIBOR rate or a fixed floor rate of 1.25%, whichever is greater, and the Company pays the counterparty a fixed interest rate. The fixed LIBOR interest rate for the contract is 2.74%. Based on the terms of the interest rate swap contract and the underlying debt, the interest rate contract was determined to be effective, and thus qualifies as a cash flow hedge. Any changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheet until earnings are affected by the variability of cash flows.

 

The following table presents the location and fair values of derivative instruments included in the Company’s Condensed Consolidated Balance Sheets (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The following table presents the location and amount of losses (gains) on derivative instruments and related hedge items included in the Company’s Condensed Consolidated Statement of Comprehensive Income for the three months ended March 30, 2014 and March 31, 2013 and (gains) losses initially recognized in accumulated other comprehensive income in the Condensed Consolidated Balance Sheet at the period-ends presented (dollars in thousands):

 

 

 

 

For a discussion of the fair value of financial instruments, see Note 16, Fair Value Measurements.

 

 

15.      LONG-TERM OBLIGATIONS

 

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

 

 

During the first three months of 2014, the Company made mandatory debt repayments of $0.3 million on its State of Ohio loans. It also made a mandatory repayment of $0.8 million on its first lien term loan. During the quarter, the Company borrowed $97.4 million and repaid $93.9 million on its revolving credit facility, leaving an outstanding balance at quarter-end of $11.1 million. Approximately $13.3 million of the revolving credit facility is used to support outstanding letters of credit.

 

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On November 19, 2013, Appvion completed a voluntary refinancing of a portion of its debt to extend debt maturities and reduce interest expense. The refinancing included the issuance of $250 million of second lien senior secured notes payable carrying an interest rate of 9.0%. The notes will mature on June 1, 2020.

 

These second lien senior secured notes are unconditionally, and jointly and severally, guaranteed by PDC and Appvion Canada, Ltd. The notes are secured by a second-priority security interest in substantially all of the property and assets of Appvion and the debt guarantors. These liens are junior in priority to the liens on this same collateral securing the outstanding debt incurred under the credit agreement. The notes contain covenants customary for similar debt which restrict Appvion’s ability, as well as the ability of the guarantors, to sell or lease certain assets or merge or consolidate with or into other companies, incur additional debt or issue preferred shares, incur liens, pay dividends or make other distributions, make other restricted payments and investments, place restrictions on the ability of certain of Appvion’s subsidiaries to pay dividends or other payments to Appvion, enter into sale and leaseback transactions, amend particular agreements relating to Appvion’s transaction with its former parent AWA and the ESOP and enter into transactions with certain affiliates.

 

On June 28, 2013, Appvion completed a voluntary refinancing of a portion of its debt to extend debt maturities, reduce interest costs and increase financial flexibility and liquidity options. The refinancing included the execution of a new credit agreement providing for a $100 million five-year revolving line of credit due June 2018 and a $335 million first lien term loan due June 2019. The new line of credit replaced the five-year, $100 million revolving credit facility due February 2015. 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. Appvion’s borrowings under the revolving credit facility bear interest at Appvion’s option at either base rate plus 3.5% or LIBOR plus 4.5%, per annum.

 

The first lien term loan bears interest at Appvion’s option at either base rate plus 3.5% or LIBOR, but not less than 1.25%, plus 4.5%, per annum. On July 30, 2013, Appvion fixed the interest rate at 7.24%, on $100.0 million of this variable rate debt using an interest rate swap contract with a forward start date of September 14, 2014 and a maturity date of June 28, 2019. The term loan amortizes in equal quarterly installments in aggregate annual amounts equal to 1.0% of the original principal amount, with the balance payable on June 28, 2019. Also, within five business days after the year-end financial statements have been filed, Appvion shall prepay an aggregate principal amount of the term loan equal to the excess, if any, of (a) 50% of defined excess cash flow, provided that such percentage shall be reduced to (1) 25% based upon Appvion achieving a consolidated leverage ratio of less than 3.50 to 1.0 but greater than or equal to 2.50 to 1.0 and (2) 0% based upon Appvion achieving a consolidated leverage ratio of less than 2.50 to 1.0 minus (b) the aggregate amount of all prepayments of the revolving credit line which constitute permanent reductions of the revolving credit facility and all optional prepayments of the first lien term loan made during the year.

 

The new credit agreement ranks senior in right of payment to all existing and future subordinated indebtedness of Appvion and is secured by security interests in substantially all of the property and assets of Appvion and the debt guarantors. As noted above, the maturity date of the revolving credit facility is June 28, 2018 and the maturity date of the first lien term loan is June 28, 2019. The new credit agreement is unconditionally, and jointly and severally, guaranteed by PDC and Appvion Canada, Ltd. It contains affirmative and negative covenants customary for similar credit facilities, which among other things, require Appvion to meet a minimum fixed charge coverage ratio under certain circumstances and restricts Appvion’s ability and the ability of Appvion’s subsidiaries, subject to certain exceptions, to incur additional indebtedness and liens, engage in sale and leaseback transactions, make investments, make loans and advances, transact certain asset sales, engage in mergers, acquisitions, consolidations, liquidations and dissolutions, pay dividends or make other payments in respect of equity interests and other restricted payments, engage in certain transactions with affiliates, limit capital expenditures and make prepayments, redemptions and repurchases of other indebtedness.

 

         The Company was in compliance with all debt covenants at March 30, 2014, and is forecasted to remain compliant for the next 12 months. The Company’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results and operating cash flows. The Company’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead the Company to seek amendments to, or waivers of, the financial covenants. The Company cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of noncompliance with debt covenants, if the lenders will not amend or waive the covenants, the debt would be due and the Company would need to seek alternative financing. The Company cannot provide assurance that it would be able to obtain alternative financing. If the Company were not able to secure alternative financing, this would have a material adverse impact on

the Company.

 

 

 

 

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16.      FAIR VALUE MEASUREMENTS

 

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):

 

 

 

The first lien term loan and the second lien notes payable are traded in public markets. Their fair value was determined using Level 2 inputs based on quoted market prices. The fair value of the State of Ohio loans was determined using Level 2 observable market inputs including current rates for 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.

 

Due to their short-term nature, the carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of fair value as of March 30, 2014 and December 28, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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17.      SEGMENT INFORMATION

 

The Company’s reportable segments are as follows: carbonless papers, thermal papers and Encapsys®. Management evaluates the performance of the segments based primarily on operating income (loss). Items excluded from the determination of segment operating income (loss) are unallocated corporate charges, interest expense and foreign exchange 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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18.      ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The changes in accumulated other comprehensive income by component for the three months ended March 30, 2014 are as follows (dollars in thousands):

 

 

The changes in accumulated other comprehensive income by component for the three months ended March 31, 2013 are as follows (dollars in thousands):

 

 

All amounts presented are net of tax.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Details about these reclassifications are as follows (dollars in thousands):

 

 

 

All amounts presented are net of tax.