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EX-32.2 - EX-32.2 - PAPERWEIGHT DEVELOPMENT CORPc365-20161231xex32_2.htm
EX-32.1 - EX-32.1 - PAPERWEIGHT DEVELOPMENT CORPc365-20161231xex32_1.htm
EX-31.2 - EX-31.2 - PAPERWEIGHT DEVELOPMENT CORPc365-20161231xex31_2.htm
EX-31.1 - EX-31.1 - PAPERWEIGHT DEVELOPMENT CORPc365-20161231xex31_1.htm
EX-21.1 - EX-21.1 - PAPERWEIGHT DEVELOPMENT CORPc365-20161231xex21_1.htm
EX-10.28 - EX-10.28 - PAPERWEIGHT DEVELOPMENT CORPc365-20161231xex10_28.htm
EX-10.26 - EX-10.26 - PAPERWEIGHT DEVELOPMENT CORPc365-20161231xex10_26.htm



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended: December 31, 2016

OR

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

For The Transition Period From            To             .

 

Commission file numbers: 333-82084-01







PAPERWEIGHT DEVELOPMENT CORP.

(Exact Name of Registrant as Specified in Its Charter)

Wisconsin

(State or Other Jurisdiction of

Incorporation or Organization)



39-2014992

(I.R.S. Employer

Identification No.)



825 East Wisconsin Avenue, P.O. Box 359,

Appleton, Wisconsin

(Address of Principal Executive Offices)



Registrant’s telephone number, including area code: (920) 734-9841

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes      No  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes      No  

 

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  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes       No  



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large Accelerated filer      Accelerated filer      Non-accelerated filer      Smaller reporting company  



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes      No  



As of March 1, 2017,  6,260,418 shares of Paperweight Development Corp. common stock, $.01 par value, were outstanding. There is no trading market for the common stock of Paperweight Development Corp. No shares of Paperweight Development Corp were held by non-affiliates.

 

Documents incorporated by reference: None.

 

 

 


 

 





INDEX 





 

 

   

   

Page

Number

PART I

   

   

   

   

   

Item 1

Business

3

   

   

   

Item 1A

Risk Factors

8

   

   

   

Item 1B

Unresolved Staff Comments

13

   

   

   

Item 2

Properties

13

   

   

   

Item 3

Legal Proceedings

14



 

 

Item 4

Mine Safety Disclosures

14

   

   

   

PART II

   

   

   

   

   

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

   

   

   

Item 6

Selected Financial Data

16

   

   

   

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

   

   

   

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

30

   

   

   

Item 8

Financial Statements and Supplementary Data

31

   

   

   

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

69

   

   

   

Item 9A

Controls and Procedures

69

   

   

   

Item 9B

Other Information

69

   

   

   

PART III

   

   

   

   

   

Item 10

Directors, Executive Officers and Corporate Governance

70

   

   

   

Item 11

Executive Compensation

75

   

   

   

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

96

   

   

   

Item 13

Certain Relationships and Related Transactions and Director Independence

96

   

   

   

Item 14

Principal Accountant Fees and Services

97

   

   

   

PART IV

   

   

   

   

   

Item 15

Exhibits and Financial Statement Schedules

98

   

   

SIGNATURES

   

   

   

EXHIBITS

   







2


 

 



PART I

 

Unless stated to the contrary or the context requires otherwise, all references in this report to the Company refer to Paperweight Development Corp. (“PDC” or “Paperweight”) and its 100%-owned subsidiaries. It includes Appvion, Inc. and its 100%-owned subsidiaries (collectively “Appvion”).

 

Item 1.Business

Overview

 

The Company is a leading manufacturer of high value-added coated and specialty paper products including carbonless, thermal, security, high-speed inkjet and colored papers. The Company creates product solutions for customers and end users through its development and use of coating formulations and applications as well as security technologies. Under U.S. generally accepted accounting principles (“GAAP”), the Company has two reportable segments: thermal papers and carbonless papers. The performance of these two segments is described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”



Company Background

 

PDC was incorporated in Wisconsin on December 28, 2000. Appvion was incorporated in Delaware in July 1965 and is the primary operating subsidiary of PDC.



Company History

 

Appleton Coated Paper Company, or ACPC, began operations in 1907 in Appleton, Wisconsin. In 1953, ACPC began working with NCR on the development and production of carbonless paper. In 1954, NCR began marketing its NCR PAPER* brand of carbonless paper, which ACPC manufactured.



In 1969, NCR acquired Combined Paper Mills, Inc., which then consisted of pulp and paper mills in Combined Locks, Wisconsin, and Roaring Spring, Pennsylvania. In 1970, NCR acquired ACPC. In 1971, NCR formed the Appleton Papers division by merging ACPC with Combined Paper Mills, Inc.

 

In 1978, Appleton, then a subsidiary of B.A.T Industries Limited, acquired the assets of the Appleton Papers division from NCR. In 1990, Appleton, together with The Wiggins Teape Group Ltd., was separated from B.A.T Industries to form Wiggins Teape Appleton p.l.c., a public company listed on the London Stock Exchange. Later that year, Wiggins Teape Appleton merged with Arjomari Prioux SA, a public French paper manufacturer and merchant. Shortly after the merger, the group changed its name to Arjo Wiggins Appleton p.l.c. Appleton operated as an indirect, 100%-owned subsidiary of Arjo Wiggins Appleton p.l.c. until 2001.

 

On November 9, 2001, Appleton employees purchased Appleton from Arjo Wiggins Appleton p.l.c. through the use of an employee stock ownership plan. On May 9, 2013, the Company changed its name from Appleton Papers Inc. to Appvion, Inc.

 

The KSOP and the ESOP

 

The Appvion Retirement Savings and Employee Stock Ownership Plan (the “KSOP” or the “plan”) includes a separate employee stock ownership plan component (the “ESOP” or the “Company Stock Fund”). The KSOP is a tax-qualified retirement plan that is available to U.S. employees. The ESOP component of the KSOP is a tax-qualified employee stock ownership plan that invests in PDC common stock.

 

In late 2001, approximately 90% of Appvion’s employees invested nearly $107 million in the ESOP. On November 9, 2001, the ESOP purchased 100% of the common stock of PDC. PDC simultaneously used all the proceeds from the sale of those shares of common stock, along with the proceeds of a senior credit facility, senior subordinated notes, a deferred payment obligation and its available cash, to finance the purchase of the acquisition described below. 



Acquisition from Arjo Wiggins

 

On November 9, 2001, PDC and a 100%-owned subsidiary acquired Appleton from Arjo Wiggins Appleton p.l.c., now known as Windward Prospects Ltd.  (formerly “AWA”), and two of its subsidiary holding companies, (the “sellers” or “affiliates of AWA”). Appvion is a 100%-owned subsidiary of PDC and the ESOP owns 100% of the shares of common stock of PDC. PDC does not conduct any business apart from undertaking matters incidental to its ownership of the stock of its subsidiaries, matters relating to the ESOP, and actions required to be taken under ancillary acquisition agreements.

3


 

 

Recent Dispositions

 

In August 2015, as part of the Company’s strategic, long-term focus on its core paper businesses, Appvion completed the sale of the assets primarily used in the development, manufacture and sale of microencapsulation materials by the former Encapsys segment of the Company (the “Encapsys Business”) to Rise Acquisition LLC (“Rise”), a Delaware limited liability company and an affiliate of Sherman Capital Holdings LLC, a Delaware limited liability company. In connection with the sale, Appvion and Rise entered into a Supply Agreement, through which Rise will supply Appvion with all of its microencapsulation product requirements for use in its carbonless paper products for a ten-year term subject to renewal.



The Company has determined that its former Encapsys segment met the criteria to be classified as discontinued operations which requires retrospective application to financial information for all periods presented. Refer to Note 3 of Notes to Consolidated Financial Statements for further information on the Company’s discontinued operations.

 

Thermal Papers

 

The thermal papers segment develops and produces substrates for the transaction and item identification markets and accounted for approximately 59% of total company net sales in 2016. The Company believes it is the largest manufacturer of direct thermal papers in North America. Thermal paper is used in four principal end markets:  (1) point-of-sale products for retail receipts and coupons; (2) label products for shipping, warehousing, medical and clean-room applications; (3) tags and tickets for airline and baggage applications, event and transportation tickets and lottery and gaming applications; and (4) printer, calculator and chart paper for engineering, industrial and medical diagnostic charts. The point-of-sale and label market segments, combined, accounted for the majority of thermal paper volume of the North American thermal market in 2016.



Point-of-sale products are sold to printers and converters who in turn sell to end-user customers or to resellers such as office supply stores, office superstores, warehouse clubs, mail order catalogs, equipment dealers, merchants and original equipment manufacturers. Label products are sold to companies who apply pressure sensitive adhesive coatings and release liners and then sell these products to label printers. Tag, ticket and chart grades are sold to specialty printing companies who convert them to finished products such as entertainment, lottery and gaming tickets, tags, coupons and medical charts.



The thermal papers market is growing with new applications being developed to use thermal technology. Based on its assessment of the period 2011 through 2016, the Company believes North American thermal markets expanded at a 2% compound average growth rate, with annual rates ranging from increases of 1% to 3%. The Company believes demand for thermal paper will continue to grow in North America and around the world. Sales of thermal papers have not been significantly impacted by seasonality. In addition to the Company, other significant thermal paper producers include Koehler AG, Oji Paper Co. Ltd. and its subsidiary Kanzaki Specialty Papers, Ricoh Company, Ltd., Mitsubishi Paper Mills Company Ltd., Hansol Paper Company, Ltd., Torraspapel S.A., and Nippon Paper Industries Co. Ltd. and its subsidiary Jujo Thermal Ltd. In the thermal papers market, the Company competes primarily on the basis of product quality, service, breadth of product offering and price.



Carbonless Papers

 

The carbonless papers segment includes carbonless, security and other specialty paper products and accounted for approximately 41% of total company net sales in 2016. The Company produces and sells carbonless roll and sheet products under the NCR PAPER* brand. The Company believes its product line is among the broadest in the industry and offers customers a single source solution for their carbonless paper needs. The Company also produces coated paper products for design and print applications and offers custom paper coating solutions.



Carbonless products are sold to converters, printers and merchant distributors who stock and sell carbonless paper to printers. Carbonless paper is used to make multipart business forms such as invoices and purchase orders. Carbonless paper is used in a variety of end markets, including government, retail, financial, insurance and manufacturing, with no one predominant end market. Demand for carbonless products in many of these markets is tied to economic growth, which impacts the number of transactions completed in a given year. Historically, sales of carbonless products have not been significantly impacted by seasonality.



The Company believes the North American market for carbonless paper products has been in decline since 1994 as a result of greater use of competing technologies such as digital laser, inkjet and thermal printers and electronic communications. The Company believes the North American carbonless paper market declined by approximately 7% to 10% annually from 2011 through 2016. The decline is expected to continue at historical rates over the next several years. The Company believes the worldwide carbonless market is also in decline, with demand declining at approximately 3% to 6% per year.



In addition to the Company, other significant carbonless paper producers include P.H. Glatfelter Company, Nekoosa Coated Products, Mitsubishi Paper Mills Company Ltd., Asia Pulp and Paper Co. Ltd., Koehler AG, Nippon Industries Co. Ltd. and Oji Paper Co. Ltd.

4


 

 

The Company produces security papers with features that resist forgery, tampering and counterfeiting. The Company’s portfolio of security papers products incorporates security technologies, including watermarks, taggants, reactive chemicals, embedded threads and fibers and machine-readable technologies, to serve global markets. Sales of the Company’s security papers products have not been significantly impacted by seasonality.

 

Security paper competitors include P.H. Glatfelter Company, Rolland Enterprises Inc., Domtar, Copamex, S.A. de C.V., Papierfabrik Louisenthal GmbH, Arjowiggins Security and De La Rue International.



The Company’s emerging specialty papers product line includes high-speed inkjet papers used to produce transactional documents such as bills and statements, direct mail, promotional materials, and catalogs and books.  The Company also manufactures a line of uncoated colored papers used for a wide range of business and personal communications.



In the carbonless market, the Company competes primarily on the basis of product quality, service, breadth of product offering and price.



* NCR PAPER is a registered trademark licensed to the Company.



Geographical Financial Information

 

Revenues from sales in the U.S. were $529.7 million in 2016, $526.0 million in 2015 and $568.6 million in 2014. Revenues from sales to customers in foreign countries were $160.7 million in 2016, $174.0 million in 2015 and $196.1 million in 2014. All long-lived assets were located in the U.S. as of December 31, 2016. Substantially all long-lived assets were located in the U.S. as of January 2, 2016 and January 3, 2015. See Note 22, Segment Information, of Notes to Consolidated Financial Statements.



Research and Development

 

Ongoing investment in research and development has enabled the Company to develop core competencies in specialty coating chemistry, coating application systems and security technologies. Research and development efforts are focused on cost reduction, product line extensions, new product development and technology transfer and development. Research and development costs related to the development of new products and significant improvements to existing products were $8.2 million in 2016, $9.0 million in 2015 and $9.5  million in 2014.



Sales, Marketing and Distribution

 

The Company promotes and sells products through its sales and marketing organization. Sales personnel operate from field locations. Marketing employees work to acquire market, end-user and competitor insight to uncover and deliver market-focused solutions. Technical service representatives assist customers with product applications and improvements and complaint resolution by telephone and in person at customer locations. Customer service representatives receive customer orders, establish delivery dates and answer inquiries about stock availability and order status.



The Company uses 10 distribution centers to store and distribute products to customers. The Company operates a distribution center in Appleton, Wisconsin. Third-party logistics services are contracted through distribution facilities in Middletown, Pennsylvania; McDonough, Georgia; Cincinnati, Ohio; Kansas City, Missouri; Portland, Oregon; Ontario, California; Burlington, Ontario, Canada; Birmingham, England; and Utrecht, Netherlands.



Distributors and Customers

 

The Company currently sells through merchant distributors that stock and redistribute carbonless sheet products globally from approximately 265 locations. Carbonless rolls are sold through a variety of channels including merchants, agents and directly to printer and converter customers worldwide. In North America, some carbonless rolls are sold to forms printers through merchant distributors on a drop-shipment basis. In those cases, the Company ships products from distribution centers and provides customer support while the merchant bears the credit risk of nonpayment.



The Company sells thermal papers to converters who cut and rewind large rolls into smaller rolls, print and otherwise further process the paper based on end-user needs. The Company sells security products through merchants and to security printers who print checks, titles, certificates and other secure documents.



Sales to the Company’s largest customer accounted for approximately 9% of 2016, 2015, and 2014 total company net sales. The five largest customers in the carbonless papers segment collectively accounted for approximately 46% of carbonless papers net sales in 2016, 44% of carbonless papers net sales in 2015 and 41% of carbonless papers net sales in 2014. The five largest customers in the thermal papers segment collectively accounted for approximately 47% of thermal papers net sales in 2016, 44% of thermal papers net sales in 2015 and 41% of thermal papers net sales in 2014.

5


 

 

Working Capital Practices

 

The Company maintains finished goods inventories sufficient to provide a high level of available stock items and next day delivery to most carbonless and thermal papers customers. Raw material inventories are maintained at levels consistent with demand for both stock and custom orders. Custom order lead times are typically less than 30 days. Accounts receivable management practices, including terms of sale, are designed to accommodate the competitive differences of each business segment and market channel.  The Company believes its practices with respect to working capital are generally consistent with industry standards.



Order Backlogs

 

In the carbonless papers business, customers typically order from stock grades and most orders are delivered the next day. Thermal papers customers also order primarily stock grades. Total carbonless papers and thermal papers products ordered but not shipped was approximately 3% of annual sales volume in 2016, and 4% of annual sales volume in 2015 and 2014.



Manufacturing

 

The Appleton plant, located in Appleton, Wisconsin, produces thermal, carbonless and specialty papers. The Roaring Spring, Pennsylvania mill is a nearly fully-integrated pulp and paper mill with three paper machines and produces carbonless, security and specialty papers. The West Carrollton, Ohio plant produces thermal paper products.



Raw Materials



Raw materials purchases primarily consist of base stock and chemicals. In 2016, those materials made up approximately 61% of the cost of goods sold. The largest raw material component, base stock, which are rolls of uncoated paper used in the production of coated paper products, comprised 39% of cost of goods sold in 2016. Base stock is acquired from multiple sources pursuant to purchase agreements which establish pricing and volume targets. These agreements mitigate exposure to significant pricing cycles common for pulp and commodity paper products. The next largest raw material component is chemicals.

 

On February 22, 2012, the Company entered into a long-term supply agreement with a supplier for the purchase of carbonless and thermal base stock for coating at the Company’s converting facilities. Under the terms of this agreement, the supplier will be the exclusive supplier of certain thermal and carbonless base stock used by the Company. The term of the agreement is 15 years. The agreement includes successive five-year renewal terms unless either party gives notice of non-renewal at least two years prior to the expiration of the then current term. Prices to be paid by the Company are subject to certain rebates and certain adjustments during the term of the agreement based on volume, changes to raw material pricing, freight prices and productivity gains. The supplier has agreed to be competitive in terms of price, delivery, quality and services. Purchases made from this supplier were approximately 92% of total 2016 base stock purchases. For further information see the disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 19 of Notes to Consolidated Financial Statements.

The Company uses many specialty raw materials which are designed and manufactured to work best with its products and manufacturing processes. The Company makes purchasing decisions based upon quality, service, value and long-term strategic importance. There are long-term agreements with key suppliers designed to ensure stable and consistent supply, to promote joint development and engineering of new raw materials and products, to enhance total value to customers and to protect mutual strategic interests.



Employees

 

As of February 26, 2017, the Company employed 1,402 persons, of whom 936 were covered by union contracts. Manufacturing employees at the Company’s manufacturing facilities in Appleton, Wisconsin, Roaring Spring, Pennsylvania and West Carrollton, Ohio are represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (“USW”). The Company has labor agreements in effect with represented employees at the Appleton plant through August 31, 2017; at the Roaring Spring mill through February 1, 2018; and at the West Carrollton plant until through March 31, 2018.    USW also represents employees at the distribution center in Appleton, Wisconsin.



The Company has enjoyed good labor-management relations over an extended period of time. There have been no work stoppages for more than 40 years. This long-term relationship has been critical in developing efficient manufacturing sites and a workforce that is highly committed to the Company’s success.



Intellectual Property

 

As part of the acquisition of the business from NCR in 1978, the Company obtained a 100-year license to use forms of the NCR PAPER* trademark in branding for carbonless products. The Company also licenses technology from other companies covering non-critical articles of manufacture, manufacturing processes or materials used in such processes. The Company does not believe that any single patent or patent application is material to the Company’s business or operations. The Company believes that the duration of existing patents is consistent with its business needs.

6


 

 

Environmental



General

 

The Company’s operations are subject to comprehensive and frequently changing federal, state and local environmental laws and regulations. These include laws and regulations governing emissions of air pollutants, discharges of wastewater and storm water, storage, treatment and disposal of materials and waste, remediation of soil, surface water and groundwater contamination and liability for damages to natural resources. In addition, the Company is also governed by laws and regulations relating to workplace safety and worker health which, among other things, regulate employee exposure to hazardous chemicals in the workplace.

 

Compliance with environmental laws and regulations is an important facet of the business. The Company expects to incur capital expenditures of approximately $0.2 million in 2017 and a total of approximately $0.9 million from 2018 through 2022 to maintain compliance with applicable federal, state, local and foreign environmental laws and regulations and to meet new regulatory requirements. The Company expects to continue to incur expenditures after 2022 to maintain compliance with applicable federal, state, local and foreign environmental laws and regulations and to meet new regulatory requirements.



The Company may be subject to strict and, under some circumstances, joint and several liability for the investigation and remediation of environmental contamination, including contamination caused by other parties, at properties that it owns or operates and at properties where the Company or its predecessors have arranged for the disposal of regulated materials. As a result, the Company may be involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. The total amount of any future costs relating to any future legal proceedings relating to environmental matters and other environmental liabilities may be material.

 

Other than what is discussed below, there are no known material liabilities with respect to environmental compliance issues.



Fox River Funding Agreement



On April 10, 2012, the United States District Court for the Eastern District of Wisconsin (“District Court”) granted Appvion’s motion for summary judgment and dismissed all claims against Appvion in the enforcement action for remediation of the Lower Fox River. The decision establishes that Appvion is no longer a potentially responsible party (“PRP”), no longer liable under the federal Comprehensive Environmental Response, Compensation, and Liability Act, (“CERCLA”), no longer considered a legal successor to NCR’s liabilities, and no longer required to comply with the 106 Order commanding remediation of the Lower Fox River.



On September 30, 2014, Appvion entered into a Funding Agreement with NCR Corporation (“NCR”), B.A.T. Industries, p.l.c. (“BAT”) and Windward Prospects Ltd. (“Windward”) relating to clean-up costs for the Lower Fox River and certain potential future sites. Under the Funding Agreement, the parties paid the following amounts on September 30, 2014 toward historical Fox River Costs (as defined in the Funding Agreement) incurred by NCR through September 1, 2014:  BAT ‑ $77.08 million; Windward ‑ $10 million; and Appvion ‑ $6 million.  In addition, BTI 2014 LLC, a wholly‑owned subsidiary of BAT (“BTI”), is responsible for funding 50% of the Fox River Costs incurred by NCR after September 1, 2014.  The parties also agreed:  (a) to vigorously pursue reasonable claims and viable claims against certain third parties and to deposit any recoveries therefrom into BTI; and (b) that any funds remaining in BTI after paying BAT and NCR for any unreimbursed funding of Fox River Costs would be used to fund 60% of any Future Sites Costs, as defined in the Funding Agreement.



Subject to the limitations described below, Appvion agreed to assume the following additional funding obligations under the Funding Agreement:



(a)

$4 million on February 1, 2015 toward Fox River Costs;

(b)

On September 1 of each year during the term of the Funding Agreement, the lesser of (1) an amount equal to 50% of the aggregate unreimbursed amount paid by BAT to the BTI for Fox River Costs (to the extent that Appvion has not previously paid such amount in any prior years) and (2) $7.5 million; and

(c)

On September 1 of each year during the term of the Funding Agreement, the lesser of (1) an amount equal to 50% of the aggregate amount paid by BAT to the BTI for Future Sites Costs (to the extent that Appvion has not previously paid such amount in prior years) and (2) $7.5 million.



Effective August 31, 2016, the parties agreed that the amount due from Appvion on September 1, 2016, as set forth in (c) above would be separated into two payments: (i) $3.0 million, which was paid on September 1, 2016; and (ii) $4.5 million, which was subsequently paid on October 3, 2016. 

7


 

 

Notwithstanding the foregoing, Appvion’s additional funding obligations are subject to the following limitations:

 

(a)

In no event will Appvion’s funding obligations for Fox River Costs exceed $25 million (the “Appvion Fox River Cap”);

(b)

In no event will Appvion’s funding obligations for Future Sites Costs exceed $25 million (the “Appvion Future Sites Cap”); and

(c)

In no event will Appvion’s funding obligations under the Funding Agreement exceed $7.5 million during any calendar year (except for the payment of $4 million on February 1, 2015 and the payment of $7.5 million on September 1, 2015). The $4 million payment due February 1, 2015, the $7.5 million payment due September 1, 2015, the $3 million payment due September 1, 2016, and the $4.5 million payment due October 3, 2016 have been timely paid.  These payments, together with the initial payment by Appvion of $6 million on September 30, 2014, fully satisfy Appvion’s funding obligations under the Funding Agreement.



Appvion bears sole responsibility for its funding obligations under the Funding Agreement. The Funding Agreement does not, however, modify, alter or amend the two indemnification agreements entered into in 2001 wherein Windward agreed to indemnify PDC and PDC agreed to indemnify Appvion for certain costs, expenses and liabilities relating to Fox River and Future Sites, including Appvion’s costs and expenses in negotiating and entering into the Funding Agreement and any future costs and expenses incurred by Appvion in pursuing recoveries.



The parties to the Funding Agreement agree that they have no recourse against Appvion for any further liability relating to the Fox River or Future Sites beyond the funding obligations set forth above up to the Appvion Fox River Cap and the Appvion Future Sites Cap, respectively. For further discussion, see Note 17, Commitments and Contingencies.



Item 1A.Risk Factors



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. The words “will,” “may,” “should,” “believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,” “plans,” “seeks” 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 the Company’s strategy, future operations, future financial position, estimated revenues, projected costs, prospects, plans and objectives of management and events or developments that it expects or anticipates will occur, are forward-looking statements. All forward-looking statements speak only as of the date on which they are made. They rely on a number of assumptions concerning future events and are subject to a number of risks and uncertainties, many of which are outside the Company’s control, which could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to, the factors listed below. Many of these factors are beyond the Company’s ability to control or predict. Given these uncertainties, undue reliance should not be placed on the forward-looking statements. The Company disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.



The Company may be subject to substantial costs and potential liabilities relating to environmental regulation and litigation.



The Company is subject to comprehensive and frequently changing laws and regulations enacted by various federal, state and local authorities concerning the impact of the environment on human health, the limitation and control of emissions and discharges into the air, ground and waters, the quality of ambient air and bodies of water and the handling, use and disposal of specified substances. Financial responsibility for the cleanup or other remediation of contaminated property or for natural resource damages can extend to previously-owned or used properties, waterways and properties owned by unrelated companies or individuals, as well as properties currently owned and used by the Company, regardless of whether the contamination is attributable entirely to prior owners. In addition, the Company makes capital expenditures and incurs operating expenses for environmental obligations and matters arising from its daily operations.



The Company may be named as a potentially responsible party, or PRP, in the future and the associated costs may be material. The Company expects environmental laws and regulations and the interpretation and enforcement of those laws and regulations to become increasingly stringent and to further limit emission and discharge levels and to increase the likelihood and cost of environmental cleanups and related activities. All of these factors are likely to increase the Company’s operating expenses, require continuing capital expenditures and adversely affect the operating flexibility of its manufacturing operations and may require indeterminable and significant additional expenditures in connection with such compliance.

8


 

 

The Company has a substantial amount of indebtedness outstanding and, as a result, it is operating as a highly leveraged company.

 

The Company’s total debt at December 31, 2016, was approximately $438.5 million. For a description of the components of the Company’s debt, as well as discussion of the June 28, 2013 and November 19, 2013 voluntary refinancing of a portion of its debt, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 9 of the Notes to Consolidated Financial Statements. This large amount of indebtedness could:

 

•         make it more difficult for the Company to satisfy its financial obligations with respect to the revolving credit facility, the first lien term loan, the second lien notes and other indebtedness;

 

•         require the Company to dedicate a substantial portion of cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, acquisitions, research and development or general corporate activities;



•         increase the Company’s vulnerability to general adverse economic, industry and competitive conditions;



•         place the Company at a competitive disadvantage compared to its competitors that have less leverage;



•         limit the Company’s ability to obtain additional financing for working capital, capital expenditures, acquisitions, research and development or general corporate purposes; and

 

•         limit the Company’s flexibility in planning for, or reacting to, changes in its businesses and the industries in which it operates.

 

Furthermore, although the Company’s ability to borrow money is restricted by the terms of its various debt agreements, it may be possible for the Company to incur even more debt and, if it does so, these risks could intensify.



The Company’s ability to service its debt is dependent on its future operating results and the Company cannot be sure that it will be able to meet its debt obligations as they come due.

 

The Company’s ability to meet its payment obligations, relating to its indebtedness, is subject to a variety of factors, including, for example, changes in:

 

•         demand for and selling prices of the Company’s products;

 

•         competition;

 

•         costs of raw materials and operating costs;

 

•         the rate of decline in sales of carbonless paper products;

 

•         environmental regulations; and

 

•         general economic conditions.



The Company expects to use cash flow from operations to pay its expenses and scheduled interest and principal payments due under its outstanding indebtedness. Its ability to make these payments depends on its future performance, which will be affected by financial, business, economic and other factors, many of which the Company cannot control. Consequently, its business may not generate sufficient cash flow from operations in the future and its anticipated growth in revenue and cash flow may not be realized, either or both of which could result in the Company being unable to repay or pay interest on its indebtedness or to fund other liquidity needs. If the Company does not have enough money to meet its debt obligations when due, it may be required to refinance all or part of its then-existing debt, sell assets or borrow more money. The Company cannot make any assurances that it will be able to accomplish any of these alternatives on terms acceptable to it, or at all. In addition, the terms of existing or future debt agreements, including the first lien term loan, the revolving credit facility and the second lien notes indenture, may restrict the Company from adopting any of these alternatives. The failure to generate sufficient cash flow or to achieve any of these alternatives could significantly adversely affect the value of its indebtedness and its ability to pay the amounts due. In addition, if the Company defaults in the payment of amounts due, it would give rise to an event of default under the note indentures and possible acceleration of amounts due under its outstanding indebtedness. In the event of any acceleration, there can be no assurance the Company will have enough cash to repay its outstanding indebtedness. On June 28, 2013, the Company completed a voluntary refinancing of a portion of its debt. The indebtedness incurred under the first lien term loan and revolving line of credit bear interest at variable rates, and therefore if interest rates increase, debt service requirements would increase. On July 30, 2013, Appvion fixed the underlying interest rate at 2.74%, on $100.0 million of this variable rate debt using an interest rate swap contract with a forward start date of September 15, 2014 and a maturity date of June 8, 2019.

9


 

 

Compliance with the covenants relating to the Company’s indebtedness may limit its operating flexibility.

 

Certain of the Company’s debt agreements contain provisions that require the Company to maintain specified financial ratios as such items are defined in the debt agreements. The Company’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results. However, it can be difficult to predict the ultimate impact of current economic trends on the Company’s future operating results. Given the uncertain global economies and other market uncertainties, there are various scenarios, including a reduction from forecasted operating results, under which the Company could violate its financial covenants. The Company’s failure to comply with such covenants or an assessment that it is likely to fail to comply with such covenants, could also lead the Company to seek amendments to or waivers of the financial covenants. No assurances can be provided that the Company would be able to obtain any amendments to or waivers of the covenants. In the event of non-compliance with debt covenants, if the lenders will not amend or waive the covenants, the debt would be due and the Company would need to seek alternative financing. The Company cannot provide assurance that it would be able to obtain alternative financing. If the Company were not able to secure alternative financing, this would have a material adverse impact on the Company.



The market for the primary product in the Company’s carbonless papers segment, carbonless paper, may decline more rapidly than anticipated.



The Company’s carbonless papers segment, of which the primary product is carbonless paper, accounted for 46% of net sales in 2014, 47% of net sales in 2015, and 41% of net sales in 2016. Total sales volume of carbonless paper products decreased approximately 10% from 2015 to 2016, and approximately 6% from 2014 to 2015. Total sales volume of carbonless paper products increased approximately 2% from 2013 to 2014. The Company believes the worldwide carbonless market is declining as users switch to alternative modes of technologies and communication. The Company expects that its total sales volume of carbonless paper products will continue to decline at rates that are consistent with the decline rate of the overall market. If the decline in the Company’s sales of carbonless paper products accelerates, or if it is unable to maintain the prices of its carbonless paper products or if it is unable to offset reductions in carbonless papers sales with increased sales of thermal papers or other products, then the Company’s business, financial condition and results of operations may be materially adversely affected.

 

The Company may be unable to develop and introduce new and enhanced products.

 

The Company’s success in developing new products will depend in large part on its ability to use its existing technical and manufacturing capabilities and knowledge in the development and introduction of new, value-added products targeted at new markets and customers. If the Company is unable to utilize its capabilities or, properly identify and address the evolving needs of targeted customers and markets, the Company’s ability to capture and develop new business opportunities will be limited. In addition, if the revenue and profits generated by new products are not sufficient to replace the anticipated decline in revenue and profits generated by carbonless products, then the Company’s business, financial condition and results of operations may be materially adversely affected.



The Company’s ability to compete effectively in the marketplace depends, in part, on its ability to continually improve productivity and reduce operating costs.

 

The Company must continually strive to improve the productivity and cost structure of its manufacturing operations and the efficiency of its support services in order to offer products that are priced competitively and deliver an attractive value proposition to its customers. The Company sets specific productivity and cost reduction goals each year for each of its production facilities and key staff functions. Accomplishing these goals is essential to its near-term competitiveness and long-term financial viability. If the Company fails to reach these goals, it may experience an erosion of its profit margins, a decline in net sales or both, which could negatively affect its ability to service its debt and invest in the future growth of its business segments.



The Company currently relies on a relatively small number of customers to generate a significant amount of its net sales from each of its various businesses.

 

The five largest customers in the carbonless papers segment collectively accounted for approximately 46% of carbonless net sales in 2016, 44% of carbonless papers net sales in 2015 and 41% of carbonless papers net sales in 2014. The five largest customers in the thermal papers segment collectively accounted for approximately 47% of thermal papers net sales in 2016, 44% of thermal papers net sales in 2015 and 41% of thermal papers net sales in 2014.



Many of the Company’s customers are under no obligation to purchase its products in the future. Furthermore, some of the Company’s customers have become insolvent or financially distressed in recent years. If the Company loses one or more of its significant customers (e.g., to a competitor or as a result of their being acquired by a customer of a competitor) or any of the Company’s significant customers experience financial difficulty, then its business, financial condition and results of operations may be materially adversely affected.

10


 

 

The Company currently relies on a small number of third parties to supply several of the key raw materials used to produce its products.

 

The Company’s business depends upon the availability of key raw materials, including base stock and certain chemicals. On February 22, 2012, the Company entered into a long-term supply agreement for the purchase of carbonless and thermal base stock for coating at the Company’s converting facilities. Under the terms of this agreement, the supplier will be the exclusive supplier of certain thermal and carbonless base stock used by the Company. The term of the agreement is 15 years. This agreement has the effect of reducing the number of raw material suppliers to the Company and increasing the Company’s dependence on key suppliers. Should this supplier of base stock fail to supply quantities ordered by the Company, the Company may not be able to procure alternate sources of carbonless and thermal base stock in quantities sufficient to meet customer requirements or at prices comparable to the terms under this supply agreement. In 2016, the Company purchased approximately $226 million of base stock from various external suppliers. Nearly 100% of the base stock purchased to produce carbonless paper and approximately 92% of the base stock purchased to produce thermal papers came from the long-term supply vendor.



For some of the key chemicals the Company uses in its products, it relies on one or two suppliers. If there is a disruption in the supply of raw materials, including chemicals, then the Company may be required to purchase these raw materials from alternative sources, which may result in a significant increase in its operating costs. Included in these increased costs would be development costs associated with qualifying new raw materials and suppliers. The Company may not be able to procure key chemicals or other raw materials from alternative suppliers in amounts sufficient to meet its needs or at prices consistent with historical prices.



The lack of available alternative suppliers could subject the Company to significant cost increases and manufacturing delays and its business, financial condition and results of operations may be materially adversely affected.



Global credit market uncertainty and economic weakness may adversely affect the Company’s customers and suppliers.



Global financial and credit markets continue to be extremely unstable and unpredictable. Worldwide economic conditions have been weak and may deteriorate further. The instability of the markets and weakness of the global economy could affect the demand for the Company’s customers’ products, the amount, timing and stability of their orders from the Company, the financial strength of its customers and suppliers, and/or the Company’s suppliers’ and customers’ ability to fulfill their obligations to the Company. These factors could materially adversely affect the Company’s business, financial condition and results of operations.



The Company has competitors in its various markets and it may not be able to maintain prices and margins for its products.

 

The Company faces strong competition in all of its business segments. Its competitors vary in size and the breadth of their product offerings and some of its competitors have significantly greater financial, technical and marketing resources than the Company. Regardless of the continuing quality of the Company’s primary products, the Company may be unable to maintain its prices or margins due to:

 

•         declining overall carbonless market size;

 

•         accelerating decline in carbonless sheet sales;



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



•         increasing manufacturing and raw material costs;

 

•         increasing competition in international markets or from domestic or foreign producers; or

 

•         declining general economic conditions.



In each of its business segments, the Company competes based on a number of factors, including price, product availability, quality and customer service. Additionally, the Company competes with domestic producers and imports from Europe and Asia. The Company’s inability to compete effectively or to maintain its prices and margins could have a material adverse effect on its earnings and cash flow.



Volatility of raw materials costs may adversely impact the Company’s margins for its products.



In the past, the Company has experienced volatility in raw materials costs, which comprise a significant portion of the Company’s operating costs. The Company endeavors to recover cost increases through continuous improvements in its business operations and product formulations and through selected price increases. However, the effects of rising raw materials costs on margins are difficult to match in precise amount or timing with offsetting price increases or cost reduction activities. To the extent the Company is unable to offset raw materials cost inflation, margins for products may be adversely impacted.

11


 

 

PDC and its eligible subsidiaries may fail to remain qualified to be taxed as subchapter S corporations and the ESOP may not continue to be exempt from U.S. federal or certain state and local income taxes.

 

PDC has made an election to be treated as a subchapter S corporation for U.S. federal and, where recognized, state and local income tax purposes and an election to treat its eligible subsidiaries as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state and local income tax purposes. PDC believes that it qualifies as a subchapter S corporation and that Appvion and other eligible subsidiaries are qualified subchapter S subsidiaries. Appvion’s Canadian subsidiary is subject to Canadian tax law and is not eligible for this treatment.



Section 1362 of the Internal Revenue Code of 1986, as amended, or the Code, provides that a corporation that meets certain requirements may elect to be taxed as a subchapter S corporation. Section 1361 of the Code provides that a corporation that, among other requirements, has all of its stock owned by a subchapter S corporation or a qualified subchapter S subsidiary may elect to be classified as a qualified subchapter S subsidiary. A qualified subchapter S subsidiary is disregarded as a separate entity for federal and most state and local income tax purposes. With limited exceptions, a subchapter S corporation does not pay any income tax. Rather, the income of an S corporation is allocated to its shareholders. An ESOP is exempt from income tax pursuant to Section 501 of the Code and is not taxed on its allocable share of a subchapter S corporation’s income. However, a plan is not treated as an ESOP unless it meets the requirements of Section 4975(e)(7) of the Code.



PDC’s continuing status as a subchapter S corporation and its eligible subsidiaries as qualified subchapter S subsidiaries for U.S. federal and state income tax purposes will depend upon its, and their ability to continue to meet the eligibility requirements.



It is possible that the Internal Revenue Service, or IRS, could take the position on audit that PDC is not eligible to be taxed as a subchapter S corporation and, as a consequence, terminate its subchapter S election. Additionally, the applicable law and regulations may change in a way that results in PDC being taxed as a corporation other than as a subchapter S corporation. Furthermore, the current law that exempts the ESOP trust from taxation on its allocable share of a subchapter S corporation’s income may change.



PDC could realize significant tax savings during profitable years due to the subchapter S corporation status. However, if, for any reason, it lost its subchapter S corporation status, or any of its qualified subchapter S subsidiaries loses its qualified subchapter S subsidiary status, it would be required to pay U.S. federal and certain state and local income taxes, thereby reducing the amount of cash available to repay debt or reinvest in the Company’s operations, which could have a material adverse effect on its earnings and cash flow. Similarly, if the plan does not qualify as an ESOP and becomes subject to tax on its share of the subchapter S corporation’s income, the Company would have to distribute cash to the ESOP trust to enable it to pay the resulting taxes, again reducing the amount of cash available to repay debt or to be reinvested in its operations.



The Company’s underfunded pension plans require future pension contributions which could limit flexibility in managing the Company.



The total projected benefit obligation of the Company’s defined benefit pension plans exceeded the fair value of the plan assets by $112.6 million at December 31, 2016. The Company was not required to make contributions to the pension plan in 2016 or 2015.  The Company is forecasting a contribution of $4.5 million in 2017. Among the key assumptions inherent in the actuarially calculated pension plan obligation and pension plan expense are the discount rate and the expected rate of return on plan assets. If interest rates and actual rates of return on invested plan assets were to decrease significantly, the pension plan obligation could increase materially. The size of future required pension contributions could result in the Company dedicating a substantial portion of its cash flow from operations to making the contributions, which could materially adversely affect its business, financial condition and results of operations.



Future legislation or regulations intended to reform pension and other employee benefit plans could adversely affect the Company’s ability to repay its debt, reinvest in its operations or grow its business through new product development or through acquisitions.

 

From time to time in recent years, legislators and agencies of the executive branch have formulated or suggested various legislative proposals that would affect employee benefit plans. If legislation is adopted that requires the Company to lift restrictions on sales of PDC common stock held in participants’ KSOP accounts, or that limits the amount of PDC common stock that may be held by the KSOP, then the Company may be required to fund the repurchase of substantial amounts of PDC common stock or take some other action restrictive to its finances. These repurchases or other restrictive actions could reduce the amount of cash available to repay debt, reinvest in its operations or grow its business through new product development or through acquisitions. In addition, these repurchases could violate covenants under the Company’s outstanding debt agreements, which could lead to a default under those agreements.

12


 

 

PDC’s legal obligations to repurchase common stock from employees and former employees may lead to a default under the agreements governing the Company’s indebtedness or may constrain the Company's ability to make necessary reinvestments in its operations or invest in new business opportunities.



It may be necessary for Appvion to make significant distributions to PDC in order for PDC to satisfy its share repurchase obligations under the terms of the KSOP to current and former employees who are participants in the ESOP. PDC incurs obligations to ESOP participants, when they retire or otherwise terminate employment, to repurchase shares of PDC. The ESOP allows PDC to satisfy its share repurchase obligations by installment payments and PDC currently satisfies its share repurchase obligations to former participants by making five equal annual installment payments. The ESOP also has obligations to permit certain participants to diversify the investment of a portion of their ESOP account, which would otherwise be invested in shares of PDC stock. However, the agreements governing the Company’s indebtedness contain limitations on its ability to satisfy the repurchase obligations. The amount of PDC’s repurchase obligations may at any time exceed these limitations and Appvion may elect, or be forced, to help PDC meet its obligations. Further, PDC, as a guarantor of the Company’s indebtedness, may also be limited to some extent from making payments to the ESOP or its beneficiaries by the terms of its and the Company’s indebtedness.



As a result of PDC’s legally imposed repurchase obligations, Appvion and/or PDC may be forced to violate the distribution and/or payment limitations contained in the agreements relating to its and the Company’s indebtedness, which may ultimately result in defaults under the agreements and the notes. Defaults on any of its indebtedness could result in acceleration of its indebtedness and cause the Company to dispose of its assets or declare bankruptcy and, as a result, it may not have sufficient funds to satisfy its obligations under the notes.



Moreover, PDC's legally imposed repurchase obligations are expected to consume a significant portion of the Company's cash flows from operations. After satisfying repurchase obligations and required debt repayments, the Company's remaining cash flow may be insufficient to make required reinvestments in its existing business or to invest in potentially desirable new business opportunities.



Item 1B.Unresolved Staff Comments

 

None.



Item 2.Properties 



The Company owns or leases the facilities reflected in the table below. The Company believes that its plants and facilities have been well maintained, are in good condition, are suitable for their respective operations and provide sufficient capacity to meet production requirements. 





 

 

 



 

 

 



 

Approximate

 

Location

Description

Square Footage

Status

Appleton, Wisconsin (Wisconsin Ave.)

Headquarters Offices and Manufacturing Plant 

1,044,000

Owned

Roaring Spring, Pennsylvania

Pulp and Paper Mill

636,000

Owned

West Carrollton, Ohio

Manufacturing Plant

754,000

Owned

Appleton, Wisconsin (East Warehouse Road)

Warehouse

273,000

Lease expires 1/31/21

Appleton, Wisconsin (Kensington Drive)

Distribution Center

357,000

Lease expires 12/31/20

Roaring Spring, Pennsylvania

Warehouse

89,000

Month to Month Lease



The Company’s business is primarily operated in Appleton, Wisconsin; West Carrollton, Ohio; and Roaring Spring, Pennsylvania.

 

During the years 2012 through 2016, the Company invested approximately $87 million in capital improvements, of which, approximately $76 million was spent at its manufacturing facilities. The primary goal of this capital spending was to improve manufacturing efficiencies, product quality and cycle time. Of the $76 million spent on manufacturing facilities, approximately $9 million was spent to comply with applicable environmental regulations.

13


 

 

Item 3.Legal Proceedings



From time to time the Company may be subject to various demands, claims, suits or other legal or regulatory proceedings arising in the ordinary course of business. The Company maintains a comprehensive insurance program to protect against such matters, though not all such exposures are, or can be, addressed by insurance. Estimated costs are recorded for such demands, claims, suits or proceedings of this nature when reasonably determinable. The Company has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While the Company will vigorously defend itself and expects to prevail in any similar cases that may be brought against it in the future, there can be no assurance that it will be successful.

The Company does not believe that any pending or threatened demands, claims, suits or other legal or regulatory proceedings will have, individually or in the aggregate, a materially adverse effect on its business, financial condition and results of operations or cash flows.



Item 4.Mine Safety Disclosures



Not applicable

14


 

 

PART II



Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 

 

There is no established trading market for the common stock of PDC. All of the outstanding shares of PDC are owned of record by the KSOP, in which there are approximately 1,690 active participants who were invested in the Company’s Stock Fund as of December 31, 2016.

 

No dividends have been declared on the common stock of PDC in the last two years, nor does PDC currently anticipate it will be paying dividends in the foreseeable future. PDC is and anticipates that it will continue to be restricted from declaring dividends and repurchasing common stock pursuant to provisions contained in the Company’s indebtedness agreements. For further information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Outstanding Indebtedness” and Note 9 of Notes to Consolidated Financial Statements.

 

During the year ended December 31, 2016, PDC sold approximately 145,102 shares of its common stock to the ESOP. The ESOP acquired the shares with pre-tax payroll deferrals, rollovers and employee loan payments made to the ESOP during the period from January 2, 2016 through December 31, 2016, by employees of the Company who are participants in the KSOP, as well as interest received by the trust. The aggregate sales price was $1.6 million. There were no underwriters used and no underwriting discounts or commissions paid. The offer and sale of the shares was made pursuant to Rule 701 under the Securities Act of 1933, as amended. The Company’s noncash matching contributions over this same period resulted in an additional 138,018 shares of PDC redeemable common stock being issued and an aggregate sales price of $1.6 million. As a result of hardship withdrawals, diversification elections, employee terminations and employee loan requests, 780,600 shares of PDC redeemable common stock were repurchased during 2016 at an aggregate price of $10.2 million.

15


 

 

Item 6.Selected Financial Data



The following tables set forth selected consolidated financial data for Paperweight Development Corp. and Subsidiaries (“PDC”) as of and for each of the five years in the five-year period ended December 31, 2016. The consolidated financial information shown below includes the Encapsys Business (through its sale in August 2015) as discontinued operations. Refer to Note 3 of Notes to Consolidated Financial Statements for further information on the Company’s discontinued operations. The selected consolidated statement of comprehensive income (loss) information for the years ended December 31, 2016, January 2, 2016, and January 3, 2015 and the selected consolidated balance sheet information as of December 31, 2016 and January 2, 2016, was derived from audited consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data." The remaining historical financial information presented below was derived from previously-reported consolidated financial statements, not included in this report.



The historical consolidated financial information presented below is not necessarily indicative of the financial position or results of operations for any future period. The financial and other operating data set forth below should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements and related notes included elsewhere in this report.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

(in thousands)

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

690,364 

 

$

700,046 

 

$

764,698 

 

$

772,693 

 

$

818,544 

Cost of sales (1)

 

 

566,258 

 

 

576,441 

 

 

657,331 

 

 

552,562 

 

 

744,341 

Gross profit

 

 

124,106 

 

 

123,605 

 

 

107,367 

 

 

220,131 

 

 

74,203 

Selling, general and administrative expenses (1)

 

 

100,578 

 

 

113,077 

 

 

140,257 

 

 

100,888 

 

 

146,869 

Restructuring and other charges (2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

28,589 

Environmental expense insurance recovery

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,188)

Fox River Funding Agreement (3)

 

 

 —

 

 

 —

 

 

23,975 

 

 

 —

 

 

 —

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

23,528 

 

 

10,528 

 

 

(56,865)

 

 

119,243 

 

 

(99,067)

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

40,638 

 

 

45,986 

 

 

49,087 

 

 

55,541 

 

 

59,430 

Debt modification/extinguishment expense

 

 

 —

 

 

3,605 

 

 

 —

 

 

59,681 

 

 

 —

Other expense (income)

 

 

1,525 

 

 

2,617 

 

 

2,730 

 

 

82 

 

 

(47)

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations before income taxes

 

 

(18,635)

 

 

(41,680)

 

 

(108,682)

 

 

3,939 

 

 

(158,450)

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

411 

 

 

245 

 

 

269 

 

 

193 

 

 

587 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

 

(19,046)

 

 

(41,925)

 

 

(108,951)

 

 

3,746 

 

 

(159,037)

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of income taxes

 

 

 —

 

 

11,750 

 

 

16,179 

 

 

13,529 

 

 

10,586 

Gain on sale, net of income taxes

 

 

 —

 

 

188,749 

 

 

 —

 

 

 —

 

 

 —

Income from discontinued operations, net of income taxes

 

 

 —

 

 

200,499 

 

 

16,179 

 

 

13,529 

 

 

10,586 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(19,046)

 

$

158,574 

 

$

(92,772)

 

$

17,275 

 

$

(148,451)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Depreciation and amortization (4)

   

$

26,792 

 

$

26,823 

 

$

27,708 

   

$

28,225 

 

$

97,480 

Capital expenditures (4)

   

 

14,755 

 

 

14,401 

 

 

13,726 

   

 

23,809 

 

 

14,920 

Balance Sheet Data (at end of period):

   

 

 

 

 

 

 

 

 

   

 

   

 

 

   

Working capital

   

$

39,952 

 

$

30,839 

 

$

29,193 

 

$

65,209 

 

$

64,823 

Total assets

   

 

387,169 

 

   

398,430 

 

   

437,583 

 

   

533,944 

 

   

553,354 

Total debt

   

 

439,243 

 

   

416,180 

 

   

581,251 

   

   

583,709 

 

   

508,029 



16


 

 

(1)

During fourth quarter 2012, the Company adopted mark-to-market accounting for its pension and other postretirement benefit plans. The net mark-to-market loss (gain), excluding discontinued operations, was recorded as follows (in thousands).



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Sales

 

$

1,466 

 

$

2,404 

 

$

44,557 

 

$

(44,920)

 

$

22,248 

Selling, general and administrative expenses

 

 

549 

 

 

1,054 

 

 

18,630 

 

 

(17,748)

 

 

9,846 



 

$

2,015 

 

$

3,458 

 

$

63,187 

 

$

(62,668)

 

$

32,094 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(2)During 2012, the Company ceased papermaking operations at its West Carrollton, Ohio facility and moved its carbonless coating to the Company’s converting plant in Appleton, Wisconsin, resulting in the reduction of 314 jobs at the West Carrollton facility and the addition of 68 jobs at the Appleton facility. Related employee termination benefits and equipment decommissioning and other expenses are included in the 2012 restructuring charge.

 

(3)See Note 17, Commitments and Contingencies, of Notes to Consolidated Financial Statements for further discussion.



(4)   Amounts exclude information related to discontinued operations.

17


 

 

Item 7.            Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Unless stated to the contrary or the context requires otherwise, all references in this report to the Company refer to Paperweight Development Corp. (“PDC” or “Paperweight”) and its 100%-owned subsidiaries. It includes Appvion, Inc. and its 100%-owned subsidiaries (collectively “Appvion”).





 

 

 

 

 



 

 

 

 

 

Overview



This discussion summarizes significant factors affecting the consolidated operating results, financial position and liquidity of PDC as of and for the three-year period ended December 31, 2016. This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes.



Amendments to the Credit Agreement



On June 24, 2016, Appvion, PDC, Jefferies Finance LLC, as administrative agent, Fifth Third Bank, as revolver agent, swing line lender and L/C issuer, and the lenders party to the Credit Agreement (the parties other than Appvion and PDC, the “Lending Parties”) entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement dated June 28, 2013. The Fourth Amendment amends the definition of Consolidated EBITDA to provide for an additional add-back to Consolidated Net Income for cash, fees and/or expenses paid or incurred in connection with certain financial and advisory services provided to the Company and Appvion in an aggregate amount not to exceed $6.5 million.



On January 16, 2017, Appvion, PDC, and the Lending Parties entered into a Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement dated June 28, 2013. The Fifth Amendment, among other things, (i) fixes the applicable interest rate on the Company’s term and revolving loans at 5.5% per annum for base rate loans and 6.5% per annum for Eurodollar loans, regardless of the Company’s then current consolidated leverage ratio, (ii) increases the maximum consolidated first lien leverage ratios applicable to the Company pursuant to the maximum consolidated leverage covenant to require maintenance of a consolidated first lien leverage ratio, during the first fiscal quarter of 2017, of not more than 3.60 to 1.00, during the second fiscal quarter of 2017, of not more than 3.50 to 1.00, during the period beginning on the third fiscal quarter of 2017 though the second fiscal quarter of 2018, of not more than 3.25 to 1.00 and from and after July 1, 2018, of not more than 3.00 to 1.00 and (iii) requires the payment of a 1.5% premium on any prepayments, payments in connection with a change in control or a refinancing or payments at maturity of either term or revolving loans.



On February 16, 2017, Appvion, PDC, and the Lending Parties entered into a Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement dated June 28, 2013. The Sixth Amendment amends the Credit Agreement to provide for the availability of additional term loans in an aggregate principal amount not to exceed $20.0 million, on the same terms and subject to the same conditions as the term loans already existing under the Credit Agreement.  Proceeds from the issuance of these term loans were reduced by $0.8 million for original issue discount and the net proceeds were used to pay down the revolving line of credit.



2016 Financial Highlights



Net sales totaled $690.4 million, a $9.6 million, or 1.4%, decrease from 2015 net sales. Shipment volumes were approximately 2% lower than in 2015. Thermal papers net sales were up 8.7% with shipment volumes approximately 6%  higher than the prior year. Current year carbonless papers net sales were lower than 2015 net sales by 12.9% and shipment volumes were approximately 10% lower.



Current year cost of sales of $566.3 million was $10.1 million, or 1.8%, lower than 2015 cost of sales. Current year cost of sales includes a mark-to-market loss of $1.5 million related to the Company’s retiree benefit plans. This compares to a retiree plan mark-to-market loss of $2.4 million recorded in cost of sales at year-end 2015.  



SG&A spending of $100.6 million was $12.5 million, or 11.1%, lower than 2015 spending. During 2016, the Company recorded a mark-to-market loss in SG&A, related to its retiree benefit plans, of $0.5 million. This compares to a mark-to-market loss of $1.1 million recorded in SG&A during 2015. Current year compensation and distribution expenses were lower than in 2015.  



On October 3, 2016, the Company paid the final payment toward the Fox River Funding Agreement, satisfying its obligations under the Funding Agreement.  For further discussion, see Note 17, Commitments and Contingencies.



During 2016, Appvion successfully completed compliance with the Boiler MACT regulations issued by the EPA.  The project was completed safely, on time, and under budget.

18


 

 

Comparison 2016 and 2015







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

   

For the Year Ended

   

   

 

   

   

   

December 31,

   

   

January 2,

   

   

Increase

   

   

   

2016

   

   

2016

   

   

(Decrease)

   

   

   

(dollars in millions)

   

   

 

   

   

   

 

   

   

 

   

   

 

   

Net sales

   

$

690.4 

   

   

$

700.0 

   

   

   

(1.4)

%

Cost of sales

   

   

566.3 

   

   

   

576.4 

   

   

   

(1.8)

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Gross profit

   

   

124.1 

   

   

   

123.6 

   

   

   

0.4 

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Selling, general and administrative expenses

   

   

100.6 

   

   

   

113.1 

   

   

   

(11.1)

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Operating income

   

   

23.5 

   

   

   

10.5 

   

   

   

123.8 

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Interest expense, net

   

   

40.6 

   

   

   

46.0 

   

   

   

(11.7)

%

Debt modification expense

 

 

 —

 

 

 

3.6 

 

 

 

(100.0)

%

Other non-operating expense, net

   

   

1.5 

 

   

   

2.6 

 

   

 

(42.3)

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Loss from continuing operations before income taxes

   

   

(18.6)

 

   

   

(41.7)

 

   

 

55.4 

%

Provision for income taxes

   

   

0.4 

 

   

   

0.2 

   

   

   

(100.0)

%



 

 

 

 

 

 

 

 

   

          

 

 

Loss from continuing operations

   

 

(19.0)

 

   

 

(41.9)

 

 

 

54.7 

%



 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 —

 

 

 

11.8 

 

 

 

(100.0)

%

Gain on sale

 

 

 —

 

 

 

188.7 

 

 

 

(100.0)

%

Income from discontinued operations

 

 

 —

 

 

 

200.5 

 

 

 

(100.0)

%

Net income (loss)

 

$

(19.0)

 

 

$

158.6 

 

 

 

(112.0)

%



   

   

   

   

   

   

   

   

   

   

   

   

Comparison as a percentage of net sales

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

   

   

82.0 

%

   

   

82.3 

%

   

   

(0.3)

%

Gross margin

   

   

18.0 

%

   

   

17.7 

%

   

   

0.3 

%

Selling, general and administrative expenses

   

   

14.6 

%

   

   

16.2 

%

   

   

(1.6)

%

Operating margin

   

   

3.4 

%

   

   

1.5 

%

   

   

1.9 

%

Loss from continuing operations before income taxes

   

   

(2.7)

%

   

   

(6.0)

%

   

   

3.3 

%

Loss from continuing operations 

   

   

(2.8)

%

   

   

(6.0)

%

   

   

3.2 

%



 

 

 

 

 

 

 

 

 

 

 

 

Operating income of $23.5 million was recorded in 2016 compared to operating income of $10.5 million in 2015, an improvement of $13.0 million. The year-on-year operating income variance was the result of the following (dollars in millions):







 

 



 

 

Unfavorable shipment volumes

$

(13.4)

Favorable price and mix

 

0.7 

Favorable manufacturing costs

 

15.4 

Lower SG&A and other

 

14.7 

Consulting fees

 

(5.8)

Retiree benefit plan mark-to-market loss

 

1.4 



$

13.0 



 

 



19


 

 

Current year interest expense was $5.4 million lower than in 2015 as the Company used proceeds from the third quarter 2015 sale of the Encapsys Business to repay $170.0 million of first lien term debt. Prior year results also include debt modification expense of $3.6 million related to the write-off of previously-deferred debt issuance costs in conjunction with this repayment of first lien term debt and the execution of the Third Amendment to the Credit.



In 2016, the Company recorded a loss from continuing operations of $19.0 million compared to a loss from continuing operations of $41.9 million in the previous year.  Discontinued operations recorded income of $11.8 million through August 2, 2015, at which time the Encapsys Business was sold, resulting in a $188.7 million gain. The Company recorded 2016 net loss of $19.0 million compared to net income of $158.6 million in 2015



Reportable Segments



The Company creates product solutions for customers and end users through its development and use of coating formulations and applications as well as security technologies. The Company has two reportable segments: thermal papers and carbonless papers.



Thermal Papers



The thermal papers market is growing with new applications being developed to use thermal technology. Based on its assessment of the period 2011 through 2016,  the Company believes North American thermal markets expanded at a 2% compound average growth rate, with annual rates ranging from increases of 1% to 3%. The Company believes demand for thermal paper will continue to grow in North America and around the world. Sales of thermal papers accounted for approximately 59% of total company net sales in 2016.



The Company competes with domestic producers and imports from Europe and Asia based on a number of factors, including price, product availability, quality, and customer service. 



Carbonless Papers



The carbonless papers segment includes carbonless, security and other specialty paper products. The Company believes the North American market for carbonless paper products has been in decline since 1994 as a result of greater use of competing technologies such as digital laser, inkjet and thermal printers and electronic communications. The Company believes the North American carbonless paper market declined by approximately 7% to 10% annually from 2011 through 2016. The decline is expected to continue at historical rates over the next several years. The Company believes the worldwide carbonless market is also in decline, with demand declining at approximately 3% to 6% per year. The carbonless papers segment accounted for approximately 41% of total company net sales in 2016.



The carbonless papers market is highly competitive. The Company competes based on a number of factors, including price, product availability, quality, and customer service. In addition to declining North American and foreign carbonless markets, the carbonless business continues to experience competitive pricing from foreign and domestic producers. Other domestic carbonless producers have continued their competitive pricing strategies in efforts to maintain or gain share. In addition, foreign competitors continue to sell into the North American carbonless market with low-price strategies. As a result of this increased pricing competition, the Company has continued to experience pressure on selling prices for carbonless products. Nevertheless, market conditions permit the Company to implement price increases from time to time to offset the increasing costs of raw materials.



Business Segment Discussion – 2016



Thermal Papers

 

Thermal papers 2016 net sales of $405.4 million were $32.5 million, or 8.7%, higher than 2015 while shipment volumes of thermal papers increased nearly 6% compared to the prior year. Shipment volumes of tag, label and entertainment (“TLE”) products grew almost 11% year-on-year and shipments of receipt paper were approximately the same as the prior year.  Net sales also benefited from favorable price and product mix.



The thermal papers segment recorded 2016 operating income of  $14.3 million compared to a  2015 operating loss of $5.8 million, an increase of $20.1 million.  Current year operating earnings were $5.2 million higher due to increased shipment volumes.  In addition, pricing and product mix were $10.0 million favorable, partially offset by unfavorable foreign currency of $1.9 million.  Continued improvements in manufacturing operations and cost savings initiatives added  $4.7 million. Thermal papers also had a favorable mark-to-market variance of $0.2 million, and unfavorable variance of $2.2 million for consulting fees, compared to 2015. In addition, distribution costs were lower by $1.4 million and other SG&A spending was $2.7 million lower than in 2015.











20


 

 

Carbonless Papers

 

Carbonless papers 2016 net sales totaled $284.9 million, a decrease of $42.3 million, or 12.9%, from the prior year. Current year shipment volumes were approximately 10% lower than 2015 shipments. Despite volume declines in this segment, specialty papers volume grew more than 13% from the prior year.



The carbonless papers segment recorded current year operating income of $17.2 million compared to 2015 operating income of $26.7 million, a decrease of $9.5 million. Current year earnings were $18.6 million lower compared to the prior year due to reduced shipment volumes, $6.8 million unfavorable due to pricing and mix, and $0.6 million due to unfavorable foreign currency exchange.  Operating results were positively impacted by improved manufacturing operations of $10.8 million and $4.7 million of lower SG&A spending. Carbonless papers also had a favorable mark-to-market variance of $1.0 million and distribution costs of $2.0, and unfavorable variance of $2.0 million for consulting fees, compared to 2015.



Unallocated Corporate Charges

 

As of year-end 2016, unallocated corporate charges totaled $8.1 million compared to $10.4 million last year.  Corporate unallocated charges included $1.6 million charge for consulting fees.



21


 

 

Comparison 2015 and 2014



 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

   

For the Year Ended

   

   

 

   

   

   

January 2,

   

   

January 3,

   

   

Increase

   

   

   

2016

   

   

2015

   

   

(Decrease)

   

   

   

(dollars in millions)

   

   

 

   

   

   

 

   

   

 

   

   

 

   

Net sales

   

$

700.0 

   

   

$

764.7 

   

   

   

(8.5)

%

Cost of sales

   

   

576.4 

   

   

   

657.3 

   

   

   

(12.3)

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Gross profit

   

   

123.6 

   

   

   

107.4 

   

   

   

15.1 

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Selling, general and administrative expenses

   

   

113.1 

   

   

   

140.3 

   

   

   

(19.4)

%

Fox River Funding Agreement

 

 

 —

 

 

 

24.0 

 

 

 

(100.0)

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Operating income (loss)

   

   

10.5 

   

   

   

(56.9)

   

   

   

(118.5)

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Interest expense, net

   

   

46.0 

   

   

   

49.1 

   

   

   

(6.3)

%

Debt modification expense

 

 

3.6 

 

 

 

 —

 

 

 

NM

 

Other non-operating expense, net

   

   

2.6 

 

   

   

2.7 

 

   

 

(3.7)

%

   

   

   

   

   

   

   

   

   

   

   

   

   

Loss from continuing operations before income taxes

   

   

(41.7)

 

   

   

(108.7)

 

   

 

61.6 

%

Provision for income taxes

   

   

0.2 

 

   

   

0.3 

   

   

   

(33.3)

%



 

 

 

 

 

 

 

 

   

          

 

 

Loss from continuing operations

   

 

(41.9)

 

   

 

(109.0)

 

 

 

61.6 

%



 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

11.8 

 

 

 

16.2 

 

 

 

(27.2)

%

Gain on sale

 

 

188.7 

 

 

 

 —

 

 

 

NM

 

Income from discontinued operations

 

 

200.5 

 

 

 

16.2 

 

 

 

1,137.7 

%

Net income (loss)

 

$

158.6 

 

 

$

(92.8)

 

 

 

(270.9)

%



   

   

   

   

   

   

   

   

   

   

   

   

Comparison as a percentage of net sales

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

   

   

82.3 

%

   

   

86.0 

%

   

   

(3.6)

%

Gross margin

   

   

17.7 

%

   

   

14.0 

%

   

   

3.6 

%

Selling, general and administrative expenses

   

   

16.2 

%

   

   

18.3 

%

   

   

(2.2)

%

Operating margin

   

   

1.5 

%

   

   

(7.4)

%

   

   

8.9 

%

Loss from continuing operations before income taxes

   

   

(6.0)

%

   

   

(14.2)

%

   

   

8.3 

%

Loss from continuing operations 

   

   

(6.0)

%

   

   

(14.3)

%

   

   

8.3 

%



 

 

 

 

 

 

 

 

 

 

 

 

Net sales for 2015 were $700.0 million, a $64.7 million, or 8.5%, decrease from 2014 net sales. Shipment volumes were approximately 4% lower than in 2014.



Operating income of $10.5 million was recorded in 2015 compared to an operating loss of $56.9 million in 2014. During 2015, improvements in manufacturing operations, as well as cost savings initiatives, reduced manufacturing costs by $30.1 million compared to 2014. This reduction was partially offset by $4.5 million of additional manufacturing costs related primarily to the downtime associated with recovery boiler maintenance at the Roaring Spring mill. In addition, a mark-to-market loss of $3.5 million, related to the Company’s retiree benefit plans, was recorded in 2015 which compared to the retiree plan mark-to-market loss of $63.2 million recorded in 2014. Of this $59.7 million mark-to-market difference, $42.2 million was in cost of sales and $17.5 million was in SG&A. Unfavorable price and product mix, all of  which was incurred within the thermal papers segment due to foreign competition driving down the price of receipt paper, reduced operating results by $35.7 million. Lower shipment volumes negatively impacted current year financial results by $14.3 million. SG&A spending was $27.2 million lower than 2014 due to reductions in compensation and distribution expenses. In addition, 2014 legal expenses were higher due to Fox River settlement matters and anti-dumping and countervailing duties claims related to imports of certain lightweight thermal paper. In 2014, the Company also recorded a $24.0 million charge for the Fox River Funding Agreement.

22


 

 

Fiscal year 2015 interest expense was $3.1 million lower than in 2014 as the Company used proceeds from the third quarter 2015 sale of the Encapsys Business to repay $170.0 million of first lien term debt. The 2015 results also include debt modification expense of $3.6 million related to the write-off of previously-deferred debt issuance costs in conjunction with this repayment of first lien term debt and the execution of the Third Amendment to the Credit.



In 2015, the Company recorded a loss from continuing of operations of $41.9 million compared to a loss from continuing operations of $109.0 million in the previous year.  Discontinued operations recorded income of $11.8 million through August 2, 2015, at which time the Encapsys Business was sold, resulting in a $188.7 million gain. In 2014, discontinued operations recorded income of $16.2 million. The Company recorded 2015 net income of $158.6 million compared to a net loss of $92.8 million in 2014. 



Business Segment Discussion – 2015

 

During 2015, net sales from continuing operations were $700.0 million, $64.7 million lower than 2014 net sales. The 2015 operating income of the papers business was $20.9 million compared to an operating loss of $24.0 million recorded in 2014. The year-on-year operating income variance was the result of the following (dollars in millions):















 

 



 

 

Lower retiree benefit plan mark-to-market loss

$

58.7 

Favorable manufacturing costs

 

30.1 

Lower SG&A and other

 

11.2 

Extended maintenance downtime at the Roaring Spring Mill

 

(4.5)

Lower shipment volumes

 

(14.3)

Unfavorable price and mix

 

(36.3)



$

44.9 



 

 



Thermal Papers

 

Thermal papers 2015 net sales of $372.8 million were $42.5 million, or 10.2%, lower than 2014 net sales of $415.3 million. During 2015, shipment volumes of thermal papers decreased approximately 2% compared to the prior year. Shipment volumes of tag, label and entertainment (“TLE”) products were flat year-on-year while shipments of receipt paper were approximately 4% lower than in 2014. This segment recorded a 2015 operating loss of $5.8 million compared to a 2014 operating loss of $11.4 million. The 2015 results included a $0.9 million mark-to-market loss related to the Company’s retiree benefit plans whereas the 2014 operating loss included a mark-to-market loss of $24.1 million. Excluding the impact of mark-to-market losses, 2015 operating results decreased by $17.6 million from the prior year. The 2015 operating results were negatively impacted by unfavorable pricing and product mix of $36.8 million, largely due to foreign competition. Unfavorable pricing and product mix was partially offset by improved manufacturing operations and cost savings initiatives of $15.7 million. In addition, SG&A spending was $7.7 million lower than in 2014 because 2014 expenses included higher legal fees associated with anti-dumping and countervailing duties claims.



Carbonless Papers

 

Carbonless papers 2015 net sales totaled $327.2 million, a decrease of $22.2 million, or 6.4%, from the prior year. The 2015 shipment volumes were approximately 6% lower than 2014 shipments. This segment recorded current year operating income of $26.7 million compared to a 2014 operating loss of $12.6 million. The 2015 income included a $2.3 million mark-to-market loss related to the Company’s retiree benefit plans whereas the 2014 operating loss included a mark-to-market loss of $40.5 million. Excluding the impact of mark-to-market losses, 2015 operating results increased by $1.1 million from the prior year. The 2015 operating results were positively impacted by improved manufacturing operations of $14.4 million and $3.5 million of lower SG&A spending. These favorable items were offset by $11.8 million of reduced profits due to lower shipment volumes, as well as $4.5 million of additional manufacturing costs related primarily to recovery boiler maintenance at the Roaring Spring, Pennsylvania mill.



Unallocated Corporate Charges

 

As of year-end 2015, unallocated corporate charges totaled $10.4 million compared to $32.9 million last year. The 2014 results included the $24.0 million charge related to the Fox River Funding Agreement as well as related legal fees.

23


 

 

Liquidity and Capital Resources

 

Overview. The Company’s primary sources of liquidity and capital resources are cash provided by operations and credit available under its revolving credit facility. The Company expects that cash on hand, internally-generated cash flow and available credit from its revolving credit facility, will provide the necessary funds for the reasonably foreseeable operating and recurring cash needs (e.g., working capital, debt service, other contractual obligations and capital expenditures). At December 31, 2016, the Company had $6.4 million of cash and, in accordance with its debt covenants, approximately $16.3 million of unused borrowing capacity under its revolving credit facility. At that date, the revolving credit facility had an outstanding balance of $31.9 million compared to $9.6 million at year-end 2015. Approximately $15.0 million of revolving credit facility commitment was used in the form of outstanding letters of credit issued thereunder. As of December 31, 2016, net debt (total debt less cash) was $432.1 million compared to $413.5 million at year-end 2015.  



Management reported that the Company was in compliance with all debt covenants at December 31, 2016, and is forecasted to remain compliant for the next 12 months. The Company’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results and operating cash flows. The Company’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead the Company to seek amendments to, or waivers of, the financial covenants. The Company cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of noncompliance with debt covenants, if the lenders will not amend or waive the Company’s noncompliance with the covenants, the outstanding debt would become due and the Company would need to seek alternative financing. The Company cannot provide assurance that it would be able to obtain alternative financing in such circumstances. If the Company were not able to secure alternative financing, this would have a material adverse impact on the Company.



Cash Flows from Operating Activities. Net cash used by operating activities during 2016 was $0.7 million compared to $9.5 million in 2015. In addition to a net loss of $19.0 million, noncash charges totaling $31.5 million were recorded. Noncash charges included $26.8 million in depreciation and amortization, $1.6 million of noncash employer matching contributions to the KSOP and $3.1 million of other net noncash charges. During 2016, working capital increased by $13.2 million. This was the result of a $14.4 million decrease in accounts payable and other accrued liabilities, largely due to the Company making the final $7.5 million payment in accordance with the Fox River Funding Agreement.  In addition, accounts receivable increased by $0.3 million.  This was partially offset by a $0.9 million decrease in inventories and a $0.3 million decrease in other current assets. During 2016, a mark-to-market pension loss of $3.3 million was recorded, accounting for much of the $3.9 million increase in accrued pension. Other, net cash used of $3.6 million included a $1.4 million postretirement health mark-to-market gain.



Net cash used by operating activities during 2015 was $9.5 million compared to $47.2 million of net cash provided by operating activities in 2014. In addition to a net income of $158.6 million, noncash charges totaling $38.9 million were recorded. Noncash charges included $27.8 million in depreciation and amortization, $3.6 million of debt modification expense, $1.9 million of noncash employer matching contributions to the KSOP and $5.6 million of other net noncash charges. In addition, a $188.7 million gain on the sale of the Encapsys Business was recorded during the current year period. During 2015, working capital increased by $14.4 million. This was largely the result of a $26.8 million decrease in accounts payable and other accrued liabilities due to the Company making $11.5 million of payments in accordance with the Fox River Funding Agreement, as well as paying its accounts payable sooner to take advantage of favorable vendor payment terms. This was partially offset by a $4.9 million decrease in accounts receivable, a $5.5 million decrease in inventories and a $2.0 million decrease in other current assets. During 2015, a mark-to-market pension loss of $10.3 million was recorded, accounting for the $7.9 million increase in accrued pension. Other, net cash used of $11.8 million included an $8.3 million postretirement health mark-to-market gain.



Net cash provided by operating activities during 2014 was $47.2 million compared to $22.7 million of net cash used by operating activities in 2013. In addition to a net loss of $92.8 million, noncash charges and gains totaling $37.8 million were recorded. Noncash charges included $30.0 million in depreciation and amortization, $2.3 million of noncash employer matching contributions to the KSOP, $2.1 million of foreign exchange loss and $3.4 million of other net noncash charges. During 2014, working capital decreased by $41.4 million. A significant component of this decrease was the $23.8 million decrease in accounts receivable.  During June 2014, the Company entered into an accounts receivable securitization program with a commitment size of $30.0 million, whereby transactions under the program are accounted for as sales of trade receivables in accordance with ASC Topic 860, “Transfers and Servicing.” Sales of trade receivables under the program are recorded as a reduction of accounts receivable in the Consolidated Balance Sheet as of January 3, 2015. Proceeds received, including collections on the deferred purchase price notes receivable, are included in cash flows from operating activities. As of year-end 2014, the accounts receivable securitization resulted in a net reduction of accounts receivable of $16.8 million. In addition, the $19.4 million increase in accounts payable and other accrued liabilities includes an $11.3 million short-term liability related to the Fox River Funding Agreement signed on September 30, 2014. During 2014, a $16.1 million contribution was made to the pension plan and a mark-to-market loss of $67.4 million was recorded, accounting for the majority of the $53.2 increase in accrued pension. Other, net cash provided of $7.6 million includes the $6.9 million long-term portion of the Fox River Funding Agreement.

24


 

 

Cash Flows from Investing Activities. Current year net cash used by investing activities was $14.7 million.  This amount included $14.8 million used for the acquisition of property, plant, and equipment and $0.1 million of sale proceeds.  During 2015, net cash provided by investing activities was $183.9 million. This included a $200.5 million increase to cash resulting from the sale of the Encapsys Business during the third quarter. In addition, $16.7 million was spent for the acquisition of property, plant and equipment. During 2014, net cash used by investing activities was $17.5 million. This amount included $19.7 million used for the acquisition of property, plant and equipment and $2.2 million of sale proceeds, primarily from the second quarter 2014 auction of papermaking equipment located at the West Carrollton, Ohio facility.



Cash Flows from Financing Activities.  During 2016, net cash provided by financing activities was $19.9 million. The Company made mandatory debt repayments of $1.6 million on its State of Ohio loans. The Company also borrowed a net $22.3 million on its revolving credit facility.



During 2016, proceeds from the issuance of PDC redeemable common stock totaled $1.6 million. The ESOP trustee purchased this stock using pre-tax deferrals, rollovers and loan payments made by employees during 2016. Current year payments to redeem PDC common stock were $10.2 million. Cash overdrafts increased $7.9 million during 2016.  



During 2015, net cash used by financing activities was $175.2 million. During third quarter 2015, the Company repaid $170.0 million on its first lien term loan using proceeds from the sale of its Encapsys Business. In addition, it made mandatory debt repayments of $2.5 million on its first lien term loan. It also made mandatory debt repayments of $1.5 million on its State of Ohio loans. During the year, the Company borrowed a net $3.2 million on its revolving credit facility. The Company incurred $0.9 million of debt acquisition costs related to the execution of the Third Amendment to the Credit Agreement. These costs have been deferred and will be amortized over the remaining term of the Credit Agreement.



During 2015, proceeds from the issuance of PDC redeemable common stock totaled $1.9 million. The ESOP trustee purchased this stock using pre-tax deferrals, rollovers and loan payments made by employees during 2015. Current year payments to redeem PDC common stock were $9.4 million.



Cash overdrafts increased $4.2 million during 2015. Cash overdrafts represent short-term obligations, in excess of deposits on hand, which have not yet cleared through the banking system. Fluctuations in the balance are a function of quarter-end payment patterns and the speed with which the payees deposit the checks.



During 2014, net cash used by financing activities was $28.8 million. The Company made mandatory debt repayments of $3.3 million on its first lien term loan and $1.4 million on its State of Ohio loans. The Company also repaid a net $1.2 million on its revolving credit facility.



Proceeds from the issuance of PDC redeemable common stock during 2014 totaled $2.4 million. The ESOP trustee purchased this stock using pre-tax deferrals, rollovers and loan payments made by employees during 2014. Payments to redeem PDC common stock in 2014 were $18.2 million. Cash overdrafts decreased $6.8 million during 2014.





25


 

 

Description of Outstanding Indebtedness. Long-term obligations, excluding capital lease obligations, consist of the following (dollars in millions).  





 

 

 

 

 

 



 

 

 

 

 

 

   

   

 

   

 



 

2016

 

2015

Revolving credit facility at approximately 9.25% base rate and 7.27% Euro rate,

 

 

 

 

 

 

due June 2018

 

$

31.9 

 

$

9.6 

Unamortized debt issuance costs

 

 

(0.5)

 

 

(0.9)

Secured variable rate industrial development bonds, 0.6% average interest rate at

 

 

 

 

 

 

December 31, 2016, due in 2027

 

 

6.0 

 

 

6.0 

Unamortized debt issuance costs

 

 

(0.1)

 

 

(0.1)

State of Ohio assistance loan at 6%, approximately $100 due monthly and final

 

 

 

 

 

 

payment due May 2017

 

 

0.7 

 

 

1.9 

Unamortized debt issuance costs

 

 

 —

 

 

 —

State of Ohio loan at 3%, approximately $30 due monthly and final

 

 

 

 

 

 

payment due May 2019

 

 

0.8 

 

 

1.1 

Columbia County, Wisconsin municipal debt due December 2019

 

 

 —

 

 

0.3 

First lien term loan at 7.75%, due June 2019

 

 

158.3 

 

 

158.3 

Unamortized discount

 

 

(0.7)

 

 

(1.0)

Unamortized debt issuance costs

 

 

(1.7)

 

 

(2.3)

Second lien senior secured notes at 9.0%, due June 2020

 

 

250.0 

 

 

250.0 

Unamortized discount

 

 

(2.2)

 

 

(2.8)

Unamortized debt issuance costs

 

 

(4.0)

 

 

(4.8)



 

 

438.5 

 

 

415.3 

Less obligations due within one year

 

 

(1.0)

 

 

(1.5)

   

 

$

437.5 

 

$

413.8 



2016



On June 24, 2016, Appvion, PDC, and the Lending Parties entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement dated June 28, 2013. The Fourth Amendment amends the definition of Consolidated EBITDA to provide for an additional add-back to Consolidated Net Income for cash, fees and/or expenses paid or incurred in connection with certain financial and advisory services provided to the Company and Appvion in an aggregate amount not to exceed $6.5 million.



On January 16, 2017, Appvion, PDC, and the Lending Parties entered into a Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement dated June 28, 2013. The Fifth Amendment, among other things, (i) fixes the applicable interest rate on the Company’s term and revolving loans at 5.5% per annum for base rate loans and 6.5% per annum for Eurodollar loans, regardless of the Company’s then current consolidated leverage ratio, (ii) increases the maximum consolidated first lien leverage ratios applicable to the Company pursuant to the maximum consolidated leverage covenant to require maintenance of a consolidated first lien leverage ratio, during the first fiscal quarter of 2017, of not more than 3.60 to 1.00, during the second fiscal quarter of 2017, of not more than 3.50 to 1.00, during the period beginning on the third fiscal quarter of 2017 though the second fiscal quarter of 2018, of not more than 3.25 to 1.00 and from and after July 1, 2018, of not more than 3.00 to 1.00 and (iii) requires the payment of a 1.5% premium on any prepayments, payments in connection with a change in control or a refinancing or payments at maturity of either term or revolving loans.



On February 16, 2017, Appvion, PDC, and the Lending Parties entered into a Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement dated June 28, 2013. The Sixth Amendment amends the Credit Agreement to provide for the availability of additional term loans in an aggregate principal amount not to exceed $20.0 million, on the same terms and subject to the same conditions as the term loans already existing under the Credit Agreement.  Proceeds from the issuance of these term loans were reduced by $0.8 million for original issue discount and the net proceeds were used to pay down the revolving line of credit.

26


 

 

2015



On August 3, 2015, Appvion, PDC and Jefferies Finance LLC, as administrative agent, and lenders under the Credit Agreement entered into the Third Amendment to the Credit Agreement. The Third Amendment became effective simultaneously with the closing of the Sale of the Encapsys Business. Upon its effectiveness, the Third Amendment, among other things, (i) permitted the Company to consummate the Sale of the Encapsys Business and provided for the corresponding release of liens on the Encapsys Business, (ii) required that not less than $165 million of the net proceeds be applied to prepay the revolving credit loans and the term loans under the Credit Agreement and provided that the remainder of the net proceeds be reinvested or otherwise applied to further prepay indebtedness in accordance with the Credit Agreement, (iii) provided for a permanent reduction of the revolving credit facility commitments from $100 million to $75 million, (iv) required the payment of a consent fee equal to 0.175% of the aggregate principal amount of loans and commitments, (v) added the pricing grid discussed above and (vi) further conformed certain terms and covenants under the Credit Agreement to account for the Sale of the Encapsys Business and the transactions contemplated thereby.



Off-Balance Sheet Arrangements. The Company had no arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of, or requirements for, capital resources at December 31, 2016.



Disclosures about Contractual Obligations, Commercial Commitments and Contingencies. A summary of significant contractual obligations, commercial commitments and contingencies as of December 31, 2016 is as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 Payment Due by Period

Contractual Obligations 

   

Total

   

   

Less Than 1 Year

   

   

1-3 Years

   

   

4-5 Years

   

   

After 5 Years

   

   

(dollars in millions)

Long-term debt (1)

   

$

447.7 

   

   

$

1.0 

   

   

$

190.7 

   

   

$

250.0 

   

   

$

6.0 

Operating leases

   

   

7.3 

   

   

   

4.1 

   

   

   

2.3 

   

   

   

0.9 

   

   

   

 —

Other long-term obligations (2)

   

   

273.1 

   

   

   

40.3 

   

   

   

74.0 

   

   

   

16.9 

   

   

   

141.9 

Total contractual cash obligations

   

$

728.1 

   

   

$

45.4 

   

   

$

267.0 

   

   

$

267.8 

   

   

$

147.9 



(1)

Does not include effects of the Fifth Amendment and Sixth Amendment to the Credit Agreement as described above, each of which were entered into in 2017.

(2)

Represents obligations for interest, pension funding, postretirement health benefits, deferred compensation payments and capital lease obligations. Interest is calculated using current rates.



In addition to the contractual obligations listed above, it will also be necessary for the Company to use cash to satisfy its repurchase obligations related to the ESOP. The following table outlines the potential repurchase liability for the next five years based on management’s assumptions, developed in conjunction with the ESOP administrator, related to participant death, retirement, diversification requests, employment termination and changes in share valuation.





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

Estimate of Potential Commitment per Period

Other Commitments

   

Total

   

   

Less Than 1 Year

 

1-3 Years

 

 

4-5 Years

   

   

(dollars in millions)

Estimated share repurchase liability

   

$

36.4 

   

   

$

8.3 

 

$

14.8 

 

$

13.3 





The Company expects that a portion of this share repurchase liability will be funded from new deferrals from employees into the Company Stock Fund. Employees may defer, on a pre-tax basis, a percentage of their pay in an amount, subject to certain IRS limitations, equal to between 2% and 50% of their annual compensation. Participants have the option of directing their deferrals to the 401(k) Fund, the Company Stock Fund or a combination of both. The Company believes that new deferrals from employees into the Company Stock Fund for the five-year period presented above will aggregate approximately $6.8 million and could be used to fund a portion of the repurchase liability set forth in the table above.    Based upon the estimated fair value of redeemable common stock of 6,260,418 shares outstanding at $10.35 per share at December 31, 2016, an ultimate redemption liability of $64.8 million was determined.



Deferrals directed to the Company Stock Fund accumulate in a short-term interest-bearing account within the ESOP trust until the next valuation date, June 30 or December 31. At that time, these deferrals and the interest earned on these amounts, are used to purchase shares based upon the price of a share of PDC common stock on the valuation date preceding or following the date on which the participant made the deferrals, whichever is lower.







27


 

 

Effects of Inflation. Prices for certain raw materials, including base stock and chemicals, as well as costs for natural gas, oil and electricity have been subject to price changes and can have material effects on the business, financial condition and results of operations. Prices for certain raw materials increased during 2016 and could continue to increase, or decrease, in response to changes in demand. The Company historically has been able to use price increases to recoup a portion of raw material price increases, but relies on cost-cutting measures and productivity and efficiency gains to offset the remaining portion of raw material price increases. While the Company expects that any significant increase in raw materials or energy costs will be offset by price increases and/or by cost containment and productivity and efficiency initiatives, profitability could be adversely affected if the Company is unable to pass on or mitigate any future cost increases.



Collective Bargaining Agreements



Manufacturing employees at the Company’s manufacturing facilities in Appleton, Wisconsin, Roaring Spring, Pennsylvania and West Carrollton, Ohio are represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union. The Company has labor agreements in effect with represented employees at the Appleton plant through August 31, 2017; at the Roaring Spring mill through February 1, 2018; and at the West Carrollton plant through March 31, 2018.

 

USW also represents employees at the Appleton, Wisconsin distribution center. Employees at the distribution centers in Ohio and Kansas City are not represented.

 

Disclosures About Certain Trading Activities that Include Non-Exchange Traded Contracts Accounted for at Fair Value.  The Company does not engage in any trading activities that include non-exchange traded contracts accounted for at fair value.

 

Disclosures About Effects of Transactions with Related and Certain Other Parties.  There were no significant transactions with related and certain other parties.



Disclosures About Critical Accounting Policies

 

PDC prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).



This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Accounting policies are disclosed in the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. The following policies are considered by management to be the most critical in understanding the judgments that are involved in the preparation of the consolidated financial statements and the uncertainties that could impact the results of operations, financial position and cash flows. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.



Redeemable Common Stock. In accordance with ASC 480, “Distinguishing Liabilities from Equity,” the appropriate accounting for redeemable equity first depends upon a determination of whether the equity is currently redeemable or not currently redeemable.  Shares that are currently redeemable are recorded at redemption value.  For shares that are not currently redeemable, the accounting guidance allows for changes in redemption value to be accreted from the initial issuance date to the earliest redemption date. This guidance also specifies that if the redemption value is less than the original issuance cost, the carrying amount of the redeemable common stock should not be less than the original issuance cost. The fair value of redeemable common stock is determined by an independent, third-party appraiser selected by the ESOP Trustee, as required by law and the ESOP. Based upon the estimated fair value of redeemable common stock of 6,260,418 shares outstanding at $10.35 per share at December 31, 2016, an ultimate redemption liability of $64.8 million was determined. The redeemable common stock recorded book value as of December 31, 2016, was $100.6 million.



Income Taxes. In conjunction with the acquisition of Appvion, PDC elected to be treated as a subchapter S corporation and elected that its eligible subsidiaries be treated as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state and local income tax purposes, and therefore, the Company anticipates that it will not incur any future U.S. federal income tax liability and minimal state and local income tax liabilities. Appvion’s Canadian subsidiary, Appvion Canada, Ltd., is not eligible for treatment as a qualified subchapter S subsidiary. As a result, the Company will incur a foreign tax liability. The Company’s income tax reserve at December 31, 2016, covers various audit issues and provisions for certain non-U.S. entities. All U.S. federal C corporation tax years are closed. Various Canadian and state tax years remain open.



Intangible and Long-Lived Assets. The Company reviews the carrying value of intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that an asset might be impaired. A considerable amount of management judgment and assumptions are required in performing the impairment test, principally in determining the fair value of the respective indefinite-lived intangible assets. Indefinite-lived intangible assets are not amortized.



Other intangible assets with definite lives continue to be amortized over their estimated useful lives. These intangible assets, as well as long-lived assets are tested for impairment when events or changes in circumstances indicate that the asset might be impaired.

28


 

 

Revenue Recognition. Revenue is recognized by the Company when all of the following criteria are met: persuasive evidence of a selling arrangement exists; the Company’s price to the customer is fixed; collectability is reasonably assured; and title has transferred to the customer. These criteria are met at the time of shipment. Estimated costs for sales incentives, discounts and sales returns and allowances are recorded as sales reductions in the period in which the related revenue is recognized. The Company typically does not invoice its customers for shipping and handling fees, which are classified as selling, general and administrative expenses.

 

Sales Returns and Allowances. A reserve is established for expected sales returns and allowances. The amount of the reserve is based on historic sales and returns and allowances data, which is analyzed by product line and market channel to determine average returns and allowances as a percent of gross sales. This percentage is applied to recent sales activity and is adjusted, as necessary, for any significant known claims or trends.

 

Employee Benefit Plans.  The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. The Company recognizes all actuarial gains and losses immediately in net periodic cost annually in the fourth quarter of each year and whenever a plan is determined to qualify for a remeasurement during a fiscal year and, the market-related value of plan assets used in the cost calculations is equal to fair value.



The determination of the Company’s obligation and expense for pension and other postretirement benefits, such as retiree healthcare and life insurance, is dependent on the selection of certain assumptions in calculating such amounts. Those assumptions include, among others and where applicable, the discount rate and rates of increase in healthcare costs. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends, when appropriate.



The discount rate is developed by selecting a portfolio of high-quality corporate bonds appropriate to provide for the projected benefit payments of the plan. This portfolio is selected from a universe of over 700 Aa-graded noncallable bonds available in the market as of December 31, 2016, further limited to those bonds with average yields between the 10th and 90th percentiles. After the bond portfolio is selected, a single rate is determined that equates the market value of the bonds selected to the discounted value of the plan’s benefit payments. Based on the methodology described above, and a selected portfolio of 21 bonds, the Company selected a discount rate of 4.21% for 2016 to value year-end liabilities for the pension plans. The discount rate used at year-end 2015 was 4.58%.



The expected long-term rate of return on assets assumption is developed considering the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. Expected returns for each asset class are developed using estimates of expected real returns plus expected inflation. Long-term expected real returns are derived from future expectations for the U.S. Treasury real yield curve. Based on the assumptions and methodology described above, the Company selected 7.00% as its long-term rate of return on assets assumption for both year-end 2016 and 2015.

 

Significant differences in actual experience or significant changes in assumptions may materially affect its pension and other postretirement obligations and future expense.



Environmental and Legal Matters

 

The Company’s operations are subject to comprehensive and frequently changing federal, state and local environmental laws and regulations. These include laws and regulations governing emissions of air pollutants, discharges of wastewater and storm water, storage, treatment and disposal of materials and waste, remediation of soil, surface water and groundwater contamination and liability for damages to natural resources. In addition, the Company is also governed by laws and regulations relating to workplace safety and worker health which, among other things, regulate employee exposure to hazardous chemicals in the workplace.

 

Compliance with environmental laws and regulations is an important facet of the business. The Company expects to incur capital expenditures of approximately $0.2 million from 2017 and a total of approximately $.9 million from 2018 through 2022 to maintain compliance with applicable federal, state, local and foreign environmental laws and regulations and to meet new regulatory requirements. The Company expects to continue to incur expenditures after 2022 to maintain compliance with applicable federal, state, local and foreign environmental laws and regulations and to meet new regulatory requirements.



The Company may be subject to strict and, under some circumstances, joint and several liability for the investigation and remediation of environmental contamination, including contamination caused by other parties, at properties that it owns or operates and at properties where the Company or its predecessors have arranged for the disposal of regulated materials. As a result, the Company may be involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. The total amount of any future costs with respect to legal proceedings related to environmental matters and or with respect to other environmental liabilities may be material.

29


 

 

The Company may be involved from time to time in certain administrative and judicial proceedings and inquiries related to environmental matters. For a discussion of environmental matters, see “Item 1. Business – Environmental” and Note 17 of the Notes to the Consolidated Financial Statements. Furthermore, from time to time the Company may be subject to various demands, claims, suits or other legal or regulatory proceedings arising in the ordinary course of business. A comprehensive insurance program is maintained to provide a measure of financial protection against such matters, though not all such exposures are, or can be, addressed by insurance. Estimated costs are recorded for such demands, claims, suits or proceedings of this nature when reasonably determinable. The Company has successfully defended such claims, settling some for amounts which are not material to its business and obtaining dismissals in others. While the Company will vigorously defend itself and expects to prevail in any similar cases that may be brought against it in the future, there can be no assurance that it will be successful.

 

The Company does not believe that any pending or threatened demands, claims, suits or other legal or regulatory proceedings will have, individually or in the aggregate, a materially adverse effect on its business, financial condition and results of operations or cash flows.



Item 7A.         Quantitative and Qualitative Disclosures About Market Risk

 

The Company selectively uses derivative instruments and other proactive risk management techniques to reduce market risk associated with changes in foreign currency exchange rates, commodity prices and interest rates.  All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures which strictly prohibit the use of financial instruments for speculative purpose. At the inception of each hedge, the Company decides if it will be designated as a cash flow hedge and, if so, assesses the effectiveness of the hedge. The Company performs hedge effectiveness testing quarterly and any ineffectiveness is recorded in current earnings. The change in fair market value of each derivative is recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated and qualifies as part of a hedge transaction under ASC 815, “Derivatives and Hedging.” For additional information, see the following in the Consolidated Financial Statements: Note 2, Summary of Significant Accounting Policies; Note 9, Long-Term Obligations; and Note 12, Derivative Instruments and Hedging Activities.



Foreign Currency Risk. The Company has a sales organization in Canada. It also contracts with a third-party logistics service to provide product distribution services in Canada. A 10% appreciation or depreciation in the Canadian dollar at December 31, 2016 would not have a significant impact on the Company’s consolidated balance sheet, consolidated statement of comprehensive income (loss) or consolidated statement of cash flows.



The Company also sells its products worldwide and thus enters into transactions denominated in various foreign currencies. Company policy is to selectively hedge its foreign currency denominated transactions in a manner that partially offsets the effects of changes in foreign currency exchange rates. Foreign currency contracts are used to hedge only those currency exposures associated with sales to customers located outside the U.S. Corresponding gains and losses on the underlying transactions offset the gains and losses on these foreign currency hedges. Maturities of forward exchange contracts coincide with settlement dates of related transactions.



Interest Rate Risk. The Company is exposed to interest rate risk on its revolving credit facility, first lien term loan and industrial development bonds. At December 31, 2016, the Company had a total of $196.2 million of variable rate borrowings outstanding, of which $158.3 million is the first lien term loan. After giving effect to the Fifth Amendment to the Credit Agreement (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Description of Outstanding Indebtedness and Note 9, Long-Term Obligations, of Notes to Consolidated Financial Statements), the first lien term loan and revolving line of credit bear interest at a base rate plus 5.5% per annum or Eurodollar plus 6.5% per annum.  The Credit Agreement provides for a fixed floor rate of 2.25% for base rate loans and 1.25% for Eurodollar loans. A 100 basis point increase in the Eurodollar interest rate above the 1.25% floor would increase annual interest expense by approximately $1.6 million. On July 30, 2013, Appvion entered into an interest rate swap contract on $100 million of this variable rate first lien term loan with a forward start date of September 15, 2014 and a maturity date of June 28, 2019. 



Commodity Prices. The Company is subject to the effects of changing raw material costs caused by movements in underlying commodity prices. The Company is exposed to fluctuating market prices for commodities, including pulp, chemicals and base stock, and has established programs to manage exposure to commodity prices through effective negotiations with suppliers. As listed within its contractual obligations, the Company enters into contracts with vendors to lock in commodity prices at various times and for various periods to limit near-term exposure to fluctuations in raw material prices.



The Company selectively hedged forecasted commodity transactions that are subject to pricing fluctuations by using swap and collar contracts to manage risks associated with market fluctuations in energy prices. These contracts are recorded in the Consolidated Balance Sheet at fair value using inputs based on the New York Mercantile Exchange as measured on the last trading day of the accounting period and compared to the strike price. The contracts’ gains or losses due to changes in fair value are recorded in current period earnings. As of December 31, 2016, all contracts have been settled.

30


 

 

Item 8.            Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm



To the Board of Directors

Paperweight Development Corp.



We have audited the accompanying consolidated balance sheets of Paperweight Development Corp. and its subsidiaries (the Company) as of December 31, 2016 and January 2, 2016 and the related consolidated statements of comprehensive income (loss), cash flows, redeemable common stock, accumulated deficit and accumulated other comprehensive income for the years then ended.  Our audits also included the financial statement schedules of Paperweight Development Corp. and its subsidiaries listed in item 15(a). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Paperweight Development Corp. and its subsidiaries as of December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.



We also have audited the adjustments to the January 3, 2015 financial statements to retrospectively apply the effects related to discontinued operations, as described in Note 3.   In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the January 3, 2015 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the January 3, 2015 financial statements taken as a whole.



/s/ RSM US LLP

Milwaukee, Wisconsin

March 17, 2017









31


 

 

Report of Independent Registered Public Accounting Firm



To the Board of Directors of

Paperweight Development Corp.



In our opinion, the consolidated statements of comprehensive income (loss), of redeemable common stock, accumulated deficit and accumulated other comprehensive income, and of cash flows for the year ended January 3, 2015, before the effects of the adjustments to retrospectively reflect the discontinued operations described in Note 3, present fairly, in all material respects, the results of operations and cash flows of Paperweight Development Corp. and its subsidiaries for the year ended January 3, 2015, in conformity with accounting principles generally accepted in the United States of America (the January 3, 2015 financial statements before the effects of the adjustments discussed in Note 3 are not presented herein).  In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) for the year ended January 3, 2015 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements before the effects of the adjustments described above.  These financial statements and financial statement schedules are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit.  We conducted our audit, before the effects of the adjustments described above, of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.



We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively reflect the discontinued operations described in Note 3 and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied.  Those adjustments were audited by other auditors.









/s/ PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

March 17, 2017







32


 

 





 

 

 

 

 



 

 

 

 

 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)



 

 

 

 

 



December 31,

 

January 2,



2016

 

2016

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

6,397 

 

$

1,817 

Accounts receivable, less allowance for doubtful accounts of $323 and $1,073, respectively

 

41,297 

 

 

41,573 

Inventories

 

86,392 

 

 

87,197 

Other current assets

 

4,478 

 

 

4,738 

Total current assets

 

138,564 

 

 

135,325 



 

 

 

 

 

Property, plant and equipment, net

 

206,413 

 

 

214,869 

Intangible assets, net

 

34,697 

 

 

36,983 

Other assets

 

7,495 

 

 

11,253 

Total assets

$

387,169 

 

$

398,430 



 

 

 

 

 

LIABILITIES, REDEEMABLE COMMON STOCK,

 

 

 

 

 

ACCUMULATED DEFICIT AND

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt, net

$

982 

 

$

1,567 

Accounts payable

 

49,433 

 

 

51,064 

Accrued interest

 

3,258 

 

 

2,814 

Other accrued liabilities

 

44,939 

 

 

49,041 

Total current liabilities

 

98,612 

 

 

104,486 



 

 

 

 

 

Long-term debt, net

 

437,515 

 

 

413,763 

Postretirement benefits other than pension

 

20,842 

 

 

22,581 

Accrued pension

 

111,963 

 

 

105,750 

Other long-term liabilities

 

30,536 

 

 

35,354 

Commitments and contingencies  (Note 17)

 

 —

 

 

 —

Redeemable common stock, $0.01 par value,

 

 

 

 

 

shares authorized:  30,000,000,

 

 

 

 

 

shares issued and outstanding: 6,260,418 and 6,757,898

 

100,641 

 

 

114,749 

Accumulated deficit

 

(431,887)

 

 

(419,925)

Accumulated other comprehensive income

 

18,947 

 

 

21,672 

Total liabilities, redeemable common stock, accumulated

 

 

 

 

 

deficit and accumulated other comprehensive income

$

387,169 

 

$

398,430 



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







33


 

 













 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)



 

 

 

 

 

 



 

 

 

 

 

 



 

For the

 

For the

 

For the



 

Year Ended

 

Year Ended

 

Year Ended



 

December 31, 2016

 

January 2, 2016

 

January 3, 2015



 

 

 

 

 

 

 

 

 

Net sales

 

$

690,364 

 

$

700,046 

 

$

764,698 



 

 

 

 

 

 

 

 

 

Cost of sales

 

 

566,258 

 

 

576,441 

 

 

657,331 



 

 

 

 

 

 

 

 

 

Gross profit

 

 

124,106 

 

 

123,605 

 

 

107,367 



 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

100,578 

 

 

113,077 

 

 

140,257 

Fox River Funding Agreement

 

 

 —

 

 

 —

 

 

23,975 



 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

23,528 

 

 

10,528 

 

 

(56,865)



 

 

 

 

 

 

 

 

 

Other expense

 

 

 

 

 

 

 

 

 

 Interest expense, net

 

 

40,638 

 

 

45,986 

 

 

49,087 

 Debt modification/extinguishment expense

 

 

 —

 

 

3,605 

 

 

 —

 Foreign exchange (gain) loss

 

 

466 

 

 

1,603 

 

 

2,070 

 Other expense

 

 

1,059 

 

 

1,014 

 

 

660 



 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

(18,635)

 

 

(41,680)

 

 

(108,682)



 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

411 

 

 

245 

 

 

269 



 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

(19,046)

 

 

(41,925)

 

 

(108,951)



 

 

 

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of income taxes

 

 

 —

 

 

11,750 

 

 

16,179 

Gain on sale, net of income taxes

 

 

 —

 

 

188,749 

 

 

 —

Income from discontinued operations, net of income taxes

 

 

 —

 

 

200,499 

 

 

16,179 



 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(19,046)

 

 

158,574 

 

 

(92,772)



 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

  Changes in retiree plans

 

 

(3,556)

 

 

(5,095)

 

 

24,895 

Unrealized gains (losses) on derivatives

 

 

831 

 

 

(419)

 

 

(1,522)

Total other comprehensive incoem (loss)

 

 

(2,725)

 

 

(5,514)

 

 

23,373 



 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(21,771)

 

$

153,060 

 

$

(69,399)



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

















34


 

 







































 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

PAPERWEIGHT DEVELOPMENT CORP.  AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE TWELVE MONTHS ENDED

(dollars in thousands)



 

 

 

 

 

 

 

 



December 31,

 

January 2,

 

January 3,



2016

 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

$

(19,046)

 

$

158,574 

 

$

(92,772)

Adjustments to reconcile net income (loss) to net cash

 

 

 

 

 

 

 

 

provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

24,160 

 

 

25,504 

 

 

27,729 

Amortization of intangible assets and other

 

2,632 

 

 

2,285 

 

 

2,286 

Amortization of financing fees

 

1,919 

 

 

1,984 

 

 

2,084 

Amortization of debt discount

 

795 

 

 

908 

 

 

961 

Employer 401(k) noncash matching contributions

 

1,606 

 

 

1,901 

 

 

2,319 

Foreign exchange (gain) loss

 

448 

 

 

1,668 

 

 

2,108 

Gain on sale of Encapsys

 

 —

 

 

(188,749)

 

 

 —

Debt modification expense

 

 —

 

 

3,605 

 

 

 —

Noncash (gain) loss on hedging

 

(36)

 

 

 —

 

 

(163)

Loss on disposals of equipment

 

23 

 

 

1,086 

 

 

453 

(Increase)/decrease in assets and increase/(decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

(270)

 

 

4,887 

 

 

23,784 

Inventories

 

944 

 

 

5,541 

 

 

(1,748)

Other current assets

 

262 

 

 

2,023 

 

 

(14)

Accounts payable and other accrued liabilities

 

(14,365)

 

 

(26,819)

 

 

19,384 

Accrued pension

 

3,914 

 

 

7,849 

 

 

53,234 

Other, net

 

(3,647)

 

 

(11,795)

 

 

7,585 

Net cash provided (used) by operating activities

 

(661)

 

 

(9,548)

 

 

47,230 



 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of equipment

 

82 

 

 

113 

 

 

2,272 

Net change in cash due to sale of Encapsys

 

 —

 

 

200,499 

 

 

 —

Additions to property, plant and equipment

 

(14,755)

 

 

(16,683)

 

 

(19,737)

Net cash provided (used) by investing activities

 

(14,673)

 

 

183,929 

 

 

(17,465)



 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Debt acquisition costs

 

 —

 

 

(850)

 

 

(185)

Payments of first lien term loan

 

 —

 

 

(172,512)

 

 

(3,350)

Payments relating to capital lease obligations

 

(207)

 

 

(223)

 

 

(114)

Proceeds from revolving line of credit

 

380,000 

 

 

339,600 

 

 

291,650 

Payments of revolving line of credit

 

(357,680)

 

 

(336,450)

 

 

(292,800)

Payments of State of Ohio loans

 

(1,567)

 

 

(1,478)

 

 

(1,399)

Proceeds from issuance of redeemable common stock

 

1,636 

 

 

1,931 

 

 

2,372 

Payments to redeem common stock

 

(10,224)

 

 

(9,411)

 

 

(18,164)

Increase (decrease) in cash overdraft

 

7,938 

 

 

4,174 

 

 

(6,817)

Net cash provided (used) by financing activities

 

19,896 

 

 

(175,219)

 

 

(28,807)



 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

18 

 

 

(65)

 

 

(38)

Change in cash and cash equivalents

 

4,580 

 

 

(903)

 

 

920 

Cash and cash equivalents at beginning of period

 

1,817 

 

 

2,720 

 

 

1,800 

Cash and cash equivalents at end of period

$

6,397 

 

$

1,817 

 

$

2,720 



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



























































 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

35


 

 

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK,

ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED

(dollars in thousands, except share data)



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Redeemable Common Stock

 

 

 

 

 

Accumulated



 

 

 

 

 

 

 

 

 

 

Other



 

Shares

 

 

 

 

 

Accumulated

 

 

Comprehensive



 

Outstanding

 

 

Amount

 

 

Deficit

 

 

Income



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Balance, December 28, 2013

 

8,129,112 

 

$

157,445 

 

$

(509,296)

 

$

3,813 



 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

(92,772)

 

 

 —

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

23,373 

Issuance of redeemable common stock

 

350,346 

 

 

4,668 

 

 

 —

 

 

 —

Redemption of redeemable common stock

 

(1,273,759)

 

 

(23,776)

 

 

5,612 

 

 

 —

Change in fair value and accretion of redeemable common stock

 

 —

 

 

(17,320)

 

 

17,320 

 

 

 —



 

 

 

 

 

 

 

 

 

 

 

Balance, January 3, 2015

 

7,205,699 

 

$

121,017 

 

$

(579,136)

 

$

27,186 



 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

158,574 

 

 

 —

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(5,514)

Issuance of redeemable common stock

 

327,274 

 

 

3,780 

 

 

 —

 

 

 —

Redemption of redeemable common stock

 

(775,075)

 

 

(14,137)

 

 

4,726 

 

 

 —

Change in fair value and accretion of redeemable common stock

 

 —

 

 

4,089 

 

 

(4,089)

 

 

 —



 

 

 

 

 

 

 

 

 

 

 

Balance, January 2, 2016

 

6,757,898 

 

$

114,749 

 

$

(419,925)

 

$

21,672 



 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

(19,046)

 

 

 —

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(2,725)

Issuance of redeemable common stock

 

283,120 

 

 

3,201 

 

 

 —

 

 

 —

Redemption of redeemable common stock

 

(780,600)

 

 

(13,916)

 

 

3,691 

 

 

 —

Change in fair value and accretion of     redeemable common stock

 

 —

 

 

(3,393)

 

 

3,393 

 

 

 —



 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

6,260,418 

 

$

100,641 

 

$

(431,887)

 

$

18,947 



 

 

 

 

 

 

 

 

 

 

 



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



 

36


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 



1.       BASIS OF PRESENTATION AND NATURE OF OPERATIONS

 

The accompanying consolidated financial statements, after the elimination of intercompany accounts and transactions, include the accounts of Paperweight Development Corp. (“PDC”) and its 100%-owned subsidiaries (collectively the “Company”), which includes Appvion, Inc. and its 100%-owned subsidiaries (collectively “Appvion”), for the years ended December 31, 2016, January 2, 2016 and January 3, 2015.



NATURE OF OPERATIONS

 

Appvion is the primary operating subsidiary of PDC. The Company creates product solutions for customers and end users through its development and use of coating formulations and applications as well as security technologies. It has two reportable segments: thermal papers and carbonless papers (see Note 22, Segment Information).

 

The thermal papers segment develops and produces substrates for the transaction and item identification markets. Thermal paper is used in four principal end markets: (1) point-of-sale products for retail receipts and coupons; (2) labels for shipping, warehousing, medical and clean-room applications; (3) tags and tickets for airline and baggage applications, event and transportation tickets and lottery and gaming applications; and (4) printer, calculator and chart paper for engineering, industrial and medical diagnostic charts. Point-of-sale products are sold to printers and converters who in turn sell to end-user customers or to resellers such as office supply stores, office superstores, warehouse clubs, mail order catalogs, equipment dealers, merchants and original equipment manufacturers. Label products are sold to companies who apply pressure sensitive adhesive coatings and release liners and then sell these products to label printers. Tag, ticket and chart grades are sold to specialty printing companies who convert them to finished products such as entertainment, lottery and gaming tickets, tags, coupons and medical charts. Sales within the thermal papers segment accounted for approximately 59% of consolidated net sales in 2016, 53%  of consolidated net sales in 2015 and 54%  of consolidated net sales in 2014.



The carbonless papers segment includes carbonless, security and other specialty paper products. Carbonless paper is used to make multipart business forms such as invoices and purchase orders. The Company produces coated products for design and print applications and offers custom coating solutions. Carbonless products are sold to converters, printers and merchant distributors who stock and sell carbonless paper to printers. The Company also produces security papers with features that resist forgery, tampering and counterfeiting. The Company’s portfolio of products incorporates security technologies, including watermarks, taggants, reactive chemicals, embedded threads and fibers and machine-readable technologies, to serve global markets. Sales within the carbonless papers segment accounted for approximately 41%  of consolidated net sales in 2016,  47% of consolidated net sales in 2015 and 46%  of consolidated net sales in 2014.



 RELATIONSHIPS WITH FORMER PARENT

 

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”) and its 100%-owned subsidiary, Appleton Papers Inc. (now Appvion, Inc.).

 

In conjunction with the acquisition, the Company entered into two indemnification agreements under which Arjo Wiggins Appleton Limited, now known as Windward Prospects Ltd (formerly “AWA”), the former parent of Appvion, agreed to indemnify PDC and PDC agreed to indemnify Appvion for the costs, expenses and liabilities related to certain governmental and third-party environmental claims, referred to as the Fox River Liabilities.

 

Under the indemnification agreements, Appvion is indemnified for the first $75 million of certain costs, expenses and liabilities relating to the Fox River and Future Sites and for amounts in excess of $100 million, including Appvion’s costs and expenses in negotiating and entering into the September 2014 Funding Agreement, Appvion’s historical costs and expenses in defending against the U.K. litigation and any future costs and expenses incurred by Appvion in pursuing recoveries (see Note 17, Commitments and Contingencies). During 2008, Appvion paid $25 million to satisfy its portion of the Fox River Liabilities not covered by the indemnification agreement with AWA.



On September 30, 2014, Appvion entered into a Funding Agreement with Windward, NCR, and B.A.T. Industries, p.l.c. (“BAT”) relating to clean-up costs for the Lower Fox River and certain potential future sites. Under the Funding Agreement, Appvion agreed to assume certain additional funding obligations not to exceed $25 million for Fox River Costs and $25 million for Future Sites Costs. Appvion bears sole responsibility for its funding obligations under the Funding Agreement, which were satisfied in 2016. The Funding Agreement does not, however, modify, alter or amend the two indemnification agreements entered into in 2001 wherein AWA agreed to indemnify PDC and PDC agreed to indemnify Appvion for certain costs, expenses and liabilities relating to Fox River and Future Sites.

37


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 



As amended in, and as limited by the terms of the purchase agreement relating to the acquisition of Appvion, AWA and two of its affiliates have agreed to indemnify PDC and Appvion for certain losses resulting from (1) inaccuracies in the environmental representations and warranties made by AWA and its affiliates, (2) certain known environmental matters that existed at the closing of the acquisition, (3) environmental matters related to the businesses of Newton Falls, Inc., Appleton Coated LLC and several other of the Company’s former affiliates and subsidiaries and (4) environmental matters relating to the real property on which the Company’s former Camp Hill, Pennsylvania plant is located that existed prior to its sale of this plant to a third-party.



RELATIONSHIP OF APPVION, INC. WITH PARENT



As a result of PDC's November 2001 acquisition of Appleton Papers Inc. (now Appvion, Inc.), Appvion entered into borrowings with a third-party and transferred the acquired cash through a subordinated demand note receivable with PDC to fund the acquisition from AWA.



As described in Note 20, the ESOP purchased 100% of the PDC shares in 2001. All ESOP shares activities, including issuance, deferrals, redemptions, and accretion, are recorded by PDC. Cash was transacted through an intercompany loan from Appvion to PDC in order to fund ESOP redemption activities and ESOP deferrals were in turn paid back to Appvion. Redemption activities were significantly larger than employee deferrals. During November 2013, this intercompany note and all related interest due from PDC was forgiven in full by Appvion. During December 2013, an interest-bearing intercompany loan from PDC to Appvion was established to record the transfer of ESOP deferrals, used to purchase PDC stock, to Appvion by PDC. During 2014, this intercompany loan from PDC to Appvion was fully repaid. Currently there is an interest-bearing intercompany loan from Appvion to PDC established in order to fund required distributions from PDC to ESOP participants, net of the transfer of ESOP deferrals used to purchase PDC stock.



2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

FISCAL YEAR

 

The Company’s fiscal year is the 52-week or 53-week period ending the Saturday nearest December 31. Fiscal year 2016 was a 52-week period ending December 31, 2016.  Fiscal year 2015 was a 52-week period ending January 2, 2016. Fiscal year 2014 was a 53-week period ending January 3, 2015.



USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more critical estimates made by management relate to pension and postretirement assumptions, accrued discounts, intangible and tangible asset impairment analyses, fair market value of redeemable common stock and receivable reserves. Actual results could differ from those estimates.

 

REVENUE RECOGNITION

 

Revenue is recognized by the Company when all of the following criteria are met: persuasive evidence of a selling arrangement exists; the Company’s price to the customer is fixed; collectability is reasonably assured; and title has transferred to the customer. These criteria are met at the time of shipment. Estimated costs for sales incentives, discounts and sales returns and allowances are recorded as sales reductions in the period in which the related revenue is recognized. The Company typically does not invoice its customers for shipping and handling fees, which are classified as selling, general and administrative expenses and totaled approximately $36 million in 2016, $39 million in 2015 and $42 million in 2014.

38


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES



The Company selectively uses financial instruments to manage some market risks from changes in foreign currency exchange rates, commodity prices and interest rates and follows the guidance of ASC 815, “Derivatives and Hedging.” The fair values of all derivatives are recorded in the Consolidated Balance Sheet. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated and qualifies as part of a hedge transaction and, if so, the type of hedge transaction.



The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts. These instruments are designated as cash flow hedges in accordance with ASC 815 and are recorded in the Consolidated Balance Sheet at fair value. The effective portion of the contracts’ gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transaction will not occur. These contracts are designed to hedge the variability in future cash flows attributable to changes in currency exchange rates.



In July 2013, the Company fixed the underlying interest rate at 2.74% on $100 million of its variable rate first lien term loan using an interest rate swap contract with a forward start date of September 15, 2014 and a maturity date of June 28, 2019. This interest rate swap contract has been designated as a cash flow hedge and is recorded in the Consolidated Balance Sheet at fair value. The effective portion of the contract’s gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transaction will not occur. This contract is highly effective in hedging the variability in future cash flows attributable to changes in interest rates.



For the years ended December 31, 2016, January 2, 2016, and January 3, 2015, the amounts recognized in earnings due to ineffectiveness of hedge transactions were immaterial. The amount reported as unrealized gain on derivatives of $0.8 million in 2016, and losses on derivatives of $0.4 million in 2015 and $1.5 million in 2014, in accumulated other comprehensive income, represents the net gain (loss) on derivatives designated as cash flow hedges.

 

CASH EQUIVALENTS

 

Cash equivalents consist of funds invested in institutional money market funds with daily liquidity. At December 31, 2016 and January 2, 2016, there were cash overdrafts of approximately $16.2 million and $8.3 million, respectively, which are included in accounts payable within the Consolidated Balance Sheets and the year-over-year change is included in the “Cash Flows from Financing Activities” section of the Consolidated Statement of Cash Flows.

 

ACCOUNTS RECEIVABLE



Trade accounts receivable are stated at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the allowance for doubtful accounts, as well as reserves for estimated cash discounts to be taken by customers and potential credits issued to customers. The Company evaluates the adequacy of the allowance for doubtful accounts monthly based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends, all of which are subject to change. Actual uncollected amounts have historically been consistent with the Company’s expectations. Reserves for estimated cash discounts are reviewed quarterly based upon current payment terms and historical patterns of actual cash discounts taken. Reserves for potential credits are reviewed semi-annually based upon historical patterns of actual credits issued. The Company may revise its estimates as more information becomes available.



INVENTORIES

 

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method for raw materials, work in process and finished goods inventories. Stores and spare parts inventories are valued at average cost. Finished goods and work in process inventories include the cost of materials, labor and manufacturing overhead.



39


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are stated at cost, including interest incurred during construction and depreciated over their estimated useful lives using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The general range of useful lives for financial reporting is 10 to 40 years for buildings and improvements and 3 to 20 years for machinery and equipment. Maintenance and repair costs that do not significantly improve the related asset or extend its useful life are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts with resulting gains or losses reflected in operating income.



INTERNAL USE SOFTWARE

 

Costs incurred related to the development of internal use software are accounted for in accordance with ASC 350, “Intangibles – Goodwill and Other” which requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use once certain criteria are met. Capitalized software costs are amortized over the lesser of 5 years or the useful life of the software using the straight-line method.

 

INTANGIBLE ASSETS

 

Certain intangible assets have been determined to have indefinite useful lives and will not be amortized until their useful lives are determined to no longer be indefinite. Other intangible assets (customer relationships and the remaining registered trademarks) are amortized over their estimated useful lives of 20 to 25 years.



IMPAIRMENT OF INTANGIBLES AND LONG-LIVED ASSETS

 

The Company reviews the carrying value of intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This impairment analysis consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of the asset exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess.

 

The Company reviews the carrying value of intangible assets with definite lives and other long-lived assets whenever events or changes in circumstances indicate the assets may be impaired. If indicators of potential impairment are identified, the Company compares the undiscounted cash flows expected to be generated by the asset or asset group to the carrying value of the asset or asset group. If the carrying amount of the asset exceeds the expected undiscounted cash flows, an impairment loss for the difference between the carrying value and fair value of the asset or asset group is recognized.

 

INCOME TAXES

 

In conjunction with the acquisition of Appvion, PDC elected to be treated as a subchapter S corporation and elected that its eligible subsidiaries be treated as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state and local income tax purposes, and therefore, the Company anticipates that it will not incur any future U.S. federal income tax liability and minimal state and local income tax liabilities.

 

Ineligible subsidiaries account for income taxes in accordance with ASC 740, “Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets in those circumstances where it is more likely than not that some or all of the deferred tax asset may not be realized.



EMPLOYEE BENEFIT PLANS



The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. The Company recognizes all actuarial gains and losses immediately in net periodic cost annually in the fourth quarter of each year and whenever a plan is determined to qualify for a remeasurement during a fiscal year, and the market-related value of plan assets used in the cost calculations is equal to fair value.

40


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

ASC 820 establishes a framework for measuring fair value and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

When available, quoted market prices were used to determine fair value and such measurements are classified within Level 1. In some cases where market prices are not available, observable market-based inputs were used to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.

 

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

 

ASC 820 expanded the definition of fair value to include the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or by the Company) will not be fulfilled. For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), fair value calculations have been adjusted accordingly.



The fair value of interest rate swap derivatives is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine the discounted cash flows that result in a measurement that is classified as Level 2. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate, also deemed to be categorized as Level 2.

 

In addition to the methods and assumptions used to record the fair value of financial instruments as discussed above, the following methods and assumptions are used to estimate the fair value of financial instruments as required by ASC 825, “Financial Instruments.”  Cash and cash equivalents, accounts receivable and accounts payable recorded in the balance sheets approximate fair value based on the short maturity of these instruments. Fair values of long-term debt are estimated based on market conditions and interest rates available to the Company for similar financial instruments.



ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The components of the non-owner changes in equity, or accumulated other comprehensive income, are as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 

   

  2016

   

   

  2015

 

Changes in retiree plans

   

$

21,186

 

 

$

24,742

 

   

   

   

   

   

   

   

   

   

Realized and unrealized losses on derivatives

   

   

(2,239

)  

   

   

(3,070

)  

   

   

$

18,947

 

   

$

21,672

 



RESEARCH AND DEVELOPMENT

 

Research and development costs are charged to expense as incurred. Such costs incurred in the development of new products or significant improvements to existing products totaled $8.2 million in 2016, $9.0 million in 2015, and $9.5 million in 2014.

41


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

ACCOUNTING PRONOUNCEMENTS

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This guidance is issued to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods.  Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance.  This guidance should be applied using a retrospective transition method for the presentation of the service cost component and other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective data, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.  The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.



In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.”  This guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  This guidance should be applied using a retrospective transition method to each period presented.  The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.



In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This guidance simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. This guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method. The Company assessed the adoption of this guidance and has concluded there will be no impact to its consolidated financial statements.



In February 2016, the FASB issued ASU No. 2016-02, “Leases.” This guidance requires lessees to recognize (with the exception of short-term leases) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.



In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This guidance requires that inventory measured using any method other than last-in, first-out or the retail inventory method shall be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. The amendments in this ASU are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company has assessed that the impact this guidance will have is immaterial on its consolidated financial statements.



In April 2015, the FASB issued ASU No. 2015-04, “Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.” This guidance provides a practical expedient to entities with a fiscal year-end that does not coincide with a month-end so as to permit the entity to measure defined benefit plan assets and obligations using the month-end closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should also be applied consistently to all plans if an entity has more than one plan. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. As required, the Company adopted this guidance for its fiscal year beginning January 3, 2016 and the impact was immaterial to its consolidated financial statements as a result of adoption.

42


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This guidance requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. Then, in August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” The amendments in ASU 2015-15 address the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements such that the Securities and Exchange Commission staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments in these ASU’s are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. These ASU’s were adopted in 2016, and in accordance with the guidance, $8.1 million of unamortized debt issuance costs, specifically attributable to each of the Company’s long-term debt issues, were reclassified from other assets, as previously reported on the Consolidated Balance Sheet as of January 2, 2016, to long-term debt. The unamortized debt issuance costs are now presented as a direct deduction from each debt liability, consistent with the presentation of the corresponding debt discount, where applicable.



In January 2015, the FASB issued ASU No. 2015-01, “Income Statement – Extraordinary and Unusual Items.” This guidance eliminates the concept of extraordinary items which required entities to separately classify, present and disclose extraordinary events and transactions. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, though early adoption is permitted provided the guidance is applied from the beginning of the year of adoption. An entity may apply the guidance prospectively and may also apply the guidance retrospectively to all prior periods presented in the financial statements. As required, the Company adopted this guidance for its fiscal year beginning January 3, 2016 and there was no impact to its consolidated financial statements as a result of adoption.



In November 2014, the FASB issued ASU No. 2014-16 “Derivatives and Hedging:  Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” This guidance requires an entity to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument issued in the form of a share, including the embedded derivative feature that is being evaluated for separate accounting from the host contract when evaluating whether the host contract is more akin to debt or equity. ASU 2014-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. As required, the Company adopted this guidance for its fiscal year beginning January 3, 2016 and there was no impact to its consolidated financial statements as a result of adoption.



In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The amendments require management to evaluate whether there are relevant conditions and events, known and reasonably knowable, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or within one year after the date the financial statements are available to be issued when applicable). Management should consider whether its plans intended to mitigate the relevant conditions or events will alleviate the substantial doubt. The amendments provide guidance as to what disclosures are required when substantial doubt is alleviated or not. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim periods beginning after December 15, 2016, with early adoption permitted. The Company has adopted this ASU and there was no impact to its consolidated financial statements.

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PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This guidance provides a single comprehensive revenue recognition model to apply in determining how and when to recognize revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When applying the new revenue model to contracts with customers, the guidance requires five steps to be applied which include: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires both quantitative and qualitative disclosures which are more comprehensive than existing revenue standards. The disclosures are intended to enable financial statement users to understand the nature, timing and uncertainty of revenue and the related cash flow. Additionally, in March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations” to clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” to clarify the guidance associated with identifying performance obligations and licensing. In May 2016, the FASB issued ASU No. 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at March 3, 2016 EITF Meeting” to rescind specific guidance included in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities-Oil and Gas, effective upon adoption of Topic 606. Also in May 2016, the FASB issued ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” to address certain issues in the guidance regarding assessing collectability, presentation of state taxes, noncash consideration, and completed contracts and contract modifications at transition. These ASU’s will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but no earlier than the original effective date of fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.



3.       DISCONTINUED OPERATIONS



On August 3, 2015, Appvion completed the sale of the assets primarily used in the development, manufacture and sale of microencapsulation materials by the Encapsys segment of the Company (the “Encapsys Business”) to Rise Acquisition LLC (“Rise”), a Delaware limited liability company and an affiliate of Sherman Capital Holdings LLC, a Delaware limited liability company, for an aggregate purchase price of $208 million in cash, subject to working capital adjustments, and the assumption of certain liabilities (the “Sale”). Total working capital adjustments and cash expenses of the Sale were approximately $7.5 million. Of the approximate $200.5 million of net proceeds, $165 million was used immediately to repay a portion of long-term debt. In addition, proceeds of $35 million were set aside as restricted cash to be used within one year of this transaction for the specific purpose of capital investment and/or further debt reduction. As of January 2, 2016, Appvion had used this entire amount of restricted cash to repay an additional $25 million in long-term debt and $10 million for capital investment. The estimated carrying value of the net assets sold was $11.8 million.



The operating results for this business for the years ended January 2, 2016 and January 3, 2015 have been reclassified and are now reported separately as discontinued operations. The $188.7 million gain on the sale of Encapsys is also reported as discontinued operations in the Consolidated Statement of Comprehensive Income (Loss) for the year ended January 2, 2016.



In connection with the Sale, Appvion and Rise entered into certain other agreements, including a Supply Agreement, by which Rise will supply Appvion with all of its microencapsulation product requirements for use in its carbonless paper products for a ten-year term subject to renewal, and a Transition Services Agreement, by which Appvion will provide certain transition services to Rise for up to three years following the closing date. Additionally, Appvion and Rise entered into a lease agreement, by which Appvion will lease a portion of its facilities in Appleton, Wisconsin to Rise for a three-year term, as well as a Patent License Agreement with respect to certain shared patents related to the Encapsys Business and Appvion’s retained paper businesses. 

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PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The following table presents the key line items constituting income from discontinued operations for the Encapsys Business for the years ended December 31, 2016, January 2, 2016, and January 3, 2015 (dollars in thousands):









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

For the

 

For the

 

For the



 

Year Ended

 

Year Ended

 

Year Ended



 

December 31, 2016

 

January 2, 2016

 

January 3, 2015

Net sales

 

$

 —

 

$

28,263 

 

$

45,119 

Cost of sales

 

 

 —

 

 

11,697 

 

 

20,050 

Selling, general and administrative expenses

 

 

 —

 

 

4,816 

 

 

8,890 

Income from discontinued operations

 

 

 —

 

 

11,750 

 

 

16,179 



 

 

 

 

 

 

 

 

 

Gain on sale

 

 

 —

 

 

188,749 

 

 

 -

Income from discontinued operations

 

$

 —

 

$

200,499 

 

$

16,179 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

The following are the significant line items of the Encapsys Business impacting cash flow for the periods presented (dollars in thousands):







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

For the

 

For the

 

For the



 

Year Ended

 

Year Ended

 

Year Ended



 

December 31, 2016

 

January 2, 2016

 

January 3, 2015

Depreciation (recovery) expense

 

$

 —

 

$

967 

 

$

2,307 

Additions to property, plant and equipment

 

 

 —

 

 

2,282 

 

 

6,011 



 

 

 

 

 

 

 

 

 



   

4.       ACCOUNTS RECEIVABLE SECURITIZATION



During June 2014, the Company entered into an accounts receivable securitization program with a commitment size of $30.0 million, whereby transactions under the program are accounted for as sales of trade receivables in accordance with ASC Topic 860, “Transfers and Servicing.” Sales of trade receivables under the program are recorded as a reduction of accounts receivable in the Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016. Proceeds received, including collections on the deferred purchase price notes receivable, are included in cash flows from operating activities in the Consolidated Statements of Cash Flows for the years ended December 31, 2016, January 2, 2016 and January 3, 2015.



Trade receivables sold to the third-party financial institution, and being serviced by Appvion, Inc., totaled $32.7 million as of December 31, 2016, for which $12.5 million in proceeds was received. Trade receivables sold to the third-party financial institution as of January 2, 2016 totaled $36.9 million, for which $18.1 million in proceeds was received. The fair value of the receivables sold equaled the carrying cost at the time of sale and no gain or loss was recorded as a result of the sale. The fair value of the deferred purchase price notes receivable recorded as of year-end 2016 was $19.3 million and $16.5 million as of year-end 2015 and is included in accounts receivable in the Consolidated Balance Sheet as of December 31, 2016 and January 2, 2016, respectively.  The Company estimates the fair value of the deferred purchase price notes receivable using Level 3 inputs based on historical performance of similar receivables including an allowance for doubtful accounts, as well as estimated cash discounts to be taken by customers and potential credits issued to customers. The Company deems the interest rate risk related to the deferred purchase price notes to be de minimis primarily due to the short average collection cycle (30 days) of the related receivables.



Servicing fees paid for the program were $0.6 million for the year ended December 31, 2016, $0.5 million for the year ended January 2, 2016, and $0.4 million for the year ended January 3, 2015. Transaction costs of $0.7 million, related to the June 2014 entry into this program, were deferred and recorded on the balance sheet as other long-term assets. They are being amortized over the three-year term of the securitization agreement. The remaining balance at December 31, 2016 was $0.1 million.

45


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

5.       OTHER INTANGIBLE ASSETS

 

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



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

As of December 31, 2016

   

   

As of January 2, 2016

   

   

Gross Carrying Amount

   

   

Accumulated Amortization

   

   

Gross Carrying Amount

   

   

Accumulated Amortization

Amortizable intangible assets:

   

 

   

   

 

   

   

 

   

   

 

     Trademarks

   

$

44,665 

   

   

$

34,667 

   

   

$

44,665 

   

   

$

32,570 

     Patents

   

   

5,443 

   

   

   

5,443 

   

   

   

6,158 

   

   

   

6,158 

     Customer relationships

   

   

5,365 

   

   

   

3,531 

   

   

   

5,365 

   

   

   

3,342 

            Subtotal

   

   

55,473 

   

   

$

43,641 

   

   

   

56,188 

   

   

$

42,070 

Unamortizable intangible assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

     Trademarks

   

   

22,865 

   

   

   

   

   

   

   

22,865 

   

   

   

   

            Total

   

$

78,338 

   

   

   

   

   

   

$

79,053 

   

   

   

   



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Of the $78.3 million of acquired intangible assets, $67.5 million was assigned to registered trademarks. Trademarks of $44.6 million related to carbonless papers are being amortized over their useful life of 20 years, while the remaining $22.9 million are considered to have an indefinite life and are not subject to amortization. Customer relationships are being amortized over their estimated useful lives of 25 years.



Amortization expense from continuing operations for the years ended December 31, 2016, January 2, 2016,  and January 3, 2015 approximated $2.3 million. Excluding the impact of any future acquisitions, the Company anticipates annual amortization of intangible assets will approximate $2.3 million for each of the years 2017 through 2021.



6.       INVENTORIES    



Inventories consist of the following (dollars in thousands):







 

 

 

 

 

 



 

 

 

 

 

 

   

   

December 31, 2016

 

January 2, 2016

Finished goods

   

$

47,710 

   

$

47,378 

Raw materials

 

 

12,701 

 

 

14,925 

Work in process

 

 

9,888 

 

 

9,300 

Stores and spare parts

 

 

16,093 

 

 

15,594 

   

   

$

86,392 

   

$

87,197 



Stores and spare parts inventory represents manufacturing supplies and equipment parts of varying age that must be available, on demand, to ensure minimal interruption of manufacturing processes. The balance is valued at average cost. All other inventories are valued using the first-in, first-out (“FIFO”) method.

46


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

7.       PROPERTY, PLANT AND EQUIPMENT



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





 

 

 

 

 

 



 

 

 

 

 

 

   

   

December 31, 2016

   

January 2, 2016

Land and improvements

   

$

9,774 

   

$

9,684 

Buildings and improvements

   

   

131,643 

   

   

129,453 

Machinery and equipment

   

   

515,101 

   

   

504,338 

Software

   

   

33,989 

   

   

33,476 

Capital leases

   

   

1,180 

   

   

996 

Construction in progress

   

   

2,254 

   

   

6,149 

   

   

   

693,941 

   

   

684,096 

Accumulated depreciation

   

   

(487,528)

   

   

(469,227)

   

   

$

206,413 

   

$

214,869 





8.      OTHER ACCRUED LIABILITIES



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



 

 

 

 

 

 



 

 

 

 

 

 

   

   

December 31, 2016

   

January 2, 2016

Compensation

   

$

6,090 

   

$

6,457 

Trade discounts

   

   

10,844 

   

   

12,977 

Workers’ compensation

   

   

2,587 

   

   

3,133 

Accrued insurance

   

   

1,381 

   

   

1,435 

Other accrued taxes

   

   

1,268 

   

   

1,694 

Postretirement benefits other than pension

   

   

1,543 

   

   

1,869 

Fox River Funding Agreement

 

 

 —

 

 

7,271 

Due on accounts receivable securitization

 

 

10,500 

 

 

5,500 

Other

   

   

10,726 

   

   

8,705 

   

   

$

44,939 

   

$

49,041 





47


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

9.      LONG-TERM OBLIGATIONS

 

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







 

 

 

 

 

 



 

 

 

 

 

 

   

   

December 31,

   

January 2,



 

2016

 

2016

Revolving credit facility at approximately 9.25% base rate and 7.27% Euro rate,

 

 

 

 

 

 

due June 2018

 

$

31,920 

 

$

9,600 

Unamortized debt issuance costs

 

 

(521)

 

 

(875)

Secured variable rate industrial development bonds, 0.6% average interest rate at

 

 

 

 

 

 

December 31, 2016, due in 2027

 

 

6,000 

 

 

6,000 

Unamortized debt issuance costs

 

 

(54)

 

 

(59)

State of Ohio assistance loan at 6%, approximately $100 due monthly and final

 

 

 

 

 

 

payment due May 2017

 

 

655 

 

 

1,905 

Unamortized debt issuance costs

 

 

(11)

 

 

(34)

State of Ohio loan at 3%, approximately $30 due monthly and final

 

 

 

 

 

 

payment due May 2019

 

 

788 

 

 

1,105 

Columbia County, Wisconsin municipal debt due December 2019

 

 

 —

 

 

300 

First lien term loan at 7.75%, due June 2019

 

 

158,300 

 

 

158,300 

Unamortized discount

 

 

(728)

 

 

(992)

Unamortized debt issuance costs

 

 

(1,684)

 

 

(2,291)

Second lien senior secured notes at 9.0%, due June 2020

 

 

250,000 

 

 

250,000 

Unamortized discount

 

 

(2,238)

 

 

(2,769)

Unamortized debt issuance costs

 

 

(3,930)

 

 

(4,860)



 

 

438,497 

 

 

415,330 

Less obligations due within one year

 

 

(982)

 

 

(1,567)

   

 

$

437,515 

 

$

413,763 



 

 

 

 

 

 



During 2016, the Company made mandatory debt repayments of $1.6 million, plus interest, on its State of Ohio loans. During the year, the Company borrowed $380.0 million and repaid $357.7 million on its revolving credit facility, leaving an outstanding balance at year-end 2016 of $31.9 million. In addition, approximately $15.0 million of the revolving credit facility commitment was used in the form of outstanding letters of credit issued thereunder, which, in accordance with its debt covenants, left approximately $16.3 million of unused borrowing capacity under its revolving credit facility. No amounts were drawn by beneficiaries under the outstanding letters of credit.



During the first quarter of 2016, the Company adopted ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” In accordance with the guidance, $8.1 million of unamortized debt issuance costs, specifically attributable to each of the Company’s long-term debt issues, were reclassified from other assets, as previously reported on the Consolidated Balance Sheet as of January 2, 2016, to long-term debt. The unamortized debt issuance costs are now presented as a direct deduction from each debt liability, consistent with the presentation of the corresponding debt discount, where applicable.



First Lien Credit Agreement



On June 28, 2013, Appvion entered into a credit agreement (the “Credit Agreement”) providing for a $100 million revolving line of credit due June 28, 2018 and a $335 million first lien term loan due June 28, 2019.  The Credit Agreement ranks senior in right of payment to all existing and future subordinated indebtedness of Appvion and is secured by security interests in substantially all of the property and assets of Appvion and the debt guarantors. The Credit Agreement is unconditionally, and jointly and severally, guaranteed by PDC and Appvion Canada, Ltd. It contains covenants customary for similar credit facilities. Affirmative and negative covenants under the Credit Agreement restrict Appvion’s ability and the ability of Appvion’s subsidiaries, subject to certain exceptions, to incur additional indebtedness and liens, engage in sale and leaseback transactions, make investments, make loans and advances, transact certain asset sales, engage in mergers, acquisitions, consolidations, liquidations and dissolutions, pay dividends or make other payments in respect of equity interests and other restricted payments, engage in certain transactions with affiliates, limit capital expenditures and make prepayments, redemptions and repurchases of other indebtedness.

48


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

After giving effect to the Third Amendment and Fifth Amendment (as defined below), the amount committed under the revolving line of credit was reduced to $75 million and $170 million of the first lien term loan was repaid using proceeds from the Sale of the Encapsys Business. The first lien term loan and revolving line of credit bear interest at a base rate plus 5.5% per annum or Eurodollar plus 6.5% per annum. The Credit Agreement provides for a fixed floor rate of 2.25% for base rate loans and 1.25% for Eurodollar loans.



On July 30, 2013, Appvion fixed the underlying interest rate at 2.74% on $100.0 million of the first lien term loan using an interest rate swap contract with a forward start date of September 15, 2014 and a maturity date of June 28, 2019. Within five business days after the year-end financial statements have been filed, Appvion is required to prepay an aggregate principal amount of the term loan equal to the excess, if any, of (a)  50% of defined excess cash flow, provided that such percentage shall be reduced to (1) 25% based upon Appvion achieving a consolidated leverage ratio of less than 3.5 to 1.0 but greater than or equal to 2.5 to 1.0 and (2) 0% based upon Appvion achieving a consolidated leverage ratio of less than 2.5 to 1.0 minus (b) the aggregate amount of all prepayments of the revolving credit line which constitute permanent reductions of the revolving credit facility and all optional prepayments of the first lien term loan made during the year.



On August 3, 2015, Appvion, PDC, Jefferies Finance LLC, as administrative agent, Fifth Third Bank, as revolver agent, swing line lender and L/C issuer, and the lenders under the Credit Agreement (the parties other than Appvion and PDC, the “Lending Parties”) entered into a Third Amendment (the “Third Amendment”) to the Credit Agreement. The Third Amendment became effective simultaneously with the closing of the Sale of the Encapsys Business. Upon its effectiveness, the Third Amendment, among other things, (i) permitted the Company to consummate the Sale of the Encapsys Business and provided for the corresponding release of liens on the Encapsys Business, (ii) required that not less than $165 million of the net proceeds be applied to prepay the revolving credit loans and the term loans under the Credit Agreement and provided that the remainder of the net proceeds be reinvested or otherwise applied to further prepay indebtedness in accordance with the Credit Agreement, (iii) provided for a permanent reduction of the revolving credit facility commitments from $100 million to $75 million, (iv) required the payment of a consent fee equal to 0.175% of the aggregate principal amount of loans and commitments, (v) added the pricing grid discussed above and (vi) further conformed certain terms and covenants under the Credit Agreement to account for the Sale of the Encapsys Business and the transactions contemplated thereby. The Third Amendment also removed the maximum consolidated leverage covenant and added (i) a maximum consolidated first lien leverage covenant that requires maintenance of a consolidated first lien leverage ratio, initially, of not more than 3.50 to 1.00, and on and after the third fiscal quarter of 2016, of not more than 3.25 to 1.00 and on and after the third fiscal quarter of 2017, of not more than 3.00 to 1.00 and (ii) a minimum consolidated fixed charge coverage covenant that requires maintenance of a consolidated fixed charge coverage ratio, initially, of not less than 0.95 to 1.00 and on and after the first fiscal quarter of 2016, of not less than 1.00 to 1.00. The Company incurred $0.9 million of debt acquisition costs related to the execution of this amendment. These costs have been deferred and will be amortized over the remaining term of the Credit Agreement.



On June 24, 2016, Appvion, PDC, and the Lending Parties entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement dated June 28, 2013. The Fourth Amendment amends the definition of Consolidated EBITDA to provide for an additional add-back to Consolidated Net Income for cash, fees and/or expenses paid or incurred in connection with certain financial and advisory services provided to the Company and Appvion in an aggregate amount not to exceed $6.5 million.



On January 16, 2017, Appvion, PDC, and the Lending Parties entered into a Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement dated June 28, 2013. The Fifth Amendment, among other things, (i) fixes the applicable interest rate on the Company’s term and revolving loans at 5.5% per annum for base rate loans and 6.5% per annum for Eurodollar loans, regardless of the Company’s then current consolidated leverage ratio, (ii) increases the maximum consolidated first lien leverage ratios applicable to the Company pursuant to the maximum consolidated leverage covenant to require maintenance of a consolidated first lien leverage ratio, during the first fiscal quarter of 2017, of not more than 3.60 to 1.00, during the second fiscal quarter of 2017, of not more than 3.50 to 1.00, during the period beginning on the third fiscal quarter of 2017 though the second fiscal quarter of 2018, of not more than 3.25 to 1.00 and from and after July 1, 2018, of not more than 3.00 to 1.00 and (iii) requires the payment of a 1.5% premium on any prepayments, payments in connection with a change in control or a refinancing or payments at maturity of either term or revolving loans.



On February 16, 2017, Appvion, PDC, and the Lending Parties entered into a Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement dated June 28, 2013. The Sixth Amendment amends the Credit Agreement to provide for the availability of additional term loans in an aggregate principal amount not to exceed $20.0 million, on the same terms and subject to the same conditions as the term loans already existing under the Credit Agreement.  Proceeds from the issuance of these term loans were reduced by $0.8 million for original issue discount and the net proceeds were used to pay down the revolving line of credit.

49


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Second Lien Secured Notes



On November 19, 2013, Appvion completed a voluntary refinancing of a portion of its debt to extend debt maturities and reduce interest expense. The refinancing included the issuance of $250 million in aggregate principal amount of second lien senior secured notes carrying an annual interest rate of 9.0%, payable semi-annually in arrears on June 1 and December 1 each year. The notes will mature on June 1, 2020 and are unconditionally, and jointly and severally, guaranteed by PDC and Appvion Canada, Ltd.  The notes are secured by a second priority security interest in substantially all of the property and assets of Appvion and the debt guarantors. These liens are junior in priority to the liens on this same collateral securing the outstanding debt incurred under the Credit Agreement. The notes contain covenants customary for similar debt which restrict Appvion’s ability, as well as the ability of the guarantors, to sell or lease certain assets or merge or consolidate with or into other companies, incur additional debt or issue preferred shares, incur liens, pay dividends or make other distributions, make other restricted payments and investments, place restrictions on the ability of certain of Appvion’s subsidiaries to pay dividends or other payments to Appvion, enter into sale and leaseback transactions, amend particular agreements relating to Appvion’s transaction with its former parent AWA and the ESOP and enter into transactions with certain affiliates. 



Management reported that the Company was in compliance with all debt covenants at December 31, 2016, and is forecasted to remain compliant for the next 12 months. The Company’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results and operating cash flows. The Company’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead the Company to seek amendments to, or waivers of, the financial covenants. The Company cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of noncompliance with debt covenants, if the lenders will not amend or waive the Company’s noncompliance with the covenants, the outstanding debt would become due and the Company would need to seek alternative financing. The Company cannot provide assurance that it would be able to obtain alternative financing in such circumstances. If the Company were not able to secure alternative financing, this would have a material adverse impact on the Company.



Scheduled repayment of principal on long-term obligations outstanding at December 31, 2016, is as follows (dollars in thousands):





 

 

 

 



 

 

 

 



 

 

Obligations



 

 

Outstanding at



 

 

December 31, 2016

2017

   

$

 

982 

2018

 

 

 

32,257 

2019

 

 

 

158,424 

2020

 

 

 

250,000 

2021

 

 

 

 —

Thereafter

 

 

 

6,000 



 

$

 

447,663 





10.      INCOME TAXES



In conjunction with the acquisition of Appvion, PDC elected to be treated as a subchapter S corporation and elected that its eligible subsidiaries be treated as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state and local income tax purposes. As a result, its tax provision includes only foreign and minimal state and local income taxes. For 2016 the Company recorded a net tax provision of $0.4 million primarily for U.S state and local income taxes. For 2015 the Company recorded a net tax provision of $0.2 million primarily for U.S. state and local income taxes. For 2014 the Company recorded a net tax provision of $0.3 million primarily for Canadian income taxes.



All U.S. federal C corporation tax years are closed. Various Canadian and state tax years remain open. Reserves for uncertain tax positions, as they relate to these matters, are insignificant. When, and if applicable, potential interest and penalty costs are accrued as incurred, with interest expense recognized in interest expense, net and penalty costs recognized in selling, general and administrative (“SG&A”) expense in the Consolidated Statement of Comprehensive Income (Loss).

50


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

11.      LEASES

 

The Company leases buildings, machinery and equipment and other facilities. Many of these leases obligate the Company to pay real estate taxes, insurance and maintenance costs. Total rent expense was $5.4 million for 2016,  $6.3 million for 2015 and $6.4 million for 2014



Future minimum lease payments as of December 31, 2016, under leases that have initial or remaining non-cancelable terms in excess of one year are as follows (dollars in thousands):





 

 

 



 

 

 



 

Operating

   

   

Leases

2017

   

$

4,085 

2018

   

   

1,305 

2019

   

   

1,061 

2020

   

   

886 

2021

   

   

 —

Thereafter

   

   

 —

Total minimum lease payments

   

$

7,337 





12.      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

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



The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts. These instruments are designated as cash flow hedges and are recorded in the Consolidated Balance Sheet at fair value using Level 2 observable market inputs. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward note, also deemed to be categorized as Level 2. The effective portion of the contracts’ gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transactions will not occur. These contracts are designed to hedge the variability in future cash flows attributable to changes in currency exchange rates. The notional amount of foreign exchange contracts used to hedge foreign currency transactions was $12.3 million as of December 31, 2016. These contracts have settlement dates extending through June 2017.



The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using collar contracts to manage risks associated with market fluctuations in energy prices.  These contracts are recorded in the Consolidated Balance Sheet at fair value using Level 2 observable market inputs based on the New York Mercantile Exchange as measured on the last trading day of the accounting period and compared to the collar price.  The contracts’ gains or losses due to changes in fair value are recorded in current period earnings.  As of December 31, 2016, all contracts have been settled.



On July 30, 2013, Appvion entered into an interest rate swap contract on $100 million of its variable rate first lien term loan with a forward start date of September 15, 2014 and a maturity date of June 28, 2019.  This interest rate swap pays the Company variable interest at the three-month Eurodollar rate or a fixed floor rate of 1.25%, whichever is greater, and the Company pays the counterparty a fixed interest rate. The fixed Eurodollar interest rate for the contract is 2.74%. Based on the terms of the interest rate swap contract and the underlying debt, the interest rate contract was determined to be effective, and thus qualifies as a cash flow hedge. Any changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive income in the accompanying Consolidated Balance Sheet until earnings are affected by the variability of cash flows.



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





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Designated as a Hedge

 

Balance Sheet Location

 

December 31, 2016

 

January 2, 2016

Foreign currency exchange derivatives

 

Accounts receivable

 

$

452 

 

$

430 

Interest rate swap

 

Other long-term liabilities

 

 

(2,657)

 

 

(3,501)

   

 

   

 

   

   

 

   

   

51


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The following table presents the location and amount of (gains) losses on derivative instruments and related hedge items included in the Company’s Consolidated Statement of Comprehensive Income (Loss) for the years ended December 31, 2016, January 2, 2016,  and January 3, 2015 and (gains) losses initially recognized in accumulated other comprehensive income in the Consolidated Balance Sheet at the period-ends presented (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Statement of

 

 

 

 

 

 

 

 

 



 

Comprehensive

 

 

For the

 

 

For the

 

 

For the



 

(Loss) Income

 

 

Year Ended

 

 

Year Ended

 

 

Year Ended

Designated as a Hedge

 

Location

 

December 31, 2016

 

January 2, 2016

 

January 3, 2015

Foreign currency exchange derivatives

 

Net sales

 

$

(637)

 

$

(1,389)

 

$

(161)

   

 

   

 

 

 

 

   

   

 

 

 

(Gains) losses recognized in accumulated

 

   

 

 

 

 

   

 

 

 

 

other comprehensive income

 

 

 

 

(377)

 

 

(381)

 

 

(619)



 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Interest expense

 

 

1,498 

 

 

1,506 

 

 

470 



 

 

 

 

 

 

 

 

 

 

 

Losses recognized in accumulated

 

 

 

 

 

 

 

 

 

 

 

other comprehensive income

 

 

 

 

2,616 

 

 

3,451 

 

 

3,270 

   

 

   

 

 

 

 

   

   

 

 

 

Not Designated as a Hedge

 

   

 

 

 

 

   

   

 

 

 

Natural gas collar

 

Cost of sales

 

 

 

   

499 

 

 

1,228 



13.      FAIR VALUE MEASUREMENTS

 

The carrying amount (including current portions) and estimated fair value of certain of the Company’s recorded financial instruments are as follows (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

December 31, 2016

 

   

January 2, 2016

   

   

Carrying

   

Fair

 

   

Carrying

   

Fair

Financial Instruments

   

Amount

   

Value

 

   

Amount

   

Value

First lien term loan

 

$

157,572 

 

$

151,269 

 

 

$

157,308 

 

$

146,296 

Second lien notes

 

 

247,762 

 

 

143,702 

 

 

 

247,231 

 

 

98,893 

Revolving credit facility

   

   

31,920 

   

   

31,920 

 

   

   

9,600 

   

   

9,600 

State of Ohio loans

   

   

1,443 

   

   

1,443 

 

   

   

3,010 

   

   

3,010 

Columbia County, Wisconsin municipal debt

   

   

 —

   

   

 —

 

   

   

300 

   

   

300 

Industrial development bonds

   

   

6,000 

   

   

6,000 

 

   

   

6,000 

   

   

6,000 



 

 

444,697 

 

 

334,334 

 

 

 

423,449 

 

 

264,099 

Debt issuance costs

 

 

(6,200)

 

 

 

 

 

 

(8,119)

 

 

 

   

   

$

438,497 

   

$

334,334 

 

   

$

415,330 

   

$

264,099 



The first lien term loan and the second lien notes are traded in public markets. Their fair value was determined using Level 2 inputs based on quoted market prices. The fair value of the State of Ohio loans was determined using Level 2 observable market inputs including current rates for financial instruments of the same remaining maturity and similar terms. The revolving credit facility and industrial development bonds have variable interest rates that reflect current market terms and conditions.



Due to their short-term nature, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities were reasonable estimates of fair value as of December 31, 2016 and January 2, 2016.



14.      EMPLOYEE BENEFITS

 

The Company has various defined benefit pension plans and defined contribution pension plans. They include a Supplemental Executive Retirement Plan (“SERP”) to provide retirement benefits for management and other highly compensated employees whose benefits are reduced by the tax-qualified plan limitations of the pension plan for eligible salaried employees.

52


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

 The status of these plans, including a reconciliation of benefit obligation, a reconciliation of plan assets and the funded status of the plans, as well as the key assumptions used in accounting for the plans, is shown below (dollars in thousands):







 

 

 

 

 

 

 



   

   

 

 

 

 

 

Pension Benefits

   

2016

 

 

2015

Change in benefit obligation

   

   

 

 

 

   

 

  Benefit obligation at beginning of period

   

$

421,041 

 

 

$

442,652 

  Service cost

   

   

5,578 

 

 

   

5,976 

  Interest cost

   

 

18,865 

 

 

 

18,095 

 Plan amendments

 

 

(91)

 

 

 

2,229 

  Actuarial loss (gain)

 

 

14,728 

 

 

 

(20,037)

 Settlements

 

 

(6,204)

 

 

 

(6,338)

  Benefits and expenses paid

 

 

(24,985)

 

 

 

(21,536)

Benefit obligation at end of period

 

$

428,932 

 

 

$

421,041 

   

 

 

   

 

 

 

   

Change in plan assets

 

 

   

 

 

 

   

  Fair value at beginning of period

 

$

314,689 

 

 

$

349,047 

  Actual return on plan assets

 

 

32,307 

 

 

 

(7,006)

  Employer contributions

 

 

561 

 

 

 

522 

 Settlements

 

 

(6,204)

 

 

 

(6,338)

  Benefits and expenses paid

 

 

(24,985)

 

 

 

(21,536)

Fair value at end of period

 

$

316,368 

 

 

$

314,689 

   

 

 

   

 

 

 

   

Funded status of plans

 

 

   

 

 

 

   

  Funded status at end of period

 

$

(112,564)

 

 

$

(106,352)

   

 

 

   

 

 

 

   

Amounts recognized in the consolidated balance sheet consist of:

 

 

   

 

 

 

   

    Accrued benefit liability-current

 

$

(601)

 

 

$

(602)

    Accrued benefit liability-noncurrent

 

 

(111,963)

 

 

 

(105,750)

Net amount recognized

 

$

(112,564)

 

 

$

(106,352)

   

 

 

   

 

 

 

   

Key assumptions at end of period (%)

 

 

   

 

 

 

   

  Discount rate

 

 

4.21 

 

 

 

4.58 



The amounts in accumulated other comprehensive income on the Consolidated Balance Sheet, net, that have not been recognized as components of net periodic benefit cost at December 31, 2016 and January 2, 2016, are as follows (dollars in thousands):







 

 

 

 

 

 



   

   

 

   

   

 



   

2016

   

2015

Prior service credit

   

$

(17,521)

   

$

(19,820)



The amount in accumulated other comprehensive income that is expected to be recognized as components of net periodic benefit cost over the next year is as follows (dollars in thousands):







 

 

 



 

 

 

Prior service credit

   

$

(2,390)





53


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The components of net periodic pension cost include the following (dollars in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

Year Ended

   

 

Year Ended

   

 

Year Ended

   

 

December 31,

   

 

January 2,

   

 

January 3,

Pension Benefits

 

2016

   

 

2016

   

 

2015

Net periodic benefit cost

 

   

 

   

 

   

 

   

 

   

 

  Service cost

 

$

5,578 

   

 

$

5,976 

   

 

$

4,766 

  Interest cost

 

   

18,865 

   

 

   

18,095 

   

 

   

20,585 

  Expected return on plan assets

 

   

(20,908)

 

 

   

(23,376)

 

 

   

(23,344)

  Amortization of

 

   

   

   

 

   

 

   

 

   

   

    Prior service (credit) cost

 

   

(2,390)

   

 

   

(2,620)

   

 

   

486 

  Mark-to-market adjustment

 

   

3,330 

   

 

   

10,344 

   

 

   

67,412 

Net periodic benefit cost (gain)

 

$

4,475 

   

 

$

8,419 

   

 

$

69,905 

Key assumptions (%)

 

   

   

   

 

   

   

   

 

   

   

  Discount rate

 

   

4.58 

   

 

   

4.18 

   

 

   

5.04 

  Expected return on plan assets

 

   

7.00 

   

 

   

7.00 

   

 

   

6.75 

  Rate of compensation increase

 

   

NA

   

 

   

NA

   

 

   

NA



Expected future benefit payments are as follows (dollars in thousands):







 

 

 



 

 

 

2017

 

$

29,473 

2018

 

   

30,055 

2019

 

   

31,236 

2020

 

   

31,231 

2021

 

   

31,324 

2022 thru 2026

 

   

147,337 

   

 

$

300,656 



As of the 2016 and 2015 measurement dates, the approximate asset allocations by asset category for the Company’s pension plan were as follows:







 

 

 

 

 



 

 

 

 

 

   

December 31, 2016

 

   

January 2, 2016

   

U.S. Equity

31 

%

   

31 

%

International Equity

   

   

   

Private Equity

   

   

   

Emerging Market Equity

   

   

   

Fixed Income

45 

   

   

46 

   

Real Estate

   

   

   

       Total

100 

%

   

100 

%









The Company’s Benefits Finance Committee (the “Committee”) is, among other things, charged with monitoring investment performance. The Committee periodically reviews fund performance and asset allocations. The plan trustee makes changes as necessary to realign the asset mix with the target allocations. The Committee has an investment policy for the pension plan assets that establishes target asset allocations by asset class as follows:







 

 



 

 

Total U.S. Equity (including private equity)

32 

%

Total International Equity

18 

%

Real Estate

%

Bonds

45 

%



54


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The investment policy objectives adopted by the Committee are designed to (a) provide benefit security to plan participants, (b) support accounting policy and funding goals, (c) maintain a target funded ratio to avoid adverse outcomes, and (d) promote stability and growth in funded status. The Committee is assisted by an investment advisor in managing the fund investments and establishing asset allocations and long-term return expectations. The investment advisor develops and maintains long-term return, risk and correlation expectations for a broad array of capital markets which the Committee uses in its monitoring activity.



The expected long-term rate of return on assets assumption is developed considering the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. Expected returns for each asset class are developed using estimates of expected real returns plus expected inflation. Long-term expected real returns are derived from future expectations for the U.S. Treasury real yield curve. Based on the assumptions and methodology described above, the Company selected 7.00% as its long-term rate of return on assets assumptions for both year-end 2016 and 2015. The mortality assumption used for each of the years 2016 and 2015 was the RP-2014 mortality table.

 

The discount rate is developed by selecting a portfolio of high-quality corporate bonds appropriate to provide for the projected benefit payments of the plan. This portfolio is selected from a universe of over 700 Aa-graded noncallable bonds available in the market as of December 31, 2016, further limited to those bonds with average yields between the 10th and 90th percentiles. After the bond portfolio is selected, a single rate is determined that equates the market value of the bonds selected to the discounted value of the plan’s benefit payments. Based on the methodology described above, and a selected portfolio of 21 bonds, the Company selected a discount rate of 4.21% for 2016 and 4.58% for 2015 to value year-end liabilities for the pension plans.

55


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the fair value of the assets within the pension plan as of December 31, 2016 and January 2, 2016 are as follows (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

 

Fair Value Measurements at December 31, 2016

   

   

 

Quoted Prices

 

 

Significant

 

 

Significant

 

 

 

   

   

 

in Active

 

 

Observable

 

 

Unobservable

 

 

 

   

   

 

Markets

 

 

Inputs

 

 

Inputs

 

 

 

   

   

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

Asset Category

   

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

   

 

$

7,764 

 

 

 

 

 

 

 

 

$

7,764 

   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Public equity

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 U.S.

(a)

 

 

 

 

 

 

97,784 

 

 

 

 

 

 

97,784 

 International

(a)

 

 

 

 

 

 

27,868 

 

 

 

 

 

 

27,868 

 Emerging markets

(b)

 

 

 

 

 

 

28,643 

 

 

 

 

 

 

28,643 

   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private equity

(c)

 

 

 

 

 

 

 

 

 

 

1,875 

 

 

 

1,875 

   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Corporate bonds

(d)

 

 

 

 

 

 

124,473 

 

 

 

 

 

 

 

124,473 

 Other fixed income

(d)

 

 

 

 

 

 

19,310 

 

 

 

 

 

 

 

19,310 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

(e)

 

 

 

 

 

 

 

 

 

 

8,651 

 

 

 

8,651 

   

   

 

$

7,764 

 

 

$

298,078 

 

 

$

10,526 

 

 

$

316,368 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

 

Fair Value Measurements at January 2, 2016

   

   

 

Quoted Prices

 

 

Significant

 

 

Significant

 

 

 

   

   

 

in Active

 

 

Observable

 

 

Unobservable

 

 

 

   

   

 

Markets

 

 

Inputs

 

 

Inputs

 

 

 

   

   

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

Asset Category

   

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

   

 

$

1,798 

 

 

 

 

 

 

 

 

$

1,798 

   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Public equity

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 U.S.

(a)

 

 

 

 

 

 

97,710 

 

 

 

 

 

 

97,710 

 International

(a)

 

 

 

 

 

 

29,343 

 

 

 

 

 

 

29,343 

 Emerging markets

(b)

 

 

 

 

 

 

26,359 

 

 

 

 

 

 

26,359 

   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private equity

(c)

 

 

 

 

 

 

 

 

 

 

3,863 

 

 

 

3,863 

   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Corporate bonds

(d)

 

 

 

 

 

 

125,251 

 

 

 

 

 

 

 

125,251 

 Other fixed income

(d)

 

 

 

 

 

 

17,628 

 

 

 

 

 

 

 

17,628 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

(e)

 

 

 

 

 

 

 

 

 

 

12,737 

 

 

 

12,737 

   

   

 

$

1,798 

 

 

$

296,291 

 

 

$

16,600 

 

 

$

314,689 



56


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

(a) U.S. and international equity investments include investments in commingled funds that invest primarily in publicly-traded equities. Equity investments are diversified across U.S. and non-U.S. stocks and are divided by investment style and market

capitalization.

(b) Emerging markets equity investments include investments in commingled funds that invest primarily in publicly-traded equities. Equity investments are diversified across non-U.S. stocks and are divided by country, investment style and market capitalization.

(c) Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt positions. The plan’s private equity investments are limited to 5% of the total limited partnership and the maximum allowable loss cannot exceed the commitment amount.

(d) Fixed income securities include investments in commingled funds that invest in a diversified blend of investment grade fixed income securities.

(e) Investment in real estate is designed to provide stable income returns and added diversification based upon the historical low correlation between real estate and equity or fixed income investments. The plan’s real estate assets consist of a commingled fund that invests in a diversified portfolio of direct real estate investments.

 

Description of Fair Value Measurements

 

Level 1 – Quoted, active market prices for identical assets or liabilities. Foreign and domestic common stocks are exchange-traded and are valued at the closing price reported by the respective exchanges on the day of valuation. Share prices of the funds, referred to as a fund's Net Asset Value (“NAV”), are calculated daily based on the closing market prices and accruals of securities in the fund's total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding. Redemptions of the mutual funds, collective trust funds and funds for employee benefit trust shares occur by contract at the respective fund’s redemption date NAV.

 

Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets and model-derived valuations in which all significant inputs are observable in active markets. The pension plan’s Level 2 investments include foreign and domestic common stocks, mutual funds, collective trust funds and funds for employee benefit trust. The NAVs of the funds are calculated monthly based on the closing market prices and accruals of securities in the fund's total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding. Redemptions of the mutual funds, collective trust fund and funds for employee benefit trust shares occur by contract at the respective fund’s redemption date NAV.

 

Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The pension plan’s Level 3 assets are primarily investment funds which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair value of these assets, management takes into account the estimated NAV of the underlying funds, as well as any other considerations that may increase or decrease such estimated value.

 

While the Company believes its valuation methods for plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets described below, could have a material effect on the computation of their estimated fair values.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

  

   

Changes in Fair Value Using



 

Significant Unobservable Inputs (Level 3)

   

   

Private

   

   

Real

   

   

 

   

   

Equities

   

   

Estate

   

   

Total

Balance, January 3, 2015

 

$

4,509 

 

 

$

15,272 

 

 

$

19,781 

Realized gains/(losses)

 

 

291 

 

 

 

(383)

 

 

 

(92)

Unrealized gains/(losses)

 

 

130 

 

 

 

1,932 

 

 

 

2,062 

Return of capital

 

 

(1,093)

 

 

 

(5,542)

 

 

 

(6,635)

Income

 

 

26 

 

 

 

1,458 

 

 

 

1,484 

Balance, January 2, 2016

 

 

3,863 

 

 

 

12,737 

 

 

 

16,600 

Realized gains/(losses)

 

 

260 

 

 

 

1,040 

 

 

 

1,300 

Unrealized gains/(losses)

 

 

(649)

 

 

 

548 

 

 

 

(101)

Return of capital

 

 

(1,599)

 

 

 

(6,167)

 

 

 

(7,766)

Income

 

 

 —

 

 

 

493 

 

 

 

493 

Balance, December 31, 2016

 

$

1,875 

 

 

$

8,651 

 

 

$

10,526 

57


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The Company expects to contribute $4.5 million to its funded pension plan in 2017. The defined benefit plan provides that hourly employees receive payments of stated amounts for each year of service. Payments under the defined benefit plan covering salaried employees are based on years of service and the employees’ compensation during employment. At December 31, 2016, the accumulated benefit obligation for the defined benefit plans were approximately $428.9 million.  At January 2, 2016, the accumulated benefit obligation for the defined benefit plans was approximately $421.0 million.

 

Certain of the Company’s hourly employees participated in a multi-employer defined benefit plan, the Pace Industry Union-Management Pension Plan (EIN #11-6166763). Participants in this plan included the West Carrollton represented manufacturing employees, where the collective bargaining agreement expired April 1, 2012. Participants also included the represented employees at the Kansas City, Kansas distribution center, where the collective bargaining agreement expired December 31, 2011. As a result of labor contracts ratified in June 2012 and September 2012, by the bargaining employees at the Kansas City, Kansas distribution center and West Carrollton, Ohio plant, respectively, both groups elected to end their participation in this multi-employer plan and instead participate in the defined benefit pension plan sponsored by the Company.   In addition, during first quarter 2012 there was a workforce reduction at the West Carrollton, Ohio plant resulting from the cessation of papermaking activities. As a result, the Company recorded a $25.0 million expense in 2012 representing its estimated cost to satisfy a complete withdrawal liability under the terms of the plan’s trust agreement, with a payment period that began January 2014 and could extend for up to 20 years, discounted in accordance with ASC Section 450-20-S99-1. Payments of $2.0 million were made during 2016, resulting in recorded interest expense of $1.1 million. As of December 31, 2016, the reserve has been reduced by $0.9 million. Of the $22.5 million reserve, $0.9 million is classified as short-term and $21.6 million is classified as long-term within the Consolidated Balance Sheet at December 31, 2016.



A deferred compensation plan, named the Executive Nonqualified “Excess” Plan of Appvion, Inc., effective on February 1, 2006, and as amended effective January 1, 2015, was established for highly-compensated employees, including all directors and executive officers. Salaried employees, with base salaries of $130,000 and over, are eligible to participate in the plan. This plan was established for the purpose of allowing a tax-favored option for saving for retirement when the IRS limits the ability of highly-compensated employees to participate under tax-qualified plans. This plan allows for deferral of compensation on a pre-tax basis and accumulation of tax-deferred earnings. Participants in the plan may choose to have deferrals increased or decreased based on the performance of a selection of mutual funds. No assets are actually set aside to fund the Company’s obligation under this plan. The non-employee directors are also allowed to participate in this plan. For the years ended December 31, 2016 and January 2, 2016, $2.7 million and $5.4 million, respectively, was recorded in other long-term assets for this plan.



58


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

15.      POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS

 

The Company has defined postretirement benefit plans that provide medical, dental and life insurance for certain retirees and eligible dependents.



The status of these plans, including a reconciliation of benefit obligations and the funded status of the plans, as well as the key assumptions used in accounting for the plans, is as follows (dollars in thousands):







 

 

 

 

 

 

 



 

 

 

 

 

 

 

Other Postretirement Benefits

   

2016

   

   

2015

Change in benefit obligation

   

 

   

   

 

  Benefit obligation at beginning of period

   

$

24,450 

   

   

$

34,076 

  Service cost

   

   

64 

   

   

   

185 

  Interest cost

   

   

954 

   

   

   

1,184 

  Plan amendments

   

   

(5)

 

   

   

(918)

  Actuarial (gain) loss

   

   

(1,449)

 

   

   

(8,304)

  Benefits and expenses paid

   

   

(1,629)

 

   

   

(1,773)

Benefit obligation at end of period

   

$

22,385 

   

   

$

24,450 

   

   

   

   

   

   

   

   

Funded status of plans

   

   

   

   

   

   

   

  Funded status at end of period

   

$

(22,385)

 

   

$

(24,450)

   

   

   

   

   

   

   

   

Amounts recognized in the consolidated balance sheet consist of:

   

   

   

   

   

   

   

  Accrued benefit liability-current

   

$

(1,543)

 

   

$

(1,869)

  Accrued benefit liability-noncurrent

   

   

(20,842)

 

   

   

(22,581)

Net amount recognized

   

$

(22,385)

 

   

$

(24,450)







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Key assumptions at end of period

   

   

   

   

   

   

   

   

  Discount rate

   

   

3.95 

%

   

   

4.25 

%

  Valuation year medical trend

   

   

7.33 

%

   

   

7.67 

%

  Ultimate medical trend

   

   

5.00 

%

   

   

5.00 

%

  Year ultimate medical trend reached

   

2023 

   

   

2023 

   



The discount rate is developed by selecting a portfolio of high-quality corporate bonds appropriate to provide for the projected benefit payments of the plan. This portfolio is selected from a universe of over 700 Aa-graded noncallable bonds available in the market as of December 31, 2016, further limited to those bonds with average yields between the 10th and 90th percentiles. After the bond portfolio is selected, a single rate is determined that equates the market value of the bonds selected to the discounted value of the plan’s benefit payments. Based on the methodology described above, and a selected portfolio of 25 bonds, the Company selected a discount rate of 3.95% for the postretirement benefit plan.



The December 31, 2016, accumulated postretirement benefit obligation (“APBO”) was determined using assumed medical care cost trend rates of 7.33%, decreasing one third percent each year to an ultimate rate of 5% in 2023. The January 2, 2016, APBO was determined using assumed medical care cost trend rates of 7.67%, decreasing one third percent each year to an ultimate rate of 5% in 2023.



The amount in accumulated other comprehensive income in the Consolidated Balance Sheet, that has not been recognized as a component of net periodic benefit cost at December 31, 2016 and January 2, 2016 is as follows (dollars in thousands):







 

 

 

 

 

 

 



 

 

 

 

 

 

 



   

2016

   

   

2015

Prior service credit

   

$

3,665 

   

   

$

4,922 



The amount in accumulated other comprehensive income expected to be recognized as a component of net periodic benefit cost over the next year is shown below (dollars in thousands):





 

 

 



 

 

 

Amortization of prior service credit

 

$

1,260 



59


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

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







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



   

For the

 

For the

 

For the



 

Year Ended

 

Year Ended

 

Year Ended



 

December 31, 2016

 

January 2, 2016

 

January 3, 2015

Service cost

   

$

64 

 

$

185 

 

$

246 

Interest cost

   

   

954 

 

 

1,184 

 

 

1,372 

Amortization of prior service credit

   

   

(1,262)

 

 

(1,163)

 

 

(1,206)

Mark-to-market adjustment

 

 

(1,449)

 

 

(8,304)

 

 

420 

Net periodic benefit (gain) loss

 

$

(1,693)

 

$

(8,098)

 

$

832 



 

 

 

 

 

 

 

 

 



The key assumptions used in the measurement of the Company’s net periodic benefit (gain) loss are shown in the following table:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

   

For the

   

   

For the

   

   

For the

   



 

Year Ended

 

 

Year Ended

 

 

Year Ended

 



 

December 31, 2016

 

 

January 2, 2016

 

 

January 3, 2015

 

  Discount rate

   

   

4.25 

%

   

   

3.86 

%

   

   

4.50 

%

  Valuation year medical trend

   

   

7.67 

%

   

   

8.00 

%

   

   

6.50 

%

  Ultimate medical trend

   

   

5.00 

%

   

   

5.00 

%

   

   

5.00 

%

  Year ultimate medical trend reached

   

2024 

   

   

2024 

   

   

2017 

   



Impact of a one percent change in medical trend rate (dollars in thousands):







 

 

 

 

 

 

 



 

 

 

 

 

 

 

  

   

1% Increase

   

   

1% Decrease

Aggregate impact on service and interest cost

   

$

18 

   

   

$

(17)

Effect on accumulated plan benefit obligation

   

   

491 

   

   

   

(444)



Expected postretirement benefit payments for each of the next five years, and the aggregate from 2022 through 2026, are as follows (dollars in thousands):







 

 

 

2017

   

$

1,543 

2018

   

   

1,847 

2019

   

   

1,882 

2020

   

   

1,902 

2021

   

   

1,923 

2022 thru 2026

   

   

8,602 

   

   

$

17,699 





16.      LONG-TERM INCENTIVE COMPENSATION 

 

In December 2001, the Company adopted the Appvion, Inc. Long-Term Incentive Plan (“LTIP”). As of January 3, 2010, the Company adopted a long-term restricted stock unit plan ("RSU"), and as amended effective January 1, 2015. Both plans utilize phantom units. The value of a unit in the LTIP is based on the change in the fair market value of PDC’s common stock under the terms of the employee stock ownership plan (the “ESOP”) between the grant date and the exercise date. All units granted under the LTIP may be exercised after three full years. Units expire ten years after the grant date. The value of a unit in the RSU is based on the value of PDC common stock, as determined by the ESOP trustee. All RSUs vest three years after the award date and are paid at vesting. The cash payment upon vesting is equal to the value of one share of PDC common stock at the most recent valuation date times the number of units granted. RSU units can be deferred to the Non-Qualified Excess Plan if the recipient so elects shortly after the units have been granted. All units under both the LTIP and RSU plans will vest immediately, and cash payment will be made, upon a change in control as defined in the plans.  At year-end 2016, the fair market value of one share of PDC common stock is $10.35.

60


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The Compensation Committee of the board establishes the number of units granted each year under these plans in accordance with the Compensation Committee’s stated goals and policies. The Compensation Committee has the discretion to use either, or both, plan(s) as appropriate to attract, motivate and retain key management employees while managing the expense to the Company. During 2016,  310,150 additional units were granted under the LTIP plan and 130,850 additional units were granted under the RSU plan. During 2015,  417,300 additional units were granted under the LTIP plan and 180,150 additional units were granted under the RSU plan. During 2014,  238,650 additional units were granted under the LTIP plan and 120,650 additional units were granted under the RSU plan. Units are valued using the most recent PDC stock price as determined by the semi-annual ESOP valuation as of June 30 and December 31.



Approximately $0.3 and $0.2 million of expense, related to the LTIP plan, was recorded during 2016 and 2015, respectively, in SG&A expense. Due to a decrease in stock price, a $1.6 million recovery was recorded during 2014 in SG&A expense. Based on the Company’s stock price as of the end of December 2016, the Company had no unrecognized compensation expense related to nonvested phantom units granted under the plan. Since the inception of the plan, 4,817,370 phantom units have been granted, 2,887,648 phantom units have been forfeited and 1,018,688 phantom units have been exercised, leaving an outstanding balance of 911,034 phantom units at December 31, 2016. A summary of 2014 - 2016 activity within the LTIP plan is as follows.







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

 

 

   

   

 

 

   

   

Weighted

   

 



 

 

 

 

 

 

 

 

Average

 

Aggregate



 

Weighted

 

 

 

 

 

Remaining

 

Intrinsic Value



 

Average Grant

 

 

Grant

 

 

Contractual

 

(dollars in



 

Unit Price

 

 

Units

 

 

Life (Years)

 

thousands)

Outstanding, December 28, 2013

   

$

20.92 

   

   

   

2,013,500 

   

   

   

   

   

   

   

Granted

 

   

16.26 

   

   

   

238,650 

   

   

   

   

   

   

   

Exercised

 

 

12.91 

 

 

 

(180,500)

 

 

 

 

 

 

 

Forfeited or expired

   

 

27.11 

   

   

   

(21,201)

 

   

   

   

   

   

   

Outstanding, January 3, 2015

   

$

21.02 

   

   

   

2,050,449 

   

   

   

5.0 

   

$

 —

Exercisable, January 3, 2015

   

$

22.13 

   

   

   

1,618,700 

   

   

   

4.1 

   

$

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 3, 2015

   

$

21.02 

   

   

   

2,050,449 

   

   

   

   

   

   

   

Granted

 

 

11.22 

 

 

 

417,300 

 

 

 

 

 

 

 

Forfeited or expired

   

   

25.33 

   

   

   

(404,615)

 

   

   

   

   

   

   

Outstanding, January 2, 2016

   

$

18.19 

   

   

   

2,063,134 

   

   

   

5.5 

   

$

 —

Exercisable, January 2, 2016

   

$

20.34 

   

   

   

1,454,367 

   

   

   

4.2 

   

$

 —



   

   

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 2, 2016

   

$

18.19 

   

   

   

2,063,134 

   

   

   

   

   

   

   

Granted

   

   

12.30 

   

   

   

310,150 

   

   

   

   

   

   

   

Exercised

 

 

12.59 

 

 

 

(416,778)

 

 

 

 

 

 

 

Forfeited or expired

   

   

18.28 

   

   

   

(1,045,472)

 

   

   

   

   

   

   

Outstanding, December 31, 2016

   

$

16.03 

   

   

   

911,034 

   

   

   

6.5 

   

$

 —

Exercisable, December 31, 2016

   

$

21.14 

   

   

   

395,784 

   

   

   

3.8 

   

$

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 



During 2016, 416,778 phantom units were exercised. In the second half of 2016, 361,000 units, originally granted at $12.84 per unit, and 55,778 units, originally granted at a price of $11.00 per unit, were exercised at the mid-year 2016 share price of $13.70 per unit for a total payment of $0.5 million representing the appreciation of the units. No phantom units were exercised during 2015. During 2014, 180,500 phantom units were exercised. In the first half of 2014, 146,000 units, originally granted at a price of $12.84 per unit, were exercised at the year-end 2013 price of $16.25 per unit for a total payment of $0.5 million representing the appreciation of the units. In the second half of 2014, 24,500 units, originally granted at a price of $12.84 per unit, and 10,000 units, originally granted at a price of $14.10 per unit, were exercised at the mid-year 2014 share price of $16.30 per unit for a total payment of $0.1 million representing the appreciation of the units. As of December 31, 2016,  no long-term liability was included in the Consolidated Balance Sheet.  

61


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Approximately $0.7 million, $1.6 million and $0.6 million of expense, related to the RSU plan, was recorded during 2016, 2015 and 2014, respectively. Since the inception of the plan,  876,075 units have been granted, 201,557 units have been forfeited and 425,868 units became fully vested and were paid, leaving an outstanding balance of 248,650 units at December 31, 2016. These shares are expected to be recognized over the weighted-average period of 1.76 years. As of year-end 2016, 37,850 RSU units became vested and exercisable. In accordance with the plan, a  payment for these RSU’s of $0.4 million was made on February 17, 2017, based on the year-end 2016 price of $10.35 per unit. A summary of 2014 – 2016 activity within the RSU plan is as follows.









 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

 

 

   

   

 

 

 

   

Weighted

   

 



 

 

 

 

 

 

 

 

Average

 

Aggregate



 

Weighted

 

 

 

 

 

Remaining

 

Intrinsic Value



 

Average Grant

 

 

Grant

 

Contractual

 

(dollars in



 

 

Unit Price

 

 

 

Units

 

 

 

Life (Years)

 

 

thousands)

Outstanding, December 28, 2013

   

$

16.37 

   

   

   

216,125 

 

   

 

   

 

   

Granted

   

   

16.25 

   

   

   

120,650 

 

   

 

 

   

 

   

Forfeited

 

 

20.27 

 

 

 

(6,800)

 

 

 

 

 

 

 

Outstanding, January 3, 2015

 

$

16.25 

   

   

   

329,975 

 

 

 

1.1 

 

$

3,630 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 3, 2015

   

$

16.25 

   

   

   

329,975 

 

   

 

 

   

 

   

Granted

   

   

11.22 

   

   

   

180,150 

 

   

 

 

   

 

   

Exercised

 

 

15.15 

 

 

 

(107,283)

 

 

 

 

 

 

 

Forfeited

   

   

13.77 

   

   

   

(42,867)

 

   

 

 

   

 

   

Outstanding, January 2, 2016

   

$

14.42 

   

   

   

359,975 

 

   

   

1.2 

   

$

4,428 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 2, 2016

   

$

14.42 

   

   

   

359,975 

 

   

 

 

   

 

   

Granted

   

   

12.30 

   

   

   

130,850 

 

   

 

 

   

 

   

Exercised

 

 

16.30 

 

 

 

(157,085)

 

 

 

 

 

 

 

Forfeited

   

   

12.53 

   

   

   

(85,090)

 

   

 

 

   

 

   

Outstanding, December 31, 2016

   

$

12.76 

   

   

   

248,650 

 

   

   

1.4 

   

$

2,574 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. Deferred compensation is in the form of phantom units and is earned over the course of six-month calendar periods of service beginning January 1 and July 1. The number of units to be earned is calculated using the established dollar value of the compensation divided by the fair market value of one share of PDC common stock as determined by the semi-annual ESOP valuation. This deferred compensation vests coincidental with the board member’s continued service on the board. Upon cessation of service as a director, the deferred compensation will be paid in five equal annual cash installments. The expense for this plan was approximately $0.1 million and $0.5 million in 2016 and 2015, respectively. During 2014, there was a $0.2 million recovery of expense.



17.      COMMITMENTS AND CONTINGENCIES

 

Lower Fox River

On September 30, 2014, Appvion entered into a Funding Agreement with NCR, B.A.T. Industries, p.l.c. (“BAT”) and Windward relating to clean-up costs for the Lower Fox River and certain potential future sites. Under the Funding Agreement, the parties paid the following amounts on September 30, 2014 toward historical Fox River Costs (as defined in the Funding Agreement) incurred by NCR through September 1, 2014:  BAT ‑ $77.08 million; Windward ‑ $10 million; and Appvion ‑ $6 million.  In addition, BTI 2014 LLC, a wholly‑owned subsidiary of BAT (“BTI”), is responsible for funding 50% of the Fox River Costs incurred by NCR after September 1, 2014.  The parties also agreed:  (a) to vigorously pursue reasonable claims and viable claims against certain third parties and to deposit any recoveries therefrom into BTI; and (b) that any funds remaining in BTI after paying BAT and NCR for any unreimbursed funding of Fox River Costs would be used to fund 60% of any Future Sites Costs, as defined in the Funding Agreement.

62


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Subject to the limitations described below, Appvion agreed to assume the following additional funding obligations under the Funding Agreement:



(a)

$4 million was paid on February 2, 2015 toward Fox River Costs;

(b)

On September 1 of each year during the term of the Funding Agreement, the lesser of (1) an amount equal to 50% of the aggregate unreimbursed amount paid by BAT to the BTI for Fox River Costs (to the extent that Appvion has not previously paid such amount in any prior years) and (2) $7.5 million ($7.5 million was paid on September 1, 2015); and

(c)

On September 1 of each year during the term of the Funding Agreement, the lesser of (1) an amount equal to 50% of the aggregate amount paid by BAT to the BTI for Future Sites Costs (to the extent that Appvion has not previously paid such amount in prior years) and (2)  $7.5 million.

Effective August 31, 2016, the parties agreed that the amount due from Appvion on September 1, 2016, as set forth in (c) above would be separated into two payments: (i) $3.0 million, which was paid on September 1, 2016; and (ii) $4.5 million, which was subsequently paid on October 3, 2016. 

Notwithstanding the foregoing, Appvion’s additional funding obligations are subject to the following limitations:

 

(a)

In no event will Appvion’s funding obligations for Fox River Costs exceed $25 million (the “Appvion Fox River Cap”);

(b)

In no event will Appvion’s funding obligations for Future Sites Costs exceed $25 million (the “Appvion Future Sites Cap”); and

(c)

In no event will Appvion’s funding obligations under the Funding Agreement exceed $7.5 million during any calendar year (except for the payment of $4 million on February 2, 2015 and the payment of $7.5 million on September 1, 2015). The $4 million payment due February 1, 2015 and the $7.5 million payment due September 1, 2015, the $3 million payment due September 1, 2016, and the $4.5 million payment due October 3, 2016 have been timely paid.  These payments, together with the initial payment by Appvion of $6 million on September 30, 2014, fully satisfy Appvion’s funding obligations under the Funding Agreement.

The parties to the Funding Agreement agree that they have no recourse against Appvion for any further liability relating to the Fox River or Future Sites beyond the Appvion Fox River Cap and the Appvion Future Sites Cap, respectively.



Appvion bears sole responsibility for its funding obligations under the Funding Agreement. The Funding Agreement does not, however, modify, alter or amend the two indemnification agreements entered into in 2001 wherein Windward agreed to indemnify PDC and PDC agreed to indemnify Appvion for certain costs, expenses and liabilities relating to Fox River and Future Sites, including Appvion’s costs and expenses in negotiating and entering into the Funding Agreement and any future costs and expenses incurred by Appvion in pursuing recoveries.



Other



From time to time, the Company may be subject to various demands, claims, suits or other legal or regulatory proceedings arising in the ordinary course of business. A comprehensive insurance program is maintained to provide a measure of financial protection against such matters, though not all such exposures are, or can be, addressed by insurance. Estimated costs are recorded for such demands, claims, suits or proceedings of this nature when reasonably determinable. The Company has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While the Company will vigorously defend itself and expects to prevail in any similar cases that may be brought against it in the future, there can be no assurance that it will be successful.

 

The Company does not believe that any pending or threatened demands, claims, suits or other legal or regulatory proceedings will have, individually or in the aggregate, a materially adverse effect on its business, financial condition and results of operations or cash flows. 

63


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

18.      CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

Supplemental cash flow disclosures (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

   

   

For the

   

   

For the

   

   

For the



 

Year Ended

 

 

Year Ended

 

 

Year Ended



 

December 31, 2016

 

 

January 2, 2016

 

 

January 3, 2015

Cash paid during the period for:

   

 

   

   

 

   

   

 

Interest

   

$

37,915 

   

   

$

42,299 

   

   

$

49,940 

Income taxes

   

   

304 

   

   

   

404 

   

   

   

221 

   

   

   

   

   

   

   

   

   

   

   

   

Cash received during the period for:

   

   

   

   

   

   

   

   

   

   

   

Income tax refunds

   

$

15 

   

   

$

 —

   

   

$

178 





19.      CONCENTRATIONS OF CREDIT AND OTHER RISKS

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base. The Company does not believe it is dependent upon any single customer. Sales to the Company’s two largest customers each represented approximately 9% and 8% of net sales for 2016, 2015, and 2014, respectively.



The five largest customers in the carbonless papers segment collectively accounted for approximately 46% of carbonless net sales in 2016,  44% of carbonless papers net sales in 2015 and 41% of carbonless papers net sales in 2014. The five largest customers in the thermal papers segment collectively accounted for approximately 47% of thermal papers net sales in 2016,  44% of thermal papers net sales in 2015 and 41% of thermal papers net sales in 2014.



          Base stock is a key raw material in the Company’s business. In 2016, the Company purchased approximately $226 million of base stock from external suppliers. Approximately $24 million of this base stock was purchased for the production of carbonless products with nearly 100% purchased from one external supplier. The Company purchased approximately $202 million of base stock for the production of thermal products with approximately 92% purchased from a single external supplier. In 2015, the Company purchased approximately $215 million of base stock from external suppliers. Approximately $39 million of this base stock was purchased for the production of carbonless products with approximately 100% purchased from one external supplier. The Company purchased approximately $176 million of base stock for the production of thermal products with approximately 94% purchased from a single external supplier. In 2014, the Company purchased approximately $239 million of base stock from external suppliers. Approximately $45 million of this base stock was purchased for the production of carbonless products with approximately 98% purchased from one external supplier. The Company purchased approximately $194 million of base stock for the production of thermal products with approximately 70% purchased from a single external supplier. 



20.      EMPLOYEE STOCK OWNERSHIP PLAN



The KSOP includes a separate ESOP component. The KSOP is a tax-qualified retirement plan that also contains a 401(k) feature, which provides participants with the ability to make pre-tax contributions to the KSOP by electing to defer a percentage of their compensation. The ESOP is a tax-qualified employee stock ownership plan that is designed to invest primarily in the common stock of PDC.



Eligible participants, as “named fiduciaries” under ERISA, were offered a one-time irrevocable election in 2001 to acquire a beneficial interest in the 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 $107 million. All proceeds of the offering were used by the ESOP trustee to purchase 10,684,373 shares of PDC common stock. As a result of this purchase, the ESOP owns 100% of the common stock of PDC. The ESOP trustee is expected to purchase common stock from PDC with future pre-tax payroll deferrals made by employees. The Company also intends to fund a significant part of its matching contribution commitment with common stock of PDC. Matching contributions charged to expense were $1.6 million in 2016, $1.9 million in 2015, and $2.3 million in 2014. 

64


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

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. Covenants in the Credit Agreement, as amended, providing for the first lien term loan and revolving credit facility, as well as the indenture governing the second lien senior secured notes restrict Appvion’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 has obligations to make distributions to former participants in the ESOP under ERISA and these obligations may conflict with the terms of these debt agreements. During 2016, 2015, and 2014, the Company exercised its right to satisfy requests for distributions to former participants using five equal annual installments.



In 2016, the ESOP trustee purchased 145,102 shares of PDC redeemable common stock for an aggregate price of $1.6 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 138,018 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 780,600 shares of PDC redeemable common stock were repurchased during 2016 at an aggregate price of $10.2 million.



In 2015, the ESOP trustee purchased 167,177 shares of PDC redeemable common stock for an aggregate price of $1.9 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 160,097 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 775,075 shares of PDC redeemable common stock were repurchased during 2015 at an aggregate price of $9.4 million.

 

In 2014, the ESOP trustee purchased 178,179 shares of PDC redeemable common stock for an aggregate price of $2.4 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 172,167 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 1,273,759 shares of PDC redeemable common stock were repurchased during 2014 at an aggregate price of $18.2 million.



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



The fair value of the redeemable common stock is determined by an independent, third-party appraiser selected by the ESOP Trustee, as required by law and the ESOP. Such valuations are made as of June 30 and December 31. The year-end 2016 share price was $10.35. Based upon the estimated fair value of the redeemable common stock at December 31, 2016, an ultimate redemption liability of approximately $64.8 million was determined. The redeemable common stock recorded book value as of December 31, 2016, was $100.6 million. The net decrease in fair value and accretion of redeemable common stock was $3.4 million for the year ended December 31, 2016.



As of December 31, 2016, the Company is obligated to purchase 1,956,365 shares of redeemable common stock eligible for redemption as a result of participants terminating employment due to retirement, resignation, dismissal, permanent layoff, disability or death. Using the year-end 2016 share price, the Company has estimated a future share repurchase obligation of approximately $20.2 million. Per plan provisions, neither the dates of nor prices at distribution are fixed or determinable, and therefore, repurchase obligations to be settled over the next five years will vary from the estimated repurchase obligation above.

65


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

21.      UNAUDITED QUARTERLY FINANCIAL DATA    



Unaudited quarterly financial data for 2016 includes the following (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

For the Three

 

   

For the Three

 

   

For the Three

   

   

For the Three

 

 

For the Year



 

Months Ended

 

 

Months Ended

 

 

Months Ended

 

 

Months Ended

 

 

Ended



 

April 3,

 

 

July 3,

 

 

October 2,

 

 

December 31,

 

 

December 31,



 

2016

 

 

2016

 

 

2016

 

 

2016

 

 

2016

Net sales

   

$

180,540 

 

   

$

173,551 

 

   

$

169,189 

   

   

$

167,084 

 

 

$

690,364 

Gross profit

   

   

36,165 

 

   

   

30,292 

 

   

   

29,337 

   

   

   

28,312 

 

 

   

124,106 

Operating income (loss)

 

 

9,561 

 

 

 

3,891 

 

 

 

3,420 

 

 

 

6,656 

 

 

 

23,528 

Net (loss) income

   

$

(421)

 

   

$

(6,860)

 

   

(7,210)

 

   

$

(4,555)

 

 

$

(19,046)



Unaudited quarterly financial data for 2015 includes the following (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

For the Three

 

   

For the Three

 

   

For the Three

   

   

For the Three

 

 

For the Year



 

Months Ended

 

 

Months Ended

 

 

Months Ended

 

 

Months Ended

 

 

Ended



 

April 5, 2015

 

 

July 5, 2015

 

 

October 4, 2015

 

 

January 2, 2016

 

January 2, 2016

Net sales

   

$

183,909 

 

   

$

166,158 

 

   

$

180,591 

   

   

$

169,388 

 

 

$

700,046 

Gross profit (loss)

   

   

32,492 

 

   

   

27,159 

 

   

   

32,870 

   

   

   

31,084 

 

 

   

123,605 

Operating income (loss)

 

 

4,333 

 

 

 

(1,443)

 

 

 

4,169 

 

 

 

3,469 

 

 

 

10,528 

Loss from continuing operations

 

 

(10,268)

 

 

 

(14,071)

 

 

 

(11,023)

 

 

 

(6,563)

 

 

 

(41,925)

Income from discontinued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

operations, net of income taxes

 

 

4,503 

 

 

 

4,264 

 

 

 

191,904 

 

 

 

(172)

 

 

 

200,499 

Net income (loss)

   

$

(5,765)

 

   

$

(9,807)

 

   

180,881 

 

   

$

(6,735)

 

 

$

158,574 



On August 3, 2015, Appvion completed the sale of the assets primarily used in the development, manufacture and sale of microencapsulation materials by the Encapsys segment of the Company for an aggregate purchase price of $208 million in cash, subject to working capital adjustments, and the assumption of certain liabilities. Total working capital adjustments and cash expenses of the sale were approximately $7.5 million. The financial results of the Encapsys segment, including the gain on the sale of the assets, have been reclassified as discontinued operations.



22.      SEGMENT INFORMATION 

 

The Company’s reportable segments are carbonless papers and thermal papers. The accounting policies applicable to these reportable segments are the same as those described in the summary of significant accounting policies. Management evaluates the performance of the segments based primarily on operating income (loss). Items excluded from the determination of segment operating income (loss) are unallocated corporate charges, interest expense, net, debt modification/extinguishment expense, foreign exchange loss and other expense.



The carbonless papers segment includes carbonless, security and other specialty paper products. Carbonless paper is used to make multipart business forms such as invoices and purchase orders. The Company also produces coated products for design and print applications and offers custom coating solutions. Carbonless products are sold to converters, printers and merchant distributors who stock and sell carbonless paper to printers. The Company also produces security papers with features that resist forgery, tampering and counterfeiting. The Company’s portfolio of products incorporates security technologies, including watermarks, taggants, reactive chemicals, embedded threads and fibers and machine-readable technologies, to serve global markets.



The thermal papers segment develops and produces substrates for the transaction and item identification markets. Thermal paper is used in four principal end markets: (1) point-of-sale products for retail receipts and coupons; (2) label products for shipping, warehousing, medical and clean-room applications; (3) tags and tickets for airline and baggage applications, event and transportation tickets and lottery and gaming applications; and (4) printer, calculator and chart paper for engineering, industrial and medical diagnostic charts. Point-of-sale products are sold to printers and converters who in turn sell to end-user customers or to resellers such as office supply stores, office superstores, warehouse clubs, mail order catalogs, equipment dealers, merchants and original equipment manufacturers. Label products are sold to companies who apply pressure sensitive adhesive coatings and release liners and then sell these products to label printers. Tag, ticket and chart grades are sold to specialty printing companies who convert them to finished products such as entertainment, lottery and gaming tickets, tags, coupons and medical charts.

66


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

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



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

   

 

For the

 

For the

 

For the



 

Year Ended

 

Year Ended

 

Year Ended



 

December 31, 2016

 

January 2, 2016

 

January 3, 2015

Net sales

 

 

 

 

 

 

 

 

 

Carbonless papers

 

$

284,930 

 

$

327,178 

 

$

349,374 

Thermal papers

 

 

405,434 

 

 

372,868 

 

 

415,324 

Total

 

$

690,364 

 

$

700,046 

 

$

764,698 

   

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

   

 

 

   

 

 

 

Carbonless papers

 

$

17,248 

 

$

26,729 

 

$

(12,640)

Thermal papers

 

 

14,333 

 

 

(5,848)

 

 

(11,348)



 

 

31,581 

 

 

20,881 

 

 

(23,988)

Unallocated corporate charges

 

 

(8,053)

 

 

(10,353)

 

 

(32,877)

Total

 

$

23,528 

 

$

10,528 

 

$

(56,865)



 

 

 

 

 

 

 

 

 

Depreciation and amortization (A)

 

 

   

 

 

   

 

 

 

Carbonless papers

 

$

13,816 

 

$

14,132 

 

$

14,055 

Thermal papers

 

 

12,655 

 

 

12,514 

 

 

13,500 

   

 

 

26,471 

 

 

26,646 

 

 

27,555 

Unallocated corporate charges

 

 

321 

 

 

177 

 

 

153 

Total

 

$

26,792 

 

$

26,823 

 

$

27,708 



(A)

Depreciation and amortization from continuing operations are allocated to the reportable segments based on the amount of activity provided by departments to the respective product lines in each reportable segment.



During 2016, the Company recorded a net mark-to-market $2.0 million related to its retiree benefit plans.  This loss was allocated as follows: $1.3 million to carbonless papers and $0.7 million to thermal papers. 



During 2015, the Company recorded a net mark-to-market loss of $3.5 million related to its retiree benefit plans. This loss was allocated as follows: $2.3 million to carbonless papers, $0.9 million to thermal papers and $0.3 million to unallocated corporate charges.



During September 2014, Appvion entered into a Funding Agreement relating to clean-up costs and liabilities for the Lower Fox River sites and potential future sites. Under the Funding Agreement, the parties agreed to a specific funding arrangement for which Appvion recorded a $24.0 million third quarter charge in unallocated corporate charges for its portion of the Funding Agreement. During 2014, the Company recorded a mark-to-market loss for pension and other postretirement benefit plans of $65.9 million. This loss was allocated as follows: $40.5 million to carbonless papers, $24.1 million to thermal papers and $1.3 million to unallocated corporate charges.



Revenues from sales in the U.S. were $529.7 million in 2016, $526.0 million in 2015, and $568.6 million in 2014. Revenues from sales to customers in foreign countries were $160.7 million in 2016, $174.0 million in 2015, and $196.1 million in 2014. All long-lived assets were located in the U.S. as of December 31, 2016 and January 2, 2016. Substantially all long-lived assets were located in the U.S. as of January 3, 2015.

67


 

PAPERWEIGHT DEVELOPMENT CORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

23.      ACCUMULATED OTHER COMPREHENSIVE INCOME



The changes in accumulated other comprehensive income by component for the year ended December 31, 2016 are as follows (dollars in thousands)









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Change in

 

Hedging

 

 



 

Retiree Plans

 

Activities

 

Total

Balance, January 2, 2016

 

$

24,742 

 

$

(3,070)

 

$

21,672 



 

 

 

 

 

 

 

 

 

Other comprehensive loss before reclassifications

 

 

 —

 

 

1,692 

 

 

1,692 

Amounts recorded in accumulated other

 

 

 

 

 

 

 

 

 

comprehensive income

 

 

(3,556)

 

 

(861)

 

 

(4,417)

Net other comprehensive loss

 

 

(3,556)

 

 

831 

 

 

(2,725)



 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

21,186 

 

$

(2,239)

 

$

18,947 



The changes in accumulated other comprehensive income by component for the year ended January 2, 2016 are as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Change in

 

Hedging

 

 



 

Retiree Plans

 

Activities

 

Total

Balance, January 3, 2015

 

$

29,837 

 

$

(2,651)

 

$

27,186 



 

 

 

 

 

 

 

 

 

Other comprehensive loss before reclassifications

 

 

 —

 

 

(302)

 

 

(302)

Amounts recorded in accumulated other

 

 

 

 

 

 

 

 

 

comprehensive income

 

 

(5,095)

 

 

(117)

 

 

(5,212)

Net other comprehensive loss

 

 

(5,095)

 

 

(419)

 

 

(5,514)



 

 

 

 

 

 

 

 

 

Balance, January 2, 2016

 

$

24,742 

 

$

(3,070)

 

$

21,672 



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



 

 

 

 

 

 

 

 

 

 

 

 



 

Amounts Reclassified from

 

 



 

Accumulated Other Comprehensive Income

 

 



 

 

 

 

 

 

 

 

 

 

Affected Line Item



 

 

 

 

 

 

 

 

 

 

in Consolidated



 

 

 

 

 

 

 

 

Statements of

Details about Accumulated

 

For the

 

For the

 

For the

 

Comprehensive

Other Comprehensive

 

Year Ended

 

Year Ended

 

Year Ended

 

Income

Income Components

 

December 31, 2016

 

January 2, 2016

 

January 3, 2015

 

(Loss)

Changes in retiree plans

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit

 

$

3,556 

 

$

5,095 

 

$

(24,895)

(a)

 



 

 

 

 

 

 

 

 

 

 

 

Hedging activities

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

(637)

 

$

(1,389)

 

$

(161)

 

Net sales

Interest rate swap

 

 

1,498 

 

 

1,506 

 

 

470 

 

Interest



 

$

861 

 

$

117 

 

$

309 

 

 



 

 

 

 

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

4,417 

 

$

5,212 

 

$

(24,586)

 

 



 

 

 

 

 

 

 

 

 

 

 





(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 14, Employee Benefits, and Note 15, Postretirement Benefit Plans other than Pensions.    





 

68


 

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.Controls and Procedures



Disclosure Controls and Procedures



The Company maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of the Company, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely discussion and decisions regarding required disclosure. Management of the Company, with the participation of the CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2016. Based on this evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of December 31, 2016.

 

Management’s Report on Internal Control Over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is designed by, or under the supervision of, the Company’s CEO and CFO and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.

 

Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. The assessment was based on criteria established in the framework Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded the Company’s internal control over financial reporting was effective as of December 31, 2016.

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the fourth quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



Item 9B.Other Information

 

None.







69


 

 

PART III



Item 10. Directors, Executive Officers and Corporate Governance

 

The following table presents information as of March 17, 2017, regarding the executive officers and directors of PDC and Appvion.

 



 

 

Name

Age

Position



 

 

Terry M. Murphy

68

Chairman and Director of PDC and Appvion

   

   

   

Carl J. Laurino

55

Director of PDC and Appvion



 

 

David A. Roberts

69

Director of PDC and Appvion



 

 

Kathi P. Seifert

67

Director of PDC and Appvion



 

 

Mark A. Suwyn

74

Director of PDC and Appvion

   

   

   

George W. Wurtz

60

Director of PDC and Appvion

   

   

   

Kevin M. Gilligan

50

President, Chief Executive Officer and a Director of PDC, and President, Chief Executive Officer and a Director of Appvion



 

 

Thomas J. Ferree

59

Senior Vice President Finance, Chief Financial Officer and Treasurer of PDC, and Senior Vice President Finance, Chief Financial Officer and Treasurer of Appvion

   

   

   

Tami L. Van Straten

45

Senior Vice President Administration, General Counsel and Secretary of PDC, and Senior Vice President, General Counsel and Secretary of Appvion



 

 

Justin C. Merritt

 

Matthew K. Stites

43

 

46

Senior Vice President – Sales, Marketing and Research and Development of Appvion

 

Vice President – Supply Chain of Appvion



Terry M. Murphy. Mr. Murphy joined PDC and Appvion as a Director in June 2007 and was elected Chairman of the Board of Appvion and PDC effective January 1, 2016. Mr. Murphy is currently a director of Hagerty, LLC, a specialty insurance company, and has held this position since July 2010.  Mr. Murphy was Executive Vice President and Chief Financial Officer of A.O. Smith from the time he joined the company in 2006 until his retirement on May 1, 2011. From 1999 to 2005, Mr. Murphy held various executive management positions at Quanex Corporation and in his last position at Quanex Corporation served as its Senior Vice President and Chief Financial Officer. Mr. Murphy earned a bachelor’s degree from the University of Wisconsin-La Crosse in 1970 and a master’s degree in business administration from Marquette University in 1974. He also earned a Juris Doctor degree from Seton Hall University School of Law in 1980 and is a certified public accountant. Mr. Murphy's financial background as a certified public accountant, former Senior Vice President and Chief Financial Officer for a large building products manufacturing company, and former Executive Vice President and Chief Financial Officer for a large diversified manufacturing company, as well as his leadership experience as an executive and director, and his graduate degree in business and degree in law, led to the conclusion that he should serve as a director of PDC and Appvion.



Carl J. Laurino. Mr. Laurino joined PDC and Appvion as a Director in January 2017. Mr. Laurino is currently the Chief Financial Officer of Maxim Crane Works LLP, a leading provider of comprehensive lifting services and solutions in the United States. Mr. Laurino retired as Senior Vice President and Chief Financial Officer of The Manitowoc Company, Inc. in June 2016, a position he had held since 2004.  Until 2016, the Manitowoc Company, Inc. was an international multi-industry capital goods manufacturer of construction cranes and related products, and food service equipment.  Mr. Laurino had joined The Manitowoc Company, Inc. in 2000 as assistant treasurer and served in that capacity until his promotion to treasurer in 2001. Previously, Mr. Laurino worked for 15 years in commercial banking in a variety of management and executive positions with Firstar Bank (n/k/a US Bank), Norwest Bank (n/k/a Wells Fargo), and Associated Bank. Mr. Laurino has served on the advisory board of directors for the University of Wisconsin-Madison Nicholas Center for Corporate Finance and Investment Banking since 2015.  Mr. Laurino earned a bachelor’s degree in business administration/finance from the University of Wisconsin-Eau Claire.  Mr. Laurino’s extensive financial background, as well as his executive management experience and leadership at the international, operational and corporate levels of The Manitowoc Company, Inc., led to the conclusion that he should serve as a director of PDC and Appvion.  

70


 

 

David A. Roberts. Mr. Roberts joined PDC and Appvion as a Director in May 2016. Mr. Roberts is Chairman of the Board of Carlisle Companies Incorporated, a diversified manufacturing company based in Charlotte, North Carolina. He served as executive chairman of Carlisle through 2016, and as chairman, president and chief executive officer of Carlisle from 2007 to 2015. Prior to joining Carlisle, Mr. Roberts served as chairman, president and chief executive officer of Graco, Inc. a manufacturer of fluid-handling systems and products.  He worked for Graco from 2001 to 2007. Prior to joining Graco, Mr. Roberts held various engineering, manufacturing, plant management and general management positions in a variety of industries including automotive, office equipment, printing and management services. Mr. Roberts has served as a director of Carlisle Companies since 2007; a director of Franklin Electric Company, Inc. since 2003; and a director of SPX Corporation since 2015. He served as a director of Graco, Inc. from 2001 until 2007; a director of Arctic Cat Inc. from 2006 until 2009; a director of ADC Telecommunications, Inc. from 2008 until 2010; and a director of Polypore International from 2011 until 2015.  Mr. Roberts earned a master’s degree in business administration from Indiana University and a bachelor’s degree from Purdue University.  Mr. Roberts’s extensive manufacturing management experience and leadership, as well as his distinguished service as a director for a diverse group of public companies, led to the conclusion that he should serve as a director of PDC and Appvion.



Kathi P. Seifert. Ms. Seifert joined PDC and Appvion as a Director in July 2004. Ms. Seifert retired as Executive Vice President and Group President of Global Personal Care Products for Kimberly-Clark Corporation in June 2004, a position she held since 1999. Ms. Seifert is also currently a director of Eli Lilly and Company, and Investors Community Bank. She has served as a director of Eli Lilly and Company since 1995, and as a director of Investor Community Bank since 2016. Ms. Seifert served as a director of Lexmark, Inc. from 2006 until 2016, as a director of Revlon Consumer Products Corporation from 2006 until 2015, and as a director of Supervalu, Inc. from 2006 until 2013. Ms. Seifert also serves on the Board of Directors for the Fox Cities Community Foundation, the Fox Cities Chamber of Commerce, Riverview Gardens, Habitat for Humanity, the Fox Cities Building for the Arts, and New North, Inc. Ms. Seifert graduated with a bachelor’s degree from Valparaiso University in 1971. Ms. Seifert's business experience as the former Executive Vice President and division Group President of a global manufacturer of family and personal care products, and as a director of a global pharmaceutical company, cosmetics and personal care products company, grocery retailing company, and printing and imaging products manufacturing company, as well as her leadership experience in these positions, led to the conclusion that she should serve as a director of PDC and Appvion.



Mark A. Suwyn. Mr. Suwyn joined PDC and Appvion as a Director in July 2011. Mr. Suwyn is currently the President of Marsuw, LLC, a private investment and consulting company, and has held this position since March 2000. Mr. Suwyn is currently serving as Chairman of WorkplaceDynamics LLC, a privately owned employee survey firm, a position he has held since August 2013. Mr. Suwyn retired as Chairman of NewPage Corporation, a large coated paper producer in North America, in June 2010. He had previously served as Chairman and Chief Executive Officer of NewPage Corporation since May 2005. He served as a director of Ballard Power Systems, Inc. from 2003 to 2012, and as a director of Contech Construction Products Inc. from 2011 through 2012. Mr. Suwyn also served as Chairman and Chief Executive Officer of Louisiana-Pacific Corporation from January 1996 until November 2004. Prior to that, Mr. Suwyn held executive management positions with International Paper Company and spent 25 years with E.I. Du Pont where he directed marketing, acquisition and joint venture efforts. Mr. Suwyn earned a doctorate degree (Inorganic Chemistry) from Washington State University and bachelor’s degree (Chemistry) from Hope College, Holland, Michigan. Mr. Suwyn’s extensive business experience in the paper industry, experience as former Chairman and Chief Executive Officer for both a large coated paper producer and a leading manufacturer of building materials, as well as his leadership experience as an executive and director and his doctorate degree in chemistry, led to the conclusion that he should serve as a director of PDC and Appvion.



George W. Wurtz, III. Mr. Wurtz joined PDC and Appvion as a Director in July 2011. Mr. Wurtz is currently the President & Chief Executive Officer of GWW & Associates LLC, a consulting and professional services firm specializing in financial restructuring, operational excellence, and client revenue engine needs. Mr. Wurtz retired as the Chairman of the Board of Soundview Paper Company LLC, Elmwood Park, New Jersey in 2015. Soundview is a privately-held manufacturer of virgin and recycled tissue consumer products. From April 2012 until October 2014, he served as Soundview’s President and Chief Executive Officer. From November 2006 until November 2011, Mr. Wurtz served as President and Chief Executive Officer of New WinCup Holdings, Stone Mountain, Georgia, a privately-held manufacturer and distributor of single-use cups, food service containers, lids and straws. Mr. Wurtz is currently a director of the State University of New York at Oswego (“SUNY Oswego”) Engineering Advisory Board and Mohawk Fine Papers, Inc. He has served as a director of the SUNY Oswego Engineering Advisory Board since 2009 and as a director of Mohawk Fine Papers, Inc. since January 2012. Mr. Wurtz retired as Executive Vice President of Georgia-Pacific Corporation in February 2006 after serving in several executive management positions including President of Paper, Bleached Board and Kraft Operations. Prior to joining Georgia-Pacific Corporation in October 2000, Mr. Wurtz was employed by James River Corporation/Fort James Corporation for 14 years and held executive management positions in operations, logistics, procurement and manufacturing planning. Mr. Wurtz received his bachelor’s degree (Industrial Arts and Technology) from SUNY Oswego in 1978. Mr. Wurtz’s extensive business experience in the paper industry, experience as former President and Chief Executive Officer of a food-service products manufacturer and distributor, as well as his leadership experience as an executive and director of several paper companies, led to the conclusion that he should serve as a director of PDC and Appvion.

 

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Kevin M. Gilligan.  Mr. Gilligan has been the President and Chief Executive Officer of Appvion and PDC since August 2015, and has been a Director of Appvion and PDC since January 2016. Mr. Gilligan previously served as President of the Paper Division since June 2014. Prior to joining the Company in 2014, Mr. Gilligan spent twenty years working for H.B. Fuller Company, a publicly-traded, global specialty chemical company focused on adhesives. From 2012 to 2014, he served as H.B. Fuller’s Vice President of Global Operations, and from 2007 through 2011 he served as Region Vice President in charge of its Asia Pacific businesses. Prior to 2007 and during his career with H.B. Fuller Company, Mr. Gilligan also served as General Manager of H.B. Fuller Window, and as H.B. Fuller’s North American Operations Director, e-business Director, Product Line Manager and Plant Manager. Mr. Gilligan began his career as a manufacturing engineer for Texas Instruments Inc. Mr. Gilligan received his bachelor’s degree in industrial and operations engineering from the University of Michigan in 1988 and received his master’s degree in business administration with concentrations in marketing and operations management from Indiana University in 1992.  Mr. Gilligan’s extensive business experience as Vice President of Global Operations and in other key management roles for an international specialty chemical company, as well as his demonstrated leadership in these positions and his graduate degree in business, led to the conclusion that he should serve as a director of PDC and Appvion.



Thomas J. Ferree. Mr. Ferree has been the Senior Vice President Finance and Chief Financial Officer of Appvion since February 2010 and Senior Vice President Finance of PDC since January 2011. Mr. Ferree was the Vice President Finance and Chief Financial Officer of Appvion October 2006 through January 2010 and Treasurer of Appvion and Chief Financial Officer and Treasurer of PDC since November 2006. Prior to joining the Company, Mr. Ferree served as Senior Vice President of Finance and Chief Financial Officer of Wells’ Dairy, Inc. since 2003. Mr. Ferree received his bachelor’s degree (Business Administration, Accounting) from the University of Iowa in 1979 and he received his master’s degree in finance from the University of Iowa in 1980.



Tami L. Van Straten. Ms. Van Straten has been Senior Vice President Administration, General Counsel and Secretary of Appvion since August 2015, and Senior Vice President Administration, General Counsel and Secretary of PDC since August 2015. Ms. Van Straten previously served as Vice President, General Counsel and Secretary of PDC and Appvion since January 2012, as General Counsel and Secretary for PDC and Appvion from March 2010 to 2012 and as Assistant General Counsel and Assistant Secretary for PDC and Appvion from August 2006 through March 2010. Ms. Van Straten joined the Company in 2001 and served in a number of legal counsel roles from 2001 to August 2006. Prior to joining the Company, Ms. Van Straten served as law clerk to the Hon. N. Patrick Crooks of the Supreme Court of Wisconsin and was in private legal practice. Ms. Van Straten earned a bachelor’s degree in criminal justice and political science from the University of Wisconsin-Oshkosh in 1994 and earned her Juris Doctor degree from Marquette University in 1997.



Justin C. Merritt.  Mr. Merritt has been Senior Vice President of Sales, Marketing and Research and Development of Appvion since October 2016.  Mr. Merritt was Vice President and General Manager – Thermal of Appvion since joining the Company in April 2015. From 2013 until joining the Company, Mr. Merritt served as Vice President, Corporate Accounts for Ecolab, Inc., a specialty chemical company focused on hygiene, water, and energy. From 2006 to 2013, he held several marketing and sales management positions with Ecolab. From 1998 to 2006, Mr. Merritt served in a variety of sales management roles for H.B. Fuller Company. Mr. Merritt received his bachelor’s degree in chemistry from Hamline University in 1995, his master’s degree in chemistry from the University of Wisconsin in 1997, and his master’s degree in business administration from University of Minnesota in 2005.



Matthew K. Stites.  Mr. Stites has been Vice President Supply Chain of Appvion since September 2016. Mr. Stites previously served as Executive Director Supply Chain of Appvion since February 2012, and as Director of Procurement of Appvion since joining the Company in 2008. From 2006 until joining the Company, Mr. Stites was a Corporate Global Commodity Manager for Dana Incorporated, a tier one global automotive company. From 1996 to 2006, Mr. Stites held a variety of supply chain and management roles with Dana. Mr. Stites received his bachelor’s degree in business management from the University of Toledo in 1995.



The boards of directors of both PDC and Appvion currently consist of seven members. Stephen Carter retired from each of the boards effective December 31, 2016. Mr. Roberts was elected as a director of PDC and Appvion effective May 11, 2016, and Mr. Laurino was elected as a director of PDC and Appvion effective January 1, 2017, each pursuant to the process and agreements outlined below.  PDC has entered into a security holders agreement with the ESOP Trust which sets forth the manner in which the ESOP Trust will vote its shares of PDC common stock in connection with the election of directors of PDC’s board of directors. Under the agreement, the ESOP Trust has agreed to vote all of its shares of PDC common stock on and after January 1, 2005, to elect to PDC’s board, four individuals nominated by PDC’s chief executive officer and three individuals jointly nominated by the ESOP Trust and the chief executive officer.

72


 

 

The ESOP Trust has agreed that any vote taken to remove a director or to fill vacancies on the boards of directors is subject to the provisions described above. The agreement also provides that directors nominated by joint nomination may only be removed by mutual agreement of the ESOP Trust and PDC’s chief executive officer. In addition to the election of directors, the agreement prohibits PDC from issuing capital stock to any person other than the ESOP Trust or making, or permitting any of its subsidiaries to make, any acquisition in a single transaction or series of related transactions with a fair market value in excess of $100 million, in each case without the prior written consent of the ESOP Trust.



PDC has entered into a security holders agreement with Appvion on terms substantially similar to those described above to provide for the manner in which PDC will vote its shares of Appvion’s common stock in connection with the election of directors of Appvion’s board of directors. In addition to the election of directors, the agreement prohibits Appvion from issuing capital stock to any person other than PDC or making, or permitting any of Appvion’s subsidiaries to make, any acquisition in a single transaction or series of related transactions with a fair market value in excess of $100 million, in each case without the prior written consent of PDC.



Pursuant to the agreements above, Mr. Murphy, Mr. Gilligan, Mr. Roberts and Ms. Seifert were nominated by Mr. Gilligan, Appvion’s chief executive officer, and elected to the boards of directors of PDC and Appvion. Mr. Laurino, Mr. Suwyn and Mr. Wurtz were jointly nominated by Mr. Gilligan and the ESOP Trust and elected to the boards of directors of PDC and Appvion.



The board of directors of PDC has an Audit Committee responsible for, among other things, providing assistance to the board of directors in fulfilling its responsibility to the ESOP participants relating to financial accounting and reporting practices and the quality and integrity of PDC financial reports. Effective January 1, 2017, members of the committee include: Mr. Suwyn, Mr. Laurino and Mr. Murphy. Mr. Suwyn serves as the Audit Committee Chair. The board of directors of PDC has determined that Mr. Suwyn is an “audit committee financial expert” as defined under the applicable rules of the SEC. Mr. Suwyn is an “independent director” as that term is defined under the listing standards of the Nasdaq Stock Market, Inc. The charter for the Audit Committee can be found on the Company’s website at www.appvion.com (investor information section).



The board of directors of PDC has a Compensation Committee responsible for authorizing the compensation of the Chief Executive Officer subject to ratification by the board of directors, approving the compensation of the named executive officers based on the recommendations of the Chief Executive Officer and reviewing the compensation of the other executive officers. The Compensation Committee also has authority for administration of the Long-Term Incentive Plan and the Long-Term Restricted Stock Unit Plan. Effective January 1, 2017, members of the committee include: Mr. Wurtz, Mr. Roberts and Ms. Seifert. Mr. Wurtz serves as the Compensation Committee Chair. See “Item 11. Executive Compensation—Compensation Discussion and Analysis,” below. The charter for the Compensation Committee is available at www.appvion.com (investor information section).



The board of directors of PDC has a Corporate Governance Committee for the purpose of developing, recommending and evaluating best corporate governance practices applicable to the Company, including those related to director compensation, nomination of directors, election of members to board committees and board education and practices. Effective January 1, 2017, members of the committee include: Ms. Seifert, Mr. Gilligan, Mr. Roberts and Mr. Wurtz. Ms. Seifert serves as the Corporate Governance Committee Chair. The charter for the Corporate Governance Committee can be found on the Company’s website at www.appvion.com (investor information section).



The Company has adopted a Code of Business Conduct and Ethics that applies to the directors, officers and employees of PDC and Appvion, including the principal executive officer, principal financial officer and controller of PDC and Appvion. This Code of Business Conduct and Ethics is posted on the Company’s Internet web site at www.appvion.com (investor information section). The Company intends to timely disclose, on the website, any amendments to, or waivers from, certain provisions of the Code of Business Conduct and Ethics that apply to the principal executive officer, principal financial officer and controller of PDC and Appvion.

73


 

 

The boards of PDC and Appvion recognize that Related Person Transactions (as defined below) can present potential or actual conflicts of interest and create the appearance that Company decisions are based on considerations other than the best interests of the Company and its shareholders. The Corporate Governance Committee and the Audit Committee have the authority to review and approve Related Person Transactions. The Company has adopted written procedures for the review of Related Person Transactions, which provide for review of all the relevant facts and circumstances for all Related Person Transactions that require approval. In determining whether to approve or disapprove a Related Person Transaction, the Corporate Governance Committee and the Audit Committee will take into account, among other factors deemed appropriate, whether the Related Person Transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the Related Person’s interest in the transaction. A Related Person Transaction is any transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness), or any series of similar transactions, arrangements or relationships, in which (a) the aggregate amount involved will or may be expected to exceed $120,000 in any fiscal year; (b) the Company is or was a participant; and (c) any Related Person has or will have a direct or indirect interest (other than solely as a result of being a director or trustee (or any similar position) or a less than 10 percent beneficial owner of another entity). A “Related Person” is any (a) person who is an executive officer, director or nominee for election as a director of the Company; (b) person who owns greater than 5 percent beneficial ownership of the Company’s outstanding common stock; or (c) Immediate Family Member of any of the foregoing. An “Immediate Family Member” includes spouse, parent, grandparents, children, grandchildren, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law and any person (other than a tenant or employee) sharing the household of a person.



The Company has also adopted other best practices including the following:

 

•      The boards of PDC and Appvion regularly approve Appvion’s CEO succession plan.

 

•      The independent directors meet regularly without the CEO present.

 

The Company maintains an Enterprise Risk Management (“ERM”) function. The purpose of ERM is to maximize the Company’s ability to achieve its business objectives. The ERM function creates a comprehensive approach to anticipate, identify, prioritize and manage material risks to the Company’s business objectives. The Audit Committee of the Board receives periodic reports from the ERM Committee regarding the ERM Committee’s activities, findings, conclusions and recommendations. The charter for the ERM function can be found at the Company’s website at www.appvion.com (investor information section).



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Item 11.Executive Compensation



Compensation Discussion and Analysis



Goals and Policies. The Management Compensation Goals and Policies, adopted by the Compensation Committee of the board of directors of PDC, establish the objectives of the Company’s compensation program as follows: 

 

enable the Company and its subsidiaries to attract, motivate and retain highly qualified people;

 

provide compensation opportunities that pay competitively for similar positions within similar companies when company performance meets pre-established goals;



include a performance-based variable pay component that supports the Company’s strategic business goals; and

 

act in the best interests of the Company’s beneficial owners, the participants in the ESOP.

 

Compensation Elements. The Company’s executive compensation includes base salary, annual performance-based incentive pay, long-term performance-based incentive pay and benefits, including general benefits available to all employees and specific executive benefits. The Compensation Committee believes these elements of executive compensation provide the proper incentives and rewards for increasing shareholder value. Base salary provides market competitive compensation for executives at a level that will attract highly qualified professionals. Annual performance-based incentive pay, in amounts based on market competitive values within the Company’s labor market for executive talent, provides an incentive for executives to achieve the Company’s annual performance goals. Long-term performance-based incentive pay provides executives with direct rewards for multi-year business performance that contributes to shareholder value over several years. Employee benefits provide health and retirement income benefits that enable employees, including executives, to maintain good health and provide financial security for employees and families in order to remain focused on the Company’s success. The mix of elements of compensation is based on the labor market.



Performance-Based Compensation. When Company performance exceeds pre-established target goals for the year, performance-based pay elements (annual and long-term incentive) allow for compensation that exceeds the median market compensation. Conversely, when performance falls short of targeted goals, performance-based pay elements allow for compensation below median market compensation levels.

 

The Compensation Committee believes that this combination of cash and equity-based compensation supports the objectives of the executive compensation program described above. First, these vehicles allow the Company to provide a competitive compensation package based on prevailing market practices. At the same time, a significant portion of target compensation is variable “at-risk” pay tied to both short-term performance and long-term performance. Variable pay for short-term performance is capped to protect the business from annual “windfall” results. The Compensation Committee believes these awards support the Company’s pay-for-performance philosophy by linking pay amounts to the Company’s level of performance and the achievement of the Company’s strategic goals. The Compensation Committee believes that the Company’s executive compensation program is not structured to encourage management to take unreasonable or excessive risks relating to the Company’s business. Instead, the Compensation Committee believes that the compensation programs encourage management to take a balanced approach that focuses on delivering annual results and contributing to shareholder value. The pay that is fixed and at risk varies by position. As shown in the table below, the Company’s emphasis on pay-for-performance resulted in performance-based compensation representing a significant portion of the total target compensation of the named executive officers in fiscal year 2016. Executive compensation includes more pay at risk than that of other employees in the organization.

75


 

 

2016 Total Direct Compensation Mix at Target Company Performance

 





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

Pay at Risk

 



 

 

 

 

(Annual and

 



 

Fixed

 

Long-Term

 



 

(Salary)

 

Incentives)(1)

 

Kevin M. Gilligan

 

 

 

 

 

 

 

President, Chief Executive Officer and a Director of PDC

 

 

 

 

 

 

 

President, Chief Executive Officer and a Director of Appvion

 

 

23 

%

 

77 

%



 

 

 

 

 

 

 

Thomas J. Ferree

 

 

 

 

 

 

 

Senior Vice President Finance, Chief Financial Officer and Treasurer of PDC, Senior Vice

 

 

 

 

 

 

 

President Finance, Chief Financial Officer and Treasurer of Appvion

 

 

44 

%

 

56 

%



 

 

 

 

 

 

 

Tami L. Van Straten

 

 

 

 

 

 

 

Senior Vice President Administration, General Counsel and Secretary of PDC

 

 

 

 

 

 

 

Senior Vice President Administration, General Counsel and Secretary of Appvion

 

 

41 

%

 

59 

%



 

 

 

 

 

 

 

Justin C. Merritt(2)

 

 

 

 

 

 

 

Senior Vice President of Sales, Marketing and Research & Development of Appvion

 

 

49 

%

 

51 

%



 

 

 

 

 

 

 

Matthew K. Stites(3)

 

 

 

 

 

 

 

Vice President Supply Chain of Appvion

 

 

67 

%

 

33 

%



 

 

 

 

 

 

 

Ethan W. Haas(4)

 

 

 

 

 

 

 

Former Vice President & General Manager, Carbonless and Specialty Papers of Appvion

 

 

49 

%

 

51 

%





(1)Calculated using annual incentive paid at target plus Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs). SAR expected value is the most recent PDC stock price discounted based on Black-Scholes valuation methodology. The assumptions used for the January 1, 2016 valuation are: Expected life of 6.5 years (mid-point of 3 and 10 years vesting period); Dividend yield of 0% (plan does not pay dividends); Risk Free Interest Rate of 2.02% (based on Treasury Constant Maturities yield curve); and Volatility of 31% (based on peer group volatility for previous 6.5 years). The SAR grant as of January 1, 2016 is valued at $4.35 per share with $12.30 per share grant price. The RSU units are valued at the most recent PDC stock price as determined by the semi-annual ESOP valuation. The RSU grant as of January 1, 2016 is valued at $12.30 per share.



(2) Mr. Merritt was promoted to his role as Senior Vice President Sales, Marketing and Research & Development of Appvion on September 8, 2016.



(3)Mr. Stites was promoted to his role as Vice President Supply Chain of Appvion on September 5, 2016.



(4)Mr. Haas left his role as Vice President & General Manager, Carbonless and Specialty Papers of Appvion on September 23, 2016.



Market Survey Process. The Compensation Committee determines competitive market pay by means of market surveys and analyses conducted periodically by nationally recognized, independent executive compensation consultants who report to the Compensation Committee. In the years in which the consultant does not conduct a full market survey and analysis, a general rate of market increase is established for executive compensation and the rate of increase is applied to the market pay determined in the prior year’s analysis.

76


 

 

A full market survey was conducted in October, 2015. Willis Towers Watson, the executive compensation consultant to the Compensation Committee, used a broad-based survey of general industry executive compensation (450 participating companies) as well as  a second broad-based survey of general industry top management compensation for smaller responding companies (400 participating companies). Market data was regressed to the Company’s revenue size of $750 million. Willis Towers Watson also used the 2015 Mercer Executive Survey data. These surveys were chosen by the compensation consultant because they best represent the Company’s labor market for executive talent, which is broader than the paper industry, and provide a reasonable sample size that allows the Company to track changes in the labor market for executive talent. The three sources provide the Compensation Committee with a broad perspective of market competitive pay practices and values to inform the decisions made by the Compensation Committee related to executive compensation.



Appvion’s senior vice president of administration provides the consultant with descriptions of each of the Company’s executive’s responsibilities but does not participate in the market surveys or analyses provided by the consultant. The senior vice president of administration also provides organizational and technical support to the Compensation Committee by coordinating the work of the compensation consultant and providing relevant information about company policies and practices. Appvion’s senior vice president of administration may provide additional analyses under the direction of the Compensation Committee for its use and review. The Chief Executive Officer (the “CEO”) provides a description of the Company’s business but does not participate in the market surveys or analyses.



The updated market analysis shows that the Company is competitive with the market across all elements of compensation – base salary, target annual incentive and total compensation (sum of base salary, target annual incentive and target long-term incentive). Competitive is defined as above the 25th percentile and below the 75th percentile of the survey data. Although the Compensation Committee considers executive compensation paid at companies included in the market survey, the Committee does not attempt to maintain a specified target percentile within the market to determine executive compensation.



In 2016, Willis Towers Watson was paid $23,283 in fees for executive compensation consulting, and $367,591 in fees for all other retirement consulting, administrative fees and actuarial services for the Company’s plans. These fees were paid by the pension trust.



Compensation Decisions. The Compensation Committee reviews and approves individual executive salaries based on the market pay for the executive’s position and the executive’s general level of performance in the position. At times, prior salary may influence a decision on current salary. An executive fully performing the duties of a position will be paid market pay for that position. An executive not yet fully performing in a position may receive less than market pay. An executive new to the role will typically be paid at market within three years. An executive making contributions significantly in excess of those expected for the position may receive above market pay. The Compensation Committee uses quantitative and qualitative metrics and exercises some judgment in determining achievement of the overall company and division performance goals and assessing the named executive’s individual performance for the prior year. The Compensation Committee uses an evaluation of individual performance in determining increases to base salary and awarding annual performance-based incentive compensation and long-term compensation.



The Compensation Committee is responsible for authorizing the compensation of the CEO, subject to ratification by the board of directors, and approving the compensation of the named executive officers who report directly to the CEO based on the recommendations of the CEO. The CEO is responsible for approving all other pay. The Compensation Committee considers market analysis and data from Willis Towers Watson in authorizing and approving compensation arrangements for executive officers. Decisions to increase or decrease executive compensation materially, if any, are based on: (1) significant changes in individual performance; (2) significant changes in job duties and responsibilities; and/or (3) review of market pay levels to ensure compensation is competitive.

77


 

 

Annual Performance-Based Incentive Plan (“Annual Incentive Plan”). For fiscal year 2016, the Compensation Committee determined that the annual incentive plan for the named executive officers would be based primarily on the following components. Each component may be paid out independently.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Corp.

 

 

 

Carbonless

 

 

 

Thermal

   

 

 

 

 

 

 

 

Strategic

 

 

 

Strategic

 

 

 

Strategic



 

Target

 

Corp.

 

Corp.

 

Revenue

 

Carbonless

 

Revenue

 

Thermal

 

Revenue

Name

 

%

 

Safety

 

EBITDA

 

Growth

 

EBITDA

 

Growth

 

EBITDA

 

Growth

Kevin Gilligan

 

 

80%

 

10%

 

70%

 

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

Thomas Ferree

 

 

60%

 

10%

 

70%

 

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

Tami Van Straten

 

 

55%

 

10%

 

70%

 

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

Justin Merritt(1)

 

 

50%

 

10%

 

30%

 

 

 

 

 

 

 

 

 

 

 

40%

 

 

20%

Matthew Stites(2)

 

 

40%

 

10%

 

70%

 

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

Ethan Haas

 

 

40%

 

10%

 

 

 

 

 

 

 

40%

 

 

20%

 

 

 

 

 

 



(1)

Mr. Merritt was promoted to Senior Vice President Sales, Marketing and Research & Development in September and his target was increased from 40% to 50% in September.

(2)

Mr. Stites was promoted to Vice President Supply Chain in September and his target was increased from 25% to 40% in September. Any incentive payout would be prorated.



EBITDA is an indicator of the Company’s profitability and financial performance and is calculated as follows: EBITDA equals Net Income (including incentive accrual expense) plus Interest, Taxes, Depreciation and Amortization. EBITDA excludes foreign exchange gain or loss and mark-to-market pension adjustments.



Strategic Revenue Growth is a measure of the Company’s increase in revenue in the Carbonless specialty business, including colored papers, inkjet and contract manufacturing, and revenue in the Thermal tag, label and entertainment business.



Corporate safety is a measure of the culture whereby all risks are identified and corrected to ensure a safe work environment for employees. In order to incentivize safe working conditions, a separate metric was established for safety in 2014. By aligning a portion of each named executive officer’s incentive to safety, its importance is reinforced. The amount payable is based on the reported company-wide OSHA Incident Rate (OIR) in 2016.



The Annual Incentive Plan allows for adjustments, as recommended by the CFO and approved by the Compensation Committee, to the calculation of EBITDA. These adjustments are restricted to unusual or non-reoccurring events such as restructuring, refinancing, acquisitions, divestitures or other items the committee determines should be adjusted and is then referred to as Adjusted EBITDA. Incentive payouts will reflect performance levels relating to Adjusted EBITDA, Strategic Revenue Growth and safety performance measures for the Company or Division level.



For each executive other than the CEO, the CEO has discretion to increase or decrease the executive’s annual performance‑based incentive by as much as 20% of the earned incentive without Compensation Committee approval based on the executive’s achievement of strategic business objectives established by the CEO at the beginning of the fiscal year. These objectives may relate to business segment margin improvement, manufacturing operations performance, or new business growth. Other circumstances in which the CEO might use his discretion to increase or decrease the executive’s annual performance-based incentive may be based on the executive’s demonstration of leadership competencies or the Company’s values (referred to as “The Appvion Way”). Some of these may be measurable while others may require more judgment and discretion to evaluate.

78


 

 

Targets were set at the beginning of the fiscal year at a level of improvement from the prior year performance.



2016 Corporate Performance Goals ($ millions)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Corporate

 

Corporate

 

 

 

 

 

Carbonless

 

Thermal

 

 

 



Adjusted

 

Strategic

 

Carbonless

 

Thermal

 

Strategic

 

Strategic

 

 

 



EBITDA

 

Revenue

 

EBITDA

 

EBITDA

 

Revenue

 

Revenue

 

Safety

Outstanding

$

76.0 

 

$

50.0 

 

$

53.0 

 

$

36.5 

 

$

10.0 

 

$

40.0 

 

 

2.50 OIR

Target

$

70.0 

 

$

45.2 

 

$

48.0 

 

$

33.5 

 

$

8.7 

 

$

36.5 

 

 

2.75 OIR

Threshold

$

63.0 

 

$

40.25 

 

$

43.0 

 

$

30.0 

 

$

7.75 

 

$

32.5 

 

 

2.90 OIR



In 2016, EBITDA for corporate calculated per the plan document resulted in a total EBITDA of $52.6 million. Adjustments were recommended by the CFO and approved by the Compensation Committee for removing consulting fees and severance. These adjustments resulted in Adjusted EBITDA of $58.7 million. Strategic Revenue Growth performance was $26.8 million (below threshold). Safety performance was 2.95 OIR (below threshold).



Fiscal Year 2016 Annual Incentive Award Payments







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Fiscal Year 2016 Annual Cash



Incentive Totals

   

 

 

 

 

 

Earned

 

 

 

 

 

 

Payment

   

 

Target

 

Earned

 

as % of

 

Discretionary

 

Actual

 

as % of

Name

 

$

 

$

 

Target

 

Adjustment $

 

Payment $

 

 

Target

Kevin Gilligan

 

$

468,000 

 

$

 

 

0% 

 

$

 

$

 

 

 

0% 

Thomas J. Ferree

 

$

259,200 

 

$

 

 

0% 

 

$

 

$

 

 

 

0% 

Tami L. Van Straten

 

$

184,250 

 

$

 

 

0% 

 

$

 

$

 

 

 

0% 

Justin C. Merritt(1)

 

$

132,500 

 

$

11,178 

 

 

8.4% 

 

$

(11,178)

 

$

 

 

 

0% 

Matthew K. Stites(2)

 

$

58,738 

 

$

 

 

0% 

 

$

 

$

 

 

 

0% 

Ethan W. Haas

 

$

112,200 

 

$

 

 

0% 

 

$

 

$

 

 

 

0% 



(1)

Management elected to forego payment of earned 2016 annual incentive.

(2)

Target is based on pro-rated earnings and target % before and after date of promotion



Long-Term Compensation. Since 2012, the Compensation Committee has determined that equity-based grants were to be a combination of approximately 50% RSU and 50% SAR grants for all named executive officers. All grants under the RSU and the SAR are subject to vesting and forfeiture provisions, thereby creating incentives for executives and employees to remain with the Company. The Compensation Committee believes that long-term incentive plans are necessary to encourage retention of executive talent and provide appropriate incentives to increase shareholder value. Individual grant levels for named executive officers are determined so that total targeted compensation, including base salary, target incentive and most recent grant of long term compensation awards, is competitive with the external market.

79


 

 

Long Term Stock Appreciation Rights Plan (SAR Plan). The purpose of the Long-Term Stock Appreciation Rights Plan (SAR Plan) is to attract and retain key management employees who are in a position to make a significant contribution to the growth and profitability of the Company by providing a reward for increase in stock performance to align with long-term shareholder value. The SAR Plan provides for future cash payments based on increases in the value of PDC common stock, as determined by the semi-annual valuation provided by the ESOP trustee. The Compensation Committee of the board will establish the number of units granted each year in accordance with the Compensation Committee’s stated goals and policies. The units are valued, as of the date of the grant, at the most recent PDC stock price as determined by the semi-annual ESOP valuation. The cash payment upon the exercise of a unit is equal to the increase in the value of PDC common stock from the date of grant until the exercise date. Recipients are required to enter into a non-compete and non-solicitation agreement in order to receive units under the SAR Plan which, if violated following the receipt of units, results in forfeiture of any and all rights to receive payment relating to the units. Other current executive and key management employees also participate in the SAR Plan.



Employees are generally entitled to exercise any SAR Plan units received prior to January 1, 2017, only after holding the units for at least three years, at which time the units are vested, and for up to ten years from the date of grant. SAR Plan units received on and after January 1, 2017 vest one third each year over a three year period and may be exercised for up to ten years from the date of the grant. In the event of a change of control, described below, the SAR Plan units become immediately exercisable. A “change of control” is defined in the SAR Plan as: 



the termination of the ESOP or amendment of the ESOP so that it ceases to be an employee stock ownership plan;

 

an event whereby the ESOP ceases to own a majority interest in the Company;

 

the sale, lease, exchange or other transfer of all or substantially all of the Company assets to a person or entity that is not controlled by the Company;

 

termination of the Company’s business, liquidation, dissolving or selling substantially all stock;

 

the Company’s merger or consolidation with another company and the Company is not the surviving company of such merger or consolidation and the surviving company is not controlled by the persons or entities who controlled the Company immediately prior to such merger or consolidation; or

 

any other event whereby ownership and effective control of the Company is transferred or conveyed to a person or entity that is not controlled by the Company.



Upon termination of a participant’s employment due to death, disability or retirement, the award of SAR units shall be one-third vested for each completed year of employment after the grant of such SAR units and are then exercisable following the next two semi-annual share price valuations. Upon termination of employment for any other reason, any SAR units that are vested are then exercisable following the next share price valuation, and any units that are not vested are forfeited.



The first grant of SAR units occurred on November 9, 2001 with additional awards made effective in January in each of the following years: 2003 through 2004, 2006 through 2009, and 2011 through 2016. The actual awards of SAR units have not been and will likely not be made on the effective date. The actual awards will be made on a date following the effective date as long as the share price has not changed since the effective date. This delay is a result of the administrative time needed by the trustee to determine and communicate the most recent PDC stock price through the semi-annual ESOP valuation process. The Compensation Committee makes a recommendation to the board for awards for the CEO and approves the awards for the other executive officers. Management decides which employees are in a position to make a significant contribution to the Company’s growth and profitability, and of the employees who receive SAR awards, most receive such awards based on the Company’s succession planning and leadership management process. 



Long-Term Restricted Stock Unit Plan (RSU Plan). Appvion’s board of directors adopted the RSU plan effective January 3, 2010, for the purpose of attracting and retaining key management employees who are in a position to make a significant contribution to the growth and profitability of the Company by providing a reward for stock performance to align with long-term shareholder value. Additional awards were made effective in January in each year 2012 through 2016. The Compensation Committee makes a recommendation to the Board for awards for the CEO and approves the awards for the other executive officers. Management decides which employees are in a position to make a significant contribution to the Company’s growth and profitability, and of the employees who receive RSU awards, most receive such awards based on the Company’s succession planning and leadership management process. 

 

80


 

 

The RSU Plan provides for future cash payments based on the value of PDC common stock, as determined by the semi‑annual valuation provided by the ESOP trustee. The Compensation Committee of the board will establish the number of units granted each year in accordance with the Compensation Committee’s stated goals and policies. The units are valued, as of the date of the grant, at the most recent PDC stock price as determined by the semi-annual ESOP valuation. Units received prior to January 1, 2017 are generally vested three years after the award date and paid at vesting. RSU Plan units received on and after January 1, 2017 vest one third each year over a three year period after the award date and are paid at vesting. The cash payment upon vesting of a unit is equal to the value of PDC common stock at the most recent valuation date times the number of units vested. Recipients are required to enter into a non-compete and non-solicitation agreement in order to receive units under the RSU which, if violated following the receipt of units, results in forfeiture of any and all rights to receive payment relating to RSU units. Other current executive and key management employees also participate in the RSU Plan.



Termination provisions, including defined change of control events, are the same as those described above in the SAR Plan.



Equity Ownership. The Company’s executives are eligible to participate in the ESOP in the same manner and with the same rights as all other U.S. employees. Because the ESOP is a tax-qualified plan subject to ERISA, the Company may not require executive participation in the ESOP at a specified level nor may the Company take any adverse employment action against an executive for the exercise of his or her right to participate or not participate in the ESOP. The Company believes, however, that it is in the best interests of the employees, as beneficial owners of the ESOP, to have executives acquire and maintain equity interests in the Company.



Termination or Change of Control. The Company has entered into Termination Protection Agreements (or TPAs) with Mr. Gilligan, Mr. Ferree, Ms. Van Straten, and Mr. Merritt. The Company has entered into an Enhanced Severance Agreement (ESA) with Mr. Stites. These agreements provide for payments to the executive officers in the event of termination whether before or within two years after a “change of control,” the executive officer’s employment is terminated other than for misconduct or “permanent disability,” or if the executive officer terminates employment for “good reason”. “Change of control,” “permanent disability,” “good reason” are each defined in the TPA and ESA. “Change of Control” is defined to include various events whereby ownership and control of the Company is effectively transferred. These events were chosen by the Company as appropriate events to trigger payment based on competitive market analysis of such agreements for executive officers. The TPAs and ESAs are discussed in detail under “Potential Payments upon Termination or Change of Control” below.



81


 

 

Compensation Committee Report

 

The 2016 Compensation Committee consisted of three independent directors including Mr. Wurtz, who serves as the Compensation Committee Chair, Mr. Roberts and Ms. Seifert.



The Compensation Committee is appointed annually by Appvion’s board of directors and operates pursuant to a Charter, which is available at www.appvion.com (investor information section). The Compensation Committee is responsible for authorizing the compensation of the CEO subject to ratification by the board of directors, approving the compensation of the named executive officers who report directly to the CEO based on the recommendations of the CEO and reviewing the compensation plans for other executive officers. The Compensation Committee may not delegate, and has not delegated, any of these duties to others.



The Compensation Committee has reviewed and discussed the above section titled “Compensation Discussion and Analysis” with management and, based on this review and discussion, recommended the inclusion of the “Compensation Discussion and Analysis” section in this annual report.







 

82


 

 

Summary Compensation Table





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Pension

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Value and

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Non-Equity

 

Deferred

 

 

 

 



 

 

 

 

 

 

 

 

SAR

 

RSU

 

Incentive Plan

 

Compensation

 

All Other

 

 



 

Year

 

Salary ($)

 

Bonus ($)

 

Awards

 

Awards

 

Compensation

 

Earnings

 

Compensation

 

Total ($)(8)

Name and Principal Position

 

 

 

 

 

 

 

($)(3)

 

($)(4)

 

($)(5)

 

($)(6)

 

($)(7)

 

 

Kevin M. Gilligan

 

 

2016

 

 

575,769 

 

 

 

 

709,050 

 

 

811,800 

 

 

 

 

465 

 

 

38,485 

 

 

2,135,560 

President, Chief Executive Officer and

 

 

2015

 

 

447,596  (1)

 

 

 

432,692 

 

 

429,560 

 

 

 

 

 

 

74,699 

 

 

1,384,547 

Director of PDC

 

 

2014

 

 

223,077  (2)

 

 

 

138,200 

 

 

130,400 

 

 

82,707 

 

 

 

 

43,070 

 

 

617,454 

President, Chief Executive Officer and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Director of Appvion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas J. Ferree

 

 

2016

 

 

432,000 

 

 

 

 

139,200 

 

 

159,900 

 

 

 

 

70,690 

 

 

37,354 

 

 

839,145 

Senior Vice President Finance, Chief

 

 

2015

 

 

432,000 

 

 

 

 

203,350 

 

 

201,300 

 

 

 

 

(7,547)

 

 

47,321 

 

 

876,424 

Financial Officer and Treasurer of PDC

 

 

2014

 

 

440,308  (2)

 

 

 

202,710 

 

 

195,000 

 

 

159,667 

 

 

85,771 

 

 

48,053 

 

 

1,131,509 

and Senior Vice President Finance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chief Financial Officer and Treasurer of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appvion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tami L. Van Straten

 

 

2016

 

 

330,385 

 

 

 

 

139,200 

 

 

159,900 

 

 

 

 

23,498 

 

 

21,570 

 

 

674,552 

Senior Vice President Administration,

 

 

2015

 

 

286,423  (1)

 

 

 

65,296 

 

 

66,000 

 

 

 

 

(1,436)

 

 

25,131 

 

 

441,414 

General Counsel and Secretary of PDC,

 

 

2014

 

 

276,442  (2)

 

 

 

69,900 

 

 

65,000 

 

 

83,515 

 

 

50,695 

 

 

26,872 

 

 

572,424 

and Senior Vice President Administration,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Counsel and Secretary of Appvion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Justin C. Merritt

 

 

2016

 

 

279,462  (1)

 

 

 

83,520 

 

 

95,940 

 

 

 

 

 

 

18,056 

 

 

476,977 

Senior Vice President Sales, Marketing and

 

 

2015

 

 

185,000 

 

 

40,000 

 

 

69,960 

 

 

71,500 

 

 

 

 

 

 

36,769 

 

 

403,229 

Research & Development of Appvion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew K. Stites

 

 

2016

 

 

195,043  (1)

 

 

 

8,700 

 

 

12,300 

 

 

 

 

2,431 

 

 

11,703 

 

 

230,177 

Vice President Supply Chain of Appvion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethan W. Haas(9)

 

 

2016

 

 

214,923 

 

 

 

 

83,520 

 

 

95,940 

 

 

 

 

 

 

10,721 

 

 

405,106 

Former Vice President and General Manager

 

 

2015

 

 

275,000 

 

 

 

 

55,968 

 

 

55,000 

 

 

 

 

 

 

15,335 

 

 

401,303 

Carbonless and Specialty Papers of Appvion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

83


 

 

(1)Salary is prorated from date of the September 4, 2016 promotion for Mr. Stites and the September 8, 2016 promotion for Mr. Merritt. Salary is prorated from the date of the August 2015 promotions for Mr. Gilligan and Ms. Van Straten.



(2)Fiscal 2014 was a 53-week fiscal year for the Company, therefore, amounts shown in the Summary Compensation Table include 53 weeks for that year. Only Salary, All Other Compensation and Total Compensation were affected by the extra week.



(3)The SAR grant date fair value is calculated based on a Black-Scholes valuation methodology.



In 2014, there were grants on January 1 and July 1. Mr. Gilligan was the only NEO to receive a grant on July 1, 2014. The assumptions used for the January 1 grant were: Expected life of 6.5 years (mid-point of 3 and 10 years vested period); Dividend yield of 0% (plan does not pay dividends); Risk Free Interest Rate of 2.43% (based on Treasury Constant maturities yield curve) and Volatility of 39% (based on peer group volatility for previous 6.5 years). The SAR grant as of January 1, 2014 was valued at $6.99 per share with a $16.25 per share grant price. The assumptions used for the July 1 grant were: Expected life of 6.5 years (mid-point of 3 and 10 years vested period); Dividend yield of 0% (plan does not pay dividends); Risk Free Interest Rate of 2.14% (based on Treasury Constant maturities yield curve) and Volatility of 39% (based on peer group volatility for previous 6.5 years). The SAR grant as of July 1, 2014 was valued at $6.91 per share with a $16.30 per share grant price.



In 2015, there were grants on January 4 and August 4. Mr. Gilligan was the only NEO to receive a grant on August 4, 2015. The assumptions used for the January 4 grant were: Expected life of 6.5 years (mid-point of 3 and 10 years vested period); Dividend yield of 0% (plan does not pay dividends); Risk Free Interest Rate of 1.93% (based on Treasury Constant maturities yield curve) and Volatility of 42% (based on peer group volatility for previous 6.5 years). The SAR grant as of January 4, 2016 was valued at $4.89 per share with an $11.00 per share grant price. The assumptions used for the August 4 grant were: Expected life of 6.5 years (mid-point of 3 and 10 years vested period); Dividend yield of 0% (plan does not pay dividends); Risk Free Interest Rate of 1.92% (based on Treasury Constant maturities yield curve) and Volatility of 37% (based on peer group volatility for previous 6.5 years). The SAR grant as of August 4, 2015 was valued at $5.20 per share with a $12.90 per share grant price.



In 2016, the assumptions used for the January 1 grant were: Expected life of 6.5 years (mid-point of 3 and 10 years vested period); Dividend yield of 0% (plan does not pay dividends); Risk Free Interest Rate of 2.02% (based on Treasury Constant maturities yield curve) and Volatility of 31% (based on peer group volatility for previous 6.5 years). The SAR grant as of January 1, 2016 was valued at $4.35 per share with a $12.30 per share grant price.



(4)The RSU grant as of January 1, 2014 was valued at $16.25 per share; the RSU grant as of July 1, 2014 was valued at $16.30 per share; the RSU grant as of January 1, 2015 was valued at $11.00 per share; the RSU grant as of August 4, 2015 was valued at $12.90 per share; and the RSU grant as of January 1, 2016 was valued at $12.30 per share. The RSU units were valued, as of the Grant Date, at the most recent PDC stock price as determined by the semi-annual ESOP valuation.



(5)Non-equity performance-based incentive plan compensation consists of payments under Appvion’s Annual Incentive Plan. Amounts paid under the Annual Incentive Plan are determined based on EBITDAI, CCD and safety goals (2014 and 2015) and EBITDA, strategic revenue growth and safety goals (2016) and other extraordinary factors, positive or negative, determined by the CEO and the Compensation Committee. Amounts paid under the Annual Incentive Plan are earned in 2015 and paid in 2016.

 

(6)The valuation methods and material assumptions used in determining the change in pension value are discussed in detail in Note 14 of the Consolidated Financial Statements in Item 8, above.

84


 

 

(7)All other compensation for 2016 consists of the following for each named executive officer:

 

Mr. Gilligan: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan of $36,999; executive life insurance of $1,486.



Mr. Ferree: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan of $35,250; executive life insurance of $2,104.



Ms. Van Straten: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan of $21,570.



Mr. Merritt: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan of $18,056.



Mr. Stites: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan of $11,703.

Mr. Haas: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan of $10,721.



(8)In 2015, Mr. Ferree deferred $119,625 into the Nonqualified Excess Plan. In 2016, Mr. Ferree deferred $101,475 into the Nonqualified Excess Plan.

 

(9)Mr. Haas left the Company on September 23, 2016.



 

85


 

 

Grants of Plan-Based Awards







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

All Other Stock

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Awards:

 

 



 

 

 

 

 

 

 

Potential Payouts Under Non-Equity

 

Number of

 

Grant Date Fair



 

Incentive Plan Awards(2)

 

Securities

 

Value of Stock



 

 

 

Grant

 

Approval

 

Threshold

 

Target

 

Maximum

 

Underlying Units

 

Awards

Name

 

Plan

 

Date(1)

Date

 

($)

 

($)

 

($)

 

(#)(3)

 

($)(4)

Kevin M. Gilligan

 

Annual Performance-Based Incentive Plan

 

 

 

 

 

 

46,800 

 

 

468,000 

 

 

936,000 

 

 

 

 

 

 



 

Stock Appreciation Rights Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

163,000 

 

 

709,050 



 

Restricted Stock Unit Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

66,000 

 

 

811,800 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas J. Ferree

 

Annual Performance-Based Incentive Plan

 

 

 

 

 

 

25,920 

 

 

259,200 

 

 

518,400 

 

 

 

 

 

 



 

Stock Appreciation Rights Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

32,000 

 

 

139,200 



 

Restricted Stock Unit Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

13,000 

 

 

159,900 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tami L. Van Straten

 

Annual Performance-Based Incentive Plan

 

 

 

 

 

 

18,425 

 

 

184,250 

 

 

368,500 

 

 

 

 

 

 



 

Stock Appreciation Rights Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

32,000 

 

 

139,200 



 

Restricted Stock Unit Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

13,000 

 

 

159,900 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Justin C. Merritt

 

Annual Performance-Based Incentive Plan

 

 

 

 

 

 

16,000 

 

 

160,000 

 

 

320,000 

 

 

 

 

 

 



 

Stock Appreciation Rights Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

19,200 

 

 

83,520 



 

Restricted Stock Unit Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

7,800 

 

 

95,940 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew K. Stites

 

Annual Performance-Based Incentive Plan

 

 

 

 

 

 

5,874 

 

 

58,738 

 

 

101,377 

 

 

 

 

 

 



 

Stock Appreciation Rights Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

2,000 

 

 

8,700 



 

Restricted Stock Unit Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

1,000 

 

 

12,300 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethan W. Haas

 

Annual Performance-Based Incentive Plan

 

 

 

 

 

 

11,000 

 

 

110,000 

 

 

220,000 

 

 

 

 

 

 



 

Stock Appreciation Rights Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

19,200 

 

 

83,520 



 

Restricted Stock Unit Plan

 

1/3/2016

 

1/18/2016

 

 

 

 

 

 

 

 

 

 

 

7,800 

 

 

95,940 



 

86


 

 

(1)The Grant Date for units under the Company’s Stock Appreciation Rights Plan and Restricted Stock Unit Plan reflect the date upon which the units were awarded to the named executive officer.

(2)All Non-Equity Incentive Plan awards are made under the Company’s Annual Incentive Plan. Projected payouts are based, or will be based, on Company financial performance and safety goals. The Threshold, Target and Maximum payouts stated are based on 2016 salaries for the Annual Incentive Plan. Actual amounts earned in 2015 and paid in 2016 are stated in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.

(3)Represents grants of units under the Company’s Long-Term Stock Appreciation Rights Plan or Restricted Stock Unit Plan.

(4)The units granted under the Company’s SAR Plan were valued, as of the date of the grant, at the most recent PDC stock price as determined by the semi-annual ESOP valuation. Value is calculated using a Black-Scholes valuation methodology. The assumptions used for the January 1 valuation were: Expected life of 6.5 years (mid-point of 3 and 10 years vested period); Dividend yield of 0% (plan does not pay dividends); Risk Free Interest Rate of 2.02% (based on Treasury Constant maturities yield curve) and Volatility of 31% (based on peer group volatility for previous 6.5 years). The SAR grant as of January 1 was valued at $4.35 per share with an $12.30 per share grant price.



Cash Compensation. The amounts included in the Summary Compensation Table generally describe the total accrued cost to the Company of executive compensation, but in some cases describe the SEC prescribed fair value at time of grant. However, in either case, much of that compensation was not paid to the Company’s executives in cash in the year reported. The following table sets out the total compensation, the elements which were accrued but not paid in each year, and the resulting net cash compensation to each of the executives. Some executives elected to defer some of that net cash compensation.



Cash Compensation Table







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Less Noncash Compensation

 

 



 

 

 

 

 

 

 

Change in

 

 

 

 



 

 

 

 

 

 

 

Pension Value

 

 

 

 



 

 

 

 

 

 

 

and

 

 

 

 



 

 

 

 

 

 

 

Nonqualified

 

 

 

 



 

 

 

 

 

 

 

Deferred

 

 

 

 



 

 

 

 

Total

 

Long-Term

 

Compensation

 

 

 

Net Cash



 

Year

 

Compensation

 

Awards

 

Earnings

 

Other

 

Compensation

Name

 

 

 

($)(1)

 

($)(2)

 

($)

 

($)(3)

 

($)

Kevin M. Gilligan

 

 

2016

 

 

2,135,560 

 

 

1,520,850 

 

 

456 

 

 

1,486 

 

 

612,768 



 

 

2015

 

 

1,384,547 

 

 

862,252 

 

 

 

 

1,486 

 

 

520,809 



 

 

2014

 

 

617,454 

 

 

268,600 

 

 

 

 

3,063 

 

 

345,791 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas J. Ferree

 

 

2016

 

 

839,145 

 

 

299,100 

 

 

70,690 

 

 

2,104 

 

 

467,251 



 

 

2015

 

 

876,424 

 

 

404,650 

 

 

 

 

2,104 

 

 

469,670 



 

 

2014

 

 

1,131,509 

 

 

397,710 

 

 

85,771 

 

 

3,424 

 

 

644,604 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tami L. Van Straten

 

 

2016

 

 

674,552 

 

 

299,100 

 

 

23,498 

 

 

 

 

351,954 



 

 

2015

 

 

441,414 

 

 

131,296 

 

 

 

 

 

 

310,118 



 

 

2014

 

 

572,424 

 

 

134,900 

 

 

50,695 

 

 

1,423 

 

 

385,406 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Justin C. Merritt

 

 

2016

 

 

476,977 

 

 

179,460 

 

 

 

 

 

 

297,517 



 

 

2015

 

 

403,229 

 

 

141,460 

 

 

 

 

 

 

261,769 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew K. Stites

 

 

2016

 

 

230,177 

 

 

21,000 

 

 

2,431 

 

 

 

 

206,746 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethan W. Haas

 

 

2016

 

 

405,106 

 

 

179,460 

 

 

 

 

 

 

225,644 



 

 

2015

 

 

401,303 

 

 

110,968 

 

 

 

 

 

 

290,335 



(1)Total Compensation includes the Annual Incentive Plan. Amounts paid under the Annual Incentive Plan are earned in year reported and paid in following year.

(2)Long Term Awards include SAR units and RSU units.

(3)Life insurance is included for all executives eligible for this benefit. Life insurance premium amounts are listed in the footnote to All Other Compensation under the Summary Compensation Table.

87


 

 

Outstanding Equity Awards at Fiscal Year-End



Awards in the table describe units issued under the Company’s Long-Term Stock Appreciation Rights Plan (SAR Plan) in 2016 and prior years.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SAR Awards



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Number of

 

Number of

 

 

 

 

 

 



 

 

 

Securities

 

Securities

 

 

 

 

 

 



 

 

 

Underlying

 

Underlying

 

 

 

 

 

 



 

Grant

 

Unexercised Units

 

Unexercised Units

 

 

 

Date

 

 



 

Date

 

Exercisable (#)

 

Unexercisable (#)

 

Grant

 

Fully

 

Expiration

Name

 

 

 

 

 

 

 

Price ($)

 

Vested(1)

 

Date(1)

Kevin M. Gilligan

 

 

1/3/2016

 

 

 

 

163,000 

 

 

12.30 

 

 

1/3/2019

 

 

1/3/2026



 

 

8/4/2015

 

 

 

 

45,000 

 

 

12.90 

 

 

8/4/2018

 

 

8/4/2025



 

 

1/4/2015

 

 

 

 

40,000 

 

 

11.00 

 

 

1/4/2018

 

 

1/4/2025



 

 

7/1/2014

 

 

 

 

20,000 

 

 

16.30 

 

 

7/1/2017

 

 

7/1/2024



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas J. Ferree

 

 

1/3/2016

 

 

 

 

32,000 

 

 

12.30 

 

 

1/3/2019

 

 

1/3/2026



 

 

1/4/2015

 

 

 

 

43,600 

 

 

11.00 

 

 

1/4/2018

 

 

1/4/2025



 

 

1/1/2014

 

 

29,000 

 

 

 

 

16.25 

 

 

1/1/2017

 

 

1/1/2024



 

 

1/1/2013

 

 

25,000 

 

 

 

 

17.55 

 

 

1/1/2016

 

 

1/1/2023



 

 

1/1/2012

 

 

43,500 

 

 

 

 

15.01 

 

 

1/1/2015

 

 

1/1/2022



 

 

1/2/2011

 

 

 

 

 

 

12.84 

 

 

1/2/2014

 

 

1/2/2021



 

 

1/1/2009

 

 

45,000 

 

 

 

 

21.43 

 

 

1/1/2012

 

 

1/1/2019



 

 

1/1/2008

 

 

31,000 

 

 

 

 

33.41 

 

 

1/1/2011

 

 

1/1/2018



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tami L. Van Straten

 

 

1/3/2016

 

 

 

 

32,000 

 

 

12.30 

 

 

1/3/2019

 

 

1/3/2026



 

 

1/4/2015

 

 

 

 

14,000 

 

 

11.00 

 

 

1/4/2018

 

 

1/4/2025



 

 

1/1/2014

 

 

10,000 

 

 

 

 

16.25 

 

 

1/1/2017

 

 

1/1/2024



 

 

1/1/2013

 

 

8,000 

 

 

 

 

17.55 

 

 

1/1/2016

 

 

1/1/2023



 

 

1/1/2012

 

 

5,500 

 

 

 

 

15.01 

 

 

1/1/2015

 

 

1/1/2022



 

 

1/2/2011

 

 

 

 

 

 

12.84 

 

 

1/2/2014

 

 

1/2/2021



 

 

1/1/2009

 

 

4,000 

 

 

 

 

21.43 

 

 

1/1/2012

 

 

1/1/2019



 

 

1/1/2008

 

 

3,000 

 

 

 

 

33.41 

 

 

1/1/2011

 

 

1/1/2018



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Justin C. Merritt

 

 

1/3/2016

 

 

 

 

19,200 

 

 

12.30 

 

 

1/3/2019

 

 

1/3/2026



 

 

4/6/2015

 

 

 

 

15,000 

 

 

11.00 

 

 

4/6/2018

 

 

4/6/2025



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew K. Stites

 

 

1/3/2016

 

 

 

 

2,000 

 

 

12.30 

 

 

1/3/2019

 

 

1/3/2026



 

 

1/4/2015

 

 

 

 

2,000 

 

 

11.00 

 

 

1/4/2018

 

 

1/4/2025



 

 

1/1/2014

 

 

1,800 

 

 

 

 

16.25 

 

 

1/1/2017

 

 

1/1/2024



 

 

1/1/2013

 

 

1,750 

 

 

 

 

17.55 

 

 

1/1/2016

 

 

1/1/2023



 

 

1/1/2012

 

 

2,000 

 

 

 

 

15.01 

 

 

1/1/2015

 

 

1/1/2022



 

 

1/2/2011

 

 

 

 

 

 

12.84 

 

 

1/1/2014

 

 

1/2/2021



 

 

1/1/2009

 

 

3,000 

 

 

 

 

21.43 

 

 

1/1/2012

 

 

1/1/2019



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethan W. Haas(2)

 

 

1/3/2016

 

 

 

 

19,200 

 

 

12.30 

 

 

1/3/2019

 

 

1/3/2026



 

 

1/4/2015

 

 

 

 

12,000 

 

 

11.00 

 

 

1/4/2018

 

 

1/4/2025



 

 

7/7/2014

 

 

 

 

 

 

16.30 

 

 

7/7/2017

 

 

7/7/2024



(1)

Employees are generally entitled to exercise any SAR units received on or before January 1, 2017 only after holding the units for at least three years and for up to ten years from the date of grant.

(2)

Mr. Haas left the company on September 23, 2016 and forfeited any SAR awards not vested.

88


 

 

Awards in the table describe units issued under the Company’s Restricted Stock Unit Plan (RSU) in 2015 and 2016.







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

RSU Awards



 

 

 

 

 

 

 

 



 

 

 

Number of

 

Market Value of

 

 



 

 

 

Underlying

 

Underlying

 

 



 

 

 

Securities

 

Securities

 

Date



 

Grant

 

That Have

 

That Have Not

 

Fully

Name

 

Date

 

Not Vested (#)

 

Vested ($)(1)

 

Vested(2)

Kevin M. Gilligan

 

 

8/4/2015

 

 

66,000 

 

 

638,100 

 

 

1/3/2019



 

 

8/4/2015

 

 

19,400 

 

 

200,790 

 

 

8/4/2018



 

 

1/4/2015

 

 

16,300 

 

 

168,705 

 

 

1/4/2018



 

 

 

 

 

 

 

 

 

 

 

 

Thomas J. Ferree

 

 

1/3/2016

 

 

13,000 

 

 

134,550 

 

 

1/3/2019



 

 

1/4/2015

 

 

18,300 

 

 

189,405 

 

 

1/4/2018



 

 

 

 

 

 

 

 

 

 

 

 

Tami L. Van Straten

 

 

1/3/2016

 

 

13,000 

 

 

134,550 

 

 

1/3/2019



 

 

1/4/2015

 

 

6,000 

 

 

62,100 

 

 

1/4/2018



 

 

 

 

 

 

 

 

 

 

 

 

Justin C. Merritt

 

 

1/3/2016

 

 

7,800 

 

 

80,730 

 

 

1/3/2019



 

 

4/6/2015

 

 

6,500 

 

 

67,275 

 

 

1/4/2018



 

 

 

 

 

 

 

 

 

 

 

 

Matthew K. Stites

 

 

1/3/2016

 

 

1,000 

 

 

10,350 

 

 

1/3/2019



 

 

1/4/2015

 

 

1,000 

 

 

10,350 

 

 

1/4/2018



 

 

 

 

 

 

 

 

 

 

 

 

Ethan W. Haas(3)

 

 

1/3/2016

 

 

7,800 

 

 

 

 

1/3/2019



 

 

1/4/2015

 

 

5,000 

 

 

 

 

1/4/2018



(1)The market value of RSU units that have not vested was calculated by multiplying the number of units by the PDC stock price of $10.35 as of December 31, 2016 as determined by the semi-annual ESOP valuation.

(2)RSU units are vested three years after the award date and paid at vesting.

(3)Mr. Haas left the company on September 23, 2016 and forfeited any RSU awards not vested.

89


 

 

Pension Benefits







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Present Value of

 

Payments



 

 

 

Number of Years of

 

Accumulated

 

During Last

Name

 

Plan Name

 

Credited Service (#)

 

Benefit ($)(1)

 

Fiscal Year ($)

Kevin M. Gilligan(2)

 

 

Pension

 

 

0

 

 

 

 

0



 

 

SERP

 

 

0

 

 

 

 

0



 

 

 

 

 

 

 

 

 

 

 

 

Thomas J. Ferree

 

 

Pension

 

 

4.4

 

 

170,245 

 

 

0



 

 

SERP

 

 

4.4

 

 

167,828 

 

 

0



 

 

 

 

 

 

 

 

 

 

 

 

Tami L. Van Straten

 

 

Pension

 

 

10.1

 

 

170,008 

 

 

0



 

 

SERP

 

 

10.1

 

 

 

 

0



 

 

 

 

 

 

 

 

 

 

 

 

Justin C. Merritt(2)

 

 

Pension

 

 

0

 

 

 

 

0



 

 

SERP

 

 

0

 

 

 

 

0



 

 

 

 

 

 

 

 

 

 

 

 

Matthew K. Stites(2)

 

 

Pension

 

 

0

 

 

 

 

0



 

 

SERP

 

 

0

 

 

 

 

0



 

 

 

 

 

 

 

 

 

 

 

 

Ethan W. Haas(2)

 

 

Pension

 

 

0

 

 

 

 

0



 

 

SERP

 

 

0

 

 

 

 

0



(1)The valuation methods and material assumptions used in determining the present value of accumulated pension benefits are discussed in detail in Note 14 of the Consolidated Financial Statements in Item 8, above.

(2)Mr. Gilligan, Mr. Merritt, Mr. Stites and Mr. Haas are not eligible for this benefit because new hires were not permitted in the Pension Plan on or after January 1, 2008.



Pension Plan and Supplemental Executive Retirement Plan (“SERP”). The Company maintains a broad-based tax-qualified, noncontributory defined benefit pension plan for eligible salaried employees, referred to as the Pension Plan. Benefits under the Pension Plan vest after five years of service. Benefits are based on years of service and employee pay. The Company has also established the SERP to provide retirement benefits for management and other highly compensated employees whose benefits are reduced by the tax-qualified plan limitations in the Pension Plan. Benefits under the Pension Plan are paid as annuities or a single lump sum following termination of employment. The lump sum option was added to the pension plan on December 1, 2014. Benefits under the SERP are paid as annuities only, except for benefits less than $20,000. The SERP benefit, when added to the Pension Plan benefit, provides a combined benefit equal to the benefit under the Pension Plan as if certain tax-qualified plan limitations did not apply. The total combined monthly benefit under the plans is equal to 1.0% of final average compensation up to Social Security covered compensation, plus 1.4% of final average compensation above Social Security covered compensation, multiplied by years of benefit service (limited to 35 years). Under the Pension Plan, the normal form of benefit is payable upon retirement at age 65 with 5 years of service. Benefit payments under the Pension Plan may begin as early as administratively possible following termination of employment. Benefit payments under the SERP must begin the later of age 55 or termination of employment. The benefit is actuarially reduced when payments begin earlier than age 62. In accordance with the terms of the plan, the Company provides an enhancement to the benefit for all eligible salaried employees when age plus service equals 65 or more at the time of termination. The pension benefits are based on years of credited service and the average annual compensation received during the highest five full consecutive calendar years of the last ten years prior to termination or March 1, 2011, whichever occurs first. Compensation covered by the plans includes base salary, incentive and deferred compensation.

 

In December 2007, it was announced that the Pension Plan covering eligible salaried employees, of which certain named executives officers are participants, would be frozen effective January 1, 2015 and replaced with a broad-based tax-qualified, noncontributory defined contribution benefit which is referred to as the Retirement Contribution benefit described below. In December 2010, it was announced that the freeze date would be accelerated to March 1, 2011. New hires were not permitted in the Pension Plan on or after January 1, 2008.



90


 

 

Nonqualified Deferred Compensation







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Executive

 

Company

 

Aggregate

 

 

 

Aggregate



 

Contributions

 

Contributions in

 

Earnings

 

Aggregate

 

Balance at



 

in Last Fiscal

 

Last Fiscal

 

in Last Fiscal

 

Withdrawals/

 

December 31,

Name

 

Year ($)(1)

 

Year ($)(2)

 

Year ($)

 

Distributions ($)

 

2016 ($)

Kevin M. Gilligan

 

 

 

 

27,969 

 

 

456 

 

 

 

 

52,303 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas J. Ferree

 

 

101,475 

 

 

16,700 

 

 

48,134 

 

 

 

 

800,464 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tami L. Van Straten

 

 

 

 

5,885 

 

 

3,578 

 

 

 

 

46,003 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Justin C. Merritt

 

 

 

 

1,157 

 

 

 

 

 

 

1,157 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew K. Stites

 

 

 

 

 

 

2,431 

 

 

 

 

26,229 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethan W. Haas

 

 

 

 

 

 

 

 

1,271 

 

 



(1)Employee Contributions to the Nonqualified Excess Plan may include base salary, annual performance-based incentive pay and/or Restricted Stock Units. Amounts reported as deferred under the Nonqualified Excess Plan are included as part of Total Compensation in the Summary Compensation Table.

(2)Excess Plan contribution related to Retirement Contribution Benefit (see below).



Nonqualified Excess Plan. On February 1, 2006, the Company established a Nonqualified Excess Plan for highly compensated employees including directors and executive officers. To be eligible for participation in the plan an employee must have an annual base salary of $130,000 or higher. This plan was established for the purpose of allowing a tax-favored option for saving for retirement when the Code limits the ability of highly compensated employees to participate under tax-qualified plans. This plan allows for deferral of compensation on a pre-tax basis and accumulation of tax-deferred earnings in an amount of up to 50% of a participant’s base salary and/or up to 75% of a participant’s annual performance-based incentive pay and/or Restricted Stock Units. Participants in the plan choose to have deferrals deemed invested in selected mutual funds. The Company invests funds equal to the amounts deferred by participants in the mutual funds which the participants select for their deemed investments. These funds are the Company’s assets to which the participants have no claim other than as general creditors of the Company. The Company pays administrative expenses of the plan and annually adds funds to the plan to make up for any difference between the participants’ deemed investments and the actual performance of the investments.



Retirement Contribution Benefit and Excess Plan. As a replacement to the pension plan, any employee hired on or after January 1, 2008, receives a contribution for future retirement benefits into the 401(k) fund of the Appvion Retirement Savings and Employee Stock Ownership Plan (KSOP). The contribution is a points-based formula ranging from 1% to 5% of total compensation based on the employee’s age and service and is the same benefit provided to other eligible employees.

 

The Company has also established a benefit within the above referenced Nonqualified Excess Plan for management and other highly compensated employees whose benefits are reduced as the result of deferring income into the Nonqualified Excess Plan or by the tax-qualified plan income limitations applied to the KSOP Plan. This benefit provides the same 1% to 5% contribution calculated on excluded pay. There is an additional “KSOP match” of 6% of excluded pay which is calculated regardless of whether the employee participates in the KSOP plan.



 

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The table below reflects the amount of compensation that would be paid to each of the named executive officers in the event of termination of such executive’s employment under various scenarios. The amounts shown assume that such termination would be effective December 31, 2016. These amounts are estimates. The actual amounts to be paid can only be determined at the time of a termination or a change of control.



Potential Payments upon Termination or Change of Control

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

COBRA

 

 

 

Termination

 

Long-Term

 

Company

 

 

 

 



 

Termination Other Than for

 

Health

 

Outplacement

 

Protection

 

Incentive Plans

 

FICA To Be

 

Tax Gross-Up

 

 

Name

 

Misconduct or With Good Reason

 

Benefits ($)(1)

 

Services ($)

 

Payments ($)(2)

 

($)(3)

 

Paid ($)(4)

 

Payments ($)

 

Total ($)

Kevin M. Gilligan

 

 

Without Change of Control

 

 

20,521 

 

 

9,500 

 

 

877,500 

 

 

 

 

12,724 

 

 

 

 

920,245 



 

 

Within two years of Change of Control

 

 

27,362 

 

 

9,500 

 

 

2,106,000 

 

 

1,052,595 

 

 

45,800 

 

 

 

 

3,241,257 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas J. Ferree

 

 

Without Change of Control

 

 

21,571 

 

 

7,500 

 

 

648,000 

 

 

 

 

9,396 

 

 

 

 

686,467 



 

 

Within two years of Change of Control

 

 

28,761 

 

 

7,500 

 

 

1,382,400 

 

 

323,955 

 

 

24,742 

 

 

 

 

1,767,358 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tami L. Van Straten

 

 

Without Change of Control

 

 

20,521 

 

 

7,500 

 

 

502,500 

 

 

 

 

7,286 

 

 

 

 

537,807 



 

 

Within two years of Change of Control

 

 

27,362 

 

 

7,500 

 

 

1,038,500 

 

 

196,650 

 

 

17,910 

 

 

 

 

1,287,922 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Justin C. Merritt

 

 

Without Change of Control

 

 

20,521 

 

 

7,500 

 

 

480,000 

 

 

 

 

6,960 

 

 

 

 

514,981 



 

 

Within two years of Change of Control

 

 

27,362 

 

 

7,500 

 

 

960,000 

 

 

148,005 

 

 

16,066 

 

 

 

 

1,158,933 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew K. Stites

 

 

Without Change of Control

 

 

13,681 

 

 

7,500 

 

 

184,000 

 

 

 

 

2,668 

 

 

 

 

207,849 



 

 

Within two years of Change of Control

 

 

27,362 

 

 

7,500 

 

 

644,000 

 

 

20,700 

 

 

9,638 

 

 

 

 

709,200 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethan W. Haas(5)

 

 

Without Change of Control

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Within two years of Change of Control

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)COBRA Health Benefits amounts stated in this table are based on cost of the high deductible family medical plan. Comprehensive family dental plan is included for Mr. Ferree.

(2)Includes Termination Protection Agreement payments or Enhanced Severance Agreement payments and prorated Annual Incentive.

(3)In the event of a change of control as defined in the Termination Protection Agreements or Enhanced Severance Agreements, SAR and RSU units become immediately exercisable. The amount reflects the value of all outstanding awards on December 31, 2016. The value of outstanding RSU units is determined by multiplying the number of units outstanding for each grant date by the PDC unit value on December 31, 2016. The value of outstanding SAR units is determined by multiplying the number of units outstanding for each grant date by the change in unit value from the date of the grant to December 31, 2016.

(4)Assumes company Medicare rate at 1.45%.

(5)Mr. Haas left the company on September 23, 2016.



 

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Termination Protection Agreements (TPAs). The Company has entered into TPAs with Mr. Gilligan, Mr. Ferree, Ms. Van Straten and Mr. Merritt that comply with Section 409A of the Internal Revenue Code. The agreements provide that if, at any time other than within two years after a “change of control,” as defined below, the Company terminates the executive officer’s employment other than for misconduct, or “permanent disability,” as defined below, or the executive officer terminates employment for “good reason,” as defined below, then the executive officer will continue to receive payments in accordance with the Company’s normal payroll practices for 18 months following termination of employment at a rate equal to the executive officer’s base salary in effect on the date on which his or her employment terminates. The payments to the executive officer would be reduced after twelve months from the date of termination by amounts he or she earns through other employment during the remaining portion of the 18-month salary continuation period. The payments would cease completely if the executive officer, at any time, directly or indirectly (whether a shareholder, owner, partner, consultant, employee or otherwise) engaged in a competing business, referred to in the TPAs as a “major business,” as defined below.

 

If, within two years of a change of control, the Company terminates the executive officer’s employment other than for misconduct, or permanent disability, or he or she terminates for good reason, then he or she is entitled to a lump-sum cash payment. This payment will be equal to two times his or her annual base salary, plus a multiple of two times his or her targeted incentive for the fiscal year in which his or her employment terminates, or if no such incentive has been established for the fiscal year of termination, then the incentive for the fiscal year prior to termination is used. The executive officer will also be entitled to a lump-sum cash payment representing a partial incentive for the year of termination, based on the number of days the executive officer worked for the Company in the year of termination. These agreements remain in effect for 24 months following a change of control unless the Company gives 18 months advance notice prior to a change of control.



Enhanced Severance Agreements (ESAs). The Company has entered into an ESA with Mr. Stites. The agreement provides that if, at any time other than within two years after a “change of control,” as defined below, the Company terminates Mr. Stites’ employment other than for misconduct or “permanent disability,” as defined below, or if Mr. Stites terminates employment for “good reason,” as defined below, Mr. Stites will continue to receive payments in accordance with the Company’s normal payroll practices for 52 weeks. The first 26 weeks will be paid at a rate of 100% of base salary and the next 26 weeks will be paid at a rate of 60% of base salary. Mr. Stites is also entitled to a lump-sum cash payment representing a partial incentive for the year of termination, based on the number of full months worked for the Company in the year of termination.



If, within two years of a change of control, the Company terminates the executive officer’s employment other than for misconduct, or permanent disability, or he or she terminates for good reason, then he or she is entitled to a lump-sum cash payment. This payment will be equal to two times his or her annual base salary, plus a multiple of two times his or her targeted incentive for the fiscal year in which his or her employment terminates, or if no such incentive has been established for the fiscal year of termination, then the incentive for the fiscal year prior to termination is used. The executive officer will also be entitled to a lump-sum cash payment representing a partial incentive for the year of termination, based on the number of days the executive officer worked for the Company in the year of termination. These agreements remain in effect for 24 months following a change of control unless the Company gives 12 months advance notice prior to a change of control.



Under both the TPAs and the ESAs, whether or not an executive officer’s employment terminates within two years of a change of control, the executive officer would also receive his or her salary through the date of termination and all other amounts owed to the executive officer at the date of termination under the Company’s benefit plans. In addition, if the executive officer’s employment terminates as described in either of the preceding paragraphs, he or she would be entitled to reimbursement for outplacement services and continued health coverage for the executive officer and his or her eligible family members for the length of severance with a maximum of two years. In addition, Mr. Ferree is entitled to dental coverage for himself and his eligible family members. 



A “change of control” is defined in the TPAs and ESAs as a change in ownership or effective control of the Company or a change in the ownership of a substantial portion of the assets of the Company, as defined by the occurrence of any one of the following events:



the termination of the ESOP or amendment of the ESOP so that it ceases to be an employee stock ownership plan;

an event whereby the ESOP ceases to own a majority interest in the Company;

 

the sale, lease, exchange or other transfer of all or substantially all of the Company assets to a person or entity that is not controlled by the Company;

 

termination of the Company’s business, liquidation, dissolving or selling substantially all stock;

 

the Company’s merger or consolidation with another company and the Company is not the surviving company of such merger or consolidation and the surviving company is not controlled by the persons or entities who controlled the Company immediately prior to such merger or consolidation; or

any other event whereby ownership and effective control of the Company is transferred or conveyed to a person or entity that is not controlled by the Company.

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 “Permanent disability” is defined in these agreements as any time an executive officer is entitled to receive benefits under the Corporation’s Long Term Disability Plan.



“Good reason” is defined in these agreements as, prior to a change of control, without the executive officer’s consent, a reduction of 25% or more of the executive officer’s base salary, and after a change of control:

 

a decrease in the executive officer’s position or responsibilities without his or her consent;

 

failure to pay, or any material reduction of, the executive officer’s salary or incentive in effect immediately prior to a change of control;

 

the relocation of the executive officer’s principal place of employment without his or her consent; or



failure by any successor entity to expressly assume and agree to the terms of the Termination Protection Agreement.



“Major business” is defined in these agreements as any business segment of the Company (e.g., carbonless paper, thermal paper or other business segments) that: (a) produced more than 5% of the revenues of the Company in the last full fiscal year prior to the executive’s termination; or (b) is projected to produce more than 5% of the revenues of the Company in the fiscal year of the executive’s termination or in either of the two succeeding fiscal years following the executive’s termination. Executive officers shall be deemed not a shareholder of a company that would otherwise be a competing entity if the executive officer’s record and beneficial ownership of the capital stock of such company amount to not more than 1% of the outstanding capital stock of any such company subject to the periodic and other reporting requirements of Section 13 or Section 15(d) of the Exchange Act.



2016 Director Compensation







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Fees Earned or

 

Stock

 

 

Name

 

Paid in Cash ($)(1)

 

Awards ($)(2)

 

Total ($)

Stephen P. Carter

 

 

70,000 

 

 

55,000 

 

 

125,000 



 

 

 

 

 

 

 

 

 

Terry M. Murphy

 

 

100,000 

 

 

55,000 

 

 

155,000 



 

 

 

 

 

 

 

 

 

David A. Roberts(3)

 

 

36,667 

 

 

36,667 

 

 

73,334 



 

 

 

 

 

 

 

 

 

Kathi P. Seifert

 

 

62,500 

 

 

55,000 

 

 

117,500 



 

 

 

 

 

 

 

 

 

Mark A. Suwyn

 

 

55,000 

 

 

55,000 

 

 

110,000 



 

 

 

 

 

 

 

 

 

George W. Wurtz

 

 

65,000 

 

 

55,000 

 

 

120,000 



(1)Non-employee directors are entitled to participate in the Company’s Nonqualified Excess Plan and may defer 100% of their fees.

(2)On January 3, 2016, each of the non-employee directors were issued 2,236 deferred compensation units valued at the December 31, 2015 share price of $12.30 per share ($27,500). On July 1, 2016, each of the then non-employee directors were issued 2,007 deferred compensation units valued at the June 30, 2016 share price of $13.70 per share ($27,500). The amounts reflect the aggregate grant date fair value computed in accordance with Financial Accounting Standards Codification Topic.

(3)Mr. Roberts was appointed as director in May, 2016.



Non-Employee Director Compensation. Cash compensation to directors of PDC and Appvion, who are not employees of Appvion, PDC or any of their subsidiaries, consists of $55,000 in annual retainer fees and $45,000 annually for serving as the chairman of the Board of Directors, $15,000 annually for serving as the chairman of the Audit Committee, $10,000 annually for serving as the chairman of the Compensation Committee and $7,500 for serving as the chairman of the Corporate Governance Committee, thus maintaining competitive market pay for chair roles. Committee chair responsibilities are described in Item 10. Director fees are paid quarterly in arrears for the services provided. If a director joins or ceases to be a director during a quarter, the cash compensation for the quarter is prorated by the number of months served. There are no separate fees paid for participation in committee or board meetings.

94


 

 

Directors also receive deferred compensation of $55,000 awarded in units which track PDC common stock. Deferred compensation will be calculated and accrued for six-month calendar periods of service beginning January 1 and July 1 using the PDC common stock price determined by the ESOP trustee as of the ESOP valuation date coincident with or most recently preceding such date of payment. If a director joins or ceases to be a director during the six-month period, the deferred compensation is prorated for the time served as a director. The deferred compensation will be paid upon cessation of service as a director in five annual cash installments, with each installment equal to one-fifth of the director’s units and the first installment paid following the next semi-annual share price determination. The value of the installment payment will be determined by the PDC common stock price in effect at the time of payment. In the event of death, disability or change in control, the deferred compensation will fully vest and be paid in a single sum using the PDC common stock price most recently determined by the ESOP trustee. No non-employee director has a compensation arrangement which differs from these standard compensation arrangements. On March 7, 2013, the board adopted The Appvion, Inc. Non-Employee Director Deferred Compensation Plan to formalize the terms of the plan. This plan was amended effective January 1, 2016.

95


 

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The Appvion Employee Stock Ownership Trust owns beneficially and of record 100% of the issued and outstanding shares of PDC. PDC owns beneficially and of record 100% of the issued and outstanding shares of Appvion. Since May 28, 2014, the trustee of The Appvion Employee Stock Ownership Trust has been Argent Trust Co of Tennessee, whose address is P.O. 6075 Poplar Avenue, Suite 702, Memphis, Tennessee 38119. Prior to April 1, 2013, the trustee of The Appvion Employee Stock Ownership Trust was Reliance Trust Company since April 1, 2013. Prior to April 1, 2013, the trustee was State Street Global Advisors.

 

The following table sets forth as of December 31, 2016, the number of shares, if any, allocated to the accounts of the directors, the named executive officers and the directors and executive officers as a group in Appvion Stock Fund of the KSOP.







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

Amount and

 

 

 

 



 

 

Nature

 

 

 

 

   

   

 

of Beneficial

 

 

 

Name of Beneficial Owner

   

 

Ownership (1)

 

 

Percent

Kevin M. Gilligan

   

 

 

4,582 

 

 

 

*

Thomas J. Ferree

 

 

 

25,867 

 

 

 

*

Tami L. Van Straten

 

 

 

10,759 

 

 

 

*

Justin C. Merritt

 

 

 

2,293 

 

 

 

*

Matthew K. Stites

 

 

 

3,399 

 

 

 

*

Ethan W. Haas(3)

 

 

 

2,466 

 

 

 

*

Stephen P. Carter

 

 

 

 -

(2)

 

 

*

Terry M. Murphy

 

 

 

 -

(2)

 

 

*

Kathi P. Seifert

 

 

 

 -

(2)

 

 

*

Mark A. Suwyn

 

 

 

 -

(2)

 

 

*

George W. Wurtz

 

 

 

 -

(2)

 

 

*



 

 

 

 

 

 

 

 

All Directors and executive officers as a group (11 persons)

 

 

 

49,366 

 

 

 

0.79% 



*Less than 1%.

(1)Participants in the KSOP have the right to direct the ESOP trustee to vote shares of common stock which have been allocated to that participant’s ESOP account either for or against specified corporate events relating to PDC. For all other shareholder votes, the ESOP trustee will vote all shares of common stock held by the ESOP as directed by the ESOP committee, subject to the security holders agreements described above under “Item 10. Directors, Executive Officers and Corporate Governance.” Participants have statutory diversification rights beginning at age 55, conditional diversification rights, and the right to receive distributions from the participant’s KSOP account upon retirement, death, disability, resignation, dismissal or permanent layoff. Participants may not sell, pledge or otherwise transfer the shares of common stock allocated to their KSOP accounts.

(2)Non-employee directors are not eligible to participate in the KSOP.

(3)Mr. Haas left his role as Vice President & General Manager, Carbonless and Specialty Papers of Appvion on September 23, 2016.



Item 13.          Certain Relationships and Related Transactions and Director Independence



None.



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Item 14.          Principal Accountant Fees and Services



Audit Fees. The aggregate fees billed for professional services rendered by RSM US LLP for both the audit of financial statements as of and for the ended year December 31, 2016 and the review of the financial statements included in the Quarterly Report on Form 10-Q and assistance with and review of documents filed with the SEC during those periods were $400,800. The aggregate fees billed for professional services rendered by RSM US LLP for both the audit of financial statements as of and for the ended year January 2, 2016 and the review of the financial statements included in the Quarterly Reports on Form 10-Q for the third quarter ended October 4, 2015 and assistance with and review of documents filed with the SEC during those periods were $333,700. The aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP for the review of the financial statements included in the Quarterly Reports on Form 10-Q for the first quarter ended April 5, 2015 and the second quarter ended July 5, 2015, the dual opinion for the 2015 Form 10-K, and assistance with and review of documents filed with the SEC during those periods were $134,435. During 2016 and 2015, RSM US LLP did not bill any aggregate fees for audit-related services. During 2015, PricewaterhouseCoopers LLP did not bill any aggregate fees for audit-related services.

 

Tax Fees. RSM US LLP did not bill any aggregate fees for tax services in 2016 or 2015. PricewaterhouseCoopers LLP did not bill any aggregate fees for tax services in 2015.

 

All Other Fees. There were other fees of $2,250 in 2016 billed by RSM US LLP and $1,800 in 2015 billed by PricewaterhouseCoopers LLP.





97


 

 

PART IV



Item 15.                 Exhibits and Financial Statement Schedules

 



 

 

 

 

 

(a)(1)

Financial Statements.

   

   

   

   

   

   

   

   

Report of Independent Registered Public Accounting Firm

   

   

31 



Report of Independent Registered Public Accounting Firm

 

 

32 



 

 

 

 



 

 

 

 

   

Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016

   

   

   

33 

   

   

   

   

   

   

   

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, January 2, 2016 and

January 3, 2015

   

   

34 

   

   

   

   

   

   

   

Consolidated Statements of Cash Flows for the years ended December 31, 2016, January 2, 2016, and January 3, 2015

   

   

35 

   

   

   

   

   

   

   

Consolidated Statements of Redeemable Common Stock, Accumulated Deficit and Accumulated Other Comprehensive Income for the years ended December 31, 2016, January 2, 2016, and January 3, 2015

   

   

36 

   

Notes to Consolidated Financial Statements

   

   

37 

   

     

   

   

   

   

(a)(2) 

SCHEDULE I – Condensed Financial Information

   

   

 

105 



 

 

 

 



SCHEDULE II – Valuation and Qualifying Accounts

   

   

108 

   

   

All other schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of a schedule or because the information required is included in the consolidated financial statements of PDC or the notes thereto or the schedules are not required or are inapplicable under the related instructions.

   

   

   

   



 

 

 

 





 

 

 

 

(a)(3)

Exhibits.

   

   

   

   

   

   

   

   

3.1 

Amended and Restated Articles of Incorporation of Paperweight Development Corp. Incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on February 4, 2002. 

 

 

3.2 

Amended and Restated By-laws of Paperweight Development Corp. Incorporated by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on February 4, 2002. 

 

 

98


 

 

4.1

Indenture, dated as of November 19, 2013,  among  Appvion, Inc. and each of the guarantors named therein (including Paperweight Development Corp.) and U.S. Bank National Association, as trustee and as collateral agent governing the 9.0% Second Lien Senior Secured Notes due 2020 (the “Second Lien Senior Secured Notes Indenture”). Incorporated by reference to Exhibit 4.1 to the Registrant’s current report on Form 8-K filed November 22, 2013.

 

 

4.2 

Form of Second Lien Senior Secured Note (included as Exhibit A to the Second Lien Senior Secured Notes Indenture). Incorporated by reference to Exhibit 4.1 to the Registrant’s current report on Form 8-K filed November 22, 2013.

4.3 

Second Lien Collateral Agreement, dated as of November 19, 2013, made by Paperweight Development Corp., Appvion, Inc., and each other Grantor identified therein in favor of U.S. Bank National Association, as collateral agent. Incorporated by reference to Exhibit 4.2 to the Registrant’s current report on Form 8-K filed November 22, 2013.

 

 

4.4 

Second Lien Collateral Agreement, dated as of November 19, 2013, made by Appvion Canada, Ltd., and each other Grantor identified therein in favor of U.S. Bank National Association, as collateral agent. Incorporated by reference to Exhibit 4.3 to the Registrant’s current report on Form 8-K filed November 22, 2013.

 

 

10.1 

Purchase Agreement by and among Arjo Wiggins Appleton p.l.c., Arjo Wiggins US Holdings Ltd., Arjo Wiggins North America Investments Ltd., Paperweight Development Corp. and New Appleton LLC, dated as of July 5, 2001. Incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on February 4, 2002.

   

   

10.1.1 

Amendment to Purchase Agreement by and among Arjo Wiggins US Holdings Ltd., Arjo Wiggins North America Investments Ltd., Arjo Wiggins Appleton Ltd., Paperweight Development Corp. and New Appleton LLC, dated as of June 11, 2004. Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2004.

   

   

10.2

Fox River AWA Environmental Indemnity Agreement by and among Arjo Wiggins Appleton p.l.c., Appleton Papers Inc., Paperweight Development Corp. and New Appleton LLC, dated as of November 9, 2001. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2011.

   

   

10.2.1 

Amendment to Fox River AWA Environmental Indemnity Agreement by and among Paperweight Development Corp., New Appleton LLC, Appleton Papers Inc. and Arjo Wiggins Appleton Ltd., dated as of June 11, 2004. Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2004.



 

10.3 

Fox River PDC Environmental Indemnity Agreement by and among Appleton Papers Inc. and Paperweight Development Corp., dated as of November 9, 2001. Incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on April 17, 2002.

   

   

10.3.1 

Amendment to Fox River PDC Environmental Indemnity Agreement by and among Appleton Papers Inc., Paperweight Development Corp. and New Appleton LLC, dated as of June 11, 2004. Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2004.

 

 

10.4 

Security Agreement by and among Appleton Papers Inc., Paperweight Development Corp., New Appleton LLC and Arjo Wiggins Appleton p.l.c., dated as November 9, 2001. Incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on April 17, 2002.

 

 

99


 

 



 

10.5 

Amended and Restated Relationship Agreement by and among Arjo Wiggins Appleton Ltd. (f/k/a Arjo Wiggins Appleton p.l.c.), Arjo Wiggins (Bermuda) Holdings Limited, Paperweight Development Corp., PDC Capital Corporation and Arjo Wiggins Appleton (Bermuda) Limited, dated as of June 11, 2004. Incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2011.

10.6 

Assignment and Assumption Deed, dated as of November 9, 2001, between Arjo Wiggins Appleton p.l.c. and Arjo Wiggins Appleton (Bermuda) Limited. Incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on April 17, 2002.

 

 

10.7

Collateral Assignment dated as of November 9, 2001, between Arjo Wiggins Appleton (Bermuda) Limited Paperweight Development Corp., New Appleton LLC and Appleton Papers Inc. Incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on April 17, 2002.

 

 

10.8

Funding Agreement, effective as of September 20, 2014, between NCR Corporation, B.A.T. Industries, p.l.c., Appvion, Inc., Winward Prospects Ltd. and BTI 2014 LLC. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2014. †



 

10.8.1

Amendment to Funding Agreement between NCR Corporation, B.A.T. Industries, p.l.c., Appvion, Inc., Winward Prospects Ltd. and BTI 2014 LLC, dated as of September 18, 2015. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 4, 2015. †

10.9

Amended and Restated Trust Agreement for the Appvion, Inc. Employee Stock Ownership Trust, effective August 3, 2015. Incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 5, 2015.

   

 

10.10

Credit Agreement, dated as of June 28, 2013 among Appvion, Inc., as borrower, Paperweight Development Corp., as holdings, Jefferies Finance LLC, as administrative agent, and Fifth Third Bank, as revolver agent, swing line lender and L/C issuer. Incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed July 2, 2013.



 

10.10.1

First Amendment to Credit Agreement, dated as of November 11, 2013, among Appvion, Inc., as borrower, Paperweight Development Corp., as holdings, Jefferies Finance LLC, as administrative agent, and Fifth Third Bank, as revolver agent, swing line lender and L/C issuer. Incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed November 12, 2013.

10.10.2

Second Amendment to Credit Agreement, dated as of November 11, 2014, among Appvion, Inc., as borrower, Paperweight Development Corp., as holdings, Jefferies Finance LLC, as administrative agent, and Fifth Third Bank, as revolver agent, swing line lender and L/C issuer. Incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed November 12, 2014.



 

10.10.3

Third Amendment to Credit Agreement, dated as of June 28, 2013, among Appvion, Inc., as borrower, Paperweight Development Corp., as holdings, Jefferies Finance LLC, as administrative agent, and certain lenders. Incorporated by reference to the Registrant’s current report on Form 8-K filed August 4, 2015.

10.10.4

Fourth Amendment to Credit Agreement, dated as of June 24, 2016, among Appvion, Inc., as Borrower, Paperweight Development Corp., as Holdings, Jeffries Finance LLC, as administrative agent and the lenders party thereto. Incorporated by reference to the Registrant’s current report on Form 8-K filed June 28, 2016.



 

10.10.5

Fifth Amendment to Credit Agreement, dated as of January 16, 2017, among Appvion, Inc., as Borrower, Paperweight Development Corp., as Holdings, Jeffries Finance LLC, as administrative agent and the lenders party thereto. Incorporated by reference to the Registrant’s current report on Form 8-K filed January 20, 2017.



 

10.10.6

Sixth Amendment to Credit Agreement, dated as of February 16, 2017, among Appvion, Inc., as Borrower, Paperweight Development Corp., as Holdings, Jeffries Finance LLC, as administrative agent and the lenders party thereto. Incorporated by reference to the Registrant’s current report on Form 8-K filed February 22, 2017.



 

100


 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

10.11

Guarantee and Collateral Agreement made by Paperweight Development Corp., Appvion, Inc., and certain of its subsidiaries, in favor of Jefferies Finance LLC, as administrative agent, dated as of June 28, 2013. Incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed July 2, 2013.

 

 

10.12

Guarantee and Collateral Agreement made by Appvion Canada, Ltd., in favor of Jefferies Finance LLC, as administrative agent, dated as of June 28, 2013. Incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K filed July 2, 2013.

 

 

10.13 

Appleton Papers Inc. New Deferred Compensation Plan, as amended on October 31, 2002, and restated effective as of November 9, 2001. Incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. (1)

 

 

10.14 

The Executive Nonqualified Excess Plan of Appleton Papers Inc., as amended and restated on January 1, 2013. Incorporated by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012. (1)

 

 

10.14.1

Adoption Agreement dated May 8, 2015, amending and restating the Appvion, Inc. Executive Nonqualified Excess Plan by and between Appvion, Inc. and Principal Life Insurance Company, as the provider. Incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 5, 2015. (1)



 

10.14.2

Resolutions by the Benefit Finance Committee of Appvion, Inc. dated November 24, 2014 amending the Appvion, Inc. Executive Nonqualified Excess Plan and the Adoption Agreement. Incorporated by reference to Exhibit 10.15.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 3, 2015. (1)

   

   

10.15

Appleton Papers Inc. Supplemental Executive Retirement Plan, as amended through March 28, 2001. Incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005. (1)

   

   

10.15.1

Amendment to the Appleton Papers Inc. Supplemental Executive Retirement Plan, effective January 1, 2009. Incorporated by reference to Exhibit 10.16.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010. (1)



 

10.15.2

Amendment to the Appvion, Inc. Supplemental Executive Retirement Plan, effective December 1, 2014. Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2014. (1)

   

   

10.16

Form of Termination Protection Agreement. Incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 2009. (1)



 

10.16.1

Clarifying Amendment to Form of Termination Protection Agreement, effective November 11, 2010. Incorporated by reference to Exhibit 10.17.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 1, 2011. (1)

   

   

10.17

Appvion, Inc. Form of Termination Protection Agreement, generally effective June 9, 2014. Incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 2, 2016. (1)



 



 

10.18

Form of Enhanced Severance Agreement, effective December 2, 2014. Incorporated by reference to Exhibit 10.19 to Registrant’s Annual Report on Form 10-K for the fiscal year ended January 3, 2015. (1)

   

   

10.19

Amended and Restated Intellectual Property Agreement among Appleton Papers Inc., WTA Inc., Appleton Coated Papers Holdings Inc. and Appleton Coated LLC, dated as of November 9, 2001. Incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on February 4, 2002.

   

   

101


 

 

10.20

Trademark License Agreement between Appleton Papers Inc., f/k/a Lentheric, Inc., and NCR Corporation, dated as of June 30, 1978. Incorporated by reference to Exhibit 10.21 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on February 4, 2002.

   

   

10.21

Security Holders Agreement by and between Paperweight Development Corp. and the Appleton Papers Inc. Employee Stock Ownership Trust, dated as of November 9, 2001. Incorporated by reference to Exhibit 10.26 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on February 4, 2002.

   

   

10.22

Security Holders Agreement by and among Paperweight Development Corp., Appleton Investment Inc. and Appleton Papers Inc., dated as of November 9, 2001. Incorporated by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-82084) filed on February 4, 2002.

   

   

10.23

Appvion, Inc. Retirement Savings and Employee Stock Ownership Plan, amended and restated generally effective as of January 1, 2014. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2014. (1)

10.23.1

Consent to Action of the ESOP Administrative Committee of Appvion, Inc. amending the Appvion, Inc. Retirement Savings and Employee Stock Ownership Plan effective January 1, 2015. Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 5, 2015. (1)



 

10.23.2

Resolution of the ESOP Administrative Committee of Appvion, Inc. dated April 29, 2015 amending the Appvion, Inc. Retirement Savings and Employee Stock Ownership Plan. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 5, 2015. (1)



 

10.23.3

Resolution of the ESOP Administrative Committee of Appvion, Inc. dated May 5, 2015 amending the Appvion, Inc. Retirement Savings and Employee Stock Ownership Plan. Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 5, 2015. (1)

10.23.4 

Resolution of the ESOP Administrative Committee of Appvion, Inc. dated June 5, 2015 amending the Appvion, Inc.  Retirement Savings and Employee Stock Ownership Plan. Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 5, 2015. (1)



 



 

10.23.5

Resolution of the ESOP Administrative Committee of Appvion, Inc. dated August 12, 2015 amending the Appvion, Inc. Retirement Savings and Employee Stock Ownership Plan. Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 5, 2015. (1)



 

10.24 

Appvion, Inc. Retirement Plan, generally amended and restated effective January 1, 2015. Incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 3, 2015. (1)

10.25

Appvion, Inc. Non-Employee Director Deferred Compensation Plan. Incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 2, 2016. (1)

 

 



 

10.26 

Appvion, Inc. Long Term Stock Appreciation Rights Plan, amended and restated, effective January 1, 2017. (1)

 

 

10.27 

Appleton Papers Inc. Long-Term Performance Cash Plan, amended and restated, effective November 11, 2010. Incorporated by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. (1)

 

 

10.28 

Appvion, Inc. Long Term Restricted Stock Unit Plan, amended and restated, effective January 1, 2017. (1)

 

 

10.29 

Stock Purchase Agreement between Appleton Papers Inc. and NEX Performance Films Inc. dated as of July 2, 2010. Incorporated by reference to Exhibit 2.1 to the Registrant’s current report on Form 8-K/A filed August 9, 2010 (exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but a copy will be furnished supplementally to the Securities and Exchange Commission upon request).

 

 

102


 

 

10.30 

Supply Agreement dated as of February 22, 2012 between Domtar Paper Company, LLC, Domtar A.W. LLC and Appleton Papers Inc. (with certain confidential information deleted therefrom). Incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.



 

18.1

Letter of Concurring Opinion from PricewaterhouseCoopers, dated March 11, 2011, to the Board or Directors of Paperweight Development Corp. and Subsidiaries regarding the preferability of change in accounting principle from the LIFO to the FIFO method. Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 1, 2011.

 

 

18.2

Letter of Concurring Opinion from PricewaterhouseCoopers, dated March 13, 2013, to the Board of Directors Paperweight Development Corp. and Subsidiaries regarding the preferability of changes in accounting principles to mark-to-market accounting for pension and other postretirement benefit plans, and to certain costs included in inventory. Incorporated by reference to Exhibit 18.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012



 

21.1

Subsidiaries of Paperweight Development Corp.

 

 

31.1 

Certification of Kevin M. Gilligan, President, Chief Executive Officer and a Director of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.

 

 

31.2 

Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.



 

 

 

32.1 

Certification of Kevin M. Gilligan, President, Chief Executive Officer and a Director of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.

 

 

32.2 

Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.

 

 

 101.ins

XBRL Instance Document

 

 

101.sch 

XBRL Taxonomy Extension Schema

 

 

101.cal 

XBRL Taxonomy Extension Calculation Linkbase



 

101.def 

XBRL Taxonomy Extension Definition Linkbase

 

 

101.lab 

Taxonomy Extension Label Linkbase

101.pre 

Taxonomy Extension Presentation Linkbase



 



 



† Portions of the exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Act of 1934.



(1) Management contract or compensatory plan or arrangement.

 

Certain exhibits and schedules to the agreements filed herewith have been omitted. Such exhibits and schedules are described in the agreements and are not material. The Registrant hereby agrees to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules.

103


 

 

 SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

5

 

   

PAPERWEIGHT DEVELOPMENT CORP. 

 

By:   

/s/ Kevin M. Gilligan

   

Kevin M. Gilligan

President and Chief Executive Officer

Date:   

March 16, 2017



 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 



 

 

Name

 

Title

 

Date

 

/s/ Kevin M. Gilligan

Kevin M. Gilligan

President, Chief Executive Officer and a Director

(Principal Executive Officer)

March 15, 2017

   

   

   

/s/ Thomas J. Ferree

Thomas J. Ferree

Senior Vice President Finance, Chief Financial Officer and Treasurer (Principal Financial Officer)

March 15, 2017

   

   

   

/s/ Terry M. Murphy

Terry M. Murphy

 

Chairman of the Board

 

March 15, 2017



 

 

/s/Carl J. Laurino

Carl J. Laurino

 

Director

 

March 15, 2017

   

   

   

/s/ David A. Roberts

David A. Roberts

 

Director

 

March 15, 2017



 

 

/s/ Kathi P. Seifert

Kathi P. Seifert

 

Director

 

March 15, 2017



 

 

/s/ Mark A. Suwyn

Mark A. Suwyn

 

Director

 

March 15, 2017

   

   

   

/s/ George W. Wurtz

George W. Wurtz

 

Director

 

March 15, 2017





Supplemental Information to be furnished with reports filed pursuant to Section 15(d) of the Act by Registrants which have not registered securities pursuant to Section 12 of the Act.

 

No annual report or proxy material has been provided to security holders covering the registrant’s fiscal year 2016.









104


 

 

 



















PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

SCHEDULE I











 

 

 

 

 

 



 

 

 

 

 

 

PAPERWEIGHT DEVELOPMENT CORP.

CONDENSED BALANCE SHEETS

(dollars in thousands)



 

 

 

 

 

 



 

 

 

 

 

 



 

December 31, 2016

 

January 2, 2016



 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Other current assets

 

$

 —

 

$

 —

Total current assets

 

 

 —

 

 

 —



 

 

 

 

 

 



 

 

 

 

 

 

Other assets

 

 

12 

 

 

12 



 

 

 

 

 

 

Total assets

 

$

12 

 

$

12 



 

 

 

 

 

 

LIABILITIES, REDEEMABLE COMMON STOCK,

 

 

 

 

 

 

ACCUMULATED DEFICIT AND ACCUMULATED

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Due to Appvion, Inc.

 

$

 —

 

$

 —

Total current liabilities

 

 

 —

 

 

 —

Investment in Appvion, Inc.

 

 

312,311 

 

 

283,516 

Redeemable common stock, $0.01 par value, shares

 

 

 

 

 

 

authorized:  30,000,000, shares issued and outstanding:

 

 

 

 

 

 

6,260,418 and 6,757,898

 

 

100,641 

 

 

114,749 

Accumulated deficit

 

 

(431,887)

 

 

(419,925)

Accumulated other comprehensive income

 

 

18,947 

 

 

21,672 



 

 

 

 

 

 

Total liabilities, redeemable common stock,

 

 

 

 

 

 

accumulated deficit and accumulated other

 

 

 

 

 

 

comprehensive income

 

$

12 

 

$

12 



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

105


 

 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

PAPERWEIGHT DEVELOPMENT CORP.

CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(dollars in thousands)



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

For the Years Ended



 

December 31, 2016

 

January 2, 2016

 

January 3, 2015



 

 

 

 

 

 

 

 

 

(Income) Loss in equity investments

 

$

19,046 

 

$

(158,574)

 

$

92,772 



 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(19,046)

 

 

158,574 

 

 

(92,772)



 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(19,046)

 

 

158,574 

 

 

(92,772)



 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Changes in retiree plans

 

 

(3,556)

 

 

(5,095)

 

 

24,895 

Realized and unrealized (losses) gains on derivatives

 

 

831 

 

 

(419)

 

 

(1,522)

Total other comprehensive (loss) income

 

 

(2,725)

 

 

(5,514)

 

 

23,373 



 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(21,771)

 

$

153,060 

 

$

(69,399)





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









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

PAPERWEIGHT DEVELOPMENT CORP.

CONDENSED STATEMENTS OF CASH FLOWS

(dollars in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the Years Ended



 

 

December 31, 2016

 

 

January 2, 2016

 

 

January 3, 2015

Net cash flows from operating activities

 

$

 

$

 

$

Net cash flows from investing activities

 

 

 

 

 

 

Net cash flows from financing activities

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

 

$

 

$



 

 

 

 

 

 

 

 

 

Noncash investing and financing activities

 

 

 

 

 

 

 

 

 

Proceeds from issuance of redeemable common stock

 

$

1,636 

 

$

1,931 

 

$

2,372 

Payments to redeem common stock

 

$

(10,224)

 

$

(9,411)

 

$

(18,164)



 

 

 

 

 

 

 

 

 

 

 

 





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



106


 

 



PAPERWEIGHT DEVELOPMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY



BASIS OF PRESENTATION 



The Parent Company follows the accounting policies as described in Note 2 to the consolidated financial statements of Paperweight Development Corp. and subsidiaries (the “Company”), with the exception of its investment in its subsidiary for which the Parent Company uses the equity method of accounting.



Certain of the Company’s debt agreements place restrictions on the ability of the Parent Company’s subsidiaries to transfer funds to the Parent Company in the form of cash dividends, loans, or advances. The types of restrictions vary depending on the nature and amount of the transfer. At December 31, 2016,  $1.7 million of net assets of the Parent Company’s subsidiaries were subject to such restrictions. 



For further information, reference should be made to the notes to the audited consolidated financial statements of the Company.  



REDEEMABLE COMMON STOCK 



For further information on proceeds from the issuance of redeemable common stock and payments to redeem common stock, refer to Note 20 of the notes to the audited consolidated financial statements of the Company.











107


 

 



 



SCHEDULE II—Valuation and Qualifying Accounts

(dollars in thousands)











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Balance at

 

 

Charged To

 

 

Amounts Written

 

 

 

 



 

Beginning

 

 

Costs and

 

 

Off Less

 

 

Balance at

Allowances for Losses on Accounts Receivable

 

of Period

 

 

Expenses

 

 

Recoveries

 

 

End of Period

   

   

 

   

   

 

   

   

 

 

   

 

January 3, 2015

   

   

907 

   

   

   

56 

   

   

   

(171)

 

   

   

792 

January 2, 2016

   

 

792 

   

   

   

797 

   

   

   

(516)

 

   

   

1,073 

December 31, 2016

   

 

1,073 

   

   

   

(101)

   

   

   

(649)

 

   

   

323 









108