As filed with the Securities and Exchange Commission on April 17, 2002
Registration No. 333-82084
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
AMENDMENT NO.1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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APPLETON PAPERS INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 2672 36-2556469
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
825 East Wisconsin Avenue
Appleton, Wisconsin 54912-0359
(920) 734-9841
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------------
Douglas P. Buth
President and Chief Executive Officer
Appleton Papers Inc.
825 East Wisconsin Avenue
Appleton, Wisconsin 54912-0359
(920) 734-9841
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
-----------------
See Table of Additional Registrants Below
Copies of communications to:
Christopher B. Noyes Paul J. Karch
Godfrey & Kahn, S.C. Appleton Papers Inc.
780 North Water Street 825 East Wisconsin Avenue
Milwaukee, Wisconsin 53202 Appleton, Wisconsin 54912-0359
(414) 273-3500 (920) 734-9841
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Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after this Registration Statement becomes effective and all
conditions to the consummation of the exchange offer described in this document
have been met.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the stock offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
efective on such date as the Commission, acting pursuant to said Section 8(A),
may determine.
ADDITIONAL REGISTRANTS
================================================================================
Address, including zip code,
State or other Primary I.R.S. and telephone number,
jurisdiction of Standard Industrial Employer including area code, of
Exact name of Registrant as incorporation or Classification Identification Registrant's principal Registration
specified in its charter organization Code Number Number executive office No.
- ---------------------------------------------------------------------------------------------------------------------------
825 East Wisconsin
Avenue, Appleton,
Wisconsin 54912-0359,
Paperweight Development Corp. Wisconsin 6719 39-2014992 (920) 734-9841 333-82084-01
- ---------------------------------------------------------------------------------------------------------------------------
c/o Delaware Corporate
Management, Inc.
Suite 1300
1105 North Market Street
Wilmington, Delaware 19899
WTA Inc...................... Delaware 5331 51-0329653 (302) 651-8339 333-82084-02
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell or offer these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer is not permitted.
SUBJECT TO COMPLETION, DATED April 17, 2002
PROSPECTUS
[LOGO]
APPLETON PAPERS
Appleton Papers Inc.
Offer to exchange up to
$250,000,000 of its 121/2% Series B Senior Subordinated Notes due 2008 which
have been registered under the Securities Act of 1933 for any and all of its
outstanding 12 1/2% Series A Senior Subordinated Notes due 2008
-----------------
MATERIAL TERMS OF THE EXCHANGE OFFER
. Expires at 5:00 p.m., New York City time, on , 2002, unless extended.
. The only conditions to completing the exchange offer are that the exchange
offer not violate applicable law or applicable interpretations of the staff
of the Securities and Exchange Commission and no injunction, order or decree
has been issued which would prohibit, prevent or materially impair our
ability to proceed with the exchange offer.
. All old notes that are validly tendered and not validly withdrawn will be
exchanged.
. Tenders of old notes may be withdrawn at any time prior to the expiration of
the exchange offer.
. The exchange of notes will not be a taxable exchange for U.S. income tax
purposes.
. We will not receive any proceeds from the exchange offer.
. The terms of the registered notes to be issued in the exchange offer are
substantially identical to the old notes that we issued on December 14,
2001, except for transfer restrictions, registration rights and liquidated
damages.
. The old notes are, and the registered notes will be, guaranteed by
Paperweight Development Corp., which is our parent company, and WTA Inc.,
which is one of our domestic subsidiaries. If we cannot make payments on the
notes when they are due, the parent and subsidiary guarantors must make them
instead. Not all of our subsidiaries are guarantors.
. The registered notes and the guarantees rank behind all of our and the
guarantors' existing and future senior debt and rank equally with all of our
and the guarantors' existing and future senior subordinated debt. As of
December 29, 2001, the old notes and guarantees were subordinated to $278.3
million of senior debt, capital lease obligations and third party debt and
approximately $55.5 million was available for borrowing as additional senior
debt under our senior credit facilities.
. There is no established trading market for the registered notes and we do
not intend to apply for listing of the registered notes on any securities
exchange.
-----------------
Consider carefully the "Risk Factors" beginning on page 13 of this prospectus.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
-----------------
The date of this prospectus is , 2002
PROSPECTUS SUMMARY
This summary highlights information that we believe is especially important
concerning this offering. You should read the entire prospectus carefully,
including the discussion under the heading "Risk Factors" and our consolidated
financial statements and related notes, before deciding whether to invest in
the notes.
Our fiscal year ends on the Saturday closest to December 31 of each year.
All references in this prospectus to a fiscal year refer to our fiscal year
ending on the Saturday closest to December 31 of that year. References to
fiscal 2001 refer to the fiscal year ended December 29, 2001, references to
fiscal 2000 refer to the fiscal year ended December 30, 2000, references to
fiscal 1999 refer to the fiscal year ended January 1, 2000, references to
fiscal 1998 refer to the fiscal year ended January 2, 1999, references to
fiscal 1997 refer to the fiscal year ended January 3, 1998 and references to
fiscal 1996 refer to the fiscal year ended December 28, 1996.
Unless stated to the contrary or the context requires otherwise, all
references to "Appleton Papers," "we," "us" or "our" refer to Appleton Papers
Inc. and our subsidiaries and predecessors.
The Exchange Offer
We issued in a private placement $250.0 million in aggregate principal
amount of our 12 1/2% Series A Senior Subordinated Notes due 2008 to Bear,
Stearns & Co. Inc., TD Securities (USA) Inc., ABN AMRO Incorporated and U.S.
Bancorp Piper Jaffray Inc., the initial purchasers, on December 14, 2001. We
refer to these notes in this prospectus as the "old notes." The initial
purchasers resold the old notes to "qualified institutional buyers" in reliance
on Rule 144A under the Securities Act of 1933, as amended. The purchasers of
the old notes agreed to comply with transfer restrictions and other conditions.
We entered into a registration rights agreement with the initial purchasers of
the old notes in which we agreed to deliver to you this prospectus. You are
entitled to exchange your old notes in the exchange offer for our 12 1/2%
Series B Senior Subordinated Notes due 2008, which we refer to in this
prospectus as the "registered notes," with substantially identical terms. We
refer to the old notes and the registered notes collectively as the "notes." We
believe that the registered notes to be issued in the exchange offer may be
resold by you without compliance with the registration and prospectus delivery
requirements of the Securities Act, subject to certain limited conditions. You
should read the discussion under the headings "The Exchange Offer" and
"Description of the Registered Notes" for further information regarding the
registered notes.
Overview
We are a leading developer and manufacturer of specialty, high value-added
coated paper products. We believe that we are the world's largest producer of
carbonless paper and the largest producer of thermal paper in the United States
and Canada. Carbonless paper is used in multi-part forms, such as invoices,
insurance claim forms, medical claim forms and credit card receipts. Thermal
paper is used in a range of products including point of sale receipts, labels,
event and travel tickets and facsimile paper. We manufacture our carbonless and
thermal paper products using highly technical processes that involve the
application of specialized dyes and reactive chemicals onto varying grades of
paper. When carbonless paper is subjected to pressure, and thermal paper to
heat, these dyes and chemicals react to create an image on the paper. In
addition to carbonless and thermal products, we produce a variety of other
niche coated products.
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Our Core Businesses
Carbonless Paper. We believe that we are the world's leading producer of
both carbonless rolls and carbonless sheets, having shipped 430,700 tons of
carbonless paper worldwide in fiscal 2001. Based on our internal assessment of
the U.S. carbonless market, we estimate that in fiscal 2001 we had a 58% share
of the U.S. carbonless roll market and a 58% share of the more profitable U.S.
carbonless sheet market. On the same basis, we believe that our share was
approximately one and one-half times as large as the share of our largest
carbonless roll competitor and approximately three times as large as the share
of our largest carbonless sheet competitor. Carbonless roll applications are
generally machine-fed continuous forms and carbonless sheet applications are
typically hand written forms. We believe that as a result of our high level of
customer service, superior product quality and the breadth of our product
offering, we were essentially the sole provider to over 80% of our customers in
fiscal 2001, which included some of the largest printers, merchants and
converters in the United States, as well as smaller regional printers. For
fiscal 2001, net sales of carbonless paper contributed 80.1% of our net sales,
or $765.5 million.
Based on our internal assessment of the U.S. carbonless paper market, we
believe that from 1994 to 1999 the U.S. carbonless paper market declined at a
compound annual rate of approximately 4%, with annual decline rates varying
between 1% and 7%. We attribute this decline to increased use by businesses of
competing printing technologies such as digital laser printers and electronic
communications. On the same basis, we estimate that the U.S. carbonless paper
market declined by approximately 10% in 2000 and 9% in 2001 and will continue
to decline at a compound annual rate of approximately 9% through 2005. We
believe that the average rate of decline is accelerating due to increasing
acceptance of substitute technologies. However, we expect the rate of decline
for carbonless sheets in the United States to be lower than the rate of decline
for carbonless rolls because there are currently fewer economically viable
substitute technologies for carbonless sheet applications than there are for
carbonless roll applications. In anticipation of the decline in the U.S.
carbonless market, we have undertaken a series of initiatives to reduce the
impact of this decline on our business, including focusing our marketing
efforts on higher margin carbonless sheets, improving our cost structure,
developing new products and expanding our share of growing international
markets.
Thermal Paper. Based on our internal assessment of the thermal paper
market, we believe that we are the largest producer of thermal paper in the
United States and Canada, with an estimated 39% share of those markets in
fiscal 2001. We also believe that our share of those markets in fiscal 2001 was
more than twice that of our largest competitor. During fiscal 2001, we shipped
approximately 68,000 tons of thermal paper worldwide. We create value-added
grades of thermal paper by enhancing the print quality and longevity of the
image and providing document security features. We manufacture thermal paper
that is, for example, used to produce point of sale receipts, shipping and
weigh scale labels, baggage tags and tickets for passenger travel, lotteries
and entertainment events. As a result of our innovation, customer service and
quality, we are essentially the sole provider to many of our largest customers,
most of which are large thermal paper converters and printers. For fiscal 2001,
net sales of thermal paper contributed 18.0% of our net sales, or $172.3
million.
Based on our internal assessment of the thermal paper market, we believe
that the U.S. and Canadian markets for thermal paper will continue to grow at a
compound annual rate of approximately 4.4% through 2005 as the advantages of
thermal printing systems become more widely recognized. These advantages
include its competitive cost, use of a single consumable versus other printing
systems that require paper and ink cartridges, quiet operation, cleanliness,
speed, high print quality, reliability and portability. The U.S. and Canadian
thermal markets consist of five segments: point of sale; label; tag and ticket;
fax; and printer/calculator/chart. Based on our internal assessment of the
thermal paper market, in fiscal 2001, the non-fax segments accounted for
approximately 92% of the U.S. and Canadian thermal markets. The point of sale,
label and tag and ticket segments are growing while the commodity-based, fax
segment is declining rapidly. As a result, we expect the non-fax segments to
account for approximately 99% of the U.S. and Canadian thermal markets by 2005.
Many of our strategic initiatives are targeted at increasing our share of the
growing segments of the thermal market and the development of new thermal
products.
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Our New Business Initiatives
In early fiscal 2000, we complemented our existing carbonless and thermal
new product development efforts by establishing a separate New Business
Development group, or NBD. NBD is responsible for the development and
introduction of new specialty, high value-added products based upon our core
competencies of:
. encapsulation technology, which is the technology that enables us to produce
microscopic capsules filled with dyes, adhesives or other substances,
. coating chemistry, which is the chemistry that enables us to produce a
variety of coatings for paper, including coatings that react to heat and
coatings that consist of microscopic capsules that react to pressure, and
. coating application processes, which are the processes that enable us to
apply coatings to paper in an efficient and cost-effective manner.
In the second quarter of 2001, we transferred our existing security products
business, which focuses on papers with special security and authentication
features, into NBD. NBD is working cooperatively with several leading companies
to jointly identify and pursue new product opportunities. For example, one new
product we are developing is coated paper with encapsulated adhesives that will
adhere to a surface when pressure is applied. This eliminates the need for
expensive silicone release liners used to cover active adhesives. Possible
applications include a wide variety of self-adhesive products including
shipping and tracking labels. NBD has already introduced two new products, a
digital ink jet printer paper, which has been commercialized, and an arts and
crafts product, which is currently in test market, and is scheduled to launch
four additional products in 2002. Although these recently introduced products
have not generated meaningful revenues to date, NBD is an important part of our
long-term growth strategy.
The ESOP
Our 401(k) plan, which was called the Appleton Papers Retirement Savings
Plan, was amended and restated effective as of January 1, 2001, in the form of
the Appleton Papers Retirement Savings and Employee Stock Ownership Plan, which
we refer to as the KSOP or the plan. The KSOP includes a separate employee
stock ownership plan component, which we refer to as the ESOP or the Company
Stock Fund. The KSOP is a tax-qualified retirement plan that is available to
all of our employees. The ESOP component of the KSOP is a tax-qualified
employee stock ownership plan that has invested and will invest in Paperweight
Development common stock.
We offered "eligible participants," as "named fiduciaries" under the
Employee Retirement Income Security Act of 1974, as amended, which we refer to
as ERISA, a one-time irrevocable election to direct State Street Global
Advisors, the ESOP trustee, to accept the transfer of all or any part of their
existing balances in the KSOP and the 401(a) plan to the Company Stock Fund.
The total proceeds transferred by eligible participants to the Company Stock
Fund were approximately $107 million, representing an average election by each
eligible participant to direct the transfer of approximately 73% of his or her
account to the Company Stock Fund. On November 9, 2001, the ESOP trustee
purchased 100% of the common stock of Paperweight Development. Paperweight
Development simultaneously used all the proceeds from the sale of those shares
of common stock to finance a portion of the purchase price of the acquisition
described below.
The Acquisition
On November 9, 2001, Paperweight Development Corp. and its then wholly owned
subsidiary, New Appleton, LLC, which we sometimes refer to as the buyers,
acquired Appleton Papers from Arjo Wiggins Appleton p.l.c., which is now known
as Arjo Wiggins Appleton Limited or AWA, a leading European
3
manufacturer of paper products and two of its subsidiary holding companies,
which we refer to as the sellers. We refer to this transaction as the
"acquisition." The purchase price was $810 million (which included the present
value of the deferred payment obligation described below), plus proceeds of
$7.4 million from the sale of our Harrisburg facility. We are now a wholly
owned subsidiary of Paperweight Development and the ESOP owns 100% of the
shares of common stock of Paperweight Development. Paperweight Development has
elected to be treated as an S corporation for federal and state income tax
purposes and elected that its eligible subsidiaries be treated as qualified
subchapter S subsidiaries for federal and state income tax purposes. We expect
that this tax treatment, together with 100% ownership of Paperweight
Development's common stock by the tax-exempt ESOP, will result in substantial
corporate tax savings and enhanced cash flow. Paperweight Development does not
conduct any business apart from undertaking matters incidental to its ownership
of stock of its subsidiaries and matters relating to the ESOP and taking
actions required to be taken under ancillary acquisition agreements.
[FLOW CHART]
CORPORATE STRUCTURE
- -----------------------------
ESOP
- -----------------------------
| 100%
- ----------------------------- . Guarantor of senior credit facilities
Paperweight Development Corp. - . Guarantor of notes
- ----------------------------- . Obligor on deferred payment obligation
| 100%
- -----------------------------
Appleton Papers Inc. - . Borrower under senior credit facilities
- ----------------------------- . Issuer of notes
Almost all of our assets and operations are owned directly by Appleton Papers
Inc. However, we have several special purpose wholly owned subsidiaries which
own some specific assets.
We and Paperweight Development financed the acquisition, refinanced most of
our current debt and paid approximately $38.8 million of related fees and
expenses with the following:
. $79 million of our available cash;
. $340 million of senior credit facilities, of which $265 million of term
loans were borrowed at the closing of the acquisition;
. $250 million in aggregate principal amount of a senior subordinated note
due 2008 issued by us to AWA, which was repaid with the proceeds of the
offering of old notes and other available cash;
. a deferred payment obligation with a present value of $140 million at
the closing of the acquisition to be paid to one of the sellers; and
. $107 million in proceeds from the sale of Paperweight Development common
stock to the ESOP.
4
Summary of the Terms of the Exchange Offer
The exchange offer relates to the exchange of up to $250.0 million aggregate
principal amount of old notes for an equal aggregate principal amount of
registered notes. We issued and sold in a private placement $250.0 million in
aggregate principal amount of the old notes on December 14, 2001. The form and
terms of the registered notes are substantially the same as the form and terms
of the old notes, except that the registered notes have been registered under
the Securities Act and will not bear legends restricting their transfer and,
except under limited circumstances, your rights under the registration rights
agreement, including your right to receive liquidated damages, will terminate.
We issued the old notes under an indenture that grants you certain rights. The
registered notes also will be issued under the indenture and you will have the
same rights under the indenture as the holders of the old notes. See
"Description of the Registered Notes."
Registration Rights Agreement The registration rights agreement grants the
holders of the old notes exchange and
registration rights. The exchange offer is
intended to satisfy these rights. If you are
eligible to participate in the exchange offer and
do not tender your old notes, you will continue
to hold the old notes, which will continue to be
subject to restrictions on transfer under the
Securities Act. After the exchange offer is
complete, except as set forth in the next
paragraph, you will no longer be entitled to any
exchange or registration rights with respect to
your old notes.
The registration rights agreement requires us to
file a registration statement for a continuous
offering in accordance with Rule 415 under the
Securities Act for your benefit if you would not
receive freely tradeable registered notes in the
exchange offer or you are ineligible to
participate in the exchange offer and indicate
that you wish to have your old notes registered
under the Securities Act. See "The Exchange
Offer--Procedures for Tendering."
Securities Offered.......... Up to $250.0 million aggregate principal amount
of 12 1/2% Series B Senior Subordinated Notes due
2008. The terms of the registered notes and the
old notes are identical in all material respects,
except that the registered notes will not contain
securities law restrictions on transfer and,
except under limited circumstances, your rights
under the registration rights agreement,
including your right to receive liquidated
damages, will terminate.
The Exchange Offer.......... We are offering to exchange $1,000 principal
amount of 12 1/2% Series B Senior Subordinated
Notes due 2008, which have been registered under
the Securities Act, for each $1,000 principal
amount of 12 1/2% Series A Senior Subordinated
Notes due 2008 which were issued on December 14,
2001 in a private placement. In order to be
exchanged, an old note must be properly tendered
and accepted. All old notes that are properly
tendered and not properly withdrawn will be
exchanged.
As of this date, there are $250.0 million
aggregate principal amount of old notes
outstanding. We will issue the registered notes
promptly after the expiration of the exchange
offer.
Resales of the Registered
Notes..................... We believe that the registered notes to be issued
in the exchange offer may be offered for resale,
resold and otherwise transferred by you
5
without compliance with the registration and
prospectus delivery provisions of the Securities
Act if you meet the following conditions:
(1)the registered notes are acquired by you in
the ordinary course of your business;
(2)you are not engaged in and do not intend to
engage in a distribution of the registered
notes;
(3)you do not have an arrangement or
understanding with any person to participate
in a distribution of the registered notes; and
(4)you are not an affiliate of ours, as that
term is defined in Rule 405 under the
Securities Act.
If you do not meet the above conditions, you may
incur liability under the Securities Act if you
transfer any registered note without delivering a
prospectus meeting the requirements of the
Securities Act or without qualifying for a
registration exemption. We do not assume or
indemnify you against that liability.
Each broker-dealer that is issued registered
notes in the exchange offer for its own account
in exchange for old notes which were acquired by
the broker-dealer as a result of market-making
activities or other trading activities must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resales of the registered
notes. A broker-dealer may use this prospectus
for an offer to resell or to otherwise transfer
these registered notes.
Expiration Date............. The exchange offer will expire at 5:00 p.m., New
York City time, on [ ], 2002, unless we decide to
extend the exchange offer. We do not intend to
extend the exchange offer, although we reserve
the right to do so.
Conditions to the Exchange
Offer..................... The only conditions to completing the exchange
offer are that the exchange offer not violate
applicable federal law and no injunction, order
or decree has been issued which would prohibit,
prevent or materially impair our ability to
proceed with the exchange offer. See "The
Exchange Offer-Conditions."
Procedures for Tendering Old
Notes Held in the Form of
Book-Entry Interests...... The old notes were issued as global securities in
fully registered form without coupons and were
deposited upon issuance with U.S. Bank National
Association, the trustee, as custodian for The
Depository Trust Company. Beneficial interests in
the old notes which are held by direct or
indirect participants in DTC through
certificateless depositary interests are shown
on, and transfers of the notes can be made only
through, records maintained in book-entry form by
DTC with respect to its participants.
If you are a holder of an old note held in the
form of a book-entry interest and you wish to
tender your old note for exchange pursuant to the
exchange offer, you must transmit to U.S. Bank
National
6
Association, as exchange agent, on or prior to
the expiration of the exchange offer either:
. a written or facsimile copy of a properly
completed and executed letter of transmittal
and all other required documents to the
exchange agent at the address set forth on
the cover page of the letter of transmittal;
or
. a computer-generated message transmitted by
means of DTC's Automated Tender Offer Program
system and received by the exchange agent and
forming a part of a confirmation of
book-entry transfer in which you acknowledge
and agree to be bound by the terms of the
letter of transmittal.
The exchange agent must also receive prior to the
expiration of the exchange offer either:
. a timely confirmation of book-entry transfer
of your old notes into the exchange agent's
account at DTC, in accordance with the
procedure for book-entry transfers described
in this prospectus under the heading "The
Exchange Offer--Procedures for
Tendering--Book-Entry Transfer," or
. the documents necessary for compliance with
the guaranteed delivery procedures described
in this prospectus under the heading "The
Exchange Offer--Procedures for
Tendering--Guaranteed Delivery Procedures."
A letter of transmittal accompanies this
prospectus. By executing the letter of
transmittal or delivering a computer-generated
message through DTC's Automated Tender Offer
Program system, you will represent to us that,
among other things:
. the registered notes to be acquired by you in
the exchange offer are being acquired in the
ordinary course of your business;
. you are not engaged in and do not intend to
engage in a distribution of the registered
notes;
. you do not have an arrangement or
understanding with any person to participate
in a distribution of the registered notes; and
. you are not our affiliate.
Procedures for Tendering
Certificated Old Notes.... No certificated notes are issued and outstanding
as of the date of this prospectus. If you acquire
certificated old notes prior to the expiration of
the exchange offer, you must tender your
certificated old notes in accordance with the
procedures described in this prospectus under the
heading "The Exchange Offer--Procedures for
Tendering--Certificated Old Notes."
Special Procedures for
Beneficial Owner.......... If you are the beneficial owner of old notes and
they are registered in the name of a broker,
dealer, commercial bank, trust company or
7
other nominee, and you wish to tender your old
notes, you should promptly contact the person in
whose name your old notes are registered and
instruct that person to tender on your behalf. If
you wish to tender on your own behalf, you must,
prior to completing and executing the letter of
transmittal and delivering your old notes, either
make appropriate arrangements to register
ownership of the old notes in your name or obtain
a properly completed bond power from the person
in whose name your old notes are registered. The
transfer of registered ownership may take
considerable time. See "The Exchange
Offer--Procedures for Tendering--Procedures
Applicable to All Holders."
Guaranteed Delivery
Procedures................ If you wish to tender your old notes and:
(1)they are not immediately available;
(2)time will not permit your old notes or other
required documents to reach the exchange
agent before the expiration of the exchange
offer; or
(3)you cannot complete the procedure for
book-entry transfer on a timely basis,
you may tender your old notes in accordance with
the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for
Tendering--Guaranteed Delivery Procedures."
Acceptance of Old Notes and
Delivery of Registered
Notes..................... Except under the circumstances described above
under "Conditions to the Exchange Offer," we will
accept for exchange any and all old notes that
are properly tendered in the exchange offer prior
to 5:00 p.m., New York City time, on the
expiration date. The registered notes to be
issued to you in the exchange offer will be
delivered promptly following the expiration date.
See "The Exchange Offer--Terms of the Exchange
Offer."
Withdrawal.................. You may withdraw the tender of your old notes at
any time prior to 5:00 p.m., New York City time,
on the expiration date. We will return to you any
old notes not accepted for exchange for any
reason without expense to you as promptly as we
can after the expiration or termination of the
exchange offer.
Exchange Agent.............. U.S. Bank National Association is serving as the
exchange agent in connection with the exchange
offer. Its address and telephone number are set
forth in "The Exchange Offer--Exchange Agent."
Consequences of Failure to
Exchange.................. If you do not participate in the exchange offer,
upon completion of the exchange offer, the
liquidity of the market for your old notes could
be adversely affected. See "The Exchange
Offer--Consequences of Failure to Exchange."
Federal Income Tax
Consequences.............. The exchange of old notes will not be a taxable
event for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
8
Summary of the Terms of the Registered Notes
Issuer...................... Appleton Papers Inc.
Notes Offered............... $250 million in principal amount of 12 1/2%
Series B senior subordinated notes due 2008.
Maturity.................... December 15, 2008.
Interest Payment Dates...... June 15 and December 15 of each year. You will
receive interest on the registered notes from the
date interest was last paid on your old notes. If
no interest was paid on your old notes, you will
receive interest from December 14, 2001.
Guarantees.................. The registered notes are unconditionally
guaranteed, jointly and severally, by Paperweight
Development and WTA Inc. We are a wholly owned
subsidiary of Paperweight Development, which is a
holding company. WTA is our wholly owned
subsidiary which owns our portfolio of
intellectual property, including patents. We
refer to these companies in this prospectus as
the "guarantors."
Optional Redemption......... We may redeem the registered notes on or after
December 15, 2005, at the redemption prices
listed under "Description of Notes--Optional
Redemption."
Prior to December 15, 2004, we may use the
proceeds of certain sales of our equity to redeem
up to 35% of the original principal amount of the
registered notes at a redemption price of
112.500% of their principal amount, plus accrued
and unpaid interest and liquidated damages, if
any, to the redemption date.
Excess Cash Flow Offer...... If we generate excess cash flow during any fiscal
year commencing with fiscal 2002, we are required
to prepay our senior debt and reduce our
revolving loan commitments and, if more than
$5 million of excess cash flow remains after such
prepayment and reduction, to make an offer to
repurchase all or part of the registered notes at
103% of their principal amount, plus accrued and
unpaid interest and liquidated damages, if any,
to the repurchase date.
Change of Control Offer..... If we experience a change of control, holders of
the registered notes may require us to repurchase
part or all of their registered notes at 101% of
their principal amount, plus accrued and unpaid
interest and liquidated damages, if any, to the
repurchase date.
Ranking..................... The registered notes are senior subordinated
indebtedness and are junior in right of payment
to all of our existing and future senior
indebtedness, including our obligations under the
senior credit facilities. See "Description of
Senior Credit Facilities."
The guarantees are senior subordinated
obligations of the guarantors and are junior in
right of payment to all of the guarantors'
existing and future senior indebtedness,
including their guarantees under the senior
credit facilities.
9
Covenants................... We will issue the registered notes under the
indenture with U.S. Bank National Association,
under which we issued the old notes. The
indenture, among other things, restricts our
ability, Paperweight Development's ability and
the ability of certain of our domestic
subsidiaries to:
. sell or lease certain assets or merge or
consolidate with or into other companies;
. borrow money;
. incur liens;
. pay dividends or make other distributions;
. make other restricted payments and
investments;
. place restrictions on the ability of certain
of our subsidiaries to pay dividends or other
payments to us;
. enter into sale-leaseback transactions;
. make capital expenditures; and
. enter into transactions with certain
affiliates.
See"Description of Registered Notes--Certain
Covenants."
Use of Proceeds............. We will not receive any cash proceeds upon
completion of the exchange offer.
Risk Factors................ You should consider carefully all of the
information set forth in this prospectus and, in
particular, you should evaluate the specific
factors under the heading "Risk Factors."
-----------------
Our principal executive offices, as well as those of Paperweight
Development, are located at 825 East Wisconsin Avenue, Appleton, Wisconsin
54912-0359. Our telephone number is (920) 734-9841. The principal executive
offices of WTA Inc. are located at c/o Delaware Corporate Management, Inc.,
Suite 1300, 1105 North Market Street, Wilmington, Delaware 19899. Its telephone
number is (302) 651-8339.
10
Summary Historical and Unaudited Pro Forma Consolidated Financial Data
The summary historical consolidated financial data as of and for the years
ended January 1, 2000 and December 30, 2000 have been derived from Appleton
Papers' audited consolidated financial statements appearing elsewhere in this
prospectus. The summary historical consolidated financial data as of December
29, 2001 and for the periods ended November 9, 2001 and December 29, 2001 have
been derived from the audited consolidated financial statements of Appleton
Papers and Paperweight Development appearing elsewhere in this prospectus. The
unaudited pro forma consolidated financial data relates to Paperweight
Development, which became our parent company following the closing of the
acquisition. The summary unaudited pro forma consolidated financial data as of
and for the year ended December 29, 2001 have been prepared to reflect the
consummation of the acquisition, the related financing transactions and the
offering of old notes as if they had occurred on December 31, 2000 in the case
of the summary unaudited pro forma consolidated statement of operations data.
The summary unaudited pro forma consolidated financial data are not necessarily
indicative of Paperweight Development's financial position or results of
operations had the transaction actually been consummated on the dates indicated
and are not necessarily indicative of the financial position or results of
operations that may be expected for any future date or period. The summary
consolidated financial data should be read in conjunction with "Unaudited Pro
Forma Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes thereto appearing elsewhere in this prospectus.
(Predecessor Basis) (Successor Basis)
---------------------------------------- -----------------------------
Fiscal
----------------------
For the Period For the Period Pro
December 31, 2000 November 10, 2001 Forma
to to Fiscal
1999 2000 November 9, 2001 December 29, 2001 2001
---------- ---------- ----------------- ----------------- -----------
(dollars in thousands) (unaudited)
Statement of Operations Data:
Net sales............................................. $1,123,833 $1,080,013 $842,868 $112,950 $955,818
Cost of sales......................................... 789,194 752,616 591,741 76,345 689,871
---------- ---------- -------- -------- --------
Gross profit.......................................... 334,639 327,397 251,127 36,605 265,947
Selling, general and administrative................... 160,075 165,699 133,874 18,693 150,985
Restructuring and other charges (1)................... 44,542 7,816 6,385 -- 6,385
Special charges (2)................................... 27,658 19,027 25,553 -- 2,164
---------- ---------- -------- -------- --------
Operating income...................................... 102,364 134,855 85,315 17,912 106,413
Interest expense, net................................. 31,653 29,494 16,623 10,232 66,632
Other expense (income)................................ 3,103 (1,176) 492 (53) 439
---------- ---------- -------- -------- --------
Income before income taxes from continuing operations. 67,608 106,537 68,200 7,733 39,342
Provision for income taxes............................ 17,715 35,725 24,574 117 500
---------- ---------- -------- -------- --------
Income from continuing operations..................... 49,893 70,812 43,626 7,616 38,842
Loss from discontinued operations, net of tax (3)..... (55,691) (13,063) (4,462) -- --
---------- ---------- -------- -------- --------
(Loss) income before extraordinary item and cumulative
effect of accounting change.......................... (5,798) 57,749 39,164 7,616 38,842
Extraordinary item, net of tax (4).................... -- (4,651) (6,443) -- --
Cumulative effect of accounting change, net of tax (5) (6,835) -- -- -- --
---------- ---------- -------- -------- --------
Net (loss) income..................................... $ (12,633) $ 53,098 $ 32,721 $ 7,616 $ 38,842
========== ========== ======== ======== ========
(Continued on next page)
11
(Predecessor Basis) (Successor Basis)
-------------------------------- -----------------------
For the Period For the Period
December 31, November 10, Pro
Fiscal 2000 to 2001 to Forma
----------------- November 9, December 29, Fiscal
1999 2000 2001 2001 2001
-------- -------- -------------- -------------- --------
(dollars in thousands)
Other Financial Data:
Adjusted EBITDA (6).......... $148,879 $177,752 $121,974... $23,917.... $182,099
Depreciation and amortization 46,515 42,897 36,659 6,005 63,886
Capital expenditures......... 37,685 81,072 49,804 6,741 56,545
- --------
(1)During the third quarter of fiscal 1999, we announced plans to close our
Harrisburg plant, which was sold on August 17, 2001. See Note 5 of Notes to
Consolidated Financial Statements.
(2)Special charges consist of the following items:
For the Period For the Period
December 31, November 10, Pro
Fiscal 2000 to 2001 to Forma
--------------- November 9, December 29, Fiscal
1999 2000 2001 2001 2001
------- ------- -------------- -------------- -------
Environmental expense (a)......... $ 3,590 $ 3,148 $23,389 $ -- --
Litigation settlements (b)........ 21,819 3,625 449 -- 449
Equipment relocation expenses (c). -- 5,215 463 -- 463
Loss on disposals of equipment (d) 2,249 539 1,252 -- 1,252
Loss on investment (e)............ -- 6,500 -- -- --
------- ------- ------- ---- -------
Total.......................... $27,658 $19,027 $25,553 $ -- $ 2,164
======= ======= ======= ==== =======
-----
(a)Represents costs related to the Lower Fox River. See
"Business--Environmental Regulation." In connection with the acquisition,
AWA has agreed to indemnify us for certain of these costs. See
"Description of Acquisition Agreements--Fox River Indemnification
Agreements."
(b)Represents settlement amounts and legal fees primarily for two litigation
matters.
(c)Represents costs to dismantle and transport equipment from the Harrisburg
plant to the Appleton plant and Roaring Spring mill as part of the
Harrisburg plant closure.
(d)Represents losses incurred on disposal of property, plant and equipment.
(e)Represents the write-off of the notes receivable and equity investment in
Paperhub.com, a proposed internet paper and supplies purchasing business.
Paperhub.com has ceased its operations and, subject to limitations, AWA
and the sellers have agreed to indemnify us for any further liabilities
in connection with this investment.
(3)Effective November 26, 2000, we completed the transfer of two wholly owned
subsidiaries, Appleton Coated and Appleton Leasing, to Appleton Coated
Papers Holdings Inc. These two subsidiaries consisted entirely of our coated
free sheet, fine paper products and leasing divisions. We classified these
subsidiaries as discontinued operations in our consolidated balance sheet
and consolidated statements of operations for all periods presented. The
Newton Falls, New York mill, which is part of the business operated by
Appleton Coated, and therefore, included in discontinued operations for the
periods presented, was not included within the November 26, 2000 transfer
described above because the Newton Falls mill was sold to a third party in
the third quarter of 2001. After the mill was sold, Newton Falls, Inc. was
transferred into an affiliate of AWA. See Note 4 of Notes to Consolidated
Financial Statements.
(4)Represents loss on debt extinguishment.
(5)Represents the write-off of deferred start-up costs.
(6)Adjusted EBITDA represents operating income plus depreciation and
amortization. Pro forma Adjusted EBITDA represents Adjusted EBITDA plus pro
forma adjustments related to the acquisition, the related financing
transactions and noncash charges from estimated employee compensation
deferrals and employer matching contributions under the ESOP totaling
$11,800. We have included Adjusted EBITDA data because we understand such
data is used by certain investors to determine historical ability to service
indebtedness. It should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles and is not indicative of operating profit or cash flow
from operations as determined under generally accepted accounting
principles. Adjusted EBITDA as calculated may differ from Adjusted EBITDA as
calculated by other companies.
12
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before making an investment decision.
Investing in the registered notes involves a high degree of risk. The
occurrence of any one or more of the following could materially adversely
affect your investment in the registered notes or our business and operating
results. Any reference to "notes" in this prospectus refers to both old notes
and registered notes, unless the context otherwise requires.
Risks Relating to the Notes
Your right to receive payments on the notes is junior to our senior
indebtedness and possibly to all of our future borrowings. Further, the
guarantees of the notes are junior to all our guarantors' senior indebtedness,
excluding the deferred payment obligation, and possibly to all of their future
borrowings. Repayment of these borrowings may make payments of principal and
interest on the notes less likely.
The notes and the guarantees rank behind all of our, Paperweight
Development's and our subsidiaries' existing indebtedness (other than trade
payables and the deferred payment obligation) and all of our and their future
borrowings (other than trade payables and the deferred payment obligation),
except any present or future indebtedness that expressly provides that it ranks
equal with, or subordinated in right of payment to, the notes and the
guarantees. As a result, upon any distribution to our creditors or the
creditors of the guarantors in a bankruptcy, liquidation or reorganization or
similar proceeding relating to us or the guarantors or our or their property,
the holders of senior debt of our company and the guarantors will be entitled
to be paid in full and in cash before any payment may be made with respect to
these notes or the guarantees. Moreover, in a bankruptcy, liquidation or
reorganization or similar proceeding, holders of certain other claims against
us and the guarantors are entitled to be paid before any payment is made on the
notes or the guarantees.
In addition, all payments on the notes and the guarantees will be prohibited
in the event of a payment default on senior debt and may be prohibited for
periods aggregating 179 days in any consecutive 360 day period in the event of
certain non-payment defaults on senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to our company or the guarantors, holders of the notes will
participate with trade creditors and all other holders of subordinated
indebtedness of Appleton Papers and the guarantors in assets, if any, remaining
after we and the guarantors have paid all of the senior debt. However, because
the indenture requires that amounts otherwise payable to holders of the notes
in a bankruptcy or similar proceeding be paid to holders of senior debt
instead, holders of the notes may receive less, ratably, than holders of trade
payables in any such proceeding. In any of these cases, we and the guarantors
may not have sufficient funds to pay all of our creditors and holders of the
notes may receive less, ratably, than the holders of senior debt.
As of December 29, 2001, the notes and the guarantees were subordinated to
$278.3 million of senior debt, capital lease obligations and third party debt
and approximately $55.5 million was available for borrowing as additional
senior debt under our senior credit facilities. We are permitted to borrow
substantial additional indebtedness, including senior debt, in the future under
the terms of the indenture and the other agreements related to our indebtedness.
The notes and guarantees are unsecured. If we become insolvent or are
liquidated, or if payment under the senior credit facilities is accelerated,
then you will only be paid out of the assets that remain after the secured
lenders are paid in full, which may not be enough to pay you in full or at all.
In addition to being subordinated to all of our existing and future senior
indebtedness, neither the notes nor the guarantees are secured by any of our
assets or the assets of our subsidiaries. Obligations under the senior credit
facilities, however, are secured by a pledge of all of our and our guarantors'
tangible and intangible assets, all of our capital stock, the capital stock of
our direct and indirect domestic subsidiaries and 100% of the stock of our
first tier foreign subsidiaries. If we become insolvent or are liquidated, or
if payment under the senior credit facilities is accelerated, the lenders under
the senior credit facilities will be entitled to exercise all of their
available legal remedies and will have a priority claim to our assets. See
"Description of Senior Credit Facilities."
13
We may not have the ability to raise the funds necessary to finance the change
of control offer required by the indenture.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes. However, it
is possible that we will not have sufficient funds at the time of the change of
control to make the required repurchase of notes or that restrictions in our
senior credit facilities will not allow such repurchases. In addition, certain
important corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a "Change of
Control" under the indenture. See "Description of Notes--Repurchase at the
Option of Holders."
Federal and state laws allow courts, under specific circumstances, to void
debts and require creditors to return payments received from debtors.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the notes and the guarantees could be voided, or
claims in respect of the notes or the guarantees could be subordinated to all
of our other debts or the debts of any guarantor if, among other things, we or
any guarantor, at the time it incurred the indebtedness evidenced by the notes
or its guarantee:
. received less than reasonably equivalent value or fair consideration for
the incurrence of such indebtedness;
. was insolvent or rendered insolvent by reason of such incurrence;
. was engaged in a business or transaction for which we or any guarantor's
remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by us or such guarantor pursuant to the notes or
any guarantee could be voided and required to be returned to us or such
guarantor, or to a fund for the benefit of our creditors or the creditors of
any guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, we or a guarantor would
be considered insolvent if:
. the sum of our or such guarantor's debts, including contingent
liabilities, were greater than the fair saleable value of all of our or
such guarantor's assets;
. the present fair saleable value of our or any guarantor's assets were
less than the amount that would be required to pay our or any
guarantor's probable liability on existing debts, including contingent
liabilities, as they become absolute and mature; or
. we or any guarantor could not pay debts as they become due.
Paperweight Development's legal obligations to repurchase common stock from
employees terminating their participation in the ESOP may lead to a default
under the agreements governing our indebtedness, including the notes.
It may be necessary for us to make significant distributions to Paperweight
Development in order for it to satisfy its share repurchase obligations to the
ESOP under ERISA and the terms of the KSOP. The ESOP incurs obligations to its
participants when they retire or otherwise terminate employment to make
diversification elections. However, the agreements governing our indebtedness,
including our indebtedness under the notes, contain limitations on our ability
to make this type of distribution. The amount of Paperweight Development's
repurchase obligations may at any time exceed these limitations and we may
elect to or be forced to help Paperweight Development meet its obligations.
Further, Paperweight Development, as a guarantor of our indebtedness, may also
be limited to some extent from making payments to the ESOP or its beneficiaries
by the
14
terms of its and our indebtedness, including our indebtedness under the notes.
As a result of Paperweight Development's legally imposed repurchase obligation,
we and/or Paperweight Development may be forced to violate the distribution
and/or payment limitations contained in the agreements relating to its and our
indebtedness, including our indebtedness under the notes, which may ultimately
result in a default under the agreements and the notes. Defaults on any of our
indebtedness could result in acceleration of our indebtedness and cause us to
dispose of our assets or declare bankruptcy, and as a result we may not have
sufficient funds to satisfy our obligations under the notes.
Risks Related to Our Business and Industry
We are subject to substantial costs and potential liabilities relating to
environmental regulation and litigation.
We are subject to substantial regulation by various federal, state and local
authorities concerned with 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 clean-up
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 us regardless of whether the contamination is attributable
entirely to prior owners. As described in the following risk factor, we have
been identified as a potentially responsible party for remediation and alleged
natural resource damages related to the Lower Fox River and Green Bay system,
which we refer to as the Lower Fox River. In addition, we make capital
expenditures and incur operating expenses for clean-up obligations and other
environmental matters arising from our daily operations.
We have approximately $20.7 million of accrued liabilities as of December
29, 2001 for estimated or anticipated liabilities and legal and consulting
costs relating to environmental matters arising from past operations. While the
accrued liabilities reflect our current estimate of the cost of these
environmental matters, the amount that we have accrued may be inadequate. In
addition, we may be named as a potentially responsible party at other sites in
the future and the costs associated with such future sites may be material. We
expect 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 clean-ups and related costs. All of these factors are
likely to increase our operating expenses, require continuing capital
expenditures and adversely affect the operating flexibility of our
manufacturing operations and may require indeterminable and significant
additional expenditures in connection with such compliance.
We have been named as a potentially responsible party related to the Lower Fox
River.
We have been named by the United States Environmental Protection Agency, or
EPA, a "potentially responsible party," or PRP, under the Comprehensive
Environmental Response Compensation and Liability Act. We have been named a PRP
because of discharges of polychlorinated biphyenyls, or PCBs, into the Fox
River from our Appleton Plant in the 1950s, 1960s and 1970s and because of
discharges from the Appleton Coated paper mill in Combined Locks, Wisconsin,
which we owned from 1978 to 2000. We could be liable for a significant portion
of the expenses of remediating the PCBs which remain in the River. These
expenses could be very large. In October 2001, the DNR and EPA released a
report in which they estimated total remediation costs, which we would share
with other PRPs, to be $307 million. In addition to remediation, various
government agencies are also asserting that we and the other PRPs are liable
for natural resource damages caused by the PCBs. In October 2000, the U.S. Fish
& Wildlife Service estimated that total natural resource damages would be in a
range between $176 million to $333 million. At this time, we cannot accurately
estimate our total liability for the Lower Fox River because we do not know how
much the remedial actions and natural resource damages may cost or how large
our share of those costs will be. Our liability could be substantial. We have
already agreed with NCR Corporation and various governmental agencies that we
and NCR will together pay a total of $41.5 million over four years for interim
remediation and natural resource restoration projects. We and NCR would each
pay about half of this amount. These liabilities are discussed in greater
detail under the heading "Business-Environmental Regulation--Lower Fox River."
15
AWA and the sellers may fail to comply with their indemnification obligations
related to the acquisition.
Pursuant to the purchase agreement relating to the acquisition, and subject
to certain limitations more completely described under the heading "Description
of Acquisition Agreements--Purchase Agreement," AWA and the sellers have agreed
to indemnify the buyers and their affiliates, including us, for certain losses
resulting from:
. the inaccuracies in the sellers' and AWA's representations and
warranties;
. the breach or nonperformance of the sellers' or AWA's covenants and
other agreements;
. the liabilities related to the businesses of Newton Falls, Inc.,
Appleton Coated LLC, Appleton Recycled Fibers, Inc., Appleton Capital
Inc., Appleton Leasing LLC, Arjo Wiggins Investments Inc., Paperhub.com,
Inc. and several other of our former subsidiaries;
. the ownership of the real property on which the Harrisburg plant is
located and environmental matters at this location prior to our sale of
the Harrisburg plant to a third party; and
. other designated liabilities.
AWA has also, subject to certain limitations, agreed to indemnify the buyers
and the buyers have agreed to indemnify us for specified environmental
liabilities relating to the contamination of the Lower Fox River as discussed
under the heading "Description of Acquisition Agreements--Fox River
Indemnification Agreements." In addition, AWA has agreed to indemnify the
buyers and us against certain taxes, including taxes they may be required to
pay in respect of periods prior to the closing of the acquisition.
If the potential matters for which we will receive indemnification from AWA
and the sellers result in significant liabilities for us, and for any reason
AWA and/or the sellers are unable or unwilling to honor these indemnification
obligations, we could be required to pay for these liabilities ourselves, which
could have a material adverse effect on our cash flow, our ability to fund or
expand our operations and our ability to repay our existing and future
indebtedness, including the notes.
We incurred a significant amount of debt to complete the acquisition and, as a
result, we will be operating as a highly leveraged company.
To complete the acquisition, it was necessary for us to incur a substantial
amount of indebtedness. Our consolidated operating company debt and deferred
payment obligation was approximately $670.2 million at December 29, 2001.
This large amount of indebtedness could:
. make it more difficult for us to satisfy our obligations with respect to
the notes;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
. limit our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and other general corporate
activities;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
. make it more difficult for us to satisfy our obligations to our
creditors and, if we fail to comply with the requirements of the
indebtedness, could result in an event of default;
. limit our ability to successfully withstand a downturn in our business
or the economy generally; and
. place us at a competitive disadvantage against other less leveraged
competitors.
Furthermore, although our ability, Paperweight Development's ability and the
ability of substantially all of our subsidiaries to borrow money is restricted
by the terms of the senior credit facilities and the deferred payment
obligation to one of the sellers and will be restricted by the terms of the
indenture, it may be possible for us and the guarantors to incur even more
debt, and if we and the guarantors were to do so, these risks could intensify.
16
Our ability to service our debt is dependent on our future operating results
and we cannot be sure that we will be able to meet our debt obligations as they
come due.
Our ability to meet our payment obligations and to comply with the financial
covenants contained in the agreements relating to our indebtedness, including
our indebtedness under the notes, is subject to a variety of factors, including
changes in:
. demand for and selling prices of our products;
. costs of raw materials;
. interest rate levels;
. our status as a qualified subchapter S subsidiary;
. environmental regulations; and
. general economic conditions.
We may not generate sufficient cash flows to meet our payment obligations under
the agreements relating to our indebtedness, including our indebtedness under
the notes. If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make the required payments on our indebtedness,
including our indebtedness under the notes, then we may be required to
refinance our indebtedness. We may not be able to refinance our indebtedness on
terms that are acceptable to us or at all. In the absence of a refinancing, our
lenders would be able to accelerate the maturity of our indebtedness, which
could cause us to default under our other indebtedness, dispose of assets or
declare bankruptcy.
Compliance with the covenants relating to our indebtedness may limit our
operating flexibility.
The agreements related to our indebtedness, including the indenture, among
other things, prohibit or restrict our ability to:
. pay dividends on or purchase stock,
. repay subordinated indebtness,
. make investments,
. borrow additional money,
. use assets as security in other transactions,
. sell assets or merge with or into other companies,
. make capital expenditures,
. enter into sale and leaseback transactions,
. sell equity interests in our subsidiaries,
. amend particular agreements relating to our transaction with AWA and the
ESOP,
. engage in new lines of business, and
. take, or fail to take, any actions that would cause us to lose our S
Corporation status.
These limitations, together with our highly leveraged position, could limit
our ability to finance our operations with debt or equity in the future. In
addition, these restrictions and our leveraged position may restrict our
ability to respond to competitive market conditions, to make capital
expenditures beyond those permitted in the agreements relating to the
indebtedness or to take advantage of business opportunities. This loss of
operating flexibility may have a material adverse affect on our ability to
achieve our financial objectives or our ability to sustain our current levels
of revenue, earnings and cash flow.
17
Recent terrorist attacks in the United States may materially adversely effect
the U.S. economy.
On September 11, 2001, New York and Washington, D.C. suffered serious
terrorist attacks. The long-term economic impact of these acts has yet to be
determined and the ultimate cost associated with these attacks may place
significant burdens on the U.S. economy as a whole. If these acts or additional
terrorist attacks cause an overall economic decline, the number of commercial
transactions in which our products are used may substantially decline which
could have a material adverse effect on our revenues, earnings and cash flows.
The market for our primary product, carbonless paper, may decline more rapidly
than we anticipate.
Carbonless paper is our primary product and accounted for 82.1% of our net
sales in fiscal 1999, 80.7% of our net sales in fiscal 2000 and 80.1% of our
net sales in fiscal 2001. The U.S. market for carbonless products is declining
as users switch to alternative modes of communication and technology that do
not use multi-part business forms. Our total sales volume of carbonless
products declined 2.3% from fiscal 1998 to fiscal 1999, 8.8% from fiscal 1999
to fiscal 2000 and 12.7% from fiscal 2000 to fiscal 2001. We assumed a decline
in our sales volume of carbonless products of approximately 8% compounded
annually for the next five years for purposes of financing the acquisition. If
the decline in our sales volume of carbonless products accelerates or if we are
unable to maintain our share of the carbonless market or the prices of our
carbonless products, then our operating efficiency and cash flow may be
materially adversely affected.
Declining general economic conditions could adversely affect us and our
customers.
End users for our products come from a broad cross section of the economy
and may be exposed in varying degrees to general declines in economic
conditions. If there is a continuing and sustained decline in general economic
conditions in the markets in which we and our customers operate and a
commensurate decline in the number of commercial transactions in which our
products are used, our customers could experience a decrease in demand for
their products and services which would result in lower sales of our products,
especially our carbonless and thermal products used in retail transactions. If
we experience prolonged decreases in demand for our products as a result of
sustained declines in economic conditions, our earnings and cash flow may be
materially adversely affected.
We may be unable to develop and introduce new and enhanced products.
Our success will depend in large part on our ability to develop and
introduce new and enhanced products that keep pace with introductions by our
competitors and changing customer preferences. If we fail to anticipate or
respond adequately to these developments, then we may lose opportunities for
business with both current and potential customers. 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 our business may suffer.
The development of new products can be very difficult and requires high
levels of innovation. The development process is also very lengthy and costly.
Our New Business Development group recently introduced two new products, one of
which has been commercialized and another that is currently in test market, and
neither of which has generated significant revenues or profits. The success of
our new product offerings will depend on several factors, including our ability
to:
. accurately anticipate and properly identify our customers' needs and
industry trends;
. price our products competitively;
. innovate, develop and commercialize new products and applications in a
timely manner;
. differentiate our products from our competitors' products; and
. use our research and development budget efficiently.
18
We currently rely on a relatively small number of customers to produce a
significant amount of our net sales from carbonless and thermal products.
Our five largest customers for carbonless products accounted for
approximately 48% of carbonless net sales in fiscal 1999, approximately 52% of
carbonless net sales in fiscal 2000 and approximately 51% of carbonless net
sales in fiscal 2001. Our dependence on these customers has increased in the
last several years as a result of their acquisition of other customers. Our
five largest customers for thermal products accounted for approximately 48% of
thermal net sales in fiscal 1999, approximately 56% of thermal net sales in
fiscal 2000 and approximately 57% of thermal net sales in fiscal 2001. Many of
our customers are under no obligation, contractual or otherwise, to purchase
our products in the future. Furthermore, some of our customers have become
insolvent or financially distressed in recent years, especially in the
carbonless market, which has resulted in bad debt write-offs of $0.9 million in
1999, $5.5 million in 2000 and $0.5 million in 2001. If we lose one or more of
our significant customers or any of our significant customers experiences
financial difficulty, then our operating efficiency, earnings and cash flow
could be materially adversely affected.
We currently rely on a small number of third parties to supply several of the
key raw materials we use to produce our products.
Our business depends upon the availability of key raw materials, including
basestock and some chemicals. In fiscal 2001, we purchased from external
suppliers approximately $175 million of basestock. We relied on two external
suppliers for over 90% of the basestock we purchased in fiscal 2001 to produce
our carbonless products. We relied on a single external supplier for
approximately 60% of the basestock we purchased in fiscal 2001 to produce our
thermal products. For some of the key chemicals we use in our products we rely
on one or two suppliers. If there is a disruption in the supply of our raw
materials, including the chemicals that we need to produce our carbonless and
thermal products, then we may be required to purchase these raw materials from
alternative sources which may result in a significant increase in our operating
costs. Included in these increased costs would be development costs associated
with qualifying new raw materials and suppliers. We may not be able to procure
carbonless basestock, thermal basestock or our other raw materials from
alternative suppliers in the future in amounts sufficient to meet our needs or
at prices consistent with historical prices. The unavailability of alternative
suppliers could subject us to significant cost increases and manufacturing
delays and could have a material adverse effect on our earnings and cash flow.
We have competitors in our various markets and may not be able to maintain
prices and margins for our products.
We face strong competition from companies in both the carbonless and thermal
markets. We expect that competition will intensify in the thermal market. Our
competitors vary in size and the breadth of their product offerings and some of
our competitors have significantly greater financial, technical and marketing
resources than we do.
Regardless of the continuing quality of our primary products, we may be
unable to maintain our prices or margins due to:
. declining overall carbonless market size;
. accelerating decline in the carbonless sheet market;
. increasing manufacturing costs;
. increasing international competition; or
. declining general economic conditions.
Our inability to compete effectively or to maintain our prices and margins
could have a material adverse effect on our earnings and cash flow.
19
We depend on our key personnel to manage our business effectively and they may
be difficult to replace.
Our success largely depends on the efforts and abilities of our current
senior and middle management teams. Their skills, experience and industry
contacts significantly benefit us. The loss of key employees could have a
negative effect on our operating results and financial condition. We do not
maintain key-man life insurance on any members of our senior management team,
other than our chief executive officer, and no members of our senior management
team are subject to employment agreements.
Our energy costs may be higher than we anticipated.
We spent approximately $31 million in fiscal 2001 on electricity, natural
gas and coal, most of which was spent on electricity. We have facilities in
both regulated and deregulated energy markets. During 2000 and 2001, we enjoyed
below market prices for electricity in two of our three markets under supply
contracts, which resulted in a benefit of approximately $2.0 million per year.
These favorable contracts expired in 2001. We expect that, as a result of
deregulation, we will experience price increases. If these price increases are
greater than anticipated, then our earnings and cash flow may be materially
adversely affected.
Paperweight Development, its eligible subsidiaries and the ESOP may not
continue to be exempt from federal or state income tax.
Paperweight Development has made an election to be taxed as an S corporation
for federal income tax purposes and an election to treat its eligible
subsidiaries, including us, as qualified subchapter S subsidiaries for federal
and state income tax purposes.
Section 1362 of the Internal Revenue Code of 1986 provides that a
corporation that meets certain requirements may elect to be taxed as an S
corporation. These requirements include, but are not limited to: (1) the
corporation having only certain types of shareholders, including ESOPs, (2) the
corporation having 75 shareholders or less and (3) the corporation having only
one class of stock.
The continuing status of Paperweight Development as an S corporation for
federal and state income tax purposes will depend upon it continuing to meet
the S corporation requirements. Neither we nor Paperweight Development have
obtained a ruling from the Internal Revenue Service or any state tax agency
confirming that Paperweight Development will be treated as an S corporation or
that we will be treated as a qualified subchapter S subsidiary. In addition,
neither we nor Paperweight Development have obtained an opinion upon which you
may rely stating that Paperweight Development qualifies as an S Corporation and
its eligible subsidiaries qualify as qualified subchapter S subsidiaries for
federal and state income tax purposes. It is possible that the Internal Revenue
Service could take the position on audit that certain debt or obligations of
Paperweight Development or its subsidiaries constitute a second class of stock
and terminate Paperweight Development's S election. The applicable law and
regulations may change in a way which results in the taxation of Paperweight
Development as a corporation other than as an S corporation. Furthermore, the
current law that exempts the ESOP trust from taxation on its allocable share of
an S corporation's income may change.
On a pro forma basis, Paperweight Development would have realized a $24.2
million benefit during fiscal 2001 as a result of the elimination of its and
its eligible subsidiaries' federal and state income tax liability. If for any
reason Paperweight Development loses its S corporation status, or any of its
qualified subchapter S subsidiaries, including us, loses its qualified
subchapter S subsidiary status, Paperweight Development and its subsidiaries
would be required to pay federal and state income tax, thereby reducing the
amount of cash available to repay debt, including the notes, or reinvest in our
operations, which would have a material adverse effect on our earnings and cash
flow. The termination of Paperweight Development's S corporation status or the
termination of Paperweight Development's subsidiaries' qualified subchapter S
subsidiary status would violate covenants under the senior credit facilities
and the indenture governing the notes and would lead to a default
20
under the senior credit facilities and/or the indenture governing the notes.
Loss of S corporation or comparable status would also require Paperweight
Development and its subsidiaries to pay state income taxes in many states.
Similarly, if the ESOP trust becomes subject to tax on its share of the S
corporation's income, Paperweight Development would have to distribute cash to
the ESOP trust to allow it to pay the tax, again reducing the amount of cash
available to repay debt, including the notes, or to be reinvested in our
operations.
As an S corporation, Paperweight Development is subject to a corporate level
tax under Section 1374 of the Code known as the built-in gain tax. The built-in
gain tax is a tax imposed on the gain inherent in assets as of the effective
date of the S election if the gain is recognized within ten years after the
effective date of the S election. If we engage in any sale of a material
portion of our assets in the future, we could be subject to a significant tax
liability.
Proposed legislation and regulations intended to address employee benefit plan
terms that may have contributed to losses in the 401(k) plan maintained by
Enron Corp. could adversely affect our ability to repay our debt.
Following the bankruptcy filing of Enron Corp., legislators and agencies of
the executive branch have proposed legislation or are formulating
recommendations to amend, restrict or eliminate various features of employee
benefit plans similar to those that may have contributed to losses in the
401(k) plan maintained by Enron Corp. For example, legislation has been
proposed in Congress to restrict the amount of company stock that may be held
by a 401(k) plan and to allow plan participants to freely sell company stock
held in their plan accounts. In addition, a Presidential Task Force has been
established which may formulate regulatory recommendations on employers'
restrictions on portfolio diversification and on employees selling their
company stock. If legislation is adopted or new regulations are adopted that
require us to lift restrictions on sales of stock held in participants' KSOP
accounts, that expand the diversification rights of participants in the KSOP,
or that limit the amount of Paperweight Development common stock that may be
held by the KSOP, then we may be required to fund the repurchase of substantial
amounts of Paperweight Development common stock or take some other action
restrictive to our finances. If so, these repurchases or other restrictive
actions could reduce the amount of cash available to repay debt, including the
notes, or to reinvest in our operations. In addition, these repurchases may
violate covenants under the senior credit facilities and the indenture
governing the notes, which would lead to a default under those documents.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 with respect to the registered notes. This prospectus,
which is a part of the registration statement, omits some of the information
included in the registration statement. Statements made in this prospectus as
to the contents of any contract, agreement or other document are not
necessarily complete. We have included in this prospectus a summary of all of
the material terms of each contract, agreement or other document filed as an
exhibit to the registration statement, but we refer you to that exhibit for a
more complete description of the matter involved.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are subject to a number of risks and uncertainties, many of which
are beyond our control. All statements other than statements of historical
facts included in this prospectus, including the statements under the headings
"Prospectus Summary" and "Business" and elsewhere regarding our strategy,
future operations, financial position, estimated revenues, projected costs,
prospects, plans and objectives of management, are forward-looking statements.
When used in this prospectus, the words "will," "believe," "anticipate,"
"intend," "estimate," "expect," "project" and similar
21
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this prospectus.
Neither we nor the guarantors of the notes undertake any obligation to update
or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Although we believe that that our
plans, intentions and expectations reflected in or suggested by the
forward-looking statements we make in this prospectus are reasonable, we can
give no assurance that such plans, intentions or expectations will be achieved.
You should read carefully the factors described in the "Risk Factors"
section of this prospectus for a description of certain risks that could, among
other things, cause actual results to differ from these forward-looking
statements.
22
THE EXCHANGE OFFER
Purpose and Effect
We sold the old notes on December 14, 2001 in a private placement to Bear,
Stearns & Co. Inc., TD Securities (USA) Inc., ABN AMRO Incorporated and U.S.
Bancorp Piper Jaffray Inc., the initial purchasers. The initial purchasers then
resold the old notes under an offering memorandum dated December 11, 2001 in
reliance on Rule 144A under the Securities Act. In connection with the issuance
of the old notes, we entered into the registration rights agreement. That
agreement requires that we file a registration statement under the Securities
Act with respect to the registered notes to be issued in the exchange offer
and, upon the effectiveness of the registration statement, offer to you the
opportunity to exchange your old notes for a like principal amount of
registered notes. These registered notes will be issued without a restrictive
legend and, except as set forth below, may be reoffered and resold by you
without registration under the Securities Act. After we complete the exchange
offer, our obligations with respect to the registration of the old notes and
the registered notes will terminate, except as provided in the last paragraph
of this section. Copies of the indenture relating to the notes and the
registration rights agreement have been filed as exhibits to the registration
statement of which this prospectus is a part. We refer to this indenture in
this prospectus as the "indenture." As a result of the filing and the
effectiveness of the registration statement, assuming we complete the exchange
offer no later than 30 days after the effectiveness of the registration
statement, certain prospective increases in the interest rate on the old notes
provided for in the registration rights agreement will not occur.
Based on an interpretation by the staff of the Securities and Exchange
Commission set forth in no-action letters issued to third parties, if you are
not our "affiliate" within the meaning of Rule 405 under the Securities Act or
a broker-dealer referred to in the next paragraph, we believe that registered
notes to be issued to you in the exchange offer may be offered for resale,
resold and otherwise transferred by you, without compliance with the
registration and prospectus delivery provisions of the Securities Act. This
interpretation, however, is based on your representation to us that:
(1)the registered notes to be issued to you in the exchange offer are
acquired in the ordinary course of your business;
(2)you are not engaged in and do not intend to engage in a distribution of
the registered notes to be issued to you in the exchange offer; and
(3)you have no arrangement or understanding with any person to participate
in a distribution of the registered notes to be issued to you in the
exchange offer.
If you tender in the exchange offer for the purpose of participating in a
distribution of the registered notes to be issued to you in the exchange offer,
you cannot rely on this interpretation by the staff of the Commission. Under
those circumstances, you must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. Each broker-dealer that receives registered notes in the
exchange offer for its own account in exchange for old notes that were acquired
by the broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of those
registered notes. See "Plan of Distribution."
If you will not receive freely tradeable registered notes in the exchange
offer or are not eligible to participate in the exchange offer, you can elect,
by indicating on the letter of transmittal and providing certain additional
necessary information, to have your old notes registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act. In the event that we are obligated to file a shelf registration
statement, we will be required to keep the shelf registration statement
effective for a period of two years following the date of original issuance of
the old notes or such shorter period that will terminate when all of the old
notes covered by the shelf registration statement have been sold pursuant to
the shelf registration statement. Other than as set forth in this paragraph,
you will not have the right to require us to register your old notes under the
Securities Act. See "--Procedures for Tendering."
23
Registration Rights; Liquidated Damages
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the registration rights agreement in its entirety
because it, and not this description, defines your registration rights as
holders of the notes.
Appleton Papers, the guarantors and the initial purchasers entered into the
registration rights agreement upon the closing of the offering of old notes.
Pursuant to the registration rights agreement, Appleton Papers and the
guarantors agreed to file with the Commission the exchange offer registration
statement of which this prospectus is a part on the appropriate form under the
Securities Act with respect to the registered notes. Appleton Papers and the
guarantors are offering to the holders of transfer-restricted securities
pursuant to the exchange offer who are able to make certain representations the
opportunity to exchange their transfer-restricted securities for registered
notes.
If:
(1)Appleton Papers and the guarantors are not permitted to consummate the
exchange offer because the exchange offer is not permitted by applicable
law or Commission policy; or
(2)any holder of transfer-restricted securities notifies Appleton Papers
prior to the 20th day following the date specified for consummation of
the exchange offer that:
(a)it is prohibited by law or Commission policy from participating in
the exchange offer; or
(b)that it may not resell the registered notes acquired by it in the
exchange offer to the public without delivering a prospectus and this
prospectus is not appropriate or available for such resales; or
(c)that it is a broker-dealer and owns notes acquired directly from
Appleton Papers or an affiliate of Appleton Papers,
Appleton Papers and the guarantors will file with the Commission a shelf
registration statement to cover resales of the old notes by the holders of the
notes who satisfy certain conditions relating to the provision of information
in connection with the shelf registration statement.
Appleton Papers and the guarantors will use their reasonable best efforts to
cause the shelf registration statement to be declared effective as promptly as
possible by the Commission.
For purposes of the preceding, "transfer restricted securities" means each
old note until:
(1)the date on which such old note has been exchanged by a person other
than a broker-dealer for a registered note in the exchange offer;
(2)following the exchange by a broker-dealer in the exchange offer of an
old note for a registered note, the date on which such registered note
is sold to a purchaser who receives from such broker-dealer on or prior
to the date of such sale a copy of this prospectus;
(3)the date on which such old note has been effectively registered under
the Securities Act and disposed of in accordance with the shelf
registration statement; or
(4)the date on which such old note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The registration rights agreement provides that:
(1)unless the exchange offer would not be permitted by applicable law or
Commission policy, Appleton Papers and the guarantors will:
(a)commence the exchange offer; and
(b)use their best efforts to issue on or prior to 30 days, or longer, if
required by the federal securities laws, after the date on which the
exchange offer registration statement was declared effective by the
Commission, registered notes in exchange for all old notes tendered
prior thereto in the exchange offer; and
24
(2)if obligated to file the shelf registration statement, Appleton Papers
and the guarantors will file the shelf registration statement with the
Commission on or prior to 30 days after such filing obligation arises
and use their respective best efforts to cause the shelf registration
statement to be declared effective by the Commission on or prior to 90
days after such obligation arises.
If:
(1)Appleton Papers and the guarantors fail to file the shelf registration
statement required by the registration rights agreement on or before the
date specified for such filing; or
(2)the shelf registration statement is not declared effective by the
Commission on or prior to the date specified for such effectiveness; or
(3)Appleton Papers and the guarantors fail to consummate the exchange offer
within 30 days after the exchange offer registration statement is
declared effective by the Commission; or
(4)the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of transfer-restricted securities
during the periods specified in the registration rights agreement (each
such event referred to in clauses (1) through (4) above, a "Registration
Default"),
then Appleton Papers and the guarantors will pay liquidated damages to each
Holder of notes, with respect to the first 90-day period immediately following
the occurrence of the first Registration Default in an amount equal to $.05 per
week per $1,000 principal amount of notes held by such Holder.
The amount of the liquidated damages will increase by an additional $.05 per
week per $1,000 principal amount of notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of liquidated damages for all Registration Defaults of $.50 per week per
$1,000 principal amount of notes.
All accrued liquidated damages will be paid by Appleton Papers and the
guarantors on each damages payment date to the global note holder by wire
transfer of immediately available funds or by federal funds check and to
holders of certificated notes by wire transfer to the accounts specified by
them or by mailing checks to their registered addresses if no such accounts
have been specified.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
Holders of notes will be required to make certain representations to
Appleton Papers (as described in the registration rights agreement) in order to
participate in the exchange offer and will be required to deliver certain
information to be used in connection with the shelf registration statement and
to provide comments on the shelf registration statement within the time periods
set forth in the registration rights agreement in order to have their notes
included in the shelf registration statement and benefit from the provisions
regarding liquidated damages set forth above. By acquiring transfer-restricted
securities, a holder is deemed to have agreed to indemnify Appleton Papers and
the guarantors against certain losses arising out of information furnished by
such holder in writing for inclusion in any shelf registration statement.
Holders of notes will also be required to suspend their use of the prospectus
included in the shelf registration statement under certain circumstances upon
receipt of written notice to that effect from Appleton Papers.
Consequences of Failure to Exchange
After we complete the exchange offer, if you have not tendered your old
notes, you will not have any further registration rights, except as set forth
above. Your old notes will continue to be subject to certain restrictions on
transfer. Therefore, the liquidity of the market for your old notes could be
adversely affected upon completion of the exchange offer if you do not
participate in the exchange offer.
25
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of registered notes in
exchange for each $1,000 principal amount of old notes accepted in the exchange
offer. You may tender some or all of your old notes pursuant to the exchange
offer. However, old notes may be tendered only in integral multiples of $1,000
in principal amount.
The form and terms of the registered notes are substantially the same as the
form and terms of the old notes, except that the registered notes to be issued
in the exchange offer have been registered under the Securities Act, will not
bear legends restricting their transfer and will not contain the registration
rights and liquidated damages provisions contained in the old notes. The
registered notes will be issued pursuant to, and entitled to the benefits of,
the indenture. The indenture also governs the old notes. The registered notes
and the old notes will be deemed one issue of notes under the indenture.
As of the date of this prospectus, $250.0 million in aggregate principal
amount of the old notes were outstanding. This prospectus, together with the
letter of transmittal, is being sent to all registered holders and to others
believed to have beneficial interests in the old notes. You do not have any
appraisal or dissenters' rights in connection with the exchange offer under the
General Corporation Law of the State of Delaware, the Wisconsin Business
Corporation Law or the indenture. We intend to conduct the exchange offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered outstanding notes when,
as, and if we have given oral or written notice of our acceptance to the
exchange agent. The exchange agent will act as our agent for the tendering
holders for the purpose of receiving the registered notes from us. If we do not
accept any tendered notes because of an invalid tender, the occurrence of
certain other events set forth in this prospectus or otherwise, we will return
certificates for any unaccepted old notes, without expense, to the tendering
holder as promptly as practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer Taxes," transfer taxes with respect to the
exchange of your old notes in the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "--Fees and Expenses" below.
Expiration Date; Amendments
The exchange offer will expire at 5:00 p.m., New York City time, on
[ ], 2002, unless we determine, in our sole discretion, to extend the
exchange offer, in which case, it will expire at the later date and time to
which it is extended. We do not intend to extend the exchange offer, although
we reserve the right to do so. If we extend the exchange offer, we will give
oral or written notice of the extension to the exchange agent and give each
registered holder notice by means of a press release or other public
announcement of any extension prior to 9:00 a.m., New York City time, on the
next business day after the scheduled expiration date.
We also reserve the right, in our sole discretion,
(1)to delay accepting any old notes or, if any of the conditions set forth
below under "--Conditions" have not been satisfied or waived, to
terminate the exchange offer by giving oral or written notice of the
delay or termination to the exchange agent, or
(2)to amend the terms of the exchange offer in any manner, by complying
with Rule 14e-1(d) under the Exchange Act to the extent that rule
applies.
26
We acknowledge and undertake to comply with the provisions of Rule 14e-1(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the old notes surrendered for exchange, promptly after the termination
or withdrawal of the exchange offer. We will notify you as promptly as we can
of any extension, delay, termination or amendment.
Procedures for Tendering
Book-Entry Interests
The old notes were issued as global securities in fully registered form
without interest coupons and were deposited upon issuance with U.S. Bank
National Association, the trustee, as the custodian for the Depository Trust
Company. Beneficial interests in the global securities, held by direct or
indirect participants in DTC, are shown on, and transfers of these interests
are effected only through, records maintained in book-entry form by DTC with
respect to its participants.
If you hold your old notes in the form of book-entry interests and you wish
to tender your old notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date either:
(1)a written or facsimile copy of a properly completed and duly executed
letter of transmittal, including all other documents required by the
letter of transmittal, at the address set forth on the cover page of the
letter of transmittal; or
(2)a computer-generated message transmitted by means of DTC's Automated
Tender Offer Program system and received by the exchange agent and
forming a part of a confirmation of book-entry transfer, in which you
acknowledge and agree to be bound by the terms of the letter of
transmittal.
In addition, in order to deliver old notes held in the form of book-entry
interests:
(1)a timely confirmation of book-entry transfer of those notes into the
exchange agent's account at DTC pursuant to the procedure for book-entry
transfers described below under "--Book-Entry Transfer" must be received
by the exchange agent prior to the expiration date; or
(2)you must comply with the guaranteed delivery procedures described below.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at your election and risk.
Instead of delivery by mail, we recommend that you use an overnight or hand
delivery service. If you do deliver by mail, we recommend that you use
registered mail, properly insured, with return receipt requested. In all cases,
sufficient time should be allowed to assure delivery to the exchange agent
before the expiration date. You should not send the letter of transmittal or
old notes to us. You may request your broker, dealer, commercial bank, trust
company, or nominee to effect the above transactions for you.
Certificated Old Notes
Only registered holders of certificated old notes may tender those notes in
the exchange offer. No certificated notes are issued and outstanding as of the
date of this prospectus. If you acquire certificated old notes prior to the
expiration of the exchange offer and you wish to tender those notes for
exchange pursuant to the exchange offer, you must transmit to the exchange
agent on or prior to the expiration date, a written or facsimile copy of a
properly completed and duly executed letter of transmittal, including all other
required documents, to the address set forth below under "--Exchange Agent." In
addition, in order to validly tender your certificated old notes:
(1)the certificates representing your old notes must be received by the
exchange agent prior to the expiration date, or
(2)you must comply with the guaranteed delivery procedures described below.
27
Procedures Applicable to All Holders
If you tender an old note and you do not withdraw the tender prior to the
expiration date, you will have made an agreement with us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
If your old notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to tender your notes, you
should contact the registered holder promptly and instruct the registered
holder to tender on your behalf. If you wish to tender on your own behalf, you
must, prior to completing and executing the letter of transmittal and
delivering your old notes, either make appropriate arrangements to register
ownership of the old notes in your name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless:
(1)old notes tendered in the exchange offer are tendered either
(A)by a registered holder who has not completed either the box entitled
"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on the letter of transmittal, or
(B)for the account of an eligible institution; and
(2)the box entitled "Special Registration Instructions" on the letter of
transmittal has not been completed.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by a financial institution,
which includes most banks, savings and loan associations and brokerage houses,
that is a participant in the Securities Transfer Agents Medallion Program, the
New York Stock Exchange Medallion Program or the Stock Exchanges Medallion
Program.
If the letter of transmittal is signed by a person other than you, your old
notes must be endorsed or accompanied by a properly completed bond power and
signed by you as your name appears on those old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless we waive this requirement, in
this instance you must submit with the letter of transmittal proper evidence
satisfactory to us of their authority to act on your behalf.
We will determine, in our sole discretion, all questions regarding the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered old notes. This determination will be final and binding.
We reserve the absolute right to reject any and all old notes not properly
tendered or any old notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes either before
or after the expiration date. Our interpretation of the terms and conditions of
the exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties.
You must cure any defects or irregularities in connection with tenders of
your old notes within the time period we will determine unless we waive that
defect or irregularity. Although we intend to notify you of defects or
irregularities with respect to your tender of old notes, neither we, nor the
exchange agent nor any other person will incur any liability for failure to
give this notification. Your tender will not be deemed to have been made and
your notes will be returned to you if:
(1)you improperly tender your old notes;
(2)you have not cured any defects or irregularities in your tender; and
(3)we have not waived those defects, irregularities or improper tender.
The exchange agent will return your notes, unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration of the
exchange offer.
28
By tendering, you will represent to us that, among other things:
(1)the registered notes to be acquired by you in the exchange offer are
being acquired in the ordinary course of your business,
(2)you are not engaging in and do not intend to engage in a distribution of
the registered notes to be acquired by you in the exchange offer,
(3)you do not have an arrangement or understanding with any person to
participate in a distribution of the registered notes to be acquired by
you in the exchange offer, and
(4)you are not our "affiliate," as defined under Rule 405 of the Securities
Act.
In all cases, issuance of registered notes for old notes that are accepted
for exchange in the exchange offer will be made only after timely receipt by
the exchange agent of certificates for your old notes or a timely book-entry
confirmation of your old notes into the exchange agent's account at DTC, a
properly completed and duly executed letter of transmittal, or a
computer-generated message instead of the letter of transmittal, and all other
required documents. If any tendered old notes are not accepted for any reason
set forth in the terms and conditions of the exchange offer or if old notes are
submitted for a greater principal amount than you desire to exchange, the
unaccepted or non-exchanged old notes, or old notes in substitution therefor,
will be returned without expense to you. In addition, in the case of old notes,
tendered by book-entry transfer into the exchange agent's account at DTC
pursuant to the book-entry transfer procedures described below, the
non-exchanged old notes will be credited to your account maintained with DTC,
as promptly as practicable after the expiration or termination of the exchange
offer.
Guaranteed Delivery Procedures
If you desire to tender your old notes and your old notes are not
immediately available, or time will not permit your old notes or other required
documents to reach the exchange agent before the expiration date, or the
procedures for book-entry transfer cannot be completed on a timely basis, you
may tender if:
(1)you tender through an eligible financial institution;
(2)prior to 5:00 p.m., New York City time, on the expiration date, the
exchange agent receives from an eligible institution a written or
facsimile copy of a properly completed and duly executed letter of
transmittal and notice of guaranteed delivery, substantially in the form
provided by us; and
(3)the certificates for all certificated old notes, in proper form for
transfer, or a book-entry confirmation, and all other documents required
by the letter of transmittal, are received by the exchange agent within
three NYSE trading days after the date of execution of the notice of
guaranteed delivery.
The notice of guaranteed delivery may be sent by facsimile transmission,
mail or hand delivery. The notice of guaranteed delivery must set forth:
(1)your name and address;
(2)the amount of old notes you are tendering; and
(3)a statement that your tender is being made by the notice of guaranteed
delivery and that you guarantee that within three NYSE trading days
after the execution of the notice of guaranteed delivery, the eligible
institution will deliver the following documents to the exchange agent:
(A)the certificates for all certificated old notes being tendered, in
proper form for transfer or a book-entry confirmation of tender;
(B)a written or facsimile copy of the letter of transmittal, or a
book-entry confirmation instead of the letter of transmittal; and
(C)any other documents required by the letter of transmittal.
29
Book-Entry Transfer
The exchange agent will establish an account with respect to the book-entry
interests at DTC for purposes of the exchange offer promptly after the date of
this prospectus. Any financial institution that is a participant in DTC's
systems may make book-entry delivery of book-entry interests by causing DTC to
transfer the book-entry interests into the exchange agent's account at DTC in
accordance with DTC's Automated Tender Offer Procedures. The participant should
transmit its acceptance to DTC on or before the expiration date or comply with
the guaranteed delivery procedures described above. DTC will verify acceptance,
execute a book-entry transfer of the tendered outstanding old notes into the
exchange agent's account at DTC and then send to the exchange agent
confirmation of the book-entry transfer. The confirmation of the book-entry
transfer will include an agent's message confirming that DTC has received an
express acknowledgment from the participant that the participant has received
and agrees to be bound by the letter of transmittal and that we may enforce the
letter of transmittal against the participant. Delivery of registered notes
issued in the exchange offer may be effected through book-entry transfer at
DTC. However the letter of transmittal or facsimile of it or an agent's
message, with any required signature guarantees and any other required
documents:
(1)must be transmitted to and received by the exchange agent at the address
listed below under "--Exchange Agent" on or before the expiration date,
or
(2)must comply with the guaranteed delivery procedures described above.
If one of the following situations occur:
(1)you cannot deliver a book-entry confirmation of book-entry delivery of
your book-entry interests into the exchange agent's account at DTC; or
(2)you cannot deliver all other documents required by the letter of
transmittal to the exchange agent prior to the expiration date,
then you must tender your book-entry interests according to the guaranteed
delivery procedures discussed above.
Withdrawal Rights
You may withdraw tenders of your old notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date.
For your withdrawal to be effective, the exchange agent must receive a
written or facsimile transmission notice of withdrawal at its address set forth
below under "--Exchange Agent" or, if you are a participant of DTC, an
electronic message using DTC's Automated Tender Offer Program, prior to 5:00
p.m., New York City time, on the expiration date.
The notice of withdrawal must:
(1)state your name;
(2)identify the specific old notes to be withdrawn, including the
certificate number or numbers and the principal amount of withdrawn
notes;
(3)be signed by you in the same manner as you signed the letter of
transmittal when you tendered your old notes, including any required
signature guarantees or be accompanied by documents of transfer
sufficient for the exchange agent to register the transfer of the old
notes into your name; and
(4)specify the name in which the old notes are to be registered, if
different from yours.
If you have tendered old notes under the book-entry transfer procedure, your
notice of withdrawal must also specify the name and number of an account at DTC
to which your withdrawn old notes can be credited.
30
We will determine all questions regarding the validity, form and
eligibility, including time of receipt, of withdrawal notices. Our
determination will be final and binding on all parties. Any old notes withdrawn
will be deemed not to have been validly tendered for exchange for purposes of
the exchange offer. Any old notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to you, or credited to
the applicable DTC account, without cost as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn old notes may be retendered by following one of the procedures
described under "-Procedures for Tendering" above at any time on or prior to
5:00 p.m., New York City time, on the expiration date.
Conditions
Notwithstanding any other provision of the exchange offer and subject to our
obligations under the registration rights agreement, we will not be required to
accept for exchange, or to issue registered notes in exchange for, any old
notes and may terminate or amend the exchange offer, if at any time before the
acceptance of any old notes for exchange any of the following events shall
occur:
(1)any injunction, order or decree shall have been issued by any court or
any governmental agency that would prohibit, prevent or otherwise
materially impair our ability to proceed with the exchange offer; or
(2)the exchange offer shall violate any applicable federal law.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to any condition, subject to applicable law.
We also may waive in whole or in part at any time and from time to time any
particular condition in our sole discretion. If we waive a condition, we may be
required in order to comply with applicable securities laws, to extend the
expiration date of the exchange offer. Our failure at any time to exercise any
of the foregoing rights will not be deemed a waiver of these rights and these
rights will be deemed ongoing rights which may be asserted at any time and from
time to time.
In addition, we will not accept for exchange any old notes tendered, and no
registered notes will be issued in exchange for any of those old notes, if at
the time the notes are tendered any stop order shall be threatened by the
Commission or be in effect with respect to the registration statement of which
this prospectus is a part or the qualification of the indenture under the Trust
Indenture Act of 1939.
The exchange offer is not conditioned on any minimum principal amount of old
notes being tendered for exchange.
Exchange Agent
We have appointed U.S. Bank National Association as exchange agent for the
exchange offer. Questions, requests for assistance and requests for additional
copies of the prospectus, the letter of transmittal and other related documents
should be directed to the exchange agent addressed as follows:
By Registered or Certified Mail: By Hand in New York: By Hand in Minnesota or
U.S. Bank National Association U.S. Bank National Association Overnight Courier:
180 East Fifth Street 100 Wall Street, Suite 2000 U.S. Bank National Association
St. Paul, Minnesota 55101 New York, New York 10005 180 East Fifth Street
Attn: Specialized Finance St. Paul, Minnesota 55101
Department Attn: Specialized Finance
Department--4th Floor
Facsimile Transmission Number:
(For Eligible Institutions Only)
(651) 244-1537
Confirm Receipt of Facsimile
by Telephone:
(800) 934-6802
Delivery or fax of the letter of transmittal to an address or number other
than those above is not a valid delivery of the letter of transmittal.
The exchange agent also acts as trustee under the indenture.
31
Fees and Expenses
We will not pay brokers, dealers, or others soliciting acceptances of the
exchange offer. The principal solicitation is being made by mail. Additional
solicitations, however, may be made in person or by telephone by our officers
and employees.
We will pay the estimated cash expenses to be incurred in connection with
the exchange offer. These are estimated in the aggregate to be approximately
$400,000 which includes fees and expenses of the exchange agent, accounting,
legal, printing and related fees and expenses.
Transfer Taxes
You will not be obligated to pay any transfer taxes in connection with a
tender of your old notes for exchange unless you instruct us to register
registered notes in the name of, or request that old notes not tendered or not
accepted in the exchange offer be returned to, a person other than the
registered tendering holder, in which event the registered tendering holder
will be responsible for the payment of any applicable transfer tax.
Accounting Treatment
We will not recognize any gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize the expense of the
exchange offer over the term of the registered notes under generally accepted
accounting principles.
32
THE ACQUISITION
On November 9, 2001, Paperweight Development Corp. and its then wholly owned
subsidiary, New Appleton, LLC, which we sometimes refer to as the buyers,
acquired Appleton Papers for a purchase price of $810 million (which included
the present value of the deferred payment obligation described below), plus
proceeds of $7.4 million from the sale of our Harrisburg facility. Paperweight
Development owns 100% of our outstanding common stock. After the completion of
the acquisition, New Appleton, LLC was liquidated into Paperweight Development.
We and Paperweight Development financed the acquisition, refinanced most of
our current debt and paid approximately $38.8 million of related fees and
expenses with the following:
. $79 million of our available cash;
. $340 million of senior credit facilities, of which $265 million of term
loans were borrowed at the closing of the acquisition;
. $250 million in aggregate principal amount of a senior subordinated note
due 2008 issued by us to AWA, which was repaid with the proceeds of the
offering of old notes and other available cash;
. a deferred payment obligation with a present value of $140 million at
the closing of the acquisition to be paid to one of the sellers; and
. $107 million in proceeds from the sale of Paperweight Development common
stock to the ESOP.
As part of the purchase agreement for the acquisition, AWA agreed to
indemnify the buyers, and the buyers agreed to indemnify us, for specified
liabilities relating to the Lower Fox River and AWA has provided financial
assurance to us in support of these indemnification obligations. For a more
complete description of these indemnification obligations and the financial
assurance, see the description under the heading "Description of Acquisition
Agreements--Fox River Indemnification Agreements."
Simultaneous with the closing of the acquisition, Appleton Papers entered
into several other agreements with affiliates of AWA as described under the
heading "Relationship with Arjo Wiggins Appleton."
33
S CORPORATION STATUS
Paperweight Development has filed an election to be treated as an S
corporation pursuant to Section 1362 of the Internal Revenue Code of 1986.
Paperweight Development has also elected to treat its eligible subsidiaries,
including Appleton Papers, as qualified subchapter S subsidiaries, which are
called QSubs. For federal income tax purposes, an S corporation and its QSubs,
unlike regular C corporations, generally do not pay taxes on their income, but
rather their income is allocated to the S corporation's shareholders, and the
shareholders must take into account their allocable share of the income when
filing their income tax returns. In the case of a shareholder that is an ESOP,
the ESOP does not pay tax on its allocable share of income. Because neither we,
nor Paperweight Development, nor the ESOP are required to pay corporate income
tax, we expect to have substantial additional cash available to repay our debt
and invest in our operations. S corporations are, however, subject to a
corporate level tax known as the built-in gain tax. The built-in gain tax is a
tax imposed on the gain inherent in assets as of the effective date of the S
election if the gain is recognized within ten years after the effective date of
the S election.
A corporation must meet certain qualification requirements to be eligible to
become an S corporation. An S corporation may only have one class of stock
(other than stock that differs solely as to voting rights) and may only have
certain types of shareholders, generally individuals, certain trusts and
certain tax-exempt organizations, including ESOPs.
Most states follow the federal tax treatment of S corporations and QSubs,
and in some states it is possible to elect different tax treatment for state
income tax purposes than federal income tax purposes. Paperweight Development
and its subsidiaries, including Appleton Papers, are operating in certain
jurisdictions that may subject the corporations to state income tax.
The foregoing summary is based upon the Internal Revenue Code, regulations
promulgated thereunder and other existing precedent, all of which are subject
to change, including on a retroactive basis.
USE OF PROCEEDS
We will not receive any proceeds from this exchange offer. The proceeds from
the offering of old notes together with approximately $12 million of our
available cash was used to redeem in full, at par, a senior subordinated note
due 2008 held by AWA and pay accrued and unpaid interest to the date of
redemption. We issued the senior subordinated note in the aggregate principal
amount of $250 million to AWA on November 9, 2001. The senior subordinated note
had a maturity date of November 9, 2008 and bore interest on the date of
redemption at the rate of 11.5% per annum.
34
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of Paperweight Development as of December 29, 2001 on a
consolidated basis.
This table should be read in conjunction with "Selected Historical
Consolidated Financial Data," "Unaudited Pro Forma Consolidated Financial
Data," our consolidated financial statements and related notes and other
financial information appearing elsewhere in this prospectus.
As of
December 29, 2001
-----------------
(in thousands)
Cash and cash equivalents......................... $ 35,702
========
Operating company debt, including current portion:
Existing third party debt...................... $ 8,650
Revolving credit facility (1).................. --
Term loans..................................... 265,000
12 1/2% senior subordinated notes due 2008..... 250,000
Capital lease obligations...................... 4,679
--------
Total operating company debt............... 528,329
Deferred payment obligation (2)................ 141,896
Shareholder's equity........................... 112,279
--------
Total capitalization....................... $782,504
========
- --------
(1)We had approximately $55.5 million available under our revolving credit
facility after giving effect to the issuance of letters of credit of
approximately $19.5 million.
(2)Represents the present value of the deferred payment obligation at December
29, 2001. Please refer to the discussion under the heading "Description of
Deferred Payment Obligation."
35
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated financial data relates to Paperweight
Development, which became our parent company following the closing of the
acquisition, as the notes are unconditionally guaranteed by Paperweight
Development. The following unaudited pro forma consolidated financial data have
been derived by the application of pro forma adjustments to the historical
consolidated financial statements of Appleton Papers and Paperweight
Development. The unaudited pro forma consolidated statement of operations data
for the period presented gives effect to the acquisition and related financing
transactions, including (1) the acquisition, (2) the senior credit facilities
and the application of the net proceeds therefrom, (3) the ESOP offering and
the application of the net proceeds therefrom, and (4) the issuance of the
deferred payment obligation, together with the offering of old notes and the
application of the proceeds therefrom, as if they had been consummated on
December 31, 2000. Assumptions underlying the pro forma adjustments are
described in the accompanying notes which should be read in conjunction with
the unaudited pro forma consolidated financial data.
The unaudited pro forma consolidated financial data should not be considered
indicative of actual results that would have been achieved had the acquisition
and related financing transactions been consummated on the date or for the
periods indicated and do not purport to indicate consolidated results of
operations as of any future date or any future period.
The unaudited pro forma consolidated financial data should be read in
conjunction with the information contained in "Selected Historical Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
accompanying notes appearing elsewhere in this prospectus.
36
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 2001
(dollars in thousands)
For the Period For the Period
December 31, November 10,
2000 to 2001 to Combined
November 9, December 29, 2001 Pro Forma Pro
2001 2001 Historical Adjustments Forma
-------------- -------------- ---------- ----------- --------
Net sales.......................... $842,868 $112,950 $955,818 $ -- $955,818
Costs and expenses:
Cost of sales................... 591,741 76,345 668,086 21,785 (1) 689,871
Selling, general and
administrative................ 133,874 18,693 152,567 (1,582)(2) 150,985
Restructuring and other charges. 6,385 -- 6,385 -- 6,385
Special charges (3)............. 25,553 -- 25,553 (23,389)(4) 2,164
-------- -------- -------- --------- --------
Operating income................... 85,315 17,912 103,227 3,186 106,413
Interest expense, net.............. 16,623 10,232 26,855 39,777 (5) 66,632
Other expense (6).................. 492 (53) 439 -- 439
-------- -------- -------- --------- --------
Income before income taxes from
continuing operations............ 68,200 7,733 75,933 (36,591) 39,342
Provision for income taxes......... 24,574 117 24,691 (24,191)(7) 500
-------- -------- -------- --------- --------
Net income from continuing
operations....................... $ 43,626 $ 7,616 $ 51,242 $(12,400) $ 38,842
======== ======== ======== ========= ========
Other Financial Data:
Depreciation and amortization... $ 36,659 $ 6,005 $ 42,664 $ 21,222 (8) $ 63,886
Capital expenditures............ 49,804 6,741 56,545 -- 56,545
37
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 2001
Pro Forma
Adjustments for
the Year Ended
December 29,
2001
---------------
(dollars in
thousands)
(1) Reflects the following:
Additional depreciation resulting from the increased fair value of machinery, equipment
and buildings for manufacturing related assets based upon various estimated useful lives
ranging from 15 to 20 years......................................................................... $14,775
Reduction in postretirement health expense based on actuarial valuations at the date of the
acquisition.......................................................................................... (408)
Increase in pension expense based on actuarial valuations at the date of the acquisition...................... 94
Additional 401(k) employer matching contributions based upon increase from 75% to
100% for manufacturing salaried employees and increase from 0% to 100% for union
hourly employees.............................................................................................. 3,000
Adjustment to LIFO expense based on estimated fair market inventory valuation................................. 4,324
--------
$21,785
========
(2) Reflects the following:
Reduction in depreciation resulting from the change in estimated useful lives of equipment
ranging from 3 to 20 years....................................................................... $(1,230)
Reduction in postretirement health expense based on actuarial valuations at the date of the
acquisition................................................................................................... (260)
Reduction in pension expense based on actuarial valuations at the date of the acquisition..................... (69)
Additional amortization resulting from the increased fair value of intangible assets based
upon various estimated useful lives ranging from 6 to 25 years................................................ 7,677
Elimination of management fee paid to AWA..................................................................... (990)
Elimination of management incentive payments triggered upon the sale of Appleton Papers.................... (6,910)
Additional 401(k) employer matching contributions based upon increase from 75% to
100% for non-manufacturing salaried employees................................................................. 200
--------
$(1,582)
========
(3) Special charges for this period consist of environmental expense, litigation settlements,
loss on disposals of equipment and equipment relocation expenses. See "Prospectus
Summary--Summary Historical and Unaudited Pro Forma Consolidated Financial Data"
footnote (2).
(4) Reflects elimination of environmental expense related to the Lower Fox River. See
"Business--Environmental Regulation." In connection with the acquisition, AWA has
agreed to indemnify us for certain of these costs. See "Description of Acquisition
Agreements--Fox River Indemnification Agreements."
(5) Reflects net difference between existing interest expense and the interest expense
associated with the financing transactions related to the acquisition and this offering and
includes $6.3 million of annual deferred debt issuance costs. Total debt incurred in
connection with the acquisition, including the present value of the deferred payment
obligation at the closing of the acquisition, totaled $668.3 million, resulting in an average
interest rate of 9.4%. Certain borrowings related to the acquisition bear interest at LIBOR
or a minimum LIBOR rate, in each case, plus an applicable margin. For purposes of the
pro forma interest expense adjustment, LIBOR is 1.9% for the period presented. A
variance in LIBOR of 1/8th percentage point would change the assumed weighted average
annual interest expense for those borrowings by approximately $0.3 million for the twelve
months ended December 29, 2001.
38
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 2001
Pro Forma
Adjustments
for the Year
Ended
December 29,
2001
------------
(dollars in
thousands)
(6) Other expense consists of foreign exchange gain/loss.
(7) Reflects elimination of U.S. income tax liability because Paperw-eight Development has
elected to be treated as a subchapter S corporation and has elected that its eligible
subsidiaries be treated as qualified subchapter S subsidiaries for U.S. and state income tax
purposes.
(8) Reflects the following:
Additional cost of sales depreciation resulting from the increased fair value of machinery,
equipment and buildings for manufacturing related assets based upon various estimated
useful lives ranging from 3 to 20 years........................................................... $ 13,545
Additional selling, general, and administrative amortization resulting from increased fair
value of intangible assets based upon various estimated useful lives ranging from 6 to 25
years............................................................................................. 7,677
--------
$21,222
========
39
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical consolidated financial
data for Paperweight Development and Appleton Papers as of and for each of the
five fiscal years in the five year period ending December 29, 2001. The
historical consolidated financial data for the fiscal years ended January 2,
1999, January 1, 2000 and December 30, 2000 and the periods ended November 9,
2001 and December 29, 2001 were derived from our consolidated financial
statements included elsewhere in this prospectus which have been audited by
PricewaterhouseCoopers LLP, our independent public accountants, as indicated in
its report included elsewhere in this prospectus. The remaining historical
financial data presented below were derived from our unaudited consolidated
financial statements and accounting records not included in this prospectus.
Prior to fiscal 1998, we did not maintain separate financial and management
reporting information for Appleton Coated LLC. As a result, our selected
financial data for fiscal 1997 is derived from unaudited financial information.
In the opinion of management, the unaudited data includes all adjusting
entries, consisting of normal recurring adjustments, necessary to fairly
present this data. The historical consolidated financial data presented in this
prospectus are not necessarily indicative of our financial position or the
results of operations for any future period. The financial and other operating
data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
historical consolidated financial statements and related notes and the
unaudited pro forma consolidated financial data included elsewhere in this
prospectus.
(Predecessor Basis) (Successor Basis)
---------------------------------------------------------------- -----------------
For the Period For the Period
December 31, 2000 November 10, 2001
to to
1997(1) 1998 1999 2000 November 9, 2001 December 29, 2001
----------- ---------- ---------- ---------- ----------------- -----------------
(unaudited)
(dollars in thousands)
Statement of Operations Data:
Net sales.......................... $1,269,287 $1,132,147 $1,123,833 $1,080,013 $842,868 $112,950
Cost of sales...................... 883,367 794,817 789,194 752,616 591,741 76,345
---------- ---------- ---------- ---------- -------- --------
Gross profit....................... 385,920 337,330 334,639 327,397 251,127 36,605
Selling, general and
administrative..................... 167,533 155,760 160,075 165,699 133,874 18,693
Restructuring and other charges (2) -- -- 44,542 7,816 6,385 --
Special charges (3)................ (1,665) 9,003 27,658 19,027 25,553 --
---------- ---------- ---------- ---------- -------- --------
Operating income................... 220,052 172,567 102,364 134,855 85,315 17,912
Interest expense, net.............. 19,915 47,815 31,653 29,494 16,623 10,232
Other (income) expense............. (125) (11,777) 3,103 (1,176) 492 (53)
---------- ---------- ---------- ---------- -------- --------
Income before income taxes from
continuing operations............. 200,262 136,529 67,608 106,537 68,200 7,733
Provision for income taxes......... 70,611 53,716 17,715 35,725 24,574 117
---------- ---------- ---------- ---------- -------- --------
Income from continuing
operations......................... 129,651 82,813 49,893 70,812 43,626 7,616
Loss from discontinued
operations, net of tax (4)........ (42,617) (25,726) (55,691) (13,063) (4,462) --
---------- ---------- ---------- ---------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change................. 87,034 57,087 (5,798) 57,749 39,164 7,616
Extraordinary item, net of tax (5). -- -- -- (4,651) (6,443) --
Cumulative effect of accounting
change, net of tax (6)............ -- -- (6,835) -- -- --
---------- ---------- ---------- ---------- -------- --------
Net income (loss).................. $ 87,034 $ 57,087 $ (12,633) $ 53,098 $ 32,721 $ 7,616
========== ========== ========== ========== ======== ========
(Continued on next page)
40
(Successor
(Predecessor Basis) Basis)
------------------------------------------------------ ------------
Fiscal
----------------------------------------
For the For the
Period Period
December 31, November 10,
2000 to 2001 to
November 9, December 29,
1997(1) 1998 1999 2000 2001 2001
---------- ---------- -------- --------- ------------ ------------
(unaudited)
(dollars in thousands)
Other Financial Data:
Adjusted EBITDA (7)................... $ 264,763 $ 220,095 $148,879 $ 177,752 $121,974 $ 23,917
Depreciation and amortization......... 44,711 47,528 46,515 42,897 36,659 6,005
Capital expenditures.................. 71,029 53,360 37,685 81,072 49,804 6,741
Ratio of earnings to fixed charges (8) 6.8 3.1 2.6 3.3 3.4 1.7
Balance Sheet Data (at end of period):
Working capital (deficit) (9)......... $ 263,922 $ 95,291 $108,892 $(171,503) $181,187 $ 138,465
Total assets.......................... 1,312,003 1,105,202 948,708 774,504 788,719 1,002,298
Total debt............................ 952,398 705,571 569,604 499,944 13,279 670,225
Shareholder's equity (deficit)........ 6,037 63,124 66,091 (519) 510,773 112,279
- --------
(1)Prior to fiscal 1998, we did not maintain separate financial and management
reporting information for Appleton Coated. As a result, this selected
financial data is derived from unaudited financial information. These
amounts reflect all of our costs of doing business and have been determined
and presented in a manner that is consistent with amounts reported for
subsequent periods.
(2)During the third quarter of fiscal 1999, we announced plans to close our
Harrisburg plant, which was sold on August 17, 2001. See Note 5 of Notes to
Consolidated Financial Statements.
(3)Special charges consist of the following items:
Fiscal
-------------------------------
For the For the
Period Period
December 31, November 10,
2000 to 2001 to
November 9, December 29,
1997 1998 1999 2000 2001 2001
------- ------ ------- ------- ------------ ------------
Environmental expense (a)......... $ 589 $3,411 $ 3,590 $ 3,148 $23,389 --
Litigation settlements (b)........ (3,771) 2,249 21,819 3,625 449 --
Equipment relocation expenses (c). -- -- -- 5,215 463 --
Loss on disposals of equipment (d) 1,517 3,343 2,249 539 1,252 --
Loss on investment (e)............ -- -- -- 6,500 -- --
------- ------ ------- ------- ------- -----
Total....................... $(1,665) $9,003 $27,658 $19,027 $25,553 --
======= ====== ======= ======= ======= =====
- --------
(a)Represents costs related to the Lower Fox River. See
''Business--Environmental Regulation.'' In connection with the
acquisition, AWA has agreed to indemnify us for certain of these costs.
See ''Description of Acquisition Agreements--Fox River Indemnification
Agreements."
(b)Represents settlement amounts and legal fees primarily for two litigation
matters.
(c)Represents costs to dismantle and transport equipment from the Harrisburg
plant to the Appleton plant and Roaring Spring mill as part of the
Harrisburg plant closure.
(d)Represents losses incurred on disposal of property, plant and equipment.
(e)Represents write-off of the notes receivable and equity investment in
Paperhub.com, a proposed internet paper and supplies purchasing business.
Paperhub.com has ceased its operations and, subject to limitations, AWA
and the sellers have agreed to indemnify us for any further liabilities in
connection with this investment.
(4)Effective November 26, 2000, we completed the transfer of two wholly owned
subsidiaries, Appleton Coated and Appleton Leasing, to Appleton Coated
Papers Holdings Inc. These two subsidiaries consisted entirely of our coated
free sheet, fine paper products and leasing divisions. We classified these
subsidiaries as discontinued operations in our consolidated balance sheet
and consolidated statements of operations for all periods presented. The
Newton Falls, New York mill, which is part of the business operated by
Appleton Coated and therefore, included in discontinued operations for the
periods presented, was not included within the November 26, 2000 transfer
described above because the Newton Falls Mill was sold to a third party in
the third quarter of 2001. After the mill was sold, Newton Falls, Inc. was
transferred to an affiliate of AWA. See Note 4 of Notes to Consolidated
Financial Statements.
(5)Represents loss on debt extinguishment.
(6)Represents the write-off of deferred start-up costs.
(7)Adjusted EBITDA represents operating income plus depreciation and
amortization. We have included Adjusted EBITDA data because we understand
such data is used by certain investors to determine historical ability to
service indebtedness. It should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles and is not indicative of operating profit or
cash flow from operations as determined under generally accepted accounting
principles. Adjusted EBITDA as calculated may differ from Adjusted EBITDA as
calculated by other companies.
(8)For the purpose of calculating these ratios, we define earnings as pretax
income from continuing operations plus fixed charges. We define fixed
charges as interest expense plus amortized expenses related to indebtedness.
(9)Beginning in fiscal 1998, includes parent company debt which has been
classified as a current liability. See Note 6 of Notes to Consolidated
Financial Statements.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity of
Paperweight Development Corp. and Appleton Papers Inc. for the three year
period ended December 29, 2001. This discussion should be read in conjunction
with our accompanying Consolidated Financial Statements and related notes.
General
We believe we are the world's leading producer of carbonless paper and the
largest producer of thermal paper in the United States and Canada. Our existing
product offerings focus on carbonless and thermal paper, which are both
specialty, value-added paper products. In fiscal 2001, we had total shipments
of approximately 498,000 tons. In early 2000, we established a separate
business unit, New Business Development, dedicated to the development and
introduction of new specialty, high value-added products based upon our core
technical and manufacturing competencies. We currently operate manufacturing
facilities in Roaring Spring, Pennsylvania, West Carrollton, Ohio and Appleton,
Wisconsin, as well as a nationwide system of eight distribution centers. Our
historical financial results reflect our ability to continue to improve gross
profit margins in our carbonless business despite declining volume and
relatively stable prices.
Acquisition of Appleton Papers. At the close of business on November 9,
2001, Paperweight Development acquired Arjo Wiggins Delaware General
Partnership, or AWDGP, and its wholly owned subsidiary, Appleton Papers, from
AWA for $810 million. Paperweight Development had no operating activity prior
to the acquisition of AWDGP.
We and Paperweight Development financed the acquisition, refinanced most of
our current debt and paid related fees and expenses with the following:
. $79 million of our available cash;
. $340 million of senior credit facilities, of which $265 million of term
loans were borrowed at the closing of the acquisition;
. $250 million in aggregate principal amount of a senior subordinated note
due 2008 issued by us to AWA, which was repaid with the proceeds of the
offering of old notes and other available cash;
. a deferred payment obligation with a present value of $140 million at
the closing of the acquisition to be paid to one of the sellers; and
. $107 million in proceeds from the sale of Paperweight Development common
stock to the ESOP.
The acquisition was accounted for using the purchase method and the
financial statements of Appleton Papers were adjusted on November 10, 2001 to
reflect its assets and liabilities at fair value. We refer to the period
November 10, 2001 to December 29, 2001 as the successor period. The successor
period includes the accounts of Paperweight Development and its wholly owned
subsidiaries, which we refer to as the successor company. We refer to the
period December 31, 2000 to November 9, 2001 as the fiscal 2001 predecessor
period. The predecessor period includes the accounts of Appleton Papers, its
wholly owned subsidiaries, as well as Appleton Papers' direct parent companies,
AWDGP and Appleton Investments LLC, which we refer to as the predecessor
company. The accounts for AWDGP and Appleton Investments consisted of debt used
to fund operations of Appleton Papers and corresponding interest expense and
tax benefits.
For purposes of the discussion of yearly operating results, the financial
information for the predecessor period for 2001 has been combined with the
successor period financial information and referred to as "fiscal 2001".
42
Cost-cutting initiatives. Our management team continuously seeks ways to
increase manufacturing efficiency. Cost reduction initiatives during the last
three fiscal years have been implemented to increase efficiencies and offset
the impact of inflationary pressures and volume declines in the carbonless
business. Over each of the last three years, these reductions have generated
annual savings of over $20.0 million. Historically, our cost reduction efforts
have focused on manufacturing optimization, purchasing, coating technologies,
product design and distribution. We expect to continue to focus on cost
reductions throughout our operations with additional purchasing efficiencies,
the improvement of manufacturing technologies, investments in process
innovation and cost savings through employee actions to improve yield and
performance.
Facility closing and related restructuring. During the third quarter of
fiscal 1999, we announced plans to close our Harrisburg plant in fiscal 2001 to
improve operational efficiencies by reducing excess production capacity. As a
result, we recorded restructuring charges of $44.5 million in fiscal 1999, $7.8
million in fiscal 2000, and $6.4 million in fiscal 2001 related to the
Harrisburg plant closure. The charge recorded in fiscal 1999 was primarily due
to the Harrisburg asset impairment totaling $26.4 million, costs for employment
terminations of $11.3 million and distribution center exit costs of $6.0
million. As part of the Harrisburg plant closure, we also recorded a special
charge, described below, of $5.2 million in fiscal 2000 and $0.5 million in
fiscal 2001. For a more detailed review of these activities, please read our
Consolidated Financial Statements and related notes included elsewhere in this
prospectus.
Special charges. Special charges consist of (1) environmental costs related
to the Lower Fox River, (2) settlement and legal fees for primarily two
litigation matters, (3) costs to dismantle and transport equipment from the
Harrisburg plant to the Appleton plant and the Roaring Spring mill as part of
the Harrisburg plant closure, (4) loss on disposals of property, plant and
equipment and (5) the write-off of the notes receivable and equity investment
in Paperhub.com, a proposed internet paper and supplies purchasing business.
Discontinued operations. On November 26, 2000, we completed the transfer of
two wholly owned subsidiaries, Appleton Coated LLC and Appleton Leasing LLC, to
Appleton Coated Papers Holdings Inc., an affiliate of AWA. These two
subsidiaries, which have been operated with a separate management team since
the first quarter of fiscal 1999, consisted entirely of our coated free sheet,
fine paper products and leasing divisions. The Newton Falls, New York mill,
which is part of the business operated by Appleton Coated, was not included
within the November 26, 2000 transfer. The Newton Falls mill was sold to a
third party in the third quarter of 2001. On October 28, 2001, we completed the
transfer of Newton Falls, Inc. to Newton Falls LLC, an affiliated company of
AWA. These subsidiaries, including the Newton Falls mill, have been classified
as discontinued operations for purposes of our financial statements and the
following discussion and analysis.
Customer buying patterns. It is typical for our carbonless sheet customers
to increase their inventories with our products prior to the effective date of
announced price increases. As a result of this "pre-buying," it is typical for
our volume of shipments to increase during the period when price increases are
announced and then decline during the period when price increases take effect.
We announced price increases during the first and
fourth quarters of fiscal 2000 which resulted in increased carbonless sheet
sales in those quarters and reduced sales in the second quarter of fiscal 2000
and the first quarter of fiscal 2001.
Raw materials and pulp and basestock pricing. Our principal raw materials
consist of basestock, chemicals, pulp, wastepaper and packaging. In fiscal
2001, these materials made up approximately 65% of our cost of goods sold. Our
largest raw material component is basestock, which was approximately 32% of our
cost of goods sold in fiscal 2001. We purchased approximately 185,000 tons of
basestock in fiscal 2001 with a cost of approximately $175 million. We purchase
most of our basestock from two sources with whom we have long-term purchase
contracts based on long-term market prices. These contracts are intended to
protect us from the significant pricing cycles for pulp and commodity paper
products. Approximately 10% of our cost of goods sold in fiscal 2001 was for
pulp, wood and wastepaper used in our paper mills in Roaring Spring and West
Carrollton. We purchased 82,000 tons of market pulp in fiscal 2001 with a cost
of $38.2 million. We purchased 85,000 tons of market wastepaper in fiscal 2001
with a cost of $13.8 million. Wastepaper and pulp prices are also subject to
43
the swings in the pulp and commodity paper cycle. We seek to reduce the impact
of those swings for pulp by using long-term contracts, indexing and hedges, and
for wastepaper by purchasing through a national broker who provides us with
competitive pricing. We produce pulp and basestock internally at our Roaring
Spring and West Carrollton paper mills. Our costs for internally produced pulp
and basestock have been less than the prices we pay outside suppliers. As our
sales of carbonless paper decline, we expect to internally produce a larger
percentage of our basestock needs, thereby saving the greater costs of
purchasing basestock from third party suppliers.
Results of Operations
The following table sets forth net sales for the fiscal periods indicated
for each of our product lines (dollars in thousands):
For the Period For the Period
Fiscal December 31, 2000 November 10, 2001
---------------------------------- to to
1999 2000 November 9, 2001 December 29, 2001 Combined 2001
---------------- ---------------- ---------------- ---------------- --------------
Net % of Net % of Net % of Net % of Net % of
Sales Total Sales Total Sales Total Sales Total Sales Total
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Carbonless (1) $ 922,861 82.1% $ 871,921 80.7% $674,562 80.0% $ 90,957 80.5% $765,519 80.1%
Thermal....... 175,277 15.6 184,658 17.1 151,586 18.0 20,672 18.3 172,258 18.0
Other......... 25,695 2.3 23,434 2.2 16,720 2.0 1,321 1.2 18,041 1.9
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total......... $1,123,833 100.0% $1,080,013 100.0% $842,868 100.0% $112,950 100.0% $955,818 100.0%
========== ===== ========== ===== ======== ===== ======== ===== ======== =====
- --------
(1)Includes security products which, in all periods, represented less than 4%
of carbonless net sales. Beginning in fiscal 2002, sales of security
products will be included with other net sales.
The following table sets forth certain information relating to our
operations expressed as a percentage of our net sales for the fiscal periods
indicated:
Fiscal For the Period For the Period
------------ December 31, 2000 November 10, 2001
to to Combined
1999 2000 November 9, 2001 December 29, 2001 2001
----- ----- ----------------- ----------------- --------
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................. 70.2 69.7 70.2 67.6 69.9
----- ----- ----- ----- -----
Gross profit....................... 29.8 30.3 29.8 32.4 30.1
Selling, general and administrative 14.2 15.3 15.9 16.5 16.0
Restructuring and other charges.... 4.0 0.7 0.8 0.0 0.7
Special charges (1)................ 2.5 1.8 3.0 0.0 2.7
----- ----- ----- ----- -----
Operating income (2)............... 9.1% 12.5% 10.1% 15.9% 10.8%
===== ===== ===== ===== =====
- --------
(1)Special charges include environmental expense, litigation settlements,
equipment relocation expenses, losses on disposals of property, plant and
equipment and a loss on investment, depending upon the fiscal period.
(2)May not sum due to rounding.
Comparison of Combined Fiscal 2001 and Fiscal 2000
Net Sales. Net sales for fiscal 2001 decreased $124.2 million, or 11.5%, to
$955.8 million, compared to $1,080.0 million for fiscal 2000. Carbonless net
sales decreased $106.4 million, or 12.2%, compared to fiscal 2000 primarily due
to a volume decline of 62,600 tons. This decrease was due to the forecasted
decline in the maturing North American carbonless market, as well as the impact
of the slowing U.S. economy on end use demand for carbonless and thermal
products. Thermal net sales decreased $12.4 million, or 6.7%, compared to the
prior year period primarily due to a volume reduction of 3,000 tons in a
majority of product segments as a
44
result of the slowing U.S. economy and a reduction in prices of some of our
grades of fax and point of sale paper in response to aggressive pricing by a
foreign competitor.
Gross Profit. Gross profit, calculated as net sales less cost of sales,
decreased $39.7 million, or 12.1%, to $287.7 million, compared to $327.4
million for fiscal 2000. Gross profit margin decreased to 30.1% for fiscal 2001
as compared to 30.3% for fiscal 2000. In the second quarter of 2001, we
completed the eighteen-month restructuring project that included the closing of
our Harrisburg plant and relocation of strategic pieces of manufacturing
equipment to our Appleton plant and Roaring Spring mill. The first half of 2001
experienced approximately $15 million of the expected negative impact of
start-up costs related to the equipment transferred from the Harrisburg plant.
During the second half of 2001, we began to benefit from the positive impact of
the elimination of the Harrisburg cost structure as well as elimination of the
start-up costs related to the transferred equipment.
Selling, General and Administrative. Selling, general and administrative
expenses for fiscal 2001 decreased $13.1 million, or 7.9%, to $152.6 million,
compared to $165.7 million for fiscal 2000. The decrease was primarily the
result of a dedicated effort to reduce these expenses, the write-off of
accounts receivable in the first quarter of fiscal 2000, lower distribution
expenses related to lower volumes in fiscal 2001 and fees received from
Appleton Coated for information technology services we provided in fiscal 2001.
Despite a decrease in total dollars for fiscal 2001 as compared to fiscal 2000,
selling, general and administrative expenses as a percentage of net sales were
16.0% of net sales during fiscal 2001, compared to 15.3% of net sales in fiscal
2000. Selling, general and administrative expenses for fiscal 2001 included a
charge of $6.9 million in management bonuses, incurred in the predecessor
period, related to the acquisition of Appleton Papers.
Restructuring and Other Charges. During the third quarter of fiscal 1999,
we announced plans to close our Harrisburg plant in fiscal 2001. Restructuring
and other charges associated with this plant closure were $6.4 million in
fiscal 2001 compared to $7.8 million in fiscal 2000. Restructuring charges for
fiscal 2001 pertained to asset impairments of $3.8 million and employee
severance benefits of $1.1 million associated with the sale of the Harrisburg
plant and $1.5 million for various costs relating to the final closure of the
plant. Restructuring charges for fiscal 2000 related primarily to severance and
benefits for identified employment terminations, which were implemented in
fiscal 2001.
Special Charges. Special charges for fiscal 2001 pertained to (1) Lower Fox
River environmental costs of $23.4 million, (2) loss on disposal of equipment
of $1.3 million, (3) a legal settlement during fiscal 2001 resulting in charges
of $0.4 million and (4) costs to dismantle and transport equipment from the
Harrisburg plant to the Appleton plant and Roaring Spring mill of $0.5 million.
Special charges for fiscal 2000 pertained to (1) Lower Fox River environmental
costs of $3.2 million, (2) a legal settlement during fiscal 2000 resulting in
charges of $3.6 million, (3) costs to dismantle and transport equipment from
the Harrisburg plant to the Appleton plant and Roaring Spring mill of $5.2
million, (4) loss on disposal of equipment of $0.5 million and (5) the
write-off of the notes receivable and equity investment in Paperhub.com, a
proposed internet paper and supplies purchasing business, of $6.5 million. In
connection with the acquisition, AWA has agreed to indemnify us for
environmental liabilities as described in Note 2 of Notes to Consolidated
Financial Statements.
Operating Income. Due to the factors mentioned above, operating income for
fiscal 2001 decreased $31.7 million, or 23.5%, to $103.2 million compared to
$134.9 million for fiscal 2000. Operating income as a percentage of net sales
for fiscal 2001 was 10.8% as compared to 12.5% of net sales for fiscal 2000.
Provision for income taxes. After the acquisition of Appleton Papers we,
along with our domestic subsidiaries, have elected to be treated as subchapter
S corporations for U.S. and state income tax purposes, and therefore, we expect
to incur no future U.S. income tax liability and minimal state income tax
liability. The effective income tax rate for the fiscal 2001 predecessor period
was 36.0% compared to 33.5% for fiscal 2000. The increase in the effective rate
for these respective periods is primarily due to a tax benefit received in
fiscal 2000 associated with a favorable IRS tax audit.
45
Loss from discontinued operations. In October 2001, we completed the
transfer of one of our wholly owned subsidiaries, Newton Falls Inc., to an
affiliated company of AWA. In November 2000, we also transferred two wholly
owned subsidiaries, Appleton Coated LLC and Appleton Leasing LLC, to an
affiliated company of AWA. These three entities have been classified as
discontinued operations for all periods presented.
Loss from discontinued operations, net of taxes was $4.5 million during
fiscal 2001 compared to $13.1 million in fiscal 2000. Operating losses for
discontinued operations approximated $6.9 million and $27.2 million in 2001 and
2000, respectively. Fiscal 2001 operating losses primarily consisted of asset
impairments and various closing costs associated with the permanent closure of
the Newton Falls mill. Operating losses in fiscal 2000 primarily related to the
operations of Appleton Coated LLC and environmental costs associated with the
closure of the Newton Falls mill.
Net income. Net income for fiscal 2001 decreased $12.8 million, or 24.1%,
to $40.3 million, compared to $53.1 million for fiscal 2000. The lower
operating income for fiscal 2001 was offset by reductions in the provision for
income taxes and losses from discontinued operations as compared to fiscal 2000.
Comparison of Fiscal 2000 and Fiscal 1999
Net Sales. Net sales for fiscal 2000 decreased $43.8 million, or 3.9%, to
$1,080.0 million, compared to $1,123.8 million for fiscal 1999. Carbonless net
sales decreased $50.9 million, or 5.5%, compared to fiscal 1999 primarily due
to a volume decline of 47,400 tons, which resulted in a decrease of $80.9
million in net sales. This decrease was partially offset by an increase in
revenue of $23.7 million due to favorable net selling prices of our carbonless
products. Overall product mix generated an additional favorable $6.3 million
effect on net sales as a result of carbonless sheet mix improvements. Thermal
net sales increased $9.4 million, or 5.4%, compared to the prior year due to
improved pricing on selected grades of our fax and point of sale applications.
Gross Profit. Gross profit, calculated as net sales less cost of sales,
decreased $7.2 million, or 2.2%, for fiscal 2000 to $327.4 million, compared to
$334.6 million for fiscal 1999. Gross profit margin improved to 30.3% in fiscal
2000, from 29.8% for fiscal 1999. The increase in our gross profit margin was
due to (1) improved pricing for both carbonless and thermal products, (2) a
favorable change in carbonless product mix and (3) our continued focus on cost
reductions, particularly in the area of centralized purchasing activities.
These improvements were partially offset by an increase in raw materials costs
and the decline in carbonless volume.
Selling, General and Administrative. Selling, general and administrative
expenses for fiscal 2000 increased $5.6 million, or 3.5%, to $165.7 million,
compared to $160.1 million for fiscal 1999. Selling, general and administrative
expenses were 15.3% of net sales during fiscal 2000, compared to 14.2% of net
sales in fiscal 1999. The increase as a percent of net sales in fiscal 2000 was
primarily due to a $4.3 million nonrecurring compensation expense associated
with the August 2000 redemption of phantom share units relating to a change in
control of AWA.
Restructuring and Other Charges. During the third quarter of fiscal 1999,
we announced plans to close our Harrisburg plant in fiscal 2001. Restructuring
and other charges associated with this plant closure were $7.8 million in
fiscal 2000 and $44.5 million in fiscal 1999. The restructuring charges in
fiscal 2000 primarily related to severance and benefits for identified
employment terminations, which were implemented in fiscal 2001. The charges
recorded in fiscal 1999 related primarily to asset impairments of $26.4
million, employment termination benefits of $11.3 million and distribution
center exit costs of $6.0 million.
Special Charges. Special charges for fiscal 2000 pertained to (1) Lower Fox
River environmental costs of $3.2 million, (2) a legal settlement during fiscal
2000 resulting in charges of $3.6 million, (3) costs to dismantle and transport
equipment from the Harrisburg plant to the Appleton plant and Roaring Spring
mill of $5.2 million, (4) loss on disposal of equipment of $0.5 million and (5)
the write-off of the notes receivable and equity investment in Paperhub.com, a
proposed internet paper and supplies purchasing business, of $6.5 million.
Special
46
charges for fiscal 1999 pertained to (1) litigation settlements of $21.8
million, (2) Lower Fox River environmental costs of $3.6 million and (3) loss
on disposal of equipment of $2.2 million.
Operating Income. Due to the factors mentioned above, operating income for
fiscal 2000 increased $32.5 million, or 31.7%, to $134.9 million compared to
$102.4 million for fiscal 1999. Operating income as a percentage of net sales
for fiscal 2000 was 12.5% as compared to 9.1% of net sales for fiscal 1999.
Provision for income taxes. The effective income tax rate for fiscal 2000
was 33.5% compared to 26.2% for the prior year. The increase in the effective
rate is primarily attributable to the fiscal 1999 merger of Appleton Holdings
Inc. into Appleton Papers and the subsequent removal of a valuation allowance
associated with net operating loss carryforwards of Appleton Holdings.
Loss from discontinued operations. The loss on discontinued operations, net
of taxes was $13.1 million in fiscal 2000 compared to $55.7 million for fiscal
1999. Operating losses for discontinued operations approximated $27.2 million
and $86.9 million in 2000 and 1999, respectively. Operating losses for the
respective periods primarily related to the operations of Appleton Coated LLC,
asset impairments for Appleton Leasing LLC and restructuring costs for the
Newton Falls mill associated with asset impairments, employee termination
benefits and environmental costs.
Net income. Net income for fiscal 2000 increased $65.7 million to $53.1
million, compared to a net loss of $12.6 million in fiscal 1999. Fiscal 2000's
increase in operating income coupled with a reduction in loss from discontinued
operations primarily accounted for the significant increase as compared to
fiscal 1999.
Liquidity and Capital Resources
Predecessor Period
Prior to the acquisition, we operated as an indirect, wholly owned
subsidiary of AWA. This resulted in a number of intercompany transactions
related to our investing and financing activities. Therefore, the following
discussion regarding our historical cash flows from operating, investing and
financing activities may not be representative of our cash flow and activities
as a separate entity following the acquisition.
We have historically financed our short-term liquidity needs with internally
generated funds, working capital lines of credit and loans from an affiliate of
AWA.
Successor Period
As a result of the acquisition on November 9, 2001, we have significant
amounts of debt requiring interest and principal repayments. Our other
liquidity needs relate primarily to capital expenditures.
Our short-term cash needs are primarily for working capital, capital
expenditures and debt service. We intend to fund our working capital, capital
expenditures, debt service requirements and other contractual obligations
through cash flows from operations and borrowings under the revolving credit
portion of our senior credit facilities. Also, our conversion from a C
corporation to a qualified subchapter S subsidiary, which means we will not be
subject to federal income taxes, should have a positive impact on our future
liquidity and cash flows. The senior credit facilities consist of a $75 million
revolving credit facility and $265 million of term loans. We used approximately
$19.5 million of availability under the revolving credit facility to issue
letters of credit and fully borrowed the term loans. In connection with the
acquisition, we also issued a senior subordinated note due 2008 to AWA with an
aggregate principal amount of $250 million, which was repaid with the proceeds
of the offering of the old notes and other available cash. In addition,
Paperweight Development agreed to pay one of the sellers a deferred payment
obligation, which had a present value of $140 million at the closing of the
acquisition.
47
Cash Flows from Operating Activities. Net cash provided by operating
activities of continuing operations was $119.7 million for the predecessor
company for the period December 31, 2000 to November 9, 2001 and $25.5 million
for the successor company for the period November 10, 2001 to December 29, 2001
as compared to $115.8 million for fiscal 2000. Reductions in accounts
receivable and inventories in 2001 more than offset the reductions in net
income from continuing operations. Accounts receivable decreased primarily due
to lower sales and a reduction in past due account balances. Inventories
declined primarily as a result of a next-day basestock inventory program
initiated during the first quarter of fiscal 2001.
Net cash provided by operating activities of continuing operations decreased
to $115.8 million during fiscal 2000, compared to $142.6 million in fiscal
1999. This change was primarily due to the net effect of an increase in income
from continuing operations, a decrease in inventories and an increase in
accrued income taxes, offset by reductions in deferred income taxes and
accounts payable and other accrued liabilities and an increase in accounts
receivable. Year end fiscal 2000 inventories declined primarily due to customer
pre-buying in response to an announced price increase effective January 2, 2001
compared to fiscal 1999. The increase in accounts receivable was primarily due
to accelerated cash receipts from customers at the end of fiscal 1999. Accounts
payable and other accrued liabilities decreased primarily due to reductions in
accruals for the Lower Fox River expense, customer rebates and employee bonuses
compared to fiscal 1999.
Cash Flows from Investing Activities. During the past three fiscal years,
we invested heavily in our facilities, including restructuring our
manufacturing base and re-installing the equipment originally located at our
Harrisburg plant. During fiscal 2001, fiscal 2000 and fiscal 1999, capital
expenditures were $56.5 million, $81.1 million and $37.7 million, respectively.
The senior credit facilities do not permit us to make capital expenditures
during any fiscal year in excess of the amount indicated:
Fiscal Year Amount
----------- ------------
2002................................ $ 60,000,000
2003................................ $50,000,000
2004 and each fiscal year thereafter $45,000,000
The indenture under which we issued the notes does not permit us to make
capital expenditures during any fiscal year in excess of the amount indicated:
Fiscal Year Amount
----------- -----------
2002................................ $70,000,000
2003................................ $60,000,000
2004 and each fiscal year thereafter $55,000,000
Under the senior credit facilities and the indenture, we may carry forward
up to 50% of any unexpended amounts for capital expenditures to the next
succeeding fiscal year. We may also make capital expenditures with the proceeds
from sales of our assets. We project that our capital expenditures will be
approximately $50.4 million in 2002, approximately $12 million of which will be
used for capital expenditures relating to Project Venture. Project Venture is
our name for the installation of a new enterprise resource planning system,
which is a computer software system used for invoicing, financial reporting,
shipment planning and manufacturing operations. We anticipate that our total
capital expenditures for Project Venture will be approximately $22.6 million.
We believe that the limitations described above will permit us to carry out our
planned capital expenditures during 2003 and each fiscal year thereafter.
Net cash used by investing activities of continuing operations was $321.5
million for the period from November 10, 2001 to December 29, 2001. Of this
amount, $314.8 million was used to complete the acquisition of Appleton Papers.
In addition, $6.7 million pertained to various machinery and equipment capital
expenditures. Net cash used by investing activities of continuing operations
was $40.8 million for the period from
December 31, 2000 to November 9, 2001. Of this amount, $49.8 million pertained
to various machinery and equipment capital expenditures, which was partially
offset by $9.0 million of proceeds from the sale of the Harrisburg facility.
48
Net cash used by investing activities of continuing operations was $157.1
million in fiscal 2000. Of this amount, $81.1 million pertained to various
machinery and equipment capital expenditures. In addition, $46.0 million was
used to purchase the remaining 20% minority interest in an AWA affiliate. In
fiscal 2000, we also invested $30.1 million in equipment that was previously
under a capital lease.
Net cash used by investing activities of continuing operations was $20.8
million in fiscal 1999. Of this amount, $37.7 million pertained to various
machinery and equipment capital expenditures. In fiscal 1999, we purchased the
remaining 20% minority interest in an AWA affiliate for approximately $42.1
million. The fiscal 1999 purchase of the minority interest was offset by $58.0
million in proceeds from the sale of our interest in an affiliated company.
Cash Flow From Financing Activities. Net cash provided by financing
activities of continuing operations was $331.8 million for the successor
period. Of this amount, $484.5 million represented the net proceeds from the
issuance of long-term debt, which was used to finance the acquisition of
Appleton Papers and for the repayment of the $250 million senior subordinated
note held by AWA. Proceeds from the issuance of Paperweight Development common
stock of $106.8 million, or $104.7 million net of stock issuance costs, were
also used to finance the acquisition of Appleton Papers. Finally, $7.4 million
was paid to AWA related to the net proceeds from the sale of the Harrisburg
plant. Net cash used by financing activities of continuing operations was $40.6
million for the fiscal 2001 predecessor period. During this period, we used
cash generated by operations and loan proceeds of $159.1 million from an AWA
affiliate to repay $160.2 million of external debt and $45.7 million of loans
from affiliated companies.
Net cash provided by financing activities was $61.6 million in fiscal 2000.
We received loan proceeds of $189.6 million from an AWA affiliate which was
used, in part, to repay $140.3 million in external and intercompany debt.
Net cash used by financing activities was $130.3 million in fiscal 1999. We
used cash generated by operations and the sale of our interest in an affiliated
company, including loan proceeds of $372.9 million from an AWA affiliate, to
repay $504.9 million in external and intercompany debt.
On November 9, 2001, we entered into an agreement that provides up to $340
million of senior credit facilities. The senior credit facilities are comprised
of the following: a four year credit facility of up to $75 million for
revolving loans, including letters of credit; a four year term loan of $115
million; and a five year term loan of $150 million. Borrowings under the
revolving credit facility and the $115 million term loan bear interest at LIBOR
plus 3.5% per annum. Borrowings under the $150 million term loan bear interest
at LIBOR plus 4.25% per annum, subject to a minimum LIBOR rate of 2.5%. The
LIBOR rate at December 29, 2001 was 1.9%. The interest rate payable on the
revolving credit facility and $115 million term loan is subject to adjustment
after six months based on the achievements of certain financial covenants. The
senior credit facilities are unconditionally and jointly and severally
guaranteed by Paperweight Development and WTA Inc., one of our wholly owned
subsidiaries.
On December 14, 2001, we issued $250 million in aggregate principal amount
of 12 1/2% senior subordinated notes due 2008, which were used to redeem in
full, at par, the senior subordinated note due 2008 held by AWA.
The notes are unsecured obligations of Appleton Papers, are subordinated in
right of payment to all of our senior debt and are unconditionally and jointly
and severally guaranteed by Paperweight Development and WTA Inc. Interest on
the notes is payable semi-annually in June and December of each year. The first
interest payment will be made on June 15, 2002. Prior to December 15, 2004, and
after 100% application toward the repayment of the senior credit facilities, we
may use the proceeds of certain sales of our equity to redeem up to 35% of the
original principal amount of the notes at a redemption price of 112.5% of their
principal amount, plus accrued and unpaid interest to the redemption date.
49
Except as described in the preceding paragraph, the notes will not be
redeemable at our option prior to December 15, 2005. On or after December 15,
2005, we may redeem during the twelve-month period beginning on December 15 of
the applicable year all or a part of the notes at the redemption prices of
106.25% in 2005, 103.125% in 2006, and 100% in 2007 and thereafter, plus
accrued and unpaid interest and liquidated damages.
Both the senior credit facilities and the indenture under which the notes
were issued contain affirmative and negative covenants. In general, the
covenants contained in the senior credit facilities are more restrictive than
those of the indenture under which the notes were issued. Among other
restrictions, the covenants contained within the senior credit facilities
require us to meet specified financial tests, including various debt and cash
flow ratios which become more restrictive over the term of the debt.
Paperweight Development incurred approximately $2.2 million of costs in
conjunction with the issuance of common stock to the KSOP. The appropriate
netting of these costs with the $106.8 million of proceeds received from the
KSOP resulted in a technical default under our minimum net worth covenant at
the date of the acquisition of Appleton Papers and during a limited portion of
the successor period. In conjunction with the terms of the senior credit
facilities, we obtained a waiver related to this technical covenant violation
and we are in compliance with this covenant as of December 29, 2001.
The senior credit facilities and indenture also contain covenants which,
among other things, restrict our ability and the ability of the guarantors of
the senior credit facilities and notes to incur liens, engage in transactions
with affiliates, incur additional indebtedness, declare dividends or redeem or
repurchase capital stock, make loans and investments, engage in mergers,
acquisitions, consolidations and asset sales, acquire assets, stock or debt
securities of any person, make capital expenditures, terminate the S
corporation status of Paperweight Development or the qualified subchapter S
subsidiary status of its subsidiaries eligible to elect such status, amend our
other debt instruments and amend other agreements related to the acquisition.
Our anticipated needs for capital through fiscal 2002 will consist primarily
of (1) interest payments on the notes and interest and principal due under the
senior credit facilities, (2) potential increases in working capital driven by
the growth of our thermal business and new business development and (3) capital
expenditures. Management believes that funds generated from operations and
funds available under our revolving credit facility will be sufficient to
satisfy our debt service obligations, working capital requirements and plans
for capital expenditures.
Disclosure About Critical Accounting Policies
Our accounting policies are disclosed in our Notes to the Consolidated
Financial Statements. There have been no material changes to these policies
during fiscal 2001. The more critical of these policies involve the use of
estimates in valuing environmental liabilities, restructuring provisions and
reserves, income taxes, inventory and accounts receivable.
Environmental. Accruals for losses associated with environmental
obligations are recorded when it is probable that a liability has been incurred
and the amount of the liability can be reasonably estimated based on existing
legislation and remediation technologies. These accruals are adjusted
periodically as assessment and remediation actions continue and/or further
legal or technical information develops.
Restructuring. Charges related to involuntary termination benefits are
recognized in the period management approves the plan of termination and all of
the following conditions exist: (1) prior to the date of the financial
statements, management having the appropriate level of authority to
involuntarily terminate employees approves and commits us to the plan of
termination and establishes the benefits that current employees will receive
upon termination; (2) prior to the date of the financial statements, the
benefit arrangement is communicated to employees in sufficient detail to enable
employees to determine the type and amount of benefits they will receive if
they are terminated; (3) the plan of termination specifically identifies the
number of
50
employees to be terminated, their job classifications or functions, and their
locations; and (4) the period of time to complete the plan of termination
indicates that significant changes to the plan of termination are not likely.
Other costs to exit an activity are recognized when management approves the
plan to exit an activity, the cost is incremental to other costs incurred by
us, the cost will be incurred as a direct result of the exit plan or the cost
represents amounts to be incurred by us under a contractual obligation that
existed prior to the commitment date and will either continue after the exit
plan is completed with no economic benefit to us or be a penalty incurred by us
to cancel the contractual obligation. The ultimate costs associated with these
termination and exit activities may differ from original estimates.
Income taxes. In conjunction with the acquisition of Appleton Papers,
Paperweight Development elected to be treated as a subchapter S corporation and
elected to treat its eligible subsidiaries, including Appleton Papers, as
qualified subchapter S subsidiaries, for U.S. and state income tax purposes. As
a result of these elections, we do not expect to incur any future U.S. income
tax liability and we expect to incur minimal state income tax liability. Our
current income tax liability consists of non-indemnified liabilities for LIFO
recapture taxes and our 50% share for adverse tax rulings for amounts between
$5 million and $10 million related to various C corporation tax years prior to
the closing of the acquisition currently under review by the IRS. All other
amounts related to tax exposures for C corporation tax years are fully
indemnified by AWA.
Inventories. We value inventories primarily at the lower of cost or market.
Cost is determined using the last-in, first-out, or LIFO, method for finished
goods, work in process and raw materials. Stores and spare parts inventory are
valued at average cost and other inventory is valued using the first-in,
first-out, or FIFO, method. Valuing inventories at the lower of cost or market
requires the use of estimates and judgment relating to excess and obsolete
inventory. Any actions taken by our customers that could impact the value of
our inventory are considered when determining the lower of cost or market
valuations.
Accounts Receivable. We value accounts receivable net of an allowance for
uncollectible accounts. This allowance is based on our estimate of the portion
of the receivables that will not be collected in the future. The ultimate
collectibility of a receivable is dependent upon the financial condition of an
individual customer, which could change rapidly and without advance warning.
Additional disclosures concerning liquidity and capital resources, including
"off-balance sheet" arrangements.
On January 22, 2002, the SEC issued a release entitled "Commission Statement
about Management's Discussion and Analysis of Financial Condition and Results
of Operations," which we refer to as the MD&A release. Below are our responses
to each of the areas addressed by the MD&A release.
Liquidity Disclosures. The MD&A release states that management should
consider the following to identify trends, demands, commitments, events and
uncertainties that require disclosure:
. Provisions in financial guarantees or commitments, debt or lease
agreements or other arrangements that could trigger a requirement for an
early payment, additional collateral support, changes in terms,
acceleration of maturity, or the creation of an additional financial
obligation, such as adverse changes in the registrant's credit rating,
financial ratios, earnings, cash flows, or stock price, or changes in
the value of underlying, linked or indexed assets.
As disclosed in our fiscal 2001 Consolidated Financial Statements, we
entered into $340 million of senior credit facilities and issued $250
million in aggregate principal amount of notes in conjunction with the
acquisition of Appleton Papers. The senior credit facilities and the
indenture require us to meet affirmative and negative covenants. In
general, the covenants contained in the senior credit facilities are
more restrictive than those of the indenture. Among other restrictions,
the covenants contained within the senior credit facilities require us
to meet specified financial tests, including various debt and cash flow
ratios which become more restrictive over the term of the loans. If we
default on any of these
51
provisions, it could require the repayment of the amounts outstanding,
which were approximately $523.7 million as of December 29, 2001.
Paperweight Development incurred approximately $2.2 million of costs in
conjunction with the issuance of common stock to the KSOP. The
appropriate netting of these costs with the $106.8 million of proceeds
received from the KSOP resulted in a technical default under our minimum
net worth covenant at the date of the acquisition of Appleton Papers and
during a limited portion of the successor period. In conjunction with
the terms of the senior credit facilities, we obtained a waiver related
to this technical covenant violation and we are in compliance with this
covenant as of December 29, 2001. Based on management's expectations for
2002, we anticipate that we will be able to comply with these covenants.
. Circumstances that could impair a registrant's ability to continue to
engage in transactions that have been integral to historical operations
or are financially or operationally essential, or that could render that
activity commercially impracticable, such as the inability to maintain a
specified investment grade credit rating, level of earnings, earnings
per share, financial ratios or collateral.
At this time, we are not aware of circumstances that could reasonably be
expected to impair our ability to continue to engage in our operations
in the future.
. Factors specific to a registrant and its markets that the registrant
expects to be given significant weight in the determination of the
registrant's credit rating or will otherwise affect the registrant's
ability to raise short-term and long-term financing.
We believe that the following factors could reasonably be given
significant weight in the determination of our credit rating or could
otherwise adversely affect our ability to raise short-term and long-term
financing:
. our highly leveraged balance sheet,
. the declining market for our carbonless paper,
. an actual rate of decline in the market for our carbonless paper that
may be greater than the rate projected by us,
. our customer concentration, and
. our reliance on a small number of suppliers for a significant portion
of our raw materials.
. Guarantees of debt or other commitments to third parties.
We do not have any significant guarantees of debt or other commitments
to third parties.
. Written options on non-financial assets (for example, real estate puts).
We do not have any written options on non-financial assets.
Off-Balance Sheet Arrangements. The MD&A release indicates that registrants
should consider the need to provide disclosures concerning transactions,
arrangements and 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. We had no such
arrangements at December 29, 2001.
Disclosures about Contractual Obligations and Commercial Commitments. In
the MD&A release, the SEC notes that current accounting standards require
disclosure concerning a registrant's obligations and commitments to make future
payments under contracts, such as debt and lease agreements, and under
contingent commitments, such as debt guarantees. The SEC has stated that it
believes that investors would find it beneficial if aggregated information
about contractual obligations and commercial commitments were provided in a
single location so that a total picture of obligations would be readily
available. They further suggested that one useful aid to presenting the total
picture of a registrant's liquidity and capital resources and the integral role
of on- and off-balance sheet arrangements may be schedules of contractual
obligations and commercial commitments as of the latest balance sheet date.
52
In response to this guidance, we have prepared the following schedule to
summarize our obligation to make future payments under various contracts as of
December 29, 2001:
Payment Due by Period
---------------------------------------------
Less Than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
- ----------------------- -------- --------- -------- -------- --------
(dollars in thousands)
Long-Term Debt................................ $665,546 $24,125 $ 64,334 $176,541 $400,546
Capital Lease Obligations..................... 4,679 643 1,163 1,065 1,808
Operating Leases.............................. 31,100 7,712 13,623 8,785 980
Unconditional Purchase Obligations(1)......... 151,812 44,034 71,153 32,225 4,400
Other Long-Term Obligations (2)............... 78,702 3,922 8,266 14,522 51,992
-------- ------- -------- -------- --------
Total Contractual Cash Obligations..... $931,839 $80,436 $158,539 $233,138 $459,726
======== ======= ======== ======== ========
- --------
(1)Represents contractual arrangements for the purchase of raw materials with
various suppliers.
(2)Represents obligations for pension, post retirement health benefits and
deferred compensation payments.
In addition to the contractual obligations listed above, it will also be
necessary for us to use cash to satisfy our 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 and employment termination and changes in share
valuation.
Estimate of Potential Commitment per Period
-------------------------------------------
Less Than 1-3 4-5
Other Commitments Total 1 Year Years Years
----------------- ------- --------- ------- -------
(dollars in thousands)
Share Repurchase Liability $99,934 $13,490 $33,169 $53,275
We expect 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 pretax basis, a percentage of their pay in an amount equal to
between 2 percent and 50 percent of their annual compensation. Participants
have the option of directing their deferrals to the Vanguard Fund, the Company
Stock Fund, or a combination of both. We believe that new deferrals from
employees into the Company Stock Fund for the five year period presented above
will aggregate approximately $39 million which would reduce the repurchase
liability set forth in the table above.
Deferrals directed to the Company Stock Fund will accumulate in a short-term
interest bearing account within the ESOP trust until the next valuation date,
June 30th or December 31st. At that time, these deferrals, and the interest
earned on these amounts, will be used to purchase shares based upon the price
of a share of Paperweight Development common stock on the valuation date
preceding or following the date on which the participant made the deferrals,
whichever is lower.
Disclosures about certain trading activities that include non-exchange
traded contracts accounted for at fair value. We do 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. We disclosed the effects of transactions with related parties in
Notes 4 and 6 of the Notes to Consolidated Financial Statements. There were no
other significant transactions with related and other certain parties.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates and
commodities. To reduce these risks, we selectively use financial instruments
and other proactive management techniques.
Interest rate risk. We are exposed to interest rate volatility with regard
to our existing senior credit facilities. Primary exposure includes movements
in the U.S. prime rate and London Interbank Offer Rate, or LIBOR. Borrowings
under the senior credit facilities bear interest at LIBOR plus a spread.
53
In February 2002, we entered into an interest rate protection cap under
which LIBOR is capped at 6% plus the spread, for a cost of $0.2 million. The
rate protection is for two years and covers 50% of our borrowings under the
senior credit facilities. The amount of principal protected declines in
conjunction with mandatory principal repayments.
It is our intention to pay down the borrowings under the senior credit
facilities within two to three years. We believe a shift in interest rates will
not have a material effect on our consolidated financial position, statement of
operations or cash flows.
Commodity prices. We are subject to effects of changing raw material costs
caused by movements in underlying commodity prices. We are exposed to
fluctuating market prices for commodities, including pulp, chemicals and
basestock. We have established programs to manage commodity prices through
effective negotiations with suppliers. As listed within our contractual
obligations, we enter into contracts with our vendors to lock in commodity
prices at various times and for various periods to limit our near-term exposure
to fluctuations in raw material prices.
New Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. As amended, SFAS No. 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. We adopted
SFAS No. 133, as amended, in fiscal 2001. The adoption of this statement did
not have a material impact on our financial position, results of operations or
cash flows.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." The statements eliminate the pooling-of-interests method of
accounting for business combinations and require that goodwill and certain
intangible assets not be amortized. Instead, these assets will be reviewed for
impairment annually with any related losses recognized in earnings when
incurred. As the acquisition was completed on November 9, 2001, we have
accounted for it under the provisions of SFAS No. 141 and SFAS No. 142.
In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which is effective for fiscal years
beginning after June 15, 2002, requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period in which it is
incurred. When the liability is recorded, the entity capitalizes the costs of
the liability by increasing the carrying amount of the related long- lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. We
are required to adopt SFAS No. 143 in fiscal 2003. We are currently evaluating
the impact of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long- Lived Assets," which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" and the accounting and reporting provisions of Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and is effective for us in fiscal 2002. We
anticipate that this statement, upon adoption, will not have a significant
impact on our financial position or results of operations.
54
BUSINESS
Overview
We are a leading developer and manufacturer of specialty, high value-added
coated paper products. We believe that we are the world's largest producer of
carbonless paper and the largest producer of thermal paper in the United States
and Canada. Carbonless paper is used in multi-part forms, such as invoices,
insurance claim forms, medical claim forms and credit card receipts. Thermal
paper is used in a range of products including point of sale receipts, labels,
event and travel tickets and facsimile paper. We manufacture our carbonless and
thermal paper products using highly technical processes that involve the
application of specialized dyes and reactive chemicals onto varying grades of
paper. When carbonless paper is subjected to pressure, and thermal paper to
heat, these dyes and chemicals react to create an image on the paper. In
addition to carbonless and thermal products, we produce a variety of other
niche coated products.
Our Competitive Strengths
Market Leader. We believe our leading position in the markets for our core
products results in meaningful competitive advantages and greater
profitability. We believe that we have earned customer loyalty and captured
market share due to our range of products, emphasis on quality, customer
support services and innovation.
Upgraded, Cost-Competitive Manufacturing Facilities. Between fiscal 1997
and fiscal 2001, we invested approximately $259 million in capital improvements
at our manufacturing facilities, of which $23 million was spent to comply with
applicable environmental regulations. Among other benefits, these expenditures
have reduced our manufacturing costs and have improved cycle times and the
quality of our products. As a result of these investments and other
initiatives, we have been able to reduce costs by more than $20 million per
year between fiscal 1998 and fiscal 2001 for a total savings of approximately
$74 million. In addition, during the first half of fiscal 2001 in order to
improve our operating structure and achieve further efficiencies, we completed
the reorganization of our manufacturing facilities by closing our Harrisburg,
Pennsylvania plant and relocating two large coating machines and other
equipment to our Appleton, Wisconsin plant and Roaring Spring, Pennsylvania
mill. These initiatives have enabled us to maintain our Adjusted EBITDA margin
at or above 13% of net sales over the past three fiscal years. In addition, we
expect that our significant investments in capital improvements over the last
several years will enable us to reduce our capital spending in upcoming years.
Efficient Manufacturing Structure. We produced approximately 500,000 tons
of carbonless and thermal paper in fiscal 2001. We believe that our significant
annual production combined with our highly efficient paper mill structure
provides us with a competitive cost position in the marketplace. Our pulp and
paper mills in West Carrollton, Ohio and Roaring Spring, which operate at full
capacity 24 hours per day, seven days per week, are able to produce uncoated
plain paper, which we call basestock, from pulp and apply the carbonless
coatings in the same process. We believe we are the only U.S. producer of
carbonless paper which uses on-machine coating to apply microcapsules. Our
mills are complemented by our Appleton plant, which employs flexible
off-machine coaters to produce our thermal grades and shorter-run, specialty
carbonless grades and to fulfill customer orders above available capacity at
our paper mills. If, as we expect, demand for carbonless paper continues to
decline, we plan to reduce carbonless production at our Appleton plant while
maintaining full production at our more cost-effective paper mills. We intend
to redirect the resulting increased available capacity at our Appleton plant to
the production of thermal products and new products developed through our new
business initiatives.
Superior Technological Expertise and Innovation. We believe that our
technological expertise and product development capabilities distinguish us
from our competitors and will enable us to continue to develop
55
new specialty, high value-added coated paper products. Since the late 1960s
when we co-introduced and commercialized thermal paper, we have continued to
expand the capabilities of our thermal products by improving image quality and
stability, resistance to environmental factors and printing characteristics. By
combining our proprietary expertise in encapsulation technology, coating
chemistry and coating application processes, we have established a platform
from which we are developing innovative new products and improvements in
response to our customers' needs. Our customers have validated our
technological innovation, as 64% of our fiscal 2001 thermal sales consisted of
grades that we developed since 1997. We have also applied our research and
development capabilities to respond to new market opportunities for our
encapsulation technology and coating processes. For example, we used our
coating materials and formulation expertise to develop and commercialize a new
product specifically designed for high speed, digital ink jet printing presses.
In addition, we are developing a paper product that adheres to other surfaces
when pressure is applied and that does not require a disposable, peel-away
sheet, which uses our proprietary encapsulation technology, and we are also
developing a new coating to insulate hot beverage containers.
High Level of Customer Support and Service. Through our Customer Focused
Quality process, we maintain a high level of customer service which has been
instrumental to our becoming essentially the sole provider for seven of our top
ten carbonless customers and two of our top ten thermal customers. We offer our
customers a comprehensive range of high quality carbonless and thermal
products, a responsive, nationwide system of eight distribution centers with
99% in-stock availability in fiscal 2001 and value-added services, the
combination of which, we believe, strengthens our customers' operations and
improves their satisfaction.
Experienced Management Team and 100% Employee Ownership. Our 13 member CEO
team, identified under the heading "Management--Directors and Executive
Officers," has an average of over 15 years of experience at Appleton Papers and
has developed a strong infrastructure of managers, personnel and systems. We
believe that our team of over 2,500 employees, who have an average of 16 years
of service with Appleton Papers, are dedicated, customer focused and loyal. We
currently enjoy good relations with our union workforce and have recently
completed extensions of all three of our major labor contracts by five or more
years. As a result of the acquisition, we have been 100% employee owned since
November 9, 2001. We believe that this ownership structure has created
meaningful incentives for all of our employees to continue to focus on our
customers and deliver strong financial performance.
Our Business Strategy
Focus on Attractive Market Segments. Our sales and marketing efforts are
focused on the higher margin, value-added segments of carbonless and thermal
paper and selected international markets. In the carbonless market, we have
worked to develop relationships with merchants that sell carbonless sheets to
small printer accounts. As a result of these efforts, and the historically
slower rate of decline in the carbonless sheet market, we expect our higher
margin carbonless sheets to contribute a growing portion of our overall
carbonless gross profit. In the thermal market, we have targeted our sales,
marketing and product development efforts on value-added products within the
non-fax segments, particularly the point of sale, label and tag and ticket
segments. An example of a newly developed application is our dual color thermal
point of sale receipt. As part of this effort, we have developed relationships
with key strategic converters, original equipment manufacturers and end users
in order to create demand for unique thermal applications. Within the
international market, we believe that Mexico and Central and South America
represent growth opportunities for sales of our carbonless products due to the
lower incidence of technological substitution, such as the replacement of
impact printers with laser printers.
Capitalize on Market Differentiation. We intend to continue to
differentiate our company by providing our customers with the broadest range of
the highest quality products in the industry, along with superior customer
service. As part of our Customer Focused Quality process, we will continue to
provide our customers with our unconditional satisfaction guarantee. We resolve
any problem, replace any product or refund product cost if our customer is not
completely satisfied. We also strive to increase the efficiency of our
customers' operations by uniquely developing electronic system links,
maintaining our 99% rate of in-stock availability
56
and our 99% rate of on-time delivery and offering support services such as
technical seminars, warehouse consultations and training programs. We believe
that maintaining our focus on the breadth of our product offering and providing
a high level of customer service differentiates us from our competitors and
enhances our financial performance.
Pursue Operational Efficiency. We continuously pursue cost savings through
purchasing initiatives, improved product design and enhanced manufacturing
processes which result in higher finished product yields and reduced paper
coating costs. We have been steadily increasing our internally generated
basestock use as a percentage of our total basestock use from 45% in fiscal
1997 to 70% in fiscal 2001. We expect that our more efficient internal pulp and
basestock production, which uses on-machine coaters, will substantially reduce
our higher cost purchases of external basestock over the next five years.
Leverage Core Technology into New Product Initiatives. We believe that our
core competencies of encapsulation technology, coating chemistry and coating
application processes can be leveraged into new product applications. In the
thermal paper market, we have developed new applications for the point of sale,
label and tag and ticket markets. For example, our thermal POS Plus(R) product
was developed by leveraging our existing thermal coating chemistry and
application knowledge and experience. This high performance thermal point of
sale product is now used by retailers such as Wal-Mart Stores, Inc. and Kohl's
Corporation. Our NBD team is focusing on applying our core encapsulation and
coating technologies in targeted markets such as labels, packaging and security
products. For example, this process has resulted in the development of one
product that has been commercialized for the high speed digital printing
industry, an arts and crafts product currently in test market, and four other
products scheduled for introduction in 2002. We intend to continue to leverage
our core technology and capabilities to pursue new business development
opportunities with the goal of enhancing our future cash flow and overall
financial performance.
Risk Factors
As discussed under the heading "Risk Factors" in this prospectus, our
business and operating results are subject to a number of risks. For example:
. We have a highly leveraged balance sheet. Our consolidated operating
company debt and deferred payment obligation was approximately $670.2
million at December 29, 2001.
. We depend on a small number of customers. Our five largest customers for
carbonless products accounted for approximately 51% of our carbonless
net sales in fiscal 2001 and our five largest customers for thermal
products accounted for approximately 57% of our thermal net sales in
fiscal 2001.
. The market for our primary product is declining. Carbonless paper
accounted for 80.1% of our net sales in fiscal 2001, and our total sales
volume of carbonless products in fiscal 2001 declined 12.7% as compared
to fiscal 2000.
. We are subject to substantial costs and potential liabilities relating
to environmental regulation and litigation, which may increase our
operating expenses, require continuing capital expenditures and
adversely affect the operating flexibility of our manufacturing
operations.
For a more comprehensive discussion of the risks relating to our business
and operating results, please refer to the "Risk Factors" section in this
prospectus.
Company Background
Appleton Coated Paper Company, or ACPC, began operations in 1907 in what is
now our Appleton plant. In 1953, ACPC began working with National Cash Register
Company, which later changed its name to NCR Corporation, on the development
and production of carbonless paper. In 1954, NCR began marketing its NCR
Paper(R) brand of carbonless paper, which ACPC manufactured.
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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. The Appleton Papers division of NCR
was formed through the merger of ACPC with Combined Paper Mills, Inc.
In 1978, Appleton Papers Inc., as a subsidiary of BAT Industries Inc.,
acquired the assets of the Appleton Papers division from NCR. In 1990, we,
together with The Wiggins Teape Group Ltd., were separated from BAT Industries
to form Wiggins Teape Appleton plc, a public company listed on the London Stock
Exchange. Later that same year, Wiggins Teape Appleton merged with Arjomari
Prioux SA, a public French paper manufacturer and merchant. Arjomari retained
its listing in Paris and, upon completion of the merger, Arjomari owned 39% of
Wiggins Teape Appleton. Shortly after the merger, the group changed its name to
Arjo Wiggins Appleton p.l.c. Prior to the acquisition, we were an indirect,
wholly owned subsidiary of Arjo Wiggins Appleton p.l.c., which is now known as
Arjo Wiggins Appleton Limited or AWA, a leading European manufacturer of paper
products.
Industry Overview
The following industry information including size of markets, net sales,
product mix, and growth and decline rates are estimates derived from our
internal assessments, which are based on a variety of sources, including
publicly available data and information obtained from customers and other
industry sources and management estimates.
Carbonless Paper
We, together with NCR, invented and introduced carbonless paper in 1954.
Carbonless paper is generally used in multi-part forms that are used by
organizations to simultaneously generate multiple copies from an original
document. Typical forms consist of two or three plys of paper. Common examples
include invoices, packing slips, insurance claim forms, credit card receipts
and duplicate checks. Carbonless paper is so named because it allows an image
to be transferred from one sheet to the next without the messy black carbon
tissue paper originally used in multi-part forms. Based on our internal
assessment of the U.S. carbonless market, we believe that in 2001 the U.S.
carbonless market totaled approximately 609,000 tons. Carbonless products are
sold in large rolls or in pre-cut sheets. In 2001, on the basis of tons
shipped, the market was comprised of approximately 83% rolls and 17% sheets.
Carbonless paper is used in a diverse group of end markets, including
government, retail, financial, insurance and manufacturing, with no one segment
dominating demand. Use in many of these markets is tied to economic growth
which impacts the number of transactions completed in a given year. As such,
periods of economic growth or contraction can impact demand. Sales of
carbonless products historically have not been significantly impacted by
seasonality.
The carbonless market experienced rapid growth during the 1980s as
carbonless paper replaced carbon tissue based multi-part forms, economic growth
fueled increased business activity and forms usage and businesses began to make
greater use of computers which also increased overall forms demand. Based on
our internal assessment, the U.S. carbonless market peaked in 1994, with total
tonnage of approximately 890,000 tons. Since 1994, the U.S. carbonless paper
market has been in decline. The decline is the result of an increased use by
businesses of competing technologies, which do not use impact printing to
create images, such as digital laser printers, ink jet printers, thermal
printers and electronic communications.
Based on our internal assessment, we believe that the annual rates of
decline in the U.S. carbonless market from 1994 to 1999 were between 1% and 7%,
with a compound annual rate of approximately 4% during this period. On the same
basis, we estimate that the U.S. carbonless paper market declined by
approximately 10% in 2000 and 9% in 2001 and will decline at a compound annual
rate of approximately 9% between 2002 and 2005. We attribute these varying
rates of decline to changes in economic conditions as reflected by the Gross
Domestic Product which result in fluctuations in the number of commercial
transactions in which our products are used, as
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well as changes in technological substitution rates. For example, a study by
CAP Ventures indicates that the percentage decline in the number of impact
printers used in the United States varied from 6.3% to 44.8% during 1994 to
1999. We believe that the average rate of decline from 2002 to 2005 will
accelerate compared to the 1994 to 1999 decline rates due to increasing
acceptance of substitute technology. We expect the rate of decline for
carbonless sheets in the United States to be lower than the rate of decline for
rolls, as has been the historical case, because there are fewer economically
viable substitute technologies for sheet applications than there are for roll
applications. One key reason for this difference is that, when used, most
carbonless sheet forms are handwritten rather than mechanically impact printed.
Additionally, small businesses buy a significant portion of carbonless sheet
forms for low volume applications and we believe they will be less likely to
incur the expense of substitute technologies. We believe that the higher rate
of decline for carbonless rolls is because roll forms are typically sold to
medium-sized to large businesses which are better positioned to implement
substitute technologies more rapidly. Despite these changing industry dynamics,
our carbonless roll and sheet prices have remained relatively stable over the
last ten years.
The U.S. carbonless market currently consists of only a few
manufacturers--Appleton, MeadWestvaco Corporation and Imation Corp. In 2001,
these three producers produced over 94% of the carbonless paper sold in the
U.S. market, after giving effect to industry consolidation in 2001. Because of
the technological complexity, breadth of product offerings, high level of
service required to effectively meet customer needs, significant required
investments in manufacturing, equipment, research and development and local
inventories and declining market demand, there have been no substantial new
domestic or international entrants in the U.S. carbonless market in recent
years.
Thermal Paper
We were a pioneer in the development of thermal paper. Working along with
NCR, we created direct thermal technology in the late 1960s. Thermal paper is
used in a wide variety of applications in five principal segments. The point of
sale segment consists of retail receipts. The label segment consists of
industrial and weigh scale labels. The tag and ticket segment consists of
entertainment, lottery and transportation tickets. The fax segment consists of
facsimile paper. The printer/calculator/chart segment consists of older
generation medical diagnostic charts. The following table sets forth the
approximate U.S. and Canadian markets breakdown for 2001 based on our internal
assessment of tons shipped for the five thermal product segments:
% of
Market
------
Point of Sale........... 44%
Label................... 29%
Tag and Ticket.......... 15%
Fax..................... 8%
Printer/Calculator/Chart 5%
Based on our internal assessment, the U.S. and Canadian thermal markets in
2001 totaled approximately 162,800 tons. Additionally, based on our internal
assessment, we estimate that total thermal consumption outside the United
States and Canada in 2001 was estimated to be 457,000 tons.
The U.S. and Canadian thermal markets experienced strong growth during the
1980s and 1990s and are expected to continue growing as the advantages of
thermal printing systems become more widely recognized. These advantages
include its competitive cost, use of a single consumable (thermal paper) versus
other printing systems which require paper and ink or toner cartridges, quiet
operation, cleanliness, speed, high print quality, reliability and portability.
Based on our internal assessment, we estimate that the annual rates of growth
in the U.S. and Canadian thermal markets from 1994 to 2000 were between
approximately 4% and 13%, averaging approximately 7% per year during this
period. On the same basis, we estimate that these markets grew by approximately
0.2% in 2001. We attribute this lower growth rate in 2001 to a slower economy
and reduced travel due to the September 11/th / terrorist attacks. Based on our
internal assessment, we expect the market to recover,
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and we believe these markets will continue to grow at a compound annual rate of
approximately 4.4% between 2002 and 2005. Historically, a large part of this
growth consisted of thermal fax paper which peaked in 1994 with a volume of
64,000 tons. Fax applications are moving rapidly to plain paper fax machines or
electronic communications, such as email. Based on our internal assessment, the
non-fax segment of the thermal market, which consists primarily of value-added
grades, is expected to account for approximately 99% of the U.S. and Canadian
thermal markets by 2005, up from 92% in 2001. We estimate annual growth between
2001 and 2005 in the non-fax segment to be approximately 6%.
Based on our internal assessment, we believe we had approximately 39% of the
combined U.S. and Canadian thermal markets in 2001, more than twice as large as
the approximately 18% share of our closest competitor, the Koehler Group, a
German-based manufacturer. In 2001, the top four producers comprised an
estimated 85% of the total market. The competitive nature of the thermal paper
market has varied over the past five years due to worldwide capacity and demand
balance shifts. For example, during 1999 to mid 2000, a market supply shortfall
caused prices in the fax and point of sale segments to increase. Since this
period, however, capacity additions by several producers including us have
eliminated the shortfall and prices have fallen. Additionally, Koehler
announced that it built a large paper machine and thermal coater in Germany,
which began production in late 2001. This new capacity is expected to
negatively impact point of sale and fax prices over the next several years.
Products
Carbonless Paper. We sell all of our carbonless roll and sheet products
under the umbrella brand of NCR Paper(R). We offer over 500 grades of
carbonless roll and sheet products with nearly 4,000 SKUs differentiated by
grade, width, length, color, basis weight and distribution center location. We
believe that we have the broadest product range in the industry and, through
our marketing efforts, have established a series of product and application
specific sub-brands, all under the NCR Paper(R) brand umbrella as follows:
Sub-Brand Product Features Key Applications
--------- ---------------- ----------------
Superior .Outstanding whiteness, brightness and .High quality end user forms where company
printability image is important
Premium .Standard quality carbonless paper .The industry's widest used paper for gener
forms
Stock Tab .Low cost, lower quality paper .High speed, computer printed green bar
forms
Specialty .Custom products to meet special customer .Custom forms requiring non-standard
requests colors, basis weights, widths or lengths
Converter .Low cost, high yield paper with average . Smallrolls used in cash registers
print quality
Xero/ .Withstands high heat, without .Specifically designed for high-speed laser
Form(R)II contamination of digital fuser roll printers and copiers
Recover(R) .Standard quality paper with recycled .Forms with required recycled content or
content "green" marketing applications
Laser snap(R) .Proprietary, laser scored sheeted paper .Forms produced from carbonless sheets
which allow tear-away plys
Ultimark(R) .The most intense, clearest image transfer .Niche, package delivery company forms
from ply to ply
The common structure of a two-part carbonless form is a top sheet, which is
coated on the back with encapsulated dye, and a bottom sheet, which is coated
with a reactive chemical on the front. Pressure on the top sheet from a pen or
printer causes the capsules on the back side of the top sheet to break and
colorless dye is then transferred to the lower sheet. The reaction with the
chemicals on the surface of the lower sheet causes the reactive dye to turn
from clear to black or blue, leaving an imprint of the image from the top
sheet. In order to
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make multi-part forms, carbonless paper is first manufactured in two basic
types, rolls and sheets, which, once printed and cut, are assembled into
multi-part forms. Rolls of carbonless paper are produced from basestock,
coated, and then cut to the customer's width and length specifications, while
remaining in rolls. Some rolls are then cut into reams of sheets and packaged
in cartons. Due to the extra steps in the manufacturing process, carbonless
sheets are typically priced at a per ton premium to carbonless rolls.
For fiscal 2001, net sales of carbonless paper contributed 80.1% of our net
sales, or $765.5 million.
Thermal Paper. We believe that we produce the widest range of thermal paper
products in the industry. Our products are used in a broad range of everyday
applications, marketed under five product segments as follows:
Segment Product Features Key Applications
------- ---------------- ----------------
Point of Sale .Image Speed, Reliability, .Receipts at Retail Stores, Restaurants, G
Archivability Pumps and ATMs
Labels .Image Durability and Barcode .Industrial Warehouse, Delivery Packages
Readability and Weigh Scale Labels (e.g., Deli)
Tag and Ticket .Barcode Readability through .Airline Boarding Passes, Cinema and
Image Definition, Retention and Entertainment Event Tickets, Airline
Contrast, Printability Baggage Tags, Lottery Tickets
Fax .Generates Images for a Broad .Facsimile Transmissions
Range of Thermal Print Head
Quality
Printer/Calculator/Chart .Image Stability and Archivability .Medical Diagnostic Charts (e.g., EKG) and
Calculators
Thermal paper is basestock paper coated with colorless dyes, co-reactants
and sensitizers that react to form an image when exposed to heat from a thermal
print head or stylus. Thermal paper products are consumed as single plys, not
multi-part forms. The many applications of thermal paper require a broad range
of product characteristics and constructions. The application of chemical
coatings in the production of thermal paper can be more complex and time
consuming than for carbonless paper, because thermal paper can require up to
four separate coats and must be dried carefully to avoid activating the heat
sensitive coating. First, a base coat is applied to the top of the base paper
to reduce the required amount of expensive active or thermal coating. The
active coat, which reacts to heat, is applied next. A protective top coat is
then added on select grades on top of the active coat to preserve the clarity
of the image. Finally, a special coating is applied to the backside of the
sheet to improve back printing. Thermal paper is initially produced in roll
form and sold to printers and converters that ultimately create products that
are consumed in both roll and non-roll forms, such as point of sale receipts,
labels, baggage tags and travel and entertainment tickets. We are able to cost
effectively produce a wide range of thermal products due to our versatile
coaters and coating preparation capabilities. We create value by producing
various grades to meet specific end user applications in a cost effective
manner.
Market demand for thermal paper continues to grow as new applications are
developed that require the benefits of thermal technology. In fiscal 2001, 64%
of our thermal paper sales consisted of grades developed since 1997. For
example, by working to meet Wal-Mart's image stability needs for its point of
sale receipts, we successfully introduced POS Plus(R). Additionally, we believe
our thermal paper is the only one used at North American lotteries that have
converted to thermal paper tickets. These lotteries serve a total of eight
states and Canadian provinces.
For fiscal 2001, net sales of thermal paper contributed 18.0% of our net
sales, or $172.3 million.
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Other Products
In addition to our core carbonless and thermal products, we also produce a
variety of niche, specialty products. In fiscal 2001, we shipped approximately
6,700 tons of these other products, including the following:
Product Product Features Key Applications
------- ---------------- ----------------
Allura(TM) poster paper . Weather resistance .Outdoor billboards
Apella(R) fluorescent papers . Brightness of color .Grocery store "sale" signs,
label marking guns and
school announcements
Currency(TM) color-coated .Metallic-like finish .Niche, annual reports and
papers brochures
For fiscal 2001, net sales of other products contributed 1.9% of our net
sales, or $18.0 million. We no longer produce Allura(TM) poster paper or
Apella(R) fluorescent papers.
Research and Development and the New Business Development Group
We have a long history of making significant advances in our product and
process technologies through investments in research and development, or R&D.
As the co-inventor of both carbonless paper and thermal paper, we have
developed core competencies in the encapsulation process, specialty coating
chemistry, and coating application technologies and systems. Our R&D effort is
focused on applying these core competencies to improve our existing products
and develop new ones. We have separated our R&D activities into two efforts:
R&D relating to our existing carbonless and thermal products; and R&D for new
products through our New Business Development group, or NBD.
We have approximately 100 employees engaged in R&D for our carbonless and
thermal product lines. For the carbonless business, these R&D professionals
focus on reducing costs through product design changes, material savings, and
manufacturing efficiency improvements and enhancing product design to produce
defect
free products which meet customer requirements. For the thermal business, R&D
efforts focus on developing thermal products with improved qualities and
characteristics that meet emerging market needs.
In early 2000, as a result of our strategic decision to grow through new
products and businesses, we complemented our existing new product development
efforts by establishing a separate New Business Development group, which
integrates R&D with market research and analysis. NBD, which has approximately
13 R&D and 20 marketing professionals, is responsible for the development and
introduction of new specialty, high value-added products based upon our core
competencies of encapsulation technology, coating chemistry and coating
application processes. In early 2001, we transferred our existing security
products business, which focuses on papers with special security and
authentication features, into NBD.
In NBD, we are using our core competencies to develop new products and
applications where our technical expertise can provide innovative and high
value-added solutions. Our NBD team is applying this expertise in the following
targeted technology platforms: encapsulation, radio frequency and coating
chemistry and application. Examples of products currently in development
include coated papers for labels with encapsulated adhesives that will adhere
to a surface when pressure is applied. This product is intended to eliminate
the need for expensive protective liners used with current pressure-sensitive
labels. Possible applications include a wide variety of self-adhesive products
including shipping and tracking labels. Other new product opportunities include
paper cups which are coated with a layer of insulation, labels and tags which
incorporate radio frequency capabilities for identification purposes and a
variety of security papers. Our security products team is developing market
focused products which use various technologies, including radio frequency,
security threads, chemical tracers and taggants, to prevent the use of
fraudulent documents. In all of these areas, we are using our own resources and
working cooperatively with leading chemical, consumer and technology companies
in market research and product development. NBD is an important part of our
long-term business growth strategy.
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Sales and Marketing
We conduct our sales and marketing activities through a dedicated team of
approximately 150 professionals in sales, marketing, technical service and
customer service. We approach sales and marketing as an ongoing process
requiring attention and support before, during and after the sale. Our
approximately 67 sales personnel are organized into teams dedicated by type of
customer including roll printers, merchant distributors, converters, secure
document accounts and international. Our sales personnel are located in field
offices, generally close to their customers. The sales force is compensated
through a combination of base pay and bonus linked to accomplishment of their
objectives. Our marketing team consists of approximately 48 employees who focus
on carbonless and thermal customers. The primary role of our marketing
employees is to commission, obtain and analyze market research studies, work
with our research and development personnel to develop new products, create
unique new value-added services and to provide general product support. We
employ approximately 10 technical service representatives who assist customers
with production improvement and complaint resolution by telephone and in person
at customer locations. We employ approximately 25 customer service
representatives, based in Appleton, Wisconsin, to receive customer orders,
establish delivery dates, resolve inquiries on stock availability and order
status and generally maintain a close relationship with our customers to meet
their needs.
We regularly evaluate our sales and marketing approach and take action in
anticipation of, or in response to, industry trends. For example, we recently
added a sales representative based in Mexico to pursue what we believe is a
growing market; we established a group of thermal product specification
representatives to work closely with original equipment manufacturers and paper
specifiers in the complex and technical lottery and point of sale applications;
we reduced the number of our carbonless sales representatives as the volume of
the business declined; and we established a security document sales team to
pursue emerging product opportunities.
Customer Focused Quality
We believe one of our most important strategic decisions to date, which we
made in the late 1980s, was our decision to focus on customer satisfaction in
all aspects of every transaction a customer has with us. Our focus and success
are shown by our having been named twice in the mid-1990s as a finalist for the
prestigious Malcolm Baldridge National Quality Award. In addition, in each year
from 1996 to 2000, more than 95% of our customers surveyed reported that they
were "very satisfied" or "satisfied," the two highest possible rating
categories in our surveys. We did not conduct a customer survey in 2001.
Our approach to our customers has become the core of our company culture. We
believe our approach to customers is a hallmark of our reputation in our
industry and that it differentiates us from our competitors. We call this
approach Customer Focused Quality, or CFQ. As part of CFQ, we provide a 100%
unconditional satisfaction guarantee whereby we stand behind our products and
will fix, replace or refund the purchase price of our products to satisfy our
customers.
Beginning in the late 1980s, we began regular training of all employees in
quality concepts and exceeding customer expectations. Beginning in the early
1990s, to better satisfy our customers' needs, we established our eight
regional distribution centers, the most extensive distribution network of its
kind in our industry in North America. Our distribution centers, and related
integrated information systems, allowed us to achieve 99% in-stock inventory
rates, and 99% on-time delivery rates in the U.S. and Canadian markets in 2001.
Throughout the 1990s, we expanded our offering of value-added services to our
customers, generally free of charge. We believe the benefits of increased sales
and customer satisfaction and loyalty have exceeded the incremental cost to us
of providing these value-added services. These services include:
. our Process Improvement for Printers program under which we provide a
complete analysis of customer printing operations, a detailed
implementation plan and a guarantee that our customers will reduce waste
and gain efficiency;
. warehouse layout consultation, to help our customers operate their
warehouses more effectively in combination with our "just-in-time"
delivery capabilities;
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. technical seminars, publications and mill and plant tours to help our
customers better handle and process our papers and view firsthand our
commitment to CFQ; and
. conducting customer satisfaction surveys of our customers' customers to
provide our customers with detailed feedback on our products and
services.
CFQ requires the relentless pursuit of customer satisfaction by every
employee. CFQ includes extensive and rigorous performance standards and the
collection and analysis of empirical data to measure actual achievements
against those standards. For example, among other metrics, in the customer
services area we measure the number of seconds and number of telephone rings it
takes to answer a customer call; in the production area we measure roll widths
and roll splice markings in precise tolerances; and in the logistics area we
measure in-stock availability and on-time and next day delivery rates.
We believe that our continuing commitment to CFQ will significantly
contribute to our ability to meet our business objectives.
Customers
We sell our products to a broad range of customers, including paper
distributors known as merchants, business forms printers and converters. We
currently have approximately 35 merchant distributor customers that stock and
redistribute our carbonless sheet products on a national or regional basis
through over 400 locations. We sell our carbonless rolls directly to
approximately 80 printer and converter customers. We also sell our carbonless
rolls to over 400 forms printers through merchant distributors on a drop
shipment basis whereby we deliver our product from our distribution center and
provide customer support directly to the printer, and the merchant bears the
credit risk of nonpayment. We primarily sell our thermal products directly to
converters that cut and rewind large rolls into smaller rolls, print and
otherwise further process the paper based on end-user needs. We believe that
during fiscal 2001 we were essentially the sole provider to over 80% of our
carbonless customers. In addition, we believe we were essentially the sole
provider to two of our top ten thermal customers and that we sold product to
approximately 88% of all potential thermal customers in the North American
market in fiscal 2001.
Two of our customers, Unisource Worldwide, Inc., a subsidiary of
Georgia-Pacific Corporation, and xpedx, a subsidiary of International Paper
Company, each provided over 10% of our total net carbonless and thermal sales
in fiscal 2001. Unisource accounted for 14.8% and xpedx for 12.0% of our fiscal
2001 net sales. The majority of sales to these two customers were drop-shipped
directly to a broad group of roll printers.
Manufacturing
Carbonless paper is produced by coating basestock with either microcapsules
which contain dye applied to the back of the topsheet, or resins which react to
the dyes applied to the front of the bottom sheet. We produce the
microcapsules, ten of which can fit in the width of a human hair, and enclose
the dyes within the capsules in a single chemical process. We coat the
microcapsules onto paper either on a paper machine where the paper is first
manufactured and then, in a continuing operation, coated with the
microcapsules, or on off-machine coaters where previously manufactured paper is
unrolled and coated in a separate operation. Coating the microcapsules on the
paper machine is a technically challenging but efficient process as it saves
the costs of rolling, transporting and then unrolling the paper required for
off-machine coating. We believe that we are the only U.S. producer of
carbonless paper which uses on-machine coating to apply microcapsules. The
microcapsule coated rolls are large and heavy yet fragile as dropping, striking
or other rough handling of finished rolls can cause the capsules to break,
making the paper unfit for use. We have developed specialized equipment and
practices which enable us to efficiently handle large volumes of coated rolls
with minimal damage.
We manufacture all our thermal paper on off-machine coaters. We mix the
specialized dyes, coreactants and stabilizers required for the thermal image
reaction and apply these and other needed coatings to basestock paper, often in
a continuous process in which the paper is coated and dried up to three times
in a single pass. Significant technical challenges in coating thermal paper
include both efficient but complete application of expensive coating materials
and drying the coated paper at low heat so that the drying process does not
cause an image reaction.
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Paper machines, and to a lesser extent off-machine coaters, are large,
complex machines that operate most efficiently when run continuously. Paper
machine production and yield decline when a machine is stopped for grade
changes in coatings, basis weight, color or width. Therefore, we organize our
manufacturing processes so that all of our paper machines and most of our
coaters run continuously throughout the year. We produce our higher volume,
longer runs of carbonless products at our most cost effective pulp and paper
mills located in West Carrollton and Roaring Spring and our shorter run
carbonless products and our thermal and other products at our flexible coating
plant in Appleton. Our 12 off-machine coaters in Appleton use five different
coating technologies. Our production volumes and the number and variety of
paper and coating machines available to us make it possible for us to
efficiently schedule and produce the wide range of carbonless and thermal
grades we offer our customers.
We use three coaters with three coating heads allowing us to produce in one
pass thermal grades requiring three coatings. We plan to add a fourth coating
head to one of our coaters in 2002 or 2003, which will further increase the
efficiency of our thermal production.
Our Roaring Spring mill produced over 80,000 tons of pulp in fiscal 2001
from hardwood trees and wood chips delivered to the mill by a number of small
local tree farms and sawmills. The mill's three paper machines used pulp and
purchased softwood pulp to produce over 120,000 tons of carbonless roll
products. Our West
Carrollton mill in fiscal 2001 produced over 100,000 tons of deinked pulp from
wastepaper. The mill's three paper machines used that pulp and purchased
hardwood and softwood to produce over 180,000 tons of carbonless roll products.
Our Appleton plant used basestock to produce over 235,000 tons of carbonless,
thermal and specialty products on 12 off-machine coaters in fiscal 2001. Our
Appleton plant produces all of our carbonless sheet products. As the demand for
carbonless paper declines, which we expect to occur, we will reduce our
carbonless production at our Appleton plant which is less cost-effective than
our carbonless production at our mills. We intend to redirect this capacity to
the production of thermal products and new products developed through our new
business initiatives.
Raw Materials
Our principal raw materials consist of basestock, chemicals, pulp,
wastepaper and packaging. In fiscal 2001, these materials made up approximately
65% of our cost of goods sold. Our largest raw material component is basestock,
which was approximately 32% of our cost of goods sold in fiscal 2001. Most of
our externally purchased basestock is acquired from two sources with whom we
have long-term purchase contracts guaranteeing our supply at long-term market
prices. These contracts protect us from the significant pricing cycles for pulp
and commodity paper products. Our basestock supply agreement with Appleton
Coated LLC is described under the heading "Relationship with Arjo Wiggins
Appleton--Basestock Supply Agreement." Approximately 10% of our cost of goods
sold in fiscal 2001 was for pulp, wood and wastepaper used in our Roaring
Spring and West Carrollton mills. While wastepaper and pulp prices are subject
to the swings in the pulp and commodity paper cycle, we seek to reduce the
impact of those swings for pulp by long-term contracts, indexing and hedges,
and for wastepaper by purchasing through a national broker which provides us
with competitive pricing.
Approximately 23% of our cost of goods sold in fiscal 2001 was for
chemicals. We are a party to two significant chemical supply agreements.
We are currently party to a chemical supply agreement with Nisseki Chemical
Texas Inc. which commenced January 1, 2002. Under this agreement we purchase
primary carbonless copy paper solvents, which are chemicals that are a key
component in our carbonless paper manufacturing process. The cost of these
purchases was approximately $1.4 million in 2001 and we anticipate the cost of
these purchases will be approximately $5.6 million in 2002 and $5.6 million in
2003. The initial term of this agreement expires on December 31, 2005 and
continues year-to-year after this date until it is terminated by either party.
We are also currently a party to a chemical supply agreement with ESCO
Company Limited Partnership, Mitsui Toatsu Chemicals, Inc. and Yamamoto
Chemicals, Inc. which commenced July 1, 1997. Under this
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agreement, we purchase black colorformers, which are chemicals that react to
other chemicals to form a neutral or black marking. The cost of these purchases
was approximately $22.1 million in 2001 and we anticipate the cost of these
purchases will be approximately $16.7 million in 2002 and $15.9 million in
2003. The initial term of this agreement expires on June 30, 2007.
The technical challenges of manufacturing our products require us to use
many specialty raw materials, designed and manufactured to work with our
products and manufacturing processes. We make purchasing decisions based upon
quality, service, value and long-term strategic importance. We have 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 our customers and to protect our mutual strategic
interests. For those raw materials which are less specialized and more like
commodities, we believe we have reduced our exposure to fluctuating commodity
prices through the use of firm annual pricing agreements, indexing prices
against commodity raw material benchmarks and guaranteed purchase volumes in
return for long term price stability. We believe that our strategy to develop
long-term agreements and effective business relationships with our key
suppliers as well as our large volume purchases contribute to our ability to
obtain competitive prices over the business cycle and to produce high quality
products for our customers.
In 1998, we reorganized our procurement department and initiated a process
to formalize our raw material sourcing efforts. This ongoing initiative created
headquarters-based procurement team leaders and specialists to aggressively
manage our total spending on key raw materials. In fiscal 1998, we established
a five-year goal through fiscal 2003 with a focus on improving our quality,
service and total value. To reduce costs, we have adopted a formal seven-step
procurement process, implemented cross functional teams, worked closely with
suppliers and established aggressive goals. We have made substantial progress
in meeting these goals.
Competition
Our core businesses of carbonless and thermal products remain highly
competitive with well positioned dedicated producers in each segment. In the
carbonless market, our primary competitor is MeadWestvaco Corporation. We
estimate that in 2001 we had approximately 58% of the U.S. carbonless roll
market and 58% of the U.S. carbonless sheet market and that MeadWestvaco had
approximately 37% of the U.S. carbonless roll market and 19% of the U.S.
carbonless sheet market. In addition, we estimate that Imation had
approximately 13% of the U.S. carbonless sheet market in 2001. There are also a
number of small carbonless producers that focus on specific regions or a
limited number of carbonless products. There were no meaningful foreign
competitors in the U.S. carbonless market in 2001. In the carbonless market, we
compete primarily on the bases of product quality, service and price.
In the thermal market, our primary competitors include Kanzaki, Koehler,
Ricoh Company, Ltd. and Nashua Corporation. Based on our internal assessment,
we estimate that we had approximately 39% of the U.S. and Canadian thermal
markets in 2001, which we believe was more than twice as large as our largest
competitor, Koehler. Kanzaki, Ricoh and Nashua are domestic producers, while
Koehler is a foreign producer based in Germany with an estimated 18% of the
thermal markets. There are a number of other foreign competitors who have a
small presence in the United States and Canada. Foreign competitors typically
focus on commodity-based fax paper, because they can effectively market a
limited range of products based primarily on price. In the thermal market, we
compete primarily on the bases of price, product quality and breadth of product
offering.
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Properties
We own or lease the facilities reflected in the table below. We believe that
our 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........... Headquarters Office and 885,000 Owned
(Wisconsin Ave.) Manufacturing Plant
Portage, Wisconsin............ Capsule Manufacturing Plant 44,000 Owned
Roaring Spring, Pennsylvania.. Pulp and Paper Mill 634,000 Owned
West Carrollton, Ohio......... Pulp and Paper Mill 750,000 Owned
Appleton, Wisconsin (1)....... Distribution Center 430,000 Lease expires 11/30/05
(Radio Drive) and Warehouse
Appleton, Wisconsin (1)....... Distribution Center 360,000 Lease expires 12/31/04
(Kensington Drive)
Independence, Kentucky........ Distribution Center 350,000 Lease expires 6/30/06
Harrisburg, Pennsylvania...... Distribution Center 300,000 Lease expires 8/16/06
Ontario, California........... Distribution Center 260,000 Lease expires 5/31/05
Edwardsville, Kansas.......... Distribution Center 240,000 Lease expires 12/28/10
McDonough, Georgia............ Distribution Center 210,000 Lease expires 3/31/07
Portland, Oregon.............. Distribution Center 70,000 Lease expires 5/31/03
Peterborough, Canada.......... Distribution Center 60,000 Lease expires 12/31/02
- --------
(1)The Radio Drive and Kensington Drive facilities are operated as a single
distribution center.
Between fiscal 1997 and fiscal 2001, we invested approximately $300 million
in capital improvements, approximately $259 million of which was spent at our
manufacturing facilities. Of this $259 million, $23 million was spent to comply
with applicable environmental regulations. The primary goal of this capital
spending was to improve manufacturing efficiencies, product quality and cycle
time. With these significant capital investments, we expect to be able to
reduce our facilities-related capital spending in upcoming years.
We also maintain 10 field sales offices in North America, all of which are
in leased premises under short-term leases.
Employees
As of December 29, 2001, we employed 2,552 persons, of whom 1,606 were
covered by union contracts.
Manufacturing employees at our major manufacturing facilities in Appleton,
Roaring Spring and West Carrollton facilities are represented by the Paper,
Allied-Industrial, Chemical and Energy Workers International Union, or PACE. We
entered into long term labor contracts for all three of these facilities early
in 2001. As a
result, labor contracts at our Appleton and West Carrollton facilities will
expire in 2006 and the Roaring Spring labor contract will expire in 2007. As of
December 29, 2001, 1,503 employees were covered by the new labor contracts at
these three facilities.
PACE also represents employees at the Appleton, Harrisburg and Edwardsville
distribution centers. Employees at the Peterborough, Canada facility are
represented by Independent Paperworkers of Canada. Employees at the Portage,
Wisconsin plant and our other distribution centers in Georgia, Kentucky,
California and Oregon have chosen not to be represented. Office employees have
also chosen not to be represented.
We have enjoyed good labor management relations over an extended period of
time. There have been no work stoppages over the last 30 years. We believe this
long-term relationship has been critical in developing efficient manufacturing
sites and a workforce that is highly committed to Customer Focused Quality.
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Intellectual Property
Our wholly owned subsidiary, WTA Inc., owns approximately 70 unexpired U.S.
patents, through assignment from Appleton Papers, covering carbonless and
thermal paper products and manufacturing technologies with foreign counterparts
in Canada, Europe and Japan. We also have licensed technology from other paper
manufacturers mainly involving non-critical manufacturing processes or
materials used in such processes. Together with NCR, we have licensed
technology to Kanzaki, Nippon Paper Industries Co., Ltd., formerly Jujo Paper
Company, Ltd. and Yamamoto Chemicals Inc.
As part of our acquisition of our business from NCR in 1978, we obtained a
100-year license to use forms of the NCR Paper(R) trademark that are used as
our brand for carbonless products.
Pursuant to our license agreements with Kanzaki, and as a result of a
settlement of a potential patent interference proceeding, our rights to
manufacture and sell thermal paper containing a single sensitizer, DPE, in some
foreign countries are restricted until 2004. In response to this restriction,
we have developed alternative technology which we believe will be
cost-effective, and we have filed U.S. patent applications for this technology.
We do not believe that any single patent or patent application is material
to our business or operations. We believe that the duration of the existing
patents is consistent with our business needs.
Information Technology
We have a highly integrated company-wide information technology system that
runs on three major hardware platforms: central mainframe computer systems;
plant distributed systems; and client server systems.
The core of our computer architecture is a large on-line, real-time
information database available 24 hours a day, seven days a week. This database
is maintained by a stable, integrated enterprise resource planning system that
supports order processing, sales, manufacturing, warehousing, logistics and
finance. Data is validated and stored on-line, single entry, in the database
and then shared electronically on demand with distributed systems. The central
mainframe systems, the plant distributed systems and over 1,500 personal
computers are connected between facilities by a high-speed wide area frame
relay network and local area fast Ethernet networks at each facility. Personal
computers access the mainframe systems and plant distributed systems 24 hours a
day.
To facilitate our growth strategy, we are currently in the process of
evaluating our enterprise resource planning platform to ensure that we support
our changing business needs.
Legal Proceedings
From time to time we are subject to a number of legal proceedings and other
claims arising in the ordinary course of our business. Other than the Appleton
Papers Inc. v. Home Indemnity Company case, the Ellis, Cinquanti, McLaughlin
and Marks v. Appleton Papers Inc. case and the Lower Fox River matter described
below, we do not believe that any pending or threatened legal proceedings or
other claims will have, individually or in the aggregate, a material adverse
effect on our financial condition or results of operations.
In Appleton Papers Inc. v. Home Indemnity Company, a case pending in Circuit
Court in Outagamie County, Wisconsin, we brought a claim against various
insurers, including Home Indemnity Company, or Home, demanding payment of
defense costs for litigation which was settled in 1999. As part of a partial
settlement agreement of that matter, Home reimbursed approximately $12 million
of our defense costs, but is now asserting that it is entitled to monetary
damages in the amount of $12 million for reimbursement of those payments under
our insurance policies. We are vigorously defending against this assertion
which Home has made both in the Appleton Papers Inc. v. Home Indemnity Company
case and in arbitration proceedings in New York, but there can be no assurance
that we will prevail.
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In Ellis, Cinquanti, McLaughlin and Marks v. Appleton Papers Inc., a case
pending in U.S. District Court in Syracuse, New York, plaintiffs generally
allege that exposure to carbonless paper has caused allergic reactions which
are totally disabling and that they are, therefore, entitled to substantial
damages. The plaintiffs are seeking monetary damages in an aggregate amount of
$12 million, plus punitive damages. We have defended a number of such cases
over the past 20 years, settling some for amounts which are not material to our
business and obtaining dismissals in others based on various arguments
including, in one case, that the plaintiff's alleged proof that carbonless
paper causes injury was based on "junk science." While we are vigorously
defending ourselves and expect to prevail in this case and in any similar cases
that may be brought against us in the future, there can be no assurance that we
will be successful in our defense.
Environmental Regulation
General
Our operations are subject to comprehensive and frequently changing federal,
state and local environmental laws and regulations, including laws and
regulations governing emissions of air pollutants, discharges of wastewater and
stormwater, storage, treatment and disposal of materials and waste, remediation
of soil, surface water and groundwater contamination, and liability for damages
to natural resources.
We are subject to the following material environmental laws and regulations:
. the Comprehensive Environmental Response Compensation and Liability Act,
as amended by the Superfund Amendments and Reauthorization Act, which
governs the identification, reporting and clean-up of hazardous
substances that have been released into the environment;
. the Solid Waste Disposal Act, as amended by the Resource Conservation
and Recovery Act and Hazardous and Solid Waste Amendment, which governs
the disposal of solid waste and the identification, treatment and
disposal of hazardous waste;
. the Toxic Substances Control Act, which governs the regulation of
hazardous chemical substances, such as asbestos, polychlorinated
biphenyls, radon and lead;
. the Federal Water Pollution Control Act, as amended by the Clean Water
Act, which governs the regulation of the discharge of pollutants into
navigable waters;
. the Clean Air Act, which governs the regulation of the emission of
contaminants into the atmosphere;
. the Emergency Planning and Community Right-to-Know Act, which governs
the reporting and emergency notification of hazardous and toxic
chemicals used in or released from a facility; and
. similar state statutes and regulations.
Compliance with these laws and regulations is an increasingly important
factor in our business. We expect to incur capital and operating expenditures
of $1.3 million in 2002, $0.6 million in 2003 and $9.6 million from 2004
through 2006 and to continue to incur expenditures after 2006 in order to
maintain compliance with applicable federal, state and local environmental laws
and regulations and to meet new regulatory requirements. Compliance with these
regulatory requirements are likely to increase our expenses, reduce our
earnings and adversely affect the operating flexibility of our manufacturing
operations, which may harm our competitive position.
We are 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 we own or
operate and at properties where we or our predecessors have arranged for the
disposal of regulated materials. As a result, we are involved from time to time
in administrative and judicial proceedings and inquiries relating to
environmental matters. We may be involved in additional proceedings in the
future and the total amount of these future costs and other environmental
liabilities may be material. To our knowledge, we have only been named a
potentially responsible party, or PRP, relating to the Fox River, which is
described below, although it is possible that we could be named as a PRP for
additional sites in the future.
69
We have adopted a corporate-wide Environment, Health and Safety, or EHS,
management system. This system includes corporate and plant specific EHS
strategic plans and goals, annual EHS audits at each plant and management and
employee incentives for continuous improvement in environmental management
practices. It also includes testing of new chemicals and mixtures and
certification of vendors.
Portage Plant
The Portage plant operates under various state and federal permits for
discharges and emissions to air and water. There are no known material
liabilities with respect to environmental compliance issues at the Portage
plant.
Roaring Spring Mill
The Roaring Spring mill operates under various state and federal permits for
discharges and emissions to air and water.
In August 2000, we entered into a consent decree with the EPA, and the State
of Pennsylvania to settle an enforcement action brought by the state and
federal governments against us for alleged violations of the federal Clean Air
Act. Under the consent decree, we made a payment to the government and agreed
to install certain air emissions control equipment at the Roaring Spring mill
by May 2002, at a cost of approximately $10 million. We have spent $9.0 million
through December 29, 2001. This air emissions control equipment, in addition to
satisfying obligations under the consent decree, will also serve to achieve
compliance with new federal air emissions control regulations known as the
"Cluster Rule," which will be applicable to the Roaring Spring mill after May
2002. The Cluster Rule regulates the release of pollutants to both the air and
water by the pulp, paper and paperboard industry. The Cluster Rule establishes
air emission standards and water effluent limitations guidelines and standards.
We are not required to comply with these standards until 2006. However, the air
emissions control equipment described above for the Roaring Spring mill that we
installed to comply with the consent decree also brings the Roaring Spring mill
into compliance with the Cluster Rule. Although this equipment is operational,
we anticipate that we will spend approximately $1.0 to $1.2 million over the
next year to fine tune the equipment and make any necessary adjustments. The
only other material capital expenditure that we expect to make over the next
several years is the installation of a lime kiln precipitator at the Roaring
Spring mill at a cost of approximately $1.4 million. Installation of this
equipment will bring us into compliance with the Cluster Rule as required in
2006. We expect to install the lime kiln precipitator in 2005. We do not
anticipate that any other material capital expenditures will be required at any
of our mills to comply with the Cluster Rule.
We have submitted to the State of Pennsylvania a landfill closure plan for a
non-hazardous clay-lined landfill that is present at the Roaring Spring mill.
Under the plan, we estimate closure costs to be approximately $950,000, with
long-term groundwater monitoring costs expected to be up to $725,000 over the
next 30 years.
Appleton Plant
The Appleton plant operates under various state and federal permits for
discharges and emissions to air and water. There are no known material
liabilities with respect to environmental compliance issues at the Appleton
plant.
West Carrollton Mill
The West Carrollton mill operates pursuant to various state and federal
permits for discharges and emissions to air and water. As a result of the
de-inking of carbonless paper containing PCBs through the early 1970s, there
have been releases of PCBs and volatile organic compounds to soil in the area
of the wastewater impoundments at the West Carrollton facility, and low levels
of PCBs have been detected in groundwater immediately under this area. In
addition, PCB contamination is present in sediment in the adjacent Great Miami
River, but it is believed that this contamination is from a source other than
the West Carrollton mill. Based on investigation and
70
delineation of PCB contamination in soil and groundwater in the area of the
wastewater impoundments, we believe that it may be necessary to undertake
remedial action in the future, although we are currently under no obligation to
do so. Remedial action to address PCB contamination in the area of the
wastewater impoundment is expected to involve construction of a cap to prevent
exposure to PCBs. In addition, remedial action may involve long term monitoring
of groundwater or the construction and operation of a groundwater
pump-and-treat system to prevent migration of PCB contamination in groundwater,
and the removal and disposal of PCB-contaminated sediment in the Great Miami
River. The cost for remedial action--including installation of a cap, long-term
pumping, treating and/or monitoring of groundwater, and removal of sediment in
the Great Miami River--is estimated to range up to approximately $10.5 million,
with approximately $3 million in short-term capital costs and the remainder to
be incurred over a period of 30 years. However, costs could exceed this amount
if additional contamination is discovered, if additional remedial action is
necessary or if the remedial action costs are more than expected. As part of
the purchase agreement, AWA has agreed to indemnify us for specified
liabilities relating to environmental conditions at the West Carrollton mill.
See the discussion under the heading "Description of Acquisition
Agreements--Purchase Agreement." In addition, the former owner and operator of
the West Carrollton mill may be liable for all or part of the cost of
remediation of historic PCB contamination. Other than the PCB contamination in
the area of the wastewater impoundments, there are no other known material
liabilities with respect to environmental issues at the West Carrollton mill.
Lower Fox River
Various state and federal government agencies and Native American tribes
have asserted claims against us and other parties with respect to historic
discharges of PCBs into the Lower Fox River in Wisconsin.
Carbonless paper containing PCBs was manufactured at what is currently our
Appleton plant from 1954 until 1971. Wastewater from the Appleton plant, the
Combined Locks paper mill now owned by Appleton Coated and from other local
industrial facilities carried PCBs into the Lower Fox River during this time
period. As a result, there are allegedly eleven million cubic yards of
PCB-contaminated sediment spread over 39 miles of the Lower Fox River. Low
levels of PCBs have also been washed by the Fox River into Green Bay, which is
part of Lake Michigan.
In June 1997, the EPA published notice that it intended to list the Lower
Fox River on the National Priorities List of Contaminated Sites pursuant to the
federal Comprehensive Environmental Response, Compensation, and Liability Act,
which we refer to as CERCLA or Superfund. The EPA identified seven PRPs for PCB
contamination in the Lower Fox River, including NCR and us as the former and
current owners and operators of the Appleton plant, and the owners of five
paper reprocessing mills located on the Fox River including Georgia-Pacific,
P.H. Glatfelter Company, Wisconsin Tissue Mills Inc., owned by Chesapeake
Corporation, Riverside Paper Corporation and U.S. Paper Mills Corp.
In October 2001, the Wisconsin Department of Natural Resources, or DNR,
released a remedial investigation/feasibility study for the Lower Fox River,
studying various remedial alternatives. Also in October 2001, the DNR and EPA
jointly issued, for public comment, a Proposed Remedial Action Plan for the
Lower Fox River proposing a remedial plan based on one of the remedial
alternatives evaluated in the feasibility study. The proposed plan involves a
combination of monitored natural recovery and dredging and off-site disposal of
sediment contaminated with PCBs. EPA and DNR estimate that the total cost for
the proposed remedial alternative, including long-term monitoring, would be
$307 million for all PRPs in the aggregate.
Public comment on the proposed plan was received until January 22, 2002. We
expect the EPA and the DNR to issue the formal record of decision selecting a
remedial action plan for the Lower Fox River in 2002. At this time, it is not
possible to accurately predict what remedial alternatives will be selected in
the record of decision, negotiated with the potentially responsible parties, or
ordered by the agencies thereafter, or what the actual costs of these remedies
will be.
In October 2000, the Fish & Wildlife Service, or FWS, released a proposed
restoration and compensation determination plan presenting the federal and
tribal natural resource trustees' planned approach for restoring
71
natural resources injured by PCBs, and calculating the potential natural
resource damages under different remedial action scenarios. The final natural
resource damage valuation will depend on the extent of PCB cleanup; however,
the proposed plan estimates that natural resource damages will fall in the
range of $176 to $333 million for all PRPs in the aggregate. The actual costs
for the PRPs to settle natural resource damage claims are expected to be
significantly lower.
We purchased the Appleton plant from NCR in 1978, after the use of PCBs in
the manufacturing process was discontinued. Nevertheless, pursuant to CERCLA,
we and NCR are viewed by the EPA as PRPs. Accordingly, we and NCR asserted
indemnity claims against each other pursuant to the terms of the agreement for
the purchase of the assets of the business in 1978. In order to resolve our
indemnification obligations to each other, we entered into an interim
settlement agreement with NCR in 1998 under which we have agreed to share both
defense and liability costs arising from the Lower Fox River.
In addition to our interim settlement agreement with NCR, five of the seven
PRPs, excluding U.S. Paper Mills and Riverside Paper, have entered into a
non-binding agreement to share both defense costs and costs for scientific
studies relating to PCBs discharged into the Lower Fox River. A study performed
by the FWS in 2000 provided a preliminary estimate of the amount of PCBs
discharged into the Fox River by each PRP, and concluded that the discharges
from the Appleton plant and the Combined Locks paper mill represented a
percentage in the range of 36% to 52% of the total PCBs discharged. These
preliminary estimates are presently under review by the FWS and may be revised.
An accurate estimate of our ultimate share of remediation and natural
resource damage liability cannot be made at this time due to uncertainties with
respect to: the scope and cost of the final remedy; the scope of restoration
and final valuation of federal and state natural resource damage assessments;
the evolving nature of remediation and restoration technologies and
governmental policies; and the amount of our share of remediation and natural
resource damage costs among the PRPs. We believe that the other PRPs will be
required and able to pay a substantial share of the remediation and natural
resource damage claims for the Lower Fox River.
We and NCR have reached an agreement with the DNR, the Wisconsin Department
of Justice, the EPA, the FWS, the U.S. Department of Justice, the National
Oceanic and Atmospheric Administration, and the Oneida and Menomonee Indian
Tribes, which we collectively refer to as the intergovermental partners, to
fund interim restoration and remediation efforts on the Lower Fox River. A
consent decree among us, NCR and the intergovernmental partners has been
entered in U.S. District Court in Milwaukee, Wisconsin whereby we, together
with NCR, will provide up to $41.5 million over a period of four years, to a
maximum of $10.4 million per year, for interim restoration and remediation
efforts directed by the intergovernmental partners. We and NCR will each pay
about half of this amount. Under the consent decree, the intergovernmental
partners agree not to sue or take administrative action against us and NCR
during the four-year period. The consent decree does not constitute a final
settlement with the intergovernmental partners or provide protection against
future claims against us and NCR; however, under the decree, we and NCR will
receive full credit for all monies expended for restoration and remediation of
the Lower Fox River during the interim period. As part of the purchase
agreement, AWA agreed to indemnify us, through Paperweight Development, for
specified liabilities relating to the Lower Fox River and has provided
financial assurance in support of its indemnification obligations. See the
discussion under the heading "Description of Acquisition Agreements--Fox River
Indemnification Agreements."
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MANAGEMENT
Directors and Executive Officers
The following table presents information as of March 31, 2002 regarding our
executive officers, whom we refer to as the CEO team, and our directors and the
executive officers and directors of Paperweight Development.
Name Age Position
- ---- --- --------
Douglas Buth... 47 Chairman, Chief Executive Officer and a Director, and Chairman,
President, Chief Executive Officer and a Director of Paperweight
Development
Paul Karch..... 46 Vice President, Human Resources & Law, Secretary, General
Counsel and a Director, and Vice President, Secretary and a Director
of Paperweight Development
Dale Parker.... 50 Vice President, Finance, Chief Financial Officer and a Director, and
Chief Financial Officer and a Director of Paperweight Development
Nicholas Davis. 63 Director and a Director of Paperweight Development
Richard Kenney. 61 Director and a Director of Paperweight Development
Susan Scherbel. 44 Director and a Director of Paperweight Development
W. A. Sikora... 64 Director and a Director of Paperweight Development
John Depies.... 45 Vice President and General Manager, Thermal
Rick Fantini... 47 Vice President, Operations
James McDermott 45 Vice President, Carbonless Sales and Marketing
Stephen Sakai.. 49 Vice President, New Business Development
John Tucker.... 59 Vice President, Information Services
Ann Whalen..... 43 Vice President, Project Venture
Ted Goodwin.... 45 Vice President, Technology
Thomas Cashman. 58 Plant Manager, Appleton Plant
Todd Downey.... 43 Mill Manager, West Carrollton Mill
John Showalter. 54 Mill Manager, Spring Mill
Douglas Buth. Mr. Buth has been Chief Executive Officer of Appleton Papers
since 1998 and President and Chief Executive Officer of Paperweight Development
since July 2001 and a Director of Paperweight Development since December 2000.
He previously served as Executive Vice President and General Manager of
Carbonless from 1997 to 1998, Vice President of Sales from 1993 to 1997 and
Vice President of Marketing from 1991 to 1993. Mr. Buth joined Appleton Papers
in 1988 as Director of Strategic Planning. Mr. Buth qualified as a CPA with
PriceWaterhouse in 1979 and thereafter held a number of financial positions
with Saks Fifth Avenue and BATUS. Mr. Buth received his BBA (Accounting) from
the University of Notre Dame in 1977.
Paul Karch. Mr. Karch has been our Vice President, Human Resources & Law ,
Secretary and General Counsel since January 2002 and Vice President and
Secretary of Paperweight Development since July 2001 and a Director of
Paperweight Development since August 2001. Previously he served as Vice
President, Law & Public Affairs, Secretary and General Counsel from September
2000 to January 2002, as Vice President, Secretary and General Counsel from
1997 to 2000, as Secretary and General Counsel from 1996 to 1997, and as Senior
Legal Counsel from 1994 to 1996.
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Prior to joining Appleton Papers, Mr. Karch was in private practice at Luce,
Forward, Hamilton & Scripps, San Diego, California from 1983 to 1993. Mr. Karch
graduated cum laude with an AB (Economics) from Harvard College in 1978 and a
JD from Harvard Law School in 1982.
Dale Parker. Mr. Parker has been our Vice President, Finance and Chief
Financial Officer since 2000 and Chief Financial Officer of Paperweight
Development since July 2001 and a Director of Paperweight Development since
August 2001. Prior to joining Appleton Papers, he held various financial
positions at Black Clawson Co., Inc., a global manufacturer of capital goods
for the paper and plastics industries, including Vice President Finance from
1988 to 2000. Mr. Parker qualified as a CPA in 1977. Mr. Parker received his BS
(Business) from Miami University in 1973 and an MBA from Xavier University in
1977.
Nicholas Davis. Mr. Davis has been a Director of Appleton Papers and a
Director of Paperweight Development since November 2001. Mr. Davis has been the
President and Chief Investment Officer of Montana Investment Advisors Inc., an
SEC regulated asset management firm based in Bozeman, Montana, since 1992.
Prior to joining Montana Investment Advisors Inc., he held various management
positions at PaineWebber, Colorado Growth Capital and White Weld. Mr. Davis
qualified as a CFA in 1969. Mr. Davis graduated with honors with a BA (Geology)
from Princeton University in 1961 and an MBA from Stanford University in 1963.
Richard Kenney. Mr. Kenney has been a Director of Appleton Papers and a
Director of Paperweight Development since November 2001. Mr. Kenney has been a
business consultant since December 2000. Prior thereto, Mr. Kenney served in a
variety of financial positions with Consolidated Papers, Inc. from 1967 until
its acquisition by Stora Enso Oyj (NYSE: SEO) in August 2000, and most recently
served as the Senior Vice President, Finance. Mr. Kenney retired from Stora
Enso Oyj in December 2000. Mr. Kenney received a BA (Economics) from Loras
College in 1963 and an MBA from Indiana University in 1965.
Susan Scherbel. Ms. Scherbel has been a Director of Appleton Papers and a
Director of Paperweight Development since January 2002. Ms. Scherbel is
employed by Bellview Associates, an investment firm she co-founded in March
2001. From January 1989 to March 2001, Ms. Scherbel served as a Managing
Director of Merrill Lynch Investment Banking, where she specialized in employee
benefit transactions. Prior to this, Ms. Scherbel served as tax counsel for
Hughes, Hubbard & Reed and as an advisor to the Assistant Secretary of the
Treasury for Tax Policy at the United State Department of Treasury. Ms.
Scherbel graduated with an AB (Government and Economics) from Harvard
University in 1979, a JD from Georgetown University in 1982 and an LLM from
Georgetown University in 1986.
W. A. Sikora. Mr. Sikora has been a Director of Appleton Papers and a
Director of Paperweight Development since November 2001. Mr. Sikora has been a
self-employed business and financial advisor to public and private companies
since 1982, except for the period 1996 to 1999 when he was Executive Vice
President of TransMontaigne Inc. (AMEX: TMG). He was also a partner in the
accounting firms of Hein + Sikora, Touche Ross & Co. and Peat Marwick Mitchell
& Co. Mr. Sikora received a BS (Accounting), with honors, from the University
of Colorado in 1959 and his certificate as a Certified Public Accountant in
1960.
John Depies. Mr. Depies has been Vice President and General Manager,
Thermal since May 2001. Mr. Depies previously served as Vice President Sales
and Marketing, Roll Printers from 1999 to 2001 and as Executive Director for
Carbonless Sales from 1997 to 1999. Mr. Depies joined Appleton Papers in 1983
and served in a number of managerial roles from 1983 to 1997. Mr. Depies
received his BA (Marketing) in 1979 and an MBA (Finance) in 1983 from the
University of Wisconsin-Oshkosh.
Rick Fantini. Mr. Fantini has been Vice President, Operations since January
2002. Previously he served as Vice President, Human Resources and Procurement
from 1998 to 2002, as Director of Procurement from 1997 to 1998, and as manager
of Business Development from 1996 to 1997, and served in a number of labor
relations and benefits jobs since joining Appleton Papers in 1980. Mr. Fantini
received a BA (Social Science) from Michigan State University in 1977, a
Masters (Labor and Industrial Relations) from Michigan State University in 1980
and an MBA from Northwestern University (Kellogg) in 1996.
74
James McDermott. Mr. McDermott has been Vice President, Carbonless Sales
and Marketing since January 2002. Prior to this, Mr. McDermott rejoined
Appleton as Vice President, Carbonless Sales from May 2001 to January 2002
after a brief departure in 1999. Mr. McDermott was Vice President of Sales &
Marketing for Dunsirn Industries from 1999 to 2001. Mr. McDermott originally
was hired by Appleton Papers in 1986 and has held various sales positions. Mr.
McDermott received a BS (Agricultural Economics) from the University of
Wisconsin-Madison in 1979.
Stephen Sakai. Mr. Sakai has been Vice President, New Business Development
since March 2001. He previously served as Vice President and General Manager,
Thermal from 1999 to March 2001, as Executive Director of Sales and Marketing
for the Coated Free Sheet Business from 1997 to 1999 and other management
positions with the Coated Free Sheet Business from February 1996 to October
1997. Prior to joining Appleton Papers he held a variety of positions in
finance, sales and marketing with Scott Paper from 1976 to 1996. Mr. Sakai
received a BA from the University of Washington in 1975 and he received an MBA
from the University of Puget Sound Business School in 1982.
John Tucker. Mr. Tucker has been Vice President, Information Services since
joining Appleton Papers in 1986. Prior to joining Appleton Papers, he was Staff
Vice President of Business and Information Systems at Kimberly-Clark
Corporation. Mr. Tucker received a BA (Math and Physics) from Southern Illinois
University in 1967 and received an MBA from the University of Missouri at
Kansas City Business School in 1971.
Ann Whalen. Ms. Whalen has been Vice President, Project Venture since
January 2002. Project Venture is our name for the installation of a new
enterprise resource planning system, which is a computer software system used
for invoicing, financial reporting, shipment planning and manufacturing
operations. She previously served as Vice President, Logistics from 1999 to
January 2002, as Vice President of Finance from 1997 to 1999 and as Controller
from 1991 to 1997. Ms. Whalen joined Appleton Papers in 1981 and served in
several accounting positions prior to 1991. Ms. Whalen received a BBA
(Accounting) from the University of Wisconsin-Madison in 1981 and she received
an MBA from the University of Wisconsin-Oshkosh in 1990.
Ted Goodwin. Mr. Goodwin has been Vice President, Technology since
September 2001. Mr. Goodwin previously served as Executive Director of New
Business Development from 1999 to 2001, and prior to this, he was the Executive
Director of Carbonless Research and Development from 1997 to 1999, Director of
Applied Research from 1994 to 1997, and Director of Thermal Research from 1991
to 1994. Mr. Goodwin joined Appleton Papers in 1979 and advanced through
several positions within Research and Development from 1979 to 1994. Mr.
Goodwin received his BS (Chemistry) from the University of Detroit in 1979 and
he received an MBA from the University of Wisconsin-Oshkosh in 1988.
Thomas Cashman. Mr. Cashman has been the Plant Manager of our Appleton
Plant since 1985. Mr. Cashman progressed through a series of labor, industrial
relations and production positions since joining Appleton Papers in 1971. Mr.
Cashman received a BA (Psychology) from St. Cloud State College in 1968 and a
Masters (Sociology) from Northern Illinois University in 1970.
Todd Downey. Mr. Downey has been the Mill Manager at our West Carrollton
Mill since 2000. He previously served as Production Manager from 1996 to 2000
and Paper Machine Business Unit Manager at our West Carrollton mill from 1994
to 1996. Prior to joining Appleton Papers in 1994, Mr. Downey worked at
Champion International's Hamilton, Ohio mill from 1982 to 1994. Mr. Downey
received a BA (Paper Science and Engineering) from Miami University in 1982.
John Showalter. Mr. Showalter has been the Mill Manager at our Spring Mill
since 1989. Mr. Showalter joined Appleton Papers in 1977 and served in several
positions prior to becoming Mill Manager. Mr. Showalter received a BS
(Education) from Penn State University in 1974 and he received a Masters
(Personnel Administration) from Ohio University in 1975.
The Board of Directors of Paperweight Development consists of seven members.
Paperweight Development 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 Paperweight Development common stock in connection with the election
of
75
directors. Under the agreement, the ESOP Trust has agreed to vote all of its
shares of Paperweight Development common stock to give effect to the following
composition of Paperweight Development's board of directors after the closing:
. prior to January 1, 2003, three individuals nominated by the ESOP Trust,
three individuals nominated by Paperweight Development's chief executive
officer and one individual proposed by the ESOP Trust and acceptable to
the chief executive officer, which we refer to as a joint nomination;
. between January 1, 2003 and December 31, 2003, two individuals nominated
by the ESOP Trust, three individuals nominated by Paperweight
Development's chief executive officer and two individuals jointly
nominated by the ESOP Trust and the chief executive officer;
. between January 1, 2004 and December 31, 2004, one individual nominated
by the ESOP Trust, three individuals nominated by Paperweight
Development's chief executive officer and three individuals jointly
nominated by the ESOP Trust and the chief executive officer; and
. on and after January 1, 2005, four individuals nominated by Paperweight
Development's chief executive officer and three individuals jointly
nominated by the ESOP Trust and the chief executive officer.
The ESOP trust has agreed that any vote taken to remove a director or to
fill vacancies on the board of directors are 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
Paperweight Development's chief executive officer. In addition to the election
of directors, the agreement prohibits Paperweight Development 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.
Paperweight Development has entered into a security holders agreement with
us on terms substantially similar to those described above to provide for the
manner in which Paperweight Development will vote its shares of our common
stock in connection with the election of directors. In addition to the election
of directors, the agreement prohibits us from issuing capital stock to any
person other than Paperweight Development or making, or permitting any of our
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 Paperweight Development.
Pursuant to the agreements above, Messrs. Buth, Karch and Parker were
nominated by Mr. Buth, our chief executive officer, and elected to the boards
of directors of Paperweight Development and Appleton Papers, Messrs. Davis,
Kenney, and Sikora were nominated by the ESOP Trust and elected to the boards
of directors of Paperweight Development and Appleton Papers and Ms. Scherbel
was jointly nominated by Mr. Buth and the ESOP Trust and elected to the boards
of directors of Paperweight Development and Appleton Papers.
Pursuant to the terms of the senior credit facilities, the indenture and the
deferred payment obligation, the security holders agreements described above
may not be amended except under limited circumstances. In addition, the senior
credit facilities, the indenture and the deferred payment obligation require
our board of directors and the board of directors of Paperweight Development to
include at least two independent directors.
The Board of Directors has an Audit Committee and Compensation Committee.
The members of both the Audit Committee and the Compensation Committee are Ms.
Scherbel and Messrs. Davis, Kenney and Sikora. The charter of the Audit
Committee provides, among other things, to provide 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
Paperweight Development financial reports. The charter of the Compensation
Committee provides that the Committee is responsible for establishing the
compensation of our Chief Executive Officer, approving the compensation of the
named executive officers and reviewing the compensation of other members of the
CEO team. The Compensation Committee also has authority for administration of
our Long-Term Incentive Plan. See "--Executive Compensation--Future Management
Compensation--Long-Term Incentive Plan."
76
Executive Compensation
The following table sets forth the compensation for the last three years
paid to our chief executive officer and our four other most highly compensated
executive officers, who we refer to as our named executive officers:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------------------------------ ---------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(1) Options/SARs(#) Compensation($)(2)
- --------------------------- ---- --------- -------- ------------------ --------------- ------------------
Douglas P. Buth 2001 419,422 210,000 27,189 27,600 1,774,868
Chairman, President and 2000 389,423 156,000 25,494 0 519,820
Chief Executive Officer 1999 358,922 180,000 25,914 0 9,579
Jerry E. Wallace 2001 224,460 105,847 11,806 5,770 591,853
Executive Vice President 2000 221,913 118,515 11,806 40,000 12,449
Operations (3) 1999 205,154 163,400 11,806 40,000 11,068
Dale E. Parker (4) 2001 216,796 102,852 13,156 5,770 731,113
Vice President, Finance 2000 173,654 77,000 4,385 40,000 23,341
and Chief Financial Officer 1999 -- -- -- -- --
Stephen P. Sakai 2001 195,675 108,367 19,709 5,770 497,955
Vice President, New 2000 180,627 88,427 16,057 40,000 13,550
Business Development 1999 172,413 96,775 14,243 40,000 10,710
Ann M.Whalen 2001 178,602 110,736 13,558 5,770 259,693
Vice President, 2000 165,145 80,847 11,807 40,000 9,290
Project Venture 1999 153,539 88,480 11,807 40,000 8,915
- --------
(1)Other annual compensation consists of perquisites and tax reimbursements
related to the perquisites.
(2)All other compensation for 2001 consists of the following for each named
executive officer: Mr. Buth, loyalty payment ($780,000), sales incentive
payment ($984,000), company contributions to defined contribution plans
($9,425) and life insurance premiums ($1,443); Mr. Wallace, loyalty payment
($414,000), sales incentive payment ($165,000), company contributions to
defined contribution plans ($9,910) and life insurance premiums ($2,943);
Mr. Parker, loyalty payment ($368,000), sales incentive payment ($350,000),
company contributions to defined contribution plans ($9,917), relocation
($527) and life insurance premiums ($2,670); Mr. Sakai, loyalty payments
($319,000), sales incentive payment ($165,000), company contributions to
defined contribution plans ($12,784) and life insurance premiums ($1,171);
and Ms. Whalen, loyalty payment ($250,000), company contributions to defined
contribution plans ($9,287) and life insurance premiums ($407). The defined
contribution plans include the KSOP and the 401(a) plan.
(3)Mr. Wallace retired effective February 1, 2002.
(4)Mr. Parker was first employed by Appleton Papers on February 28, 2000.
77
Stock Appreciation Rights Plans
The following table summarizes certain information concerning SAR grants
made under the Appleton Papers Inc. Long-Term Incentive Plan to the named
executive officers during fiscal 2001.
Option/SAR Grants in Fiscal 2001
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Terms(1)
------------------------------- --------------------
% of Total
Number of Options/
Securities SARs
Underlying Granted to Exercise
Options/ Employees or Base
SARs in Fiscal Price Expiration
Name Granted (#) Year ($/Sh) Date 5%($) 10%($)
- ---- ----------- ---------- -------- ---------- ------- -------
Douglas P. Buth. 27,600 13.7% 10.00 11/9/11 173,575 439,873
Jerry E. Wallace 5,770 2.9% 10.00 11/9/11 36,287 91,959
Dale E. Parker.. 5,770 2.9% 10.00 11/9/11 36,287 91,959
Stephen P. Sakai 5,770 2.9% 10.00 11/9/11 36,287 91,959
Ann M. Whalen... 5,770 2.9% 10.00 11/9/11 36,287 91,959
- --------
(1)The dollar amounts under these columns are the result of calculations at
assumed rates of stock price appreciation of 5% and 10% over the ten-year
period of the grant. These assumed rates of growth were selected by the
Securities and Exchange Commission for illustration purposes only. The
actual value realized by our named executive officers with respect to these
SARs are reflected in the following table.
The following table summarizes for each of the named executive officers the
number of shares of Paperweight Development common stock with respect to which
SARs were exercised during fiscal 2001 and the dollar value realized upon
exercise of SARs. Value realized upon exercise is the difference between the
fair market value of the underlying shares of Paperweight Development common
stock on the exercise date and the exercise or base price of the SARs.
Aggregated Option/SAR Exercises in Fiscal 2001
and FY-End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End(#) FY-End($)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------- ----------- ------------- ----------- -------------
Douglas P. Buth. 0 -- 0 27,600 0 0
Jerry E. Wallace 0 -- 0 5,770 0 0
Dale E. Parker.. 0 -- 0 5,770 0 0
Stephen P. Sakai 0 -- 0 5,770 0 0
Ann M. Whalen... 0 -- 0 5,770 0 0
Pension and Related Plans
In addition to the KSOP, we maintain a broad-based qualified,
noncontributory defined benefit pension plan for eligible salaried employees,
the pension plan. We have also established a Supplemental Executive Retirement
Plan, the SERP, to provide retirement benefits for management and other highly
compensated employees whose benefits are reduced by qualified plan limitations
in the pension plan. 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 qualified plan limitations did not apply. Under the pension plan and
the SERP, a pension is payable upon retirement at age 65, or upon earlier
termination if certain conditions are satisfied. 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 retirement. Compensation covered by the plans includes base salary,
bonus and overtime pay as defined in the pension plan.
78
The table below shows the estimated monthly single life annuity benefit
under the pension plans (without qualified plan limitations) at various salary
levels and years of credited service payable upon retirement at age 65 in the
year 2001 (2001 Social Security Covered Compensation is used in the formula).
The benefit shown is not subject to any deduction for any Social Security
benefit:
Years of Service
--------------------------------------
Remuneration 15 20 25 30 35
------------ ------ ------- ------- ------- -------
$125,000 $2,007 $ 2,677 $ 3,346 $ 4,015 $ 4,684
150,000 2,445 3,260 4,075 4,890 5,705
175,000 2,883 3,843 4,804 5,765 6,726
200,000 3,320 4,427 5,533 6,640 7,747
225,000 3,758 5,010 6,263 7,515 8,768
250,000 4,195 5,593 6,992 8,390 9,788
300,000 5,070 6,760 8,450 10,140 11,830
400,000 6,820 9,093 11,367 13,640 15,913
450,000 7,695 10,260 12,825 15,390 17,955
500,000 8,570 11,427 14,283 17,140 19,997
We have two non-qualified deferred compensation plans for senior executives.
The first has been in place for some time and allows participants to defer
receipt of any percentage of his or her compensation by filing an appropriate
election with us. Under the arrangements related to this plan, we funded a
rabbi trust on October 11, 2001 to provide funds for our current obligations of
approximately $2.4 million under this plan, of which approximately $1.4 million
are obligations to current senior executives (approximately $1.1 million of
which are obligations to the named executives) and approximately $1.0 million
are obligations to retired executives. The funds in the rabbi trust remain
subject to claims of our creditors in the event of insolvency. There will be no
further deferrals to this plan. We have also established a new deferred
compensation plan for senior executives which will allow for future deferrals
but for which no funds will be transferred to the rabbi trust. In addition to
deferrals similar to those allowed under the old plan, this new plan will also
provide for the deferrals of the loyalty payments described below under the
heading "--Transaction-Related Executive Compensation." Except for the amounts
deferred from the loyalty payments which will increase or decrease based on
changes in the value of Paperweight Development common stock, amounts deferred
in both plans will be increased at the then prevailing ten-year Treasury note
rate.
Termination Protection Agreements
We had entered into termination protection agreements with the members of
our CEO team, including the named executive officers. These agreements provided
that if, at any time other than within three years after a "change of control,"
as defined in the agreement, we terminated the executive officer's employment
other than for misconduct, or "permanent disability," as defined in the
agreement, or the executive officer terminated his employment for "good
reason," as defined in the agreement, then the executive officer would continue
to receive payments in accordance with our normal payroll practices for two
years following termination of employment at a rate equivalent to the executive
officer's base salary in effect on the date on which his employment terminated.
The payments to the executive officer would have been reduced by amounts the
executive officer earned through employment during the two year salary
continuation period but after six months from the date of termination. The
payments would have ceased completely if the executive officer, at any time,
engaged in a competing business.
Conversely, if, within three years of a change of control, we terminated the
executive officer's employment other than for misconduct, or permanent
disability, or the executive officer terminated his or her employment for good
reason, then the executive officer would have been entitled to a lump-sum cash
payment. This payment would have been equal to two times the executive
officer's annual base salary, plus a multiple of two times the executive
officer's targeted bonus for the year in which his or her employment
terminated, or if no such bonus
79
had been established for the year of termination, then the bonus for the fiscal
year prior to termination would have been used. The executive officer would
have also been entitled to enhanced pension benefits and a lump-sum cash
payment representing a partial bonus for the year of termination, based on the
number of days the executive officer worked in the year of termination.
We recently entered into new termination protection agreements with most
members of our CEO team, including four of the named executive officers, upon
closing of the transaction that replaced the termination protection agreements
described above. The new agreements provide that if, at any time other than
within two years after a "change of control," as defined below, we terminate
the executive officer's employment other than for misconduct, or "permanent
disability," as defined below, or the executive officer terminates the
executive officer's employment for "good reason," as defined below, then the
executive officer will continue to receive payments in accordance with our
normal payroll practices for eighteen months following termination of
employment at a rate equal to the executive officer's base salary in effect on
the date in which his or her employment terminates. The payments to the
executive officer would be reduced by amounts he or she earns through
employment during the eighteen month salary continuation period after twelve
months from the date of termination. The payments would cease completely if the
executive officer, at any time, engaged in a competing business.
Conversely, if, within two years of a change of control, we terminate the
executive officer's employment other than for misconduct, or permanent
disability, or he or she terminates his employment for good reason, then he or
she will be 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 bonus for the fiscal year in which his or her employment
terminates, or if no such bonus has been established for the fiscal year of
termination, then the bonus for the fiscal year prior to termination will be
used. The executive officer will also be entitled to a lump-sum cash payment
representing a partial bonus for the year of termination, based on the number
of days the executive officer worked in the year of termination.
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 our benefit plans. In
addition, he or she would be entitled to reimbursement for outplacement
services and continued health and dental coverage for the executive officer and
the executive officer's family for 18 months after the date of termination not
in connection with a change of control or 24 months after the date of
termination in connection with a change of control.
Our new severance agreements provide that if certain amounts to be paid
thereunder constitute "parachute payments," as defined in Section 280(G) of the
Internal Revenue Code, the severance benefits owed to the executive officer may
be increased such that the net amount retained by the executive officer after
deduction of any excise taxes and income taxes on the excise tax and additional
payments, shall be equal to the original severance benefits.
A "change of control" is defined in our new agreements as:
. the transfer of substantially all of our assets to an unrelated party;
. our liquidation;
. our merger or consolidation into another company; or
. any other event whereby ownership and control is effectively transferred.
"Permanent Disability" is defined in our new agreements as any time an
executive officer is entitled to receive benefits under Title II of the Social
Security Act.
"Good Reason" is defined in our new agreements as, prior to a change in
control, without the executive officer's consent, a reduction of 25% or more of
the executive officer's base salary and after a change in control:
. a decrease in the executive officer's position or responsibilities
without his or her consent;
80
. failure to pay the executive officer's salary or bonus in effect
immediately prior to a change in control; or
. the relocation of the executive officer's principal place of employment
without his or her consent.
Transaction-Related Executive Compensation
As part of AWA's efforts to sell Appleton Papers which began in mid-2000,
prior to consideration of an ESOP-funded purchaser, AWA agreed to compensate
certain executive officers for their efforts in selling us to a third party
through two programs, which we refer to as the AWA incentive programs. The
first of those provided for a "loyalty payment" to the named executive officers
and other members of our CEO team as of October 1, 2000, who remained officers
through the closing of any sale of Appleton Papers and who agreed to be engaged
for between one and two years on behalf of any buyer of Appleton Papers. We
refer to these officers as the loyalty payment recipients. The loyalty payments
were related to pre-existing termination protection agreements between AWA and
the loyalty payment recipients. Under these agreements, AWA was liable upon a
change of control for payments equal to two times the annual compensation of
each loyalty payment recipient.
The total loyalty payments, which were approximately one-half of the amounts
which would have otherwise been due, were accepted by the loyalty payment
recipients in lieu of the payments under the existing termination protection
agreements. AWA would not have been liable for these payments if the purchase
price for Appleton Papers had been less than $759.4 million. These loyalty
payments totaled $4.1 million for the loyalty payment recipients. As part of
the acquisition, each of the loyalty payment recipients agreed to defer
a substantial portion of his or her loyalty payment into a deferred
compensation plan. The deferred amounts were not paid to the loyalty payment
recipients and are therefore available to us until their employment is
terminated. The deferred amounts are functionally equivalent to an equity
investment in Paperweight Development, subject to the same investment risk and
return profile as the ESOP equity investment. Investment return on the deferred
amounts will be equal to the increases or decreases in the value of Paperweight
Development common stock as determined by the independent, third party
appraiser selected by the ESOP trustee. The amounts deferred are the equivalent
of each loyalty payment recipient investing approximately half of the after-tax
portion of the loyalty payment in Appleton Papers, in a total amount of
$1.2 million.
The second compensation program involved a "sales incentive" payment which,
under the agreement with AWA, would have ranged from $0, if the purchase price
for us to any buyer were less than $700 million, to $10.0 million if the
purchase price for us was $1.2 billion or more. At the agreed purchase price in
the acquisition of $810 million, the total sales incentive amount was $2.8
million. The sales incentive was allocated 40% to Mr. Buth and the balance was
distributed by Mr. Buth in his discretion among other employees who assisted
with the acquisition.
Payments under the AWA incentive programs, although paid directly by
Appleton Papers, were borne by AWA under the terms of the acquisition. The AWA
incentive programs created a conflict of interest for the management team by
giving them an incentive to agree to a higher purchase price. The CEO team
believes that the purchase price as negotiated was fair to the buyers. In
addition, Paperweight Development's financial advisor, Houlihan Lokey Howard &
Zukin, rendered an opinion to the Paperweight Development board of directors
that concluded that the purchase price as negotiated was fair, from a financial
point of view, to the buyers. The opinion was rendered solely to the board of
directors of Paperweight Development and may not be relied upon by any other
person, including any purchaser of the notes. The CEO team believes that its
interest in our long-term success, the success of the ESOP and its collective
investments in the ESOP (approximately $5 million from the CEO team's KSOP and
401(a) accounts, and the invested portion of the loyalty payments of $1.2
million) provided management's negotiating team with an incentive to negotiate
a lower and fair price which outweighed any incentive to seek a higher price to
increase payments provided by the AWA incentive programs.
81
Future Management Compensation and Long-Term Incentive Plan
Future management compensation will be determined by the Compensation
Committee of the Paperweight Development Board of Directors. We expect that our
management compensation policy will provide that management salaries, cash
bonuses and other compensation will be consistent with our strategic goals and
the best interests of the participants in the ESOP and generally be within the
middle of the range for management compensation for similar companies. The ESOP
trustee has reviewed the proposed management compensation arrangements as part
of its review of and determination with respect to, the ESOP investment in us.
In addition to salaries, annual performance bonuses and fringe benefits,
such as health and life insurance, approximately 100 management employees will
be participants in the Appleton Papers Inc. Long-Term Incentive Plan. The plan
provides for future cash bonuses based on the long-term performance of Appleton
Papers and increases in the value of Paperweight Development common stock, as
determined by the semi-annual appraisals of the Paperweight Development common
stock as determined by the independent, third party appraiser selected by the
ESOP trustee. The plan will annually award specific "phantom stock" units to
employees in aggregate quantities of up to 2% of outstanding Paperweight
Development stock, with up to an additional 1% to select newly hired management
employees. The units will be awarded at the most recent Paperweight Development
stock price as determined by the semi-annual ESOP appraisal. Employees holding
phantom stock units will be entitled to trigger the cash bonus for any phantom
stock unit only after holding the unit for at least three years, except in the
event of the sale or recapitalization of Paperweight Development or us. The
cash bonus for any unit will be equal to the increase in the value of
Paperweight Development common stock from the date of issue until the trigger
date. We believe the plan is within standard industry terms for management
long-term incentive compensation and will benefit us by retaining management
talent and providing management with appropriate incentives to manage us in
order to increase Paperweight Development's share price.
Director Compensation
Directors of Appleton Papers and Paperweight Development who are not
employees of Appleton Papers, Paperweight Development or any of their
subsidiaries are currently entitled to an annual fee for service on both boards
of $20,000. Directors are also entitled to an annual fee of $2,500 for serving
as the chairman of a board committee and receive a fee of $1,000 per day for
in-person meetings and $500 per day for other meetings. In addition, each
director is reimbursed for travel expenses incurred in connection with
attending board meetings.
82
RELATIONSHIP WITH ARJO WIGGINS APPLETON
We have entered into a number of agreements with AWA and its subsidiaries
for the purpose of defining our ongoing relationship with AWA and the conduct
of our respective businesses after the acquisition. These agreements were
developed prior to or in connection with the acquisition while we were an
indirect, wholly owned subsidiary of AWA, and, therefore, such agreements were
not the product of arm's-length negotiations. As a result, there can be no
assurance that each of these agreements, or the transactions provided for in
these agreements, has been or will be effected on terms at least as favorable
to us as could have been obtained from parties other than AWA.
These agreements may be modified and additional agreements, arrangements and
transactions may be entered into between us after completion of this offering.
Any such future modifications, agreements, arrangements and transactions will
be determined through negotiation between us and AWA or its subsidiaries.
The following is a summary of the material features of certain agreements
between us and AWA and AWA's subsidiaries.
Fox River Indemnification Agreements
We entered into the Fox River Indemnification Agreements under which we will
receive indemnification from AWA for liabilities related to the historic
discharge of PCBs from the Appleton plant or otherwise relating to the
manufacture of carbonless paper at various locations, including the Lower Fox
River. For a more complete description of the Fox River Indemnification
Agreements, see the discussion under the heading "Description of Acquisition
Agreements--Fox River Indemnification Agreements."
2008 Note
At the closing of the acquisition on November 9, 2001, we issued to AWA a
senior subordinated note due 2008 in the principal amount of $250 million,
which we refer to as the 2008 Note. The 2008 Note would have matured on
November 9, 2008 and bore interest at the rate of 11.5% per annum on the date
it was redeemed. The 2008 Note was guaranteed by Paperweight Development and
certain of our domestic subsidiaries. The proceeds of the offering of old
notes, together with other available cash, was used to redeem in full, at par,
the 2008 Note and pay accrued and unpaid interest to the date of redemption.
Basestock Supply Agreement
We are currently party to a basestock supply agreement with Appleton Coated
which commenced December 30, 2001. Under this agreement we will purchase and
Appleton Coated will sell to us at least 67,500 tons of basestock products in
2002 and 27,000 tons in 2003. We anticipate our expenses related to these
purchases will be approximately $60 million in 2002 and $25 million in 2003.
The initial term of the new basestock supply agreement expires December 29,
2003 and the agreement may be extended for additional one-year terms by mutual
agreement of the parties.
Intellectual Property Agreements
As of the closing of the acquisition, we amended and restated the
intellectual property agreement among WTA Inc., Appleton Coated and us, which
we refer to as the Amended and Restated Intellectual Property Agreement.
Appleton Coated Papers Holdings, Inc., the corporate parent of Appleton Coated,
was made a party to the Amended and Restated Intellectual Property Agreement
and the agreement was amended to set forth the ownership of designated
intellectual property rights as between Appleton Coated and us relating to the
83
manufacture of coated papers and basestock. Also, under this agreement and
subject to certain limited exceptions, Appleton Coated and Appleton Coated
Papers Holdings, Inc. have agreed not to manufacture or sell carbonless copying
paper in the United States, Canada, Mexico, the Caribbean or Central or South
America for a period of three years.
We have also entered into an intellectual property agreement among WTA Inc.,
Arjo Wiggins Appleton Holdings Limited, Arjo Wiggins Limited and us pursuant to
which the parties grant to each other a fully paid, perpetual, worldwide,
nonexclusive, royalty-free license to use each others' intellectual property
with respect to the use or sale of carbonless paper and/or thermal paper and/or
ingredients used in the manufacture of either, including basestock. There is a
territorial restriction in these cross licenses relating to "manufacture," in
terms of making, having made, and further developing. For us, the license
prohibits manufacturing in Western and Eastern Europe under AWA patents, but
does not prohibit the sale or use of carbonless paper, thermal paper and their
respective ingredients in these territories. For AWA the license prohibits
manufacturing in North, Central and South America under our and WTA Inc.
patents, but does not prohibit the sale or use of carbonless paper, thermal
paper and their respective ingredients, in these territories. The license
granted under this agreement may only be terminated under some circumstances.
Information Technology Services and Data Center Agreements
We have entered into information technology services and data center
agreements with Appleton Coated and Arjo Wiggins Carbonless Paper Europe Ltd.
pursuant to which Appleton Coated and Carbonless Europe use our computer
information systems and communications network to perform certain functions.
These agreements are terminable without cause on six months' notice. The
agreement with Appleton Coated expired December 31, 2001 and the agreement with
Carbonless Europe expired July 27, 2001, at which time the agreement
automatically continued, subject to termination on six months' notice from
either party. We anticipate the revenues received under the latter agreement to
be approximately $870,000 in fiscal 2002.
Trademark License Agreements
We have entered into trademark license agreements with Appleton Coated, Arjo
Wiggins Appleton Holdings Limited and Arjo Wiggins Limited pursuant to which we
will license exclusive and non-exclusive rights to use various trademarks and
related rights. The licenses granted under these agreements are royalty-free.
The trademark license agreement with Appleton Coated is perpetual, but may be
terminated:
. three years after the date on which Appleton Coated assigns the rights
granted under the agreement to a company other than Worms et Cie. or its
affiliates; or
. three years after the date on which Appleton Coated ceases to be an
affiliate of Worms et Cie.
The trademark license agreement with Arjo Wiggins Appleton Holdings Limited
and Arjo Wiggins Limited has a term of two years.
Pension Plan Transfer Agreement
In connection with the acquisition, we entered into a Pension Plan Transfer
Agreement under which we divided the assets and liabilities of the Appleton
Papers Inc. Retirement Plan for Non-Bargaining Unit Employees between us and
Appleton Coated as of the closing. In November 2001, we transferred assets from
our plan to a new plan established by Appleton Coated in an amount equal to the
then present value of the pension liabilities under our plan for current and
former employees of Appleton Coated and a pro-rata share of any surplus amounts
above the then present value of the pension liabilities under our plan for
Appleton Coated's and our current and former employees. Our current and former
employees continue to participate in our plan and the current and former
employees of Appleton Coated participate in the new plan established by
Appleton Coated and the pension liabilities for these current and former
employees of Appleton Coated are liabilities of Appleton Coated's new plan.
84
CERTAIN TRANSACTIONS
In the past we have entered into intercompany transactions and arrangements
related to our business and to the financing of AWA and our operations with AWA
and its affiliates. These transactions and arrangements were entered into while
we were a wholly owned subsidiary of AWA, and, therefore, were not necessarily
the result of arm's length negotiations. As a result, these transactions and
arrangements may not have been effected on terms at least as favorable to us as
could have been obtained from parties other than AWA and its affiliates.
In December 1997, we entered into a revolving credit facility and borrowed
$600 million. We then used the $600 million to repay intercompany debt. We
repaid approximately $212.3 million in fiscal 1998 and $387.7 million of this
debt in fiscal 1999. In fiscal 1999, we entered into loans with affiliates of
AWA for $372.9 million and used the proceeds from these loans primarily to
repay the revolving credit facility. These loans from affiliates of AWA totaled
$273.7 million at the end of fiscal 1999 and $331.6 million at the end of
fiscal 2000 and had interest rates ranging from 5.6% to 7.3%. In conjunction
with our acquisition from AWA by Paperweight Development, these loans were
repaid prior to the closing of the acquisition.
On December 16, 1999, Arjo Wiggins Investments Inc., which was formed to
facilitate international financial tax transactions with other affiliates of
AWA, issued us an additional 11 shares of its capital stock, increasing our
ownership of Arjo Wiggins Investments from 78.6% to 80.0%. Arjo Wiggins
Investments held a 14.5% interest in Arjo Wiggins SA, a French company,
ultimately owned by AWA. The historical cost of the investment by Arjo Wiggins
Investments in Arjo Wiggins SA was $34 million. On December 17, 1999, Arjo
Wiggins Investments sold its equity interest in Arjo Wiggins SA to AWA for $58
million resulting in a gross taxable gain of $24 million. This related party
gain, net of $8.4 million of taxes, has been charged directly to our
shareholder's equity in our financial statements at January 1, 2000. On July
26, 2000, we bought the remaining 20% minority share of Arjo Wiggins
Investments, which was held by a subsidiary of AWA, for $46 million. Once we
held 100% of the stock of Arjo Wiggins Investments, it was liquidated into us.
We held at December 30, 2000 a $125 million note payable by Arjo Wiggins SA.
This note was transferred to us by operation of law when Arjo Wiggins
Investments was liquidated into us. Interest at the annual rate of 6.46% on
this note was payable on June 15 and December 15 of each year. In connection
with this note, we recorded $6.4 million of interest income in fiscal 2001 and
$8.1 million of interest income in each of fiscal 2000 and fiscal 1999. Given
the nature of the loan, this note was recorded as an offset to shareholder's
equity on the consolidated balance sheets in our consolidated financial
statements. This note was sold to AWA for $125 million plus all accrued
interest prior to closing of the acquisition.
In September 1998, AWA Finance Ltd. redeemed 26 million of its shares from
our subsidiary, Appleton Capital Inc., for $50 million in cash. In December
1998, Appleton Capital sold its remaining 73 million shares of AWA Finance to
AWA for $138.7 million. In total, these two transactions resulted in a gain to
us of $10.6 million which was primarily caused by movement in the foreign
exchange markets and has been reflected in net income for fiscal 1998. On March
31, 1999, we bought the remaining 20% minority share of Appleton Capital, which
was held by a subsidiary of AWA, for $42.1 million. Once we held 100% of the
stock of Appleton Capital, it was liquidated into us.
During fiscal 2000 and continuing through March 2001, we paid AWA a
management fee of approximately $100,000 per month pursuant to a management
services agreement. Our obligation to pay AWA, under that agreement, terminated
upon completion of the acquisition and, in accordance with the purchase
agreement, AWA refunded $400,000 to us for management fees paid in fiscal 2001.
We do not anticipate any additional cost to replace these services.
85
We are party to certain other intercompany arrangements which resulted in
amounts owed to us or by us as follows:
Fiscal
---------------------
1999 2000 2001
------ ------ -----
(dollars in millions)
Amount due (to)/from us at the end of the period with respect to
the cash pooling agreement..................................... $ (3.5) $ (1.8) $ 0.0
Miscellaneous payables owed by us at the end of the period....... 0.2 6.9 0.0
Management fees paid by us to AWA for 1998 through mid-year
fiscal 1999 and Arjo Wiggins Appleton Holdings Limited for
the second half of fiscal 1999 through year end fiscal 2000 and
year end fiscal 2001........................................... 1.4 2.1 1.0
Basestock purchases by us from Appleton Coated for the period.... 209.4 165.3 86.4
For a further description of recent transactions between us and AWA and its
affiliates, please see Note 6 of Notes to Consolidated Financial Statements
included elsewhere in this prospectus.
We will continue to engage in various transactions with AWA and its
affiliates on a contractual and non-contractual basis. The existing and
presently contemplated contractual arrangements are described in greater detail
under the headings "Description of Acquisition Agreements" and "Relationship
with Arjo Wiggins Appleton."
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The Appleton Papers Inc. Employee Stock Ownership Trust, whose address is
c/o State Street Global Advisors, Two International Place, Floor 34, Boston,
Massachusetts 02110, owns beneficially and of record 100% of the issued and
outstanding shares of Paperweight Development Corp. Paperweight Development
owns beneficially and of record 100% of the issued and outstanding shares of
Appleton Papers Inc., which in turn owns beneficially and of record 100% of the
issued and outstanding shares of WTA Inc.
The following table sets forth as of December 31, 2001 the number of shares
allocated to the accounts of our directors, our named executive officers and
our directors and executive officers as a group in the Company Stock Fund of
the KSOP.
Amount and Nature
of Beneficial
Name of Beneficial Owner Ownership(1) Percent
- ------------------------ ----------------- -------
Douglas Buth................................................ 58,655 *
Paul Karch.................................................. 34,954 *
Dale Parker................................................. 12,713 *
Nicholas Davis.............................................. --(2) *
Richard Kenney.............................................. --(2) *
Susan Scherbel.............................................. --(2) *
William Sikora.............................................. --(2) *
Jerry Wallace............................................... 57,171 *
Stephen Sakai............................................... 17,593 *
Ann Whalen.................................................. 46,403 *
All directors and executive officers as a group (19 persons) 551,987 5.1%
- --------
* Less than 1%.
(1)Participants in the KSOP have limited, shared voting rights with the ESOP
trustee, statutory diversification rights beginning at age 55 and
conditional diversification rights beginning on January 1, 2006. See "The
Appleton Papers Retirement Savings and Employee Stock Ownership
Plan--Diversification Rights" and "--Voting Rights."
(2)Non-employee directors are not eligible to participate in the KSOP.
86
DESCRIPTION OF ACQUISITION AGREEMENTS
Purchase Agreement
Purchase Price. The purchase price paid by the buyers for Appleton Papers
was $810 million (which included the present value of the deferred payment
obligation described under the heading "Description of Deferred Payment
Obligation") plus proceeds of $7.4 million from the sale of our Harrisburg
facility.
Representations and Warranties. As part of the purchase agreement, the
sellers and AWA made representations and warranties to the buyers, relating to,
among other things, the following:
. the sellers' and AWA's organizational status and their authorizations to
enter into the purchase agreement and the related transactions;
. the capitalization of certain of its subsidiaries;
. the governmental approvals and consents necessary to complete the
acquisition;
. the accuracy of certain financial statements;
. the property ownership rights of certain of its subsidiaries;
. compliance with labor laws and the status of existing employee benefit
plans; and
. compliance with other applicable laws, including environmental laws.
As part of the purchase agreement, the buyers also made representations and
warranties to the sellers regarding, among other things, the buyers'
organizational status and their authorization to enter into the purchase
agreement and the related transactions. All representations and warranties of
the buyers and sellers set forth in the purchase agreement survive until July
30, 2003, except that the sellers' representations and warranties related to
their existence, the existence of certain of AWA's subsidiaries, the
capitalization of certain of AWA's subsidiaries, the authorization of the
transaction, certain tax matters, employment and employee benefit plan matters
and environmental matters survive until the expiration of the applicable
statute of limitations.
Covenants. The purchase agreement provided for a number of agreements and
covenants of the parties, including the following:
. effective as of the closing, the buyers agreed to employ all of our
active employees after the closing (subject to our rights to terminate
at-will employees and our rights under employment and collective
bargaining agreements) and continue our existing benefit plans;
. the buyers agreed to make all tax filings for the periods prior to the
closing when we were owned by AWA and to administer certain tax
proceedings;
. the sellers agreed to pay the first $5 million of income taxes for
periods prior to the closing when we were owned by AWA, the sellers and
the buyers agreed to evenly divide the obligation to pay such income
taxes in excess of $5 million and less than $10 million and the sellers
agreed to pay all of such income taxes in excess of $10 million, except
that we are responsible for the payment of all income taxes from October
1, 2001 to the closing date. The sellers are entitled to apply any tax
refunds for these periods prior to closing that we receive after closing
to prior period liabilities. Refunds in excess of prior period
liabilities will be retained by the buyers;
. we agreed not to use the name "Arjo Wiggins" beginning two months after
the closing; and
. the parties agreed to keep each other's business plans, trade secrets,
customer lists and other proprietary information confidential.
87
Indemnification. The sellers and AWA agreed to indemnify the buyers and
their affiliates for all losses resulting from any inaccuracies in the sellers'
representations and warranties, the breach or nonperformance of their covenants
and other agreements set forth in the purchase agreement, for liabilities
related to the business and operations of Newton Falls, Inc., Appleton Coated
LLC, Appleton Capital Inc., Appleton Leasing LLC, Arjo Wiggins Investments
Inc., Appleton Recycled Fibers, Inc., Paperhub.com, Inc. and several other of
our former subsidiaries, which we refer to as the excluded operations, the
ownership of the real property on which the Harrisburg plant is located and for
pre-closing environmental matters at this location, and for certain other
designated liabilities, which we refer to as other excluded liabilities,
including pending litigation, and some known environmental conditions or
issues, other than those matters relating to the Lower Fox River which are
covered by the Fox River Indemnification Agreements described below in this
section. The liability of the sellers and AWA under these provisions are
limited to losses for:
. in the case of a breach of an environmental representation or warranty
or a loss arising from a known environmental condition or issue
constituting other excluded liabilities, 50% of the first $5 million of
losses, and 100% of losses in excess of $5 million; and
. in all other cases, 100% of the losses.
The sellers and AWA agreed to pay the buyers for any losses suffered as a
result of these provisions in increments of $100,000 each, or every six months
if the losses are less than that. The total liability of the sellers and AWA
under these provisions is limited to $100 million, except for losses relating
to the excluded operations, the ownership of the real property on which the
Harrisburg plant is located and for pre-closing environmental matters at this
location, certain income taxes and liabilities addressed in the Fox River
Indemnification Agreements for which there will be no limitation on AWA's
potential liability. AWA agreed to indemnify the buyers for specified
environmental liabilities relating to the contamination of the Lower Fox River
under the separate Fox River Indemnification Agreements which are described
below in this section.
The buyers agreed to indemnify the sellers and their affiliates for all
losses resulting from inaccuracies in the buyers' representations and
warranties, the breach or nonperformance of their covenants and other
agreements to be set forth in the purchase agreement, the conduct of the
acquired business after the closing, in respect of specified employee benefit
plans, in respect of guarantees provided by the sellers and their affiliates
for the benefit of the acquired business, or claims by the buyers' shareholders
or lenders.
The purchase agreement sets forth procedures for making claims for
indemnification, defending against claims that give rise to rights of
indemnification and for settling disputes between the buyers and the sellers
over claims for indemnification.
Non-Competition. The sellers agreed not to manufacture or sell carbonless
copying paper in excess of specified amounts in the United States, Canada,
Mexico, the Caribbean or Central or South America for a period of three years
after the closing of the acquisition. This agreement, however, does not apply
to sales of carbonless copying paper to the sellers' existing customers; sales
of coated front carbonless copying paper to us from the operations of Appleton
Coated LLC (which is subject to a non-compete provision contained in the
Amended and Restated Intellectual Property Agreement which is described under
the heading "Relationship with Arjo Wiggins Appleton"); ownership of less than
20% of any company that manufactures or sells carbonless copying paper; or the
acquisition of any business that does not derive more than 15% of its revenues
from the manufacture or sale of carbonless copying paper in the prohibited
regions, provided the total revenues of the sellers and their affiliates from
the sales of carbonless copying paper in the prohibited regions resulting from
acquisitions made under this exception from the non-compete obligations does
not exceed $100 million or, if it does, that the sellers dispose of such
business within six months after it has been acquired, and the entity making
the acquisition agrees in writing with the buyers not to take any action out of
the ordinary course of business which would expand the competitive activities
of the acquired business.
The buyers agreed not to manufacture or sell carbonless copying paper in
Europe for a period of three years after the closing of the acquisition. This
agreement, however, does not apply to the ownership of less than 20% of
88
any company that manufactures or sells carbonless copying paper or the
acquisition of any business that does not derive more than 15% of its revenues
from the manufacture or sale of carbonless copying paper in the prohibited
region, provided the total revenues of the buyers and their affiliates from the
sales of carbonless copying paper in the prohibited region resulting from
acquisitions made under this exemption from the non-compete obligations does
not exceed $100 million or, if it does, that the buyers dispose of such
business within six months after it has been acquired, and the entity making
the acquisition agrees in writing with the sellers not to take any action out
of the ordinary course of business which would expand the competitive
activities of the acquired business.
The purchase agreement contains provisions for the enforcement and
termination of these restrictions.
Guarantee of AWA. AWA, the parent corporation of the sellers, agreed to
guarantee all of the obligations of the sellers under the purchase agreement,
including the payment of the sellers' indemnification obligations.
Disputes. The purchase agreement provides that any disputes among the
parties relating to the purchase agreement which cannot be resolved by the
executive officers of the parties will be resolved by an independent third
party arbitrator in a binding arbitration in accordance with the Center for
Public Resources-Rules for Non-Administered Arbitration. Any such arbitration
would be held in New York, New York.
Fox River Indemnification Agreements
As of the closing of the acquisition, we entered into indemnification
agreements under which AWA agreed to indemnify Paperweight Development and
Paperweight Development agreed to indemnify us for all governmental and third
party liabilities, which we refer to as the Fox River Liabilities, related to
the past discharge of polychlorinated biphenyls, or PCBs, from the Appleton
plant or otherwise related to the manufacture of carbonless paper at various
locations, including the Lower Fox River. The indemnification agreements mirror
one another and result in our receiving the indemnification payments made by
AWA. This summary assumes that AWA is satisfying the Fox River Liabilities by
paying us directly or making payments on our behalf, even though the
indemnification agreements provide that Paperweight Development is indemnified
by AWA and Paperweight Development indemnifies us.
We will be indemnified for the first $75 million of Fox River Liabilities
and for those in excess of $100 million. We are responsible for the $25 million
of liabilities between $75 and $100 million. The indemnification agreements
provide that it is the intent of the parties that at no time will we or
Paperweight Development be out-of-pocket for any costs and expenses relating to
the Fox River Liabilities for which we or Paperweight Development will be
indemnified.
To provide us with financial assurance that AWA will be able to meet its
indemnification obligations under these agreements, AWA has:
. agreed to deposit up to $75 million, minus all previous indemnification
payments made to us for Fox River Liabilities, into an escrow account,
which we refer to as the net worth protection, if AWA's consolidated
tangible net worth is less than (Pounds)500 million (1) for two
consecutive fiscal quarters, or (2) in whole or in part as a result of a
sale of assets outside the ordinary course of business, a sale of stock
or other ownership interests of any direct or indirect operating
subsidiary or a transaction out of the ordinary course of business;
. purchased and fully paid for a multi-year arrangement, which we refer to
as the annuity, to provide a limited stream of cash flow available to
pay AWA's share of the Fox River Liabilities over a multi-year period
beginning approximately eight years from the closing of the acquisition;
and
. purchased and fully paid for indemnity claim insurance from an affiliate
of American International Group, Inc., or AIG, that provides for the
payment of AWA's share of the Fox River Liabilities in amounts that
increase over a six year period. This arrangement, which we refer to as
the credit enhancement, will generally remain in effect until the stated
maturity of the notes.
89
The credit enhancement will terminate sooner than the stated maturity of the
notes if we experience some types of changes of control, provided we comply
with the provisions of the senior credit facilities and senior subordinated
notes, including provisions that could require us to repay or offer to repay
that indebtedness. The credit enhancement will be extended beyond the stated
maturity of the notes, which we refer to as an extension period, (1) for up to
three years if a designated arbiter is not able to determine that we will have
sufficient internal cash to repay the notes at stated maturity, or if the
designated arbiter determines we will have sufficient cash but we do not
actually repay the notes or irrevocably deposit funds sufficient to repay them
or (2) for up to five years if AWA shall have committed a payment default under
its indemnification obligations in excess of $1 million that is not cured
within 60 days of written notice. The amount of credit enhancement required
during an extension period will be the lesser of (1) two times the excess of
the required remaining indemnification payments during the extension period
over funds available from the net worth protection and the annuity as
determined by a designated arbiter or (2) the amount of credit enhancement
otherwise remaining on the first day of the extension period.
The net worth protection, the annuity and the credit enhancement are
collectively referred to as the financial assurance. Under the indemnification
agreements, AWA is able to reduce some of the financial assurance to avoid
duplication of the three components of the financial assurance.
In order to establish and administer the credit enhancement and the annuity,
AWA and Paperweight Development each formed direct or indirect special purpose
subsidiaries that jointly own a Bermuda corporation, which we refer to as the
policyholder. The policyholder owns and is the direct beneficiary of the credit
enhancement and the annuity. The policyholder has assumed AWA's share of the
Fox River Liabilities under AWA's indemnification agreement up to the amount of
the credit enhancement, but AWA has not been released from its primary
responsibility for performance under its indemnification agreement. This
structure is intended to protect the policyholder, the credit enhancement and
the annuity from claims made by the creditors of AWA, Paperweight Development
and/or their respective affiliates, including the special purpose subsidiaries
that own the policyholder, in a bankruptcy or other liquidation proceeding
involving any of these companies. There can be no assurance that this structure
will accomplish its intended result.
At the closing of the acquisition, AWA, Paperweight Development, the special
purpose subsidiaries and the policyholder entered into a Relationship Agreement
which, among other things and subject to certain limited exceptions, prohibits
AWA and Paperweight Development from taking any actions that would result in
any change to this structure including, without limitation, (1) amendments to
the charter documents of any of the special purpose subsidiaries or the
policyholder, (2) issuances, redemptions or transfers of any of the equity
securities of the special purpose subsidiaries or the policyholder and (3)
transfers or assignments of the credit enhancement. In addition, AWA and
Paperweight Development agreed, with respect to the special purpose
subsidiaries, and the special purpose subsidiaries agreed, with respect to the
policyholder, that they will not make any assignment for the benefit of
creditors, consent to the appointment of a receiver for their assets, or file
any petition or application under any bankruptcy, reorganization or similar
liquidation law or regulation.
The indemnification agreements provide that AWA can elect to control and
manage the Fox River Liabilities with the cooperation and assistance of our
personnel. We have agreed to make certain of our employees available to AWA at
its cost to assist with discussions and negotiations with the EPA, the DNR, the
FWS and other governmental agencies.
We cannot assure you that AWA will honor its indemnification obligations or
that the financial assurance will ultimately be sufficient as to timing or
amount to fulfill AWA's obligations under the indemnification agreements.
The indemnification agreements provide for a dispute resolution process
involving arbitration in accordance with the Center for Public Resources--Rules
for Non-Administered Arbitration.
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DESCRIPTION OF SENIOR CREDIT FACILITIES
The senior credit facilities have been provided by a syndicate of banks and
other financial institutions, with Bear, Stearns & Co. Inc. as sole lead
arranger, Bear Stearns Corporate Lending Inc., as syndication agent, Toronto
Dominion (Texas) Inc., as administrative agent and Firstar Bank, N.A. and
LaSalle Bank National Association, each as documentation agent. Set forth below
is a summary of the terms of the senior credit facilities.
The senior credit facilities consist of:
. a four-year revolving credit facility of up to $75 million for revolving
loans, including letters of credit;
. a four-year term loan A of $115 million; and
. a five-year term loan B of $150 million.
We are permitted to repay any of our borrowings, or reborrowings in the case
of the revolving loans, under the senior credit facilities without paying a
premium or penalty, other than the payment of breakage costs and reimbursement
of the lenders' actual re-deployment costs under certain circumstances. Under
certain circumstances, we are required to prepay our term loans with proceeds
of certain equity issuances, debt incurrences or asset sales by us or our
subsidiaries and with a portion of our excess cash flow each year.
We borrowed amounts under the senior credit facilities to provide a portion
of the proceeds required to consummate the acquisition and we expect to borrow
amounts under the senior credit facilities from time to time to provide for
working capital and general corporate needs. As of December 29, 2001, there was
approximately $265 million of outstanding indebtedness under the senior credit
facilities and approximately $55.5 million of unused borrowing capacity under
the revolving credit facility for working capital and other corporate purposes.
We used approximately $19.5 million of our revolving credit facility to support
outstanding letters of credit.
Security; Guarantee. Paperweight Development and each of its direct and
indirect domestic subsidiaries has guaranteed our obligations under the senior
credit facilities. The following secure our obligations under the senior credit
facilities and each of the guarantors under its guarantee:
. a first priority security interest in all of our and each guarantors'
receivables, contracts, contract rights, equipment, intellectual
property, real property, inventory and all of our and their other
tangible and intangible assets, subject to certain customary exceptions,
and
. a pledge of all of our capital stock and that of the other direct and
indirect domestic subsidiaries of Paperweight Development and 100% of
the stock of our first tier foreign subsidiaries.
Interest. Our borrowings under the revolving credit facility and the term
loan A bear interest at our option initially at either a base rate plus 2.50%
or LIBOR plus 3.50% per annum. As of December 29, 2001, the term loan A bore
interest at a rate of 5.4% per annum. Our borrowings under the term loan B bear
interest at our option at either a base rate plus 3.25% or LIBOR plus 4.25% per
annum, subject to a minimum LIBOR rate of 2.50%. As of December 29, 2001, the
term loan B bore interest at a rate of 6.75% per annum. The interest rate
payable on the revolving credit facility and term loan A are subject to
adjustment after six months based on achievement of certain financial covenants.
Fees. In addition to fees paid in connection with the establishment of the
senior credit facilities, we will pay certain other fees in connection with the
senior credit facilities, including: (1) letter of credit fees; (2) agency
fees; and (3) commitment fees. Commitment fees are payable at a rate of 0.50%
per annum on the unused borrowing capacity under the revolving credit facility.
Covenants. The senior credit facilities require that we meet certain
financial tests which include:
. a maximum senior leverage ratio, which is a ratio of a measure of our
senior debt to our EBITDA that decreases from 1.65 to 1.00 to 1.00 to
1.00 for the quarter ending December 31, 2002 and continuing after this
date while the senior credit facilities are outstanding;
91
. a maximum total leverage ratio, which is a ratio of a measure of our
total debt to our EBITDA that decreases from 3.25 to 1.00 to 1.60 to
1.00 for the quarter ending December 31, 2004 and continuing after this
date while the senior credit facilities are outstanding;
. a minimum interest coverage ratio, which is a ratio of our EBITDA to our
total interest expense that increases from 3.85 to 1.00 to 4.00 to 1.00
for the quarter ending March 31, 2003 and continuing after this date
while the senior credit facilities are outstanding;
. a minimum fixed charge coverage ratio, which is a ratio of our EBITDA to
our total fixed charges that increases from 1.30 to 1.00 to 1.65 to 1.00
for the quarter ending March 31, 2004 and continuing after this date
while the senior credit facilities are outstanding; and
. a minimum net worth test, which does not permit our stockholder's equity
to be less than $107 million, plus 50% of our quarterly net income, plus
proceeds received from the sale of Paperweight Development common stock
to the ESOP, net of distributions to the ESOP.
The senior credit facilities also contain covenants which, among other
things, restrict our ability and the ability of other guarantors of the senior
credit facilities, subject to certain exceptions, to do the following:
. incur liens;
. engage in transactions with affiliates;
. incur indebtedness;
. declare dividends or redeem or repurchase capital stock;
. make loans and investments;
. engage in mergers, acquisitions, consolidations and asset sales;
. acquire assets, stock or debt securities of any person;
. make capital expenditures;
. terminate the S corporation status of Paperweight Development or the
qualified subschapter S subsidiary status of its subsidiaries eligible
to elect such status;
. amend our other debt instruments related to the notes and the deferred
payment obligation or make optional prepayments thereunder; and
. amend other agreements related to the acquisition, including the
purchase agreement and the Fox River Indemnification Agreements.
The senior credit facilities also require that we satisfy certain
affirmative covenants and make certain customary indemnifications to our
lenders and the administrative agent under the senior credit facilities.
Events of Default. The senior credit facilities contain customary events of
default, including:
. paymentdefaults under the senior credit facilities or other indebtedness;
. breachesof representations and warranties we made in the senior credit
facilities;
. defaultsin the covenants we made in the senior credit facilities;
. eventsof bankruptcy or insolvency;
. violationsof ERISA;
. judgmentdefaults of $5 million or more;
. defaultsunder other indebtedness, including the notes and the deferred
payment obligation;
. defaultsunder the agreements related to the Fox River indemnification
arrangements;
. defaultsunder the purchase agreement;
. changesin control; and
. failureof the notes, guarantees or deferred payment obligation to
continue to be subordinated to the senior credit facilities.
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DESCRIPTION OF THE REGISTERED NOTES
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions." In this description, the word "Appleton
Papers" refers only to Appleton Papers Inc. and not to any of its Subsidiaries
or the Parent Entity.
Appleton Papers will issue the registered notes under the indenture among
itself, the Guarantors and U.S. Bank National Association, as trustee. We refer
to the old notes and the registered notes collectively as the "notes." The
terms of the notes include those stated in the indenture and those made part of
the indenture by reference to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of the notes. Copies of the indenture are available as set forth below
under "--Additional Information." Certain defined terms used in this
description but not defined below under ''--Certain Definitions" have the
meanings assigned to them in the indenture.
The registered Holder of a note will be treated as the owner of it for all
purposes. Only registered Holders will have rights under the indenture.
Brief Description of the Notes and the Guarantees
The Notes
The notes:
. are general unsecured obligations of Appleton Papers;
. are subordinated in right of payment to all existing and future Senior
Debt of Appleton Papers;
. are pari passu in right of payment with any future senior subordinated
Indebtedness of Appleton Papers; and
. are unconditionally guaranteed by the Guarantors.
The Guarantees
The notes are guaranteed by all of Appleton Papers' Restricted Subsidiaries,
other than Excluded Restricted Subsidiaries, and its Parent Entity. As of the
date of this prospectus, WTA Inc. is the only Restricted Subsidiary of Appleton
Papers that is not an Excluded Restricted Subsidiary and is therefore the only
Subsidiary of Appleton Papers that has guaranteed the notes.
Each guarantee of the notes:
. is a general unsecured obligation of the Guarantor;
. is subordinated in right of payment to all existing and future Senior
Debt of that Guarantor; and
. is pari passu in right of payment with any future senior subordinated
Indebtedness of that Guarantor.
As of December 29, 2001, Appleton Papers and the Guarantors had total Senior
Debt of $278.3 million. As indicated above and as discussed in detail below
under the caption "--Subordination," payments on the notes and under the
guarantees are subordinated to the payment of Senior Debt. The indenture will
permit us and the Guarantors to incur additional Senior Debt.
As described above, only one of our Subsidiaries has guaranteed the notes.
In the event of a bankruptcy, liquidation or reorganization of any of our
non-Guarantor Subsidiaries, the non-Guarantor Subsidiaries will pay the holders
of their debt and their trade creditors before they will be able to distribute
any of their assets to
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Appleton Papers. The Guarantors generated none of our consolidated net sales
for fiscal 2001 and held approximately 6% of our total assets as of December
29, 2001. See Note 22 of Notes to Consolidated Financial Statements included in
this prospectus for more detail about the division of our consolidated results
of operations and assets among the Guarantors and non-Guarantor Subsidiaries.
As of the date of the indenture, all but one of our subsidiaries are
"Restricted Subsidiaries." However, under the circumstances described below
under the subheading "--Certain Covenants--Designation of Restricted and
Unrestricted Subsidiaries," we will be permitted in the future to designate
certain of our subsidiaries as "Unrestricted Subsidiaries." Our Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants in the
indenture. Our Unrestricted Subsidiaries will not guarantee the notes.
Principal, Maturity and Interest
Appleton Papers will issue notes with a maximum aggregate principal amount
of $250.0 million. The notes will be treated as a single class for all purposes
under the indenture, including waivers, amendments, redemptions and offers to
purchase. Appleton Papers will issue notes in denominations of $1,000 and
integral multiples of $1,000. The notes will mature on December 15, 2008.
Interest on the notes will accrue at the rate of 12 1/2% per annum and will
be payable semi-annually in arrears on June 15 and December 15, commencing on
June 15, 2002. Appleton Papers will make each interest payment to the Holders
of record on the immediately preceding June 1 and December 1.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Methods of Receiving Payments on the Notes
If a Holder has given wire transfer instructions to Appleton Papers,
Appleton Papers will pay all principal of and interest, premium and Liquidated
Damages, if any, on that Holder's notes in accordance with those instructions.
All other payments on notes will be made at the office or agency of the paying
agent and registrar within the City and State of New York unless Appleton
Papers elects to make interest payments by check mailed to the Holders at their
address set forth in the register of Holders.
Paying Agent and Registrar for the Notes
The trustee will initially act as paying agent and registrar. Appleton
Papers may change the paying agent or registrar without prior notice to the
Holders of the notes, and Appleton Papers or any of its Subsidiaries may act as
paying agent or registrar.
Transfer and Exchange
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. Appleton Papers is
not required to transfer or exchange any note selected for redemption. Also,
Appleton Papers is not required to transfer or exchange any note for a period
of 15 days before a selection of notes to be redeemed.
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Parent Guarantees and Subsidiary Guarantees
The notes are guaranteed by the Parent Entity and any future Parent Entity
as well as by each of the current and future Domestic Restricted Subsidiaries.
These Parent Guarantees and Subsidiary Guarantees are joint and several
obligations of the Guarantors. Each Parent Guarantee and Subsidiary Guarantee
is subordinated to the prior payment in full of all Senior Debt of that
Guarantor. The obligations of each Guarantor under its guarantee of the notes
are limited as necessary to prevent such guarantee from constituting a
fraudulent conveyance under applicable law. See "Risk Factors--Risks Relating
to the Notes--Federal and state laws allow courts, under specific
circumstances, to avoid debts and require creditors to return payments received
from debtors."
A Guarantor may not sell or otherwise dispose of all or substantially all of
its assets to, or consolidate with or merge with or into, whether or not such
Guarantor is the surviving Person, another Person, other than Appleton Papers
or another Guarantor, unless:
(1)immediately after giving effect to that transaction, no Default or Event
of Default exists; and
(2)either:
(a)the Person acquiring the property in any such sale or disposition or
the Person formed by or surviving any such consolidation or merger
assumes all the obligations of that Guarantor under the indenture,
its Subsidiary Guarantee or Parent Guarantee and the registration
rights agreement pursuant to a supplemental indenture satisfactory to
the trustee; or
(b)the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the indenture, and
(3)if the Guarantor is a party to the Environmental Indemnity Agreements,
all rights afforded to such Guarantor are effectively assigned in full
to the Person formed by or surviving any consolidation or merger, if
other than Appleton Papers or another Guarantor, or the Person to which
such sale, assignment, transfer, conveyance or other disposition has
been made, pursuant to agreements reasonably satisfactory to the trustee.
The Subsidiary Guarantee of a Subsidiary Guarantor will be released:
(1)in connection with any sale or other disposition of all or substantially
all of the assets of that Guarantor, including by way of merger or
consolidation, to a Person that is not, either before or after giving
effect to such transaction, a Subsidiary of Appleton Papers, if the sale
or other disposition complies with the applicable provisions of the
indenture;
(2)in connection with any sale of all of the Capital Stock of a Guarantor
to a Person that is not, either before or after giving effect to such
transaction, a Subsidiary of Appleton Papers, if the sale complies with
the applicable provisions of the indenture; or
(3)if Appleton Papers designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary in accordance with the
applicable provisions of the indenture.
See "--Repurchase at the Option of Holders--Asset Sales."
Subordination
The payment of principal of and, interest, premium and Liquidated Damages,
if any, on the notes by Appleton Papers is subordinated to the prior payment in
full of all Senior Debt of Appleton Papers, and of the Guarantors including
Senior Debt incurred after the date of the indenture.
The payment of principal of and, interest, premium and Liquidated Damages,
if any, on the notes by any Guarantor is subordinated to the prior payment in
full of all Senior Debt of Appleton Papers and of the Guarantors, including
Senior Debt incurred after the date of the indenture.
The holders of Senior Debt will be entitled to receive payment in full of
all Obligations due in respect of Senior Debt, including interest after the
commencement of any bankruptcy proceeding at the rate specified in
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the applicable Senior Debt, before the Holders of notes will be entitled to
receive any payment with respect to the notes by Appleton Papers or such
Guarantor, except that Holders of notes may receive and retain Permitted Junior
Securities and payments made from the trust described under "--Legal Defeasance
and Covenant Defeasance," in the event of any distribution to creditors of
Appleton Papers or such Guarantor:
(1)in a liquidation or dissolution of Appleton Papers or such Guarantor;
(2)in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Appleton Papers or such Guarantor or the property
of Appleton Papers or such Guarantor;
(3)in an assignment for the benefit of creditors of Appleton Papers or such
Guarantor; or
(4)in any marshaling of Appleton Papers' or such Guarantor's assets and
liabilities.
Appleton Papers also may not make any payment in respect of the notes,
except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance," and may not make any deposits
with the trustee as described under "--Legal Defeasance and Covenant
Defeasance" or as described under "--Actions Related to Debt Arbiter
Determination" if:
(1)a payment default on Designated Senior Debt occurs and is continuing
beyond any applicable grace period; or
(2)any other default occurs and is continuing on any series of Designated
Senior Debt that permits holders of that series of Designated Senior
Debt to accelerate its maturity and the trustee receives a notice of
such default, which we refer to as a "Payment Blockage Notice," from
Appleton Papers or the holders of any Designated Senior Debt.
Payments on the notes may and will be resumed:
(1)in the case of a payment default, upon the date on which such default is
cured or waived; and
(2)in the case of a nonpayment default, upon the earliest of (a) the date
on which such nonpayment default is cured or waived, (b) 179 days after
the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated
or (c) the date on which the trustee receives notice from the holder of
such Designated Senior Debt rescinding such Payment Blockage Notice.
No new Payment Blockage Notice may be delivered unless and until:
(1)360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
(2)all payments of principal, interest and premium and Liquidated Damages,
if any, on the notes that have come due have been paid in full in cash.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the trustee will be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default has been cured or
waived for a period of not less than 90 days.
If the trustee or any Holder of the notes receives a payment in respect of
the notes, except in Permitted Junior Securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance," when:
(1)the payment is prohibited by these subordination provisions; and
(2)the trustee or the Holder has actual knowledge that the payment is
prohibited;
the trustee or the Holder, as the case may be, will hold the payment in trust
for the benefit of the holders of Senior Debt. Upon the proper written request
of the holders of Senior Debt, the trustee or the Holder, as the case may be,
will deliver the amounts in trust to the holders of Senior Debt or their proper
representative.
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Appleton Papers must promptly notify holders of Senior Debt if payment of
the notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a bankruptcy, liquidation or reorganization of Appleton Papers or any
Guarantors, Holders of notes may recover less ratably than creditors of
Appleton Papers or any Guarantors who are holders of Senior Debt. See "Risk
Factors--Risks Relating to the Notes--Your right to receive payments on these
notes is junior to our senior indebtedness and possibly to all of our future
borrowings. Further, the guarantees of these notes are junior to all our
guarantors' senior indebtedness, excluding the deferred payment obligation, and
possibly to all of their future borrowings."
"Designated Senior Debt" means:
(1)any Indebtedness outstanding under the Credit Agreement; and
(2)after payment in full of all Obligations under the Credit Agreement, any
other Senior Debt permitted under the indenture to be incurred, the
principal amount of which is $25.0 million or more, and that has been
designated by Appleton Papers as "Designated Senior Debt."
"Permitted Junior Securities" means:
(1)Equity Interests in Appleton Papers or any Guarantor; or
(2)debt securities that are subordinated to all Senior Debt and any debt
securities issued in exchange for Senior Debt to substantially the same
extent as, or to a greater extent than, the notes and the Parent
Guarantees and Subsidiary Guarantees are subordinated to Senior Debt
under the indenture.
"Senior Debt" means:
(1)all Indebtedness of Appleton Papers or any Guarantor outstanding under
the Credit Agreement and all Hedging Obligations with respect thereto;
(2)any other Indebtedness of Appleton Papers or any Guarantor permitted to
be incurred under the terms of the indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is
on a parity with or subordinated in right of payment to the notes or any
Parent Guarantee or Subsidiary Guarantee; and
(3)all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1)any liability for federal, state, local or other taxes owed or owing by
Appleton Papers;
(2)any intercompany Indebtedness of Appleton Papers or any of its
Subsidiaries to Appleton Papers or any of its Affiliates;
(3)any trade payables; or
(4)the portion of any Indebtedness that is incurred in violation of the
indenture.
Optional Redemption
At any time prior to December 15, 2004, Appleton Papers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of notes
issued under the indenture at a redemption price of 112.500% of the principal
amount, plus accrued and unpaid interest and, Liquidated Damages, if any, to
the redemption date, with the net cash proceeds of an initial public offering
of common stock of Appleton Papers or the net cash proceeds from the issuance
of Equity Interests, other than Disqualified Stock, to third parties other than
the Parent Entity; provided that:
(1)at least 65% of the aggregate principal amount of notes issued under the
indenture remains outstanding immediately after the occurrence of such
redemption, excluding notes held by Appleton Papers and its
Subsidiaries; and
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(2)the redemption occurs within 60 days of the date of the closing of such
initial public offering or other equity cash investment.
Except pursuant to the preceding paragraph, the notes will not be redeemable
at Appleton Papers' option prior to December 15, 2005.
On or after December 15, 2005, Appleton Papers may redeem all or a part of
the notes upon not less than 30 nor more than 60 days' notice, at the
redemption prices, expressed as percentages of principal amount, set forth
below plus accrued and unpaid interest and Liquidated Damages, if any, on the
notes redeemed, to the applicable redemption date, if redeemed during the
twelve-month period beginning on December 15 of the years indicated below:
Year Percentage
---- ----------
2005............... 106.250%
2006............... 103.125%
2007 and thereafter 100.000%
Mandatory Redemption
Appleton Papers is not required to make mandatory redemption or sinking fund
payments with respect to the notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require Appleton Papers to repurchase all or any part, equal to $1,000 or an
integral multiple of $1,000, of that Holder's notes pursuant to a Change of
Control Offer on the terms set forth in the indenture. In the Change of Control
Offer, Appleton Papers will offer a Change of Control Payment in cash equal to
101% of the aggregate principal amount of notes repurchased plus accrued and
unpaid interest and Liquidated Damages, if any, on the notes repurchased, to
the date of purchase. Within 20 days following any Change of Control, Appleton
Papers will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
notes on the Change of Control Payment Date specified in the notice, which date
will be no earlier than 30 days and no later than 60 days from the date such
notice is mailed, pursuant to the procedures required by the indenture and
described in such notice. Appleton Papers will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent those laws and regulations are applicable in
connection with the repurchase of the notes as a result of a Change of Control.
To the extent that the provisions of any securities laws or regulations
conflict with the Change of Control provisions of the indenture, Appleton
Papers will comply with the applicable securities laws and regulations and will
not be deemed to have breached its obligations under the Change of Control
provisions of the indenture by virtue of such conflict.
On the Change of Control Payment Date, Appleton Papers will, to the extent
lawful:
(1)accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control Offer;
(2)deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions of notes properly tendered;
and
(3)deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions of notes being purchased by
Appleton Papers.
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The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail, or cause to be transferred by book entry, to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control,
Appleton Papers will either repay all outstanding Senior Debt or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of notes required by this covenant. Appleton
Papers will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The provisions described above that require Appleton Papers to make a Change
of Control Offer following a Change of Control will be applicable whether or
not any other provisions of the indenture are applicable. Except as described
above with respect to a Change of Control, the indenture does not contain
provisions that permit the Holders of the notes to require that Appleton Papers
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
Appleton Papers will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by Appleton
Papers and purchases all notes properly tendered and not withdrawn under the
Change of Control Offer.
The Credit Agreement provides that certain change of control events with
respect to Appleton Papers would constitute a default thereunder. Moreover, the
exercise by the Holders of their right to require Appleton Papers to repurchase
the notes could cause a default under the Credit Agreement, even if the change
of control itself does not, due to the financial effect of such repurchase on
Appleton Papers. Finally, Appleton Papers' ability to pay cash to the Holders
upon a repurchase may be limited by Appleton Papers' then existing financial
resources.
The definition of Change of Control includes a phrase relating to the direct
or indirect sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the properties or assets of Appleton Papers and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of notes to require Appleton Papers to repurchase its notes as a result
of a sale, lease, transfer, conveyance or other disposition of less than all of
the assets of Appleton Papers and its Subsidiaries taken as a whole to another
Person or group may be uncertain.
Asset Sales
The Parent Entity and Appleton Papers will not, and Appleton Papers will not
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1)Appleton Papers, or the Restricted Subsidiary or Parent Entity, as the
case may be, receives consideration at the time of the Asset Sale at
least equal to the fair market value of the assets or Equity Interests
issued or sold or otherwise disposed of;
(2)the fair market value is determined by Appleton Papers' Board of
Directors and evidenced by a resolution of the Board of Directors set
forth in an officers' certificate delivered to the trustee; and
(3)at least 75% of the consideration received in the Asset Sale by Appleton
Papers or such Restricted Subsidiary or Parent Entity is in the form of
cash or Cash Equivalents. For purposes of this provision, each of the
following will be deemed to be cash:
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(a)any liabilities, as shown on Appleton Papers' or such Restricted
Subsidiary's or Parent Entity's most recent balance sheet, of Appleton
Papers or any Restricted Subsidiary or Parent Entity, other than
contingent liabilities and liabilities that are by their terms
subordinated to the notes or any guarantee thereof, that are assumed by
the transferee of any such assets pursuant to a customary novation
agreement that releases Appleton Papers or such Restricted Subsidiary or
Parent Entity from further liability; and
(b)any securities, notes or other obligations received by Appleton Papers
or any such Restricted Subsidiary or Parent Entity from such transferee
that are contemporaneously, subject to ordinary settlement periods,
converted by Appleton Papers or such Restricted Subsidiary or Parent
Entity into cash, to the extent of the cash received in that conversion.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
Appleton Papers may apply, or cause to be applied, those Net Proceeds at its
option:
(1)to repay Senior Debt and, if the Senior Debt repaid is revolving credit
Indebtedness, to correspondingly permanently reduce commitments with
respect to such revolving credit Indebtedness;
(2)to acquire all or substantially all of the assets of, or a majority of
the Voting Stock of, another Permitted Business;
(3)to make a capital expenditure; or
(4)to acquire or make capitalized repairs to other long-term assets that
are used or useful in a Permitted Business.
Notwithstanding the foregoing, neither Appleton Papers nor one or more of
its Subsidiaries shall engage in an Asset Sale in which the purchaser or
transferee is the Parent Entity.
Pending the final application of any Net Proceeds, Appleton Papers may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided above will constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $5.0 million, Appleton Papers will make an Asset Sale
Offer to all Holders of notes and all holders of other Indebtedness that is
pari passu with the notes containing provisions similar to those set forth in
the indenture with respect to offers to purchase or redeem with the proceeds of
sales of assets to purchase the maximum principal amount of notes and such
other pari passu Indebtedness that may be purchased out of the Excess Proceeds.
The offer price in any Asset Sale Offer will be equal to 100% of the principal
amount plus accrued and unpaid interest and Liquidated Damages, if any, to the
date of purchase, and will be payable in cash. If any Excess Proceeds remain
after consummation of an Asset Sale Offer, Appleton Papers may use those Excess
Proceeds for any purpose not otherwise prohibited by the indenture. If the
aggregate principal amount of notes and other pari passu Indebtedness tendered
into such Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee
will select the notes and such other pari passu Indebtedness to be purchased on
a pro rata basis. Upon completion of each Asset Sale Offer, the amount of
Excess Proceeds will be reset at zero.
Appleton Papers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sale
provisions of the indenture, Appleton Papers will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the indenture by virtue of such
conflict.
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Excess Cash Flow
If, for any fiscal year of Appleton Papers commencing with the fiscal year
ending December 28, 2002, there is Excess Cash Flow, Appleton Papers will first
apply the Excess Cash Flow Amount to repay Senior Debt and, if the Senior Debt
repaid is revolving credit Indebtedness, to correspondingly permanently reduce
commitments with respect to such revolving credit Indebtedness and second,
permanently reduce revolving credit commitments relating to Senior Debt in an
amount equal to the remaining Excess Cash Flow Amount, if any, not used to
repay Senior Debt, provided that Appleton Papers shall not be required in
either case to reduce such revolving credit commitments to less than $50.0
million. If more than $5.0 million of the Excess Cash Flow Amount remains after
such prepayment and adjustment for such permanent reduction, Appleton Papers
will make an Excess Cash Flow Offer to Holders of the notes to purchase the
maximum principal amount of the notes that may be repurchased with the
remaining Excess Cash Flow Amount. The offer price in any Excess Cash Flow
Offer will be equal to 103% of the principal amount plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase, and will be
payable in cash. If any Excess Cash Flow remains after consummation of an
Excess Cash Flow Offer, Appleton Papers may use such Excess Cash Flow for any
purpose not otherwise prohibited by the indenture. If the aggregate principal
amount of notes tendered into such Excess Cash Flow Offer exceeds the remaining
amount of such Excess Cash Flow, the trustee will select the notes to be
purchased on a pro rata basis. The application of any Excess Cash Flow amounts
towards the prepayment of Senior Debt and any Excess Cash Flow Offer must occur
within 20 days of the earlier to occur of (a) the day on which year end
financial statements first become available or (b) 90 days after the end of the
fiscal year. Any Excess Cash Flow Offer will be made pursuant to the procedures
set forth in the indenture which shall be substantially similar to the
repurchase procedures set forth under the subheading "--Repurchase at the
Option of Holders--Change of Control."
Appleton Papers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Excess Cash Flow Offer. To the extent that
the provisions of any securities laws or regulations conflict with the Excess
Cash Flow provisions of the indenture, Appleton Papers will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under the Excess Cash Flow provisions of the indenture
by virtue of such conflict.
The Credit Agreement prohibits Appleton Papers from purchasing any notes,
and also provides that certain change of control or asset sale events with
respect to Appleton Papers would constitute a default under that agreement. Any
future credit agreements or other agreements relating to Senior Debt to which
Appleton Papers becomes a party may contain similar restrictions and
provisions. In the event a Change of Control or Asset Sale occurs, or there is
the requisite Excess Cash Flow, at a time when Appleton Papers is prohibited
from purchasing notes, Appleton Papers could seek the consent of its senior
lenders to the purchase of notes or could attempt to refinance the borrowings
that contain such prohibition. If Appleton Papers does not obtain such a
consent or refinance such borrowings, Appleton Papers will remain prohibited
from purchasing notes. In such case, Appleton Papers' failure to purchase
tendered notes would constitute an Event of Default under the indenture which
would, in turn, constitute a default under such Senior Debt. In such
circumstances, the subordination provisions in the indenture would likely
restrict payments to the Holders of notes.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1)if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2)if the notes are not listed on any national securities exchange, on a
pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
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No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior
to a redemption date if the notice is issued in connection with a defeasance of
the notes or a satisfaction and discharge of the indenture. Notices of
redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that
note that is to be redeemed. A new note in principal amount equal to the
unredeemed portion of the original note will be issued in the name of the
Holder of notes upon cancellation of the original note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption.
Certain Covenants
Restricted Payments
The Parent Entity and Appleton Papers will not, and will not permit any of
the Restricted Subsidiaries to, directly or indirectly:
(1)declare or pay any dividend or make any other payment or distribution on
account of Appleton Papers' or any of its Restricted Subsidiaries' or
the Parent Entity's Equity Interests, including any payment in
connection with any merger or consolidation involving Appleton Papers or
any of its Restricted Subsidiaries or the Parent Entity, or to the
direct or indirect holders of Appleton Papers' or any of its Restricted
Subsidiaries' or the Parent Entity's Equity Interests in their capacity
as such, other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of Appleton Papers or
dividends or distributions payable to Appleton Papers or a Restricted
Subsidiary of Appleton Papers;
(2)purchase, redeem or otherwise acquire or retire for value, including in
connection with any merger or consolidation involving Appleton Papers,
any Equity Interests of Appleton Papers or any direct or indirect parent
of Appleton Papers;
(3)make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes or the Parent Guarantees or the Subsidiary
Guarantees, except a payment of interest or principal at the Stated
Maturity thereof; or
(4)make any Restricted Investment (we collectively refer to all such
payments and other actions set forth in these clauses (1) through (4)
above as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1)no Default or Event of Default has occurred and is continuing or would
occur as a consequence of such Restricted Payment; and
(2)Appleton Papers would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Leverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
(3)such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by Appleton Papers and its Restricted
Subsidiaries after the date of the indenture, excluding Restricted
Payments permitted by clauses (2), (3), (4), (6), (7) and (8) of the
next succeeding paragraph, is less than the sum, without duplication of:
(a)30% of the Consolidated Net Income of Paperweight Development for the
period, taken as one accounting period, from the beginning of the
first fiscal quarter commencing after the date of the indenture to
the end of Paperweight Development's most recently ended fiscal
quarter for which internal financial statements are available at the
time of such Restricted Payment, or, if such Consolidated Net Income
for such period is a deficit, less 100% of such deficit, plus
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(b)100% of the aggregate net cash proceeds received by Appleton Papers
since the date of the indenture as a contribution to its common
equity capital or from the issue or sale of Equity Interests of
Appleton Papers, other than Disqualified Stock, or from the issue or
sale of convertible or exchangeable debt securities of Appleton
Papers that have been converted into or exchanged for such Equity
Interests, other than Equity Interests, Disqualified Stock or debt
securities sold to a Subsidiary of Appleton Papers, plus
(c)to the extent that any Restricted Investment that was made after the
date of the indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (i) the cash return of capital with
respect to such Restricted Investment, less the cost of disposition,
if any, and (ii) the initial amount of such Restricted Investment,
plus
(d)upon the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the lesser of (i) the fair market value of such
Subsidiary or (ii) Appleton Paper's initial Investment in such
Subsidiary.
Notwithstanding the foregoing, the Parent Entity and Appleton Papers will not,
and will not permit any of the Restricted Subsidiaries to make any payment in
respect of the Deferred Payment Obligation prior to its Stated Maturity.
So long as no Default or Event of Default has occurred and is continuing or
would be caused thereby, the preceding provisions will not prohibit:
(1)the payment of any dividend within 60 days after the date of declaration
of the dividend, if at the date of declaration the dividend payment
would have complied with the provisions of the indenture;
(2)the redemption, repurchase, retirement, defeasance or other acquisition
of any subordinated Indebtedness of Appleton Papers or any Guarantor or
of any Equity Interests of Appleton Papers in exchange for, or out of
the net cash proceeds of the substantially concurrent sale, other than
to a Restricted Subsidiary of Appleton Papers, of, Equity Interests of
Appleton Papers, other than Disqualified Stock; provided that the amount
of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition will be excluded
from clause (3) (b) of the preceding paragraph;
(3)the defeasance, redemption, repurchase, retirement or other acquisition
of subordinated Indebtedness of Appleton Papers or any Guarantor with
the net cash proceeds from an incurrence of Permitted Refinancing
Indebtedness unless otherwise prohibited by the terms of the indenture;
(4)the payment of any dividend by a Restricted Subsidiary of Appleton
Papers to the holders of its Equity Interests on a pro rata basis;
(5)the payment of loans, advances, dividends or distributions by Appleton
Papers to the Parent Entity to permit the Parent Entity to satisfy its
legal obligations to pay taxes and administrative and other expenses
incurred in the ordinary course of business provided that such amounts
are promptly used to pay such taxes and administrative and other
expenses and provided further that such amounts may not exceed, without
duplication, $1,000,000 in the aggregate for payments to the Parent
Entity in any twelve month period;
(6)issuances of Capital Stock by Paperweight Development to the ESOP in
satisfaction of the employer matching obligation under the ESOP;
(7)investments acquired solely as a capital contribution; and
(8)distributions by Appleton Papers to permit Paperweight Development to
repay the Intercompany Acquisition Loan so long as the amount of any
such distribution is simultaneously netted against amounts owing to
Appleton Papers under the Intercompany Acquisition Loan and no cash is
paid as a result of any such distribution.
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The amount of all Restricted Payments, other than cash, will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Appleton Papers or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be
valued by this covenant will be determined by the Board of Directors whose
resolution with respect thereto will be delivered to the trustee. The Board of
Directors' determination must be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of
national standing if the fair market value exceeds $7.5 million. Not later than
the date of making any Restricted Payment, Appleton Papers will deliver to the
trustee an officers' certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Parent Entity and Appleton Papers will not, and will not permit any of
their Subsidiaries to incur, meaning to directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to, any Indebtedness, including
Acquired Debt, and Appleton Papers will not and will not permit the Parent
Entity to issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that
Appleton Papers may incur Indebtedness, including Acquired Debt, or issue
Disqualified Stock, and Appleton Papers' Subsidiary Guarantors may incur
Indebtedness or issue preferred stock, if the Leverage Ratio of Paperweight
Development at the time of incurrence of such Indebtedness or the issuance of
such Disqualified Stock or such preferred stock, as the case may be, after
giving pro forma effect to such incurrence or issuance as of such date and to
the use of proceeds therefrom as if the same had occurred at the beginning of
the most recently ended four full fiscal quarter period of Paperweight
Development for which internal financial statements are available, would have
been no greater than (a) 3.25 to 1, if such incurrence or issuance is on or
prior to September 30, 2002, (b) 2.50 to 1, if such incurrence or issuance is
after September 30, 2002 but on or prior to September 30, 2003; (c) 2.25 to 1,
if such incurrence or issuance is after September 30, 2003 but on or prior to
September 30, 2004; or (d) 1.75 to 1 thereafter.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness, which we refer to as "Permitted Debt":
(1)the incurrence by Appleton Papers of additional Indebtedness and letters
of credit, and the incurrence by the Guarantors of related Guarantees,
under the Credit Agreement in an aggregate principal amount at any one
time outstanding under this clause (1), with letters of credit being
deemed to have a principal amount equal to the maximum potential
liability of Appleton Papers and its Restricted Subsidiaries thereunder,
not to exceed $340.0 million (a) less the aggregate amount of all
repayments, optional or mandatory, of the principal of any term
Indebtedness under the Credit Agreement or the guarantees thereof, other
than repayments that are concurrently reborrowed, that have been made by
Appleton Papers or any of its Restricted Subsidiaries since the date of
the indenture and (b) less the aggregate amount of all commitment
reductions with respect to any revolving credit borrowings under the
Credit Agreement or the guarantees thereof that have been made by
Appleton Papers or any of its Restricted Subsidiaries since the date of
the indenture, provided, however, that no repayments or reductions under
the immediately preceding clauses (a) or (b) shall reduce below $75.0
million the amount of Indebtedness that may be outstanding at any one
time under this clause (1);
(2)the incurrence by Appleton Papers and its Restricted Subsidiaries of the
Existing Indebtedness;
(3)the incurrence by the Parent Entity of the Deferred Payment Obligation
and Intercompany Acquisition Loan;
(4)the incurrence by Appleton Papers and the Guarantors of Indebtedness
represented by the notes and the related Parent Guarantees and the
Subsidiary Guarantees to be issued on the date of the indenture and the
exchange notes and the related Parent Guarantees and the Subsidiary
Guarantees to be issued pursuant to the registration rights agreement;
104
(5)the incurrence by Appleton Papers or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of Appleton Papers or such Restricted Subsidiary, in an
aggregate principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (5), not to exceed 3% of the
consolidated tangible net assets of Appleton Papers and its Restricted
Subsidiaries as of the last day of the most recently ended full fiscal
quarter period of Appleton Papers for which internal financial
statements are available, with tangible net assets being calculated for
this purpose as the sum of (i) Consolidated Current Assets plus (ii)
consolidated property, plant and equipment, net of accumulated
depreciation, calculated in accordance with GAAP and set forth on the
consolidated balance sheet at such date less (iii) Consolidated Current
Liabilities;
(6)the incurrence by Appleton Papers or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace Indebtedness,
other than intercompany Indebtedness, that was permitted by the
indenture to be incurred under the first paragraph of this covenant or
clauses (2), (4), (5), (6) or (11) of this paragraph;
(7)the incurrence by Appleton Papers or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among Appleton Papers and any of
its Subsidiaries; provided, however, that:
(a)if Appleton Papers or any Guarantor is the obligor on such
Indebtedness, such Indebtedness must be expressly subordinated to the
prior payment in full in cash of all Obligations with respect to the
notes, in the case of Appleton Papers, or the Subsidiary Guarantee or
Parent Guarantee, in the case of a Guarantor; and
(b)(i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than
Appleton Papers or a Restricted Subsidiary of Appleton Papers and
(ii) any sale or other transfer of any such Indebtedness to a Person
that is not either Appleton Papers or a Restricted Subsidiary of
Appleton Papers; will be deemed, in each case, to constitute an
incurrence of such Indebtedness by Appleton Papers or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(7);
(8)the incurrence by Appleton Papers or any of its Restricted Subsidiaries
of Hedging Obligations provided, that to the extent such Hedging
Obligations relate to Indebtedness, such Indebtedness is permitted by
the terms of the indenture to be outstanding;
(9)the guarantee by Appleton Papers or any of the Guarantors of
Indebtedness of Appleton Papers or a Restricted Subsidiary of Appleton
Papers that was permitted to be incurred by another provision of this
covenant;
(10)the accrual of interest, the accretion, including the accretion on the
Deferred Payment Obligation, or amortization of original issue discount,
the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant;
(11)the incurrence by Appleton Papers or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount, or accreted
value, as applicable, at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (11), not to exceed $20.0
million;
(12)the incurrence by Appleton Papers of Indebtedness or Obligations
represented by or incurred pursuant the Environmental Indemnity
Agreements;
(13)Indebtedness of Appleton Papers or any Restricted Subsidiary arising
from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently, except in the case of
daylight overdrafts, drawn against insufficient funds in the ordinary
course of business, provided that such indebtedness is satisfied within
three business days of incurrence;
105
(14)the incurrence by Appleton Papers' Unrestricted Subsidiaries of
Non-Recourse Debt; provided, however, that if any such Indebtedness
ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event
will be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Appleton Papers that was not permitted by this clause (14);
(15)Indebtedness arising from agreements of Appleton Papers or a Restricted
Subsidiary or the Parent Entity providing for indemnification,
adjustment of purchase price, earn out or other similar obligations, in
each case, incurred or assumed in connection with the disposition of any
business, assets or a Restricted Subsidiary, other than guarantees of
Indebtedness incurred by any person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing
such acquisition; provided that the maximum assumable liability in
respect of all such Indebtedness shall at no time exceed 20% of the
gross proceeds actually received by Appleton Papers and its Restricted
Subsidiaries in connection with such disposition;
(16)obligations in respect of performance and surety bonds provided by
Appleton Papers or any Restricted Subsidiary of the Company in the
ordinary course of business consistent with past practice; and
(17)Indebtedness arising under the Intercompany Acquisition Loan, provided,
however, that such Indebtedness must be expressly subordinated to the
Parent Guarantee.
Notwithstanding the foregoing, Appleton Papers will not permit the Parent
Entity to amend, modify, change or refinance the Deferred Payment Obligation.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (16) above, or is entitled to
be incurred pursuant to the first paragraph of this covenant, Appleton Papers
will be permitted to classify such item of Indebtedness on the date of its
incurrence, or later reclassify all or a portion of such item of Indebtedness,
in any manner that complies with this covenant. Indebtedness under the Credit
Agreement outstanding on the date on which notes are first issued and
authenticated under the indenture will be deemed to have been incurred on such
date in reliance on the exception provided by clause (1) of the definition of
Permitted Debt.
No Senior Subordinated Debt
Appleton Papers will not incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to any Senior Debt of Appleton Papers and senior in any
respect in right of payment to the notes. No Guarantor will incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that
is subordinate or junior in right of payment to the Senior Debt of such
Guarantor and senior in any respect in right of payment to such Guarantor's
Subsidiary Guarantee or Parent Guarantee.
Liens
Appleton Papers will not and will not permit any of its Subsidiaries to,
create, incur, assume or otherwise cause or suffer to exist or become effective
any Lien of any kind securing Indebtedness, Attributable Debt or trade
payables, other than Permitted Liens, upon any of their property or assets, now
owned or hereafter acquired, unless all payments due under the indenture and
the notes are secured on an equal and ratable basis with the obligations so
secured until such time as such obligations are no longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
Appleton Papers will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1)pay dividends or make any other distributions on its Capital Stock to
Appleton Papers or any of its Restricted Subsidiaries, or with respect
to any other interest or participation in, or measured by, its profits,
or pay any indebtedness owed to Appleton Papers or any of its Restricted
Subsidiaries;
106
(2)make loans or advances to Appleton Papers or any of its Restricted
Subsidiaries; or
(3)transfer any of its properties or assets to Appleton Papers or any of
its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1)agreements governing Existing Indebtedness and the Credit Agreement as
in effect on the date of the indenture and any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of those agreements, provided
that the amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more
restrictive, taken as a whole, with respect to such dividend and other
payment restrictions than those contained in those agreements on the
date of the indenture;
(2)the indenture, the notes and the Parent Guarantees and the Subsidiary
Guarantees;
(3)applicable law;
(4)any instrument governing Indebtedness or Capital Stock of a Person
acquired by Appleton Papers or any of its Restricted Subsidiaries as in
effect at the time of such acquisition, except to the extent such
Indebtedness or Capital Stock was incurred in connection with or in
contemplation of such acquisition, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness
was permitted by the terms of the indenture to be incurred;
(5)customary non-assignment provisions in leases, licenses and supply
contracts entered into in the ordinary course of business;
(6)purchase money obligations for property acquired in the ordinary course
of business that impose restrictions on that property of the nature
described in clause (3) of the preceding paragraph;
(7)any agreement for the sale or other disposition of the assets or Capital
Stock of a Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale or other disposition;
(8)Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(9)Liens securing Indebtedness otherwise permitted to be incurred under the
provisions of the covenant described above under the caption "--Liens"
that limit the right of the debtor to dispose of the assets subject to
such Liens;
(10)provisions with respect to the disposition or distribution of assets or
property in joint venture agreements, asset sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary
course of business;
(11)restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business;
(12)any agreement governing Indebtedness incurred after the date of the
indenture permitted under "--Incurrence of Indebtedness and Issuance of
Preferred Stock;" provided that the restrictions contained in any such
agreement, taken as a whole, are not less favorable to the Holders of
the notes than those contained in the agreements governing Existing
Indebtedness; or
(13)any encumbrances or restrictions imposed by amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements
or refinancings of contracts, instruments or obligations referred to in
clauses (1) through (12) above; provided that such amendments,
107
modifications,restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a
whole, with respect to such dividend or other payment
restrictions than those contained in the dividend or other
payment restrictions prior to such amendment, modification,
restatement, renewal, increase, supplement, refunding,
replacement or refinancing.
Merger, Consolidation or Sale of Assets
Appleton Papers may not directly or indirectly: (1) consolidate or merge
with or into another Person, whether or not Appleton Papers is the surviving
corporation; or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of Appleton Papers and its
Restricted Subsidiaries taken as a whole, in one or more related transactions,
to another Person, unless:
(1)either: (a) Appleton Papers is the surviving corporation; or (b) the
Person formed by or surviving any such consolidation or merger, if other
than Appleton Papers, or to which such sale, assignment, transfer,
conveyance or other disposition has been made is a corporation organized
or existing under the laws of the United States, any state of the United
States or the District of Columbia;
(2)the Person formed by or surviving any such consolidation or merger, if
other than Appleton Papers, or the Person to which such sale,
assignment, transfer, conveyance or other disposition has been made
assumes all the obligations of Appleton Papers under the notes, the
indenture and the registration rights agreement pursuant to agreements
reasonably satisfactory to the trustee;
(3)immediately after such transaction no Default or Event of Default exists;
(4)Appleton Papers or the Person formed by or surviving any such
consolidation or merger, if other than Appleton Papers, or to which such
sale, assignment, transfer, conveyance or other disposition has been
made:
(a)will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of Appleton
Papers immediately preceding the transaction; and
(b)will, on the date of such transaction after giving pro forma effect
thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Leverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(5)all rights afforded to Appleton Papers or Paperweight Development by the
Environmental Indemnity Agreements are effectively assigned, in full, to
the Person formed by or surviving any such consolidation or merger, if
other than Appleton Papers or Paperweight Development, or the Person to
which such sale, assignment, transfer, conveyance or other disposition
has been made pursuant to agreements reasonably satisfactory to the
trustee.
Appleton Papers may not, directly or indirectly, lease all or substantially
all of its properties or assets, in one or more related transactions, to any
other Person. This "Merger, Consolidation or Sale of Assets" covenant will not
apply to a consolidation, merger, sale, assignment, transfer, conveyance or
other disposition of assets between or among Appleton Papers and any of its
Wholly Owned Restricted Subsidiaries.
In addition, Appleton Papers will not permit the Parent Entity to and the
Parent Entity will not consolidate or merge with any entity other than another
Parent Entity and will not permit any merger between any future Parent Entity
unless and until the conditions set forth in clauses (1) through (5) above have
been satisfied provided that with respect to clause (4)(a), the Consolidated
Net Worth immediately after any such transaction shall be equal to or greater
than the Consolidated Net Worth of such Parent Entity immediately preceding the
transaction.
108
Capital Expenditures
Appleton Papers will not and will not permit any of its Subsidiaries to make
or commit to make any Capital Expenditure, except (a) Capital Expenditures of
Appleton Papers and its Subsidiaries not exceeding, during any fiscal year of
the Parent Entity, or, in the case of fiscal year 2001, during the fourth
fiscal quarter of 2001, the amount set forth below opposite such fiscal year:
Fiscal Year Amount
----------- -----------
2001................................ $15,600,000
2002................................ $70,000,000
2003................................ $60,000,000
2004 and each fiscal year thereafter $55,000,000
; provided, that (i) up to 50% of any such amount referred to above, if not so
expended in the original fiscal year for which it is permitted, may be carried
forward for expenditure in the next succeeding fiscal year and (ii) Capital
Expenditures made pursuant to this clause (a) during any fiscal year shall be
deemed made, first, in respect of amounts permitted for such fiscal year as
provided above and, second, in respect of amounts carried forward from the
prior fiscal year pursuant to subclause (i) above and (b) Capital Expenditures
made with the proceeds of any Reinvestment Deferred Amount.
Transactions with Affiliates
The Parent Entity and Appleton Papers will not, and will not permit any of
the Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate, each of which we refer to as an "Affiliate
Transaction", unless:
(1)the Affiliate Transaction is on terms that are no less favorable to
Appleton Papers or the relevant Restricted Subsidiary or the Parent
Entity than those that would have been obtained in a comparable
transaction by Appleton Papers or such Restricted Subsidiary or such
Parent Entity with an unrelated Person; and
(2)Appleton Papers delivers to the trustee:
(a)with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an
officers' certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board
of Directors; and
(b)with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1)any employment, termination protection, deferred compensation,
incentive, non-competition, benefit, indemnification or similar
agreement or plan entered into by Appleton Papers or any of its
Restricted Subsidiaries or the Parent Entity in the ordinary course of
business with officers, directors or employees of Appleton Papers or
such Restricted Subsidiary or Parent Entity;
(2)transactions between or among the Parent Entity, Appleton Papers and/or
one or more of its Restricted Subsidiaries that is a Guarantor;
(3)transactions with a Person that is an Affiliate of Appleton Papers
solely because Appleton Papers owns an Equity Interest in, or controls,
or is under common control with, such Person;
(4)payment of reasonable compensation, including equity-based compensation,
and expense reimbursements to members of the Board of Directors who are
not otherwise Affiliates of Appleton Papers;
109
(5)sales of Equity Interests, other than Disqualified Stock, to Affiliates
of Appleton Papers not otherwise prohibited by the indenture;
(6)Restricted Payments or Permitted Investments that are permitted by the
provisions of the indenture described above under the caption
"--Restricted Payments;"
(7)the repurchase by Paperweight Development, or the issuance by
Paperweight Development, of shares of its Capital Stock, from or to the
ESOP, as the case may be, pursuant to the terms of the ESOP
Documentation, not otherwise prohibited by the indenture; and
(8)amendments to the ESOP as may, from time to time, be required by law.
Additional Subsidiary Guarantees or Parent Guarantees
If Appleton Papers or any of its Subsidiaries acquires or creates another
Domestic Subsidiary after the date of the indenture, other than a Subsidiary
with less than $2.0 million in total assets at the time of its creation and
thereafter as assessed each quarter based on the most recently available
quarterly balance sheet or a group of Subsidiaries with less than $5.0 million
in total assets in the aggregate at the time of their creation and thereafter
as assessed each quarter based on the most recently available quarterly balance
sheet, excluding all Subsidiaries that have been properly designated as
Unrestricted Subsidiaries in accordance with the indenture for so long as they
continue to constitute Unrestricted Subsidiaries, then each newly acquired or
created Domestic Subsidiary will become a Guarantor and will execute a
supplemental indenture and deliver an opinion of counsel reasonably
satisfactory to the trustee within 10 Business Days of the date on which it was
acquired, created or assessed.
If the Parent Entity acquires or creates another entity having a direct or
indirect ownership interest in Appleton Papers after the date of the indenture,
then that newly acquired or created entity will become a Guarantor and execute
a supplemental indenture and deliver an opinion of counsel reasonably
satisfactory to the trustee within 10 Business Days of the date on which it was
acquired or created.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the
aggregate fair market value of all outstanding Investments owned by Appleton
Papers and the Restricted Subsidiaries in the Subsidiary properly designated
will be deemed to be an Investment made as of the time of the designation and
will reduce the amount available for Restricted Payments under the first
paragraph of the covenant described above under the caption "--Restricted
Payments" or Permitted Investments, as determined by Appleton Papers. That
designation will only be permitted if the Investment would be permitted at that
time and if the Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. The Board of Directors may redesignate any
Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation
would not cause a Default.
Sale and Leaseback Transactions
The Parent Entity and Appleton Papers will not, and will not permit any of
the Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that Appleton Papers or any Subsidiary Guarantor may enter into a sale
and leaseback transaction if:
(1)Appleton Papers or that Subsidiary Guarantor, as applicable, could have
(a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction and (b) incurred a Lien
to secure such Indebtedness pursuant to the covenant described above
under the caption "--Liens;"
(2)the gross cash proceeds of that sale and leaseback transaction are at
least equal to the fair market value, as determined in good faith by the
Board of Directors and set forth in an officers' certificate delivered
to the trustee, of the property that is the subject of that sale and
leaseback transaction; and
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(3)the transfer of assets in that sale and leaseback transaction is
permitted by, and Appleton Papers applies the proceeds of such
transaction in compliance with, the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales."
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Subsidiaries
Appleton Papers will not, and will not permit any of its Subsidiaries to,
transfer, convey, sell, lease or otherwise dispose of any Equity Interests in
any Wholly Owned Restricted Subsidiary of Appleton Papers to any Person, other
than Appleton Papers or a Wholly Owned Restricted Subsidiary of Appleton
Papers, unless:
(1)such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in such Wholly Owned Restricted Subsidiary; and
(2)the cash Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption "--Repurchase at the Option of Holders--Asset
Sales."
In addition, Appleton Papers will not permit any Wholly Owned Restricted
Subsidiary of Appleton Papers to issue any of its Equity Interests, other than,
if necessary, shares of its Capital Stock constituting directors' qualifying
shares, to any Person other than to Appleton Papers or a Wholly Owned
Restricted Subsidiary of Appleton Papers.
No Amendment to Deferred Payment Obligation, Fox River Indemnity
Arrangements, Security Holders Agreements, Intercompany Acquisition Loan or
ESOP Documentation
Without the consent of the Holders of at least a majority in aggregate
principal amount of the notes then outstanding, Appleton Papers will not permit
Paperweight Development to amend, modify, waive, assign or otherwise change, or
consent or agree to any amendment, modification, waiver or other change to, any
of the terms of the Deferred Payment Obligation other than any such amendment,
modification, waiver or other change that:
(1)would extend the maturity or reduce the amount of any payment of
principal thereof or reduce the rate or extend any date for payment of
interest thereon,
(2)does not involve the payment of a consent fee, or
(3)involves a change to a notice address or cures any ambiguity, defect or
inconsistency in a manner not in any respect adverse to the Holders of
the notes.
Without the consent of the Holders of at least a majority in aggregate
principal amount of the notes then outstanding, Appleton Papers and Paperweight
Development will not amend, supplement or otherwise modify, or permit the
amendment, supplement or modification of (pursuant to a waiver, endorsement or
otherwise) the terms and conditions of the Fox River Indemnity Arrangements
other than to the extent necessary to change a notice address or to cure any
ambiguity, defect or inconsistency in a manner not in any respect adverse to
the Holders of the notes; provided, however, that under certain limited
circumstances, the non-economic terms of the Credit Enhancement and the Bermuda
Company Agreements may be amended with the consent of the trustee upon receipt
of an officer's certificate and legal and investment banking opinions to the
general effect that the proposed amendment is not adverse to Arjo Wiggins
Appleton (Bermuda) Limited, which is the policyholder under the Credit
Enhancement, Paperweight Development, Appleton Papers or, in the case of the
investment banking opinion, the Holders of the notes.
Without the consent of the Holders of at least a majority in aggregate
principal amount of the notes then outstanding, Appleton Papers and Paperweight
Development will not amend, supplement or otherwise modify, or permit the
amendment, supplement or modification of (pursuant to a waiver, endorsement or
otherwise) the terms and conditions of the Security Holders Agreements other
than to the extent necessary to change a notice address or to cure any
ambiguity, defect or inconsistency in a manner not in any respect adverse to
the Holders of the notes.
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Without the consent of the Holders of at least a majority in aggregate
principal amount of the notes then outstanding, Appleton Papers and the Parent
Entity will not amend, supplement or otherwise modify, or permit the amendment,
supplement or modification of (pursuant to a waiver, endorsement or otherwise)
the terms and conditions of the Intercompany Acquisition Loan except to change
a notice address or to cure any ambiguity, defect or inconsistency in a manner
not in any respect adverse to the Holders of the notes.
Without the consent of the Holders of at least a majority in aggregate
principal amount of the notes then outstanding, Appleton Papers and the Parent
Entity will not amend, supplement or otherwise modify, or permit the amendment,
supplement or modification of (pursuant to a waiver, endorsement or otherwise)
the ESOP Documentation except as may be required by law or to change a notice
address or to cure any ambiguity, defect or inconsistency in a manner not in
any respect adverse to the Holders of the notes; provided, however, that
certain administrative, non-economic and other terms of the ESOP Documentation,
not including provisions regarding contributions to the ESOP, distributions to
participants, amendment or termination of the ESOP, and other provisions
identified in the indenture, may be amended with the consent of the trustee
upon receipt of an officer's certificate and a legal opinion, to the general
effect that the proposed amendment is not adverse to Paperweight Development or
Appleton Papers, and an opinion of an ESOP consultant, to the general effect
that the proposed amendment will not accelerate the timing or amount of
Paperweight Development's obligations to repurchase common stock from employees
terminating their participation in the ESOP.
Business Activities
Appleton Papers will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent
as would not be material to Appleton Papers and its Restricted Subsidiaries
taken as a whole.
Appleton Papers will not permit the Parent Entity to conduct, transact or
otherwise engage in, or commit to conduct, transact or otherwise engage in, any
business or operations other than those incidental to its direct or indirect
ownership of the Capital Stock of Appleton Papers, including matters related to
the ESOP, and those actions required to be taken under the Deferred Payment
Obligation, Guarantees permitted by the indenture, the Intercompany Acquisition
Loan, the Environmental Indemnity Agreements and the Credit Enhancement.
Payments for Consent
Appleton Papers will not, and will not permit any of its Subsidiaries or the
Parent Entity to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any Holder of notes for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of the indenture or the notes unless such consideration is offered
to be paid and is paid to all Holders of the notes that consent, waive or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
Actions related to Debt Arbiter Determination
If, pursuant to the terms of the Fox River AWA Environmental Indemnity
Agreement, the Designated Debt Arbiter, as defined therein, determines that
Appleton Papers will have sufficient internal excess cash to be able to repay
the notes at their stated maturity, then such internal excess cash shall be
deposited for purposes of such repayment with the trustee within five days of
such determination but not earlier than 30 days prior to the Stated Maturity of
the notes, provided, that if the amount initially deposited is not sufficient
to repay the notes in full at their stated maturity, then Appleton Papers shall
make additional deposits promptly and from time to time during the period
between the initial deposit and the stated maturity as additional internal
excess cash becomes available until the total repayment amount has been
deposited.
S Corporation Status
Appleton Papers will not and will not permit the Parent Entity to take, or
fail to take, any action that would terminate, or could reasonably be expected
to lead to the termination of, Paperweight Development's qualification as an "S
Corporation" or the qualification of any Subsidiary of Paperweight Development,
other
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than any such Subsidiary that is an "Ineligible Corporation" under Section
1361(b)(2) of the Code, as a "qualified subchapter S subsidiary," in each case,
for U.S. federal income tax purposes.
Independent Directors
The Board of Directors of both Appleton Papers and Paperweight Development
shall include, at all times, at least two Independent Directors.
Reports
Whether or not required by the Commission, so long as any notes are
outstanding, Appleton Papers will furnish to the Holders of notes, within the
time periods specified in the Commission's rules and regulations:
(1)all quarterly and annual financial information that would be required to
be contained in a filing with the Commission on Forms 10-Q and 10-K if
Appleton Papers were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and, with respect to the annual information only, a
report on the annual financial statements by Appleton Papers' certified
independent accountants; and
(2)all current reports that would be required to be filed with the
Commission on Form 8-K if Appleton Papers were required to file such
reports.
If Appleton Papers or any Guarantor has designated any of its Subsidiaries
as Unrestricted Subsidiaries, then the quarterly and annual financial
information required by the preceding paragraph will include a reasonably
detailed presentation, either on the face of the financial statements or in the
footnotes thereto to the same extent that would be required by Regulation S-X,
and in addition, in Management's Discussion and Analysis of Financial Condition
and Results of Operations, of the financial condition and results of operations
of Appleton Papers and the Restricted Subsidiaries separate from the financial
condition and results of operations of the Unrestricted Subsidiaries.
In addition, following the consummation of the exchange offer contemplated
by the registration rights agreement, whether or not required by the
Commission, Appleton Papers will file a copy of all of the information and
reports referred to in clauses (1) and (2) above with the Commission for public
availability within the time periods specified in the Commission's rules and
regulations, unless the Commission will not accept such a filing, and make such
information available to securities analysts and prospective investors upon
request. In addition, Appleton Papers and the Parent Guarantors and the
Subsidiary Guarantors have agreed that, for so long as any notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
Each of the following is an Event of Default:
(1)default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the notes whether or not
prohibited by the subordination provisions of the indenture;
(2)default in payment when due of the principal of, or premium, if any, on
the notes, whether or not prohibited by the subordination provisions of
the indenture;
(3)failure by Appleton Papers or any of its Restricted Subsidiaries to
comply with the provisions of the indenture described under the captions
"--Repurchase at the Option of Holders--Change of Control,"
''--Repurchase at the Option of Holders--Asset Sales," "--Repurchase at
the Option of Holders--Excess Cash Flow," "--Certain
Covenants--Restricted Payments," "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," "--Certain
Covenants--Merger, Consolidation or Sale of Assets," "--Certain
Covenants--No Amendment to Deferred Payment Obligation, Fox River
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Indemnity Arrangements, Security Holders Agreements, Intercompany
Acquisition Loan or ESOP Documentation," or "--Certain
Covenants--Actions Related to Debt Arbiter Determination;"
(4)failure by Appleton Papers or any of its Restricted Subsidiaries for 60
days after notice to comply with any of the other agreements in the
indenture;
(5)default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Appleton Papers or any of its
Restricted Subsidiaries, or the payment of which is guaranteed by
Appleton Papers or any of its Restricted Subsidiaries, whether such
Indebtedness or guarantee now exists, or is created after the date of
the indenture, if that default:
(a)is caused by a failure to pay principal of, or interest or premium,
if any, on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default,
which we refer to as a "Payment Default"; or
(b)results in the acceleration of such Indebtedness prior to its express
maturity,
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $10.0 million or more;
(6)failure by Appleton Papers or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $10.0 million, which judgments
are not paid, discharged, or stayed or the execution of which has not
been otherwise postponed or precluded in accordance with applicable
procedures, for a period of 60 days; and
(7)except as permitted by the indenture, any Subsidiary Guarantee or Parent
Guarantee shall be held in any judicial proceeding to be unenforceable
or invalid or shall cease for any reason to be in full force and effect
or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Subsidiary Guarantee or
Parent Guarantee;
(8)the Environmental Indemnity Agreements or the Credit Enhancement are
terminated, held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason, except in accordance with the
terms thereof, to be in full force and effect or any party thereto, or
any Person acting on behalf of any party thereto, shall deny or
disaffirm in writing its obligations under either the Environmental
Indemnity Agreements or the Credit Enhancement; and
(9)certain events of bankruptcy or insolvency described in the indenture
with respect to the Parent Entity, Appleton Papers or any one or more of
its Subsidiaries with, individually or in the aggregate, total assets or
liabilities of greater than or equal to $10.0 million.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to Appleton Papers, any Restricted Subsidiary that
is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding notes will
become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the trustee or the Holders of
at least 25% in principal amount of the then outstanding notes may declare all
the notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
Holders of the notes notice of any continuing Default or Event of Default if it
determines that withholding the notice is in their interest, except a Default
or Event of Default relating to the payment of principal or interest or
Liquidated Damages.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its
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consequences under the indenture except a continuing Default or Event of
Default in the payment of interest or Liquidated Damages on, or the principal
of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Appleton Papers or any
of its affiliates with the intention of avoiding payment of the premium that
Appleton Papers would have had to pay if Appleton Papers then had elected to
redeem the notes pursuant to the optional redemption provisions of the
indenture, an equivalent premium will also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the notes. If
an Event of Default occurs prior to December 15, 2005, by reason of any willful
action, or inaction, taken, or not taken, by or on behalf of Appleton Papers
with the intention of avoiding the prohibition on redemption of the notes prior
to December 15, 2005, then the premium specified in the indenture will also
become immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
Appleton Papers is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, Appleton Papers is required to deliver to the trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Appleton
Papers or any Guarantor, as such, will have any liability for any obligations
of Appleton Papers or the Guarantors under the notes, the indenture, the Parent
Guarantees or the Subsidiary Guarantees, or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of notes
by accepting a note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the notes. The waiver may
not be effective to waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
Appleton Papers may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all
obligations of the Guarantors discharged with respect to their Parent
Guarantees and Subsidiary Guarantees, which we refer to as "Legal Defeasance",
except for:
(1)the rights of Holders of outstanding notes to receive payments in respect of
the principal of, or interest or premium and Liquidated Damages, if any, on
such notes when such payments are due from the trust referred to below;
(2)Appleton Papers' obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or stolen
notes and the maintenance of an office or agency for payment and money for
security payments held in trust;
(3)the rights, powers, trusts, duties and immunities of the trustee, and
Appleton Papers' and the Guarantors' obligations in connection therewith; and
(4)the Legal Defeasance provisions of the indenture.
In addition, Appleton Papers may, at its option and at any time, elect to
have the obligations of Appleton Papers and the Guarantors released with
respect to certain covenants that are described in the indenture, which we
refer to as "Covenant Defeasance", and thereafter any omission to comply with
those covenants will not constitute a Default or Event of Default with respect
to the notes. In the event Covenant Defeasance occurs, certain events, not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events, described under "--Events of Default and Remedies" will no longer
constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1)Appleton Papers must irrevocably deposit with the trustee, in trust, for
the benefit of the Holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination of cash in U.S.
dollars and non-callable Government Securities, in amounts as will be
sufficient, in the opinion of a
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nationallyrecognized firm of independent public accountants, to pay the
principal of, or interest and premium and Liquidated Damages, if any,
on the outstanding notes on the stated maturity or on the applicable
redemption date, as the case may be, and Appleton Papers must specify
whether the notes are being defeased to maturity or to a particular
redemption date;
(2)in the case of Legal Defeasance, Appleton Papers has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that (a) Appleton Papers has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the
date of the indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon
such opinion of counsel will confirm that, the Holders of the
outstanding notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3)in the case of Covenant Defeasance, Appleton Papers has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4)no Default or Event of Default has occurred and is continuing on the
date of such deposit, other than a Default or Event of Default resulting
from the borrowing of funds to be applied to such deposit;
(5)such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under any material agreement or
instrument, other than the indenture, to which Appleton Papers or any of
its Subsidiaries is a party or by which Appleton Papers or any of its
Subsidiaries is bound;
(6)Appleton Papers must deliver to the trustee an officers' certificate
stating that the deposit was not made by Appleton Papers with the intent
of preferring the Holders of notes over the other creditors of Appleton
Papers with the intent of defeating, hindering, delaying or defrauding
creditors of Appleton Papers or others; and
(7)Appleton Papers must deliver to the trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent
relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding, including
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, notes, and any existing default or compliance with any provision of
the indenture or the notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding notes, including consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, notes.
Without the consent of each Holder affected, an amendment or waiver may not,
with respect to any notes held by a non-consenting Holder:
(1)reduce the principal amount of notes whose Holders must consent to an
amendment, supplement or waiver;
(2)reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes, other
than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders";
(3)reduce the rate of or change the time for payment of interest on any
note;
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(4)waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Liquidated Damages, if any, on the notes, except
a rescission of acceleration of the notes by the Holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration;
(5)make any note payable in money other than that stated in the notes;
(6)make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of Holders of notes to receive payments
of principal of, or interest or premium or Liquidated Damages, if any,
on the notes;
(7)waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders";
(8)release any Guarantor from any of its obligations under its Parent
Guarantee or its Subsidiary Guarantee or the indenture, except in
accordance with the terms of the indenture; or
(9)make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any Holder of notes,
Appleton Papers, the Guarantors and the trustee may amend or supplement the
indenture or the notes:
(1)to change a notice address or to cure any ambiguity, defect or
inconsistency;
(2)to provide for uncertificated notes in addition to or in place of
certificated notes;
(3)to provide for the assumption of Appleton Papers' or a Guarantor's
obligations to Holders of notes in the case of a merger or consolidation
or sale of all or substantially all of Appleton Papers' assets;
(4)to make any change that would provide any additional rights or benefits
to the Holders of notes or that does not adversely affect the legal
rights under the indenture of any such Holder;
(5)to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act;
(6)to provide for the acceptance of appointment under the indenture of a
successor trustee with respect to the notes issued thereunder; or
(7)to allow any Guarantor to execute a supplemental indenture and/or a
Parent Guarantee or Subsidiary Guarantee, as applicable, with respect to
the notes.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1)either:
(a)all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to
Appleton Papers, have been delivered to the trustee for cancellation;
or
(b)all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the mailing of
a notice of redemption or otherwise or will become due and payable
within one year and Appleton Papers or any Guarantor has irrevocably
deposited or caused to be deposited with the trustee as trust funds
in trust solely for the benefit of the Holders, cash in U.S. dollars,
non-callable Government Securities, or a combination of cash in U.S.
dollars and non-callable Government Securities, in amounts as will be
sufficient without consideration of any reinvestment of interest, to
pay and discharge the entire indebtedness on the notes not delivered
to the trustee for cancellation for principal, premium and Liquidated
Damages, if any, and accrued interest to the date of maturity or
redemption;
(2)no Default or Event of Default has occurred and is continuing on the
date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which Appleton Papers or any
Guarantor is a party or by which Appleton Papers or any Guarantor is
bound;
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(3)Appleton Papers or any Guarantor has paid or caused to be paid all sums
payable by it under the indenture; and
(4)Appleton Papers has delivered irrevocable instructions to the trustee
under the indenture to apply the deposited money toward the payment of
the notes at maturity or the redemption date, as the case may be.
In addition, Appleton Papers must deliver an officers' certificate and an
opinion of counsel to the trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
Concerning the Trustee
If the trustee becomes a creditor of Appleton Papers or any Guarantor, the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security
or otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue or
resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to Appleton Papers Inc., 825 E. Wisconsin Avenue,
P.O. Box 359, Appleton, Wisconsin 54912-0359, Attention: Paul J. Karch. In
addition, the indenture has been filed as an exhibit to the registration
statement on Form S-4, of which this prospectus is a part.
Book-Entry, Delivery and Form
The registered notes initially will be represented by one or more notes in
registered, global form without interest coupons, which we refer to
collectively as the "Global Notes". The Global Notes will be deposited upon
issuance with the trustee as custodian for The Depository Trust Company, or
DTC, in New York, New York, and registered in the name of DTC or its nominee,
in each case for credit to an account of a direct or indirect participant in
DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
notes in certificated form except in the limited circumstances described below.
See "--Exchange of Global Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of notes in
certificated form.
Depository Procedures
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to changes by DTC. Appleton
Papers takes no responsibility for these operations and procedures and urges
investors to contact DTC or its participants directly to discuss these matters.
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DTC has advised Appleton Papers that DTC is a limited-purpose trust company
created to hold securities for its participating organizations, which we refer
to collectively as the "Participants", and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly, which we refer to collectively as the "Indirect
Participants". Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of
the Participants and Indirect Participants.
DTC has also advised Appleton Papers that, pursuant to procedures
established by it:
(1)upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the exchange agent with portions of the
principal amount of the Global Notes; and
(2)ownership of these interests in the Global Notes will be shown on, and
the transfer of ownership of these interests will be effected only
through, records maintained by DTC, with respect to the Participants, or
by the Participants and the Indirect Participants, with respect to other
owners of beneficial interests in the Global Notes.
Investors in the Global Notes who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes who
are not Participants may hold their interests therein indirectly through
organizations which are Participants in such system. All interests in a Global
Note may be subject to the procedures and requirements of DTC. The laws of some
states require that certain Persons take physical delivery in definitive form
of securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such Persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants, the ability of a Person having beneficial interests
in a Global Note to pledge such interests to Persons that do not participate in
the DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interests in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
"Holders" thereof under the indenture for any purpose.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the indenture. Under the terms of the indenture, Appleton Papers and the
trustee will treat the Persons in whose names the notes, including the Global
Notes, are registered as the owners of the notes for the purpose of receiving
payments and for all other purposes. Consequently, neither Appleton Papers, nor
the trustee nor any agent of Appleton Papers or the trustee has or will have
any responsibility or liability for:
(1)any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interest in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or
Indirect Participant's records relating to the beneficial ownership
interests in the Global Notes; or
(2)any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants.
DTC has advised Appleton Papers that its current practice, upon receipt of
any payment in respect of securities such as the notes, including principal and
interest, is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not
receive payment on such
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payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the trustee or Appleton Papers. Neither
Appleton Papers nor the trustee will be liable for any delay by DTC or any of
its Participants in identifying the beneficial owners of the notes, and
Appleton Papers and the trustee may conclusively rely on and will be protected
in relying on instructions from DTC or its nominee for all purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.
DTC has advised Appleton Papers that it will take any action permitted to be
taken by a Holder of notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the notes, DTC reserves the
right to exchange the Global Notes for legended notes in certificated form, and
to distribute such notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and may
discontinue such procedures at any time. Neither Appleton Papers, nor the
trustee nor any of their respective agents will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
Exchange of Global Notes for Certificated Notes
A Global Note is exchangeable for definitive notes in registered
certificated form, which we refer to as "Certificated Notes," if:
(1)DTC (a) notifies Appleton Papers that it is unwilling or unable to
continue as depositary for the Global Notes and Appleton Papers fails to
appoint a successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act;
(2)Appleton Papers, at its option, notifies the trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3)there has occurred and is continuing a Default or Event of Default with
respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated
Notes delivered in exchange for any Global Note or beneficial interests in
Global Notes will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary in accordance with
its customary procedures.
Same Day Settlement and Payment
Appleton Papers will make payments in respect of the notes represented by
the Global Notes, including principal, premium, if any, and interest, by wire
transfer of immediately available funds to the accounts specified by the Global
Note Holder. Appleton Papers will make all payments of principal, interest and
premium, if any, with respect to Certificated Notes by wire transfer of
immediately available funds to the accounts specified by the Holders of the
Certificated Notes or, if no such account is specified, by mailing a check to
each such Holder's registered address.
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PDC Capital Corporation
Notwithstanding any other provisions of the indenture, PDC Capital
Corporation, a Delaware corporation, shall not be subject to the terms and
conditions of the indenture provided that it has no assets other than nominal
assets and its common stock ownership of Arjo Wiggins Appleton (Bermuda)
Limited.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1)Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Subsidiary of such specified Person,
whether or not such Indebtedness is incurred in connection with, or in
contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2)Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of
the Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings.
"Asset Sale" means:
(1)the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business
consistent with past practices; provided that the sale, conveyance or
other disposition of all or substantially all of the assets of Appleton
Papers and its Subsidiaries taken as a whole will be governed by the
provisions of the indenture described above under the caption
"--Repurchase at the Option of Holders--Change of Control" and/or the
provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the
provisions of the indenture described under "--Repurchase at the Option
of Holders--Asset Sales;" and
(2)the issuance of Equity Interests in any of Appleton Papers' Restricted
Subsidiaries or the sale of Equity Interests in any of its Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1)any single transaction or series of related transactions that involves
assets having a fair market value of less than $1.0 million;
(2)a transfer of assets between or among Appleton Papers and one or more of
its Subsidiary Guarantors;
(3)an issuance of Equity Interests by a Restricted Subsidiary to Appleton
Papers, the Parent Entity or to another Restricted Subsidiary or any
issuance by Paperweight Development of its Capital Stock to the ESOP;
(4)the sale or lease of equipment, inventory, accounts receivable or other
assets in the ordinary course of business;
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(5)the sale or other disposition of cash or Cash Equivalents;
(6)a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "--Certain
Covenants--Restricted Payments;"
(7)the disposition, in the ordinary course of business, of obsolete,
worn-out, damaged or otherwise unusable or no longer useful equipment or
assets; or
(8)the licensing of intellectual property in the ordinary course of
business.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Available ESOP Contributions" means with respect to any period, the sum of
(a) the aggregate amount of cash received by Paperweight Development in respect
of ESOP Stock Issuances during such period, which cash has been, in turn,
contributed to the Parent Entity and then to Appleton Papers during such
period, and (b) any Carryover Contributions for such period.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person", as that term is used in Section 13(d)(3)
of the Exchange Act, such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Bermuda Company Agreements" means the collective reference to (a) the
Relationship Agreement, (b) the Assignment and Assumption Deed, dated as of
November 9, 2001, between AWA and Arjo Wiggins Appleton (Bermuda) Limited, (c)
the by-laws and memorandum of association of Arjo Wiggins Appleton (Bermuda)
Limited, (d) the certificate of incorporation and by-laws of PDC Capital
Corporation and (e) the Bermuda Security Agreement.
"Bermuda Security Agreement" means the Collateral Assignment, dated as of
November 9, 2001 by Arjo Wiggins Appleton (Bermuda) Limited in favor of
Appleton Papers.
"Board of Directors" means:
(1)with respect to a corporation, the board of directors of the corporation;
(2)with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3)with respect to any other Person, the board or committee of such Person
serving a similar function.
"Capital Expenditures" means for any period, with respect to any Person, the
aggregate of all expenditures by such Person and its Subsidiaries for the
acquisition or leasing, pursuant to Capital Lease Obligations, of fixed or
capital assets or additions to equipment, including replacements, capitalized
repairs and improvements during such period.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
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"Capital Stock" means:
(1)in the case of a corporation, corporate stock;
(2)in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3)in the case of a partnership or limited liability company, partnership
or membership interests, whether general or limited; and
(4)any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Carryover Contributions" means with respect to any period, the amount, if
any, by which the aggregate amount of cash received by Paperweight Development,
in respect of ESOP Stock Issuances during the period from November 9, 2001 to
the day immediately preceding the first day of such period exceeds ESOP Related
Distributions during the period from November 9, 2001 to the day immediately
preceding the first day of such period.
"Cash Equivalents" means:
(1)United States dollars;
(2)securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the United
States government, provided that the full faith and credit of the United
States is pledged in support of those securities, having maturities of
not more than one year from the date of acquisition;
(3)certificates of deposit and eurodollar time deposits with maturities of
one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each
case, with any lender party to the Credit Agreement or with any domestic
commercial bank having capital and surplus in excess of $500.0 million
and a Thomson Bank Watch Rating of "B" or better;
(4)repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5)commercial paper of an issuer rated at least P-1 by Moody's Investors
Service, Inc. or A-1 by Standard & Poor's Rating Services or carrying an
equivalent rating by a nationally recognized rating agency, if both the
two named rating agencies cease publishing ratings of commercial paper
issuers generally, and in each case maturing within six months after the
date of acquisition; and
(6)money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1)the direct or indirect sale, transfer, conveyance or other disposition,
other than by way of merger or consolidation, in one or a series of
related transactions, of all or substantially all of the properties or
assets of Appleton Papers and its Restricted Subsidiaries taken as a
whole to any "person", as that term is used in Section 13(d)(3) of the
Exchange Act;
(2)the adoption of a plan relating to the liquidation or dissolution of
Appleton Papers;
(3)the consummation of any transaction, including any merger or
consolidation, the result of which is that any "person", as defined
above, becomes the Beneficial Owner, directly or indirectly, of more
than 50% of the Voting Stock of Appleton Papers, measured by voting
power rather than number of shares;
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(4)the first day on which a majority of the members of the Board of
Directors of Appleton Papers and Paperweight Development are not
Continuing Directors;
(5)the first day on which the Parent Entity ceases to own 100% of the
outstanding Equity Interests of Appleton Papers; or
(6)the failure of the ESOP to own 100% of Paperweight Development.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow" means, with respect to any specified Person for any
period, the Consolidated Net Income of such Person for such period plus:
(1)an amount equal to any extraordinary loss plus any net loss realized by
such Person or any of its Restricted Subsidiaries in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2)provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
(3)Consolidated Interest Expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized to the extent that any such expense was deducted in
computing such Consolidated Net Income; plus
(4)depreciation, amortization, including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period and other non-cash expenses, excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a
prepaid cash expense that was paid in a prior period, of such Person and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, the foregoing being referred to
as "Non-Cash Charges;" plus
(5)other non-cash charges from employee compensation expenses arising from
the issuance of stock, options to purchase stock, deferrals and stock
appreciation rights, employer matching contributions pursuant to the
ESOP, excluding any such expenses which relate to options or rights
which, at the option of the holder thereof, may be settled in cash; plus
(6)restructuring and relocation expenses related to Appleton Paper's
Harrisburg, Pennsylvania facility closure incurred prior to the date of
the indenture and not exceeding $12,900,000 in the aggregate; plus
(7)losses in respect of the Appleton Paper's investment in Paperhub.com to
the extent recognized on or prior to the date of the indenture and not
exceeding $6,500,000 in the aggregate; minus
(8)non-cash items increasing such Consolidated Net Income for such period,
other than the accrual of revenue in the ordinary course of business,
in each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Current Assets" means, at any date, all amounts, other than
cash and Cash Equivalents, that would, in conformity with GAAP, be set forth
opposite the caption "total current assets" or any like caption on a
consolidated balance sheet of any Person and its Subsidiaries at such date.
"Consolidated Current Liabilities" means, at any date, all amounts that
would, in conformity with GAAP, be set forth opposite the caption "total
current liabilities" or any like caption on a consolidated balance sheet of any
Person and its Subsidiaries at such date, but excluding the current portion of
any Indebtedness of any Person and its Subsidiaries.
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"Consolidated Indebtedness" means, with respect to any Person as of any date
of determination, the sum, without duplication, of:
(1)the total amount of Indebtedness of such Person and its Subsidiaries;
plus
(2)the total amount of Indebtedness of any other Person, to the extent that
such Indebtedness has been Guaranteed by the referent Person or one or
more of its Subsidiaries; plus
(3)the aggregate liquidation value of all Disqualified Stock of such Person
and all preferred stock of Subsidiaries of such Person,
in each case, determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of:
(1)the consolidated interest expense of such Person and its Subsidiaries
for such period, whether paid or accrued, including amortization of
original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, including the Deferred
Payment Obligation, the interest component of all payments associated
with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance
financings, and net payments, if any, pursuant to Hedging Obligations;
and
(2)the consolidated interest expense of such Person and its Subsidiaries
that was capitalized during such period; and
(3)any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Subsidiaries or secured by a
Lien on assets of such Person or one of its Subsidiaries, whether or not
such Guarantee or Lien is called upon; and
(4)the product of (a) all dividend payments on any series of preferred
stock of such Person or any of its Subsidiaries, times (b) a fraction,
the numerator of which is one and the denominator of which is one minus
the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1)the Net Income, but not loss, of any Unrestricted Subsidiary will be
excluded whether or not distributed to the specified Person or a Wholly
Owned Restricted Subsidiary of the Person;
(2)the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental
approval, that has not been obtained, or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders;
(3)the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded;
(4)the Net Income of any Person which is not a Subsidiary or is accounted
for by the equity method of accounting will be excluded except to the
extent of the amount of dividends or distributions actually paid in cash
by such Person to the specified Person; and
(5)the cumulative effect of a change in accounting principles will be
excluded.
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"Consolidated Net Worth" means, with respect to any specified Person as of
any date, the sum of:
(1)the consolidated equity of the common stockholders of such Person and
its consolidated Subsidiaries as of such date; plus
(2)the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of preferred stock, other than
Disqualified Stock, that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but
only to the extent of any cash received by such Person upon issuance of
such preferred stock.
"Consolidated Working Capital" means, at any date, the excess of
Consolidated Current Assets on such date over Consolidated Current Liabilities
on such date.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Appleton Papers or Paperweight Development, as the
case may be, who:
(1)was a member of such Board of Directors of such company on the date of
the indenture; or
(2)was nominated for election or elected to such Board of Directors in
accordance with the Security Holders Agreements, or, if inapplicable,
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Credit Agreement" means that certain Credit Agreement, dated as of November
8, 2001 by and among Paperweight Development Corp., Appleton Papers, the
several lenders party thereto, Bear, Stearns & Co. Inc., as sole lead arranger
and sole bookrunner, Bear Stearns Corporate Lending Inc., as syndication agent,
U.S. Bank National Association d/b/a Firstar Bank, N.A. and LaSalle Bank
National Association, as documentation agents, M&I Marshall & Ilsley Bank, as
managing agent, Associated Bank, N.A. as co-agent and Toronto Dominion (Texas),
Inc., as administrative agent, providing for a senior secured credit facility
for up to $340.0 million consisting of a $75.0 million four-year revolving
credit facility, a $115.0 million four-year term loan A and a $150.0 million
five-year term loan B including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced,
whether by the same lender or any other lender or group of lenders, from time
to time.
"Credit Enhancement" means the indemnity claim insurance policy issued by
Commerce and Industry Insurance Company, substantially in the form of Schedule
6.1.5.1 to the AWA Environmental Indemnity Agreement, issued on November 9,
2001 in favor of Arjo Wiggins Appleton (Bermuda) Limited, a company limited by
shares organized under the Companies Act of 1981 of the Island of Bermuda.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Deferred Payment Obligation" means the obligation of Paperweight
Development to pay Arjo Wiggins North American Investments Ltd. approximately
$321 million on the terms and conditions set forth in Schedule 2.3 of the
Purchase Agreement by and among AWA, Arjo Wiggins US Holdings Ltd., Arjo
Wiggins North American Investments Ltd., Paperweight Development Corp. and New
Appleton LLC, dated as of July 5, 2001, excluding any refinancings thereof.
"Disposition" means, with respect to any property, any sale, lease, sale and
leaseback, assignment, conveyance, transfer or other disposition thereof.
"Disqualified Stock" means any Capital Stock that, by its terms, or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock, or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or
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otherwise, or redeemable at the option of the holder of the Capital Stock, in
whole or in part, on or prior to the date that is 91 days after the date on
which the notes mature. Notwithstanding the preceding sentence, any Capital
Stock that would constitute Disqualified Stock solely because the holders of
the Capital Stock have the right to require Appleton Papers to repurchase such
Capital Stock upon the occurrence of a change of control or an asset sale will
not constitute Disqualified Stock if the terms of such Capital Stock provide
that Appleton Papers may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption ''--Certain
Covenants--Restricted Payments" and any Capital Stock that would constitute
Disqualified Stock solely because the holders of that Capital Stock have the
right to require Paperweight Development or Paperweight Development has the
obligation to repurchase such Capital Stock pursuant to the terms of the ESOP
will not constitute "Disqualified Stock."
"Domestic Subsidiary" means any Subsidiary of Appleton Papers that was
formed under the laws of the United States or any state of the United States or
the District of Columbia or that guarantees or otherwise provides direct credit
support for any Indebtedness of Appleton Papers.
"Environmental Indemnity Agreements" means the Fox River AWA Environmental
Indemnity Agreement and the Fox River PDC Environmental Indemnity Agreement.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"ESOP" means the Appleton Papers Retirement Savings and Employee Stock
Ownership Plan.
"ESOP Documentation" means the collective reference to (a) the ESOP, (b) the
Trust and (c) all amendments, supplements or other modifications to any of the
foregoing, all schedules, exhibits and annexes thereto and all agreements
affecting the terms thereof or entered into in connection therewith.
"ESOP Related Distributions" means all payments, loans, advances,
distributions or dividends made by Appleton Papers to the Parent Entity to
permit the Parent Entity to satisfy its obligations to repurchase its common
stock pursuant to the ESOP Documentation.
"ESOP Stock Issuances" means with respect to any period, any issuance of
common stock by Paperweight Development to the ESOP during such period.
"Excess Cash Flow" means for any fiscal year of Paperweight Development, the
excess, if any, of (a) the sum, without duplication, of (i) Consolidated Net
Income for such fiscal year, (ii) the amount of all Non-Cash Charges, including
depreciation and amortization deducted in arriving at such Consolidated Net
Income, (iii) decreases in Consolidated Working Capital for such fiscal year,
and (iv) the aggregate net amount of non-cash loss on the Disposition of
property by Appleton Papers and its Subsidiaries during such fiscal year, other
than sales of inventory in the ordinary course of business, to the extent
deducted in arriving at such Consolidated Net Income over (b) the sum, without
duplication, of (i) the amount of all non-cash credits included in arriving at
such Consolidated Net Income, (ii) the aggregate amount actually paid by
Appleton Papers and its Subsidiaries in cash during such fiscal year on account
of Capital Expenditures, excluding the principal amount of Indebtedness
incurred to finance such expenditures, but including repayments of any such
Indebtedness incurred during such period or any prior period and any such
expenditures financed with the proceeds of any Reinvestment Deferred Amount,
(iii) the aggregate amount of all prepayments of revolving and swingline loans
under the Credit Agreement during such fiscal year to the extent accompanying
permanent optional reductions of the revolving commitments are made thereunder
and all optional prepayments of the term loans under the Credit Agreement
during such fiscal year, (iv) the aggregate amount of all regularly scheduled
principal payments of all Indebtedness for money borrowed, including the term
loans under the Credit Agreement of Appleton Papers and its Subsidiaries made
during such fiscal year, other than in respect of any revolving credit facility
to the extent there is not an equivalent permanent reduction in commitments
thereunder, (v) increases in Consolidated
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Working Capital for such fiscal year, and (vi) the aggregate net amount of
non-cash gain on the Disposition of property by Appleton Papers and its
Subsidiaries during such fiscal year, other than sales of inventory in the
ordinary course of business, to the extent included in arriving at such
Consolidated Net Income and (vii) the excess, if any, of (A) ESOP Related
Distributions during such fiscal year, over (B) Available ESOP Contributions
during such fiscal year.
"Excess Cash Flow Amount" means 75% of Excess Cash Flow.
"Excluded Restricted Subsidiaries" means Appleton Papers Canada Ltd. and
Appleton Papers de Mexico, S.A. de C.V.
"Existing Indebtedness" means up to $13.3 million in aggregate principal
amount of Indebtedness of Appleton Papers and its Subsidiaries, other than
Indebtedness under the Credit Agreement but including $8.7 million pursuant to
the IRB and $4.6 million of Capital Lease Obligations, until such amounts are
repaid.
"Fox River AWA Environmental Indemnity Agreement" means the Fox River AWA
Environmental Indemnity Agreement by and among Paperweight Development, New
Appleton, Appleton Papers and AWA dated as of November 9, 2001, as amended,
modified or supplemented from time to time.
"Fox River Indemnity Arrangements" means the collective reference to the Fox
River PDC Environmental Indemnity Agreement, the Fox River AWA Environmental
Indemnity Agreement, the Credit Enhancement, the Fox River Security Agreement
and the Bermuda Company Agreements.
"Fox River PDC Environmental Indemnity Agreement" means the Fox River PDC
Environmental Indemnity Agreement by and among Paperweight Development, New
Appleton and Appleton Papers dated as of November 9, 2001, as amended, modified
or supplemented from time to time.
"Fox River Security Agreement" means the Security Agreement, substantially
in the form attached as Exhibit B to the Fox River AWA Environmental Indemnity
Agreement, by and among Appleton Papers, Paperweight Development, New Appleton,
LLC and AWA.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Government Securities" means direct obligations, or certificates
representing an ownership interest in such obligations, of the United States of
America, including any agency or instrumentality thereof, for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including by way of a pledge of assets or through
letters of credit or reimbursement agreements in respect thereof, of all or any
part of any Indebtedness.
"Guarantors" means each of:
(1)the Parent Entity;
(2)Appleton Papers' Restricted Subsidiaries, other than the Excluded
Restricted Subsidiaries, on the date of the indenture; and
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(3)any other subsidiary that executes a Subsidiary Guarantee in accordance
with the provisions of the indenture,
and their respective successors and assigns provided that any Person
constituting a Guarantor as described above shall cease to constitute a
Guarantor if its respective Guarantee is released in accordance with the
indenture.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1)interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements;
(2)other agreements or arrangements designed to protect such Person against
fluctuations in interest rates; and
(3)agreements or arrangements designed to protect such Person against
currency fluctuations or fluctuations in the cost of raw materials,
in each case, in amounts reasonably related to such Person's business and
operations and not for speculative purposes.
"Indebtedness" means, with respect to any specified Person, any indebtedness
of such Person, whether or not contingent:
(1)in respect of borrowed money;
(2)evidenced by bonds, notes, debentures or similar instruments or letters
of credit, or reimbursement agreements in respect thereof;
(3)in respect of banker's acceptances;
(4)representing Capital Lease Obligations;
(5)representing the balance deferred and unpaid of the purchase price of
any property, except any such balance that constitutes an accrued
expense or trade payable provided that the Deferred Payment Obligation
shall be excluded from the calculation of Indebtedness with respect to
Paperweight Development; or
(6)representing any Hedging Obligations,
if and to the extent any of the preceding items, other than letters of credit
and Hedging Obligations, would appear as a liability upon a balance sheet of
the specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person, whether or not such Indebtedness is assumed by
the specified Person, and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1)the accreted value of the Indebtedness, in the case of any Indebtedness
issued with original issue discount; and
(2)the principal amount of the Indebtedness, together with any interest on
the Indebtedness that is more than 30 days past due, in the case of any
other Indebtedness.
"Independent Director" means a director that would qualify as an independent
director for purposes of a company's audit committee pursuant to Nasdaq Stock
Market Listing Requirements; provided however, that in lieu of having the
applicable financial expertise required by such requirements, such director may
have operational business expertise.
"Intercompany Acquisition Loan" means the loan by Appleton Papers to
Paperweight Development in the aggregate of $546.0 million using the proceeds
of the Senior Subordinated Note due 2008 issued to AWA on November 9, 2001,
$265.0 million of term loans under the Credit Agreement and $31.0 million of
Appleton Papers' cash available immediately prior to November 9, 2001.
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"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons, including Affiliates, in the forms
of loans, including Guarantees or other obligations, advances or capital
contributions, excluding commission, travel and similar advances to directors,
officers and employees made in the ordinary course of business, purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If Appleton
Papers or any Subsidiary of Appleton Papers sells or otherwise disposes of any
Equity Interests of any direct or indirect Subsidiary of Appleton Papers such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of Appleton Papers, Appleton Papers will be deemed to have
made an Investment on the date of any such sale or disposition equal to the
fair market value of the Equity Interests of such Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Certain Covenants--Restricted
Payments." The acquisition by Appleton Papers or any Subsidiary of Appleton
Papers of a Person that holds an Investment in a third Person will be deemed to
be an Investment by Appleton Papers or such Subsidiary in such third Person in
an amount equal to the fair market value of the Investment held by the acquired
Person in such third Person in an amount determined as provided in the final
paragraph of the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"IRB" means the unsecured variable rate industrial revenue bonds due 2013
and 2027 existing on the date of the indenture.
"Leverage Ratio" means, as of any date of determination, the ratio of (a)
the Consolidated Indebtedness of Paperweight Development, excluding the
Deferred Payment Obligation, as of such date to (b) the Consolidated Cash Flow
of Paperweight Development for the most recent four full fiscal quarters ending
immediately prior to such date for which internal financial statements are
available, determined on a pro forma basis after giving effect to all
acquisitions or Dispositions of assets made by the Parent Entity, Appleton
Papers or its Restricted Subsidiaries from the beginning of such four quarter
period through and including such date of determination, including any related
financing transactions, as if such acquisitions and Dispositions had occurred
at the beginning of such four quarter period. In addition, for purposes of
making the computation referred to above, (i) acquisitions that have been made
by the Parent Entity, Appleton Papers or its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the calculation date shall be deemed to
have occurred on the first day of the four quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the calculation date, shall be excluded.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code, or equivalent statutes, of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1)any gain, but not loss, together with any related provision for taxes on
such gain, but not loss, realized in connection with: (a) any Asset
Sale; or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2)any extraordinary gain, but not loss, together with any related
provision for taxes on such extraordinary gain, but not loss.
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"Net Proceeds" means the aggregate cash proceeds received by Appleton Papers
or any of its Restricted Subsidiaries or the Parent Entity in respect of any
Asset Sale, including any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale, net of (i) the direct
costs relating to such Asset Sale, including legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result of the Asset Sale, (ii) payments required to be made to holders of
minority interests in Restricted Subsidiaries as a result of such Asset Sale,
(iii) taxes paid or payable as a result of the Asset Sale, in each case, after
taking into account any available tax credits or deductions and any tax sharing
arrangements and (iv) any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP.
"Non-Cash Charges" shall have the meaning set forth in clause (4) under the
definition of "Consolidated Cash Flow."
"Non-Recourse Debt" means Indebtedness:
(1)as to which neither Appleton Papers nor any of its Restricted
Subsidiaries (a) provides credit support of any kind, including any
undertaking, agreement or instrument that would constitute Indebtedness,
(b) is directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2)no default with respect to which, including any rights that the holders
of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary, would permit upon notice, lapse of time or both
any holder of any other Indebtedness, other than the notes, of Appleton
Papers or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment of the Indebtedness to be
accelerated or payable prior to its stated maturity; and
(3)as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of Appleton Papers or any of
its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Parent Entity" means Paperweight Development Corp. and any future direct or
indirect parent of Appleton Papers.
"Permitted Business" means any business engaged in by Appleton Papers or its
Restricted Subsidiaries as of the date of the indenture or any business
reasonably related, ancillary or complementary thereto.
"Permitted Investments" means:
(1)any Investment in Appleton Papers or in a Restricted Subsidiary that is
a Guarantor;
(2)any Investment in Cash Equivalents;
(3)any Investment existing on the date of the indenture;
(4)any Investment by Appleton Papers or any Restricted Subsidiary in a
Person, if as a result of such Investment:
(a)such Person becomes a Restricted Subsidiary of Appleton Papers and a
Guarantor; or
(b)such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, Appleton Papers or a Restricted Subsidiary that is a
Guarantor;
(5)any Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the
covenant described above under the caption "--Repurchase at the Option
of Holders--Asset Sales;"
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(6)any Investment solely in exchange for the issuance of Equity Interests,
other than Disqualified Stock, of Paperweight Development;
(7)any Investments received in compromise of obligations of such persons
incurred in the ordinary course of trade creditors or customers that
were incurred in the ordinary course of business, including pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of any trade creditor or customer;
(8)Hedging Obligations;
(9)other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (9) that are at the time
outstanding not to exceed $5.0 million;
(10)loans and advances to employees and officers of Appleton Papers, the
Restricted Subsidiaries and the Parent Entity, or guarantees of third
party loans to such persons, in the ordinary course of business for bona
fide business purposes not in excess of $2.0 million at any time
outstanding; and
(11)extensions of trade credit, including accounts receivable, by Appleton
Papers and its Restricted Subsidiaries on commercially reasonable terms
in the ordinary course of business.
"Permitted Liens" means:
(1)Liens of Appleton Papers and any Guarantor that are securing
Indebtedness and other Obligations under the Credit Agreement or that
are securing Senior Debt that was permitted by the terms of the
indenture to be incurred;
(2)Liens in favor of Appleton Papers or the Guarantors;
(3)Liens on property of a Person existing at the time such Person is merged
with or into or consolidated with Appleton Papers or any Subsidiary of
Appleton Papers; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
Appleton Papers or the Subsidiary;
(4)Liens on property existing at the time of acquisition of the property by
Appleton Papers or any Subsidiary of Appleton Papers, provided that such
Liens were in existence prior to the contemplation of such acquisition;
(5)Liens to secure Indebtedness, including Capital Lease Obligations,
permitted by clause (4) of the second paragraph of the covenant entitled
"--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such
Indebtedness;
(6)Liens existing on the date of the indenture and any extensions or
renewals thereof otherwise permitted by the terms of the indenture;
(7)Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as is required
in conformity with GAAP has been made therefor;
(8)Liens incurred in the ordinary course of business of Appleton Papers or
any Subsidiary of Appleton Papers with respect to Obligations that do
not exceed $10.0 million at any one time outstanding;
(9)Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries;
(10)Liens on rights of "Recovery" in favor of AWA pursuant to and as defined
in the Fox River Indemnity Arrangements;
132
(11)statutory Liens of landlords and Liens of carriers, warehouseman,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by
law incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserve or other
appropriate provisions, if any, shall be required by GAAP shall have
been made in respect thereof;
(12)Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; and
(13)Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security.
"Permitted Refinancing Indebtedness" means any Indebtedness of Appleton
Papers or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Appleton Papers or any of its Restricted
Subsidiaries, other than intercompany Indebtedness, or any Indebtedness of the
Parent Entity in the form of Guarantees of the Credit Agreement; provided that:
(1)the principal amount, or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal amount,
or accreted value, if applicable, of the Indebtedness extended,
refinanced, renewed, replaced, defeased or refunded, plus all accrued
interest on the Indebtedness and the amount of all expenses and premiums
incurred in connection therewith;
(2)such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(3)if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment
to, the notes on terms at least as favorable to the Holders of notes as
those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and
(4)such Indebtedness is incurred either by Appleton Papers or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Recovery Event" means any settlement of or payment in respect of any
property or casualty insurance claim or any condemnation proceeding relating to
any asset of any Person.
"Reinvestment Deferred Amount" means with respect to any Reinvestment Event,
the aggregate net cash proceeds received by a Person in connection therewith
that are not applied to prepay term loans under the Credit Agreement or reduce
the revolving commitments under the Credit Agreement as a result of the
delivery of a Reinvestment Notice.
"Reinvestment Event" means any Asset Sale or Recovery Event in respect of
which Appleton Papers has delivered a Reinvestment Notice.
"Reinvestment Notice" means a written notice executed by an officer stating
that no Event of Default has occurred and is continuing and that Appleton
Papers, directly or indirectly through a Subsidiary, intends and expects to use
all or a specified portion of the net cash proceeds of an Asset Sale or
Recovery Event to make a capital expenditure or acquire or make capitalized
repairs to fixed or capital assets that are used or useful in a Permitted
Business.
"Relationship Agreement" means the Agreement dated as of November 9, 2001 by
and among AWA, Arjo Wiggins (Bermuda) Holdings Limited, Paperweight
Development, PDC Capital Corporation and Arjo Wiggins Appleton (Bermuda)
Limited.
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"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Security Holders Agreements" means, collectively, the Security Holders
Agreement by and between Paperweight Development and the Trust dated as of
November 9, 2001 and the Security Holders Agreement by and between Appleton
Papers and the Trust dated as of November 9, 2001.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1)any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees of the corporation,
association or other business entity is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person, or a combination thereof; and
(2)any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are that Person or one or more
Subsidiaries of that Person, or any combination thereof.
"Trust" means the Appleton Papers Inc. Employee Stock Ownership Trust
adopted July 19, 2001.
"Unrestricted Subsidiary" means Appleton Recycled Fibers, Inc. and any
Subsidiary of Appleton Papers, other than Appleton Papers Canada Ltd. and
Appleton Papers de Mexico, S.A. de C.V. or any successor to either of them,
that is designated by the Board of Directors of Appleton Papers as an
Unrestricted Subsidiary pursuant to a board resolution, but only to the extent
that such Subsidiary:
(1)has no Indebtedness other than Non-Recourse Debt;
(2)is not party to any agreement, contract, arrangement or understanding
with Appleton Papers or any Restricted Subsidiary of Appleton Papers
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to Appleton Papers or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Appleton Papers;
(3)is a Person with respect to which neither Appleton Papers nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4)has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Appleton Papers or any of its Restricted
Subsidiaries; and
(5)has at least one director on its Board of Directors that is not a
director or executive officer of Appleton Papers or any of its
Restricted Subsidiaries and has at least one executive officer that is
not a director or executive officer of Appleton Papers or any of its
Restricted Subsidiaries.
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Any designation of a Subsidiary of Appleton Papers as an Unrestricted
Subsidiary will be evidenced to the trustee by filing with the trustee a
certified copy of the Board Resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under
the caption "--Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such
Subsidiary will be deemed to be incurred by a Restricted Subsidiary of Appleton
Papers as of such date and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," Appleton Papers will be in default of such covenant. The Board of
Directors of Appleton Papers may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation will
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of
Appleton Papers of any outstanding Indebtedness of such Unrestricted Subsidiary
and such designation will only be permitted if (1) such Indebtedness is
permitted under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1)the sum of the products obtained by multiplying (a) the amount of each
then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years, calculated to
the nearest one-twelfth, that will elapse between such date and the
making of such payment; by
(2)the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which, other than directors' qualifying shares,
will at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person and one or more Wholly Owned
Subsidiaries of such Person.
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DESCRIPTION OF DEFERRED PAYMENT OBLIGATION
In connection with the acquisition, Paperweight Development agreed to pay
one of the sellers approximately $321 million on May 8, 2010. We refer to this
agreement as the deferred payment obligation.
The deferred payment obligation is or will be contractually subordinated in
right of payment to the prior repayment in full of the senior credit facilities
and the notes and the fulfillment of all of Paperweight Development's
obligations under its guarantees of the senior credit facilities and the notes,
provided, however, that such subordination is solely for the benefit of the
holders of the senior credit facilities and the notes and not for the benefit
of any other creditor. Paperweight Development has the right to set-off the
amount of any losses suffered by the buyers for which the sellers are obligated
to provide indemnification under the purchase agreement against any payments
due under the deferred payment obligation.
In connection with the deferred payment obligation, Paperweight Development
agreed to the following:
. to limit the distributions Paperweight Development is allowed to make to
the ESOP other than (a) those distributions required to repurchase stock
from employees whose employment is terminated or who exercise their
diversification rights under the KSOP and (b) loans to the ESOP to
permit the ESOP to make loans or to fund hardship distributions to
participants in the ESOP;
. not to incur or allow us to incur indebtedness without the consent of
the holder of the deferred payment obligation, except (1) to refinance
the senior credit facilities, the senior subordinated note held by AWA
and the notes, (2) to obtain $100 million of incremental indebtedness,
(3) to obtain some types of working capital facilities or (4) as
permitted by other limited exceptions;
. not to own assets other than our capital stock;
. to allow the holder of the deferred payment obligation the right to
transfer the obligation to a qualified institutional buyer and to other
parties, except our competitors, with Paperweight Development's consent,
which may not be unreasonably withheld;
. to restrict our business to the businesses that we currently conduct,
any extension of our business and any businesses that take advantage of
our strategic strengths, including our basic core technologies, such as
encapsulation, coating chemistry, coating application, papermaking and
the like; and
. to provide AWA with all information provided to the holders of the notes.
If at any time prior to the date that the deferred payment obligation is
paid in full we default on the payment of any principal or interest owing under
the senior credit facilities or the notes (or any document relating to the
refinancing of such indebtedness) and the default continues for thirty days,
the holder of the deferred payment obligation will have the right to designate
one member to our board of directors. Notwithstanding the foregoing, if the
seller holding the deferred payment obligation transfers more than 50% of the
deferred payment obligation to a third party, then such third party holder
would be entitled to designate two directors to our board of directors upon any
such payment default.
Paperweight Development will be permitted to prepay the deferred payment
obligation, in whole at any time, or in part from time to time, for an amount
equal to $140 million increased by 10% per annum compounded semi-annually from
the closing date of the acquisition through the date of repayment, less the
amount of any prior prepayments. However, the agreement governing the senior
credit facilities prohibits or restricts prepayments, or repayment on the due
date, of the deferred payment obligation as long as the senior credit
facilities remain outstanding. The indenture will prohibit prepayments, or
repayment on the due date, of the deferred payment obligation as long as the
notes remain outstanding.
136
In the event of some types of change of control of either Paperweight
Development or us, Paperweight Development is required to offer to repurchase
the deferred payment obligation at a price equal to the price that would have
been payable if the deferred payment obligation had been prepaid on that date,
provided, however,
that the trustee or the holders of 25% in aggregate principal amount of the
notes then outstanding shall have the right to block any such payments by
Paperweight Development in respect of the deferred payment obligation by
delivery of a written payment blockage notice. Any such payment blockage shall
last for a period of 179 days from the date of notice or, if longer, so long as
an event of default shall have occurred and be continuing under the terms of
the indenture. No change of control event that existed or was continuing on the
date of delivery of any payment blockage notice will be, or be made, the basis
for a subsequent payment blockage notice.
Certain but not all amendments to the deferred payment obligation will
require the consent of the holders of a majority in aggregate principal amount
of the notes.
137
THE APPLETON PAPERS RETIREMENT SAVINGS
AND EMPLOYEE STOCK OWNERSHIP PLAN
General
Our 401(k) plan, which is called the Appleton Papers Retirement Savings
Plan, was amended and restated effective as of January 1, 2001, in the form of
the Appleton Papers Retirement Savings and Employee Stock Ownership Plan, which
we refer to as the KSOP or the plan. The KSOP includes a separate employee
stock ownership plan component, which we refer to as the ESOP or the Company
Stock Fund. The KSOP is a tax-qualified retirement plan that also contains a
401(k) feature, which provides participants with the ability to make pretax
contributions to the KSOP by electing to defer a percentage of their
compensation. Historically, participants have had the choice to direct these
contributions to a number of investment options in the non-ESOP component of
the plan, which we refer to as the Vanguard Fund. The ESOP component of the
KSOP is a tax-qualified employee stock ownership plan that is designed to
invest primarily in common stock of Paperweight Development.
Eligible participants, as "named fiduciaries" under ERISA, were offered a
one-time irrevocable election to acquire a beneficial interest in the common
stock of Paperweight Development by electing to direct the transfer of all or a
portion of their existing account balances in the KSOP and the 401(a) plan to
the Company Stock Fund. During the transfer election period, eligible
participants were able to elect to transfer all or any portion of the following
accounts to the Company Stock Fund: (1) account balances held in the Vanguard
Fund, regardless of whether they are vested, less any outstanding loan
balances, and (2) any account balances, regardless of whether they are vested,
in our 401(a) plan which is called the Appleton Papers Inc. Retirement Medical
Savings Plan.
The total proceeds transferred by eligible participants to the Company Stock
Fund were approximately $107 million, representing an average election by each
eligible participant to direct the transfer of approximately 73% of his or her
account to the Company Stock Fund. All proceeds of the offering were used by
the ESOP trustee to purchase the common stock of Paperweight Development. As a
result of this purchase, the ESOP owns 100% of the common stock of Paperweight
Development. The ESOP trustee may purchase common stock from Paperweight
Development with future pretax deferrals made by employees. We also intend to
fund a significant part of our matching contribution commitment with common
stock of Paperweight Development.
Eligibility
All employees participating in the 401(k) plan prior to its restatement
effective as of January 1, 2001 continued as participants in the KSOP, subject
to the terms of the KSOP. New employees of Appleton Papers will become eligible
to participate in the KSOP as follows:
. Nonunion full-time employees will be eligible to participate in the KSOP
beginning on their first day of service;
. Nonunion part-time employees will be eligible to participate in the KSOP
beginning after completing one year of service; and
. Union employees will be eligible to participate in the KSOP beginning on
the first day on which they are eligible to receive welfare benefits
pursuant to their union's collective bargaining agreement.
Leased employees and temporary employees will not be eligible to participate
in the KSOP. There are no minimum age requirements that apply to eligible
employees' participation in the plan.
138
Contributions to the KSOP
All contributions to the KSOP are reflected in accounts established and
maintained in each participant's name under the KSOP. Participants in the KSOP
each have an account in the plan that receives allocations of cash or common
stock attributable to:
. Each participant's existing balances in the Vanguard Fund and/or the
401(a) plan which that participant elected to transfer to the Company
Stock Fund pursuant to the transfer election described above, all of
which is deemed vested, regardless of whether such amounts were vested
when held in the Vanguard Fund and 401(a) plan accounts;
. Future pretax payroll deductions that each participant may elect to
direct to the Company Stock Fund and/or to the Vanguard Fund;
. Future company matching contributions; and
. Future discretionary profit sharing contributions and/or dividends paid
on the shares of common stock allocated to each participant's account,
if any.
Employee Deferrals
Participants may defer on a pretax basis, a percentage of their pay in an
amount equal to between 2 percent and 50 percent of their annual compensation.
However, the total of any participant's deferrals cannot exceed the annual IRS
pretax payroll deduction limit, which is currently $11,000. Certain highly
compensated employees of Appleton Papers may be limited in the amount of pretax
payroll deductions that they can make to the KSOP each year.
Participants' deferrals are deducted from their paychecks, in accordance
with the biweekly payroll schedule. Participants have the option of directing
their deferrals to the Vanguard Fund, the Company Stock Fund, or a combination
of both.
Deferrals directed to the Company Stock Fund will accumulate in a short-term
interest bearing account within the ESOP trust until the next valuation date,
June 30th or December 31st. At that time, these deferrals, and the interest
earned on these amounts, will be used to purchase shares based upon the price
of a share of Paperweight Development common stock on the valuation date
preceding or following the date on which the participant made the deferrals,
whichever is lower.
BCI Group, the ESOP record keeper, will then allocate shares of common stock
to that participant's account based on the amount that is held in that
participant's temporary account attributable to that participant's pretax
payroll deductions, plus the earnings on these amounts, if any.
Company Matching Contributions
We make matching contributions to the KSOP accounts based on the amount of
each participant's deferrals. Historically, we have made a matching
contribution to the accounts of employees who participated in the 401(k) plan.
The basis on which we will make matching contributions has changed. This
section describes the general rules governing the company matching contribution.
The matching contribution will be made twice per year on June 30 and
December 31 on deferrals directed to the Company Stock Fund, and in accordance
with the biweekly payroll cycle for those deferrals directed to the Vanguard
Fund. All matching contributions will be made to the Company Stock Fund in the
form of Paperweight Development common stock with limited exceptions based upon
each participant's union or nonunion employee status.
139
Vesting
Participants' deferrals and any rollover contributions to the KSOP, in
addition to the earnings on these amounts, are 100 percent vested at all times.
All amounts transferred to the Company Stock Fund are 100 percent vested at all
times.
The vesting schedule for the KSOP allows each participant to become 20
percent vested in that participant's employer matching contribution and
discretionary profit sharing contributions, if any, made to that participant's
account, after each year of service with us. After five years of service, each
participant will be fully vested in that participant's account. In determining
a participant's vested balance, the participant will receive credit for the
entire amount of time the participant has been employed by us. If any
participant leaves employment with us before becoming fully vested, the KSOP
provides that the unvested portion of that participant's account will be
forfeited. Regardless of any participant's period of service, that participant
becomes fully vested in that participant's account if that participant dies,
becomes permanently disabled, or retires.
Diversification Rights
When any participant has reached age 55 and has 10 years of participation in
the KSOP, including years that participant participated in the 401(k) plan or
401(a) plan before 2001, the participant has the right to make diversification
elections for a period of six years as required by law. This means that the
participant, as a "named fiduciary" under ERISA, will be able to transfer
account balances out of the Company Stock Fund into other available investment
options. The purpose of these rules is to ensure that participants have the
right to gradually reduce the risk profile of their retirement accounts by
investing in multiple funds prior to the time that they will begin making
withdrawals from those accounts.
Distributions
The value of each participant's account balances 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. The following charts summarize the various
distribution options from participants' KSOP accounts.
Distributions from the Company Stock Fund
Event Account Timing
- ----- ------- ------
Retirement, Transfer .Participants with an account balance of more than $5,000 do not
Death and/or Account have to begin taking a distribution until age 70 1/2
Disability (old money) .Participant may request annual installments for up to 10 years
.Participant may request a lump sum distribution
.Distributions will begin as soon as practicable following receipt
of request
Future Deferrals
(new money) .Same as above
Resignation, Transfer Account .Participants with an account balance of more than $5,000 do not
Dismissal or (old money) have to begin taking a distribution until age 70 1/2
Permanent .Participant may request a lump sum distribution
Layoff .Distributions will begin as soon as practicable following receipt
of request
Future Deferrals .Participants with an account balance of more than $5,000 do not
(new money) have to begin taking a distribution until age 70 1/2
.Participant may request a lump sum distribution
.Distributable beginning no later than in the sixth year following
the year in which termination occurred
140
Requests for lump sum distributions from the Company Stock Fund, including
the KSOP transfer account, will be granted in accordance with a uniform,
nondiscriminatory policy established by the ESOP committee. In general, all
requests for lump sum distributions in any plan year will be granted to the
extent that the aggregate amount requested does not exceed the amount of new
deferrals to the Company Stock Fund, less any distributions that must be made
in accordance with the statutory requirements and installment distributions
obligated under prior year distribution elections. In certain respects,
covenants in the agreements providing for the senior credit facilities and the
notes restrict our ability to pay dividends to Paperweight Development which
could limit its ability to repurchase shares distributed to ESOP participants
who have terminated employment or who are entitled to diversification rights.
Notwithstanding these covenants, Paperweight Development has obligations to
make distributions to former participants in the ESOP under ERISA and these
obligations may supersede the terms of any such agreements. If a lump sum
distribution cannot be made, distributions to former participants will be made
in up to five equal annual installments.
Valuation of Each Participant's KSOP Account
Each participant's account will be adjusted periodically to reflect the fair
market value of the investment options in which that participant's accounts are
invested. Participants' non-ESOP investments will be valued each day that the
New York Stock Exchange is open for business.
The fair market value of the common stock held in the ESOP will be
determined by an independent, third party appraiser selected by the ESOP
trustee as of each June 30 and December 31, following the closing of the
transaction.
Distribution requests and loan distributions from the Company Stock Fund
will be made based on the current fair market value at the end of the period in
which the request is submitted. Participant hardship distributions and
diversification transfers from the Company Stock Fund will be made based on the
most recent appraised value of the common stock of Paperweight Development.
Plan Loans and Hardship Withdrawals
The KSOP provides participants with the option to take out loans up to an
amount equal to 50 percent of their account balance, not to exceed $50,000
($25,000 from the Vanguard Fund and $25,000 from the Company Stock Fund).
Participants may have no more than two loans outstanding at any time, one from
the Company Stock Fund, and one from the Vanguard Fund. Participants must take
a loan for the maximum available amount from the Vanguard Fund before
requesting a loan from the Company Stock Fund. Any loans from the Company Stock
Fund are subject to any covenants contained in the agreements for our senior
credit facilities and the notes in place at the time of the request. Loan
repayments will be directed to the accounts from which the loan was made.
Loans in the amount of $1,000 to $10,000 may be made for any reason. Loans
in the amount of $10,001 to $25,000 may only be made for the following reasons:
purchase of the participant's primary residence, payment of medical expenses,
preventing foreclosure or eviction from the participant's primary residence or
payment of tuition for the next 12 months. The term of the loans must not be
less than one year or more than five years, except that a loan used to purchase
a primary residence may extend up to 15 years.
Loan requests are subject to an origination fee of $30, which is deducted
from the loan proceeds, plus an annual administrative fee of $20, which is
deducted from the participant's account for each year of the loan. These fees
are subject to change.
The KSOP also permits hardship withdrawals in certain circumstances, first
from the Vanguard Fund, and, if necessary, from the Company Stock Fund. If a
participant takes a hardship withdrawal, that participant may not make
deferrals to the KSOP for six months after the withdrawal. In addition, the
maximum amount of the deferrals
141
that any participant may make to the KSOP in the calendar year following your
hardship withdrawal will be reduced by the amount of that participant's
deferrals in the year in which the participant received the hardship
distribution.
The ESOP and Benefit Finance Committees
The board of directors of Appleton Papers appoints the ESOP committee. The
ESOP committee is responsible for the administration of the KSOP and the
financial management of the Company Stock Fund. The ESOP committee consists of
the following executive officers of Appleton Papers: Doug Buth, Paul Karch,
Dale Parker and Rick Fantini. Kerry Arent, Director of Benefits and
Compensation will act as Secretary to the ESOP committee.
The ESOP committee has delegated to the Benefit Finance Committee the
financial management of the Vanguard Fund.
KSOP Trustees
Our Board of Directors has selected The Vanguard Fiduciary Trust Company as
trustee of the non-ESOP trust and State Street Bank and Trust Company as
trustee of the ESOP trust.
Voting Rights
As a named fiduciary under ERISA, each participant has 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 the following major
corporate events relating to Paperweight Development:
. Mergers and consolidations;
. Sale of all or substantially all of Paperweight Development's assets, or
stock, including, for this purpose, all of the stock Paperweight
Development owns in Appleton Papers;
. Recapitalizations and reclassifications; and
. Liquidations and dissolutions.
For all other shareholder votes, including the election of directors, the
ESOP trustee, as a named fiduciary under ERISA, will vote all shares of common
stock held by the ESOP as directed by the ESOP committee but subject, however,
in the case of the election of directors, to the security holders agreement
described above. See "Management--Directors and Executive Officers."
Amendment or Termination
We have reserved the right, at any time, to either amend or terminate the
KSOP or ESOP. This right is subject to limitations contained in our senior
credit facilities and to substantially similar limitations contained in the
indenture and described in "Description of Notes--Certain Covenants--No
Amendment to Deferred Payment Obligation, Environmental Indemnity Agreements,
Relationship Agreement, Security Holders Agreements, Intercompany Acquisition
Loan or ESOP Documentation." Furthermore, no amendment to the KSOP or ESOP may:
. cause any portion of the KSOP's or ESOP's assets to revert back to or
become property of Paperweight Development, Appleton Papers or any other
related party; or
. decrease the number of shares allocated to the accounts of participants
in the ESOP.
In addition, if we terminate the KSOP or ESOP at any point in the future,
all participants will become 100% vested in the KSOP or ESOP benefits they have
accrued up to that point.
142
ERISA
The KSOP is an individual account plan under which a participant's benefits
are based on the amount contributed to the participant's account and any gains
and losses which are allocated to such account. As an individual account plan
intended to be qualified within the meaning of Internal Revenue Code Section
401(a), the KSOP is subject to some, but not all, of the provisions of ERISA.
The KSOP is excluded from coverage under Title IV of ERISA, which generally
provides for the guarantee of certain retirement benefits.
The KSOP is, however, subject to the provisions of Titles I and II of ERISA,
which, among other things, require that each participant be furnished with an
annual report of the KSOP's financial condition and a comprehensive description
of the participant's rights under the KSOP, set minimum standards of
responsibility applicable to fiduciaries with respect to the KSOP and establish
minimum standards for participation and vesting of benefits.
143
PLAN OF DISTRIBUTION
Any broker-dealer who holds old notes that were acquired for the account of
such broker-dealer as a result of market-making activities or other trading
activities (other than old notes acquired directly from us or any of our
affiliates) may exchange such old notes for registered notes in the exchange
offer. Each broker-dealer that receives registered notes in the exchange offer
for its own account must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of such
notes. This prospectus, as it may be amended or supplemented from time to time,
may be used by all persons subject to the prospectus delivery requirements of
the Securities Act, including broker-dealers in connection with resales of
registered notes received in exchange for old notes, where such old notes were
acquired as a result of market-making activities or other trading activities.
We have agreed that, for a period of one year after the expiration of the
exchange offer, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of registered notes by
broker-dealers. Registered notes received by broker-dealers in the exchange
offer for their own account may be sold from time to time in one or more
transactions in the over-the counter market, in negotiated transactions,
through the writing of options on the registered notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such registered notes. Any broker
dealer that resells registered notes that were received by it in the exchange
offer for its own account and any broker or dealer that participates in a
distribution of such notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of such notes
and any commissions or concessions received by any such persons may be deemed
to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of one year after the expiration of the exchange offer, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to
the exchange offer, including the reasonable fees and expenses of counsel to
the initial purchasers of the old notes, other than commissions or concessions
of any brokers or dealers and will indemnify holders of the notes, including
any broker-dealers, against certain liabilities, including liabilities under
the Securities Act.
144
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of U.S. federal income tax consequences relating
to the exchange of old notes for registered notes in the exchange offer. It
does not contain a complete analysis of all the potential tax considerations
relating thereto. This summary is limited to holders of old notes who hold the
old notes as "capital assets" (in general, assets held for investment) and does
not deal with special situations. For example, this summary does not address:
. tax consequences to holders who may be subject to special tax treatment,
such as tax-exempt entities, dealers in securities or currencies, banks,
other financial institutions, insurance companies, regulated investment
companies, or traders in securities that elect to use a mark-to-market
method of accounting for their securities holdings;
. tax consequences to persons holding notes as part of a hedging,
integrated, constructive sale or conversion transaction or a straddle or
other risk reduction transaction;
. tax consequences to holders whose "functional currency" is not the U.S.
dollar;
. tax consequences to partnerships or similar pass-through entities (if a
partnership (including any entity treated as a partnership for United
States federal income tax purposes) is a beneficial owner of the notes,
the United States federal income tax treatment of a partner in the
partnership will generally depend on the status of the partner and the
activities of the partnership);
. tax consequences to holders who have ceased to be United States citizens
or to be taxed as resident aliens;
. U.S. federal gift tax, estate tax or alternative minimum tax
consequences, if any; or
. any state, local or foreign tax consequences.
The discussion below is a summary of the opinion of Godfrey & Kahn, S.C.,
our outside counsel, and is based upon the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations promulgated thereunder, and rulings, judicial decisions and
administrative interpretations thereunder, as of the date hereof. Those
authorities may be changed, perhaps retroactively, so as to result in U.S.
federal income tax consequences different from those discussed below.
Consequences of Tendering Notes
The exchange of your old notes for registered notes in the exchange offer
will not constitute an exchange for federal income tax purposes. Accordingly,
the exchange offer should have no federal income tax consequences to you if you
exchange your old notes for registered notes. For example, there should be no
change in your tax basis and your holding period should carry over to the
registered notes. In addition, the federal income tax consequences of holding
and disposing of your registered notes should also be the same as those
applicable to your old notes.
The preceding discussion of U.S. federal income tax consequences is not tax
advice. Accordingly, each investor is urged to consult its own tax advisor as
to particular tax consequences to it of purchasing, holding and disposing of
the registered notes, including the applicability and effect of any state,
local or foreign tax laws, and of any proposed changes in applicable laws.
145
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
notes and the guarantees will be passed upon for Appleton Papers by White &
Case LLP, New York, New York. Godfrey & Kahn, S.C., Milwaukee, Wisconsin, will
render an opinion to Appleton Papers regarding the material U.S. federal income
tax consequences of the exchange offer.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements as of December 29, 2001 and December
30, 2000, for the periods ended November 9, 2001 and December 29, 2001 and for
the two years in the period ended December 30, 2000 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
146
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Accountants................................................................ F-2
Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000........................ F-3
Consolidated Statements of Operations for the periods November 10, 2001 to December 29, 2001 and
December 31, 2000 to November 9, 2001 and for the years ended December 30, 2000 and January 1,
2000........................................................................................... F-4
Consolidated Statements of Cash Flows for the periods November 10, 2001 to December 29, 2001 and
December 31, 2000 to November 9, 2001 and for the years ended December 30, 2000 and January 1,
2000........................................................................................... F-5
Consolidated Statements of Shareholder's Equity for the periods November 10, 2001 to December 29,
2001 and December 31, 2000 to November 9, 2001 and for the years ended December 30, 2000 and
January 1, 2000................................................................................ F-6
Notes to Consolidated Financial Statements....................................................... F-7
F-1
Report of Independent Accountants
To the Shareholder and Board of Directors
of Paperweight Development Corp. and Appleton Papers Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Paperweight
Development Corp. and its subsidiaries (Successor Company) as of December 29,
2001 and the related consolidated statements of operations, shareholder's
equity and cash flows for the period from November 10, 2001 to December 29,
2001. We have also audited the accompanying consolidated balance sheet of
Appleton Papers Inc. and its subsidiaries (Predecessor Company) as of December
30, 2000 and the related consolidated statements of operations, shareholder's
equity and cash flows for the period December 31, 2000 to November 9, 2001 and
for each of the two years in the period ended December 30, 2000. These
financial statements are the responsibility of the respective Successor and
Predecessor Company's managements. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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. An audit also includes 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 provide a reasonable basis for our opinion.
In our opinion, the Successor Company consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Paperweight Development Corp. and its subsidiaries at December 29,
2001, and the results of their operations and their cash flows for the period
from November 10, 2001 to December 29, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the Predecessor Company consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Appleton Papers Inc. and its subsidiaries at December 30, 2000, and the results
of their operations and their cash flows for the period December 31, 2000 to
November 9, 2001 and for each of the two years in the period ended December 30,
2000 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
had a change in ownership as of November 9, 2001 which resulted in a new basis
of accounting.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for certain start-up and pre-operating costs.
/S/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 4, 2002
F-2
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 2001 and DECEMBER 30, 2000
(dollars in thousands, except share data)
(Successor Basis) (Predecessor Basis)
----------------- -------------------
2001 2000
----------------- -------------------
ASSETS
Current assets
Cash and cash equivalents................................ $ 35,702 $ 39,871
Accounts receivable, less allowance for
doubtful accounts of $1,585 and $1,763, respectively... 105,348 142,850
Inventories.............................................. 134,598 127,149
Deferred tax assets...................................... -- 15,706
Other current assets..................................... 12,010 8,561
Net assets of discontinued operations.................... -- 13,577
---------- ---------
Total current assets................................. 287,658 347,714
Property, plant and equipment, net........................ 531,776 414,490
Goodwill, less accumulated amortization of $11,995........ -- 9,317
Intangible assets, less accumulated amortization of $1,289 136,479 --
Other assets.............................................. 46,385 2,983
---------- ---------
Total assets......................................... $1,002,298 $ 774,504
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt........................ $ 24,125 $ --
Accounts payable......................................... 49,217 59,727
Due to parent and affiliated companies................... -- 336,721
Accrued income taxes..................................... 6,578 44,012
Restructuring reserve.................................... 5,464 15,396
Other accrued liabilities................................ 63,809 63,361
---------- ---------
Total current liabilities............................ 149,193 519,217
Long-term debt............................................ 499,525 158,650
Capital lease obligation.................................. 4,314 4,573
Deferred income taxes..................................... -- 45,615
Postretirement benefits other than pension................ 57,178 39,388
Accrued pension........................................... 15,954 --
Other long-term liabilities............................... 21,959 7,580
Deferred payment obligation............................... 141,896 --
Commitments and contingencies (Note 18)................... -- --
Shareholder's equity
Successor common stock, $0.01 par value
shares authorized: 30,000,000
shares issued and outstanding: 10,684,372.............. 107 --
Predecessor common stock, no par value
shares authorized: 1,000
shares issued and outstanding: 100..................... -- 10,500
Paid-in capital.......................................... 104,556 (224,282)
Retained earnings........................................ 7,616 338,263
Shareholder note......................................... -- (125,000)
---------- ---------
Total shareholder's equity (deficit)................. 112,279 (519)
---------- ---------
Total liabilities and shareholder's equity................ $1,002,298 $ 774,504
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(Successor Basis) (Predecessor Basis)
-------------------- -----------------------------------------------------
For the Period For the Period For the For the
November 10, 2001 to December 31, 2000 to Year Ended Year Ended
December 29, 2001 November 9, 2001 December 30, 2000 January 1, 2000
-------------------- -------------------- ----------------- ---------------
Net sales............................... $112,950 $842,868 $1,080,013 $1,123,833
Costs and expenses:
Cost of sales........................ 76,345 591,741 752,616 789,194
Selling, general and administrative.. 18,693 133,874 165,699 160,075
Restructuring and other charges...... -- 6,385 7,816 44,542
Environmental expense................ -- 23,389 3,148 3,590
Litigation settlements............... -- 449 3,625 21,819
Equipment relocation expenses........ -- 463 5,215 --
Loss on disposals of equipment....... -- 1,252 539 2,249
Loss on investment................... -- -- 6,500 --
-------- -------- ---------- ----------
Operating income........................ 17,912 85,315 134,855 102,364
Other expense (income)
Interest expense..................... 10,638 25,441 43,244 42,926
Interest income...................... (406) (8,818) (13,750) (11,273)
Minority interest.................... -- -- 1,230 4,896
Foreign exchange (gain) loss......... (53) 492 (2,406) (1,793)
-------- -------- ---------- ----------
Income before income taxes.............. 7,733 68,200 106,537 67,608
Provision for income taxes.............. 117 24,574 35,725 17,715
-------- -------- ---------- ----------
Income from continuing operations....... 7,616 43,626 70,812 49,893
-------- -------- ---------- ----------
Discontinued operations, net of tax:
Loss from discontinued operations.... -- (4,462) (13,063) (55,691)
-------- -------- ---------- ----------
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................ 7,616 39,164 57,749 (5,798)
Extraordinary item, net of tax:
Loss on debt extinguishment.......... -- (6,443) (4,651) --
Cumulative effect of accounting change,
net of tax:
Write-off of deferred start-up costs. -- -- -- (6,835)
-------- -------- ---------- ----------
Net income (loss)....................... $ 7,616 $ 32,721 $ 53,098 $ (12,633)
======== ======== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Successor Basis)
-----------------
For the Period
November 10,
2001 to
December 29,
2001
-----------------
Cash flows from operating activities:
Income from continuing operations, extraordinary items and cumulative
effect of accounting change.............................................. $ 7,616
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities of continuing operations:
Extraordinary item, net of tax........................................... --
Cumulative effect of accounting change, net of tax....................... --
Depreciation and amortization............................................ 6,005
Employer 401(k) noncash matching contributions........................... 1,154
Minority interest........................................................ --
Deferred income taxes.................................................... --
Foreign exchange (gain) loss............................................. (53)
Loss on disposals of equipment........................................... --
Asset impairment charges................................................. --
Accretion of deferred payment and capital lease obligations.............. 1,890
Changes in assets ((increase)/decrease) and liabilities
(increase/(decrease)):
Accounts receivable..................................................... 17,524
Inventories............................................................. (4,767)
Other current assets.................................................... 54
Accounts payable and other accrued liabilities.......................... (5,996)
Accrued income taxes.................................................... 289
Restructuring reserve................................................... (19)
Lower Fox River liability............................................... --
Other, net.............................................................. 1,788
---------
Net cash provided by operating activities of continuing operations.......... 25,485
Net cash provided by (used by) operating activities of discontinued
operations................................................................. --
---------
Net cash provided by operating activities................................... 25,485
Cash flows from investing activities:
Proceeds from sale of equipment........................................... 19
Additions to property, plant and equipment................................ (6,741)
Acquisition of business, net of cash acquired............................. (314,826)
Purchase of minority interest in affiliates............................... --
Proceeds from sale of equity investment................................... --
Payments to acquire equipment from capital lease.......................... --
---------
Net cash (used by) investing activities of continuing operations............ (321,548)
Net cash (used by) investing activities of discontinued operations.......... --
---------
Net cash (used by) investing activities..................................... (321,548)
Cash flows from financing activities:
Payments of long-term debt................................................ --
Payment of revolving credit facility...................................... --
Payments for debt extinguishment.......................................... --
Payments relating to capital lease obligation............................. (56)
Payments of loans from parent and affiliated companies.................... --
Loans from parent and affiliated companies................................ --
Due to parent and affiliated companies, net............................... --
Due to former parent and affiliated companies, net........................ (7,388)
Payment of senior subordinated seller note................................ (250,000)
Proceeds from issuance of long-term debt, net of issuance costs........... 484,546
Proceeds from issuance of Successor common stock, net of issuance costs... 104,663
---------
Net cash provided by (used by) financing activities of continuing operations 331,765
Net cash (used by) provided by financing activities of discontinued
operations................................................................. --
---------
Net cash provided by (used by) financing activities......................... 331,765
Change in cash and cash equivalents......................................... 35,702
Cash and cash equivalents at beginning of period............................ --
---------
Cash and cash equivalents at end of period.................................. $ 35,702
=========
(Predecessor Basis)
-------------------------------------
For the Period For the
December 31, For the Year Year
2000 to Ended Ended
November 9, December 30, January 1,
2001 2000 2000
-------------- ------------ ----------
Cash flows from operating activities:
Income from continuing operations, extraordinary items and cumulative
effect of accounting change.............................................. $ 37,183 $ 66,161 $ 43,058
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities of continuing operations:
Extraordinary item, net of tax........................................... 6,443 4,651 --
Cumulative effect of accounting change, net of tax....................... -- -- 6,835
Depreciation and amortization............................................ 36,659 42,897 46,515
Employer 401(k) noncash matching contributions........................... -- -- --
Minority interest........................................................ -- 1,230 4,896
Deferred income taxes.................................................... (11,840) (26,469) (2,854)
Foreign exchange (gain) loss............................................. 492 (2,406) (1,793)
Loss on disposals of equipment........................................... 1,252 539 2,249
Asset impairment charges................................................. 3,827 -- 26,390
Accretion of deferred payment and capital lease obligations.............. 324 239 702
Changes in assets ((increase)/decrease) and liabilities
(increase/(decrease)):
Accounts receivable..................................................... 17,215 (13,553) 1,730
Inventories............................................................. 25,308 5,273 11,999
Other current assets.................................................... (226) 3,156 8,430
Accounts payable and other accrued liabilities.......................... (5,560) (8,779) 11,863
Accrued income taxes.................................................... (707) 37,044 (17,258)
Restructuring reserve................................................... (9,913) 4,661 10,735
Lower Fox River liability............................................... 20,012 -- --
Other, net.............................................................. (770) 1,165 (10,852)
--------- --------- ---------
Net cash provided by operating activities of continuing operations.......... 119,699 115,809 142,645
Net cash provided by (used by) operating activities of discontinued
operations................................................................. 11,897 (13,370) 53,171
--------- --------- ---------
Net cash provided by operating activities................................... 131,596 102,439 195,816
Cash flows from investing activities:
Proceeds from sale of equipment........................................... 9,016 53 1,014
Additions to property, plant and equipment................................ (49,804) (81,072) (37,685)
Acquisition of business, net of cash acquired............................. -- -- --
Purchase of minority interest in affiliates............................... -- (45,960) (42,104)
Proceeds from sale of equity investment................................... -- -- 58,000
Payments to acquire equipment from capital lease.......................... -- (30,141) --
--------- --------- ---------
Net cash (used by) investing activities of continuing operations............ (40,788) (157,120) (20,775)
Net cash (used by) investing activities of discontinued operations.......... -- (25,259) (54,228)
--------- --------- ---------
Net cash (used by) investing activities..................................... (40,788) (182,379) (75,003)
Cash flows from financing activities:
Payments of long-term debt................................................ -- (17,000) (18,000)
Payment of revolving credit facility...................................... -- -- (387,747)
Payments for debt extinguishment.......................................... (160,182) (92,930) --
Payments relating to capital lease obligation............................. (268) (246) (225)
Payments of loans from parent and affiliated companies.................... (45,745) (30,394) (99,176)
Loans from parent and affiliated companies................................ 159,140 189,575 372,876
Due to parent and affiliated companies, net............................... 6,412 12,611 1,993
Due to former parent and affiliated companies, net........................ -- -- --
Payment of senior subordinated seller note................................ -- -- --
Proceeds from issuance of long-term debt, net of issuance costs........... -- -- --
Proceeds from issuance of Successor common stock, net of issuance costs... -- -- --
--------- --------- ---------
Net cash provided by (used by) financing activities of continuing operations (40,643) 61,616 (130,279)
Net cash (used by) provided by financing activities of discontinued
operations................................................................. (11,528) 12,256 (13,795)
--------- --------- ---------
Net cash provided by (used by) financing activities......................... (52,171) 73,872 (144,074)
Change in cash and cash equivalents......................................... 38,637 (6,068) (23,261)
Cash and cash equivalents at beginning of period............................ 39,871 45,939 69,200
--------- --------- ---------
Cash and cash equivalents at end of period.................................. $ 78,508 $ 39,871 $ 45,939
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(dollars in thousands, except share data)
Common Stock Total
------------------- Shareholder's
Shares Paid-In Retained Shareholder Equity
Outstanding Amount Capital Earnings Note (Deficit)
----------- ------- --------- --------- ----------- -------------
Balance, January 2, 1999 (Predecessor Basis).......... 100 $10,500 $(239,882) $ 417,506 $(125,000) $ 63,124
Net loss............................................ -- -- -- (12,633) -- (12,633)
Gain on sale of equity investment in affiliate, net
of tax............................................. -- -- 15,600 -- -- 15,600
---------- ------- --------- --------- --------- ---------
Balance, January 1, 2000 (Predecessor Basis).......... 100 10,500 (224,282) 404,873 (125,000) 66,091
Net income.......................................... -- -- -- 53,098 -- 53,098
Dividend distribution............................... -- -- -- (119,708) -- (119,708)
---------- ------- --------- --------- --------- ---------
Balance, December 30, 2000 (Predecessor Basis)........ 100 10,500 (224,282) 338,263 (125,000) (519)
Net income.......................................... -- -- -- 32,721 -- 32,721
Conversion of shareholder note...................... -- -- -- -- 125,000 125,000
Dividend distribution............................... -- -- -- (7,388) -- (7,388)
Capital contribution from parent and affiliated
companies.......................................... -- -- 352,973 -- -- 352,973
Transfer of liability to affiliated company......... -- -- 2,782 -- -- 2,782
Recovery of withholding tax......................... -- -- -- 5,204 -- 5,204
---------- ------- --------- --------- --------- ---------
Balance, November 9, 2001 (Predecessor Basis)......... 100 10,500 131,473 368,800 -- 510,773
========== ======= ========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
Issuance of Successor common stock, net of
issuance costs..................................... 10,684,372 107 104,556 -- -- 104,663
Net income.......................................... -- -- -- 7,616 -- 7,616
---------- ------- --------- --------- --------- ---------
Balance, December 29, 2001 (Successor Basis).......... 10,684,372 $ 107 $ 104,556 $ 7,616 $ -- $ 112,279
========== ======= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations
Paperweight Development Corp. ("PDC") and New Appleton LLC were formed on
December 28, 2000 by an executive management group of Appleton Papers Inc.
("API") for the purpose of purchasing all of the partnership interests of Arjo
Wiggins Delaware General Partnership ("AWDGP") through an Employee Stock
Ownership Plan (the "ESOP"). Prior to the acquisition of AWDGP, PDC had no
operating activity. PDC used ESOP funds and indirect borrowings through
subsidiaries to fund the cash portion of the purchase price. Eligible employees
of API under the Employee Retirement Income Security Act of 1974 ("ERISA"), as
amended, were offered a one-time irrevocable election to direct State Street
Global Advisors, the ESOP trustee, to accept the transfer of all or any part of
their existing balances in the 401(k) and the 401(a) plans to the Company Stock
Fund. At the close of the election period, the proceeds from this offering were
approximately $106.8 million and were used to purchase 100% of the outstanding
common stock of PDC (see Note 21 "Employee Stock Ownership Plan"). PDC
completed the acquisition of AWDGP on November 9, 2001.
The partnership interests in AWDGP were held by Arjo Wiggins US Holdings
Limited (87.5%) and Arjo Wiggins North America Investments Limited (12.5%). API
was a wholly owned subsidiary of Appleton Investments LLC ("AI") and AI was a
wholly owned subsidiary of AWDGP. In December 2001, AI was liquidated and
merged into AWDGP, subsequently AWDGP was liquidated and merged into API and
New Appleton LLC was liquidated and merged into PDC.
The accompanying consolidated financial statements, after the elimination of
intercompany accounts and transactions, include the accounts of PDC and its
wholly owned subsidiaries (collectively the "Company") for the period November
10, 2001 to December 29, 2001 ("Successor Period"). The accounts prior to the
acquisition of AWDGP ("Predecessor Period") pertain to API, its wholly owned
subsidiaries, as well as AWDGP and AI. The accounts of AWDGP and AI consisted
of debt used to fund the operations of API and the corresponding interest
expense and tax benefits. The consolidated balance sheet as of December 29,
2001 and the related consolidated statements of operations, cash flows and
shareholder's equity for the Successor Period have been segregated from the
Predecessor Period to reflect the change in the reporting entity. Subsequent to
the November 9, 2001 acquisition, API became a wholly owned subsidiary of PDC
(see Note 2 "Acquisition of Appleton Papers Inc.").
Prior to July 2000, API's ultimate parent was Arjo Wiggins Appleton p.l.c.
("AWA"), a company incorporated in the United Kingdom. In July 2000, API's
ultimate parent became Worms et Cie. through the purchase of AWA's outstanding
shares. Worms et Cie. is incorporated in France.
Prior to November 23, 1999, API's parent was Appleton Holdings Inc. ("AHI").
On November 23, 1999, AHI was merged into API and as a result, API became a
wholly owned subsidiary of AI. Since the merger represented a transaction
between companies under common control, the accompanying consolidated financial
statements prior to the merger have been presented on a historical cost basis
as if the merger had taken place as of the earliest period presented.
Nature Of Operations
API is the primary operating subsidiary of PDC and was the primary operating
subsidiary of AWDGP and its principal line of business is the manufacture of
carbonless and thermal paper. Sales of carbonless paper accounted for
approximately 80% of consolidated net sales in the fiscal 2001 Successor and
Predecessor Periods, and 81% and 82% of consolidated net sales for 2000 and
1999, respectively. The principal markets for API's products are printers,
merchants and converters in the United States and Canada.
F-7
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisition of Appleton Papers Inc.
At the close of business on November 9, 2001, PDC completed the purchase of
all the partnership interests of AWDGP (the "Acquisition"). The total cash
purchase price consists of the following (dollars in thousands):
Agreed upon purchase price....................... $ 810,000
Transaction fees................................. 6,203
Cash acquired by buyer........................... (78,508)
Settlement of intercompany note receivable....... (32,869)
---------
Net assets acquired........................... 704,826
Senior subordinated seller note.................. (250,000)
Deferred payment obligation...................... (140,000)
---------
Acquisition of business, net of cash acquired. $ 314,826
=========
The transaction was financed with $106.8 million of proceeds received from
the ESOP ($104.7 million, net of stock issuance costs), $265 million of
long-term debt borrowed at the closing (see Note 11 "Long-Term Obligations"),
$250 million in aggregate principal amount of a senior subordinated note due
2008 issued to AWA which bore interest at the rate of 11.5% per annum in the
Successor Period, and a deferred payment obligation with a present value of
$140 million at the closing of the Acquisition to be paid to AWA (see Note 11
"Long-Term Obligations").
As part of the purchase agreement, AWA agreed to indemnify the Company for
the first $75 million and for all amounts over $100 million, of liabilities, if
any, relating to the Lower Fox River contingency (see Note 18 "Commitments and
Contingencies"). The Company will be responsible for the $25 million between
$75 million and $100 million. To provide the Company with financial assurance
that AWA will be able to meet its indemnification obligations under these
agreements, AWA agreed to deposit $75 million into an escrow account if AWA's
consolidated tangible net worth is less than 500 million British Pounds for two
consecutive fiscal quarters. AWA also purchased and fully paid for an indemnity
claim insurance policy from an affiliate of American International Group, Inc.
("AIG") that provides for the payment of AWA's share of the Lower Fox River
expenses in amounts that increase over a six year period and then, when certain
Acquisition debt has been repaid, may be reduced to lower maximum amounts to be
paid over a number of years.
AWA also agreed to indemnify the Company for liabilities related to the
business and operations of Newton Falls, Inc., Appleton Coated LLC, Appleton
Capital Inc., Appleton Leasing LLC, Arjo Wiggins Investments Inc., Appleton
Recycled Fibers, Inc., Paperhub.com, Inc. and several other of API's former
subsidiaries, the ownership of the real property on which the Harrisburg plant
is located and for pre-closing environmental contingencies at this location,
and for certain other designated liabilities, which are referred to as other
excluded liabilities, including pending litigation, and some known
environmental conditions or issues, other than those matters relating to the
Lower Fox River which are covered by the Fox River Indemnification Agreement
described above. Under these provisions AWA is obligated to reimburse API for
losses for, in the case of a breach of an environmental representation or
warranty or a loss arising from a known environmental condition or issue
constituting other excluded liabilities, 50% of the first $5 million of losses,
100% of losses in excess of $5 million, and in all other cases, 100% of the
losses.
F-8
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Acquisition was accounted for using the purchase method and the
financial statements of API were adjusted on November 10, 2001 to reflect
assets and liabilities at fair value. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed, excluding
cash acquired (dollars in thousands):
(Successor Basis)
-----------------
At
November 10, 2001
-----------------
Current assets............... $264,714
Property, plant and equipment 529,770
Intangible assets............ 137,768
Other assets................. 17,210
--------
Total assets acquired..... $949,462
--------
Current liabilities.......... $137,028
Long-term debt............... 8,650
Other long-term liabilities.. 98,958
--------
Total liabilities assumed. $244,636
--------
Net assets acquired....... $704,826
========
Of the $137.8 million of acquired intangible assets, $90.7 million was
assigned to registered trademarks. Trademarks, related to carbonless paper, of
approximately $60.0 million are being amortized over their remaining useful
life of 20 years, while the remaining $30.7 million are considered to have an
indefinite life, and as such, are not subject to amortization. The remaining
acquired intangible assets are being amortized over their estimated useful
lives ranging from 6 to 25 years and pertain to patents of $40.0 million and
customer relationships of $7.1 million, respectively.
Due to noncompliance on the part of Enron Corp., the Company is in the
process of terminating an unfavorable purchase commitment contract that was in
existence at the Acquisition date; thus the allocation of purchase price is
preliminary, pending the final outcome of this court proceeding. Should the
ruling be adverse to the Company, an additional liability with a corresponding
increase to goodwill will be included within the final purchase price
allocation.
The following unaudited pro forma data summarized the results of operations
for the periods indicated as if the Acquisition had been completed on December
31, 2000 and January 2, 2000, respectively. The pro forma data gives effect to
actual operating results prior to the Acquisition and adjustments to costs of
products sold, selling general and administrative, special charges, interest
expense, depreciation, amortization and income taxes. These unaudited pro forma
amounts do not purport to be indicative of the results that would have actually
been obtained if the Acquisition had occurred on December 31, 2000 and January
2, 2000 or that may be obtained in the future (dollars in thousands):
(Unaudited Pro Forma)
-----------------------------------
Year ended Year ended
December 29, 2001 December 30, 2000
----------------- -----------------
Net sales............................ $955,818 $1,080,013
Net income from continuing operations $ 38,842 $ 52,866
F-9
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. 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. The fiscal 2001 Predecessor and Successor Periods
ended November 9, 2001 and December 29, 2001, respectively. Fiscal years 2000
and 1999 were 52-week periods ending on December 30, 2000 and January 1, 2000,
respectively.
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 pertain to environmental, restructuring, income taxes and receivable
and inventory reserves. Actual results could differ from those estimates.
Reclassifications
Certain prior year financial statement amounts have been reclassified to
conform to their current year presentation. These reclassifications had no
effect on net income.
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; collectibility is reasonably assured; and title has
transferred to the customer. Generally, these criteria are met at the time of
shipment.
Impairment Of Long-lived Assets
The Company reviews the carrying value of goodwill and indefinite lived
intangible assets annually for impairment. The carrying value of definite lived
intangible assets and long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment would be determined based upon a comparison of the
undiscounted future net cash flows anticipated to be generated during the
remaining life of API's goodwill and intangible assets or long-lived assets to
the carrying value. Measurement of any impairment loss would be based upon
discounted operating cash flows.
Cash Equivalents
Cash equivalents consist of funds invested in institutional money market
funds with daily liquidity and commercial paper with original maturity dates
less than three months. At December 29, 2001 and December 30, 2000, there were
cash overdrafts of approximately $6.8 million and $2.5 million, respectively,
which are included in accounts payable within the accompanying consolidated
balance sheets.
F-10
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") method for finished goods, work in
process and raw materials. Stores and spare parts inventory are valued at
average cost and certain other inventories are valued using the first-in,
first-out ("FIFO") method. Finished goods and work-in process inventories
include the cost of materials, labor and manufacturing overhead.
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 2 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 earnings.
Goodwill And Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair
value of identifiable net assets of acquired companies, resulting from
acquisitions consummated prior to July 1, 2001 was amortized on a straight-line
basis over 40 years. API reviewed the carrying values of goodwill and other
intangibles for impairment whenever events or changes in circumstances
indicated that the carrying amount may not be recoverable. Goodwill arising
from acquisitions subsequent to July 1, 2001 will not be amortized. Certain
intangible assets have been determined to have indefinite useful lives, and
will not be amortized until their useful lives are determined to be no longer
indefinite. Other intangible assets are amortized over their estimated useful
lives of 6 to 25 years. Goodwill and indefinite lived intangible assets are
reviewed for impairment annually.
Equity Investments
The equity method of accounting is used when the Company has significant
influence, but not control over an investee, and is generally reflective of a
20% to 50% interest in an investee. Under the equity method, original
investments are recorded at cost and adjusted by the Company's share of the
earnings or losses and distributions from these investees (see Note 6
"Transactions with AWA and AWA Affiliated Companies"). At December 29, 2001
there were no equity investments held by the Company.
Income Taxes
In conjunction with the Acquisition, the Company and its subsidiaries have
elected to be treated as subchapter S corporations for U.S. and state income
tax purposes, and therefore, the Company anticipates to incur no future U.S.
income tax liability and minimal state income tax liability.
Prior to the Acquisition, API and its domestic subsidiaries were included
within the consolidated tax return of AWDGP and accounted for income taxes in
accordance with SFAS No. 109, "Accounting for 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
year in which the differences are expected to reverse.
F-11
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of 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 and deferred payment and lease
obligations are estimated based on market conditions and interest rates
available to the Company for similar financial instruments.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components in
financial statements. The Company does not have any components of comprehensive
income that are required to be disclosed in accordance with SFAS 130.
Start-Up and Pre-Operating Costs
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"). SOP 98-5 required adoption of its provisions for fiscal years beginning
after December 15, 1998. Adoption of these provisions during fiscal 1999
required API to write-off previously deferred start-up and pre-operating costs.
The impact is reported as a cumulative effect of an accounting change in 1999
and resulted in a charge of $11.5 million ($6.8 million, net of income taxes).
The Company's policy is to expense all start-up and pre-operating costs.
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 amounted to $1.7 million during the Successor Period and
$12.5 million for the fiscal 2001 Predecessor Period. Similar research and
development costs were $15.9 million and $15.4 million in 2000 and 1999,
respectively. Such costs for API's discontinued coated free sheet and fine
paper products division approximated $2.8 million in both 2000 and 1999.
Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. As amended, SFAS No. 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. The Company
adopted SFAS No. 133, as amended, in fiscal 2001. The adoption of this
statement did not have a material impact on the Company's financial position,
results of operations or cash flows.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." The statements eliminate the pooling-of-interests method of
accounting for business combinations and require that goodwill and certain
intangible assets not be amortized. Instead, these assets will be reviewed for
impairment annually with any related losses recognized in earnings when
incurred. As the Acquisition was completed on November 9, 2001, the Company has
accounted for it under the provisions of SFAS No. 141 and SFAS No. 142.
F-12
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which is effective for fiscal years
beginning after June 15, 2002, requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period in which it is
incurred. When the liability is recorded, the entity capitalizes the costs of
the liability by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
The Company is required to adopt SFAS No. 143 in fiscal 2003. The Company is
currently evaluating the impact of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" and the accounting and reporting provisions of Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and is effective for the Company in fiscal 2002.
The Company anticipates this statement, upon adoption, will not have a
significant impact on its financial position or results of operations.
4. Discontinued Operations
On October 28, 2001, API completed the transfer of one of its wholly owned
subsidiaries, Newton Falls Inc. ("NFI"), to Newton Falls LLC ("NFLLC"), an
affiliated company of AWA. The Newton Falls mill, which represented the
remainder of API's coated free sheet and fine paper products division, was
permanently closed in the third quarter of 2001. API's deficit investment in
this subsidiary at the date of transfer was $2.8 million. This amount was
credited to shareholder's equity as API and NFLLC were commonly controlled
entities.
Effective November 26, 2000, API completed the transfer of two wholly-owned
subsidiaries, Appleton Coated LLC ("AC") and Appleton Leasing LLC, to Appleton
Coated Papers Holdings Inc. ("ACPHI"), a company whose ultimate parent was also
Worms et Cie. API's investment in these subsidiaries at the date of the
transfer was $225.1 million. API received related party notes receivable
totaling $105.4 million as proceeds for this transaction. The $119.7 million
loss generated as a result of this related party transaction has been charged
to shareholder's equity as a dividend distribution as API and ACPHI were
commonly controlled entities.
API has classified these subsidiaries as discontinued operations in its
consolidated balance sheet as of December 30, 2000 and its consolidated
statements of operations and cash flows for all periods presented.
Revenues for these subsidiaries were none in the fiscal 2001 Predecessor
Period, $221.7 million in 2000 and $231.8 million in 1999. Operating losses for
these subsidiaries were $6.9 million in the fiscal 2001 Predecessor Period, and
$27.2 million and $86.9 million in 2000 and 1999, respectively. The benefit for
income taxes on discontinued operations was approximately $2.6 million for the
fiscal 2001 Predecessor Period, and $3.8 million and $35.0 million in 2000 and
1999, respectively. Net assets of discontinued operations were comprised of the
following (dollars in thousands):
F-13
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Predecessor Basis)
-------------------
December 30, 2000
-------------------
ASSETS
Current assets:
Cash and cash equivalents............... $ 6
Accounts receivable, less allowance for
doubtful accounts of $0............... 174
Inventories............................. 389
Other current assets.................... 595
-------
Total current assets................ 1,164
Property, plant and equipment, net...... 7,504
Deferred tax assets..................... 19,836
Other assets............................ 219
-------
Total assets........................ $28,723
-------
LIABILITIES
Current liabilities:
Accounts payable........................ $ 276
Restructuring reserve................... 4,493
Other accrued liabilities............... 3,388
-------
Total current liabilities........... 8,157
Other long-term liabilities............. 6,989
-------
Total liabilities................... $15,146
-------
Net assets.............................. $13,577
=======
5. Restructuring and Other Charges
During the third quarter of 1999, API announced plans to close the Newton
Falls mill in 2000 and the Harrisburg plant in 2001. API recorded restructuring
charges of $12.7 million in the fiscal 2001 Predecessor Period, $13.5 million
in 2000 and $101.9 million in 1999 related to these facility closings. During
1999, API also recorded a $2.9 million write-down of goodwill related to the
Newton Falls mill which has been included within loss from discontinued
operations within the fiscal 1999 Consolidated Statement of Operations.
In the third quarter of 2000, API ceased operations at the Newton Falls mill
and permanently closed the mill during the third quarter of 2001. API sold its
Harrisburg plant in August 2001. As part of this sale, API entered into a five
year agreement to lease the portion of the plant that served as a distribution
center.
The table below summarizes the components of restructuring costs included in
the consolidated statements of operations (dollars in thousands):
F-14
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Predecessor Basis)
------------------------------------------------------------------------------------
For the Period December 31, For the Year Ended For the Year Ended January 1,
2000 to November 9, 2001 December 30, 2000 2000
-------------------------- ------------------------- -----------------------------
Restructuring Loss from Restructuring Loss from Restructuring Loss from
and Other Discontinued and Other Discontinued and Other Discontinued
Charges Operations Charges Operations Charges Operations
------------- ------------ ------------- ------------ ------------- ------------
Asset impairments... $3,827 $3,277 $ -- $ -- $26,390 $43,312
Employee termination
benefits.......... 1,089 -- 5,856 437 11,267 11,236
Distribution center
exit costs........ -- -- -- -- 5,991 --
Environmental costs. -- -- -- 3,000 -- --
Newton Falls mill
closing costs..... -- 2,667 -- 2,859 -- --
Loss on contractual
obligations....... -- (85) -- (682) -- 2,569
Other............... 1,469 415 1,960 36 894 218
------ ------ ------ ------ ------- -------
$6,385 $6,274 $7,816 $5,650 $44,542 $57,335
====== ====== ====== ====== ======= =======
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," API recorded an
impairment loss of $69.7 million ($26.4 million for the Harrisburg plant and
$43.3 million for the Newton Falls mill). The write-downs reduced the book
value of the land, buildings and equipment at both facilities to their
estimated fair values at January 1, 2000. In fiscal 2001, the sale of the
Harrisburg plant and the closure of the Newton Falls mill resulted in
additional impairment losses of $3.8 million and $3.3 million, respectively.
Charges related to employee termination benefits totaling $22.5 million were
also recorded in 1999. Of the $11.3 million Harrisburg charge, $6.5 million
represented pension benefits and postretirement medical costs. Additional
Harrisburg plant severance was recorded in fiscal 2000 and the fiscal 2001
Predecessor Period for the 348 plant and distribution center employees whose
employment was terminated in 2001.
In 1999, API committed to exiting its New York distribution center in 2001,
which was no longer needed with the closure of the Newton Falls mill, and
recorded $6.0 million of restructuring and other charges.
In conjunction with the permanent closure of the Newton Falls mill in 2001,
API estimated that it would incur environmental costs of $3.0 million to dredge
the areas surrounding the mill. In October 2001, the remaining reserve related
to these environmental costs of $2.8 million was transferred to an affiliated
company (see Note 4 "Discontinued Operations"). Newton Falls mill closing costs
of $2.7 million in the fiscal 2001 Predecessor Period and $2.9 million in 2000
relate to additional costs caused by various delays in closing the facility
that were not included within API's original estimates.
Other charges of $1.9 million, $2.0 million and $1.1 million were recorded
in the fiscal 2001 Predecessor Period, 2000 and 1999, respectively. The 2001
charges primarily pertained to other payments made for various closing costs
incurred for the Harrisburg plant. The most significant of the 2000 costs
pertained to an early retirement package offered to salaried employees in 2000
that was not in place as of January 1, 2000. During 1999, API also recorded
charges ($0.9 million for Harrisburg and $0.2 million for Newton Falls) for
losses on equipment disposals at other operating locations that were a direct
result of API's plan to close the Harrisburg and Newton Falls facilities.
F-15
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below summarizes the components of the restructuring reserve
included on the Consolidated Balance Sheets at December 29, 2001 and December
30, 2000 (dollars in thousands):
Transfer
of
2001 Reserve to
2000 Reserve Charges to AWA 2001
Reserve Additions Reserve Affiliate Reserve
------- --------- ---------- ---------- -------
Asset impairments................ $ -- $3,827 $ (3,827) $ -- $ --
Employee termination benefits--
Harrisburg...................... 9,405 1,089 (10,494) -- --
Employee termination benefits--
Newton Falls Mill *............. 1,399 -- (1,399) -- --
Distribution center exit costs... 5,991 -- (527) -- 5,464
Environmental costs *............ 3,000 -- (218) (2,782) --
Loss on contractual obligations * 94 -- (94) -- --
Other............................ -- 1,469 (1,469) -- --
------- ------ -------- ------- ------
$19,889 $6,385 $(18,028) $(2,782) $5,464
======= ====== ======== ======= ======
- --------
* Reserve is included within net assets of discontinued operations
During the fiscal 2001 Predecessor Period, the employment of 348 Harrisburg
plant and distribution center employees was terminated resulting in $10.5
million in severance payments.
Lease payments of $0.5 million were primarily made during the fiscal 2001
Predecessor Period resulting in charges against the reserve for distribution
center exit costs.
Other payments of $1.5 million were made during the fiscal 2001 Predecessor
Period for various costs associated with the permanent closure of the
Harrisburg manufacturing plant.
6. Transactions with AWA and AWA Affiliated Companies
In December 1997, API entered into a revolving credit facility with a
financial institution and borrowed $600 million against the facility. API
repaid approximately $387.7 million and $212.3 million of this debt in 1999 and
1998, respectively. In 1999, API entered into loans with affiliated companies
for $372.9 million. The proceeds of these loans were used primarily to repay
the revolving credit facility. At year-end 2000 these loans from affiliated
companies totaled $331.6 million and had interest rates ranging from 5.0% to
7.0%. Principal amounts of these loans were payable upon demand.
On November 6, 2001 AWDGP's two partners made a capital contribution of
approximately $353.0 million to AWDGP. A portion of the receivables associated
with this capital contribution were assigned to affiliated companies for full
settlement of intercompany loan balances. Prior to the Acquisition, API made a
dividend distribution of approximately $7.4 million to an affiliated company.
API has historically maintained related party balances with various AWA
affiliates. At year-end 2000 advances associated with a cash pooling agreement
with certain affiliated companies totaled $1.8 million. Other year-end related
party balances with AWA affiliates included miscellaneous payables of $6.9
million in 2000.
F-16
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management fee expenses to AWA approximated $1.0 million in the fiscal 2001
Predecessor Period, $2.1 million in 2000 and $1.4 million in 1999. Basestock
and other paper purchases from Appleton Coated LLC for the fiscal 2001
Predecessor Period was $86.4 million. Similar purchases were $165.3 million in
2000. Fees, associated with information technology and other services, received
from affiliated companies approximated $2.7 million for the fiscal 2001
Predecessor Period. Similar fees received during 2000 and 1999 were $4.3
million and $0, respectively.
On December 16, 1999, Arjo Wiggins Investments Inc. ("AWII") issued an
additional 11 shares of stock to API, increasing API's share in AWII from 78.6%
to 80%. AWII held a 14.5% interest in Arjo Wiggins SA ("AWSA"), a French
company ultimately owned by AWA, with a historical cost of $34 million. On
December 17, 1999, AWII sold its $34 million equity interest in AWSA to AWA for
$58 million. This transaction resulted in a gross taxable gain of $24 million.
This related party gain (net of $8.4 million of taxes) has been charged
directly to shareholder's equity in the accompanying financial statements at
January 1, 2000. On July 26, 2000, API bought the 20% minority interest share
of AWII held by a subsidiary of AWA for $46.0 million and AWII was liquidated
into API.
During 2000 and through September of 2001 API held a $125 million
shareholder note in AWSA (the "AWSA Note"). The AWSA Note could be redeemed at
the option of AWSA on every tenth anniversary of the January 5, 1994 issue
date. Interest at the annual rate of 6.46% was payable on June 15 and December
15 of each year. API recorded $6.4 million of interest income in the fiscal
2001 Predecessor Period and $8.1 million of interest income in 2000 and 1999,
respectively. Given the nature of the loan, the AWSA Note was recorded as an
offset to shareholder's equity on the consolidated balance sheets. Effective
October 1, 2001 the note was sold to AWA for $125 million plus accrued
interest. In consideration for the sale of the AWSA Note, AWA agreed to reduce
intercompany debt owed by API to AWA.
On March 31, 1999, API redeemed the 20% minority interest share of Appleton
Capital Inc. ("ACI") held by a subsidiary of AWA for $42.1 million. In
addition, ACI was liquidated into API.
During 1990 API made a dividend distribution of $113.4 million to AWA of
which $5.2 million represented withholding tax. This $113.4 million dividend
was charged directly to equity. Subsequent to remitting the withholding tax,
API determined the distribution was not subject to withholding tax and filed
for a refund. API received the refund, but expecting the issue to be contested
by the IRS, recorded the receipt of the refund as an accrued liability. During
the third quarter of 2001 the issue was settled by the IRS in API's favor and
the $5.2 million accrued liability was reversed directly to retained earnings.
7. Inventories
Inventories consist of the following (dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------
2001 2000
----------------- -------------------
Finished goods................ $ 67,145 $ 60,747
Raw materials, work-in-process
and supplies................. 68,683 87,087
-------- --------
Total cost.................... 135,828 147,834
Excess cost over LIFO cost.... (1,230) (20,685)
-------- --------
$134,598 $127,149
======== ========
F-17
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stores and spare parts inventory balances of $21.8 million in 2001 and $23.6
million in 2000 are valued at average cost. Inventories totaling $1.6 million
in 2001 and $1.4 million in 2000 are valued at first-in, first-out (''FIFO'')
cost.
In the fiscal 2001 Predecessor Period and 2000, inventory quantities
decreased which resulted in a liquidation of LIFO inventory layers carried at
lower costs than prevailed in prior years. The impact of the liquidation during
the fiscal 2001 Predecessor Period was insignificant while 2000 resulted in a
$1.8 million decrease in cost of sales.
8. Property, Plant and Equipment
Assets were recorded at fair market value at the beginning of the Successor
Period. Property, plant and equipment balances within the Predecessor Period
were carried at cost. Balances within the respective periods consist of the
following (dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------
2001 2000
----------------- -------------------
Land and improvements................ $ 4,725 $ 3,683
Buildings and improvements........... 74,727 108,487
Machinery and equipment.............. 432,717 794,307
Capital leases....................... 4,764 6,000
Construction in progress............. 19,559 65,048
-------- ---------
536,492 977,525
Accumulated depreciation/amortization (4,716) (563,035)
-------- ---------
$531,776 $ 414,490
======== =========
9. Other Assets
Other assets consist of the following (dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------
2001 2000
----------------- -------------------
Deferred debt expense..................... $28,814 $ 399
Lower Fox River indemnification receivable 14,674 --
Other..................................... 2,897 2,584
------- ------
$46,385 $2,983
======= ======
10. Other Accrued Liabilities
Other accrued liabilities consist of the following (dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------
2001 2000
----------------- -------------------
Payroll.................. $11,865 $12,838
Trade discounts.......... 22,799 23,695
Worker's compensation.... 5,897 3,842
Lower Fox River liability 5,990 --
Other.................... 17,258 22,986
------- -------
$63,809 $63,361
======= =======
F-18
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Long-Term Obligations
Long-term obligations, excluding the capital lease obligation, consist of
the following (dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------
2001 2000
----------------- -------------------
Unsecured variable rate industrial
development bonds, 3.0% average
interest rate at December 29, 2001,
$2,650 due in 2013 and $6,000 due
in 2027.......................................................... $ 8,650 $ 8,650
Senior unsecured notes payable, 6.26%,
repaid during 2001............................................... -- 125,000
Senior unsecured notes payable, 6.61%,
repaid during 2001............................................... -- 25,000
Senior secured variable rate notes payable,
LIBOR plus 3.5%, $7,667 due quarterly
beginning March 31, 2002 and ending
November 8, 2005................................................. 115,000 --
Senior secured variable rate notes payable,
LIBOR plus 4.25%, $375 due quarterly.............................
beginning March 31, 2002 with $143,250
due November 8, 2006............................................. 150,000 --
Senior subordinated notes payable, 12.5%,
due December 15, 2008............................................ 250,000 --
-------- --------
523,650 158,650
Less obligations due within one year.............................. (24,125) --
-------- --------
499,525 158,650
Deferred payment obligation,
due May 8, 2010, increased 10% per annum compounded semi-annually
from the Acquisition date to the date of repayment............. 141,896 --
-------- --------
$641,421 $158,650
======== ========
On November 9, 2001, API entered into a $340 million Senior Credit Facility.
The Senior Credit Facility is comprised of the following: a four year credit
facility of up to $75 million for revolving loans, including letters of credit;
a four year senior secured note of $115 million; and a five year senior secured
note of $150 million. Borrowings under the revolving credit facility and the
$115 million senior secured note bear interest at LIBOR plus 3.5% per annum.
Borrowings under the $150 million senior secured note bear interest at LIBOR
plus 4.25% per annum, subject to a minimum LIBOR rate of 2.5%. The LIBOR rate
at December 29, 2001 was 1.9%. The interest rate payable under the revolving
credit facility and $115 million senior secured note are subject to adjustments
after six months based on the achievements of certain financial covenants. The
Senior Credit Facility is unconditionally and jointly and severally guaranteed
by PDC and WTA Inc., a wholly owned subsidiary of API (see Note 22 "Guarantor
Financial Information").
On December 14, 2001, API issued $250 million aggregate principal amount of
12.5% Senior Subordinated Notes due 2008, which were used to redeem in full, at
par, the senior subordinated note due 2008 held by AWA (see Note 2 "Acquisition
of Appleton Papers Inc."). The Senior Subordinated Notes are unsecured
obligations of
F-19
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
API, ranking subordinate in right of payment to all senior debt of API and are
unconditionally, jointly and severally guaranteed by PDC and WTA Inc. (see Note
22 "Guarantor Financial Information"). Interest on the Senior Subordinated
Notes is payable semi-annually in June and December of each year. The first
interest payment will be made on June 15, 2002. Prior to December 15, 2004, and
after 100% application toward the repayment of the Senior Credit Facility, API
may use the proceeds of certain sales of its equity to redeem up to 35% of the
original principal amount of the Senior Subordinated Notes at a redemption
price of 112.5% of their principal amount, plus accrued and unpaid interest to
the redemption date.
Except pursuant to the preceding paragraph, the Senior Subordinated Notes
will not be redeemable at API's option prior to December 15, 2005. On or after
December 15, 2005, API may redeem during the twelve-month period beginning on
December 15 of the applicable year all or a part of the Senior Subordinated
Notes at the redemption prices of 106.25% in 2005, 103.125% in 2006, and 100%
in 2007 and thereafter, plus accrued and unpaid interest and liquidated
damages. Liquidated damages are those, by agreement, owing to each entitled
note holder if API fails to obtain, prior to the agreed deadlines, or maintain
the agreed upon registration statements from the Securities and Exchange
Commission. The liquidated damages are equal to $.05 per week per $1,000 in
principal amount of securities held by each entitled note holder for each week
or portion thereof that the registration defaults continue for the first 90-day
period immediately following the occurrence of such registration default, an
additional $.05 per week per $1,000 in principal amount with respect to each
subsequent 90-day period up to a maximum amount of liquidated damages of $.50
per week per $1,000 in principal amount. The liquidated damages, if any, will
be paid to each entitled note holder on each interest payment date.
Both the Senior Credit Facility and the Senior Subordinated Notes contain
customary affirmative and negative covenants. In general, the covenants
contained in the Senior Credit Facility are more restrictive than those of the
Senior Subordinated Notes. Among other restrictions, the covenants contained
within the Senior Credit Facility require the Company to meet specified
financial tests, including various debt and cash flow ratios which become more
restrictive over the term of the debt. These financial tests include the
following: a maximum consolidated leverage ratio of 3.25 to 1.00 at December
29, 2001 decreasing to 1.60 to 1.00 by December 31, 2004 and thereafter; a
maximum consolidated senior leverage ratio of 1.65 to 1.00 at December 29, 2001
decreasing to 1.00 to 1.00 by December 31, 2002 and thereafter; a minimum
consolidated interest coverage ratio of 3.85 to 1.00 for four consecutive
fiscal quarters beginning March 31, 2002 increasing to 4.00 to 1.00 by March
31, 2003 and thereafter; a minimum consolidated fixed charge coverage ratio of
1.30 to 1.00 for four consecutive quarters beginning March 31, 2002 increasing
to 1.65 to 1.00 by March 31, 2004 and thereafter; and a minimum consolidated
net worth of $107.0 million plus fifty percent of consolidated net income for
each fiscal quarter beginning on March 31, 2002 for which consolidated net
income is positive plus the excess of the aggregate amount of all ESOP stock
issuances after November 9, 2001 over the aggregate amount of any ESOP related
distributions after November 9, 2001.
The Senior Credit Facility and Senior Subordinated Notes also contain
covenants which, among other things, restrict API's ability and the ability of
other guarantors of the Senior Credit Facility and Senior Subordinated Notes to
incur liens, engage in transactions with affiliates, incur additional
indebtedness, declare dividends or redeem or repurchase capital stock, make
loans and investments, engage in mergers, acquisitions, consolidations and
asset sales, acquire assets, stock or debt securities of any person, make
capital expenditures, terminate the S corporation status of PDC or the
qualified subchapter S subsidiary status of its subsidiaries eligible to elect
such status, amend API's other debt instruments and amend other agreements
related to the Acquisition.
F-20
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company incurred approximately $2.2 million of costs in conjunction with
the issuance of common stock to the ESOP (see Note 21 "Employee Stock Ownership
Plan"). The appropriate netting of these costs with the $106.8 million of
proceeds received from the ESOP resulted in the Company being in technical
default with its minimum net worth covenant discussed above at the date of the
Acquisition and during a limited portion of the Successor Period. In
conjunction with the terms of the Senior Credit Facility, the Company has
obtained a waiver related to this technical covenant violation. The Company was
in compliance with this covenant as of December 29, 2001.
Both the Senior Credit Facility and Senior Subordinated Notes contain
customary events of default, including, without limitation, payment defaults,
breaches of representations and warranties, covenant defaults, certain events
of bankruptcy and insolvency, ERISA violations, judgment defaults,
cross-defaults to certain other indebtedness, including the notes, agreements
related to the Lower Fox River indemnification arrangements and purchase
agreement, and a change in control. In the case of default, the loans, accrued
interest and all other amounts owing become due and payable immediately.
The total issuance costs associated with the Senior Credit Facility and
Senior Subordinated Notes through December 29, 2001 were $30.5 million.
In connection with the Acquisition (see Note 2 "Acquisition of Appleton
Papers Inc."), PDC agreed to pay AWA approximately $321 million on May 8, 2010
(the "Deferred Payment Obligation"). The Deferred Payment Obligation is or will
be contractually subordinated in right of payment to the prior repayment in
full of the Senior Credit Facility and the Senior Subordinated Notes and the
fulfillment of all of PDC's obligations under its guarantees of the Senior
Credit Facility and the Senior Subordinated Notes. PDC has the right to set-off
the amount of any losses suffered by the Company for which AWA is obligated to
provide indemnification under the purchase agreement against any payments due
under the deferred payment obligation.
In connection with the Deferred Payment Obligation, PDC agreed to the
following: limit the distributions PDC is allowed to make to the ESOP other
than (a) those distributions required to repurchase stock from employees whose
employment is terminated or who exercise their diversification rights under the
ESOP and (b) loans to the ESOP to permit the ESOP to make loans or to fund
hardship distributions to participants in the ESOP; not to incur or allow API
to incur indebtedness without the consent of the holder of the Deferred Payment
Obligation, except (1) to refinance the Senior Credit Facility, (2) to obtain
$100 million of incremental indebtedness, or (3) to obtain some types of
working capital facilities; not to own assets other than API's capital stock;
to allow the holder of the Deferred Payment Obligation the right to transfer
the obligation to a qualified institutional buyer and to other parties, except
API's competitors, with PDC's consent, which may not be unreasonably withheld;
and to provide AWA with all information provided to the holders of the Senior
Subordinated Notes.
If at any time prior to the date that the Deferred Payment Obligation is
paid in full API defaults on the payment of any principal or interest owing
under the Senior Credit Facility or the Senior Subordinated Notes and the
default continues for thirty days, the holder of the Deferred Payment
Obligation will have the right to designate one member to the Company's board
of directors. Notwithstanding the foregoing, if AWA transfers more than 50% of
the Deferred Payment Obligation to a third party, then such third party holder
would be entitled to designate two directors to the Company's board of
directors upon any payment default. PDC will be permitted to prepay the
Deferred Payment Obligation, in whole at any time, or in part from time to
time, for an amount equal to $140 million increased by 10% per annum compounded
semi-annually from the closing date of the Acquisition through the date of
repayment, less the amount of any prior prepayments. However, the agreements
governing the Senior Credit Facility and the Senior Subordinated Notes prohibit
or restrict prepayments, or repayment on the due date, of the Deferred Payment
Obligation as long as the Senior Credit Facility and the Senior Subordinated
Notes remain outstanding.
F-21
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 29, 2001 there was approximately $55.5 million of unused
borrowing capacity under the $75 million revolving credit facility for working
capital and other corporate purposes. Approximately $19.5 million of the
revolving credit facility was used to support outstanding letters of credit. A
commitment fee of 0.5% per annum is assessed on its unused borrowing capacity.
At December 30, 2000 API had a $50.0 million and a $25.0 million revolving
credit line with two separate banks. No borrowings on these lines of credit
were outstanding at December 30, 2000.
API recorded an extraordinary loss of $6.4 million, net of income taxes,
during 2001 as a result of the early redemption of the 6.26% and 6.61% senior
unsecured notes payable. On October 19, 2001, API paid $150.0 million in
principal due on the notes and $3.3 million in related interest. The
extraordinary loss consisted primarily of a prepayment penalty and the
write-off of unamortized debt issuance costs, net of $3.9 million in associated
income tax benefits. The redemption of the debt was financed with funds
received from an affiliated company.
API also recorded an extraordinary loss of $4.7 million, net of income
taxes, during 2000 as a result of the early redemption of 9.85% senior
unsecured notes payable. On November 21, 2000, API paid $86.0 million in
principal due on the notes and $2.6 million in related interest. The
extraordinary loss consisted primarily of a prepayment penalty and the
write-off of unamortized debt issuance costs, net of $2.8 million in associated
income tax benefits. The redemption of the debt was financed with funds
received from an affiliated company.
Repayment of principal on long-term obligations outstanding at December 29,
2001 is as follows (dollars in thousands):
2002...... $ 24,125
2003...... 32,167
2004...... 32,167
2005...... 32,167
2006...... 144,374
Thereafter 400,546
--------
$665,546
========
12. Income Taxes
In conjunction with the acquisition of API, the Company and its subsidiaries
have elected to be treated as subchapter S corporations for U.S. and state
income tax purposes. The components of the provision for income taxes from
continuing operations are as follows (dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------------------------
For the Period For the Period
November 10, December 31, For the For the
2001 to 2000 to Year Ended Year Ended
December 29, November 9, December 30, January 1,
2001 2001 2000 2000
----------------- -------------- ------------ ----------
Current.............. $117 $ 36,414 $ 62,194 $20,569
Deferred............. -- (11,840) (26,469) (2,854)
---- -------- -------- -------
Total tax expense. $117 $ 24,574 $ 35,725 $17,715
==== ======== ======== =======
F-22
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An analysis of effective income tax rates for continuing operations is shown
below (dollars in thousands):
(Predecessor Basis)
-------------------------------------
For the Period
December 31, For the For the
2000 to Year Ended Year Ended
November 9, December 30, January 1,
2001 2000 2000
-------------- ------------ ----------
Expected tax at statutory federal tax rates $23,870 $37,288 $ 23,663
State and local income taxes
net of federal tax benefit............... 2,046 4,028 3,520
Benefit from Extraterritorial Income
Exclusion/Foreign Sales Corporation...... (1,085) (1,095) (1,389)
Prior year taxes........................... (1,453) (4,975) (10,062)
Tax attributable to minority interest...... -- -- 1,831
Loss carryforward.......................... -- -- (1,400)
Tax gain on related party sale............. -- -- 1,326
Other, net................................. 1,196 479 226
------- ------- --------
Total tax expense....................... $24,574 $35,725 $ 17,715
======= ======= ========
Effective income tax rate.................. 36.0% 33.5% 26.2%
======= ======= ========
No analysis of effective income tax rates for the Successor Period is shown
because the Company has elected subchapter S corporation status and thus its
tax provision includes only minimal foreign and state income taxes.
The effective income tax rate for discontinued operations was 37.2% for the
fiscal 2001 Predecessor Period, 22.4% for 2000 and 38.6% for 1999.
F-23
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of SFAS 109 deferred income tax assets and liabilities are as
follows (dollars in thousands):
(Predecessor Basis)
-------------------
2000
-------------------
Deferred Tax Assets
-------------------
Other accrued liabilities................. $ 5,502
Postretirement benefits other than pension 17,084
Restructuring reserve..................... 8,723
Accounts receivable....................... 3,809
State deferred income tax................. 9,287
Other..................................... 4,445
--------
48,850
--------
Deferred Tax Liabilities
------------------------
Property, plant and equipment............. 60,706
Pension and deferred compensation......... 887
Other..................................... 17,166
--------
78,759
--------
Net deferred tax liability................ $(29,909)
========
13. 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 and contain multiple renewal options, which cover periods
ranging from one to ten years. Total rent expense was $1.2 million for the
Successor Period, $7.5 million for the fiscal 2001 Predecessor Period, $12.9
million in 2000 and $11.8 million in 1999.
Prior to 2001, API also leased buildings and machinery and equipment under
several capital lease agreements, the payments of which were guaranteed by AWA.
Appleton Leasing LLC held a majority of API's capital leases through November
26, 2000, when the former subsidiary, and $144.7 million of the capital lease
obligations, were transferred to ACPHI (see Note 4 "Discontinued Operations").
In October 2000, API terminated one of its capital leases and purchased the
assets covered by the lease. As a result of this termination, API made a net
termination payment of $31.6 million, which included a lease termination
penalty of $1.3 million.
In 1999 API's coated free sheet and fine paper products division also
terminated one of its capital leases and it purchased the assets covered by the
lease. As a result of this termination, API made a net termination payment of
$38.2 million, which included a lease termination penalty of $0.6 million.
Based upon API's best estimate of the future use of these assets, management
determined certain assets covered by this lease agreement became impaired and
recorded a $13.7 million impairment charge in 1999. In 2000, an additional
write-down of approximately $6.0 million was recorded for these assets as
management's projections related to the use of these assets changed from
earlier estimates. These write-downs are included in loss from discontinued
operations in the 2000 and 1999 Consolidated Statements of Operations.
F-24
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assets recorded under capital leases consist of the following (dollars in
thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------
2001 2000
----------------- -------------------
Building..................... $4,764 $ 6,000
Less accumulated depreciation (44) (2,000)
------ -------
$4,720 $ 4,000
====== =======
Future minimum lease payments as of December 29, 2001 under leases that have
initial or remaining non-cancelable terms in excess of one year are as follows
(dollars in thousands):
Capital Operating
Lease Leases
------- ---------
2002........................................................ $ 670 $ 7,712
2003........................................................ 670 6,745
2004........................................................ 670 6,878
2005........................................................ 675 5,588
2006........................................................ 731 3,197
Thereafter.................................................. 2,865 980
------- -------
Total minimum lease payments................................ 6,281 $31,100
=======
Less amounts representing interest.......................... (1,602)
-------
Present value of minimum lease payments under capital leases 4,679
Less current principal portion.............................. (365)
-------
$ 4,314
=======
14. Interest Expense (Income)
Interest expense (income) consists of the following (dollars in thousands)
(Successor
Basis) (Predecessor Basis)
-------------- ----------------------------------------------------------------------
For the Period
November 10,
2001 to For the Period
December 29, December 31, 2000 to For the Year For the Year
2001 November 9, 2001 Ended December 30, 2000 Ended January 1, 2000
-------------- ----------------------- ---------------------- ----------------------
Continuing Continuing Discontinued Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations Operations Operations Operations
-------------- ---------- ------------ ---------- ------------ ---------- ------------
Interest expense-
Affiliates......... $ -- $16,293 $187 $20,581 $ -- $16,022 $ 86
Interest expense-
External........... 10,653 9,471 -- 22,884 7,804 27,036 9,314
Interest (income)-
Affiliates......... -- (6,492) -- (8,588) (1,086) (8,347) (176)
Interest (income)-
External........... (406) (2,326) -- (5,162) -- (2,926) (42)
Capitalized interest (15) (323) -- (221) (728) (132) (30)
------- ------- ---- ------- ------- ------- ------
$10,232 $16,623 $187 $29,494 $ 5,990 $31,653 $9,152
======= ======= ==== ======= ======= ======= ======
F-25
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Fair Value of Financial Instruments
The carrying amount (including current portions) and estimated fair value of
certain of the Company's recorded financial instruments are as follows (dollars
in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------
2001 2000
----------------- -------------------
Fair Carrying Fair Carrying
Financial Instruments Value Amount Value Amount
--------------------- -------- -------- -------- --------
Debt....................... $523,650 $523,650 $156,189 $158,650
Deferred payment obligation 141,896 141,896 -- --
-------- -------- -------- --------
$665,546 $665,546 $156,189 $158,650
Lease obligation........... $ 4,679 $ 4,679 $ 4,896 $ 4,896
The fair values of debt and lease obligations were determined based on
quoted market prices for similar issues or on current rates available to the
Company for financial instruments of the same remaining maturities and similar
terms.
F-26
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Pension Benefits
The Company has various defined benefit pension plans and a defined
contribution pension plan. Assets of the Company's defined benefit plans
primarily consist of marketable equity and fixed income securities and real
estate. The measurement date for the Successor Period and the fiscal 2001
Predecessor Period was October 31, 2001 and the measurement date for fiscal
2000 was September 30, 2000. The status of these plans, including a
reconciliation of benefit obligations, a reconciliation of plan assets, the
funded status of the plans as well as the weighted-average assumptions used in
accounting for the plans include the following (dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -----------------------------------
For the Period For the Period
November 10, 2001 December 31, 2000
to December 29, to November 9, For the Year Ended
2001 2001 December 30, 2000
----------------- ----------------- ------------------
Pension Benefits
- ----------------
Change in benefit obligation
Benefit obligation at beginning
of period......................... $189,278 $165,153 $194,557
Service cost........................ 808 3,996 6,804
Interest cost....................... 1,780 10,225 14,876
Plan amendments..................... -- 7,923 4,082
Actuarial (gain) loss............... (2,588) 21,709 (6,118)
Transfer of discontinued operations. -- (10,751) (41,282)
Special termination benefits........ -- -- 1,328
Benefits and expenses paid.......... -- (8,977) (9,094)
-------- -------- --------
Benefit obligation at end of period.... $189,278 $189,278 $165,153
======== ======== ========
Change in plan assets
Fair value at beginning of period... $173,544 $212,346 $243,039
Actual return on plan assets........ -- (16,381) 28,945
Transfer of discontinued operations. -- (13,444) (50,544)
Benefits and expenses paid.......... -- (8,977) (9,094)
-------- -------- --------
Fair value at end of period............ $173,544 $173,544 $212,346
======== ======== ========
Funded status of plans
Funded status at end of period...... $(15,734) $(15,734) $ 47,193
Unrecognized
Net actuarial (gain) loss....... (220) 5,283 (50,935)
Prior service cost.............. -- 14,627 7,657
Net transition obligation....... -- 680 750
-------- -------- --------
Net (liability) asset............... $(15,954) $ 4,856 $ 4,665
======== ======== ========
Weighted-average assumptions
at end of period (%)
Discount rate.......................... 7.00 7.00 7.75
Expected return on plan assets......... 9.00 9.00 9.00
Rate of compensation increase.......... 4.25 4.25 4.75
F-27
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 30, 2000 the benefit obligation and fair value of plan assets
related to discontinued operations approximated $10.8 million and $13.4
million, respectively. Net accrued benefit costs related to discontinued
operations approximated $0.8 million in 2000.
At December 30, 2000 API maintained one pension plan with a projected
benefit obligation that exceeded plan assets. The projected benefit obligation
and fair value of plan assets for this plan were $8.5 million and $7.6 million,
respectively.
The components of net periodic pension costs include the following (dollars
in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------------------------
For the Period For the Period
November 10, December 31, For the For the
2001 to 2000 to Year Ended Year Ended
December 29, November 9, December 30, January 1,
Pension Benefits 2001 2001 2000 2000
- ---------------- ----------------- -------------- ------------ ----------
Net periodic benefit cost
Service cost.................. $ 808 $ 3,996 $ 6,804 $ 7,547
Interest cost................. 1,780 10,225 14,876 12,748
Expected return on plan
assets...................... (2,344) (13,748) (19,286) (17,275)
Amortization of
Transition obligation..... -- 70 261 279
Prior service cost........ -- 953 1,175 1,291
Actuarial (gain) loss..... -- (757) (317) 62
Special benefits charge....... -- -- 1,328 7,259
Curtailment gain.............. -- -- -- (2,332)
------- -------- -------- --------
Net periodic benefit cost........ 244 739 4,841 9,579
Charges related to
discontinued operations........ -- -- (1,464) (1,935)
------- -------- -------- --------
Net periodic benefit cost of
continuing operations.......... $ 244 $ 739 $ 3,377 $ 7,644
======= ======== ======== ========
Defined benefit plans covering hourly employees provide payment of stated
amounts for each year of service. Payments for the defined benefit plan
covering salaried employees are based on years of service and the employees'
compensation during employment. In 2000, API offered an early retirement plan
for salaried employees in conjunction with the 1999 restructuring plans
resulting in a special benefits charge of $1.3 million. The $1.3 million charge
is included in restructuring and other charges.
In 1999, a curtailment gain of $2.3 million and a special benefits charge of
$7.3 million were recorded as a result of the announcement of the restructuring
plans for the Harrisburg plant and the Newton Falls mill.
Certain of API's hourly employees participate in a multi-employer defined
benefit plan. API's cost for these plans amounted to $0.1 million in the
Successor Period, $0.5 million in the fiscal 2001 Predecessor Period, $0.7
million in 2000 and $0.9 million in 1999. The Company has not recorded a
liability for the unfunded amount related to this plan as the liability cannot
be reasonably estimated.
In addition, API has unfunded, non-qualified retirement plans for certain
management employees and directors. Benefits are based on final average
compensation and vest upon retirement from API.
F-28
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 2001, the Company adopted the Appleton Papers Inc. Long-Term
Incentive Plan (the "Plan"), which provides officers and key employees the
opportunity to earn phantom stock units, the value of which is related to the
appreciation of the value of the Company's common stock. Officers and key
employees were awarded 200,900 stock units in December 2001 at $10 per share.
The stock units vest ratably over three years. No compensation expense has been
recognized within the Successor Period financial statements.
As part of AWA's efforts to sell AWDGP, which began in mid-2000, AWA agreed
to compensate certain executive officers for their efforts in selling AWDGP to
a third party through two AWA incentive programs. The first incentive program
provided for a loyalty payment to named executive officers as of October 1,
2000 who remained officers through the closing of any sale of AWDGP and who
agreed to be engaged for between one and two years on behalf of any buyer of
AWDGP. As part of the Acquisition, each of the recipients in this program
agreed to defer a substantial portion of the payment into a deferred
compensation plan and therefore the funds are available to the Company until
the officers' employment is terminated. Expenses under this program totaled
$4.1 million in the fiscal 2001 Predecessor Period. The second incentive
program involved sales incentive payments made to the Company's chief executive
officer and other employees who assisted with the successful completion of the
Acquisition. Total payments made under this program were $2.8 million in the
fiscal 2001 Predecessor Period.
API also maintained a phantom share option plan for eligible employees in
which annual compensation expense amounted to $4.3 million and $0.4 million in
2000 and 1999, respectively. In conjunction with the purchase of AWA by Worms
et Cie. in July 2000, the plan was terminated and all outstanding phantom
shares became fully vested with API making cash payments totaling $4.7 million
to the participants.
17. Postretirement Benefit Plans Other Than Pensions
The Company has defined postretirement benefit plans that provide medical
and life insurance for certain retirees and eligible dependents. In 1999, API
approved a plan amendment that entitled retirees to continue health benefits at
group COBRA rates until they become eligible for Medicare coverage. API also
recorded a curtailment and special benefits charge of $2.6 million in 1999
(included in restructuring and other charges) relating to the Harrisburg plant
and Newton Falls mill restructuring plans. The measurement date for the
Successor Period and for the fiscal 2001 Predecessor Period was October 31,
2001 and the measurement date for fiscal 2000 was September 30, 2000. The
status of these plans, including a reconciliation of benefit obligations and
the funded status of the plans as well as the weighted-average assumptions used
in accounting for the plans include the following (dollars in thousands):
F-29
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Successor Basis) (Predecessor Basis)
----------------- --------------------------------
For the Period
For the Period December 31,
November 10, 2001 2000
to December 29, to November 9, For the year ended
Other Postretirement Benefits 2001 2001 December 30, 2000
- ----------------------------- ----------------- -------------- ------------------
Change in benefit obligation
Benefit obligation at beginning of
period............................ $ 60,612 $ 60,621 $ 71,555
Service cost........................ 129 661 949
Interest cost....................... 545 3,864 5,207
Plan amendments..................... -- -- 1,562
Actuarial (gain) loss............... (169) 7,616 1,020
Transfer of discontinued operations. -- (8,715) (14,644)
Special termination benefits........ -- -- 84
Benefits and expenses paid.......... (505) (3,435) (5,112)
-------- -------- --------
Benefit obligation at end of period.... $ 60,612 $ 60,612 $ 60,621
======== ======== ========
Funded status of plans
Funded status at end of period...... $(60,612) $(60,612) $(60,621)
Unrecognized
Net actuarial (gain) loss....... (169) 10,888 4,950
Prior service cost.............. -- 4,771 5,239
-------- -------- --------
Accrued benefit cost................ $(60,781) $(44,953) $(50,432)
======== ======== ========
Weighted-average assumptions
at end of period (%)
Discount rate....................... 7.00 7.00 7.75
Pre-Medicare medical inflation...... 10.00 10.00 8.00
Post-Medicare medical inflation..... 10.00 10.00 8.00
Ultimate medical inflation.......... 5.50 5.50 5.50
Year ultimate inflation reached..... 2004 2004 2003
At December 30, 2000 the benefit obligation and accrued benefit cost related
to discontinued operations approximated $8.7 million and $7.8 million,
respectively.
F-30
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of other postretirement benefit costs include the following
(dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- -------------------------------------
For the Period For the Period
November 10, December 31, For the For the
2001 to 2000 to Year Ended Year Ended
December 29, November 9, December 30, January 1,
Other Postretirement Benefits 2001 2001 2000 2000
- ----------------------------- ----------------- -------------- ------------ ----------
Net periodic benefit cost
Service cost........................ $129 $ 661 $ 949 $ 1,034
Interest cost....................... 545 3,864 5,207 4,582
Amortization of
Prior service cost.............. -- 469 670 538
Actuarial loss.................. -- 124 113 457
Special benefits charge............. -- -- 84 2,038
Curtailment loss.................... -- -- -- 610
---- ------ ------- -------
Net periodic benefit cost.............. 674 5,118 7,023 9,259
Charges related to discontinued
operations........................... -- (506) (1,921) (2,441)
---- ------ ------- -------
Net periodic benefit cost of continuing
operations........................... $674 $4,612 $ 5,102 $ 6,818
==== ====== ======= =======
Impact of a one percent change in medical trend rate (dollars in thousands):
1% Increase 1% Decrease
----------- -----------
Aggregate impact on service and interest cost $ 353 $ (304)
Effect on accumulated plan benefit obligation 4,194 (3,653)
18. Commitments and Contingencies
Commitments
The Company has entered into certain contractual arrangements for the
purchase of raw materials with various suppliers. Obligations as of December
29, 2001 under these contractual agreements are as follows (dollars in
thousands):
2002...... $25,023
2003...... 22,071
2004...... 11,060
2005...... 9,700
2006...... 9,200
Thereafter 4,400
-------
$81,454
=======
F-31
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table above excludes purchase commitments related to purchases of pulp
for use in normal operations from Enron Corp. Under the terms of the contract,
the Company has invoked its right to terminate the agreement. The matter is
currently pending before the bankruptcy court. If the pulp contracts are
enforced by the bankruptcy court, the obligations related to the purchase
commitments would be as follows (dollars in thousands):
2002 $19,011
2003 19,011
2004 19,011
2005 13,325
-------
$70,358
=======
Actual purchases under these obligations approximated $6.0 million in the
Successor Period, $47.6 million in the fiscal 2001 Predecessor Period, $57.5
million in 2000 and $45.1 million in 1999.
Basestock is a key raw material in the Company's business. For the entire
year of fiscal 2001, the Company purchased approximately $175 million of
basestock from external suppliers. Approximately $107 million of this basestock
was purchased for the production of carbonless products with over 90% purchased
from two external suppliers. The Company purchased approximately $60 million of
basestock for the production of thermal products with over 60% purchased from a
single external supplier.
Contingencies
Lower Fox River
In June 1997, the United States Environmental Protection Agency ("EPA")
published notice that it intended to list the Lower Fox River system on the
National Priorities List of contaminated sites pursuant to the Federal
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"
or "Superfund"). The EPA identified seven potentially responsible parties
("PRPs") for PCB contamination in the Lower Fox River system, including NCR
Corporation ("NCR") and API as the former and current owners and operators of
the Appleton plant, and the owners of five paper reprocessing mills located on
the Lower Fox River including Georgia-Pacific, P.H. Glatfelter Company,
Wisconsin Tissue Mills Inc., owned by Chesapeake Corporation, Riverside Paper
Corporation and U.S. Paper Mills Corp.
In October 2000, the Fish & Wildlife Service ("FWS") released a proposed
restoration and compensation determination plan presenting the federal and
tribal natural resource trustees' planned approach for restoring natural
resources injured by PCBs, and calculating the potential natural resource
damages ("NRDs") under different remedial action scenarios. The final NRD
valuation will depend on the extent of PCB cleanup; however, the proposed plan
estimates that NRDs will fall in the range of $176 to $333 million for all PRPs
in the aggregate. Over the past several years and at various natural resource
damage sites, the FWS and other government agencies have settled NRD claims for
amounts substantially lower than original estimates or claims. Therefore, API
anticipates the actual costs for the PRPs to settle NRD claims related to the
Lower Fox River to be significantly lower than the initial range of $176 to
$333 million.
In October 2001, the Wisconsin Department of Natural Resources ("DNR"),
released a remedial investigation/feasibility study for the Lower Fox River and
Green Bay, studying various remedial alternatives. Also in October 2001, the
DNR and EPA jointly issued, for public comment, a Proposed Remedial Action Plan
for the Lower Fox River and Green Bay, proposing a remedial plan based on one
of the remedial alternatives evaluated in the feasibility study. The proposed
plan involves a combination of monitored natural recovery and
F-32
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dredging and off-site disposal of sediment contaminated with PCBs. The EPA and
DNR estimate that the total cost for the proposed remedial alternative,
including long-term monitoring, will be $307 million for all PRPs in the
aggregate. Extensive public comment on the proposed plan was received by the
DNR and EPA. The EPA and DNR expect to issue the formal record of decision
selecting the remedial action plan for the Lower Fox River in 2002. At this
time, it is not possible to accurately predict what remedial alternatives will
be selected in the record of decision, negotiated with the potentially
responsible parties or ordered by the agencies thereafter.
Therefore, the total costs estimated by the EPA and FWS for the proposed
remediation and NRD discussed above range from $483 million to $640 million. An
accurate estimate of API's ultimate share of remediation and NRD liability
cannot be made at this time due to uncertainties with respect to: the scope and
cost of the final remedy; the scope of restoration and final valuation of
federal and state NRD assessments; the evolving nature of remediation and
restoration technologies and governmental policies; and the amount of API's
share of remediation and NRD costs among the PRPs. An FWS study estimated that
other PRPs discharged at least half of the PCBs to the Lower Fox River system,
and as such, will be required to pay a significant share of the remediation and
NRD claims for the Lower Fox River. API believes that, based upon the current
financial status of the other PRPs, they will be able to pay their share of
remediation and NRD costs.
API purchased the Appleton plant from NCR in 1978, after the use of PCBs in
the manufacturing process was discontinued. Nevertheless, pursuant to CERCLA
both API and NCR are viewed by the EPA as PRPs. Accordingly, API and NCR
asserted indemnity claims against one another pursuant to the terms of the
agreement for the sale of the business in 1978. API and NCR have entered into
an interim settlement agreement whereby they have agreed to share both defense
and liability costs arising from the Lower Fox River.
API, NCR and the DNR, the Wisconsin Department of Justice, the EPA, the FWS,
the U.S. Department of Justice, the National Oceanic and Atmospheric
Administration, and the Oneida and Menomonee Indian Tribes (collectively
referred to as the intergovernmental partners, or "IGP") have entered into a
consent decree whereby API and NCR will provide up to $41.5 million over a
period of four years, to a maximum of $10.4 million per year, for interim
restoration and remediation efforts directed by the IGP. API and NCR will each
pay about half of this amount. Under the consent decree, the IGP agrees not to
sue or take administrative action against API and NCR during the four-year
period. The consent decree does not constitute a final settlement with the IGP
or provide protection against future claims against API and NCR; however, under
the decree, API and NCR will receive full credit for all monies expended for
restoration and remediation of the Lower Fox River during the interim period.
API recorded a charge for its discounted share of the potential arrangement of
$19.2 million during the first quarter of 2001.
In addition to the interim settlement agreement between API and NCR, five of
the seven PRPs (excluding U.S. Paper Mills and Riverside Paper) have entered
into a non-binding agreement to share both defense costs and costs for
scientific studies relating to PCBs discharged into the Lower Fox River. A
study performed by the FWS in 2000 provided a preliminary estimate of the
amount of PCBs discharged to the Lower Fox River by each PRP, and concluded
that the discharge from API's plants and mills represented in the range of 36%
to 52% of the total PCBs discharged.
Given the uncertainty surrounding the ultimate course of action for Lower
Fox River remediation and API's share of remedial costs, no provision has been
recorded in the accompanying financial statements for estimated Lower Fox River
remediation costs except for the $19.2 million liability, recorded within other
current and other long-term liabilities on the consolidated balance sheet, plus
interest, associated with the consent decree between API, NCR and the IGP as of
December 29, 2001.
F-33
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of the Acquisition, AWA has agreed to indemnify the Company for the
first $75 million and for all amounts over $100 million in liabilities relating
to the Lower Fox River (see Note 2 "Acquisition of Appleton Papers Inc.").
Accordingly the Company has recorded a $19.2 million receivable, recorded
within other current and other noncurrent assets on the consolidated balance
sheet, from AWA, plus interest, to recognize the indemnification of the consent
decree between API, NCR and the IGP in the opening balance sheet at November
10, 2001.
West Carrollton Mill
The West Carrollton mill operates pursuant to various state and federal
permits for discharges and emissions to air and water. As a result of the
de-inking of carbonless paper containing PCBs through the early 1970s, there
have been releases of PCBs and volatile organic compounds into the soil in the
area of the wastewater impoundments at the West Carrollton facility, and low
levels of PCBs have been detected in groundwater immediately under this area.
In addition, PCB contamination is present in sediment in the adjacent Great
Miami River, but it is believed that this contamination is from a source other
than the West Carrollton mill.
Based on investigation and delineation of PCB contamination in soil and
groundwater in the area of the wastewater impoundments, API believes that it
may be necessary to undertake remedial action in the future, although API is
currently under no obligation to do so. Remedial action to address PCB
contamination in the area of the wastewater impoundment may involve
construction of a cap to prevent exposure to PCBs. In addition, remedial action
may involve long-term monitoring of groundwater or the construction and
operation of a groundwater pump-and-treat system to prevent migration of PCB
contamination in groundwater, and the removal and disposal of PCB-contaminated
sediment in the Great Miami River. The cost for remedial action ranges from $0
for natural attenuation, to approximately $10.5 million, for installation of a
cap, long-term pumping, treating and/or monitoring of groundwater and removal
of sediment in the Great Miami River. Approximately $3 million of the estimated
costs relate to short-term capital costs, with the remainder to be incurred
over a period of 30 years. However, costs could exceed this amount if
additional contamination is discovered, if additional remedial action is
necessary or if the remedial action costs are more than expected.
Given the uncertainty surrounding the ultimate course of action for the
Great Miami River remediation and the Company's share of remediation costs, if
any, no provision has been recorded in the accompanying financial statements
for estimated remediation costs. As part of the final purchase agreement
between PDC and AWA, AWA has agreed to indemnify the Company for 50% of all
environmental liabilities associated with the West Carrollton mill up to $5.0
million. AWA is liable for 100% of all environmental costs exceeding $5.0
million. (see Note 2 "Acquisition of Appleton Papers Inc.").
Other
In December 2000, API settled an antitrust class action suit related to
sales in the thermal fax market in 1990-1992. In June 1999, API settled
litigation claims in relation to a patent dispute and allegations of violations
of United States antitrust legislation for the sale of carbonless paper.
From time to time, the Company is involved in a number of product liability
and various other suits incident to the operation of its business. Insurance
coverages are maintained and estimated costs are recorded for claims and suits
of this nature. It is management's opinion that none of these will have a
materially adverse effect on the Company's financial position, results of
operations or cash flows.
F-34
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Consolidated Statements of Cash Flows
Supplemental cash flow disclosures (dollars in thousands):
(Successor Basis) (Predecessor Basis)
----------------- --------------------------------------
For the Period For the Period
November 10, December 31, For the For the
2001 to 2000 to Year Ended Year Ended
December 29, November 9, December 30, January 1,
2001 2001 2000 2000
----------------- -------------- ------------ ----------
Cash paid during the period for:
Interest (net of amount capitalized). $ 4,312 $ 23,209 $ 48,884 $50,967
Income taxes......................... -- 21,387 26,443 28,582
Non-cash transactions
during the period:
Capital contribution from parent
and affiliated companies........... -- 352,973 -- --
Conversion of shareholder note....... -- 125,000 -- --
Transfer of liability (asset) to
affiliated company................. -- 2,782 (105,434) --
Recovery of withholding tax.......... -- 5,204 -- --
Deferred payment obligation.......... 140,000 -- -- --
Senior subordinated seller note...... 250,000 -- -- --
20. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments that exceed
the maximum federally insured limits and trade receivables. The Company places
its temporary cash investments with high quality financial funds that by policy
limit their exposure to any one financial security.
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 largest customer represented 15% of net sales in 2001, 13% in
2000 and 14% in 1999.
21. Employee Stock Ownership Plan
The Appleton Papers Retirement Savings Plan, was amended and restated
effective as of January 1, 2001, in the form of the Appleton Papers Retirement
Savings and Employee Stock Ownership Plan (the "KSOP" or the "Plan"). The KSOP
includes a separate employee stock ownership plan component (the "ESOP" or the
"Company Stock Fund"). The KSOP is a tax-qualified retirement plan that also
contains a 401(k) feature, which provides participants with the ability to make
pretax contributions to the KSOP by electing to defer a percentage of their
compensation. The ESOP component of the KSOP is a tax-qualified employee stock
ownership plan that is designed to invest primarily in common stock of PDC.
F-35
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Eligible participants, as "named fiduciaries" under ERISA, were offered a
one-time irrevocable election 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. During the transfer
election period, eligible participants were able to elect to transfer all or
any portion of the following accounts to the Company Stock Fund: (1) account
balances held in the Vanguard Fund, regardless of whether they were vested,
less any outstanding loan balances, and (2) any account balances, regardless of
whether they were vested, in the 401(a) plan.
The total proceeds transferred by eligible participants to the Company Stock
Fund were approximately $106.8 million. All proceeds of the offering were used
by the ESOP trustee to purchase 10,684,372 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 pretax
deferrals made by employees. The Company also intends to fund a significant
part of its matching contribution commitment with common stock of PDC. The
Company's matching contributions charged to expense amounted to $1.3 million
for the Successor Period, of which $1.2 million related to contributions which
will be deposited into the Company Stock Fund. Compensation expense associated
with the Plan approximated $3.4 million for the fiscal 2001 Predecessor Period,
$4.5 million in 2000 and $4.4 million in 1999.
22. Guarantor Financial Information
API (the "Issuer") has completed a private placement debt offering of senior
subordinated notes (the "Notes") which have been guaranteed by PDC (the "Parent
Guarantor") and WTA, Inc., a wholly owned subsidiary of API, (the "Subsidiary
Guarantor"). These guarantees are full, unconditional and joint and several.
Presented below is condensed consolidating financial information for the
Parent Guarantor, the Issuer, the Subsidiary Guarantor and its wholly owned
foreign subsidiary (the "Non-Guarantor Subsidiary") as of December 29, 2001 and
December 30, 2000 and for the Successor Period and the fiscal 2001 Predecessor
Period and the years ended December 30, 2000 and January 1, 2000. This
financial information should be read in conjunction with the consolidated
financial statements and other notes related thereto.
The condensed consolidating financial information has been presented to show
the nature of the assets held, results of operations and cash flows of the
Parent Guarantor, Issuer, Subsidiary Guarantor and Non-Guarantor Subsidiary
assuming the guarantee structure of the Notes was in effect at the beginning of
the periods presented. Separate financial statements for the Parent and
Subsidiary Guarantor are not presented based on management's determination that
they would not provide additional information that is material to readers of
these financial statements.
In conjunction with the issuance of the Notes, restrictions have been placed
on the subsidiaries of the Issuer that would limit dividend distributions by
these subsidiaries as outlined within the respective credit agreements.
F-36
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 29, 2001
(dollars in thousands)
(Successor Basis)
-------------------------------------------------------------------------
Parent Subsidiary Non-Guarantor
Guarantor Issuer Guarantor Subsidiary Eliminations Consolidated
--------- ---------- ---------- ------------- ------------ ------------
ASSETS
Current assets
Cash and cash equivalents......... $ -- $ 34,123 $ 36 $ 1,543 $ -- $ 35,702
Accounts receivable, net.......... -- 98,674 -- 6,674 -- 105,348
Inventories....................... -- 132,501 -- 2,097 -- 134,598
Other current assets.............. 7,305 4,687 -- 18 -- 12,010
-------- ---------- ---------- ------- ----------- ----------
Total current assets.......... 7,305 269,985 36 10,332 -- 287,658
Property, plant and equipment,
net............................. -- 531,745 -- 31 -- 531,776
Investment in subsidiary.......... 831,855 220,733 -- -- (1,052,588) --
Other assets...................... 14,674 129,002 39,157 31 -- 182,864
-------- ---------- ---------- ------- ----------- ----------
Total assets.................. $853,834 $1,151,465 $ 39,193 $10,394 $(1,052,588) $1,002,298
======== ========== ========== ======= =========== ==========
LIABILITIES AND
SHAREHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt. $ -- $ 24,125 $ -- $ -- $ 24,125
Accounts payable.................. -- 49,191 -- 26 -- 49,217
Due to (from) parent and
affiliated companies............ 599,659 (428,475) (175,665) 4,481 -- --
Other accrued liabilities......... -- 75,839 -- 12 -- 75,851
-------- ---------- ---------- ------- ----------- ----------
Total current liabilities..... 599,659 (279,320) (175,665) 4,519 -- 149,193
Long-term debt.................... -- 499,525 -- -- -- 499,525
Capital lease obligation.......... -- 4,314 -- -- -- 4,314
Other long-term liabilities....... -- 95,091 -- -- -- 95,091
Deferred payment obligation....... 141,896 -- -- -- -- 141,896
Shareholder's equity.............. 112,279 831,855 214,858 5,875 (1,052,588) 112,279
-------- ---------- ---------- ------- ----------- ----------
Total liabilities and
shareholder's equity........ $853,834 $1,151,465 $ 39,193 $10,394 $(1,052,588) $1,002,298
======== ========== ========== ======= =========== ==========
F-37
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 30, 2000
(dollars in thousands)
(Predecessor Basis)
----------------------------------------------------------
Subsidiary Non-Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
ASSETS
Current assets
Cash and cash equivalents................... $ 39,410 $ 34 $ 427 $ -- $ 39,871
Accounts receivable, net.................... 132,294 -- 10,556 -- 142,850
Inventories................................. 125,735 -- 2,083 (669) 127,149
Other current assets........................ 24,248 -- 19 -- 24,267
Net assets of discontinued operations....... 13,577 -- -- -- 13,577
-------- --------- ------- --------- --------
-------- --------- ------- --------- --------
Total current assets.................... 335,264 34 13,085 (669) 347,714
Property, plant and equipment, net.......... 414,431 -- 59 -- 414,490
Goodwill, net............................... 9,317 -- -- -- 9,317
Investment in subsidiary.................... 163,221 -- -- (163,221) --
Other assets................................ 2,949 -- 34 -- 2,983
-------- --------- ------- --------- --------
-------- --------- ------- --------- --------
Total assets............................ $925,182 $ 34 $13,178 $(163,890) $774,504
======== ========= ======= ========= ========
LIABILITIES AND SHAREHOLDER'S
EQUITY
Current liabilities
Accounts payable............................ $ 59,343 $ -- $ 384 $ -- $ 59,727
Due to (from) parent and affiliated
companies................................. 492,803 (159,889) 3,807 -- 336,721
Other accrued liabilities................... 117,103 3,923 1,743 -- 122,769
-------- --------- ------- --------- --------
Total current liabilities............... 669,249 (155,966) 5,934 -- 519,217
Long-term debt.............................. 158,650 -- -- -- 158,650
Capital lease obligation.................... 4,573 -- -- -- 4,573
Other long-term liabilities................. 92,560 -- 23 -- 92,583
Shareholder's equity (deficit).............. 150 156,000 7,221 (163,890) (519)
-------- --------- ------- --------- --------
-------- --------- ------- --------- --------
Total liabilities and shareholder's
equity.............................. $925,182 $ 34 $13,178 $(163,890) $774,504
======== ========= ======= ========= ========
F-38
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 10, 2001 through DECEMBER 29, 2001
(dollars in thousands)
(Successor Basis)
---------------------------------------------------------------------
Parent Subsidiary Non-Guarantor
Guarantor Issuer Guarantor Subsidiary Eliminations Consolidated
--------- -------- ---------- ------------- ------------ ------------
Net sales........................... $ -- $112,989 $ -- $7,268 $ (7,307) $112,950
Cost of sales....................... -- 76,795 -- 7,034 (7,484) 76,345
Selling, general and administrative. -- 17,223 843 347 280 18,693
-------- -------- ------- ------ -------- --------
Operating income (loss)............. -- 18,971 (843) (113) (103) 17,912
Interest expense (income), net...... 8,036 3,256 (1,056) (4) -- 10,232
Intercompany royalty expense
(income).......................... -- 1,674 (1,674) -- -- --
Income in equity investment......... (15,652) (1,764) -- -- 17,416 --
Other income........................ -- -- -- (53) -- (53)
-------- -------- ------- ------ -------- --------
Income (loss) before income taxes... 7,616 15,805 1,887 (56) (17,519) 7,733
Provision (benefit) for income taxes -- 153 -- (36) -- 117
-------- -------- ------- ------ -------- --------
Net income (loss)................... $ 7,616 $ 15,652 $ 1,887 $ (20) $(17,519) $ 7,616
======== ======== ======= ====== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD DECEMBER 31, 2000 TO NOVEMBER 9, 2001
(dollars in thousands)
(Predecessor Basis)
--------------------------------------------------------
Non-
Subsidiary Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
-------- ---------- ---------- ------------ ------------
Net sales............................... $842,546 $ -- $52,028 $(51,706) $842,868
Cost of sales........................... 594,354 -- 51,275 (53,888) 591,741
Selling, general and administrative..... 129,577 126 2,246 1,925 133,874
Restructuring and other charges......... 31,938 -- -- -- 31,938
-------- -------- ------- -------- --------
Operating income (loss)................. 86,677 (126) (1,493) 257 85,315
Interest expense (income), net.......... 24,185 (7,476) (86) -- 16,623
Intercompany royalty expense (income)... 12,392 (12,392) -- -- --
Intercompany dividend income............ (5,830) -- -- 5,830 --
Income in equity investment............. (10,072) -- -- 10,072 --
Other expense........................... 4 -- 488 -- 492
-------- -------- ------- -------- --------
Income (loss) before income taxes....... 65,998 19,742 (1,895) (15,645) 68,200
Provision (benefit) for income taxes.... 22,372 2,771 (569) -- 24,574
-------- -------- ------- -------- --------
Income (loss) from continuing operations 43,626 16,971 (1,326) (15,645) 43,626
Loss from discontinued operations....... (4,462) -- -- -- (4,462)
-------- -------- ------- -------- --------
Income (loss) before extraordinary item. 39,164 16,971 (1,326) (15,645) 39,164
Extraordinary item, net of tax.......... (6,443) -- -- -- (6,443)
-------- -------- ------- -------- --------
Net income (loss)....................... $ 32,721 $ 16,971 $(1,326) $(15,645) $ 32,721
======== ======== ======= ======== ========
F-39
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 2000
(dollars in thousands)
(Predecessor Basis)
----------------------------------------------------------
Non-
Subsidiary Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
---------- ---------- ---------- ------------ ------------
Net sales............................ $1,073,422 $ -- $81,866 $(75,275) $1,080,013
Cost of sales........................ 753,908 -- 76,969 (78,261) 752,616
Selling, general and administrative.. 159,589 34 3,082 2,994 165,699
Restructuring and other charges...... 26,843 -- -- -- 26,843
---------- -------- ------- -------- ----------
Operating income (loss).............. 133,082 (34) 1,815 (8) 134,855
Interest expense (income), net....... 43,122 (13,472) (156) -- 29,494
Intercompany royalty expense (income) 15,849 (15,849) -- -- --
Intercompany dividend income......... (53,414) -- -- 53,414 --
Loss in equity investment............ 31,210 -- -- (31,210) --
Other (income) expense............... (1,519) -- 343 -- (1,176)
---------- -------- ------- -------- ----------
Income before income taxes........... 97,834 29,287 1,628 (22,212) 106,537
Provision for income taxes........... 27,022 7,800 903 -- 35,725
---------- -------- ------- -------- ----------
Income from continuing operations.... 70,812 21,487 725 (22,212) 70,812
Loss from discontinued operations.... (13,063) -- -- -- (13,063)
---------- -------- ------- -------- ----------
Income before extraordinary item..... 57,749 21,487 725 (22,212) 57,749
Extraordinary item, net of tax....... (4,651) -- -- -- (4,651)
---------- -------- ------- -------- ----------
Net income........................... $ 53,098 $ 21,487 $ 725 $(22,212) $ 53,098
========== ======== ======= ======== ==========
F-40
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 1, 2000
(dollars in thousands)
(Predecessor Basis)
-------------------------------------------------------------
Subsidiary Non-Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
---------- ---------- ------------- ------------ ------------
Net sales.................................. $1,115,213 $ -- $84,742 $(76,122) $1,123,833
Cost of sales.............................. 789,221 -- 79,225 (79,252) 789,194
Selling, general and administrative........ 153,521 241 2,933 3,380 160,075
Restructuring and other charges............ 72,200 -- -- -- 72,200
---------- -------- ------- -------- ----------
Operating income (loss).................... 100,271 (241) 2,584 (250) 102,364
Interest expense (income), net............. 40,381 (8,660) (68) -- 31,653
Intercompany royalty expense (income)...... 16,472 (16,472) -- -- --
Income in equity investment................ (24,376) -- -- 24,376 --
Other expense (income)..................... 3,541 -- (438) -- 3,103
---------- -------- ------- -------- ----------
Income before income taxes................. 64,253 24,891 3,090 (24,626) 67,608
Provision for income taxes................. 14,360 1,970 1,385 -- 17,715
---------- -------- ------- -------- ----------
Income from continuing operations.......... 49,893 22,921 1,705 (24,626) 49,893
Loss from discontinued operations.......... (55,691) -- -- -- (55,691)
---------- -------- ------- -------- ----------
(Loss) income before cumulative effect of
accounting change........................ (5,798) 22,921 1,705 (24,626) (5,798)
Cumulative effect of accounting change, net
of tax................................... (6,835) -- -- -- (6,835)
---------- -------- ------- -------- ----------
Net (loss) income.......................... $ (12,633) $ 22,921 $ 1,705 $(24,626) $ (12,633)
========== ======== ======= ======== ==========
F-41
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD NOVEMBER 10, 2001 through DECEMBER 29, 2001
(dollars in thousands)
(Successor Basis)
-----------------------------------------------------------------------
Parent Subsidiary Non-Guarantor
Guarantor Issuer Guarantor Subsidiary Eliminations Consolidated
--------- --------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income (loss)............................. $ 7,616 $ 15,652 $ 1,887 $ (20) $(17,519) $ 7,616
Adjustments to reconcile net income (loss) to
net cash provided by (used by) operating
activities:
Depreciation and amortization............... -- 5,159 843 3 -- 6,005
Other....................................... -- 2,991 -- -- -- 2,991
Change in assets and liabilities, net....... (29,532) 25,468 (3,234) (1,348) 17,519 8,873
--------- --------- ------- ------- -------- ---------
Net cash (used by) provided by operating
activities.................................. (21,916) 49,270 (504) (1,365) -- 25,485
Cash flows from investing activities:
Proceeds from sale of equipment.............. -- 19 -- -- -- 19
Additions to property, plant and equipment... -- (6,741) -- -- -- (6,741)
Acquisition of business, net of cash
acquired.................................... (314,826) -- -- -- -- (314,826)
--------- --------- ------- ------- -------- ---------
Net cash (used by) investing activities...... (314,826) (6,722) -- -- -- (321,548)
Cash flows from financing activities:
Payments relating to capital lease
obligation.................................. -- (56) -- -- -- (56)
Due to parent and affiliated companies, net.. 239,467 (242,915) 540 2,908 -- --
Due to former parent and affiliated
companies, net.............................. (7,388) -- -- -- -- (7,388)
Payment of senior subordinated seller note... -- (250,000) -- -- -- (250,000)
Proceeds from issuance of long-term debt,
net of issuance costs....................... -- 484,546 -- -- -- 484,546
Proceeds from issuance of Successor
common stock, net of issuance costs......... 104,663 -- -- -- -- 104,663
--------- --------- ------- ------- -------- ---------
Net cash provided by (used by) financing
activities.................................. 336,742 (8,425) 540 2,908 -- 331,765
Change in cash and cash equivalents............. -- 34,123 36 1,543 -- 35,702
Cash and cash equivalents at beginning of
period......................................... -- -- -- -- -- --
--------- --------- ------- ------- -------- ---------
Cash and cash equivalents at end of period...... $ -- $ 34,123 $ 36 $ 1,543 $ -- $ 35,702
========= ========= ======= ======= ======== =========
F-42
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD DECEMBER 31, 2000 TO NOVEMBER 9, 2001
(dollars in thousands)
(Predecessor Basis)
---------------------------------------------------------
Non-
Subsidiary Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
--------- ---------- ---------- ------------ ------------
Cash flows from operating activities:
Income from continuing operations and
extraordinary item....................................... $ 37,183 $ 16,971 $(1,326) $(15,645) $ 37,183
Adjustments to reconcile income from
continuing operations and extraordinary
item to net cash provided by (used by) operating
activities of continuing operations:
Extraordinary item, net of tax.......................... 6,443 -- -- -- 6,443
Depreciation and amortization........................... 36,637 -- 22 -- 36,659
Deferred income taxes................................... (11,840) -- -- -- (11,840)
Asset impairment charges................................ 3,827 -- -- -- 3,827
Other................................................... 2,068 -- -- -- 2,068
Changes in assets and liabilities, net.................. 33,123 (689) 3,110 9,815 45,359
--------- -------- ------- -------- ---------
Net cash provided by operating activities of continuing
operations................................................ 107,441 16,282 1,806 (5,830) 119,699
Net cash provided by operating activities of discontinued
operations................................................ 11,897 -- -- -- 11,897
--------- -------- ------- -------- ---------
Net cash provided by operating activities.................. 119,338 16,282 1,806 (5,830) 131,596
Cash flows from investing activities:
Proceeds from sale of equipment............................ 9,016 -- -- -- 9,016
Additions to property, plant and equipment................. (49,804) -- -- -- (49,804)
--------- -------- ------- -------- ---------
Net cash (used by) investing activities of continuing
operations................................................ (40,788) -- -- -- (40,788)
Net cash (used by) investing activities of discontinued
operations................................................ -- -- -- -- --
--------- -------- ------- -------- ---------
Net cash (used by) investing activities.................... (40,788) -- -- -- (40,788)
Cash flows from financing activities:
Payment for debt extinguishment............................ (160,182) -- -- -- (160,182)
Payments relating to capital lease obligation.............. (268) -- -- -- (268)
Payments of loans from parent and affiliated companies..... (45,745) -- -- -- (45,745)
Payments of cash dividends................................. (5,830) -- -- 5,830 --
Loans from parent and affiliated companies................. 159,140 -- -- -- 159,140
Due to parent and affiliated companies, net................ 19,834 (16,280) 2,858 -- 6,412
--------- -------- ------- -------- ---------
Net cash (used by) provided by financing activities of
continuing operations..................................... (33,051) (16,280) 2,858 5,830 (40,643)
Net cash (used by) financing activities of discontinued
operations................................................ (11,528) -- -- -- (11,528)
--------- -------- ------- -------- ---------
Net cash (used by) provided by financing activities........ (44,579) (16,280) 2,858 5,830 (52,171)
Change in cash and cash equivalents........................... 33,971 2 4,664 -- 38,637
Cash and cash equivalents at beginning of period.............. 39,410 34 427 -- 39,871
--------- -------- ------- -------- ---------
Cash and cash equivalents at end of period.................... $ 73,381 $ 36 $ 5,091 $ -- $ 78,508
========= ======== ======= ======== =========
F-43
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 2000
(dollars in thousands)
(Predecessor Basis)
------------------------------------------------------------
Subsidiary Non-Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Income from continuing operations and extraordinary
item..................................................... $ 66,161 $ 21,487 $ 725 $(22,212) $ 66,161
Adjustments to reconcile income from continuing
operations and extraordinary item to net cash provided
by (used by) operating activities of continuing
operations:
Extraordinary item, net of tax.......................... 4,651 -- -- -- 4,651
Depreciation and amortization........................... 42,857 -- 40 -- 42,897
Deferred income taxes................................... (26,469) -- -- -- (26,469)
Other................................................... (401) -- 3 -- (398)
Change in assets and liabilities, net................... 59,911 2,371 (2,113) (31,202) 28,967
--------- -------- ------- -------- ---------
Net cash provided by (used by) operating activities of
continuing operations................................... 146,710 23,858 (1,345) (53,414) 115,809
Net cash (used by) operating activities of discontinued
operations............................................... (13,370) -- -- -- (13,370)
--------- -------- ------- -------- ---------
Net cash provided by (used by) operating activities....... 133,340 23,858 (1,345) (53,414) 102,439
Cash flows from investing activities:
Proceeds from sale of equipment........................... 53 -- -- -- 53
Additions to property, plant and equipment................ (81,060) -- (12) -- (81,072)
Purchase of minority interest in affiliates............... (45,960) -- -- -- (45,960)
Payments to acquire equipment from capital lease.......... (30,141) -- -- -- (30,141)
--------- -------- ------- -------- ---------
Net cash (used by) investing activities of continuing
operations............................................... (157,108) -- (12) -- (157,120)
Net cash (used by) investing activities of discontinued
operations............................................... (25,259) -- -- -- (25,259)
--------- -------- ------- -------- ---------
Net cash (used by) investing activities................... (182,367) -- (12) -- (182,379)
Cash flows from financing activities:
Payments of long-term debt................................ (17,000) -- -- -- (17,000)
Payments for debt extinguishment.......................... (92,930) -- -- -- (92,930)
Payments relating to capital lease obligation............. (246) -- -- -- (246)
Payments of loans from parent and affiliated companies.... (30,394) -- -- -- (30,394)
Payments of cash dividends................................ -- (50,000) (3,414) 53,414 --
Loans from parent and affiliated companies................ 189,575 -- -- -- 189,575
Due to parent and affiliated companies, net............... (15,514) 24,510 3,615 -- 12,611
--------- -------- ------- -------- ---------
Net cash provided by (used by) financing activities of
continuing operations................................... 33,491 (25,490) 201 53,414 61,616
Net cash provided by financing activities of discontinued
operations............................................... 12,256 -- -- -- 12,256
--------- -------- ------- -------- ---------
Net cash provided by (used by) financing activities....... 45,747 (25,490) 201 53,414 73,872
Change in cash and cash equivalents......................... (3,280) (1,632) (1,156) -- (6,068)
Cash and cash equivalents at beginning of year.............. 42,690 1,666 1,583 -- 45,939
--------- -------- ------- -------- ---------
Cash and cash equivalents at end of year.................... $ 39,410 $ 34 $ 427 $ -- $ 39,871
========= ======== ======= ======== =========
F-44
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 1, 2000
(dollars in thousands)
(Predecessor Basis)
------------------------------------------------------------
Subsidiary Non-Guarantor
Issuer Guarantor Subsidiary Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Income from continuing operations and
cumulative effect of accounting change....... $ 43,058 $ 22,921 $ 1,705 $(24,626) $ 43,058
Adjustments to reconcile income from
continuing operations and cumulative
effect of accounting change to net cash
provided by operating activities of
continuing operations:
Cumulative effect of accounting
change, net of tax....................... 6,835 -- -- -- 6,835
Depreciation and amortization.............. 46,468 -- 47 -- 46,515
Deferred income taxes...................... (2,854) -- -- -- (2,854)
Asset impairment charges................... 26,390 -- -- -- 26,390
Other...................................... 6,054 -- -- -- 6,054
Changes in assets and liabilities, net..... (6,218) (2,271) 510 24,626 16,647
--------- -------- ------- -------- ---------
Net cash provided by operating activities
of continuing operations..................... 119,733 20,650 2,262 -- 142,645
Net cash provided by operating activities
of discontinued operations................... 53,171 -- -- -- 53,171
--------- -------- ------- -------- ---------
Net cash provided by operating activities...... 172,904 20,650 2,262 -- 195,816
Cash flows from investing activities:
Proceeds from sale of equipment................ 1,014 -- -- -- 1,014
Additions to property, plant and
equipment.................................... (37,615) -- (70) -- (37,685)
Purchase of minority interest in affiliates.... (42,104) -- -- -- (42,104)
Proceeds from sale of equity investment........ 58,000 -- -- -- 58,000
--------- -------- ------- -------- ---------
Net cash (used by) investing activities of
continuing operations........................ (20,705) -- (70) -- (20,775)
Net cash (used by) investing activities of
discontinued operations...................... (54,228) -- -- -- (54,228)
--------- -------- ------- -------- ---------
Net cash (used by) investing activities........ (74,933) -- (70) -- (75,003)
Cash flows from financing activities:
Payments of long-term debt..................... (18,000) -- -- -- (18,000)
Payments of revolving credit facility.......... (387,747) -- -- -- (387,747)
Payments relating to capital lease
obligation................................... (225) -- -- -- (225)
Payments of loans from parent and
affiliated companies......................... (99,176) -- -- -- (99,176)
Loans from parent and affiliated
companies.................................... 372,876 -- -- -- 372,876
Due to parent and affiliated companies,
net.......................................... 29,453 (25,034) (2,426) -- 1,993
--------- -------- ------- -------- ---------
Net cash (used by) financing activities of
continuing operations........................ (102,819) (25,034) (2,426) -- (130,279)
Net cash (used by) financing activities of
discontinued operations...................... (13,795) -- -- -- (13,795)
--------- -------- ------- -------- ---------
Net cash (used by) financing activities........ (116,614) (25,034) (2,426) -- (144,074)
Change in cash and cash equivalents............... (18,643) (4,384) (234) -- (23,261)
Cash and cash equivalents at beginning of year.... 61,333 6,050 1,817 -- 69,200
--------- -------- ------- -------- ---------
Cash and cash equivalents at end of year.......... $ 42,690 $ 1,666 $ 1,583 $ -- $ 45,939
========= ======== ======= ======== =========
F-45
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2002 (the 90th day after the date of this
prospectus), all dealers that effect transactions in these securities, whether
or not participating in this exchange offer, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to unsold allotments or
subscriptions. We have not authorized any dealer, salesperson or other person
to give any information or represent anything not contained in this prospectus.
You must not rely on any unauthorized information. This prospectus does not
offer to sell or buy any securities in any jurisdiction where it is unlawful.
The information in this prospectus is current as of , 2002.
---------------------
TABLE OF CONTENTS
---------------------
Page
----
Prospectus Summary......................... 1
Risk Factors............................... 13
Where You Can Find More Information........ 21
Special Note Regarding Forward-Looking
Statements............................... 21
The Exchange Offer......................... 23
The Acquisition............................ 33
S Corporation Status....................... 34
Use of Proceeds............................ 34
Capitalization............................. 35
Unaudited Pro Forma Consolidated Financial
Data...................................... 36
Selected Historical Consolidated Financial
Data...................................... 40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 42
Business................................... 55
Management................................. 73
Relationship with Arjo Wiggins Appleton.... 83
Certain Transactions....................... 85
Security Ownership of Certain Beneficial
Owners and Management..................... 86
Description of Acquisition Agreements...... 87
Description of Senior Credit Facilities.... 91
Description of the Registered Notes........ 93
Description of Deferred Payment Obligation- 136
The Appleton Papers Retirement Savings and
Employee Stock Ownership Plan............. 138
Plan of Distribution....................... 144
Material Federal Income Tax Consequences... 145
Legal Matters--............................ 146
Independent Accountants.................... 146
Index to Consolidated Financial Statements. F-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$250,000,000
[LOGO]
APPLETON PAPERS
Appleton Papers Inc.
12 1/2% Series B
Senior Subordinated
Notes due 2008
---------------------------
PROSPECTUS
---------------------------
, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Paperweight Development Corp. is a Wisconsin corporation. Sections 180.0850
to 180.0859 of the Wisconsin Business Corporation Law require a corporation to
indemnify a director or officer who is a party to any threatened, pending or
completed civil, criminal, administrative or investigative action, suit,
arbitration or other proceeding, whether formal or informal, which involves
foreign, federal, state or local law and which is brought by or in the right of
the corporation or by any other person. A corporation's obligation to indemnify
any such person includes the obligation to pay any judgment, settlement,
penalty, assessment, forfeiture or fine, including any excise tax assessed with
respect to an employee benefit plan, and all reasonable expenses including
fees, costs, charges, disbursements, attorneys' and other expenses, except in
those cases in which liability was incurred as a result of the breach or
failure to perform a duty which the director or officer owes to the corporation
and the breach or failure to perform constitutes: (i) a willful failure to deal
fairly with the corporation or its shareholders in connection with a matter in
which the director or officer has a material conflict of interest; (ii) a
violation of criminal law, unless the person has reasonable cause to believe
his conduct was lawful or had no reasonable cause to believe his conduct was
unlawful; (iii) a transaction from which the person derived an improper
personal profit; or (iv) willful misconduct.
Unless otherwise provided in a corporation's articles of incorporation or
bylaws, or by written agreement, an officer or director seeking indemnification
is entitled to indemnification if approved in any of the following manners: (i)
by majority vote of a disinterested quorum of the board of directors, or if
such quorum of disinterested directors cannot be obtained, by a majority vote
of a committee of two or more disinterested directors; (ii) by independent
legal counsel; (iii) by a panel of three arbitrators; (iv) by affirmative vote
of shareholders; (v) by a court; or (vi) with respect to any additional right
to indemnification granted, by any other method permitted in Section 180.0858
of the Wisconsin Business Corporation Law.
Reasonable expenses incurred by a director or officer who is a party to a
proceeding may be reimbursed by a corporation at such time as the director or
officer furnishes to the corporation a written affirmation of his good faith
belief that he has not breached or failed to perform his duties and a written
undertaking to repay any amounts advanced if it is determined that
indemnification by the corporation is not required.
The indemnification provisions of Section 180.0850 to 180.0859 are not
exclusive. A corporation may expand an officer's or director's rights to
indemnification: (i) in its articles of incorporation or bylaws; (ii) by
written agreement; (iii) by resolution of its board of directors; or (iv) by
resolution of a majority of all of the corporation's voting shares then issued
and outstanding.
As permitted by Section 180.0858, Paperweight Development Corp. has adopted
indemnification provisions in its bylaws which closely track the statutory
indemnification provisions with certain exceptions. In particular, Section 7.1
of the amended and restated bylaws of Paperweight Development Corp. among other
items, provides that (i) an individual shall be indemnified unless it is proven
by a final judicial adjudication that indemnification is prohibited and (ii)
payment or reimbursement of expenses, subject to certain limitations, will be
mandatory rather than permissive. Paperweight Development Corp. has purchased
directors' and officers' liability insurance which insures Paperweight
Development Corp.'s officers and directors against certain liabilities which
may arise under the Securities Act of 1933.
Both Appleton Papers Inc. and WTA Inc. are Delaware corporations. Subsection
(b)(7) of Section 102 of the Delaware General Corporation Law enables a
corporation in its original certificate of incorporation or an amendment to its
certificate of incorporation to eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for
violations of the director's fiduciary duty, except (1) for
II-1
any breach of the director's duty of loyalty to the corporation or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) pursuant to Section
174 of the Delaware General Corporation Law (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (4) for any transactions from which a director derived an
improper personal benefit. Each of the Amended and Restated Certificate of
Incorporation of Appleton Papers Inc. and the Amended Certificate of
Incorporation of WTA Inc. has eliminated the personal liability of directors to
the fullest extent permitted by Subsection (b)(7) of Section 102 of the
Delaware General Corporation Law.
Subsection (a) of Section 145 of the Delaware General Corporation Law
empowers a corporation to indemnify any person, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding provided that such
person acted in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, provided further that such person has no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person, who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of such action or suit provided that such director or
officer acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to
which such director or officer shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such director or officer is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a present or former director
or officer of a corporation has been successful in the defense of any action,
suit or proceeding referred to in subsections (a) and (b) or in the defense of
any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith; that indemnification and advancement of
expenses provided for, by, or granted pursuant to, Section 145 shall not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; and empowers the corporation to purchase and maintain insurance on
behalf of any person who is or was a director or officer of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture trust or
other enterprise against any liability asserted against such person or incurred
by such person in any such capacity, or arising out of such person's status as
such, whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Each of the Amended and Restated By-Laws of Appleton Papers Inc. and the
By-Laws of WTA Inc. provide for indemnification of any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action or suit by reason of the fact that such person is or was a
director, officer or employee of the corporation, or is or was serving at the
request of the corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise against
judgments, fines and amounts paid in settlement actually incurred by him in
connection with such action or suit . The Amended and Restated By-Laws of
Appleton Papers Inc. prohibit indemnification of a person where it is finally
adjudicated that such person has committed acts of active and deliberate
dishonesty with actual dishonest purpose and intent.
II-2
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits. See the Exhibit Index
(b) Financial Statement Schedules.
Report of Independent Accountants on
Financial Statement Schedule
To the Shareholder and Board of Directors
of Paperweight Development Corp. and Appleton Papers Inc. and Subsidiaries:
Our audits of the consolidated financial statements referred to in our report
dated March 4, 2002, appearing in the S-4 Registration Statement of Appleton
Papers Inc. (which report and consolidated financial statements are included in
this S-4 Registration Statement) also included an audit of the financial
statement schedule listed in Item 21(b) of this S-4 Registration Statement. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/S/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 4, 2002
PAPERWEIGHT DEVELOPMENT CORP. and SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Amounts
Balance at Charged to Written Off Balance at
Beginning Costs and Less End of
of Period Expenses Recoveries Period
- - ---------- ---------- ----------- ----------
January 1, 2000 (Predecessor Basis).. $2,260 2,108 (691) $3,677
======= ===== ====== =======
December 30, 2000 (Predecessor Basis) $3,677 2,875 (4,789) $1,763
======= ===== ====== =======
November 9, 2001 (Predecessor Basis). $ 1,763 175 (353) $ 1,585
======= ===== ====== =======
December 29, 2001 (Successor Basis).. $ 1,585 12 (12) $ 1,585
======= ===== ====== =======
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 Paperweight Development Corp. or the notes thereto or
the schedules are not required or are inapplicable under the related
instructions.
(c) Report, Opinion or Appraisal. See Exhibits 5 and 8.
II-3
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of any employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed to be underwriters, in
addition to the information called for by the other items of the applicable
form.
(d) That every prospectus: (i) that is filed pursuant to paragraph (c)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
II-4
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(f) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(g) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Appleton, State of
Wisconsin, on April 17, 2002.
WTA INC.
/S/ DAVID J. RICKERT
By: _______________________________
David J. Rickert
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ DAVID J. RICKERT President and a Director April 17, 2002
----------------------- (Principal Executive Officer,
David J. Rickert Principal Financial Officer and
Principal Accounting Officer)
/S/ DAVID W. DUPERT Director April 17, 2002
-----------------------
David W. Dupert
/S/ MICHAEL I. POLLOCK Director April 17, 2002
-----------------------
Michael I. Pollock
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Appleton, State of
Wisconsin, on April 17, 2002.
APPLETON PAPERS INC.
/S/ DOUGLAS P. BUTH
By: _______________________________
Douglas P. Buth
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ DOUGLAS P. BUTH Chairman, President, Chief April 17, 2002
------------------------ Executive Officer and a Director
Douglas P. Buth (Principal Executive Officer)
/S/ DALE E. PARKER Vice President, Chief Financial April 17, 2002
------------------------ Officer and a Director (Principal
Dale E. Parker Financial Officer)
/S/ STEPHEN G. KULA Controller April 17, 2002
------------------------ (Principal Accounting Officer)
Stephen G. Kula
/S/ NICHOLAS H.C. DAVIS Director April 17, 2002
------------------------
Nicholas H.C. Davis
/S/ RICHARD J. KENNEY Director April 17, 2002
------------------------
Richard J. Kenney
/S/ WILLIAM A. SIKORA Director April 17, 2002
------------------------
William A. Sikora
------------------------ Director
Susan Scherbel
/S/ PAUL J. KARCH Director April 17, 2002
------------------------
Paul J. Karch
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Appleton, State of
Wisconsin, on April 17, 2002 .
PAPERWEIGHT DEVELOPMENT CORP.
/S/ DOUGLAS P. BUTH
By: _______________________________
Douglas P. Buth
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ DOUGLAS P. BUTH Chairman, President, Chief April 17, 2002
------------------------ Executive Officer and a Director
Douglas P. Buth (Principal Executive Officer)
/S/ DALE E. PARKER Chief Financial Officer and a April 17, 2002
------------------------ Director (Principal Financial
Dale E. Parker Officer)
/S/ STEPHEN G. KULA Controller April 17, 2002
------------------------ (Principal Accounting Officer)
Stephen G. Kula
/S/ NICHOLAS H.C. DAVIS Director April 17, 2002
------------------------
Nicholas H.C. Davis
/S/ RICHARD J. KENNEY Director April 17, 2002
------------------------
Richard J. Kenney
/S/ WILLIAM A. SIKORA Director April 17, 2002
------------------------
William A. Sikora
------------------------ Director
Susan Scherbel
/S/ PAUL J. KARCH Director April 17, 2002
------------------------
Paul J. Karch
II-8
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1* Second Amended and Restated Certificate of Incorporation of Appleton Papers Inc.
3.2* Amended and Restated By-laws of Appleton Papers Inc.
3.3* Amended and Restated Articles of Incorporation of Paperweight Development Corp.
3.4* Amended and Restated By-laws of Paperweight Development Corp.
3.5* Certificate of Incorporation of WTA Inc.
3.6* Certificate of Amendment of Certificate of Incorporation of WTA Inc.
3.7* By-laws of WTA Inc.
4.1* Indenture, dated as of December 14, 2001, between Appleton Papers Inc. and each of the
guarantors named therein and U.S. Bank National Association, as trustee (the "Indenture").
4.2* Form of Registered Note (included as Exhibit A1 to the Indenture).
4.3* A/B Exchange Registration Rights Agreement, dated as of December 14, 2001, by and among
Appleton Papers Inc. and the parties listed as guarantors thereto and Bear, Stearns & Co. Inc., TD
Securities (USA) Inc., ABN AMRO Incorporated and U.S. Bancorp Piper Jaffray Inc.
5.1 Opinion and consent of White & Case LLP as to the validity of the securities being registered.
8.1 Opinion and consent of Godfrey & Kahn, S.C. regarding the federal income tax consequences of
the exchange offer.
10.1* Purchase Agreement, dated as of December 11, 2001, between Appleton Papers Inc. and the
parties listed as guarantors on Exhibit A thereto and Bear, Stearns & Co. Inc., TD Securities
(USA) Inc., ABN AMRO Incorporated and U.S. Bancorp Piper Jaffray Inc.
10.2* Credit Agreement, dated as of November 8, 2001, among Paperweight Development Corp.,
Appleton Papers Inc., as Borrower, the several lenders from time to time parties thereto, Bear
Stearns Corporate Lending Inc., as syndication agent, Firstar Bank N.A. and La Salle National
Bank Association, as documentation agents, and Toronto Dominion (Texas), Inc., as
administrative agent (the "Credit Agreement").
10.3* First Amendment, dated as of December 7, 2001, to the Credit Agreement.
10.4* 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.
10.5* Deferred Payment Obligation (included as Schedule 2.3 to Exhibit 10.4).
10.6 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.(1)
10.7 Fox River PDC Environmental Indemnity Agreement by and among Appleton Papers Inc.,
Paperweight Development Corp. and New Appleton LLC, dated as of November 9, 2001.
10.8 Security Agreement by and among Appleton Papers Inc., Paperweight Development Corp., New
Appleton LLC and Arjo Wiggins Appleton p.l.c., dated as of November 9, 2001.
10.9 Agreement, dated as of November 9, 2001, by and among Arjo Wiggins Appleton p.l.c., Arjo
Wiggins (Bermuda) Holdings Limited, Paperweight Development Corp., PDC Capital Corporation
and Arjo Wiggins Appleton (Bermuda) Limited.
10.10 Assignment and Assumption Deed, dated as of November 9, 2001, between Arjo Wiggins
Appleton p.l.c. and Arjo Wiggins Appleton (Bermuda) Limited.
10.11 Collateral Assignment, dated as of November 9, 2001, by Arjo Wiggins Appleton (Bermuda)
Limited in favor of Appleton Papers Inc.
10.12* Appleton Papers Retirement Savings and Employee Stock Ownership Plan, restated effective
January 1, 2001.
10.13* Appleton Papers Inc. Employee Stock Ownership Trust, adopted July 19, 2001.
EXI-1
Exhibit No. Description
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10.14* Appleton Papers Inc. Deferred Compensation Plan, restated effective as of January 1, 2000.
10.15* Appleton Papers Inc. New Deferred Compensation Plan, adopted May 20, 2001.
10.16* Letter Agreement between Arjo Wiggins Appleton p.l.c. and Douglas Buth dated February 12,
2001 regarding Transaction-Related Executive Compensation.
10.17* Appleton Papers Inc. Long-Term Incentive Plan adopted June 22, 2001.
10.18* Appleton Papers Inc. Supplemental Executive Retirement Plan, as amended through December 4,
1998.
10.19* Form of Termination Protection Agreement.
10.20* Amended and Restated Intellectual Property Agreement among Appleton Papers Inc., WTA Inc.
and Appleton Coated LLC dated as of November 9, 2001.
10.21* Trademark License Agreement between Appleton Papers Inc. f/k/a Lentheric, Inc., and NCR
Corporation, dated effective June 30, 1978.
10.22 Basestock Supply Agreement between Appleton Papers Inc. and Appleton Coated LLC dated
June 27, 2001.(1)
10.23 Supply Agreement by and among ESCO Company Limited Partnership, Mitsui Toatsu Chemicals,
Inc., Yamamoto Chemicals, Inc. and Appleton Papers Inc. dated as of July 1, 1997.(1)
10.24 Sales Agreement between Nisseki Chemical Texas Inc. and Appleton Papers Inc. effective
January 1, 2002.(1)
10.25* Security Holders Agreement by and between Appleton Papers Inc. and the Appleton Papers Inc.
Employee Stock Ownership Trust dated as of November 9, 2001.
10.26* Security Holders Agreement by and between Paperweight Development Corp. and the Appleton
Papers Inc. Employee Stock Ownership Trust dated as of November 9, 2001.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of Paperweight Development Corp.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of White & Case LLP (included in Exhibit 5.1 hereto)
23.3 Consent of Godfrey & Kahn, S.C. (included in Exhibit 8.1. hereto)
25.1* Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of U.S.
Bank National Association, as trustee under the Indenture.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
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* Filed as an exhibit to the Registrant's Registration Statement on Form S-4
on February 4, 2002.
(1)Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
Certain exhibits and schedules to the agreements filed herewith have been
omitted. Such exhibits and schedules are described in the agreements. The
Registrants hereby agree to furnish to the Securities and Exchange Commission,
upon its request, any or all of such omitted exhibits or schedules.
EXI-2