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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: June 30, 2002 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 number: 333-82084
APPLETON PAPERS INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2556469
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
825 East Wisconsin Avenue
Appleton, Wisconsin 54912-0359
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 734-9841
-------------------------
See Table of Additional Registrants Below
-------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
As of August 13, 2002, 100 shares of Appleton Papers Inc. common stock, $100.00
par value, were outstanding. There is no trading market for the common stock of
Appleton Papers Inc. As of August 13, 2002, each of the additional registrants
had the number of shares outstanding which is shown in the table below. There is
no trading market for the common stock of the additional registrants. No shares
of the registrant or the additional registrants were held by non-affiliates.
Appleton Papers Inc. and WTA Inc. meet the conditions set forth in General
Instruction H(1)(a) and (b) and are therefore filing this form with the reduced
disclosure format.
ADDITIONAL REGISTRANTS
===================================================================================================================================
Address, including zip
State or other Number of I.R.S. code, and telephone
jurisdiction of Shares Employee number, including area
Exact name of Registrant as incorporation or Outstanding Identification code, of Registrant's Registration
specified in its charter organization as of June 30, Number principal No.
2002 executive office
- ---------------------------------- ------------------- ---------------- ----------------- --------------------------- --------------
825 East Wisconsin
Avenue, Appleton,
Wisconsin 54912-0359
Paperweight Development Corp. Wisconsin 10,916,434 39-2014992 (920) 734-9841 333-82084-01
- ---------------------------------- ------------------- ---------------- ----------------- --------------------------- --------------
c/o Delaware Corporate
Management, Inc.
Suite 1300
1105 North Market Street
Wilmington, Delaware 19899
WTA Inc. Delaware 1 51-0329653 (302) 651-8339 333-82084-02
====================================================================================================================================
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INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
a) Condensed Consolidated Balance Sheets ................ 1
b) Condensed Consolidated Statements of Operations ...... 2
c) Condensed Consolidated Statements of Cash Flows ...... 3
d) Notes to Condensed Consolidated Financial Statements . 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 26
Item 3 Quantitative and Qualitative Disclosures
About Market Risk .......................................... 32
PART II OTHER INFORMATION AND SIGNATURES
Item 1 Legal Proceedings .......................................... 33
Item 6 Exhibits and Reports on Form 8-K ........................... 33
Signatures ......................................................... 34
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, December 29,
2002 2001
----------- -----------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 26,502 $ 35,702
Accounts receivable, less allowance for
doubtful accounts of $1,625 and $1,585, respectively 111,225 105,348
Inventories 114,776 134,598
Other current assets 12,209 12,010
---------- ----------
Total current assets 264,712 287,658
Property, plant and equipment, net 516,279 531,776
Intangible assets, less accumulated amortization of
$6,021 and $1,289, respectively 131,747 136,479
Other assets 26,543 46,385
---------- ----------
Total assets $ 939,281 $1,002,298
========== ==========
LIABILITIES, REDEEMABLE COMMON STOCK AND RETAINED EARNINGS
Current liabilities
Current portion of long-term bank debt $ 17,992 $ 24,125
Accounts payable 45,842 49,217
Accrued interest expense 2,262 2,403
Accrued income taxes 9,805 6,578
Restructuring reserve 5,021 5,464
Other accrued liabilities 63,073 61,406
---------- ----------
Total current liabilities 143,995 149,193
Other long-term bank debt 168,405 240,875
Variable rate industrial development bonds 8,650 8,650
Capital lease obligation 4,134 4,314
Postretirement benefits other than pension 57,916 57,178
Accrued pension 18,085 15,954
Other long-term liabilities 19,570 21,959
Senior subordinated notes payable 250,000 250,000
Deferred payment obligation 149,015 141,896
Commitments and contingencies (Note 11) - -
Redeemable common stock, $0.01 par value
shares authorized: 30,000,000
shares issued and outstanding: 10,916,434 and
10,684,373, respectively 112,108 104,663
Retained earnings 7,403 7,616
---------- ----------
Total liabilities, redeemable common stock and retained earnings $ 939,281 $1,002,298
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
1
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
(Successor Basis) (Predecessor Basis) (Successor Basis) (Predecessor Basis)
------------------ ------------------- ----------------- -------------------
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------------ ------------------- ----------------- -------------------
Net sales $ 228,698 $ 239,188 $ 453,274 $ 479,498
Cost of sales 164,155 171,567 319,392 346,457
--------- --------- --------- ---------
Gross profit 64,543 67,621 133,882 133,041
Selling, general and administrative 40,330 38,865 80,183 74,755
Restructuring and other charges - 504 - 868
Environmental expense - 814 - 20,924
Equipment relocation expenses - 201 - 322
--------- --------- --------- ---------
Operating income 24,213 27,237 53,699 36,172
Other expense (income)
Interest expense 18,399 7,417 37,772 15,137
Debt extinguishment expenses 11,754 - 11,754 -
Interest income (193) (2,700) (565) (5,545)
Foreign exchange (gain) loss (349) (223) (429) 57
--------- --------- --------- ---------
(Loss) income before income taxes (5,398) 22,743 5,167 26,523
(Benefit) provision for income taxes (40) 8,837 39 10,305
--------- --------- --------- ---------
(Loss) income from continuing operations (5,358) 13,906 5,128 16,218
--------- --------- --------- ---------
Discontinued operations, net of tax:
Loss from discontinued operations - (325) - (1,469)
--------- --------- --------- ---------
Net (loss) income $ (5,358) $ 13,581 $ 5,128 $ 14,749
========= ========= ========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
2
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
(Successor Basis) (Predecessor Basis)
----------------------- -----------------------
Six Months Ended Six Months Ended
June 30, 2002 July 1, 2001
----------------------- -----------------------
Cash flows from operating activities:
Income from continuing operations $ 5,128 $ 16,218
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities of continuing operations:
Depreciation 29,263 22,182
Amortization of intangible assets 4,732 266
Amortization of financing fees 6,740 37
Employer 401(k) noncash matching contributions 3,791 -
Foreign exchange (gain) loss (429) 57
Loss on disposal of equipment 552 1,041
Debt extinguishment expenses 11,754 -
Accretion of deferred payment and capital lease obligations 7,274 176
(Increase)/decrease in assets and increase/(decrease) in liabilities:
Accounts receivable (5,448) 19,695
Inventories 19,822 17,100
Other current assets (199) (87)
Accounts payable and other accrued liabilities (3,316) (16,854)
Accrued income taxes 3,227 (6,812)
Restructuring reserve (443) (9,786)
Lower Fox River liability - 19,209
Other, net 659 228
-------- --------
Net cash provided by operating activities of continuing operations 83,107 62,670
Net cash (used by) operating activities of discontinued operations - (2,103)
-------- --------
Net cash provided by operating activities 83,107 60,567
Cash flows from investing activities:
Proceeds from sale of equipment 10 4
Additions to property, plant and equipment (14,328) (36,546)
-------- --------
Net cash (used by) investing activities of continuing operations (14,318) (36,542)
Net cash (used by) investing activities of discontinued operations - -
-------- --------
Net cash (used by) investing activities (14,318) (36,542)
Cash flows from financing activities:
Payments of long-term bank debt (78,603) -
Payments relating to capital lease obligation (336) (335)
Proceeds from issuance of redeemable common stock 1,161 -
Payments to redeem common stock (211) -
Payments of loans from Predecessor parent and affiliated companies - (45,745)
Loans from Predecessor parent and affiliated companies - 9,140
Due to Predecessor parent and affiliated companies, net - 8,288
-------- --------
Net cash (used by) financing activities of continuing operations (77,989) (28,652)
Net cash provided by financing activities of discontinued operations - 4,978
-------- --------
Net cash (used by) financing activities (77,989) (23,674)
Change in cash and cash equivalents (9,200) 351
Cash and cash equivalents at beginning of period 35,702 39,871
-------- --------
Cash and cash equivalents at end of period $ 26,502 $ 40,222
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, all adjustments necessary for the fair
presentation of the results of operations for the three and six months ended
June 30, 2002 and July 1, 2001, cash flows for the six months ended June 30,
2002 and July 1, 2001 and financial position at June 30, 2002 have been made.
All adjustments made are of a normal recurring nature.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto of Paperweight
Development Corp. ("PDC") and subsidiaries for each of the three years in the
period ended December 29, 2001 as audited by PricewaterhouseCoopers LLP which
are included in the Registration Statement on Form S-4 dated June 12, 2002 of
Appleton Papers Inc. ("API") (Registration No. 333-82084). The consolidated
balance sheet data as of December 29, 2001 contained within these financial
statements was derived from the audited financial statements but does not
include all disclosures required by accounting principles generally accepted in
the United States of America.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full year.
2. ACQUISITION OF APPLETON PAPERS INC.
At the close of business on November 9, 2001, PDC and New Appleton LLC
completed the purchase of all the partnership interests of Arjo Wiggins Delaware
General Partnership ("AWDGP"). Prior to the acquisition of AWDGP, PDC had no
operating activity. The accompanying condensed consolidated financial
statements, presented for periods following the acquisition ("Successor
Period"), include the accounts of PDC and its wholly owned subsidiaries
(collectively the "Company"). The accounts prior to the acquisition of AWDGP
("Predecessor Period") pertain to API, its wholly owned subsidiaries, as well as
AWDGP. The accounts of AWDGP consisted of debt used to fund the operations of
API and the corresponding interest expense and tax benefits. Subsequent to the
November 9, 2001 acquisition of the partnership interests of AWDGP (the
"Acquisition"), API became a wholly owned subsidiary of PDC. The total cash
purchase price consisted of the following (dollars in thousands):
Agreed upon purchase price $ 810,000
Transaction fees 6,203
Cash acquired by buyer (78,508)
Settlement of intercompany note receivable (32,869)
---------
Net assets acquired 704,826
Senior subordinated seller note (250,000)
Deferred payment obligation (140,000)
---------
Acquisition of business, net of cash acquired $ 314,826
=========
4
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The transaction was financed with $106.8 million of proceeds received from
the ESOP ($104.7 million, net of stock issuance costs), $265 million of
long-term debt borrowed at the closing, $250 million in aggregate principal
amount of a senior subordinated note due 2008 issued to Arjo Wiggins Appleton
plc ("AWA") which bore interest at the rate of 11.5% per annum in the Successor
Period, and a deferred payment obligation with a present value of $140 million
at the closing of the Acquisition to be paid to AWA.
The Acquisition was accounted for using the purchase method in accordance
with SFAS No. 141, "Business Combinations", and the financial statements of API
were adjusted on November 10, 2001 to reflect assets and liabilities at fair
value. Fair values assigned to intangible assets acquired in the Acquisition
approximated $137.8 million. Intangible assets related to registered trademarks
approximated $90.7 million. Trademarks, related to carbonless paper, of
approximately $60.0 million are being amortized over their useful life of 20
years, while the remaining $30.7 million are considered to have an indefinite
life, and as such, are not subject to amortization. The remaining acquired
intangible assets are being amortized over their estimated useful lives ranging
from 6 to 25 years and pertain to patents of $40.0 million and customer
relationships of $7.1 million, respectively. Amortization expense for the three
and six months ended June 30, 2002 approximated $2.4 million and $4.7 million,
respectively. Intangible assets consist of the following (dollars in thousands):
As of June 30, 2002 As of December 29, 2001
------------------- -----------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- -------------- -------------- ------------
Amortized intangible assets:
Trademarks $ 60,000 $ 1,904 $ 60,000 $ 404
Patents 40,000 3,920 40,000 843
Customer relationships 7,050 197 7,050 42
-------- ------- -------- ------
Total $107,050 $ 6,021 $107,050 $1,289
======== ======= ======== ======
Unamortized intangible assets:
Trademarks $ 30,718 $ 30,718
======== ========
Due to nonperformance on the part of Enron Corp., the Company is in the
process of terminating unfavorable purchase contracts that were in existence at
the Acquisition date. The allocation of purchase price is preliminary, pending
the final outcome of this matter which is anticipated to be completed by the end
of fiscal 2002. If the resolution of this matter is adverse to the Company or in
the event that Enron pursues damages for breach of contract, an additional
liability with a corresponding increase to goodwill will be reflected within the
final purchase price allocation. The Company currently estimates that the
potential liability associated with these unfavorable purchase contracts may
range from $0 to $10 million.
5
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. DISCONTINUED OPERATIONS
On October 28, 2001, API completed the transfer of one of its wholly owned
subsidiaries, Newton Falls Inc. ("NFI"), to Newton Falls LLC ("NFLLC"), an
affiliated company of AWA. The Newton Falls mill, which represented the
remainder of API's coated free sheet and fine paper products division, was
permanently closed in the third quarter of 2001. API has classified NFI as a
discontinued operation in its condensed consolidated statements of operations
and of cash flows for all periods presented.
Revenues for NFI were $0 for the three and six month periods ended July 1,
2001. NFI's operating loss for the same three and six month periods was $0.5
million and $2.3 million, respectively. The benefit for income taxes on
discontinued operations was approximately $0.2 million and $0.9 million for the
three and six months ended July 1, 2001, respectively.
4. RESTRUCTURING AND OTHER CHARGES
During the third quarter of 1999, API announced plans to close the Newton
Falls mill in 2000 and the Harrisburg plant in 2001. In the third quarter of
2000, API ceased operations at the Newton Falls mill and permanently closed the
mill during the third quarter of 2001. API sold its Harrisburg plant in August
2001. As part of this sale, API entered into a five year agreement to lease the
portion of the plant that served as a distribution center.
Restructuring costs of $0.9 million recorded during the first half of 2001
pertained to various closing costs incurred for the Harrisburg plant.
The table below summarizes the components of the restructuring reserve
included on the condensed consolidated balance sheet at June 30, 2002 and
December 29, 2001 (dollars in thousands):
December 29, 2002 June 30,
2001 Reserve Charges to 2002
Reserve Additions Reserve Reserve
------------------- ---------------- --------------- ----------------
Distribution center exit costs $ 5,464 $ -- $ (443) $ 5,021
The $0.4 million reduction to the reserve represents lease payments, net of
sublease income, for the New York distribution center for the first half of
2002. In 1999, the Company committed to exiting this distribution center in 2001
because it was no longer needed as a result of the closure of the Newton Falls
mill and thus recorded $6.0 million of related restructuring and other charges
expected to be incurred until the long-term lease expires in 2007.
5. TRANSACTIONS WITH PREDECESSOR PARENT AND AFFILIATED COMPANIES
Management fee expenses to AWA were approximately $0.3 million and $0.6
million for the three and six month periods ended July 1, 2001, respectively.
Fees, associated with information technology and other services, received from
affiliated companies approximated $0.8 million and $1.7 million, respectively,
for these same three and six month periods.
6
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Through September of 2001 API held a $125 million shareholder note in Arjo
Wiggins SA (the "AWSA Note"). The AWSA Note could be redeemed at the option of
Arjo Wiggins SA on every tenth anniversary of the January 5, 1994 issue date.
Interest at the annual rate of 6.46% was payable on June 15 and December 15 of
each year. API recorded $2.0 million and $4.0 million of interest income for the
three and six month periods ended July 1, 2001, respectively, relating to this
note. Effective October 1, 2001 the note was sold to AWA for $125 million plus
accrued interest.
6. INVENTORIES
Inventories consist of the following (dollars in thousands):
June 30, December 29,
2002 2001
--------- ------------
Finished goods $ 58,004 $ 67,145
Raw materials, work-in-process
and supplies 58,002 68,683
--------- ---------
Total cost 116,006 135,828
Excess cost over LIFO cost (1,230) (1,230)
--------- ---------
$ 114,776 $ 134,598
========= =========
Stores and spare parts inventory balances of $21.6 million at June 30, 2002
and $21.8 million at December 29, 2001 are valued at average cost. Inventories
totaling $1.4 million at June 30, 2002 and $1.6 million at December 29, 2001 are
valued at first-in, first-out ("FIFO") cost.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment balances consist of the following (dollars in
thousands):
June 30, December 29,
2002 2001
--------- ------------
Land and improvements $ 4,884 $ 4,725
Buildings and improvements 75,854 74,727
Machinery and equipment 441,319 432,717
Capital lease 4,764 4,764
Construction in progress 23,362 19,559
--------- ---------
550,183 536,492
Accumulated depreciation/amortization (33,904) (4,716)
--------- ---------
$ 516,279 $ 531,776
========= =========
Depreciation and amortization expense for the three months ended June 30,
2002 and July 1, 2001 approximated $14.7 million and $10.8 million,
respectively. Depreciation and amortization expense for the six months ended
June 30, 2002 and July 1, 2001 approximated $29.3 million and $22.2 million,
respectively. Depreciation expense of approximately $12.8 million and $9.0
million for the three months ended June 30, 2002 and July 1, 2001, respectively,
pertained to manufacturing-related
7
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
assets and was recorded within cost of sales. Depreciation expense of
approximately $25.5 million and $18.3 million for the six months ended June 30,
2002 and July 1, 2001, respectively, pertained to manufacturing-related assets
and was recorded within cost of sales. Depreciation expense of approximately
$1.9 million and $1.8 million for the three months ended June 30, 2002 and July
1, 2001, respectively, pertained to corporate administrative-related assets and
was recorded within selling, general and administrative expenses. Depreciation
expense of approximately $3.8 million and $3.9 million for the six months ended
June 30, 2002 and July 1, 2001, respectively, pertained to corporate
administrative-related assets and was recorded within selling, general and
administrative expenses.
8. OTHER ASSETS
Other assets consist of the following (dollars in thousands):
June 30, December 29,
2002 2001
--------- ------------
Deferred debt expense $11,643 $28,814
Lower Fox River indemnification receivable 12,026 14,674
Other 2,874 2,897
------- -------
$26,543 $46,385
======= =======
9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following (dollars in thousands):
June 30, December 29,
2002 2001
----------- ------------
Payroll $10,328 $11,865
Trade discounts 22,439 22,799
Worker's compensation 5,358 5,897
Lower Fox River liability 6,047 5,990
Other 18,901 14,855
------- -------
$63,073 $61,406
======= =======
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The Company is
currently evaluating the impact of SFAS No. 143 which it is required to adopt in
fiscal 2003.
In April 2002, SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued.
This statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of the SFAS No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements". This statement also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", and amends
SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-
8
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The provisions of this
statement were effective for the Company for all transactions consummated after
May 15, 2002.
In June 2002, FASB voted in favor of issuing FASB Statement No. 146 (SFAS
No. 146), "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 will be effective for exit or disposal activities
that are initiated after December 31, 2002. Early application is encouraged. The
Company anticipates that this statement, upon adoption, will not have a
significant impact on its financial position or results of operations.
11. COMMITMENTS AND CONTINGENCIES
Lower Fox River
In June 1997, the United States Environmental Protection Agency ("EPA")
published notice that it intended to list the Lower Fox River system 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 system, including NCR
Corporation ("NCR") and API as the former and current owners and operators of
the Appleton plant, and the owners of five paper reprocessing mills located on
the Lower Fox River including Georgia-Pacific, P.H. Glatfelter Company, WTM I
Co., owned by Chesapeake Corporation, Riverside Paper Corporation and U.S. Paper
Mills Corp., owned by Sonoco Products Company.
In October 2000, the Fish & Wildlife Service ("FWS") released a proposed
restoration and compensation determination plan presenting the federal and
tribal natural resource trustees' planned approach for restoring natural
resources injured by PCBs, and calculating the potential natural resource
damages ("NRDs") under different remedial action scenarios. The final NRD
valuation will depend on the extent of PCB cleanup; however, the proposed plan
estimates that NRDs will be in the range of $176 to $333 million for all PRPs in
the aggregate. Over the past several years and at various natural resource
damage sites, the FWS and other government agencies have settled NRD claims for
amounts substantially less than original estimates or claims. Georgia-Pacific
has reported that it has entered into an agreement with the Wisconsin Department
of Natural Resources ("DNR") and the FWS that would settle claims for natural
resource damages under federal and state law at a cost to Georgia-Pacific of
approximately $14 million. The agreement will be effective when entered by the
appropriate Federal Court. API anticipates the actual costs for the PRPs to
settle NRD claims related to the Lower Fox River to be significantly less than
the initial range of $176 to $333 million.
In October 2001, DNR released a remedial investigation/feasibility study
for the Lower Fox River and Green Bay, studying various remedial alternatives.
Also in October 2001, the DNR and EPA
9
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
jointly issued, for public comment, a Proposed Remedial Action Plan for the
Lower Fox River, proposing a remedial plan based on one of the remedial
alternatives evaluated in the feasibility study. The proposed plan involves a
combination of monitored natural recovery and dredging and off-site disposal of
sediment contaminated with PCBs. The EPA and DNR estimate the total costs for
the Proposed Remedial Action Plan to approximate $308 million, comprised of
approximately $256 million in active remediation costs and $52 million in
long-term monitoring costs, over a 7-to-18-year time period. Most of the
estimated costs pertain to the removal of large quantities of sediment from the
Lower Fox River by dredging, dewatering of the dredged materials, treatment of
the dredge water and off-site disposal of the remaining solids. Based on cost
estimates of large-scale dredging response actions at other sites and many
subjective assumptions regarding the work to be done, engineers engaged by the
PRPs have indicated that the cost of the remediation work in the proposed
remedial action plan could be between $740 and $1,600 million. The DNR strongly
disputes this analysis and continues to believe that its cost estimates, as
described in the proposed plan, are accurate. The range of estimated costs for
other Lower Fox River remedial alternatives considered and not selected by the
agencies was between approximately $18 million and $1,096 million.
The total costs estimated by the EPA and FWS for the proposed remediation
and NRD discussed above range from $483 million to $640 million. The Company
does not believe that the remedial action proposed by the DNR and EPA is
appropriate or cost effective. API, along with the other PRPs, has developed a
substantial body of evidence that demonstrates the eventual selection of
alternatives involving active river-wide remediation, particularly massive
dredging, would be inappropriate and unnecessary. There is ongoing vigorous
debate within the scientific, regulatory, legal, public policy and legislative
communities over how to properly manage contaminated sediments. A participant in
that debate has been a panel of independent prominent scientific experts in
hydrology, sediment remediation, river ecology and related disciplines which API
asked to review issues relating to the Lower Fox River and develop a remediation
plan. That expert panel prepared a report, submitted to the DNR as part of API's
comments on the Proposed Remedial Action Plan, which recommends capping
contaminated sediments rather than dredging. Based on engineering studies of an
earlier version of the panel's remediation plan, we believe that the cost for
the capping proposed in the panel's remediation plan would be less than the $256
million estimate for full-scale dredging remediation in the Proposed Remedial
Action Plan. API believes there continues to be a high degree of uncertainty
about the type and scope of alternatives that may ultimately be implemented in
the Lower Fox River.
API purchased the Appleton plant from NCR in 1978, after the use of PCBs in
the manufacturing process was discontinued. Nevertheless, pursuant to CERCLA
both API and NCR are viewed by the EPA as PRPs. Accordingly, API and NCR
asserted indemnity claims against each other pursuant to the terms of the
agreement for the sale of the business in 1978. API and NCR have entered into an
interim settlement agreement in which they have agreed to share both defense and
liability costs arising from the Lower Fox River.
API, NCR and the DNR, the Wisconsin Department of Justice, the EPA, the
FWS, the U.S. Department of Justice, the National Oceanic and Atmospheric
Administration, and the Oneida and Menomonee Indian Tribes (collectively
referred to as the intergovernmental partners, or "IGP") have entered into a
consent decree in which API and NCR will provide up to $41.5 million over a
period of four years, to a maximum of $10.4 million per year, for interim
restoration and remediation efforts directed by the IGP. API and NCR will each
pay about half of this amount. Under the consent decree,
10
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the IGP agree not to sue or take administrative action against API and NCR
during the four-year period. The consent decree does not constitute a final
settlement with the IGP or provide protection against future claims against API
and NCR; however, under the decree, API and NCR will receive full credit for all
monies expended for restoration and remediation of the Lower Fox River during
the interim period. API recorded a charge for its discounted share of the
potential arrangement of $19.2 million during the first quarter of 2001.
In addition to the interim settlement agreement between API and NCR, five
of the seven PRPs (excluding U.S. Paper Mills and Riverside Paper) have entered
into a non-binding agreement to share both defense costs and costs for
scientific studies relating to PCBs discharged into the Lower Fox River. A study
performed by the FWS in 2000 provided a preliminary estimate of the amount of
PCBs discharged to the Lower Fox River by each PRP, and concluded that the
discharge from API's plants and mills represented in the range of 36% to 52% of
the total PCBs discharged. These preliminary estimates are presently under
review by the FWS and may be revised. The FWS analysis will not be binding on
the PRPs. The final allocation of liability among the PRPs will be determined by
negotiation, litigation or other dispute resolution process.
Based on historical and technical analyses performed by environmental
engineers API has engaged, the Company believes that the percentage discharge of
PCBs for the Appleton and Combined Locks facilities is less than 20% of the
total discharged by all the PRPs. A portion of API'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 their respective shares of
the potential liability, API could be responsible for a portion of their shares.
Based on a review of publicly available financial information about the other
PRPs, API believes that the other PRPs will be required, and have adequate
financial resources, to pay their share of the remediation and natural resource
damage claims for the Lower Fox River.
An accurate estimate of API's ultimate share of remediation and natural
resource damage liability cannot be made at this time due to uncertainties with
respect to: the scope and cost of the final remediation plan; the scope of
restoration and final valuation of federal and state natural resource damage
assessments; the evolving nature of remediation and restoration technologies and
governmental policies; and the amount of API's share of remediation and natural
resource damage costs relative to the other PRPs. Given the numerous
uncertainties regarding the cost estimates for remediation and restoration of
the Lower Fox River and the factors which will determine API's share of those
costs, API's potential liability falls within a range for which no amount in the
range is a better estimate than any other, and even then it is not possible to
estimate the high end of the range. API believes that the low end of the range,
which has been estimated assuming no large-scale active remediation, a share of
liability based on accurate estimates of PCB discharges, an NRD settlement
similar to those obtained by other PRPs, and API's sharing of these costs with
NCR, will be less than the amounts API expects to pay to the IGP under the
consent decree described above. It is possible that API's share of costs will be
higher than the low end of the range.
Because of the uncertainty surrounding the ultimate course of action for
Lower Fox River remediation and API's share of remedial costs, as discussed
above, no provision has been recorded in the accompanying financial statements
for estimated Lower Fox River remediation costs except for the $19.2 million
liability, recorded in other current and other long-term liabilities on the
consolidated
11
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
balance sheet, plus interest, associated with the consent decree between API,
NCR and the IGP. Under this consent decree, payments totaling $3.2 were made
during the first half of 2002. At June 30, 2002 this liability approximated
$17.7 million.
As part of the Acquisition, AWA has agreed to indemnify the Company for the
first $75 million and for all amounts over $100 million in liabilities relating
to the Lower Fox River. Accordingly, the Company recorded a $19.2 million
receivable from AWA, recorded in other current and other noncurrent assets on
the consolidated balance sheet, plus interest, to recognize the indemnification
of the consent decree between API, NCR and the IGP. This receivable has since
been reduced by $3.2 million in conjunction with AWA's indemnification of the
consent decree payments noted above. At June 30, 2002 this receivable
approximated $17.7 million.
West Carrollton Mill
The West Carrollton mill operates pursuant to various state and federal
permits for discharges and emissions to air and water. As a result of the
de-inking of carbonless paper containing PCBs through the early 1970s, there
have been releases of PCBs and volatile organic compounds into the soil in the
area of the wastewater impoundments at the West Carrollton facility, and low
levels of PCBs have been detected in groundwater immediately under this area. In
addition, PCB contamination is present in sediment in the adjacent Great Miami
River, but it is believed that this contamination is from a source other than
the West Carrollton mill.
Based on investigation and delineation of PCB contamination in soil and
groundwater in the area of the wastewater impoundments, API believes that it may
be necessary to undertake remedial action in the future, although API is
currently under no obligation to do so. API 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. Remedial action to address PCB contamination in the area of the wastewater
impoundment may involve construction of a cap to prevent exposure to PCBs. In
addition, remedial action may involve long-term monitoring of groundwater or the
construction and operation of a groundwater pump-and-treat system to prevent
migration of PCB contamination in groundwater, and the removal and disposal of
PCB-contaminated sediment in the Great Miami River. The cost for remedial action
ranges from $0 for natural attenuation, to approximately $10.5 million, for
installation of a cap, long-term pumping, treating and/or monitoring of
groundwater and removal of sediment in the Great Miami River. Approximately $3
million of the estimated costs relate to short-term capital costs, with 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 Great Miami River remediation and the Company's share of remediation costs,
if any, no provision has been recorded in the accompanying financial statements
for estimated remediation costs. As part of the final purchase agreement between
PDC and AWA, AWA has agreed to indemnify the Company for 50% of all
environmental liabilities associated with the West Carrollton mill up to $5.0
million. AWA is liable for 100% of all such environmental costs exceeding $5.0
million.
12
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other
From time to time, the Company is involved in product liability and various
other suits incident to the operation of its business. Insurance coverage is
maintained and estimated costs are recorded for claims and suits of this nature.
It is management's opinion that none of these claims or suits will have a
materially adverse effect on the Company's financial position, results of
operations or cash flows.
12. EMPLOYEE STOCK OWNERSHIP PLAN
The Appleton Papers Retirement Savings Plan, was amended and restated
effective as of January 1, 2001, in the form of the Appleton Papers Retirement
Savings and Employee Stock Ownership Plan (the "KSOP"). The KSOP includes a
separate employee stock ownership plan component (the "ESOP" or the "Company
Stock Fund"). The KSOP is a tax-qualified retirement plan that also contains a
401(k) feature, which provides participants with the ability to make pretax
contributions to the KSOP by electing to defer a percentage of their
compensation. The ESOP component of the KSOP is a tax-qualified employee stock
ownership plan that is designed to invest primarily in redeemable common stock
of PDC. Eligible participants, as "named fiduciaries" under ERISA, were offered
a one-time irrevocable election to acquire a beneficial interest in the
redeemable common stock of PDC by electing to direct the transfer of all or a
portion of their existing account balances in the KSOP and the 401(a) plan
(Appleton Papers Inc. Retirement Medical Savings Plan) to the Company Stock
Fund. The total proceeds transferred by eligible participants to the Company
Stock Fund were approximately $106.8 million. All proceeds of the offering were
used by the ESOP trustee to purchase 10,684,373 shares of PDC redeemable common
stock. As a result of this purchase, the ESOP owns 100% of the redeemable common
stock of PDC.
The value of each participant's account balance will be paid to that
participant, or that participant's beneficiary, in the case of the participant's
death, upon the participant's retirement, death, disability, resignation,
dismissal, or permanent layoff. Requests for lump sum distributions from the
Company Stock Fund will be granted in accordance with a uniform,
nondiscriminatory policy established by the ESOP committee. In general, all
requests for lump sum distributions in any plan year will be granted to the
extent that the aggregate amount requested does not exceed the amount of new
deferrals to the Company Stock Fund, less any distributions that must be made in
accordance with the statutory requirements and installment distributions
obligated under prior year distribution elections. Covenants in the agreements
providing for API's senior credit facilities and the senior subordinated notes
restrict API's ability to pay dividends to PDC which could limit PDC's ability
to repurchase shares distributed to ESOP participants who have terminated
employment or who are entitled to diversification rights. PDC is obligated to
make distributions to former participants in the ESOP under ERISA and these
obligations may supersede the terms of the respective agreements. If lump sum
distributions cannot be made, distributions to former participants will be made
in up to five equal annual installments.
Based upon management's assumptions related to participant death,
retirement, diversification requests, employment termination and changes in
share value, the Company estimates that the potential repurchase obligations
over the next five years may approximate $99.9 million. The Company anticipates
that a portion of these disbursements will be funded from new payroll deferrals
from employees into the Company Stock Fund, which are estimated to approximate
$39 million. These estimated net repurchase obligations of approximately $60.9
million are anticipated to be disbursed in annual payments increasing from $6
million to $22 million over the five year period.
13
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's matching contributions charged to expense amounted to $2.0
million for the three months ended June 30, 2002 and $3.8 million for the six
months ended June 30, 2002, all of which will be deposited into the Company
Stock Fund. In the first half of 2002, the ESOP trustee purchased 116,614 shares
of PDC redeemable common stock for an aggregate price of $1,166,141 from pretax
deferrals made by employees from November 10, 2001 through December 29, 2001,
while the Company's matching deferrals over this same period resulted in an
additional 115,447 shares of redeemable common stock being issued. During the
first half of 2002, those employees eligible to begin account diversification
redeemed approximately $0.2 million of PDC redeemable common stock.
In accordance with EITF Topic D-98, redeemable equity securities are
required to be accreted (i.e., increased) so that 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. The Company accreted the
redeemable common stock by $4.6 million for the three months ended June 30, 2002
and $5.3 million for the six months ended June 30, 2002. Redeemable common stock
is being accreted up to the earliest redemption date based upon the estimated
fair market value of the redeemable common stock as of June 30, 2002. The
earliest redemption date occurs when the holder reaches 55 years of age and has
10 years of participation in the KSOP. At that point, the holder has the right
to make diversification elections for a period of six years. Based upon the
estimated fair value of the redeemable common stock, an ultimate redemption
amount of approximately $224 million was determined with a remaining
unrecognized accretion amount of approximately $112 million at June 30, 2002.
The accretion is being charged to retained earnings as redeemable common stock
is the only class of shares outstanding.
13. LONG-TERM OBLIGATIONS
Long-term obligations, excluding the capital lease obligation, consist of
the following (dollars in thousands):
14
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued)
June 30, December 29,
2002 2001
------------ -------------
Senior secured variable rate notes payable,
LIBOR plus 3.0%, $5,716 due quarterly
ending November 8, 2005 $ 74,304 $ 115,000
Senior secured variable rate notes payable,
LIBOR plus 4.25%, $375 due quarterly
with $143,250 due November 8, 2006 -- 150,000
Senior secured variable rate notes payable,
LIBOR plus 3.25%, $282 due quarterly
with $107,585 due November 8, 2006 112,093 --
--------- ---------
186,397 265,000
Less obligations due within one year (17,992) (24,125)
--------- ---------
168,405 240,875
Unsecured variable rate industrial development
bonds, 1.7% average interest rate
at June 30, 2002, $2,650
due in 2013 and $6,000 due in 2027 8,650 8,650
Senior subordinated notes payable, 12.5%
due December 15, 2008 250,000 250,000
Deferred payment obligation, due
May 8, 2010, increased 10% per annum
compounded semi-annually to the date of
repayment 149,015 141,896
On November 9, 2001, API entered into a $340 million Senior Credit
Facility. The Senior Credit Facility was comprised of the following: a four year
credit facility of up to $75 million for revolving loans, including letters of
credit; a four year senior secured note of $115 million; and a five year senior
secured note of $150 million. Borrowings under the revolving credit facility and
the $115 million senior secured note bore interest at LIBOR plus 3.5% through
May 8, 2002. On May 9, 2002, because the Company's consolidated leverage ratio
was calculated at less than 2.50 to 1.00 but greater than or equal to 2.00 to
1.00, the interest rate was reduced to LIBOR plus 3.0%. Through May 8, 2002,
borrowings under the $150 million senior secured note bore interest at LIBOR
plus 4.25% per annum, subject to a minimum LIBOR rate of 2.5%. On May 9, 2002
the interest rate margin on this note was reduced by 0.5% because of
improvements to the Company's consolidated leverage ratio as noted above. On
June 6, 2002, the Company refinanced the $112.4 million remaining principal
amount and replaced it with similar debt carrying a reduced interest rate of
LIBOR plus 3.25%, not subject to a minimum LIBOR rate. As a result of this
refinancing, $11.8 million of deferred debt issuance costs were written off
during June as debt extinguishment expenses. The LIBOR rate on June 30, 2002 was
1.8%. During the first half of 2002, the Company made mandatory debt repayments
of $13.0 million, plus interest, and voluntary debt prepayments totaling $65.6
million, plus interest, on its outstanding senior secured variable rate notes.
On December 14, 2001, API issued $250 million aggregate principal amount of
its 12.5% Series A Senior Subordinated Notes due 2008, which were used to redeem
in full, at par, the senior subordinated note due 2008 held by AWA (see Note 2
"Acquisition of Appleton Papers Inc."). On
15
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued)
June 12, 2002 the Company filed a Registration Statement on Form S-4 to register
an offer with the Securities and Exchange Commission to exchange up to $250
million of its registered 12.5% Series B Senior Subordinated Notes due 2008 for
any and all of its outstanding 12.5% Series A Senior Subordinated Notes due
2008. The exchange offer closed on July 12, 2002. The entire outstanding
principal balance of Series A notes was exchanged for Series B notes. The Series
B notes and the Series A notes have substantially the same terms, conditions and
covenants.
14. SEGMENT INFORMATION
The Company has three operating segments, Carbonless, Thermal and Other.
Based upon quantitative thresholds, Carbonless and Thermal constitute the
Company's reportable segments.
The Company does not allocate total assets internally in assessing
operating performance. Net sales, operating income (loss) and depreciation and
amortization as determined by the Company for its reportable segments are as
follows (dollars in thousands):
(Successor (Predecessor (Successor (Predecessor
Basis) Basis) Basis) Basis)
-------------------- -------------------- -------------------- -------------------
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
-------------------- -------------------- -------------------- -------------------
Net sales
Carbonless $ 172,136 $ 184,642 $ 343,754 $ 370,863
Thermal 44,530 42,719 85,745 84,045
Other 12,032 11,827 23,775 24,590
--------- --------- --------- ---------
Total $ 228,698 $ 239,188 $ 453,274 $ 479,498
Operating income (loss)
Carbonless $ 22,083 $ 25,935 $ 50,600 $ 34,836
Thermal 2,524 2,437 3,664 3,907
Other (394) (1,135) (565) (2,571)
--------- --------- --------- ---------
Total $ 24,213 $ 27,237 $ 53,699 $ 36,172
Depreciation and
amortization
Carbonless $ 13,620 $ 8,759 $ 27,169 $ 18,024
Thermal 2,613 1,724 5,266 3,474
Other 764 473 1,560 950
--------- --------- --------- ---------
Total $ 16,997 $ 10,956 $ 33,995 $ 22,448
15. GUARANTOR FINANCIAL INFORMATION
API (the "Issuer") has issued senior subordinated notes (the "Notes") which
have been guaranteed by PDC (the "Parent Guarantor") and WTA Inc., a wholly
owned subsidiary of API (the "Subsidiary Guarantor"). These guarantees are full,
unconditional and joint and several.
Presented below is condensed consolidating financial information for the
Parent Guarantor, the Issuer, the Subsidiary Guarantor and its wholly owned
foreign subsidiary (the "Non-Guarantor Subsidiary") as of June 30, 2002 and
December 29, 2001 and for the three and six months ended June
16
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued)
30, 2002 and July 1, 2001. This financial information should be read in
conjunction with the condensed consolidated financial statements and other notes
related thereto.
The condensed consolidating financial information has been presented to
show the nature of the assets held, results of operations and cash flows of the
Parent Guarantor, Issuer, Subsidiary Guarantor and Non-Guarantor Subsidiary
assuming the guarantee structure of the Notes was in effect at the beginning of
the periods presented. Separate financial statements for the Parent and
Subsidiary Guarantor are not presented based on management's determination that
they would not provide additional information that is material to readers of
these financial statements.
In conjunction with the issuance of the Notes, restrictions have been
placed on the subsidiaries of the Issuer under the indenture that would limit
dividend distributions by these subsidiaries.
17
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
(unaudited)
(dollars in thousands)
Parent Subsidiary Non-Guarantor
Guarantor Issuer Guarantor Subsidiary Eliminations Consolidated
--------- ----------- ---------- ------------- ------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ - $ 24,729 $ 27 $ 1,746 $ - $ 26,502
Accounts receivable, net - 104,860 - 6,365 - 111,225
Inventories - 112,896 - 1,880 - 114,776
Other current assets 6,047 6,077 - 85 - 12,209
-------- ----------- --------- -------- ----------- --------
Total current assets 6,047 248,562 27 10,076 - 264,712
Property, plant and equipment, net - 516,248 - 31 - 516,279
Investment in subsidiary 861,540 226,391 - - (1,087,931) -
Other assets 12,038 110,137 36,081 34 - 158,290
-------- ----------- --------- -------- ----------- --------
Total assets $879,625 $ 1,101,338 $ 36,108 $ 10,141 $(1,087,931) $939,281
======== =========== ========= ======== =========== ========
LIABILITIES, REDEEMABLE COMMON STOCK
AND RETAINED EARNINGS
Current liabilities
Current portion of long-term bank debt $ - $ 17,992 $ - $ - $ - $ 17,992
Accounts payable - 45,740 - 102 - 45,842
Due to (from) parent and affiliated companies 611,099 (431,030) (184,900) 4,831 - -
Other accrued liabilities - 80,336 - (175) - 80,161
-------- ----------- --------- -------- ----------- --------
Total current liabilities 611,099 (286,962) (184,900) 4,758 - 143,995
Long-term debt - 427,055 - - - 427,055
Capital lease obligation - 4,134 - - - 4,134
Other long-term liabilities - 95,571 - - - 95,571
Deferred payment obligation 149,015 - - - - 149,015
Redeemable common stock and
retained earnings 119,511 861,540 221,008 5,383 (1,087,931) 119,511
-------- ----------- --------- -------- ----------- --------
Total liabilities, redeemable common
stock and retained earnings $879,625 $ 1,101,338 $ 36,108 $ 10,141 $(1,087,931) $939,281
======== =========== ========= ======== =========== ========
18
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 29, 2001
(dollars in thousands)
Parent Subsidiary Non-Guarantor
Guarantor Issuer Guarantor Subsidiary Eliminations Consolidated
--------- ----------- ---------- ------------- ------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ - $ 34,123 $ 36 $ 1,543 $ - $ 35,702
Accounts receivable, net - 98,674 - 6,674 - 105,348
Inventories - 132,501 - 2,097 - 134,598
Other current assets 7,305 4,687 - 18 - 12,010
-------- ----------- --------- ------- ----------- ----------
Total current assets 7,305 269,985 36 10,332 - 287,658
Property, plant and equipment, net - 531,745 - 31 - 531,776
Investment in subsidiary 831,855 220,733 - - (1,052,588) -
Other assets 14,674 129,002 39,157 31 - 182,864
-------- ----------- --------- ------- ----------- ----------
Total assets $853,834 $ 1,151,465 $ 39,193 $10,394 $(1,052,588) $1,002,298
======== =========== ========= ======= =========== ==========
LIABILITIES, REDEEMABLE COMMON STOCK
AND RETAINED EARNINGS
Current liabilities
Current portion of long-term bank debt $ - $ 24,125 $ - $ - $ - $ 24,125
Accounts payable - 49,191 - 26 - 49,217
Due to (from) parent and affiliated companies 599,659 (428,475) (175,665) 4,481 - -
Other accrued liabilities - 75,839 - 12 - 75,851
-------- ----------- --------- ------- ----------- ----------
Total current liabilities 599,659 (279,320) (175,665) 4,519 - 149,193
Long-term debt - 499,525 - - - 499,525
Capital lease obligation - 4,314 - - - 4,314
Other long-term liabilities - 95,091 - - - 95,091
Deferred payment obligation 141,896 - - - - 141,896
Redeemable common stock and
retained earnings 112,279 831,855 214,858 5,875 (1,052,588) 112,279
-------- ----------- --------- ------- ----------- ----------
Total liabilities, redeemable common stock
and retained earnings $853,834 $ 1,151,465 $ 39,193 $10,394 $(1,052,588) $1,002,298
======== =========== ========= ======= =========== ==========
19
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(unaudited)
(dollars in thousands)
(Successor Basis)
-----------------------------------------------------------------------------------------------
Parent Subsidiary Non-Guarantor
Guarantor Issuer Guarantor Subsidiary Eliminations Consolidated
------------ ------------ ----------- ----------------- --------------- ------------------
Net sales $ - $451,896 $ - $ 26,084 $(24,706) $453,274
Cost of sales - 319,239 - 25,761 (25,608) 319,392
-------- -------- -------- -------- -------- ---------
Gross profit - 132,657 - 323 902 133,882
Selling, general and administrative 13 74,876 3,161 1,251 882 80,183
-------- -------- -------- -------- -------- ---------
Operating (loss) income (13) 57,781 (3,161) (928) 20 53,699
Interest expense 24,544 39,599 - - (26,371) 37,772
Debt extinguishment expenses - 11,754 - - - 11,754
Interest income - (17,924) (9,005) (7) 26,371 (565)
Intercompany royalty expense (income) - 6,536 (6,536) - - -
Income in equity investment (29,685) (11,907) - - 41,592 -
Other income - (1) - (428) - (429)
-------- -------- -------- -------- -------- ---------
Income (loss) before income taxes 5,128 29,724 12,380 (493) (41,572) 5,167
Provision for income taxes - 39 - - - 39
-------- -------- -------- -------- -------- ---------
Net income (loss) $ 5,128 $ 29,685 $ 12,380 $ (493) $(41,572) $ 5,128
======== ======== ======== ======== ======== =========
20
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 1, 2001
(unaudited)
(dollars in thousands)
(Predecessor Basis)
------------------------------------------------------------------------------------------
Subsidiary Non-Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
-------------- ---------------- ------------------- ------------------ ---------------
Net sales $ 481,205 $ - $31,178 $(32,885) $479,498
Cost of sales 349,140 - 31,497 (34,180) 346,457
---------- ------------ -------------- ------------- ------------
Gross Profit 132,065 - (319) 1,295 133,041
Selling, general and administrative 72,200 27 1,328 1,200 74,755
Restructuring and other charges 22,114 - - - 22,114
---------- ------------ -------------- ------------- ------------
Operating income (loss) 37,751 (27) (1,647) 95 36,172
Interest expense 19,897 - - (4,760) 15,137
Interest income (5,481) (4,767) (57) 4,760 (5,545)
Intercompany royalty expense (income) 7,038 (7,038) - - -
Income in equity investment (10,229) - - 10,229 -
Other expense 3 - 54 - 57
---------- ------------ -------------- ------------- ------------
Income (loss) before income taxes 26,523 11,778 (1,644) (10,134) 26,523
Provision for income taxes 10,305 - - - 10,305
---------- ------------ -------------- ------------- ------------
Income (loss) from continuing operations 16,218 11,778 (1,644) (10,134) 16,218
Loss from discontinued operations (1,469) - - - (1,469)
---------- ------------ -------------- ------------- ------------
Net income (loss) $ 14,749 $ 11,778 $(1,644) $(10,134) $ 14,749
========== ============ ============== ============= ============
21
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(unaudited)
(dollars in thousands)
(Successor Basis)
----------------------------------------------------------------------------------------------
Parent Subsidiary Non-Guarantor
Guarantor Issuer Guarantor Subsidiary Eliminations Consolidated
------------- ----------- ------------- ----------------- --------------- ---------------
Net sales $ - $ 227,426 $ - $ 13,943 $(12,671) $ 228,698
Cost of sales - 163,987 - 13,190 (13,022) 164,155
-------- --------- ------- -------- -------- ---------
Gross profit - 63,439 - 753 351 64,543
Selling, general and administrative - 37,682 1,549 644 455 40,330
-------- --------- ------- -------- -------- ---------
Operating income (loss) - 25,757 (1,549) 109 (104) 24,213
Interest expense 12,247 22,171 - - (16,019) 18,399
Debt extinguishment expenses - 11,754 - - - 11,754
Interest income - (8,557) (7,652) (3) 16,019 (193)
Intercompany royalty expense (income) - 3,291 (3,291) - - -
Income in equity investment (6,889) (9,751) - - 16,640 -
Other income - - - (349) - (349)
-------- --------- ------- -------- -------- ---------
(Loss) income before income taxes (5,358) 6,849 9,394 461 (16,744) (5,398)
Benefit for income taxes - (40) - - - (40)
-------- --------- ------- -------- -------- ---------
Net (loss) income (5,358) $ 6,889 $ 9,394 $ 461 $(16,744) $ (5,358)
======== ========= ======= ======== ======== =========
22
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 1, 2001
(unaudited)
(dollars in thousands)
(Predecessor Basis)
-------------------------------------------------------------------------------------------
Subsidiary Non-Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
------------- ---------------- ------------------- ----------------- ------------------
Net sales $ 239,276 $ - $ 13,444 $(13,532) $ 239,188
Cost of sales 171,807 - 13,802 (14,042) 171,567
--------- ------- -------- -------- ---------
Gross Profit 67,469 - (358) 510 67,621
Selling, general and administrative 37,630 3 671 561 38,865
Restructuring and other charges 1,519 - - - 1,519
--------- ------- -------- -------- ---------
Operating income (loss) 28,320 (3) (1,029) (51) 27,237
Interest expense 9,363 - - (1,946) 7,417
Interest income (2,326) (2,296) (24) 1,946 (2,700)
Intercompany royalty expense (income) 3,513 (3,513) - - -
Income in equity investment (4,976) - - 4,976 -
Other expense (income) 3 - (226) - (223)
--------- ------- -------- -------- ---------
Income (loss) before income taxes 22,743 5,806 (779) (5,027) 22,743
Provision for income taxes 8,837 - - - 8,837
--------- ------- -------- -------- ---------
Income (loss) from continuing operations 13,906 5,806 (779) (5,027) 13,906
Loss from discontinued operations (325) - - - (325)
--------- ------- -------- -------- ---------
Net income (loss) $ 13,581 $ 5,806 $ (779) $ (5,027) $ 13,581
========= ======= ======== ======== =========
23
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(unaudited)
(dollars in thousands)
(Successor Basis)
---------------------------------------------------------------------------
Parent Subsidiary Non-Guarantor
Guarantor Issuer Guarantor Subsidiary Eliminations Consolidated
----------- -------- ---------- ------------ ------------- ------------
Cash flows from operating activities:
Net income (loss) $ 5,128 $ 29,685 $ 12,380 $ (493) $(41,572) $ 5,128
Adjustments to reconcile net income (loss) to
net cash provided by (used by) operating
activities:
Depreciation and amortization - 30,906 3,076 13 - 33,995
Other 7,119 22,991 - (428) - 29,682
Change in assets and liabilities, net (24,637) 2,823 - 774 35,342 14,302
-------- -------- -------- ------- -------- --------
Net cash (used by) provided by operating activities (12,390) 86,405 15,456 (134) (6,230) 83,107
Cash flows from investing activities:
Proceeds from sale of equipment - 10 - - - 10
Additions to property, plant and equipment - (14,315) - (13) - (14,328)
-------- -------- -------- ------- -------- --------
Net cash (used by) investing activities - (14,305) - (13) - (14,318)
Cash flows from financing activities:
Payments of long-term debt - (78,603) - - - (78,603)
Payments relating to capital lease obligation - (336) - - - (336)
Due to parent and affiliated companies, net 11,440 (2,555) (9,235) 350 - -
Proceeds from issuance of redeemable common stock 1,161 - - - - 1,161
Payments to redeem common stock (211) - - - - (211)
Intercompany dividend - - (6,230) - 6,230 -
-------- -------- -------- ------- -------- --------
Net cash provided by (used by) financing activities 12,390 (81,494) (15,465) 350 6,230 (77,989)
Change in cash and cash equivalents - (9,394) (9) 203 - (9,200)
Cash and cash equivalents at beginning of period - 34,123 36 1,543 - 35,702
-------- -------- -------- ------- -------- --------
Cash and cash equivalents at end of period $ - $ 24,729 $ 27 $ 1,746 $ - $ 26,502
======== ======== ======== ======= ======== ========
24
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 1, 2001
(unaudited)
(dollars in thousands)
(Predecessor Basis)
-----------------------------------------------------------
Subsidiary Non-Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Income (loss) from continuing operations $ 16,218 $ 11,778 $(1,644) $(10,134) $ 16,218
Adjustments to reconcile income from continuing operations
to net cash provided by (used by) operating activities of
continuing operations:
Depreciation and amortization 22,433 - 15 - 22,448
Other 1,257 - 54 - 1,311
Change in assets and liabilities, net 14,898 (4,000) 1,661 10,134 22,693
-------- -------- ------- -------- --------
Net cash provided by operating activities of continuing operations 54,806 7,778 86 - 62,670
Net cash (used by) operating activities of discontinued operations (2,103) - - - (2,103)
-------- -------- ------- -------- --------
Net cash provided by operating activities 52,703 7,778 86 - 60,567
Cash flows from investing activities:
Proceeds from sale of equipment 4 - - - 4
Additions to property, plant and equipment (36,546) - - - (36,546)
-------- -------- ------- -------- --------
Net cash (used by) investing activities of continuing operations (36,542) - - - (36,542)
Net cash (used by) investing activities of discontinued operations - - - - -
-------- -------- ------- -------- --------
Net cash (used by) investing activities (36,542) - - - (36,542)
Cash flows from financing activities:
Payments relating to capital lease obligation (335) - - - (335)
Payments of loans from Predecessor parent and affiliated companies (45,745) - - - (45,745)
Loans from Predecessor parent and affiliated companies 9,140 - - - 9,140
Due to Predecessor parent and affiliated companies, net 14,461 (7,799) 1,626 - 8,288
-------- -------- ------- -------- --------
Net cash (used by) provided by financing activities of
continuing operations (22,479) (7,799) 1,626 - (28,652)
Net cash provided by financing activities of discontinued operations 4,978 - - - 4,978
-------- -------- ------- -------- --------
Net cash (used by) provided by financing activities (17,501) (7,799) 1,626 - (23,674)
Change in cash and cash equivalents (1,340) (21) 1,712 - 351
Cash and cash equivalents at beginning of period 39,410 34 427 - 39,871
-------- -------- ------- -------- --------
Cash and cash equivalents at end of period $ 38,070 $ 13 $ 2,139 $ - $ 40,222
======== ======== ======= ======== ========
25
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Results of Operations for the Three-Month Periods Ended June 30,
2002 and July 1, 2001
Net Sales. Net sales for the three months ended June 30, 2002 were $228.7
million, a decrease of $10.5 million, or 4.4%, compared to $239.2 million for
the three months ended July 1, 2001. Carbonless net sales decreased $12.5
million, or 6.8%, compared to the prior year period due to a roll volume decline
of 9%, which was partially offset by a slight increase in sheet volume. Pricing
for carbonless products in total, remained stable for the three months ended
June 30, 2002 as compared to the same period in 2001, as we have not announced
any price increases during this period. Thermal net sales increased $1.8
million, or 4.2% as a result of volume increases of 10.3%. Thermal volume
increases for the three months ended June 30, 2002 were from a combination of
new product introductions, account gains and increased demand for
transaction-based thermal products.
Gross Profit. Gross profit was $64.5 million for the second quarter of
fiscal 2002, compared to $67.6 million for the second quarter of fiscal 2001, a
decrease of $3.1 million, or 4.6%. Gross profit margin was 28.2% for the second
quarter of fiscal 2002 as compared to 28.3% for the same quarter of fiscal 2001.
During the second quarter of fiscal 2001, we completed an eighteen-month
restructuring project that included the closing of our Harrisburg plant and
relocation of strategic manufacturing equipment to our Appleton plant and
Roaring Spring mill and we incurred an $8.0 million charge for start-up costs
related to the equipment transferred from the Harrisburg plant during the
quarter. Beginning in the second half of fiscal 2001, we began to benefit from
the positive impact of the elimination of the Harrisburg cost structure as well
as the elimination of the start-up costs related to the transferred equipment.
In addition, lower raw material costs for pulp and chemicals for the three
months ended June 30, 2002 also favorably impacted gross profit. These benefits
were offset by the carbonless volume decline and an increase of $3.8 million in
manufacturing depreciation expense, when compared to the second quarter of
fiscal 2001, since the acquisition of Appleton Papers by Paperweight Development
was recorded using the purchase method of accounting, and the financial
statements of Appleton Papers were adjusted on November 10, 2001 to reflect
property, plant and equipment at fair value. During the second quarter of fiscal
2002, we also recorded $1.3 million in expense associated with a voluntary
special retirement program accepted by thirty-eight qualified hourly employees
at the Appleton plant.
Selling, General and Administrative. Selling, general and administrative
expenses for the second quarter of fiscal 2002 were $40.3 million compared to
$38.9 million in the second quarter of fiscal 2001, an increase of $1.4 million,
or 3.6%. Amortization expense related to intangible assets increased $2.2
million for the second quarter of fiscal 2002 as compared to the second quarter
of fiscal 2001 due to the value assigned to intangible assets in the purchase
price allocation related to the acquisition of Appleton Papers. Bad debt expense
in the second quarter of fiscal 2002 was $0.7 million higher than in the second
quarter of fiscal 2001 primarily due to potential credit exposure from
Argentinean customers. Long-term management incentive plans based on the
performance of Appleton Papers and changes in the value of Paperweight
Development redeemable common stock resulted in an increase in non-cash
compensation expense of $1.6 million during the second quarter of fiscal 2002.
Distribution costs for the second quarter of 2002 decreased by $2.0 million, or
11.7%, compared to the second quarter of 2001 due to reduced carbonless volumes,
lower freight costs and reduced warehousing expenses.
Restructuring and Other Charges. During the third quarter of fiscal 1999,
we announced plans to close our Harrisburg plant in fiscal 2001. Restructuring
and other charges associated with this plant closure, which was completed in
fiscal 2001, approximated $0.5 million in the second quarter of fiscal 2001, and
pertained to costs relating to the final closure of the plant.
Other Operating Expenses. Other operating expenses for the second quarter
of fiscal 2001 pertained to Lower Fox River environmental costs of $0.8 million
and costs to dismantle and transport equipment from the Harrisburg plant to the
Appleton plant and Roaring Spring mill of $0.2 million. In connection
26
with the acquisition of Appleton Papers, AWA has agreed to indemnify Appleton
Papers for environmental liabilities as described in Note 2 of our fiscal 2001
Notes to Consolidated Financial Statements.
Operating Income. Operating income for the second quarter of fiscal 2002
was $24.2 million compared to $27.2 million for the same period in fiscal 2001,
a decrease of $3.0 million, or 11.0%. Operating income as a percentage of net
sales for the second quarter of fiscal 2002 was 10.6% as compared to 11.4% of
net sales for the same period in fiscal 2001. Carbonless operating income for
the second quarter of fiscal 2002 decreased $3.9 million compared to the same
period in fiscal 2001 primarily due to the decline in roll volume in the second
quarter of fiscal of 2002 as compared to the same time period in fiscal 2001.
Thermal operating income for the second quarter of fiscal 2002 increased $0.1
million compared to the second quarter of fiscal 2001 despite an increase in
deprecation and amortization expenses for the second quarter of fiscal 2002 as a
result of the November 10, 2001 purchase price allocation.
Interest expense. Interest expense for the second quarter of fiscal 2002
was $18.4 million, an increase of $11.0 million compared to $7.4 million for the
second quarter of fiscal 2001 due to the issuance of long-term debt obligations
associated with the acquisition of Appleton Papers on November 9, 2001.
Debt extinguishment expenses. During June 2002, a portion of our long-term
debt obligations was refinanced with new debt carrying a reduced interest rate.
As a result, we were required to write off $11.8 million of deferred debt
issuance costs associated with the original debt instrument. Refer to "Liquidity
and Capital Resources" below for additional discussion of this refinancing.
Interest Income. Interest income for the second quarter of fiscal 2002 was
$0.2 million, a decrease of $2.5 million compared to $2.7 million for the second
quarter of fiscal 2001. The decrease was due to the October 1, 2001 sale of a
$125 million interest-bearing shareholder note we held from Arjo Wiggins SA, a
French company ultimately owned by Arjo Wiggins Appleton plc ("AWA").
Provision for income taxes. In connection with the acquisition of Appleton
Papers, Paperweight Development and its domestic subsidiaries elected to be
treated as subchapter S corporations for U.S. and state income tax purposes. We
expect to incur no future U.S. income tax liability and minimal state income tax
liability.
Loss from discontinued operations. In October 2001, we completed the
transfer of one of our wholly owned subsidiaries, Newton Falls Inc., to an
affiliated company of AWA. This entity was classified as a discontinued
operation for the second quarter of fiscal 2001.
Loss from discontinued operations, net of taxes, was $0.3 million for the
second quarter of fiscal 2001 and primarily consisted of closing costs
associated with the permanent closure of the Newton Falls mill.
Net income. For the second quarter of fiscal 2002, we incurred a net loss
of $5.4 million compared to net income of $13.6 million for the second quarter
of fiscal 2001. This resulted primarily from the debt extinguishment charge of
$11.8 million, increased interest expense of $11.0 million and the reduction in
operating income, partially offset by reduced income taxes of $8.9 million.
Comparison of Results of Operations for the Six-Month Periods Ended June 30,
2002 and July 1, 2001
27
Net Sales. Net sales for the six months ended June 30, 2002 were $453.3
million, a decrease of $26.2 million, or 5.5%, compared to $479.5 million for
the six months ended July 1, 2001. Carbonless net sales decreased $27.1 million,
or 7.3%, compared to the prior year period due to a roll volume decline of 10%,
which was partially offset by a modest increase in sheet volume. Pricing for
carbonless products in total, remained stable for the first half of 2002 as
compared to the same period in 2001, as we have not announced any price
increases during this period. Thermal net sales increased $1.7 million as a
result of volume increases of 10.7%. Thermal volume increases during the first
half of 2002 were from a combination of new product introductions, account gains
and increased demand for transaction-based thermal products.
Gross Profit. Gross profit was $133.9 million for the first half of fiscal
2002, compared to $133.0 million for the same period in fiscal 2001, an increase
of $0.9 million, or 0.7%. Gross profit margin increased to 29.5% for the first
half of fiscal 2002 as compared to 27.7% for the same period in fiscal 2001.
During the first half of fiscal 2001, we completed an eighteen-month
restructuring project that included the closing of our Harrisburg plant and
relocation of strategic manufacturing equipment to our Appleton plant and
Roaring Spring mill and we incurred a $15.0 million charge for start-up costs
related to the equipment transferred from the Harrisburg plant during the first
half. Beginning in the second half of fiscal 2001, we began to benefit from the
positive impact of the elimination of the Harrisburg cost structure as well as
the elimination of the start-up costs related to the transferred equipment. In
addition, lower raw material costs for pulp and chemicals for the first half of
2002 also favorably impacted gross profit. These benefits were partially offset
by the carbonless volume decline and an increase of $7.3 million in
manufacturing depreciation expense, when compared to the first half of fiscal
2001, since the acquisition of Appleton Papers by Paperweight Development was
recorded using the purchase method of accounting, and the financial statements
of Appleton Papers were adjusted on November 10, 2001 to reflect property, plant
and equipment at fair value. During the first half of fiscal 2002, we also
recorded $1.3 million in expense associated with a voluntary special retirement
program accepted by thirty-eight qualified hourly employees at the Appleton
plant.
Selling, General and Administrative. Selling, general and administrative
expenses for the first half of fiscal 2002 were $80.2 million compared to $74.8
million for the same period in fiscal 2001, an increase of $5.4 million, or
7.2%. Amortization expense related to intangible assets increased $4.5 million
for the first half of fiscal 2002 as compared to the same period of fiscal 2001
due to the value assigned to intangible assets in the purchase price allocation
related to the acquisition of Appleton Papers. Bad debt expense for the first
half of fiscal 2002 was $1.3 million higher than in the same period of fiscal
2001 primarily due to potential credit exposure from Argentinean customers.
Long-term management incentive plans based on the performance of Appleton Papers
and changes in the value of Paperweight Development redeemable common stock
resulted in an increase in non-cash compensation expenses of $2.6 million during
the first half of fiscal 2002. Distribution costs for the first half of fiscal
2002 decreased by $4.3 million, or 12.8%, compared to the same period in fiscal
2001 due to reduced carbonless volumes, lower freight costs and reduced
warehousing expenses.
Restructuring and Other Charges. Restructuring and other charges associated
with the Harrisburg plant closure, which was completed in fiscal 2001,
approximated $0.9 million in the first half of fiscal 2001 and pertained to
costs relating to the final closure of the Harrisburg plant.
Other Operating Expenses. Other operating expenses for the first half of
fiscal 2001 pertained to Lower Fox River environmental costs of $20.9 million
and costs to dismantle and transport equipment from the Harrisburg plant to the
Appleton plant and Roaring Spring mill of $0.3 million. In connection with the
acquisition of Appleton Papers, AWA has agreed to indemnify Appleton Papers for
environmental liabilities as described in Note 2 of our fiscal 2001 Notes to
Consolidated Financial Statements.
Operating Income. Operating income for the first half of fiscal 2002 was
$53.7 million compared to $36.2 million for the same period in fiscal 2001, an
increase of $17.5 million, or 48.3%. Operating income as a percentage of net
sales for the first half of fiscal 2002 was 11.8% as compared to 7.5% of net
sales for same period in fiscal 2001. Carbonless operating income for the first
half of fiscal 2002
28
increased $15.8 million compared to the first half of fiscal 2001 primarily due
to the $20.9 million in environmental expense in the first half of 2001. Thermal
operating income for the first half of fiscal 2002 decreased $0.2 million
compared to the first half of fiscal 2001 due to an increase in deprecation and
amortization expenses for the first half of fiscal 2002 as a result of the
November 10, 2001 purchase price allocation.
Interest expense. Interest expense for the first half of fiscal 2002 was
$37.8 million, an increase of $22.7 million compared to $15.1 million for the
same period in fiscal 2001 due to the issuance of long-term debt obligations
associated with the acquisition of Appleton Papers on November 9, 2001.
Debt extinguishment expenses. During June 2002, a portion of our long-term
debt obligations was refinanced with new debt carrying a reduced interest rate.
As a result, we were required to write off $11.8 million of deferred debt
issuance costs associated with the original debt. Refer to "Liquidity and
Capital Resources" below for additional discussion of this refinancing.
Interest Income. Interest income for the first half of fiscal 2002 was $0.6
million, a decrease of $4.9 million compared to $5.5 million for the same period
in fiscal 2001. The decrease was due to the October 1, 2001 sale of a $125
million interest-bearing shareholder note we held from Arjo Wiggins SA, a French
company ultimately owned by AWA.
Provision for income taxes. In connection with the acquisition of Appleton
Papers, Paperweight Development and its domestic subsidiaries elected to be
treated as subchapter S corporations for U.S. and state income tax purposes. We
expect to incur no future U.S. income tax liability and minimal state income tax
liability.
Loss from discontinued operations. In October 2001, we completed the
transfer of one of our wholly owned subsidiaries, Newton Falls Inc., to an
affiliated company of AWA. This entity was classified as a discontinued
operation for the six months ended July 1, 2001.
Loss from discontinued operations, net of taxes, was $1.5 million for the
first half of fiscal 2001 and primarily consisted of asset impairments and
closing costs associated with the permanent closure of the Newton Falls mill.
Net income. Net income for the first half of fiscal 2002 was $5.1 million
compared to $14.7 million for the same period in fiscal 2001, a decrease of $9.6
million resulting primarily from the increase in operating income offset by the
increase in interest expense and debt extinguishment charge.
Liquidity and Capital Resources
Predecessor Period
Prior to the acquisition of Appleton Papers by Paperweight Development, we
operated as an indirect, wholly owned subsidiary of AWA. This resulted in
numerous intercompany transactions related to our investing and financing
activities. Therefore, the following discussion regarding our historical cash
flows from operating, investing and financing activities is not representative
of our cash flow and activities as a separate entity following the acquisition.
We historically financed our short-term liquidity needs with internally
generated funds, working capital lines of credit and loans from an affiliate of
AWA.
29
Successor Period
As a result of the acquisition of Appleton Papers on November 9, 2001, we
incurred significant debt requiring periodic interest and principal repayments.
Our other liquidity needs relate primarily to capital expenditures.
Our short-term cash needs are primarily for working capital, capital
expenditures, repurchase of company stock and debt service. We have the
availability to fund our working capital, capital expenditures, debt service
requirements and other contractual obligations through cash flows from
operations and borrowings under the revolving credit portion of our senior
credit facilities. Also, our conversion from a C corporation to a qualified
subchapter S subsidiary, which means that neither we nor Paperweight
Development, nor any of our subsidiaries will be subject to U.S. income taxes,
should have a positive impact on our future liquidity and cash flows. Our senior
credit facilities consist of a $75 million revolving credit facility and $265
million in term loans. We used approximately $17.5 million of availability under
the revolving credit facility to issue letters of credit and fully borrowed the
term loans. In connection with the acquisition, we also issued a senior
subordinated note due 2008 to AWA with an aggregate principal amount of $250
million, which was repaid with the proceeds from the private offering of our 12
1/2% Series A Senior Subordinated Notes due 2008 and other available cash. We
filed a registration statement on Form S-4, (Registration Number 333-82084), to
register an offer to exchange up to $250 million of our 12 1/2% Series B Senior
Subordinated Notes due 2008 for our outstanding 12 1/2% Series A Senior
Subordinated Notes due 2008. We closed the exchange offer on July 12, 2002. The
holders exchanged the entire $250 million of our Series A Notes for our Series B
Notes. In addition, Paperweight Development agreed to pay one of the sellers a
deferred payment obligation, which had a present value of $140 million at the
closing of the acquisition and a value of $321 million at its maturity date in
2010.
Redeemable equity securities are required to be accreted (i.e., increased)
so that 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. We have accreted the redeemable common stock by $4.6 million for the three
months ended June 30, 2002 and $5.3 million for the six months ended June 30,
2002. Redeemable common stock is being accreted up to the earliest redemption
date based upon the estimated fair market value of the redeemable common stock
as of June 30, 2002. The earliest redemption date occurs when the holder reaches
55 years of age and has 10 years of participation in the KSOP. At that point,
the holder has the right to make diversification elections for a period of six
years. Based upon the estimated fair value of the redeemable common stock, an
ultimate redemption amount of approximately $224 million was determined with a
remaining unrecognized accretion amount of approximately $112 million at June
30, 2002. The accretion is being charged to retained earnings as redeemable
common stock is the only class of shares outstanding.
Cash Flows from Operating Activities. Net cash provided by operating
activities of continuing operations for the first half of fiscal 2002 was $83.1
million. As required by purchase accounting, fixed assets and intangible assets
were recorded at fair value as of the date of the acquisition resulting in an
increase in deprecation and amortization expense of $11.5 million for the first
half of fiscal 2002. We also incurred $3.8 million in 401(k) non-cash employer
matching contributions during the first half of fiscal 2002. A decrease in
working capital for the first half of fiscal 2002 increased operating cash flows
by $13.6 million. A decrease in inventories of $19.8 million was partially
offset by an increase in accounts receivable of $5.4 million.
Net cash provided by operating activities of continuing operations for the
first half of fiscal 2001 was $62.7 million. A decrease in working capital for
the first half of fiscal 2001 increased operating cash flows by $3.3 million.
Accounts receivable decreased $19.7 million largely due to a reduction in past
30
due account balances. Inventories decreased $17.1 million primarily as a result
of a next-day basestock inventory program initiated during the
first quarter of fiscal 2001. Accounts payable and other accrued liabilities
decreased $33.5 million largely due to the payment of federal income taxes and
employee bonuses accrued for at fiscal year end 2000.
Cash Flows from Investing Activities. Net cash used by investing activities
of continuing operations was $14.3 million for the first half of fiscal 2002. Of
this amount, $8.6 million was expended on capital projects approved prior to the
end of fiscal 2001. The remaining $5.7 million was expended on capital projects
approved in 2002, $3.3 million of which was associated with the installation of
our new enterprise resource planning platform.
Net cash used by investing activities of continuing operations was $36.5
million for the first half of fiscal 2001. A majority of these capital
expenditures were in the manufacturing area and related to machine upgrades and
rebuilds, the re-installation of the equipment originally located at our
Harrisburg plant and environmental compliance.
Cash Flows from Financing Activities. Net cash used by financing activities
of continuing operations was $78.0 million in the first half of fiscal 2002. We
used cash generated by operations to repay $78.6 million of term loans. Of this
amount, $13.0 million was for mandatory principal repayments, while the
remaining $65.6 million represented voluntary principal repayments which we made
in order to reduce future interest expense. During the first half of fiscal
2002, we received proceeds of $1.2 million from the sale of shares of
Paperweight Development common stock. The ESOP trustee purchased these shares
with pretax payroll deferrals made by employees from November 10, 2001 through
December 29, 2001. Additionally, $0.2 million was used to repurchase the stock
of employees who were eligible to begin account diversification.
Net cash used by financing activities of continuing operations was $28.7
million in the first half of fiscal 2001. We used cash generated by operations
and loan proceeds of $9.1 million to repay $37.5 million of intercompany debt
and payables.
On November 9, 2001, we entered into a $340 million senior credit facility.
The senior credit facility was comprised of the following: a four year credit
facility of up to $75 million for revolving loans, including letters of credit;
a four year term loan of $115 million; and a five year term loan of $150
million. Borrowings under the revolving credit facility and the $115 million
term loan bore interest at LIBOR plus 3.5% through May 8, 2002. On May 9,
because our consolidated leverage ratio was calculated at less than 2.50 to 1.00
but greater than or equal to 2.00 to 1.00, the interest rate was reduced to
LIBOR plus 3.0%. Through May 8, 2002, interest on borrowings under the $150
million term loan was LIBOR plus 4.25% per annum, subject to a minimum LIBOR
rate of 2.5%. On May 9, 2002, the interest rate on this note was reduced by 0.5%
because of our improvements to our consolidated leverage ratio as noted above.
On June 6, 2002, we refinanced the $112.4 million remaining principal amount and
replaced it with similar debt carrying a reduced interest rate of LIBOR plus
3.25%, not subject to a minimum LIBOR rate. As a result of this refinancing ,
$11.8 million of deferred debt issuance costs were written off during June in a
non-cash transaction as debt extinguishment expenses. The LIBOR rate on June 30,
2002 was 1.8%. The senior credit facility is unconditionally and jointly and
severally guaranteed by Paperweight Development and WTA Inc., one of our wholly
owned subsidiaries.
On December 14, 2001, we issued $250 million aggregate principal amount of
12.5% Series A Senior Subordinated Notes due 2008, which were used to redeem in
full, at par, the senior subordinated note due 2008 held by AWA as described in
Note 2 of our fiscal 2001 Notes to Consolidated Financial Statements. On June
12, 2002 we filed a Registration Statement on Form S-4 to register an offer with
the Securities and Exchange Commission to exchange up to $250 million of our
registered 12.5% Series B
31
Senior Subordinated Notes due 2008 for any and all of our outstanding 12.5%
Series A Senior Subordinated Notes due 2008. The exchange offer closed on July
12, 2002. The entire outstanding principal balance of Series A notes was
exchanged for Series B notes. The Series B notes and the Series A notes have
substantially the same terms, conditions and covenants. Subsequent to the
closing of the exchange offer, we purchased and retired $19.8 million of our
Series B notes.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. We are currently
evaluating the impact of SFAS No. 143, which we are required to adopt in fiscal
2003.
In April 2002, SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued.
This statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of the SFAS No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements". This statement also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", and amends
SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of this statement were effective for us for all transactions
consummated after May 15, 2002.
In June 2002, FASB voted in favor of issuing FASB Statement No. 146 (SFAS
No. 146), "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 will be effective for exit or disposal activities
that are initiated after December 31, 2002. Early application is encouraged. We
anticipate that this statement, upon adoption, will not have a significant
impact on our financial position or results of operations.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
For information regarding our quantitative and qualitative disclosures
about market risk, please see our Registration Statement on Form S-4 (Reg. No.
333-82084). There have been no material changes in our quantitative or
qualitative exposure to market risk from that described in the registration
statement.
32
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward-looking statements. The words "will,"
"believes," "anticipates," "intends," "estimates," "expects," "projects,"
"plans" 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 our strategy, future operations, future
financial position, estimated revenues, projected costs, prospects, plans and
objectives of management and events or developments that we expect or anticipate
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 of our 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 the heading "Risk Factors" in
our Registration Statement on Form S-4 dated June 12, 2002, which factors are
incorporated herein by reference. We disclaim any obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
For information relating to our legal proceedings, please see our
Registration Statement on Form S-4 (Reg. No. 333-82084). There have been no
material changes in our legal proceedings from that described in the
registration statement, except as follows:
In Appleton Papers Inc. v. Home Indemnity Company, a case filed in
Outagamie County, Wisconsin, we brought a claim against various insurance
companies, including Home Indemnity Company, demanding payment of defense costs
for litigation which was settled in 1999. On July 10, 2002, we settled this
matter with Home Indemnity Company and one of the other insurers. As part of the
settlement Home withdrew its claim for reimbursement of approximately $12
million of our defense costs.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
12.1 Computation of Ratio of Earnings to Fixed Charges
99.1 Statement of Douglas P. Buth, Chairman, President and Chief
Executive Officer of Appleton Papers Inc., pursuant to 18 U.S.C.
Section 1350.
99.2 Statement of Dale E. Parker, Vice President and Chief Financial
Officer of Appleton Papers Inc., pursuant to 18 U.S.C. Section
1350.
99.3 Statement of Douglas P. Buth, Chairman, President and Chief
Executive Officer of Paperweight Development Corp., pursuant to
18 U.S.C. Section 1350.
99.4 Statement of Dale E. Parker, Chief Financial Officer of
Paperweight Development Corp., pursuant to 18 U.S.C.
Section 1350.
99.5 Statement of David J. Rickert, President (Principal Executive
Officer and Principal Financial Officer) of WTA Inc. pursuant to
18 U.S.C. Section 1350.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended June 30,
2002.
33
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 13, 2002 /s/ Dale E. Parker
-------------- ------------------------------------------
Dale E. Parker
Vice President and Chief Financial Officer
(Signing on behalf of the Registrant and
as the Principal Financial Officer)
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 13, 2002 /s/ Dale E. Parker
--------------- ------------------------------------------
Dale E. Parker
Chief Financial Officer
(Signing on behalf of the Registrant and
as the Principal Financial Officer)
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.
WTA INC.
------------------------------------------
(Registrant)
Date: August 13, 2002 /s/ David J. Rickert
--------------- ------------------------------------------
David J. Rickert
President
(Signing on behalf of the Registrant and
as the Principal Financial Officer)
34