10-Q 1 form10-q.htm 2ND QUARTER 10-Q form10-q.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 3, 2011

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  x
 
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, 2011, 9,358,734 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, 2011, 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
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
39
     
Item 4
Controls and Procedures
39
     
PART II
OTHER INFORMATION
  
     
Item 1
Legal Proceedings
40
     
Item 1A
Risk Factors
40
     
Item 6
Exhibits
42
     
Signatures
  
43






 
 
 
 
 
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 3, 2011
    
January 1, 2011
  
ASSETS
            
Current assets
            
  Cash and cash equivalents
  
$
5,000
    
$
3,772
  
  Accounts receivable, less allowance for doubtful accounts of $1,214 and $1,435, respectively
    
93,490
      
93,374
  
  Inventories
    
110,644
      
110,032
  
  Other current assets
    
17,415
      
41,992
  
       Total current assets
    
226,549
      
249,170
  
                 
Property, plant and equipment, net of accumulated depreciation of
  $492,499 and $470,676, respectively
    
341,228
      
354,601
  
Intangible assets, net
    
47,283
      
48,449
  
Other assets
    
17,963
      
24,779
  
                 
       Total assets
  
$
633,023
    
$
676,999
  
                 
LIABILITIES, REDEEMABLE COMMON STOCK,
ACCUMULATED DEFICIT AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
                
Current liabilities
                
  Current portion of long-term debt
  
$
1,203
    
$
18,694
  
  Accounts payable
    
48,609
      
48,651
  
  Accrued interest
    
2,950
      
3,094
  
  Other accrued liabilities
    
48,957
      
62,988
  
       Total current liabilities
    
101,719
      
133,427
  
                 
Long-term debt
    
550,696
      
540,131
  
Postretirement benefits other than pension
    
44,825
      
45,133
  
Accrued pension
    
77,496
      
88,583
  
Other long-term liabilities
    
7,320
      
5,716
  
Commitments and contingencies (Note 13)
    
-
      
-
  
Redeemable common stock, $0.01 par value,
  shares authorized: 30,000,000,
  shares issued and outstanding:  9,360,639 and
  9,713,212, respectively
    
102,524
      
110,045
  
Accumulated deficit
    
(159,397
)
    
(153,765
)
Accumulated other comprehensive loss
    
(92,160
)
    
(92,271
)
 
      Total liabilities, redeemable common stock, accumulated
      deficit and accumulated other comprehensive loss
  
$
633,023
    
$
676,999
  


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 3, 2011
  
Three Months
Ended
July 4, 2010
  
Six Months
Ended
July 3, 2011
  
Six Months
Ended
July 4, 2010
                 
Net sales
  
$
216,586
  
$
220,784
  
$
434,601
  
$
               430,792
                         
Cost of sales
    
174,160
    
183,365
    
345,324
    
   353,650 
                         
  Gross profit
    
42,426
    
37,419
    
89,277
    
    77,142 
                         
Selling, general and administrative expenses
    
31,772
    
35,318
    
65,121
    
    70,131 
Environmental expense insurance recovery
    
-
    
-
    
-
    
     (8,181)
Litigation settlement
    
(82
)
  
-
    
3,122
    
- 
                         
Operating income
    
10,736
    
2,101
    
21,034
    
    15,192 
                         
Other expense (income)
                        
  Interest expense
    
15,683
    
16,746
    
31,833
    
    33,668 
  Debt extinguishment expense, net
    
-
    
- 
    
-
    
      5,532 
  Interest income
    
(37
)
  
(35
 )   
(74
 )   
  (45)
  Foreign exchange (gain) loss
    
(101
)
  
1,623
    
(1,074
 )   
      1,360 
  Other income
    
(1,374
)
  
-
    
(1,374
 )   
-
                         
Loss before income taxes
    
(3,435
)
  
(16,233
) 
  
(8,277
 )   
(25,323)
                         
(Benefit) provision for income taxes
    
(154
)
  
45
    
201
    
(46)
                         
Loss from continuing operations
    
(3,281
)
  
(16,278
) 
  
(8,478
 )   
(25,277)
                         
Discontinued operations
                        
   Income from discontinued operations, net
   of income taxes
    
-
    
1,302
 
  
-
    
      2,854 
                         
Net loss
  
$
(3,281
)
$
(14,976
) 
$
(8,478
) 
$
(22,423)
                         
                         
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 3, 2011
    
July 4, 2010
  
Cash flows from operating activities:
            
Net loss
  
$
(8,478
)
  
$
(22,423
)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
                
Depreciation
    
22,950
      
24,698
  
Amortization of intangible assets
    
1,166
      
1,742
  
Amortization of financing fees
    
2,137
      
1,965
  
Amortization of bond discount
    
466
      
302
  
Employer 401(k) non-cash matching contributions
    
1,502
      
1,838
  
Foreign exchange (gain) loss
    
(1,088
)
    
1,366
 
Net gain from involuntary conversion of equipment
    
(1,374
)
    
-
  
Loss on disposals of equipment
    
201
      
83
  
Accretion of capital lease obligation
    
5
      
23
  
Loss on debt extinguishment
    
-
      
5,532
  
Environmental expense insurance recovery (including accretion)
    
(72
 )     
(8,214
)
(Increase)/decrease in assets and increase/(decrease) in liabilities:
                
Accounts receivable
    
680
      
(31,062
)
Inventories
    
(458
)
    
(793
)
Other current assets
    
14,133
      
573
  
Accounts payable and other accrued liabilities
    
(930
)
    
(2,616
)
Accrued pension
    
(8,617
)
    
3,581
  
Other, net
    
972
      
(5,545
)
Net cash provided (used) by operating activities
    
23,195
      
(28,950
)
                 
Cash flows from investing activities:
                
        Proceeds from sale of equipment
    
-
      
57
  
        Insurance proceeds from involuntary conversion of equipment
    
1,374
      
-
  
        Additions to property, plant and equipment
    
(9,404
)
    
(6,799
)
Net cash used by investing activities
    
(8,030
)
    
(6,742
)
                 
Cash flows from financing activities:
                
Payments of senior secured notes payable
    
-
      
(211,225
)
Payments of senior subordinated notes payable
    
(17,491
)
    
-
  
Proceeds from senior secured first lien notes payable
    
-
      
299,007
  
Debt acquisition costs
    
-
      
(10,807
)
Payments relating to capital lease obligations
    
(28
)
    
(389
)
Proceeds from old revolving line of credit
    
-
      
21,350
  
Payments of old revolving line of credit
    
-
      
(109,575
)
Proceeds from new revolving line of credit
    
130,300
      
154,793
  
Payments of new revolving line of credit
    
(119,600
)
    
(99,350
)
Payments of State of Ohio loans
    
(601
)
    
(570
)
Payments of secured financing
    
-
      
(1,494
)
Proceeds from issuance of redeemable common stock
    
1,382
      
1,924
  
Payments to redeem common stock
    
(7,349
)
    
(7,736
)
Decrease in cash overdraft
    
(564
)
    
(6,274
)
Net cash (used) provided by financing activities
    
(13,951
)
    
29,654
  
                 
Effect of foreign exchange rate changes on cash and cash equivalents
    
14
      
(6
)
Change in cash and cash equivalents
    
1,228
      
(6,044
)
Cash and cash equivalents at beginning of period
    
3,772
      
9,963
  
Cash and cash equivalents at end of period
  
$
5,000
    
$
3,919
  
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
  
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
  
                               
Balance, January 1, 2011
    
9,713,212
    
$
110,045
    
$
(153,765
)
  
$
(92,271
)
      
                                       
Comprehensive loss:
                                      
  Net loss
    
 -
      
 -
      
(8,478
)
    
 -
    
$
(8,478
)
  Changes in retiree plans
    
 -
      
 -
      
 -
      
1,404
      
1,404
  
  Realized and unrealized loss on derivatives
    
-
      
-
      
-
      
(1,293
)
    
(1,293
)
    Total comprehensive loss
                                  
$
(8,367
)
Issuance of redeemable common stock
    
208,340
      
2,674
                          
Redemption of redeemable common stock
    
(560,913
)
    
(7,349
)
    
-
      
-
          
Accretion of redeemable common stock
    
-
      
(2,846
)
    
2,846
      
-
          
                                         
Balance, July 3, 2011
    
9,360,639
    
$
102,524
    
$
(159,397
)
  
$
(92,160
)
        
                                         
Balance, January 2, 2010
    
10,097,099
    
$
122,087
    
$
(129,093
)
  
$
(99,717
)
        
                                         
Comprehensive loss:
                                        
  Net loss
    
-
      
-
      
(22,423
)
    
-
    
$
(22,423
)
  Changes in retiree plans
    
-
      
-
      
-
      
596
      
596
  
  Realized and unrealized gain on derivatives
    
-
      
-
      
-
      
159
      
159
  
    Total comprehensive loss
                                  
$
(21,668
)
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
    
$
(148,025
)
  
$
(98,962
)
        




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 3, 2011 and July 4, 2010, the cash flows for the six months ended July 3, 2011 and July 4, 2010 and financial position at July 3, 2011 and January 1, 2011 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 1, 2011, which are included in the annual report on Form 10-K for the year ended January 1, 2011. The consolidated balance sheet data as of January 1, 2011, 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 12 months to satisfy potential claims under the stock purchase agreement with Films. No claims were made against the escrow and the $2 million was paid to Appleton on July 25, 2011. The cash proceeds of the sale were used to reduce debt and a $0.4 million net gain was recorded in income from discontinued operations for the year ended January 1, 2011. APC had been 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.

The operating results of APC and NEX have been reclassified and are reported as discontinued operations within the Condensed Consolidated Statement of Operations for the three and six months ended July 4, 2010. During the first three and six months of 2010, discontinued operations reported net sales of $25.1 million and $47.3, respectively, and operating income before income taxes of $1.3 million and $2.9 million respectively.

3.       BUSINESS INTERRUPTION AND PROPERTY LOSS

Manufacturing operations at the Company’s West Carrollton, Ohio paper mill were temporarily interrupted in July 2010 by the collapse of one of its coal silos. The incident caused no injuries. One boiler was extensively damaged as well as the supporting infrastructure for two other boilers. While most of the West Carrollton facility was undamaged, the collapse of the coal silo reduced the mill’s ability to produce the power and steam required to operate its manufacturing equipment. The thermal coater resumed production a few days later and the remainder of the mill resumed production in early August. Appleton managed customer orders and shifted paper production to other company-owned manufacturing facilities in order to minimize any impact to its customers. The boiler that was extensively damaged resumed operation just prior to the end of first quarter 2011.
 
Losses associated with property damage and business interruption were covered by insurance subject to a deductible of $1.0 million. As of July 3, 2011, the corresponding insurance claim was agreed and settled in full with all proceeds received from the insurer. Appleton incurred approximately $24.1 million in property damage, cost to repair and business interruption. After netting the $1.0 million deductible, and $1.7 million of capital and $0.8 million of expense for safety and efficiency upgrades to the replacement property, the Company recovered $20.3 million from its insurer and is seeking $0.3 million in credits from a vendor.


 
 
 
 
 
 
7
 
 


 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Expenses associated with property damage and business interruption, totaling $17.1 million, were reported in cost of sales within the Consolidated Statement of Operations for the year ended January 1, 2011. Expenses associated with property damage and business interruption, totaling $0.7 million, have been reported in cost of sales within the Condensed Consolidated Statement of Operations for the six months ended July 3, 2011. According to the terms of the insurance policy, Appleton recorded a $17.1 million recovery, less a $0.9 million valuation reserve, as a reduction to cost of sales for the year ended January 1, 2011, and a $0.5 million recovery as a reduction to cost of sales for the six months ended July 3, 2011. Business interruption coverage also includes recovery from lost margins related to the accident and therefore, Appleton recorded a gain of $0.6 million in cost of sales within the Consolidated Statement of Operations for the year ended January 1, 2011, as this amount was agreed with the insurer. During the first half of 2011, Appleton recorded an additional $0.2 million gain in cost of sales related to lost margins. Appleton also recorded a $0.4 million involuntary conversion loss on fixed assets associated with the property loss in its Consolidated Statement of Operations for the year ended January 1, 2011.

Total capital spending of approximately $5.5 million was incurred for work associated with bringing the damaged boiler back online. At year-end 2010, $1.0 million, net of the $1.0 million deductible, was recorded as a gain on the other (income) loss line within the Consolidated Statement of Operations. For the six months ended July 3, 2011, Appleton recorded an additional $1.4 million of gain on the other income line within the Condensed Consolidated Statement of Operations, all of which was recorded during the second quarter.
 
4.        OTHER INTANGIBLE ASSETS

The Company reviews the carrying value of intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that an asset might be impaired.

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

   
As of July 3, 2011
    
As of January 1, 2011
  
   
Gross Carrying Amount
    
Accumulated Amortization
    
Gross Carrying Amount
    
Accumulated Amortization
  
Amortizable intangible assets:
                        
     Trademarks
  
$
44,665
    
$
23,128
    
$
44,665
    
$
22,079
  
     Patents
    
11,000
      
11,000
      
12,376
      
12,376
  
     Customer relationships
    
5,365
      
2,484
      
5,365
      
2,367
  
            Subtotal
    
61,030
    
$
36,612
      
62,406
    
$
36,822
  
Unamortizable intangible assets:
                                
     Trademarks
    
22,865
              
22,865
          
            Total
  
$
83,895
            
$
85,271
          

Of the $83.9 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. Customer relationships are being amortized over their estimated useful life of 25 years.

Amortization expense for the three and six months ended July 3, 2011 was $0.6 million and $1.2 million, respectively. Amortization expense for the three and six months ended July 4, 2010 was $0.6 million and $1.2 million, respectively.

 
 
 
 
 
 
8
 
 


 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5.        INVENTORIES
 
Inventories consist of the following (dollars in thousands):
   
July 3, 2011
    
January 1, 2011
  
Finished goods
  
$
47,058
    
$
44,239
  
Raw materials, work in process and supplies
    
63,586
      
65,793
  
   
$
110,644
    
$
110,032
  

Stores and spare parts inventory balances of $24.4 million and $23.8 million at July 3, 2011 and January 1, 2011, respectively, are valued at average cost and are included in raw materials, work in process and supplies. All other inventories are valued using the first-in, first-out (“FIFO”) method.

6.        PROPERTY, PLANT AND EQUIPMENT

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

   
July 3, 2011
    
January 1, 2011
  
Land and improvements
  
$
9,226
    
$
8,611
  
Buildings and improvements
    
132,296
      
131,512
  
Machinery and equipment
    
649,682
      
643,300
  
Software
    
32,538
      
32,575
  
Capital lease
    
165
      
165
  
Construction in progress
    
9,820
      
9,114
  
     
833,727
      
825,277
  
Accumulated depreciation/amortization
    
(492,499
)
    
(470,676
)
   
$
341,228
    
$
354,601
  

Depreciation expense for the three and six months ended July 3, 2011 and July 4, 2010 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 3, 2011
    
July 4, 2010
    
July 3, 2011
    
July 4, 2010
  
Cost of sales
   $ 10,272     $ 10,246     $ 20,697     $ 20,386  
Selling, general and administrative expenses
     1,127       1,582       2,253       3,163  
    $ 11,399     $ 11,828     $ 22,950     $ 23,549  


 
 
 
 
 
 
9
 
 


 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

7.        OTHER CURRENT AND NONCURRENT ASSETS

Other current assets consist of the following (dollars in thousands):
 
   
July 3, 2011
    
January 1, 2011
  
Environmental indemnification receivable
  
$
6,017
    
$
20,580
  
Environmental expense insurance recovery
    
2,888
      
5,008
  
Escrow from sale of Films
    
2,000
      
2,000
  
Insurance recovery from coal silo accident
    
-
      
8,183
  
Other
    
6,510
      
6,221
  
   
$
17,415
    
$
41,992
  
 
Other noncurrent assets consist of the following (dollars in thousands):
 
   
July 3, 2011
    
January 1, 2011
  
Deferred debt issuance costs
  
$
11,617
    
$
13,754
  
Environmental expense insurance recovery
    
-
      
4,045
  
Other
    
6,346
      
6,980
  
   
$
17,963
    
$
24,779
  

8.       OTHER ACCRUED LIABILITIES

Other accrued liabilities, as presented in the current liabilities section of the balance sheet, consist of the following (dollars in thousands):
 
   
July 3, 2011
    
January 1, 2011
  
Compensation
  
$
8,028
    
$
8,997
  
Trade discounts
    
14,245
      
16,035
  
Workers’ compensation
    
4,220
      
3,680
  
Accrued insurance
    
2,088
      
2,375
  
Other accrued taxes
    
1,673
      
1,428
  
Postretirement benefits other than pension
    
3,758
      
3,758
  
Fox River Liabilities
    
6,017
      
20,580
  
Litigation settlement
    
1,750
      
-
  
Other
    
7,178
      
6,135
  
   
$
48,957
    
$
62,988
  

9.       NEW ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Statements Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, "Presentation of Comprehensive Income." It provides updated guidance related to the presentation of other comprehensive income, offering two alternatives for presentation, including (a) a single continuous statement of comprehensive income or (b) two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company expects that adoption will not have a significant impact on its consolidated financial statements.

 
 
 
 
 
 
10
 
 


PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," which amends ASC 820. This updated guidance relates to fair value measurements and disclosures, including (a) the application of the highest and best use valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity and (c) quantitative information required for fair value measurements categorized within Level 3. Additionally, disclosure requirements have been expanded to include additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the effects, if any, the adoption of this guidance will have on its consolidated financial statements.

In January 2010, the 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. During first quarter 2011, the Company adopted the portion of ASU No. 2010-06 relating to Level 3 fair value measurements. The disclosures required by adoption are included in Note 15 of Notes to Condensed Consolidated Financial Statements. Current year adoption had no impact on its financial statements.
 
10.      EMPLOYEE BENEFITS

The Company has various defined benefit pension plans and defined contribution pension plans. This includes a Supplemental Executive Retirement Plan (“SERP”) to provide retirement benefits for management and other highly compensated employees whose benefits are reduced by the tax-qualified plan limitations of the pension plan for eligible salaried employees. Effective January 1, 2008, the Company amended the Appleton Papers Inc. Retirement Plan (the “Plan”) to provide that any non-union individuals hired or re-hired on or after January 1, 2008, would not be eligible to participate in the Plan. Also, plan benefits accrued under the Plan were frozen as of April 1, 2008, with respect to Plan participants who elected to participate, effective April 1, 2008, in a “Mandatory Profit Sharing Contribution” known as the Retirement Contribution benefit under the Appleton Papers Inc. Retirement Savings and Employee Stock Ownership Plan (the “KSOP”), or January 1, 2015, in the case of any other Plan participants. In December 2010, it was announced that the effective date of the freeze would change from January 1, 2015 to March 1, 2011.

The components of net periodic pension cost associated with the defined benefit pension plans include the following (dollars in thousands):
 
Pension Benefits
  
For the Three
Months Ended
July 3, 2011
    
For the Three
Months Ended
July 4, 2010
    
For the Six
Months Ended
July 3, 2011
    
For the Six
Months Ended
July 4, 2010
  
Net periodic benefit cost
                        
  Service cost
   $ 1,026     $ 1,516     $ 2,053     $ 3,033  
  Interest cost
     4,955       4,901       9,909       9,801  
  Expected return on plan assets
     (5,603 )     (5,318 )     (11,206 )     (10,636 )
  Amortization of prior service cost
     121       135       243       270  
  Amortization of actuarial loss
     1,114       654       2,227       1,307  
Net periodic benefit cost
   $ 1,613     $ 1,888     $ 3,226     $ 3,775  

The Company expects to contribute $18 million to its defined benefit pension plan in 2011. The Company contributed $11.6 million to this pension plan during first half 2011.

 
 
 
 
 
 
11
 
 


 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

11.      POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS

The Company has defined postretirement benefit plans that provide medical, dental and life insurance for certain retirees and eligible dependents. In December 2010, certain changes to the postretirement benefit plan were announced. Upon retirement and after COBRA benefits expire, the Company will continue to provide a subsidy toward the premium paid for pre-Medicare retiree medical coverage for those full-time salaried employees hired prior to April 1, 2003, and who retire before July 1, 2011. Beginning in 2012, Appleton’s contribution will be capped at $200 per person per month until December 31, 2020, or until Medicare-eligible, whichever comes first. In addition, those Medicare-eligible salaried retirees, spouses and surviving spouses who currently receive benefits from Appleton, beginning in 2012, will receive $100 per month to be used toward individual insurance coverage or other medical-related expenses.

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

Other Postretirement Benefits
  
For the Three
Months Ended
July 3, 2011
    
For the Three
Months Ended
July 4, 2010
    
For the Six
Months Ended
July 3, 2011
    
For the Six
Months Ended
July 4, 2010
  
Net periodic benefit cost
                        
  Service cost
   $ 140     $ 196     $ 280     $ 392  
  Interest cost
     651       760       1,302       1,520  
  Amortization of prior service credit
     (690 )     (538 )     (1,380 )     (1,076 )
  Amortization of actuarial loss
     157       48       314       96  
Net periodic benefit cost
   $ 258     $ 466     $ 516     $ 932  

12.      LONG-TERM INCENTIVE COMPENSATION

In December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive Plan (“LTIP”). Effective January 3, 2010, the Company adopted a long-term restricted stock unit plan ("RSU"). These plans, in accordance with the specific terms of each plan, 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. 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. All units granted under the LTIP may be exercised after three full years. Units expire ten years after the grant 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 RSUs vest three years after the award date and are paid at vesting. The cash payment upon vesting is equal to the value of one share of PDC common stock at the most recent valuation date times the number of units granted. Beginning in 2009, recipients were required to enter into a non-compete and non-solicitation agreement in order to receive units which, if violated following the receipt of units, results in forfeiture of any and all rights to receive payment relating to the units.

The Compensation Committee of the board establishes the number of units granted each year under these plans in accordance with the Compensation Committee’s stated goals and policies. The Compensation Committee has the discretion to use either, or both, plan(s) as appropriate to attract, motivate and retain key management employees while managing the expense to the Company. In 2010, all units were granted under the RSU. Prior to 2010, and again in 2011, all units were granted under the LTIP. The units were valued at the most recent PDC stock price as determined by the semi-annual ESOP valuation. As of June 30, 2011, the fair market value of one share of PDC common stock was $14.10. The Compensation Committee approved an aggregate total for the 2010 year of up to 219,000 units to be granted, of which, 213,000 units were granted under the RSU. Due to terminations of employment, 6,500 and 7,500 unvested units were forfeited during 2011 and 2010, respectively. A balance of 199,000 RSU units remains as of July 3, 2011. Approximately $0.3 million and $0.5 million of expense, related to this plan, was recorded during the three- and six-month periods ended July 3, 2011. Approximately $0.2 million and $0.4 million of expense, related to this plan, was recorded during the three- and six-month periods ended July 4, 2010. During the first half of 2011, 753,500 units were granted under the LTIP plan. Approximately $0.2 million of expense was recorded during the three and six months ended July 3, 2011 as a result of this grant.

 
 
 
 
 
 
12
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)
 
Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. Deferred compensation is in the form of phantom units and is earned over the course of six-month calendar periods of service beginning January 1 and July 1. The number of units to be earned is calculated using the established dollar value of the compensation divided by the fair market value of one share of PDC common stock as determined by the semi-annual ESOP valuation. This deferred compensation vests coincidentally with the board member’s continued service on the board. Upon cessation of service as a director, the deferred compensation will be paid in five equal annual cash installments. Approximately $0.1 million was recorded as expense for this plan during the three months ended July 3, 2011. There was no expense recorded for this plan during the three months ended July 4, 2010. Approximately $0.2 million and $0.1 million was recorded as expense, related to this plan, for the six-month periods ended July 3, 2011 and July 4, 2010, respectively.

13.      COMMITMENTS AND CONTINGENCIES

Lower Fox River
 
Introduction. Various federal and state government agencies and Native American tribes have asserted claims against Appleton and others with respect to historic discharges of 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, which is now CBC Coating, Inc., 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.
 
The EPA issued an administrative order in November 2007, directing the PRPs to implement the remedial action of the Fox River. Certain PRPs have initiated preliminary work under a work plan and are negotiating to reach a funding arrangement to complete the work plan.
 
Appleton and NCR filed a lawsuit in January 2008 in federal court against various defendants, including other PRPs and certain municipalities, in an effort to require contribution to the cost of cleaning up PCB-contaminated sediment in the Fox River. In December 2009, the court granted the defendants’ motion for summary judgment, dismissing the claim. In February 2011, the same court granted the defendants' motion for summary judgment determining that Appleton and NCR are responsible for costs associated with the remedial action on the Fox River. Appleton and NCR intend to appeal these decisions.
 

 
 
 
 
 
 
13
 
 


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

In October 2010, the United States of America (“US”) and the State of Wisconsin (“SOW”) filed a lawsuit on behalf of the EPA and the DNR, respectively, against ten companies (including the seven PRPs identified in 1997) and two municipalities seeking recovery of unreimbursed response costs and natural resources damages as well as a declaratory judgment that the defendants are liable for future response costs related to the Lower Fox River. At the same time, the US and SOW lodged a consent decree with Georgia-Pacific (“GP”). Under the consent decree, and in exchange for a covenant not to sue and statutory contribution protection for portions of the Lower Fox River, GP would stipulate liability for performance of the required cleanup of a designated portion of the Lower Fox River, waive any objections to the cleanup remedy selected by EPA and DNR and pay $7 million toward the government’s unreimbursed past costs and expected future costs. The court approved the consent decree in April 2011. In June 2011, the EPA and DNR filed a motion for Preliminary Injunction seeking to expand the scope of work on the Fox River for 2011. The court denied the motion for Preliminary Injunction on July 5, 2011 and indicated in the decision that it was unlikely that the US could show that Appleton is liable under CERCLA. Appleton filed a motion for summary judgment on July 28, 2011 requesting the court determine that Appleton is not liable under CERCLA and that all claims against Appleton in the Government Case be dismissed with prejudice.
 
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, in whole or in part, for the presence of hazardous substances at a site. Parties liable under CERCLA 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. Appleton has obtained its own historical and technical analyses which suggest the percentage of PCBs discharged from the Appleton and Combined Locks facilities is less than 20% of the total PCBs discharged, and more recent analyses suggest the percentage is only 8% to 10%. These estimates have not been finalized and are not binding on the PRPs.

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 legal analyses and ongoing reviews 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.

Appleton has filed a motion for summary judgment requesting the court determine that Appleton is not liable under CERCLA and that all claims against Appleton in the Government Case be dismissed with prejudice.

 
 
 
 
 
 
14
 
 

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

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 continuing remediation activities provide evidence to reasonably estimate a range of Appleton’s potential liability. Periodically, legal determinations may obligate Appleton to fund portions of clean-up costs to extents greater than Appleton’s ultimate share as finally determined, and in such instances, Appleton may reserve additional amounts (including appropriate reimbursement under its indemnification agreements as discussed below).
 
Accordingly, at January 1, 2011, the reserve for Appleton’s liability for the Lower Fox River was $20.6 million. Based on anticipated clean-up spending for 2011, Appleton increased its reserve by $9.4 million during the first quarter of 2011. Currently, the EPA is seeking to expand the scope of work for 2011. Final resolution of this dispute may result in further increases to Appleton's reserve and related indemnification receivable. Also during the first six months of 2011, $24.0 million of payments were made from the reserve. This resulted in a remaining reserve of $6.0 million as of July 3, 2011, all of which is recorded in other accrued liabilities.
 
The following assumptions were used in evaluating Appleton’s Lower Fox River liability and establishing a remediation reserve:
 
            • 
total remediation costs of $735 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;

            • 
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, Arjo Wiggins Appleton Ltd, now known as Windward Prospects Ltd (“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 to satisfy its portion of the Fox River Liabilities not covered by the indemnification agreement with AWA. AWA has paid $249.4 million in connection with Fox River Liabilities through the first six months of 2011. At July 3, 2011, the total indemnification receivable from AWA was $6.0 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 3, 2011, the policy had $0.6 million of remaining coverage. 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.


 
 
 
 
 
 
15
 
 

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

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 3, 2011.
 
In March 2008, Appleton received favorable jury verdicts in a state court declaratory judgment relating to insurance coverage of its environmental claims involving the Fox River. A final judgment and order was entered in January 2009. The insurers appealed the final judgment. In June 2010, the Wisconsin Court of Appeals upheld the final judgment. Settlements have been negotiated between the insurers and Appleton. Under the terms of the indemnification agreement, recoveries from insurance are reimbursed to AWA to the extent of its indemnification obligation. During 2010, Appleton 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 the first six months of 2011, Appleton received $6.2 million of these funds. The remaining receivable is included in other current assets of the Condensed Consolidated Balance Sheet as of July 3, 2011. An $8.9 million environmental expense insurance recovery was also recorded as a separate line item within operating income on the Consolidated Statement of Operations for the year ended January 1, 2011.

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.


 
 
 
 
 
 
16
 
 

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

Legal Proceedings
 
In September 2007, Appleton commenced litigation against Andritz BMB AG and Andritz, Inc. The claims asserted included breach of obligations under a February 2007 agreement to perform certain engineering services which also granted Appleton an option to purchase certain equipment and services relating to an off-machine paper coating line. This matter proceeded to trial and, on May 14, 2009, Appleton received a favorable jury verdict. The defendant filed post-trial motions in response to the verdict. On August 11, 2009, an Outagamie County, Wisconsin judge denied the defendant’s post-trial motions seeking to overturn the jury’s verdict and granted Appleton’s motion to enter judgment in favor of Appleton in the amount of $29.1 million plus costs and 12% interest annually beginning as of January 9, 2009. The defendant appealed the final judgment. In March 2011, the Wisconsin Court of Appeals issued a decision unanimously affirming the final judgment. In April 2011, Andritz filed a petition to the Wisconsin Supreme Court, seeking further review of this matter. Appleton filed a response objecting to the petition, and is awaiting a determination from the Wisconsin Supreme Court regarding whether it will review this case. Due to the pending petition, no gain has been recorded, though ultimate resolution of the litigation could have a material effect on Appleton’s financial results.

Litigation Settlement
 
During the first six months of 2011, Appleton resolved litigation initiated by a supplier over contract terms and recorded a charge to income of $3.1 million, including legal fees. Prior to resolution, Appleton had assessed the potential for liability as less than reasonably possible. However, during a court-ordered pre-trial mediation, the parties were able to resolve the litigation to the satisfaction of both parties.

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 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, 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 business, financial condition and results of operations or cash flows.

14.      EMPLOYEE STOCK OWNERSHIP PLAN

Appleton’s matching contributions charged to expense were $0.8 million and $0.9 million for the three months ended July 3, 2011 and July 4, 2010, respectively. Appleton’s matching contributions charged to expense were $1.5 million and $1.8 million for the six months ended July 3, 2011 and July 4, 2010, respectively. As a result of hardship withdrawals, required diversifications and employee terminations, 560,913 shares of PDC redeemable common stock were repurchased during the first six months of 2011 at an aggregate price of approximately $7.3 million. During the same period, the ESOP trustee purchased 107,671 shares of PDC redeemable common stock for an aggregate price of $1.4 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 100,669 shares of redeemable common stock being issued. During the first six months of 2010, as a result of hardship withdrawals, required diversifications and employee terminations, 604,374 shares of PDC redeemable common stock were repurchased 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.
 

 
 
 
 
 
 
17
 
 

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

In accordance with 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 is redeemable common stock. Redeemable common stock is being accreted to the earliest redemption date mandated by federal law based upon the estimated fair market value of the redeemable common stock as of July 3, 2011. Excluding the year-end 2010 and June 30, 2011 stock valuations which resulted in increases to the price of PDC common stock, recent stock valuations have been marked with decreases to the stock price. The impact of these reductions caused the Company to reduce redeemable common stock accretion by $2.8 million for the six months ended July 3, 2011. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $132 million has been determined. The recorded book value of the redeemable common stock as of July 3, 2011, was $103 million.

Due to a reduction in the June 30, 2010 share price, redeemable common stock accretion was reduced 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 was determined. The recorded book value of the redeemable common stock as of July 4, 2010 was $114 million.

15.      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company selectively uses financial instruments to manage some market risks from changes in interest rates, foreign currency exchange rates or commodity prices. The fair values of all derivatives are recorded in the Condensed Consolidated Balance Sheet. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive loss, depending on whether the derivative is designated and qualifies as part of a hedge transaction and, if so, the type of hedge transaction.

The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts. These instruments are designated as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward note, also deemed to be categorized as Level 2. The effective portion of the contracts’ gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive loss and are subsequently reclassified into earnings when the underlying transactions occur and affect earnings 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 $45.6 million as of July 3, 2011. These contracts have settlement dates extending through December 2012.
 
Appleton selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap 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 strike price. The contracts’ gains or losses due to changes in fair value are recorded in current period earnings. At July 3, 2011, the hedged volumes of these contracts totaled 250,000 MMBTU (Million British Thermal Units) of natural gas. The contracts have settlement dates extending through December 2011.

Appleton 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. These contracts are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs based on pricing published by RISI as measured on the last trading day of the accounting period and compared to the swap’s fixed price. The contracts’ gains or losses due to changes in fair value are recorded in current period earnings. At July 3, 2011, the hedged volumes of these contracts totaled 8,000 tons of pulp. The contracts have settlement dates extending through February 2012.

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. As a result of the February 2010 voluntary refinancing, Appleton paid $5.0 million, including interest, to settle this derivative.

 
 
 
 
 
 
18
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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

Designated as a Hedge
  
Balance Sheet Location
  
July 3, 2011
    
January 1, 2011
  
Foreign currency exchange derivatives
  
Other current assets
  
$
-
    
$
393
  
Foreign currency exchange derivatives
  
Other current liabilities
    
(1,051
) 
    
(67
)
                     
Not Designated as a Hedge
                    
Natural gas fixed swap
  
Other current liabilities
    
(108
)
    
(69
)
Pulp fixed swap
  
Other current assets
    
100
      
 -
  
 
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 Operations for the three and six months ended July 3, 2011 and July 4, 2010 and losses (gains) 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 3, 2011
  
For the Three
Months Ended
July 4, 2010
    
For the Six Months Ended July 3, 2011
  
For the Six
 Months Ended July 4, 2010
  
Foreign currency exchange derivatives
  
Net sales
   $
      383
 
$                                    (943
)  $
  
      832
  
$                          (808
)
                           
Losses (gains) recognized in accumulated other comprehensive loss
                  
907
  
 (406
) 
                           
Not Designated as a Hedge
            
 
            
Natural gas fixed swap
  
Cost of sales
    
63
  
-
    
122
  
-
  
Pulp fixed swap
  
Cost of sales
    
120
  
-
    
(205
)
-
  
Interest rate swap contract
  
Interest expense
    
-
  
-
    
-
  
961
  
 
While preparing Note 14 – Derivative Instruments and Hedging Activities, included in the 2010 Form 10-K, it was discovered that the financial impact to net sales of foreign exchange hedging, as reported in each of the 2010 Forms 10-Q, was incorrect. Only the disclosure as presented was incorrect. There were no errors in accounting or financial statement classification. The following schedule shows the disclosure error and corrected information (dollars in thousands) as presented above.
 
 
   
(As Reported)
Impact of
Hedging on Net Sales
  
Error Correction
  
(As Corrected)
Impact of
Hedging on Net Sales
  
For the three months ended July 4, 2010
  
$             43 gain
   $
900 gain
 
$         943 gain
 
For the six months ended July 4, 2010    $             96 gain   $  712 gain    $         808 gain   
                 

 
For a discussion of the fair value of financial instruments, see Note 17, Fair Value of Financial Instruments.

 
 
 
 
 
 
19
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

16.      LONG-TERM OBLIGATIONS

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

   
July 3, 2011
    
January 1, 2011
  
Revolving credit facility at approximately 4.0% at July 3, 2011
  
 $
40,000
    
 $
29,300
  
Secured variable rate industrial development bonds, 0.5% average interest rate at July 3, 2011, $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
    
6,650
      
7,105
  
State of Ohio loan at 1% until July 2011, then 3% until May 2019, approximately $30 due monthly and final payment due May 2019
    
2,421
      
2,567
  
Senior notes payable at 8.125%, due June 2011
    
-
      
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
      
305,000
  
Unamortized discount on 10.5% senior secured first lien notes payable, due June 2015
    
(4,783
)
    
(5,249
)
Second lien notes payable at 11.25%, due December 2015
    
161,766
      
161,766
  
     
551,899
      
558,825
  
Less obligations due within one year
    
(1,203
)
    
(18,694
)
   
$
550,696
    
$
540,131
  

During the first six months of 2011, Appleton made mandatory debt repayments of $0.6 million, plus interest, on its State of Ohio loans. During the first half of 2011, Appleton borrowed $130.3 million and repaid $119.6 million on its revolving credit facility, leaving an outstanding balance of $40.0 million at quarter-end. Approximately $16.9 million of the revolving credit facility is used to support outstanding letters of credit.

During June 2011, in accordance with the terms of its 8.125% senior notes payable, Appleton repaid in full the remaining note balance of $17.5 million. A payment of $18.2 million represented full and complete payment of all unpaid principal and accrued and unpaid interest. These funds were sourced from a combination of cash from operations and borrowing on the revolving credit facility. Upon payment, the notes were terminated and Appleton was released from all obligations under the notes.

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 a five-year, asset-backed $100 million revolving credit facility. The 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 Appleton to increase the size of the revolving credit facility by up to $25 million if Appleton can obtain commitments for the incremental amount. Borrowings under the revolving credit facility are 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. This asset-backed revolving credit facility contains a debt covenant whereby if the Company's average availability ratio should fall below 20%, then the Company is subject to a fixed charge coverage ratio of not less than 1.10:1.00. The average availability ratio is calculated monthly and is a function of the Company's average outstanding revolver borrowing as compared to the borrowing base of eligible inventory and accounts receivable as discussed above.
 

 
 
 
 
 
 
20
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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. 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. The revolving credit facility contains affirmative and negative covenants customary for similar credit facilities, which among other things, 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.
 
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.
 
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 AWA and the ESOP; and enter into transactions with certain affiliates. These covenants are subject to important exceptions and qualifications set forth in the indenture governing the 11.25% second lien notes due 2015, as amended.

The senior subordinated notes, as amended, are unconditionally guaranteed by PDC and Rose Holdings Limited.

As of July 3, 2011, Appleton was in compliance with all debt covenants and is forecasted to remain compliant for the next twelve months. Appleton’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results. Appleton’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could 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)

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount (including current portions) and estimated fair value of certain of the Company’s recorded financial instruments are as follows (dollars in thousands):
 
   
July 3, 2011
    
January 1, 2011
  
   
Carrying
    
Fair
    
Carrying
    
Fair
  
Financial Instruments
  
Amount
    
Value
    
Amount
    
Value
  
Senior subordinated notes payable
  
$
32,195
    
$
28,815
    
$
32,195
    
$
15,293
  
Senior notes payable
    
-
      
-
      
17,491
      
16,966
  
Senior secured first lien notes payable
  
300,217
      
315,978
      
299,751
      
299,751
  
Second lien notes payable
  
161,766
      
164,192
      
161,766
      
130,222
  
Revolving credit facility
  
40,000
      
40,000
      
29,300
      
29,300
  
State of Ohio loans
9,071
9,819
9,672
10,185
Industrial development bonds
    
8,650
      
8,650
      
8,650
      
8,650
  
   
$
551,899
    
$
567,454
    
$
558,825
    
$
510,367
  
 
The senior subordinated 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 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.

 
 
 
 
 
 
22
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

18.      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. Items excluded from the determination of segment operating income are unallocated corporate charges, interest income, interest expense, debt extinguishment expense, foreign exchange (gain) loss 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 3, 2011
    
For the Three Months Ended
July 4, 2010
  
For the Six Months Ended
July 3, 2011
    
For the Six Months Ended
July 4, 2010
  
Net sales
                        
Carbonless papers
    
$                 116,692 
   
$                 128,001
  
$
235,988
    
$
252,625
  
Thermal papers
    
91,733 
   
87,151
    
180,660
      
167,376
  
     
208,425 
   
215,152
    
416,648
      
420,001
  
                             
Encapsys 
    
  14,018 
   
  11,887
    
 29,494
      
  23,355
  
Intersegment (A)
    
(5,857)
    
(6,255
 )   
(11,541
)
    
(12,564
)
Total
    
$                 216,586
    
$                 220,784
  
$
434,601
    
$
430,792
  
Operating income (loss)
                            
Carbonless papers
    
$                     5,461
    
$                     4,910
  
$
15,000
    
$
13,143
  
Thermal papers
    
4,664 
   
(2,015
)
  
7,192
      
(4,103
)
     
10,125 
   
2,895
    
22,192
      
9,040
  
 
Encapsys
    
3,218 
   
1,614
    
  7,150
      
  3,147
  
Unallocated corporate charges
    
(1,769)
    
(1,329
 )   
(6,578
)
    
5,232
  
Intersegment (A)
    
(838)
    
(1,079
 )   
(1,730
)
    
(2,227
)
Total
    
$                   10,736
    
$                     2,101
  
$
21,034
    
$
15,192
  
Depreciation and amortization
                            
Carbonless papers
    
$                     6,509
    
$                     6,883
  
$
13,009
    
$
13,739
  
Thermal papers
    
4,596 
   
4,931
    
9,192
      
9,869
  
     
11,105 
   
11,814
    
22,201
      
23,608
  
                             
Encapsys 
    
 839
    
 548
    
1,837
      
  1,009
  
Unallocated corporate charges
    
38
    
49
    
78
      
97
  
Total
    
$                   11,982
    
$                   12,411
  
$
24,116
    
$
24,714
  
 
 
(A) Intersegment represents the portion of the Encapsys segment financial results relating to encapsulated products provided internally for the production of carbonless papers.

During the six months ended July 3, 2011, the Company recorded a $3.1 million litigation settlement within unallocated corporate charges. During the six months ended July 4, 2010, the Company recorded an $8.2 million environmental expense insurance recovery within unallocated corporate charges.

 
 
 
 
 
 
23
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

19.      GUARANTOR FINANCIAL INFORMATION

Appleton (the “Issuer”) has issued senior subordinated notes, as amended, which have been guaranteed by PDC (the “Parent Guarantor”), 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 3, 2011 and January 1, 2011, and for the three and six months ended July 3, 2011 and July 4, 2010. This financial information should be read in conjunction with the condensed consolidated financial statements and other notes related thereto.

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 3, 2011
(unaudited)
(dollars in thousands)
 
   
Parent
Guarantor
    
Issuer
    
Subsidiary
Guarantors
    
Non-Guarantor
 Subsidiary
    
Eliminations
    
Consolidated
                                   
ASSETS
                                  
Current assets
                                  
   Cash and cash equivalents
  
$
38 
   
$
4,907
    
$
-
    
$
55
    
$
-
    
$
5,000 
   Accounts receivable, net
    
- 
      
85,851
      
-
      
7,639
      
-
      
93,490 
   Inventories
    
- 
      
108,942
      
-
      
1,702
      
-
      
110,644 
   Other current assets
    
6,017 
      
11,364
      
-
      
34
      
-
      
17,415 
      Total current assets
    
6,055 
      
211,064
      
-
      
9,430
      
-
      
226,549 
                                               
   Property, plant and equipment, net
    
- 
      
341,211
      
-
      
17
      
-
      
341,228 
   Investment in subsidiaries
    
159,989 
      
15,738
      
-
      
-
      
(175,727)
      
- 
   Other assets
    
12 
     
65,101
      
-
      
133
      
-
      
65,246 
       Total assets
  
$
166,056 
    
$
633,114
    
$
-
    
$
9,580
    
$
(175,727)
    
$
633,023 
                                               
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
                                        
Current liabilities
                                              
   Current portion of long-term debt
  
$
- 
    
$
1,203
 
  
$
-
    
$
-
    
$
-
    
$
1,203
   Accounts payable
    
- 
      
48,531
      
-
      
78
      
-
      
48,609
   Due to (from) parent and affiliated companies
    
315,089 
      
(306,588
)
    
-
      
(8,501
)
    
-
      
- 
   Other accrued liabilities
    
- 
      
49,749
      
-
      
2,158
      
-
      
51,907 
       Total current liabilities
    
315,089 
      
(207,105
)
    
-
      
(6,265
)
    
-
      
101,719 
                                               
Long-term debt
    
- 
      
550,696
      
-
      
-
      
-
      
550,696 
Other long-term liabilities
    
- 
      
129,534
      
-
      
107
      
-
      
129,641 
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss
    
(149,033)
      
159,989
      
-
      
15,738
      
(175,727)
      
(149,033)
                                               
      Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss
  
$
166,056 
    
$
633,114
    
$
-
    
$
9,580
    
$
(175,727)
    
$
633,023 

 
 
 
 
 
 
25
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
CONDENSED CONSOLIDATING BALANCE SHEET
 
JANUARY 1, 2011
           (unaudited)
(dollars in thousands)
 
   
Parent
Guarantor
    
Issuer
    
Subsidiary
Guarantors
    
Non-Guarantor
Subsidiary
    
Eliminations
    
Consolidated
                                   
ASSETS
                                  
Current assets
                                  
   Cash and cash equivalents
  
$
- 
    
$
3,399
    
$
-
    
$
373
    
$
- 
    
$
3,772 
   Accounts receivable, net
    
- 
      
85,988
      
101
      
7,285
      
- 
      
93,374 
   Inventories
    
- 
      
107,908
      
-
      
2,124
      
- 
      
110,032 
   Other current assets
    
20,580 
      
21,364
      
-
      
48
      
- 
      
41,992 
      Total current assets
    
20,580 
      
218,659
      
101
      
9,830
      
- 
      
249,170 
                                               
   Property, plant and equipment, net
    
- 
      
354,597
      
-
      
4
      
- 
      
354,601 
   Investment in subsidiaries
    
161,559 
      
13,462
      
-
      
-
      
(175,021)
      
- 
   Other assets
    
12 
      
73,087
      
-
      
129
      
- 
      
73,228 
       Total assets
  
$
182,151 
    
$
659,805
    
$
101
    
$
9,963
    
$
(175,021)
    
$
676,999 
                                               
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
                                        
Current liabilities
                                              
   Current portion of long-term debt
  
$
- 
    
$
18,694
    
$
-
    
$
-
    
$
- 
    
$
18,694 
   Accounts payable
    
- 
      
48,608
      
-
      
43
      
- 
      
48,651 
   Due to (from) parent and affiliated companies
    
318,142 
      
(312,040
)
    
101
      
(6,203
)
    
- 
      
- 
   Other accrued liabilities
    
- 
      
63,524
      
-
      
2,558
      
- 
      
66,082 
       Total current liabilities
    
318,142 
      
(181,214
)
    
101
      
(3,602
)
    
- 
      
133,427 
                                               
Long-term debt
    
- 
      
540,131
      
-
      
-
      
- 
      
540,131 
Other long-term liabilities
    
- 
      
139,329
      
-
      
103
      
- 
      
139,432 
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss
    
(135,991)
      
161,559
      
-
      
13,462
      
(175,021)
      
(135,991)
                                               
      Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss
  
$
182,151 
    
$
659,805
    
$
101
    
$
9,963
    
$
(175,021)
    
$
676,999 

 
 
 
 
 
 
26
 
 


PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
  
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
   
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
  
FOR THE SIX MONTHS ENDED JULY 3, 2011
  
(unaudited)
  
(dollars in thousands)
  
   
   
Parent
          
Subsidiary
    
Non-Guarantor
              
   
Guarantor
    
Issuer
    
Guarantors
    
Subsidiary
    
Eliminations
    
Consolidated
  
Net sales
  
$
-
    
$
431,465
    
$
-
    
$
25,966
    
$
(22,830
)
  
$
434,601
  
Cost of sales
    
-
      
344,923
      
-
      
23,348
      
(22,947
)
    
345,324
  
                                                 
Gross profit
    
-
      
86,542
      
-
      
2,618
      
117
      
89,277
  
Selling, general and administrative expenses
    
-
      
64,172
      
-
      
949
      
-
      
65,121
  
Litigation settlement
    
-
      
3,122
      
-
      
-
      
-
      
3,122
  
                                                 
Operating income
    
-
      
19,248
      
-
      
1,669
 
    
117
      
21,034
  
Interest expense
    
6,797
      
31,995
      
-
      
-
      
(6,959
)
    
31,833
  
Interest income
    
-
      
(6,871
)
    
-
      
(162
)
    
6,959
      
(74
)
Loss (income) in equity investments
    
1,681
      
(2,466
)
    
-
      
-
      
785
      
-
  
Other income
    
-
      
(1,833
)
    
-
      
(542
)
    
(73
)
    
(2,448
)
                                                 
(Loss) income before income taxes
    
(8,478
)
    
(1,577
)
    
-
      
2,373
      
(595
)
    
(8,277
)
Provision for income taxes
    
-
      
104
      
-
      
97
      
-
 
    
201
  
                                                 
Net (loss) income
  
$
(8,478
)
  
$
(1,681
)
  
$
-
    
$
2,276
    
$
(595
)
  
$
(8,478
)





 
 
 
 
 
 
27
 
 
 
 
 
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
  
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
   
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
  
FOR THE SIX MONTHS ENDED JULY 4, 2010
  
(unaudited)
  
(dollars in thousands)
  
   
   
Parent
          
Subsidiary
    
Non-Guarantor
              
   
Guarantor
    
Issuer
    
Guarantors
    
Subsidiary
    
Eliminations
    
Consolidated
  
Net sales
  
$
-
    
$
429,688
    
$
-
    
$
23,491
    
$
(22,387
)
  
$
430,792
  
Cost of sales
    
-
      
353,385
      
-
      
22,957
      
(22,692
)
    
353,650
  
                                                 
Gross profit
    
-
      
76,303
      
-
      
534
      
305
      
77,142
  
Selling, general and administrative expenses
    
-
      
69,212
      
-
      
919
      
-
      
70,131
  
Environmental expense insurance recovery
    
-
      
(8,181
)
    
-
      
-
      
-
      
(8,181
)
                                                 
Operating income (loss)
    
-
      
15,272
      
-
      
(385
)
    
305
      
15,192
  
Interest expense
    
6,646
      
33,968
      
-
      
-
      
(6,946
)
    
33,668
  
Debt extinguishment expense, net
    
-
      
5,532
      
-
      
-
      
-
      
5,532
  
Interest income
    
-
      
(6,691
)
    
-
      
(300
)
    
6,946
      
(45
)
Loss (income) in equity investments
    
15,777
      
(2,953
)
    
-
      
-
      
(12,824
)
    
-
  
Other loss
    
-
      
1,253
      
-
      
93
      
14
      
1,360
 
                                                 
Loss from continuing operations before income taxes
    
(22,423
)
    
(15,837
)
    
-
      
(178
)
    
13,115
      
(25,323
)
Provision (benefit) for income taxes
    
-
      
44
      
-
      
(90
)
    
-
 
    
(46
)
                                                 
Loss from continuing operations
    
(22,423
)
    
(15,881
)
    
-
      
(88
)
    
13,115
      
(25,277
)
Income from discontinued operations, net of income taxes
    
-
      
104
      
2,750
      
-
      
-
      
2,854
  
                                                 
Net (loss) income
  
$
(22,423
)
  
$
(15,777
)
  
$
2,750
    
$
(88
)
  
$
13,115
    
$
(22,423
)
 
 
 
 
 

 
 
 
 
 
 
28
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
  
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
   
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
  
FOR THE THREE MONTHS ENDED JULY 3, 2011
  
(unaudited)
  
(dollars in thousands)
  
   
   
Parent
          
Subsidiary
    
Non-Guarantor
              
   
Guarantor
    
Issuer
    
Guarantors
    
Subsidiary
    
Eliminations
    
Consolidated
  
Net sales
  
$
-
    
$
215,575
    
$
-
    
$
12,262
    
$
(11,251
)
  
$
216,586
  
Cost of sales
    
-
      
174,293
      
-
      
10,964
      
(11,097
)
    
174,160
  
                                                 
Gross profit
    
-
      
41,282
      
-
      
1,298
      
(154
)
    
42,426
  
Selling, general and administrative expenses
    
-
      
31,308
      
-
      
464
      
-
      
31,772
  
Litigation settlement
    
-
      
(82
)
    
-
      
-
      
-
      
(82)
  
                                                 
Operating income
    
-
      
10,056
      
-
      
834
      
(154
)
    
10,736
  
Interest expense
    
3,421
      
15,769
      
-
      
-
      
(3,507
)
    
15,683
  
Interest income
    
-
      
(3,458
)
    
-
      
(86
)
    
3,507
      
(37
)
Income in equity investments
    
(140)
      
(1,045
)
    
-
      
-
      
1,185
      
-
  
Other income
    
-
      
(1,402
)
    
-
      
(101
)
    
28
      
(1,475
)
                                                 
(Loss) income before income taxes
    
(3,281)
 
    
192
      
-
      
1,021
      
(1,367
)
    
(3,435
)
Provision (benefit) for income taxes
    
-
      
52
      
-
      
(206
)
    
-
      
(154
)
                                                 
Net (loss) income
  
$
(3,281)
 
  
$
140
    
$
-
    
$
1,227
    
$
(1,367
)
  
$
(3,281
)





 
 
 
 
 
 
29
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
  
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
   
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
  
FOR THE THREE MONTHS ENDED JULY 4, 2010
  
(unaudited)
  
(dollars in thousands)
  
   
   
Parent
          
Subsidiary
    
Non-Guarantor
              
   
Guarantor
    
Issuer
    
Guarantors
    
Subsidiary
    
Eliminations
    
Consolidated
  
Net sales
  
$
-
    
$
219,672
    
$
-
    
$
12,151
    
$
(11,039
)
  
$
220,784
  
Cost of sales
    
-
      
182,972
      
-
      
11,624
      
(11,231
)
    
183,365
  
                                                 
Gross profit
    
-
      
36,700
      
-
      
527
      
192
      
37,419
  
Selling, general and administrative
expenses
    
-
      
34,839
      
-
      
479
      
-
      
35,318
  
                                                 
Operating income
    
-
      
1,861
      
-
      
48
      
192
      
2,101
  
Interest expense
    
3,347
      
16,796
      
-
      
-
      
(3,397
)
    
16,746
  
Interest income
    
-
      
(3,382
)
    
-
      
(50
)
    
3,397
      
(35
)
Loss (income) in equity investments
    
11,629
      
(1,028
)
    
-
      
-
      
(10,601
)
    
- 
  
Other loss
    
-
      
1,105
      
-
      
614
      
(96
)
    
1,623
  
                                                 
Loss from continuing operations before income taxes
    
(14,976
)
    
(11,630
)
    
-
      
(516
)
    
10,889
      
(16,233
)
Provision for income taxes
    
-
      
14
      
-
      
31
      
-
      
45
  
                                                 
Loss from continuing operations
    
(14,976
)
    
(11,644
)
    
-
      
(547
)
    
10,889
      
(16,278
)
Income from discontinued operations, net of income taxes
    
-
      
15
      
1,287
      
-
      
-
      
1,302
  
                                                 
Net (loss) income
  
$
(14,976
)
  
$
(11,629
)
  
$
1,287
    
$
(547
)
  
$
10,889
    
$
(14,976
)


 
 
 
 
 
30
 
 


PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
  
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
   
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
  
FOR THE SIX MONTHS ENDED JULY 3, 2011
  
(unaudited)
  
(dollars in thousands)
  
   
   
Parent
          
Subsidiary
    
Non-Guarantor
              
   
Guarantor
    
Issuer
    
Guarantors
    
Subsidiary
    
Eliminations
    
Consolidated
  
                                     
Cash flows from operating activities:
                                    
Net (loss) income
  
$
(8,478
)
  
$
(1,681
)
  
$
-
    
$
2,276
    
$
(595
)
  
$
(8,478
)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                                                
Depreciation and amortization
    
-
      
24,114
      
-
      
2
      
-
      
24,116
 
Other
    
-
      
2,319
      
-
      
(542
)
    
-
      
1,777
 
Change in assets and liabilities, net 
    
17,536
      
(12,710
)
    
101
      
258
      
595
      
5,780
 
Net cash provided by operating activities
    
9,058
 
    
12,042
      
101
      
1,994
      
-
      
23,195
 
Cash flows from investing activities:
                                                
Insurance proceeds from involuntary conversion of equipment
    
-
      
1,374
      
-
      
-
      
-
      
1,374
  
Additions to property, plant and equipment
    
-
      
(9,390
)
    
-
      
(14
)
    
-
      
(9,404
)
                                                 
Net cash used by investing activities
    
-
      
(8,016
)
    
-
      
(14
)
    
-
      
(8,030
)
Cash flows from financing activities:
                                                
Payments of senior subordinated notes payable
    
-
      
(17,491
)
    
-
      
-
      
-
      
(17,491
)
Payments relating to capital lease obligations
    
-
      
(28
)
    
-
      
-
      
-
      
(28
)
Proceeds from new revolving line of credit
    
-
      
130,300
 
    
-
      
-
      
-
      
130,300
  
Payments of new revolving line of credit
    
-
      
(119,600
)
    
-
      
-
      
-
      
(119,600
)
Payments of State of Ohio loan
    
-
      
(601
)
    
-
      
-
      
-
      
(601
)
Due to parent and affiliated companies, net
    
(3,053
)
    
5,452
      
(101
)
    
(2,298
)
    
-
      
-
  
Proceeds from issuance of redeemable common stock
    
1,382
      
-
      
-
      
-
      
-
      
1,382
  
Payments to redeem common stock
    
(7,349
)
    
-
      
-
      
-
      
-
      
(7,349
)
Decrease in cash overdraft 
    
-
      
(564
)
    
-
      
-
      
-
      
(564
)
                                                 
Net cash used by financing activities
    
(9,020
)
    
(2,532
)
    
(101
)
    
(2,298
)
    
-
      
(13,951
)
                                                 
Effect of foreign exchange rate changes on cash and cash equivalents
    
-
      
14
      
-
      
-
      
-
      
14
 
Change in cash and cash equivalents
    
38
      
1,508
      
-
      
(318
)
    
-
      
1,228
 
Cash and cash equivalents at beginning of period
    
-
      
3,399
      
-
      
373
      
-
      
3,772
 
Cash and cash equivalents at end of period
  
$
38
    
$
4,907
    
$
-
    
$
55
    
$
-
    
$
5,000
  
 


 
 
 
 
 
31
 
 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
  
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
   
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
  
FOR THE SIX MONTHS ENDED JULY 4, 2010
  
(unaudited)
  
(dollars in thousands)
  
   
   
Parent
          
Subsidiary
    
Non-Guarantor
              
   
Guarantor
    
Issuer
    
Guarantors
    
Subsidiary
    
Eliminations
    
Consolidated
  
Cash flows from operating activities:
                                    
Net (loss) income
  
$
(22,423
)
  
$
(15,777
)
  
$
2,750
    
$
(88
)
  
$
13,115
    
$
(22,423
)
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities:
                                                
Depreciation and amortization
    
-
      
24,711
      
1,726
      
3
      
-
      
26,440
  
Other
    
-
      
2,881
      
-
      
14
      
-
      
2,895
  
Change in assets and liabilities, net 
    
50,565
      
  (70,058
)
    
(2,834
)
    
(420
)
    
(13,115
)
    
  (35,862
)
Net cash provided (used) by operating activities
    
28,142
      
(58,243
)
    
1,642
      
(491
)
    
-
      
(28,950
)
Cash flows from investing activities:
                                                
Proceeds from sale of equipment
    
-
      
57
      
-
      
-
      
-
      
57
  
Additions to property, plant and equipment
    
-
      
(6,234
)
    
(565
)
    
-
      
-
      
(6,799
)
                                                 
Net cash used by investing activities
    
-
      
(6,177
)
    
(565
)
    
-
      
-
      
(6,742
)
Cash flows from financing activities:
                                                
Payments of senior secured notes payable
    
-
      
(211,225
)
    
-
      
-
      
-
      
(211,225
)
Proceeds from senior secured first lien notes payable
    
-
      
299,007
      
-
      
-
      
-
      
299,007
  
Debt acquisition costs
    
-
      
(10,807
)
    
-
      
-
      
-
      
(10,807
)
Payments relating to capital lease obligations
    
-
      
(389
)
    
-
      
-
      
-
      
(389
)
Proceeds from old revolving line of credit
    
-
      
21,350
      
-
      
-
      
-
      
21,350
  
Payments of old revolving line of credit
    
-
      
(109,575
)
    
-
      
-
      
-
      
(109,575
)
Proceeds from new revolving line of credit
    
  -
      
154,793
      
  -
      
  -
      
  -
      
154,793
  
Payments of new revolving line of credit
    
-
      
(99,350
)
    
-
      
-
      
-
      
(99,350
)
Payments of State of Ohio loans
    
-
      
(570
)
    
-
      
-
      
-
      
(570
)
Payments of secured financing
    
-
      
(1,494
)
    
-
      
-
      
-
      
(1,494
)
Due to parent and affiliated companies, net
    
(22,330
)
    
22,668
      
(1,078
)
    
740
      
-
        
-
Proceeds from issuance of redeemable common stock
    
1,924
      
-
      
-
      
-
      
-
      
1,924
  
Payments to redeem common stock 
    
(7,736
)
    
-
      
-
      
-
      
-
      
(7,736
)
Decrease in cash overdraft 
    
-
      
(6,274
)
    
-
      
-
      
-
      
(6,274
)
Net cash (used) provided by financing activities
    
(28,142
)
    
58,134
      
(1,078
)
    
740
      
-
      
29,654
  
                                                 
Effect of foreign exchange rate changes on cash and cash equivalents
    
-
      
(6
)
    
-
      
-
      
-
      
(6
)
Change in cash and cash equivalents
    
-
      
(6,292
)
    
(1
)
    
249
      
-
      
(6,044
)
Cash and cash equivalents at beginning of period
    
-
      
9,161
      
1
      
801
      
-
      
9,963
  
Cash and cash equivalents at end of period
  
$
-
    
$
2,869
    
$
-
    
$
1,050
    
$
-
    
$
3,919
  


 
32
 
 


Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Unless stated to the contrary or the context requires otherwise, all references to “Paperweight Development,” “PDC” or “Company” refer to Paperweight Development Corp. and its subsidiaries and predecessors. Appleton Papers Inc. is a 100%-owned subsidiary of Paperweight Development, which is referred to as “Appleton” in this report.

Overview
 
This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of PDC and Appleton for the quarter ended July 3, 2011. This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related Notes. Reference should also be made to the Annual Report on Form 10-K for the year ended January 1, 2011, the consolidated financial statements and related notes included therein.

Appleton's business and results of operations are impacted by various factors, including raw materials pricing and availability. As discussed below, raw material prices continued to negatively impact the business. In response to escalating raw material costs, Appleton has been able to initiate and sustain price increases in order to manage its margins. The Company continues to be proactive and disciplined as it implements manufacturing efficiencies and cost saving measures to help balance the negative impact of increasing input costs on the business. Appleton's business and financial results may continue to be adversely affected by increasing raw material prices as well as the possibility of not being able to sustain price increases out in the market place to keep pace with these rising input costs.

Financial Highlights
 
Second quarter 2011 net sales of $216.6 million decreased 1.9% compared to net sales of $220.8 million for second quarter 2010. Within the paper business, favorable pricing partially offset the negative financial impact of a 10% volume shortfall when compared to second quarter 2010. Second quarter 2011 Encapsys® net sales of $14.0 million were $2.1 million higher than second quarter 2010 net sales. Encapsys second quarter 2011 volumes were approximately 23% higher than second quarter 2010.
 
A loss from continuing operations of $3.3 million was recorded during second quarter 2011 compared to a $16.3 million loss from continuing operations recorded in second quarter 2010. The current quarter loss includes $3.5 million of spending associated with the annual maintenance shutdown at the Roaring Spring, Pennsylvania paper mill. This compares to $2.7 million spent during the second quarter 2010 shutdown. Current year operating income continues to be negatively impacted by escalating raw material prices though offset by strong product pricing and cost reduction efforts throughout the organization.

During June 2011, in accordance with the terms of its 8.125% senior notes payable, Appleton repaid in full the remaining note balance of $17.5 million. In addition, $27.4 million of semi-annual interest due on its outstanding bond indebtedness was paid.

 
 
 
 
 
33
 
 
 
 

Comparison of Unaudited Results of Operations for the Quarters Ended July 3, 2011 and July 4, 2010

   
For the Quarter Ended
        
   
July 3,
    
July 4,
    
Increase
  
   
2011
    
2010
    
(Decrease)
  
   
(dollars in millions)
        
                   
Net sales
  
$
216.6
    
$
220.8
      
-1.9
%
Cost of sales
    
174.2
      
183.4
      
-5.0
%
                         
Gross profit
    
42.4
      
37.4
      
13.4
%
                         
Selling, general and administrative expenses
    
31.8
      
35.3
      
-9.9
%
Litigation settlement
    
(0.1
 )     
-
      
                        nm   
                         
Operating income
    
10.7
      
2.1
      
409.5
%
                         
Interest expense, net
    
15.6
      
16.7
      
-6.6
%
Other non-operating (income) expense, net
    
(1.5
)
    
1.7
 
  
188.2
%
                         
Loss from continuing operations before income taxes
    
(3.4
)
    
(16.3
)
  
79.1
%
Benefit for income taxes
    
(0.1
 )     
-
 
    
nm
  
                         
Loss from continuing operations
    
(3.3
)
    
(16.3
)
  
79.8
%
Income from discontinued operations, net of income taxes
    
-
      
1.3
    
-100.0
%
 
Net loss
  
$
(3.3
)
  
$
(15.0
)
  
78.0
%
 
Comparison as a percentage of net sales
                        
Cost of sales
    
80.4
%
    
83.1
%
    
-2.7
%
Gross margin
    
19.6
%
    
16.9
%
    
2.7
%
Selling, general and administrative expenses
    
14.7
%
    
16.0
%
    
-1.3
%
Operating margin
    
4.9
%
    
0.9
%
    
4.0
%
Loss from continuing operations before income taxes
    
-1.6
%
    
-7.4
%
    
5.8
%
Loss from continuing operations
    
-1.5
%
    
-7.4
%
    
5.9
%
Income from discontinued operations, net of income taxes
    
-
      
0.6
%
    
-0.6
%
Net loss
    
-1.5
%
    
-6.8
%
    
5.3
%
 
Net sales for second quarter 2011 were $216.6 million, a decrease of $4.2 million, or 1.9%, compared to the prior year period. When compared to the prior year quarter, shipment volumes within the paper business were approximately 10% lower. This was partially offset by favorable product pricing and an increase in Encapsys shipment volumes of approximately 23%.
 
Second quarter 2011 operating income of $10.7 million increased $8.6 million over second quarter 2010 operating income of $2.1 million. In comparison to last year, second quarter 2011 gross profit of $42.4 million was 13.4% higher. Second quarter 2011 gross margin increased by 2.7 percentage points over the prior year period. Appleton’s paper business was positively impacted by improved price and mix of $14.1 million as well as reduced costs of $2.2 million. This was partially offset by the increased cost of raw materials and utilities of $6.5 million and a $2.6 million reduction of operating income due to lower shipment volumes. Quarter-on-quarter, Encapsys contributed a $1.6 million increase to operating income. Second quarter 2011 selling, general and administrative expenses (“SG&A”) were $3.5 million lower than the same period of 2010 primarily the result of reduced distribution costs associated with lower shipment volumes, lower compensation expense, a reduction in health care costs and lower depreciation expense.

 
 
 
 
 
 
 
34
 
 
 
 

The second quarter 2011 loss from continuing operations of $3.3 million compares to a loss from continuing operations of $16.3 million recorded in second quarter 2010. In addition to the items noted above, second quarter 2011 net interest expense was $1.1 million lower than the same quarter last year due to lower interest expense incurred on lower outstanding revolver balances as well as the fourth quarter 2010 repayment in full of the secured term note payable. For the three months ended July 3, 2011, a $1.4 million gain was recorded as a result of the involuntary conversion of equipment associated with the West Carrollton mill coal silo collapse. Also during second quarter 2011, the Company recorded a foreign currency exchange gain of $0.1 million compared to a $1.6 million foreign currency exchange loss recorded during second quarter 2010. The Company reported a net loss of $3.3 million for the second quarter of 2011 compared to a net loss of $15.0 million reported for second quarter 2010, which included income from discontinued operations of $1.3 million.

Comparison of Unaudited Results of Operations for the Six Months Ended July 3, 2011 and July 4, 2010

   
For the Six Months Ended
        
   
July 3,
    
July 4,
    
Increase
  
   
2011
    
2010
    
(Decrease)
  
   
(dollars in millions)
        
                   
Net sales
  
$
434.6
   
$
430.8
     
0.9
%
Cost of sales
    
345.3
     
353.7
     
-2.4
%
                         
Gross profit
    
89.3
      
77.1
     
15.8
%
                         
Selling, general and administrative expenses
    
65.2
     
70.1
     
-7.0
%
Environmental expense insurance recovery
    
-
     
(8.2
)
    
-100.0%
Litigation settlement
    
3.1
     
-
      
                    nm
                         
Operating income
    
21.0
     
15.2
      
38.2
%
                         
Interest expense, net
    
31.7
     
33.6
     
-5.7
%
Debt extinguishment expense, net
    
-
     
5.5
   
-100.0
%
Other non-operating (income) expense, net
    
(2.4
)
    
1.4
 
  
271.4
%
                         
Loss from continuing operations before income taxes
    
(8.3
 )    
(25.3
)
  
67.2
%
Provision for income taxes
    
0.2
     
-
 
    
 nm
  
                         
Loss from continuing operations
    
(8.5
 )     
(25.3
)
  
66.4
%
Income from discontinued operations, net of income taxes
    
-
      
2.9
   
-100.0
%
 
Net loss
  
$
(8.5
)
  
$
(22.4
)
  
62.1
%
 
Comparison as a percentage of net sales
                        
Cost of sales
    
79.5
%
    
82.1
%
    
-2.6
%
Gross margin
    
20.5
%
    
17.9
%
    
2.6
%
Selling, general and administrative expenses
    
15.0
%
    
16.3
%
    
-1.3
%
Operating margin
    
4.8
%
    
3.5
%
    
1.3
%
Loss from continuing operations before income taxes
    
-1.9
%
    
-5.9
%
    
4.0
%
Loss from continuing operations
    
-1.9
%
    
-5.9
%
    
4.0
%
Income from discontinued operations, net of income taxes
    
-
      
0.7
%
    
-0.7
%
Net loss
    
-1.9
%
    
-5.2
%
    
3.3
%
 
Net sales for the first six months of 2011 were $434.6 million, an increase of $3.8 million, or 0.9%, compared to the first six months of 2010. This increase was largely due to the continued growth of the Encapsys business as well as favorable pricing offsetting lower shipment volumes within the paper business.
 

 
 
 
 
 
 
 
35
 
 
 
 

Operating income for the first six months of 2011 increased $5.8 million, or 38.2%, to $21.0 million. First half 2011 operating income includes a $3.1 million charge for a litigation settlement while first half 2010 operating income included environmental expense insurance recovery of $8.2 million. In comparison to last year, first half 2011 gross profit of $89.3 million was 15.8% higher. Gross margin for the first six months of 2011 increased by 2.6 percentage points over the prior year period. Appleton’s paper business was positively impacted by improved price and mix of $27.7 million as well as reduced costs of $3.8 million. This was partially offset by increased cost of raw materials and utilities of $13.7 million and a $4.6 million reduction of operating income due to lower shipment volumes. Year-on-year, Encapsys contributed a $4.0 million increase to operating income. First half 2011 SG&A spending was $4.9 million lower than during the same period of 2010 as a result of the same reasons discussed above.

The Company reported a net loss of $8.5 million for the first six months of 2011 compared to a net loss of $22.4 million reported last year, which included income from discontinued operations of $2.9 million.

Business Segment Discussion

Second quarter 2011 net sales within the Company’s paper business were $208.4 million or $6.7 million lower than second quarter 2010 net sales. First half 2011 net sales within the Company’s paper business were $416.6 million or $3.4 million lower than the same period last year. Second quarter 2011 operating income of $10.1 million was $7.2 million higher than second quarter 2010 operating income. First half 2011 operating income of $22.2 million was $13.2 million higher than the same period last year. The year-on-year operating income variance was the result of the following (dollars in millions):
 
   
For the Three
    
For the Six
  
   
Months Ended
    
Months Ended
  
   
July 3, 2011 v.
    
July 3, 2011 v.
  
   
the Three Months
    
the Six Months
  
   
Ended July 4, 2010
    
Ended July 4, 2010
  
             
Favorable price and mix
  
$                                                    14.1
    
$                                                       27.7
  
Reduced costs
  
                                                        2.2
    
                                                           3.8
  
Net inflation of raw material and utilities pricing
  
                                                      (6.5
 )   
                                                      (13.7
 )
Lower shipment volumes
  
                                                       (2.6
 )   
                                                          (4.6
 )
   
$                                                      7.2
    
$                                                       13.2
  
 
Carbonless Papers
 
•
Second quarter 2011 carbonless papers net sales totaled $116.7 million, a decrease of $11.3 million, or 8.8%, from prior year levels. Shipment volumes during second quarter 2011 were approximately 14% lower than the same period last year. The majority of this decline in shipment volumes occurred within the carbonless roll market across all market channels. The negative impact of lower shipment volumes was partially offset by the benefits realized from price increases initiated since 2010 in response to rapidly rising raw material costs. During the first six months of 2011, carbonless net sales totaled $236.0 million, a decrease of $16.6 million, or 6.6%, from prior year levels. On a year-to-date basis, 2011 carbonless shipment volumes are approximately 12% lower than last year.

•
Second quarter 2011 carbonless papers operating income of $5.5 million increased $0.6 million compared to second quarter 2010. During the first six months of 2011, operating income of $15.0 million increased $1.9 million compared to the same 2010 period. As mentioned above, operating income for the first six months of 2011 was favorably impacted by the benefit of price increases initiated in response to the ongoing negative impact of rapidly rising raw material costs. Also, second quarter operating income includes $3.5 million of spending associated with the annual maintenance shutdown at the Roaring Spring, Pennsylvania paper mill. This compares to $2.7 million spent during the second quarter 2010 shutdown.

 
 
 
 
 
 
 
36
 
 
 
 

Thermal Papers
 
•
Second quarter 2011 thermal papers net sales totaled $91.7 million, an increase of $4.6 million, or 5.3%, over the same prior year period. First half 2011 thermal papers net sales totaled $180.7 million, an increase of $13.3 million, or 7.9%, when compared to last year. During 2011, to improve profitability, Appleton has been managing volumes and price of the point of sale receipt paper (“POS”) portion of the thermal business rather than selling higher shipment volumes at lower margins. Second quarter 2011 shipment volumes, as well as first half 2011 shipment volumes of POS, were approximately 13% and 8% lower than the year before, respectively. Quarter-on-quarter, shipment volumes of tag, label and entertainment (“TLE”) were approximately 10% higher. On a year-to-date basis, TLE shipment volumes were 9% higher. The thermal papers segment also benefited from favorable pricing realized in response to escalating raw material costs.

•
The thermal papers segment recorded operating income of $4.7 million for second quarter 2011. This compared to a second quarter 2010 operating loss of $2.0 million. The thermal papers segment recorded operating income of $7.2 million for the first half of 2011 compared to an operating loss of $4.1 million for the first six months of 2010. Though 2011 operating income includes higher raw materials and utility costs, the increase in net sales and improved product mix offset the negative impact of these items.

Encapsys
 
•
Encapsys second quarter 2011 net sales of $14.0 million were $2.1 million, or 17.9%, higher than second quarter 2010. Second quarter 2011 volumes were approximately 23% higher than the prior year quarter. During the first half of 2011, Encapsys net sales totaled $29.5 million which was $6.1 million, or 26.3%, higher than the same period of 2010. First half 2011 volumes were approximately 30% higher than the same period last year.

•
As a result of higher shipment volumes, improved manufacturing performance and lower SG&A expenses, Encapsys second quarter 2011 operating income was $3.2 million compared to $1.6 million during second quarter 2010. Year-to-date 2011 operating income was $7.2 million compared to $3.1 million for the first six months of 2010.

Unallocated Corporate Charges
 
•
Unallocated corporate charges and business development costs increased $0.4 million in second quarter 2011 compared to second quarter 2010. Year-to-date 2011 expense was $11.8 million higher than 2010 due to the recording of a $3.1 million litigation settlement during first half 2011 and an $8.2 million Fox River insurance recovery during first half 2010.

Liquidity and Capital Resources
 
Overview. Appleton’s primary sources of liquidity and capital resources are cash provided by operations and available borrowings under its revolving credit facility. Appleton expects that cash on hand, internally-generated cash flow and available credit from its revolving credit facility will provide the necessary funds for the reasonably foreseeable operating and recurring cash needs (e.g., working capital, debt service, other contractual obligations and capital expenditures). At July 3, 2011, Appleton had $5.0 million of cash and $35.8 million of unused borrowing capacity under its revolving credit facility. Net debt decreased to $546.9 million compared to $555.1 million at year-end 2010.

During June 2011, in accordance with the terms of its 8.125% senior notes payable, Appleton repaid in full the remaining note balance of $17.5 million. In addition, $27.4 million of semi-annual interest due on its outstanding bond indebtedness was paid. During the current quarter, Appleton made contributions to its pension plan totaling $6.3 million, for a total of $11.6 million thus far during 2011.

Appleton was in compliance with all debt covenants and is forecasted to remain compliant for the next twelve months. Appleton’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results. Appleton’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could 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.

 
 
 
 
 
 
 
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Cash Flows from Operating Activities. Net cash of $23.2 million was provided by operating activities during the first six months of 2011. This was a $52.1 million increase in operating cash when compared to net cash used by operating activities during the first six months of 2010. The net loss of $8.5 million, adjusted for non-cash charges, provided $17.4 million in operating cash for the period. Non-cash charges included $24.1 million of depreciation and amortization, $1.5 million of non-cash employer matching contributions to the KSOP and $2.8 million of other non-cash charges. These non-cash charges were decreased by a $1.4 million gain from involuntary conversion of equipment and $1.1 million of foreign exchange gain and environmental insurance recovery accretion. Cash was also provided during the quarter from a $13.4 million decrease in working capital and $1.0 million of other cash provided. A decrease in the pension liability, which includes $11.6 million of pension plan contributions, resulted in an $8.6 million net use of cash.

The primary component of the $13.4 million decrease in working capital was a $14.1 million decrease in other current assets, largely the result of receiving $10.3 million of cash proceeds to settle the West Carrollton silo collapse insurance claim. During this same time period, an additional $2.1 million of insurance receivable was recorded for this claim. Also during the first six months of this year, the Company received $6.2 million related to the Fox River insurance recovery. Other working capital changes in accounts receivable, inventories and accounts payable and other accrued liabilities were immaterial and netted a $0.7 use of cash.

Cash Flows from Investing Activities. During the first six months of 2011, $8.0 million of cash was used for investing activities, of which, $9.4 million was used for the acquisition of property, plant and equipment. This compares to $6.7 million used during the first half of 2010, $6.8 million of which was used for the acquisition of property, plant and equipment. Of the $9.4 million spent during first half 2011 for the acquisition of property, plant and equipment, $2.3 million related to equipment replacement resulting from the July 2010 coal silo collapse at the West Carrollton, Ohio paper mill. Insurance proceeds of $1.4 million were received during the first six months of 2011 to compensate the Company’s losses. As of the end of June 2011, this insurance claim has been settled and the proceeds received.

Cash Flows from Financing Activities. Net cash used for financing activities in 2011 was $14.0 million compared to $29.6 million of cash provided during the prior year. During June 2011, in accordance with the terms of its 8.125% senior notes payable, Appleton repaid in full the remaining note balance of $17.5 million. Appleton also made mandatory debt repayments of $0.6 million, plus interest, on its State of Ohio loans. During 2011, Appleton has borrowed an additional $10.7 million on its revolving credit facility and, as of July 3, 2011, the unpaid balance on the revolving credit facility was $40.0 million.

First half 2011 proceeds from the issuance of PDC redeemable common stock totaled $1.4 million. The ESOP trustee purchased this stock using pre-tax deferrals, rollovers and loan payments made by employees during the first six months of 2011. Payments to redeem PDC common stock were $7.4 million during this same period of 2011.

Cash overdrafts decreased $0.6 million during the first half of 2011. Cash overdrafts represent short-term obligations, in excess of deposits on hand, which have not yet cleared through the banking system. Fluctuations in the balance are a function of quarter-end payment patterns and the speed with which the payees deposit the checks.

New Accounting Pronouncements
 
    In June 2011, the Financial Accounting Statements Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, "Presentation of Comprehensive Income." It provides updated guidance related to the presentation of other comprehensive income, offering two alternatives for presentation, including (a) a single continuous statement of comprehensive income or (b) two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company expects that adoption will not have a significant impact on its consolidated financial statements.
 

 
 
 
 
 
 
 
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In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," which amends ASC 820. This updated guidance relates to fair value measurements and disclosures, including (a) the application of the highest and best use valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity and (c) quantitative information required for fair value measurements categorized within Level 3. Additionally, disclosure requirements have been expanded to include additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the effects, if any, the adoption of this guidance will have on its consolidated financial statements.

In January 2010, the 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. During first quarter 2011, the Company adopted the portion of ASU No. 2010-06 relating to Level 3 fair value measurements. The disclosures required by adoption are included in Note 15 of Notes to Condensed Consolidated Financial Statements. Current year adoption had no impact on its financial statements.

Item 3—Quantitative and Qualitative Disclosures About Market Risk
 
For information regarding quantitative and qualitative disclosures about market risk, see the Annual Report on Form 10-K for the year ended January 1, 2011. There have been no other material changes in the quantitative or qualitative exposure to market risk from that described in the Form 10-K.

Item 4—Controls and Procedures
 
Internal Controls Over Financial Reporting
 
There were no changes in the internal control over financial reporting of Appleton or PDC as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the registrants’ internal control over financial reporting.
 
Disclosure Controls and Procedures
 
Appleton and PDC carried out an evaluation, under the supervision and with the participation of their management, including their respective principal executive officer and principal financial officer, of the effectiveness of the design and operation of their disclosure controls and procedures as such terms are defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Appleton and PDC maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by Appleton and PDC in the reports filed or submitted by them under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also designed to ensure that the information is accumulated and communicated to management, including their respective principal executive and principal financial officers, to allow timely decisions regarding required disclosures. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer of Appleton and PDC have concluded that their disclosure controls and procedures are effective as of the end of the period covered by this Form 10-Q.


 
 
 
 
 
 
 
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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information regarding legal proceedings is contained in Note 13 to the Condensed Consolidated Financial Statements contained in this report and is incorporated herein by reference.

Item 1A – Risk Factors
 
Other than with respect to the updated risk factor below, there have been no material changes in the risk factors disclosed in the Annual Report on Form 10-K for the year ended January 1, 2011.

Appleton has competitors in its various markets and it may not be able to maintain prices and margins for its products.
 
Appleton faces strong competition in all of its business segments. Its competitors vary in size and the breadth of their product offerings and some of its competitors have significantly greater financial, technical and marketing resources than Appleton does. Regardless of the continuing quality of Appleton’s primary products, Appleton may be unable to maintain its prices or margins due to:
 
•          declining overall carbonless market size;
 
•          accelerating decline in carbonless sheet sales;

•          variations in demand for, or pricing of, carbonless products;

•          increasing manufacturing and raw material costs;
 
•          increasing competition in international markets or from domestic or foreign producers or
 
•          declining general economic conditions.
 
Appleton’s inability to compete effectively or to maintain its prices and margins could have a material adverse effect on its earnings and cash flow.

The carbonless paper market is highly competitive. Appleton competes based on a number of factors, including price, product availability, quality and customer service. Additionally, Appleton competes with domestic production and imports from Europe and Asia. In September 2007, Appleton filed antidumping petitions against imports of certain lightweight thermal paper (“LWTP”) from China, Germany and Korea and a countervailing duty petition against such imports from China. On September 26, 2008, the U.S Department of Commerce (“Department”) issued its final determination, affirming that certain Chinese producers and exporters of LWTP sold the product in the U.S. at prices below fair value, imposing final duties of 19.77% to 115.29% on those imports. The Department also affirmed that German producers and exporters of LWTP sold the product in the U.S. at prices below fair value and imposed final duties on those imports of 6.5%. In addition, the Department announced its final determination concerning the imposition of countervailing duties on imports of LWTP from China to offset the subsidies that Chinese producers receive from the Chinese government. For all but one Chinese producer, the Department imposed duties of between 13.17% and 137.25%. Between the countervailing and anti-dumping duties, the Department imposed total duties of 19.77% to 252.54% on imports of LWTP from China. On October 30, 2008, the U.S. International Trade Commission (“ITC”) made a final determination that there is a reasonable indication that the U.S. industry producing certain LWTP is threatened with material injury due to unfairly traded imports from China and Germany. As a result, the final duties went into effect in November 2008. These duties do not have a direct impact on Appleton’s net income.

A German manufacturer filed an appeal of the ITC determination to the U.S. Court of International Trade (“CIT”), and the appeal was decided in favor of Appleton in November 2009. In December 2009, the German manufacturer filed a further appeal of the matter to the U.S. Court of Appeals for the Federal Circuit (“CAFC”). In January 2011, a three-judge panel of the CAFC vacated the decision of the CIT and remanded the matter for further consideration by the ITC. In April 2011, the General Counsel’s office of the ITC filed a request for the full CAFC to review the panel decision, which was denied. The ITC is expected to file its remand results by September 30, 2011.

 
 
 
 
 
 
 
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In addition, Appleton and the German manufacturer each filed a request for administrative review with the Department, seeking to modify the amount of the duties based on the market practices during the first 12-month period following implementation of the final duties, as well as the second 12-month period following implementation of the final duties. In April 2011, the Department issued a final determination in the administrative review of the first 12-month period following the final duties, resulting in a dumping margin of 3.77 percent for imports from the German manufacturer for the period from November 2008 to October 2009. The German manufacturer has appealed the determination to the CIT. Upon final resolution of the appeals or the second administrative review, certain of the duties could be reduced, increased or eliminated.

In March 2009, the Mexican government began imposing tariffs on 90 U.S. products sold into Mexico, including carbonless paper. The tariff on carbonless paper had been 10%. Beginning January 1, 2010, all U.S. sales of carbonless paper into Mexico were assessed a 5% tariff. In August 2010, the Mexican government announced a rotating list of 99 U.S. products to receive tariffs of 5% - 45%. Carbonless paper was eliminated from this list, and currently is not subject to any import tariffs. Though the tariff was paid by the customer, this automatically increased the price of carbonless paper by the amount of the tariff which could have opened the door for non-U.S. competitors to enter the Mexican market with their carbonless products and take advantage of the ability to offer customers more favorable pricing.

Also during 2010, the Mexican government passed legislation requiring all businesses in Mexico to file their invoices electronically with the government when the transactional value of the invoice is greater than 2000 pesos. In January 2011, this legislation became effective. This legislation allows a phase-in period whereby companies can still use paper invoices for up to two years as long as they obtained prior approval from the government to continue to print sequentially numbered invoices during this phase-in period. The legislation also permitted companies to begin the transition to electronic invoicing prior to the effective date of the legislation. This legislation provides that once a company agrees to offer one of its customers the option of receiving electronic invoices then it needs to extend this option to all customers and thereby no longer issue paper invoices. Currently, it is difficult to estimate what impact this might have on sales of carbonless paper into Mexico for use in multipart documents such as invoices. Other multipart documents, including delivery notices, order acknowledgments and other administrative documents, were not addressed in the legislation.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. The words “will,” “may,” “should,” “believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,” “plans,” “seek” or similar expressions are intended to identify forward-looking statements. All statements in this report other than statements of historical fact, including statements which address Appleton’s strategy, future operations, future financial position, estimated revenues, projected costs, prospects, plans and objectives of management and events or developments that Appleton expects or anticipates will occur, are forward-looking statements. All forward-looking statements speak only as of the date on which they are made. They rely on a number of assumptions concerning future events and are subject to a number of risks and uncertainties, many of which are outside the Company’s control that could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to, the factors listed under “Item 1A – Risk Factors” in the Annual Report on Form 10-K for the year ended January 1, 2011, as well as in the Quarterly Report on Form 10-Q for the current quarter ended July 3, 2011, which factors are incorporated herein by reference and as updated above. Many of these factors are beyond Appleton’s ability to control or predict. Given these uncertainties, do not place undue reliance on the forward-looking statements. Appleton disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.



 
 
 
 
 
 
 
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Item 6—Exhibits
 
     4.1 
Second Lien Collateral Agreement, dated as of September 30, 2009, among Appleton Papers Inc., Paperweight Development Corp. and each other Grantor identified therein in favor of U.S. Bank National Association, as Collateral Agent.
   
   10.1
Fox River AWA Environmental Indemnity Agreement by and among Arjo Wiggins Appleton p.l.c., Appleton Papers Inc., Paperweight Development Corp. and New Appleton LLC, dated as of November 9, 2001.
   
   10.2
Amended and Restated Relationship Agreement by and among Arjo Wiggins Appleton Ltd. (f/k/a Arjo Wiggins Appleton p.l.c.), Arjo Wiggins (Bermuda) Holdings Limited, Paperweight Development Corp., PDC Capital Corporation and Arjo Wiggins Appleton (Bermuda) Limited, dated as of June 11, 2004.
   
   10.3
Second Amendment to Credit Agreement dated as of June 5, 2007, dated as of September 30, 2009, among Appleton Papers Inc., as the U.S. Borrower, Paperweight Development Corp. as Holdings, certain subsidiaries of Holdings, as Guarantors, Bank of America, N.A. as Administrative Agent, swing line lender and L/C issuer, and Lenders as identified on the signature pages thereof.
   
   10.4
Collateral Agreement made by Appleton Papers Canada Ltd. in favor of U.S. Bank National Association, as collateral agent, dated as of February 8, 2010.
   
   10.5
Credit Agreement, dated as of February 8, 2010, among Appleton Papers Inc., as borrower, Paperweight Development Corp., as holdings, Fifth Third Bank, as administrative agent, swing line lender and an L/C issuer, the other lenders party thereto and Fifth Third Bank, as sole lead arranger and sole book manager.
   
   10.6 
Guarantee and Collateral Agreement made by Paperweight Development Corp., Appleton Papers Inc. and certain of its  subsidiaries, in favor of Fifth Third Bank, as administrative agent, dated as of February 8, 2010.
   
    10.7 Guarantee and Collateral Agreement made by Appleton Papers Canada Ltd. in favor of Fifth Third Bank, as administrative agent, dated as of February 8, 2010.
   
    10.8 Stock Purchase Agreement between Appleton Papers Inc. and NEX Performance Films Inc. dated as of July 2, 2010.    Incorporated by reference to Exhibit 2.1 to the Registrant’s current report on Form 8-K/A filed August 9, 2010 (exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but a copy will be furnished supplementally to the Securities and Exchange Commission upon request.)
   
31.1
Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.
   
31.2
Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.
   
31.3
Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.
   
31.4
Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.
   
32.1
Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Appleton Papers Inc., pursuant to 18 U.S.C. Section 1350.
   
32.2
Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Appleton Papers Inc., pursuant to 18 U.S.C. Section 1350.
   
32.3
Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.
   
32.4
Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.



 
 
 
 
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
 
APPLETON PAPERS INC.
            (Registrant)
   
  
Date: August 11, 2011    
 
/s/ Thomas J. Ferree
 
Thomas J. Ferree
 
Senior Vice President Finance, Chief Financial Officer and Treasurer (Signing on behalf of the Registrant and as the Principal Financial Officer)
 






 
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
 
PAPERWEIGHT DEVELOPMENT CORP.
                        (Registrant)
   
  
Date: August 11, 2011    
 
/s/ Thomas J. Ferree
 
Thomas J. Ferree
 
Senior Vice President Finance, Chief Financial Officer and Treasurer (Signing on behalf of the Registrant and as the Principal Financial Officer)

 


 
 
 
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