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**STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

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| **(Mark One)** | ** ** | ** **                                                                                                   |
|----------------|------------|--------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                   |
| **x**          | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| ** **     | ** ** | ** **                                                                                                   |
| ** **     | ** ** | **For the  fiscal year ended December 31, 2009**                                                        |
| ** **     | ** ** | ** **                                                                                                   |
| ** **     | ** ** | **OR**                                                                                                       |
| ** **     | ** ** | ** **                                                                                                   |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from      to      **

 

**Commissionfile number 001-32240**

 

**NEENAH PAPER, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                     | ** ** | **20-1308307**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **3460  Preston Ridge Road****Alpharetta, Georgia** |   | **30005**  |
|-----------------------------------------------------|--------|------------|
| (Address of principal  executive offices)           |   | (Zip Code) |

 

Registrant’s telephonenumber, including area code: **(678) 566-6500**

 

Securities registeredpursuant to Section 12(b) of the Act:

 
| **Title of Each Class**                                             | ** ** | **Name of Each Exchange on Which Registered** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|
| Common Stock—$0.01 Par  Value Preferred  Stock Purchase Rights |       | New York Stock Exchange                       |

 

Securities registeredpursuant to Section 12(g) of the Act:**None**

 

Indicate by check mark if theregistrant is a well-seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes o  No x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

 

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

 

Indicate by check mark if disclosureof delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

| Large accelerated  filer o                |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                   |   | Smaller reporting  company o |
| (Do not check if a smaller  reporting company) |   |                              |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of theAct). Yes o  No x

 

The aggregate market value of theregistrant’s common stock held by non-affiliates on June 30, 2009 (basedon the closing stock price on the New York Stock Exchange) on such date was$130 million.

 

As of February 26, 2010, therewere 14,705,596 shares of the Company’s common stock outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Certain information contained in thedefinitive proxy statement for the Company’s Annual Meeting of Stockholders tobe held on May 19, 2010 is incorporated by reference into Part IIIhereof.

 

 

 

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**TABLE OFCONTENTS**

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| ** **      | ** **                                                                                                             | **Page** |
|-----------------|------------------------------------------------------------------------------------------------------------------------|----------|
| *Part 1*   |                                                                                                                   |     |
| Item 1.         | Business                                                                                                               | 2        |
| Item 1A.        | Risk Factors                                                                                                           | 10       |
| Item 1B.        | Unresolved Staff Comments                                                                                              | 16       |
| Item 2.         | Properties                                                                                                             | 16       |
| Item 3.         | Legal Proceedings                                                                                                      | 17       |
| Item 4.         | (Removed and Reserved)                                                                                                 | 17       |
| * *        |                                                                                                                   |     |
| *Part II*  |                                                                                                                   |     |
| Item 5.         | Market for the Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 18       |
| Item 6.         | Selected Financial Data                                                                                                | 19       |
| Item 7.         | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            | 22       |
| Item 7A.        | Quantitative and Qualitative Disclosures  About Market Risk                                                            | 36       |
| Item 8.         | Financial Statements and Supplementary Data                                                                            | 38       |
| Item 9.         | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                                  | 38       |
| Item 9A.        | Controls and Procedures                                                                                                | 38       |
| Item 9B.        | Other Information                                                                                                      | 39       |
| * *        |                                                                                                                   |     |
| *Part III* |                                                                                                                   |     |
| Item 10.        | Directors and Executive Officers of the Registrant                                                                     | 40       |
| Item 11.        | Executive Compensation                                                                                                 | 40       |
| Item 12.        | Security Ownership of Certain Beneficial  Owners and Management                                                        | 40       |
| Item 13.        | Certain Relationships and Related  Transactions and Director Independence                                              | 40       |
| Item 14.        | Principal Accountant Fees and Services                                                                                 | 40       |
| * *        |                                                                                                                   |     |
| *Part IV*  |                                                                                                                   |     |
| Item 15.        | Exhibits and Financial Statement Schedule                                                                              | 41       |
| Signatures      |                                                                                                                   | 46       |

 

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**PART I**

 

In this report, unless the contextrequires otherwise, references to “we,” “us,” “our,” “Neenah” or the “Company”are intended to mean Neenah Paper, Inc. and its consolidated subsidiaries.

 

**Item 1.****           ****Business**

 

**Overview**

 

We are a leading producer of premiumfine papers and technical products. We have two primary operations: our finepaper business and our technical products business. We also own approximately475,000 acres of timberlands in Nova Scotia, Canada.

 

Our fine paper business is a leadingproducer of premium writing, text, cover and specialty papers used in corporateidentity packages, corporate annual reports, invitations, personal stationeryand high-end packaging for point of purchase advertising. Our products includesome of the most recognized and preferred papers in North America, where weenjoy leading market positions in many of our product categories. We sell ourproducts primarily to authorized paper distributors, converters and specialtybusinesses. Our fine paper manufacturing facilities are located in Appleton,Neenah and Whiting, Wisconsin.

 

Our technical products business is aleading international producer of transportation and other filter media,durable, saturated and coated substrates for a variety of end uses; andnonwoven wall coverings. Our technical products business is organized into fiveglobal strategic business units (“SBUs”) which sell into 17 product categories.We focus on categories where we believe we are a market leader or have acompetitive advantage, which include, among others, transportation and otherfilter media, specialty tape, label, abrasive, medical packaging, nonwoven wallcoverings and image transfer technical products markets. We are also a globalsupplier of materials used for customer-specific applications in furniture,book covers and original equipment manufacturers’ products. Our customers arelocated in more than 35 countries. Our technical products manufacturingfacilities are located in Munising, Michigan and near Munich and Frankfurt,Germany.

 

**Company Structure**

 

Our corporate structure consists ofNeenah Paper, Inc., and five wholly owned subsidiaries.

 

*Neenah Paper, Inc.*is a Delaware corporation that holds our trademarks andpatents related to all of our U.S. businesses (except Fox River), all of ourU.S. inventory, the real estate, mills and manufacturing assets associated withour fine paper operations in Neenah and Whiting, Wisconsin, and all of the equityin our subsidiaries listed below. The common stock of Neenah is publicly tradedon the New York Stock Exchange under the symbol “NP.”

 

*Neenah PaperMichigan, Inc.*is a Delaware corporation and awholly owned subsidiary of Neenah Paper, Inc. that owns the real estate,the mill and the manufacturing assets associated with our U.S. technicalproducts business.

 

*NPCC HoldingCompany LLC.*is a Delaware limited liabilitycompany and wholly owned subsidiary of Neenah Paper, Inc. It owns all ofthe equity of Neenah Paper Company of Canada.  Neenah Paper Company ofCanada is a Nova Scotia unlimited liability corporation that owns approximately475,000 acres of timberlands in Nova Scotia, Canada.

 

*Neenah Paper FVC, Inc.*is a Delaware corporation and wholly owned subsidiary ofNeenah Paper, Inc., that owns all of the equity of Neenah Paper FR,LLC.  Neenah Paper FR, LLC is a Delaware limited liability company thatowns the real estate, mills and manufacturing assets associated with ouroperation in Appleton, Wisconsin.

 

*Neenah PaperInternational Holding Company, LLC.* is a Delaware limitedliability company and wholly owned subsidiary of Neenah Paper Inc. thatowns all of the equity of Neenah Paper International, LLC.  Neenah PaperInternational, LLC is a Delaware limited liability company that owns all of theequity of Neenah Germany GmbH and in conjunction with Neenah Germany GmbH allof the equity of Neenah Services GmbH & Co. KG.

 

*Neenah PaperInternational Finance Company BV* is a private company withlimited liability organized under the laws of the Netherlands and a whollyowned subsidiary of Neenah Paper, Inc.

 

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**History ofthe Businesses**

 

Neenahwas incorporated in April 2004 in contemplation of the spin-off byKimberly-Clark Corporation (“Kimberly-Clark”) of its fine paper and technicalproducts businesses in the United States and its Canadian pulp business(collectively, the “Pulp and Paper Business”). We had no material assets oractivities until Kimberly-Clark’s transfer to us of the Pulp and Paper businesson November 30, 2004. On that date, Kimberly-Clark completed thedistribution of all of the shares of our common stock to the stockholders ofKimberly-Clark (the “Spin-Off”). Following the Spin-Off, we are an independentpublic company and Kimberly-Clark has no ownership interest in us.

 

*Fine Paper. *Thefine paper business was incorporated in 1885 as Neenah Paper Company, whichinitially operated a single paper mill in Neenah, Wisconsin. Kimberly-Clarkacquired the mill in 1956. In 1981, Kimberly-Clark purchased an additional milllocated in Whiting, Wisconsin to increase the production capacity of the finepaper business. In the late 1980s and early 1990s, Kimberly-Clark expanded thecapacity of the fine paper business in response to increased demand by buildingtwo new paper machines at the Whiting mill, rebuilding two existing papermachines at the Whiting mill and completing a major expansion of the Neenahfacility with the installation of a new paper machine, a new finishing center,a new customer service center and a distribution center expansion. As a resultof decreased demand, in the 2000s the Neenah mill retired two of its olderpaper machines. In March 2007, we acquired Fox Valley Corporation (nownamed Neenah Paper FVC, Inc.), which owned Fox River Paper Company, LLC (“FoxRiver”, now named Neenah Paper FR, LLC).  The Fox River assets acquiredconsisted of four U.S. paper mills and various related assets, producingpremium fine papers with well-known brands including STARWHITE®, SUNDANCE®,ESSE® and OXFORD®.

 

As part of our plan to integrate theoperations of Fox River with those of our existing fine paper mills, we closedthe Housatonic mill, located near Great Barrington, Massachusetts in May 2007.During the second quarter of 2008, we closed the former Fox River fine papermill located in Urbana, Ohio. In May 2009, we closed the former Fox Riverfine paper mill located in Ripon, California. We have deposed of the Housatonic and Urbana mills and are in theprocess of selling the remaining assets of the Ripon mill. The Company’s otherpremium fine paper mills have absorbed the production previously made at thesefacilities. See Note 3 of Notes to Consolidated Financial Statements, “Closureof the Ripon Mill.”

 

*TechnicalProducts.*In 1952, Kimberly-Clark purchased the Munising mill, locatedin Munising, Michigan. Subsequent to the purchase, Kimberly-Clark converted themill to produce durable, saturated and coated papers for sale and use in avariety of industrial applications for its technical products business. In October 2006,we purchased the outstanding interests of FiberMark Services GmbH &Co. KG and the outstanding interests of FiberMark Beteiligungs GmbH(collectively “Neenah Germany”). The Neenah Germany assets consist of two millslocated near Munich, Germany and a third mill near Frankfurt, Germany, thatproduce a wide range of products, including transportation and other filtermedia, nonwoven wall coverings, masking and other tapes, abrasive backings, andspecialized printing and coating substrates.

 

*Pulp.*Atthe Spin-Off, our pulp operations consisted of pulp mills located in TerraceBay, Ontario and Pictou, Nova Scotia and approximately 1,000,000 acres of ownedtimberlands in Nova Scotia, Canada. In August 2006, we transferred ourTerrace Bay mill and related woodlands operations to certain affiliates ofBuchanan Forest Products Ltd. (“Buchanan”). See Note 5 of Notes to ConsolidatedFinancial Statements, “Discontinued Operations — Transfer of the Terrace BayMill.” In June 2006, we sold approximately 500,000 acres of woodlands inNova Scotia. In June 2008, we sold the Pictou Mill, which was the lastpulp mill we owned, to Northern Pulp Nova Scotia Corporation (“Northern Pulp”).See Note 5 of Notes to Consolidated Financial Statements, “DiscontinuedOperations — Sale of the Pictou Mill and the Woodlands.”

 

*AssetsHeld for Sale — Discontinued Operations*. In the first quarter of 2007, we engaged anationally known investment banking firm to identify buyers interested inacquiring the Pictou Mill and/or approximately 475,000 acres of timberlands inNova Scotia, Canada (the “Woodlands”). In February 2008, we committed to a plan to sell the Pictou Mill(which was sold in June 2008) and to separately pursue purchasers of theWoodlands. On March 1, 2010, we announced that Neenah Canada had signed adefinitive agreement to sell the Woodlands for C$82.5 million ($78.6 million).See Note 17 of Notes to Consolidated Financial Statements, “Subsequent Event.”

 

**Business Strategy**

 

*Increase the Sizeof our Paper Businesses.*Following the Spin-Off, wesought to increase the size of our successful specialty and premium paperbusinesses.  Growth in our paper businesses was pursued organicallyand through acquisitions, such as Neenah Germany and Fox River. Ultimately, wedecided to exit the pulp business, where our scale and cost position wasdetermined to be sub-optimal for this global commodity and our pulp mills wereeventually divested.

 

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*Deliver Consistent Profitable Growth.*Webelieve that our fine paper and technical products production assets provide uswith a flexible and effective platform for growth.  Our experienced teamof employees and management are pursuing business strategies designed to takeadvantage of existing strengths in these businesses—including our strong marketpositions, well recognized brands, high-quality products and efficientmanufacturing operations—while responding to the challenges faced by each unit.We expect our fine paper business to continue to deliver significant cash flowsas we gain share in a declining market and seek additional growthopportunities, and grow in Technical Products markets, both organically andthrough acquisitions.

 

*Provide Investorswith Attractive Returns.*We believe that thesuccessful execution of our strategies and our continued use of return oncapital as an important metric to evaluate decisions and allocate capital toour core business will result in positive returns for investors. We also expectto provide returns to investors by paying dividends in line with peercompanies.

 

**Products**

 

*Fine Paper.*Thefine paper business manufactures and sells world-class branded premium writing,text, cover and specialty papers used in corporate identity packages, corporateannual reports, invitations, personal stationery and high-end packaging forpoint of purchase advertising. Our fine paper business had net sales ofapproximately $256 million, $336 million and $367 million in 2009,2008 and 2007, respectively.

 

Premium writing papers are used forbusiness and personal stationery, corporate identity packages, envelopes andsimilar end-use applications. Market leading writing papers are sold by thefine paper business under the CLASSIC®, ENVIRONMENT®, NEENAH®, CAPITOL BOND®and NEUTECH® trademarks, which are denoted by a brand watermark in each sheetof writing paper. The fine paper business also sells private watermarked paperand other specialty writing papers.

 

Text and cover papers are used inapplications such as corporate brochures, pocket folders, corporate annualreports, advertising inserts, direct mail, business cards, hang tags,scrapbooks, and a variety of other uses where colors, textured finishes orheavier weight papers are desired. Our brands in this category include CLASSIC®,CLASSIC CREST®, STARWHITE®, SUNDANCE®, ESSE® and ENVIRONMENT®. We also sell avariety of custom colors, paper finishes, and duplex/laminated papers.

 

The fine paper business produces andsells other specialty papers, including translucent papers, art papers, papersfor optical scanning and other specialized applications, under the UV/ULTRA® IItranslucent paper trademark and other brands.

 

In 2009, we signed an exclusive licensingagreement with Crane & Co. Inc. (“Crane”) for Neenah to manufacture, marketand distribute Crane’s business paper brands.

 

*TechnicalProducts.  *The technical products business is aleading producer of filtration media and durable, saturated and coatedsubstrates for a variety of end uses, including tapes, premask, abrasives,labels, medical packaging, decorative components, wall covering, and imagetransfer papers. Our technical products business had net sales of approximately$318 million, $397 million and $401 million in 2009, 2008 and 2007,respectively. JET-PRO®, SofStretchTM, KIMDURA®, MUNISING LP®, PREVAILTM, NEENAH®,Gessner® and varitess® are brands of our technical products business.

 

In general, the products of ourtechnical products business are sold to other manufacturers as key componentsfor their finished products. The technical products business is organized intofive SBUs: Filtration; Tape; Component Materials, which includes our abrasivesbusiness; Graphics and Identification; and Wall Covering to sell itsproducts into major market segments. Several of the key market segments served,including tape and abrasives, are global in scope.

 

The Filtration SBU producesfiltration media for induction air, fuel, oil, and cabin air applications inautomotive transportation and for vacuum cleaner bags and filters. Transportation filtration media are sold to suppliers of automotive companiesas original equipment on new cars and trucks as well as to the automotiveaftermarket.  This business is primarily in Europe.

 

The Tape SBU produces both saturatedand unsaturated crepe and flat papers and sells them to manufacturers toproduce finished pressure sensitive products for sale in automotive, automotiveaftermarket, transportation, manufacturing and building construction, andindustrial general purpose applications.

 

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The Component Materials SBU is a leading producer of latexsaturated and coated papers for use by a wide variety of manufacturers.Finished lightweight sandpaper is sold in the automotive, automotiveaftermarket, construction, metal and woodworking industries for both waterproofand dry sanding applications.  Premask paper is used as a protective overwrap for products during the manufacturing process and for applying signs,labeling and other finished products.  Medical packaging paper is apolymer impregnated base sheet that provides a breathable sterilizationbarrier. When sealed together with film, this paper becomes a medical packagingmaterial that allows sterilization from steam, ethylene oxide, or gammaradiation and at the same time provides unique barrier properties.  TheComponent Materials SBU also produces a line of release papers and furniturebackers.

 

TheGraphics and Identification SBU produces label and tag products fromsaturated (latex impregnated) base label stock and purchased synthetic baselabel stock. Top coatings are applied to the base label stock to allow for highquality variable and digital printing. The synthetic label stock is recognizedas a high quality, UV (ultra-violet) stable product used for outdoorapplications. The business sells its label and tag stock to pressure sensitivecoaters, who in turn sell the coated label and tag stock to the label printingcommunity. Image transfer papers are used to transfer an image from paper totee shirts, hats, coffee mugs, and other surfaces. The Graphics andIdentification SBU produces and applies a proprietary imaging coating to itsimage transfer papers for use in digital printing applications. Image transferpapers are primarily sold through large retail outlets and through masterdistributors.  Decorative components papers are made from light and mediumweight latex saturated papers which can then be coated for printability.Decorative components papers are primarily sold to coater converters,distributors, publishers and printers for use in book covers, stationery andfancy packaging.  The Graphics and Identification SBU also producesand sells clean room papers and durable printing papers into their respectivemarkets.

 

The WallCovering SBU produces a line of substrates made from saturated and coatedwet-laid nonwovens and markets to converters serving primarily Europeancommercial and do-it-yourself markets.

 

**Markets and Customers**

 

*Fine Paper.*Premium writing, text and coverpapers represent approximately three percent of the North American uncoatedfree sheet market. The uncoated free sheet market has been declining two tofour percent annually due to the increasing use of electronic media forcommunication. For2009, the American Forestry and Paper Associations (the “AF&PA”) reported a27 percent year-over-year industry decline in the premium writing, text andcover uncoated free sheet paper category. Lower industry volume reflected asharp decline in consumption for a number of key end use market segments,including advertising, financial institutions and transportation. Thestationery segment of the uncoated free sheet market is divided into cotton andsulfite grades. The text and cover paper segment of the market, used incorporate identification applications, is split between smooth papers andtextured papers. Text papers have traditionally been utilized for special, highend collateral material such as corporate brochures, annual reports and specialedition books. Cover papers are primarily used for business cards, pocketfolders, brochures and report covers including corporate annual reports.

 

The finepaper business sells its products through our sales and marketing organizationsprimarily in three channels: authorized paper distributors, converters anddirect sales. Sales to distributors, including distributor owned paper stores,account for approximately 70 percent of revenue in the fine paper business.Less than five percent of the sales of our fine paper business are exported tointernational distributors.

 

Sales to thefine paper business’s two largest customers (both of which are distributors)represented approximately 30 percent of its total sales in 2009. We practicelimited distribution to improve our ability to control the marketing of ourproducts. Although a complete loss of either of these customers would cause atemporary decline in the business’s sales volume, the decline could bepartially offset by expanding sales to existing distributors, and furtheroffset over a several month period with the addition of new distributors.

 

*Technical Products.*Thetechnical products business relies on five SBUs to sell its products globallyinto 17 product categories. Such categories, broadly defined as polymerimpregnated and synthetic paper, include papers used as raw materials in thefollowing applications: filtration, tape, component materials for manufacturedproducts, graphics and identification, and wall covering.

 

Severalproducts (filtration media, wall coverings, abrasives, tapes, labels) are usedin markets that are directly affected by economic business cycles. Other marketsegments such as image transfer papers used in small/home office and consumerapplications are relatively stable. Price competition is common in most of thesegments served by the technical products business and has increased due to atrend of using film and other lower cost substrates instead of paper in someapplications.

 

Thetechnical products business relies on a team of direct sales representativesand customer service representatives to market and sell approximately 95percent of its sales volume directly to customers and converters. Less thanfive percent of the sales of the technical products business are sold throughindustrial distributors.

 

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Thetechnical products business has over 500 customers worldwide. The distributionof sales in 2009 was approximately 55 percent in Europe, 25 percent in NorthAmerica and 20 percent in Latin America and Asia. Customers typically convertand transform base papers and film into finished rolls and sheets by addingadhesives, coatings, and finishes. These transformed products are then sold toend-users.

 

*Concentration.*  For the years ended December 31,2009, 2008 and 2007, no customer accounted for more than 10 percent of ourconsolidated net sales.

 

The following tables present further information about ourbusinesses by geographic area (dollars in millions):

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net sales**         |       |                             |       |   |   |   |   |
| United States         |       | $                                | 360.9      |   | $ | 467.3 |   | $ | 502.9 |   |
| Europe                |       | 213.0                            |       | 265.0 |   | 264.4 |   |
| Intergeographic items |       | —                           |       | — |   | (0.3 | ) |
| Consolidated          |       | $                                | 573.9      |   | $ | 732.3 |   | $ | 767.0 |   |

 
| ** **       | ** ** | **December 31,** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Total Assets** |       |                  |       |   |   |   |   |
| United States    |       | $                     | 330.9      |   | $ | 371.8 |   | $ | 337.5 |   |
| Canada           |       | 5.4                   |       | 3.3 |   | 201.6 |   |
| Europe           |       | 301.2                 |       | 314.9 |   | 398.7 |   |
| Total            |       | $                     | 637.5      |   | $ | 690.0 |   | $ | 937.8 |   |

 

Net salesand total assets are attributed to geographic areas based on the physicallocation of the selling entities and the physical location of the assets. SeeNote 14 of Notes to Consolidated Financial Statements “Business Segment andGeographic Information” for information with respect to net sales, profits(losses) and total assets by business segment.

 

**Raw Materials**

 

*Fine Paper.*Hardwood pulp is the primary fiberused to produce products of the fine paper business. Our fine paper businessconsumed approximately 55,000 metric tons, 65,000 metric tons and 80,000 metrictons of hardwood pulp in 2009, 2008 and 2007, respectively. Other significantraw material inputs in the production of fine paper products include softwoodpulp, cotton fiber, recycled fiber, dyes and fillers. An interruption in oursupply of pulp or cotton could adversely affect our fine paper sales. The finepaper business purchases all of its raw materials externally.

 

*Technical Products.*Thetechnical products business purchases latex, a primary raw material used toproduce its products, from various suppliers. Softwood pulp, including certainspecialty pulp, is the other main raw material consumed. The technical productsbusiness purchases substantially all of its raw material requirements externally.We believe that all of the raw materials for our technical products operations,except for certain specialty latex grades and specialty softwood pulp, arereadily available from several sources and that the loss of a single supplierwould not cause a shutdown of our manufacturing operations. An interruption inthe supply of certain latex specialty grades or specialty softwood pulp,however, could disrupt and eventually cause a shutdown of production of certaintechnical products.

* *

*Concentration.*  Except for certainspecialty latex grades and specialty softwood pulp used by our technicalproducts business, we are not aware of any significant concentration ofbusiness transacted with a particular supplier that could, if suddenlyeliminated, have a material adverse affect on our operations. While we believethat alternative sources of critical supplies would be available, disruption ofour primary sources could create a temporary, adverse effect on productshipments. An interruption in the supply of a latex specialty grade or ofspecialty softwood pulp to our technical products business, each of which iscurrently obtained from a single source, could disrupt and eventually cause ashutdown of production of certain technical products.

 

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**Energy and Water**

 

The equipment used in the manufacture of the products of ourfine paper and technical products businesses uses significant amounts ofenergy, primarily electricity, natural gas, oil and coal. We generatesubstantially all of our electrical energy at the Munising mill andapproximately 20 percent of the electrical energy at our mills in Bruckmühl,Germany and Appleton, Wisconsin. We also purchase electrical energy fromexternal sources, including electricity generated from renewable sources.

 

Availabilityof energy is not expected to be a problem in the foreseeable future, but thepurchase price of such energy can and likely will fluctuate significantly basedon changes in demand and other factors.

 

An adequatesupply of water is needed to manufacture our products. We believe that there isan adequate supply of water for this purpose at each of our manufacturinglocations.

 

**Working Capital**

 

*Fine Paper.*The fine paper business maintainsapproximately 10 days of raw material inventories to support its papermaking operations and about 50 days to 55 days of finished goods inventoryto fill customer orders. Fine Paper sales terms range between 20 and30 days for customer payments, with 20-day terms used most often. Supplierinvoices are typically paid within 30 days.

 

*Technical Products.*Our U.S.technical products business maintains approximately 25 days to 30 days ofraw materials and supplies inventories to support its manufacturing operationsand approximately 25 days to 30 days of finished goods inventory tosupport customer orders for its products. Sales terms in the technical productsbusiness vary depending on the type of product sold and customer category.Extended credit terms of up to 120 days are offered to customers locatedin certain international markets. Sales are collected in approximately 45 daysto 50 days and supplier invoices are generally paid within 30 days.  Our German technical products businessmaintains approximately 20 days of raw materials and supplies inventoriesto support its manufacturing operations and approximately 30 days offinished goods inventory to support customer orders for its products. Salesterms in the technical products business vary depending on the type of productsold and customer category. Extended credit terms of up to 120 days are offeredto customers located in certain international markets. Sales are collected inapproximately 55 to 60 days and supplier invoices are generally paid within 20days.

 

**Competition**

 

*Fine Paper.*We believe our fine paper businessis a leading supplier of premium writing, text, cover and specialty papers inNorth America. The fine paper business competes directly in this market withMohawk Fine Papers Inc., Wausau Paper Corp. and other smaller companies.We believe the primary bases of competition for premium writing, text and coverpapers are brand recognition, product quality, customer service, productavailability, promotional support and variety of colors and textures. Price also can be a factor particularly versus lower quality opaque and offsetpapers. We have and will continue to invest in advertising and other programsaimed at graphic designers, printers and corporate end-users in order tocommunicate the advantages of using our products.

 

*Technical Products.*Ourtechnical products business competes in global markets with a number of largemultinational competitors, including ArjoWiggins S.A.S. and AhlstromCorporation. It also competes in some, but not all, of these segments withsmaller regional manufacturers, such as Monadnock Paper Mills, Inc.,Fortress Paper, Ltd., Potsdam Specialty Paper, Inc. and Paper Line S.p.A.We believe the bases of competition in most of these segments are the abilityto design and develop customized product features to meet customerspecifications while maintaining quality, customer service and price. Webelieve our research and development program gives us an advantage incustomizing base papers to meet customer needs.

 

**Research and Development**

 

Our domestictechnical products business maintains research and development laboratories inthe U.S. in Roswell, Georgia and Munising, Michigan to support its strategy ofdeveloping new products and technologies, and to support growth in its existingproduct lines and other strategically important markets. Our German technicalproducts business maintains laboratory and research and development staff ateach of its manufacturing locations and dedicated application engineers for keyaccounts to support product development and process improvements.  OurGerman technical products business also has a nano fiber pilot plant for thetesting of advanced filter media applications.  We have continuallyinvested in product research and development with spending of $5.5 million in2009, $6.5 million in 2008 and $6.4 million in 2007.

 

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**Intellectual Property**

 

We own more than 50 trademarks with registrations inapproximately 50 countries. Our business has built its market leadingreputation on trademarked brands that date back as far as 1908. The CLASSIC®family of brands is one of the most well known and respected trademarks in theprinting and writing industry. The CLASSIC® family includes CLASSIC CREST®,CLASSIC® Laid, CLASSIC® Linen, CLASSIC COLUMNS® and CLASSIC COTTON® papers. Ourbranded products, which also include the ENVIRONMENT® brand and brands such asSTARWHITE®, SUNDANCE® and ESSE®, have played an important role in the marketingof the product lines of the fine paper business, which are recognized as anindustry leader for quality, consistency and printing applications. In thefourth quarter of 2009, our fine paper business entered into an exclusivelicensing agreement to market and distribute Crane & Co.’s CRANE’SCREST®, CRANE’S BOND®, CRANE’S LETTRA®, CRANE’S PALETTETM and CRANE’S® ChoicePapers branded fine papers.  In thefourth quarter of 2008, our fine paper business acquired the trademarks for theClassic brand in certain key international markets.  This investmentcontinues to build on our long term strategy to consolidate the writing, textand cover (WT&C) categories in the US and continue to grow our strongestbrands by increasing our international market penetration.

 

The KIMDURA®and MUNISING LP® trademarks have made a significant contribution to the marketingof synthetic film and clean room papers of the technical productsbusiness.  The Gessner® and varitess® trademarks have played an importantrole in the marketing of Neenah Germany product lines.

 

We own morethan 40 patents and have multiple pending patent applications in the UnitedStates, Canada, Western Europe and certain other countries covering imagetransfer paper, abrasives and medical packaging. We believe our image transferpatents have contributed to establishing the technical products business as aleading supplier of image transfer papers.

 

**Backlog and Seasonality**

 

*Fine Paper.*The fine paper business hashistorically experienced a steady flow of orders with marginally higher salesin the first quarter due to annual report production and a slight reduction inthe third quarter due to scheduled maintenance downtime. Orders for stockproducts are typically shipped within two days, while custom orders are shippedwithin two to three weeks of receipt. Raw material purchases and manufacturing schedulesare planned based on a combination of historical trends, customer forecasts andcurrent market conditions. The order backlogs in the fine paper business on December 31,2009 and December 31, 2008 were $6.1 million and $10.8 million,respectively, which represent approximately 8 days and 11 days, respectively,of sales. The order backlogs from December 31, 2009 and 2008 were filledin the respective following years.

 

*Technical Products.* In general,sales and profits for the technical products business have been relativelystronger in the first half of the year with reductions in the third quarter dueto reduced customer converting schedules and in the fourth quarter due to areduction in inventory levels by our customers. During 2009, the technical productsbusiness showed sequential growth in quarterly sales and earnings as theoverall economic environment improved. The order flow for the technical products business is subject toseasonal peaks for several of its products, such as the larger volume grades oftape, abrasives, premask, and label stock used primarily in the downstreamfinished goods manufacturing process. To assure timely shipments during theseseasonal peaks, the technical products business has agreements with certaincustomers to manufacture orders and hold them in inventory for later shipment.The technical products business also manages these peaks by providing certaincustomers with finished goods inventory on consignment. Such consignment salesrepresent less than five percent of the technical products business’s annualsales. Orders are typically shipped within six to eight weeks of receipt of theorder. However, the technical products business periodically experiencesperiods where order entry levels surge, and order backlogs can increasesubstantially. Raw materials are purchased and manufacturing schedules areplanned based on customer forecasts, current market conditions and individualorders for custom products. The order backlog in the technical productsbusiness on December 31, 2009 was approximately $67 million andrepresented approximately 20 percent of prior year sales. The order backlogs inthe technical products business on December 31, 2008 were approximately$56 million and represented approximately 15 percent of prior year sales. Wehave previously filled the order backlog from December 31, 2008 and expectto fill the order backlog from December 31, 2009 within the current fiscalyear.

 

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**Employee and Labor Relations**

 

As of December 31, 2009, the Company had approximately1,700 regular full-time employees of whom 675 hourly and 325 salaried employeeswere located in the United States and 450 hourly and 250 salariedemployees were located in Germany.

 

Hourly employeesat the Whiting, Neenah, Munising and Appleton paper mills are represented bythe United Steelworkers Union (the “USW”). The collective bargaining agreementfor the Munising paper mill expired on July 14, 2009. The Company iscurrently negotiating a new labor agreement for the mill with the USW. In December 2009,the Company and the USW signed a new collective bargaining agreement for theWhiting paper mill that is effective through January 31, 2013. In October 2009,the Company and the USW signed a new collective bargaining agreement for theNeenah paper mill that is effective through June 30, 2013. The collectivebargaining agreement for the Appleton paper mill expires on May 31, 2010.Separately, the Neenah, Whiting and Munising paper mills have bargained jointlywith the union on pension matters. The agreement on pension matters will remainin effect through 2019.

 

Approximately 50 percent of salaried employees and 80 percentof hourly employees of Neenah Germany are eligible to be represented by theMining, Chemicals and Energy Trade Union, Industriegewerkschaft Bergbau, Chemieand Energie (the “IG BCE”).  The collective bargaining agreement coveringunion employees of Neenah Germany is negotiated by the IG BCE and a nationaltrade association representing all employers in the industry.  Unionmembership is voluntary and under German law does not need to be disclosed tothe Company. As a result, the number of employees covered by the collectivebargaining agreement that expires in August 2010 cannot be determined.

 

**Environmental, Health and Safety Matters**

 

Ouroperations are subject to federal, state and local laws, regulations andordinances relating to various environmental, health and safety matters. Ouroperations are in compliance with, or we are taking actions designed to ensurecompliance with, these laws, regulations and ordinances. However, the nature ofour operations exposes us to the risk of claims concerning non-compliance withenvironmental, health and safety laws or standards, and there can be noassurance that material costs or liabilities will not be incurred in connectionwith those claims. Except for certain orders issued by environmental, healthand safety regulatory agencies with which we believe we are in compliance andwhich we believe are immaterial to our financial condition, results ofoperations and liquidity, we are not currently named as a party in any judicialor administrative proceeding relating to environmental, health and safetymatters.

 

Greenhousegas (“GHG”) emissions have increasingly become the subject of political andregulatory focus. Concern over potential climate change, including globalwarming, has led to legislative and regulatory initiatives directed at limitingGHG emissions. For example, legislators in the United States are consideringlaws that would create a “cap-and-trade” regime that would establish a limit(or cap) on overall GHG emissions and create a market for the purchase and saleof emissions permits or “allowances.” All the states in which we operate are currently considering GHGlegislation or regulations, either individually and/or as part of regionalinitiatives, that are independent of any federal proposals. While not all arelikely to become law it is reasonably possible that additional climate changerelated mandates will be forthcoming, and it is expected that they mayadversely impact our costs by increasing energy costs and raw material prices,requiring operational or equipments modifications to reduce emissions,requiring the purchase of carbon offsets and creating costs to comply withregulations or to mitigate the financial consequences of a “cap and trade”regime.

 

While wehave incurred in the past several years, and will continue to incur, capitaland operating expenditures in order to comply with environmental, health andsafety laws, regulations and ordinances, we believe that our future cost ofcompliance with environmental, health and safety laws, regulations andordinances, and our exposure to liability for environmental, health and safetyclaims will not have a material adverse effect on our financial condition,results of operations or liquidity. However, future events, such as changes inexisting laws and regulations, new legislation to limit GHG emissions orcontamination of sites owned, operated or used for waste disposal by us(including currently unknown contamination and contamination caused by priorowners and operators of such sites or other waste generators) may give rise toadditional costs which could have a material adverse effect on our financialcondition, results of operations or liquidity.

 

We haveplanned capital expenditures to comply with environmental, health and safetylaws, regulations and ordinances****duringthe period 2010 through 2012 of approximately $1 million to $2 millionannually.  Our anticipated capital expenditures for environmental projectsare not expected to have a material adverse effect on our financial condition,results of operations or liquidity.

 

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**AVAILABLE INFORMATION**

 

We are subject to the reporting requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934. As such, we file annual,quarterly and current reports, proxy statements and other information with theSecurities and Exchange Commission (“SEC”). Our SEC filings are available tothe public over the Internet at the SEC’s web site at www.sec.gov. You may alsoread and copy any document we file at the SEC’s public reference room inWashington, D.C., 100 F Street, N.E., Washington, D.C. 20549. Please call theSEC at 1-800-SEC-0330 for further information on the public reference room. Ourcommon stock is traded on the New York Stock Exchange under the symbol NP. Youmay inspect the reports, proxy statements and other information concerning usat the offices of the New York Stock Exchange, 20 Broad Street, New York, NewYork 10005.

 

Our web siteis www.neenah.com. Our reports on Form 10-K, Form 10-Q and Form 8-K,as well as amendments to those reports, are and will be available free ofcharge on our web site as soon as reasonably practicable after we file orfurnish such reports with the SEC. In addition, you may request a copy of anyof these reports (excluding exhibits) at no cost upon written request to us at:Investor Relations, Neenah Paper, Inc., 3460 Preston Ridge Road, Suite 600,Alpharetta, Georgia 30005.

 

**Item 1A.****        ****Risk Factors**

 

*You should carefully consider each of the following risks and all ofthe other information contained in this Annual Report on Form 10-K. Someof the risks described below relate principally to our business and theindustry in which we operate, while others relate principally to ourindebtedness. The remaining risks relate principally to the securities marketsgenerally and ownership of our common stock.*

 

*Our business, financial condition, results of operations or liquidity couldbe materially adversely affected by any of these risks, and, as a result, thetrading price of our common stock could decline. The risks described below arenot the only ones we face. Additional risks not presently known to us or thatwe currently deem immaterial may also impair our business operations.*

 

**Risks Related to Our Business and Industry**

 

***Our business will suffer if we are unable toeffectively respond to decreased demand for some of our products due to currentconditions in the global economy.***

 

We haveexperienced and may continue to experience decreased demand for some of ourproducts due to slowing or negative global economic growth, uncertainty incredit markets, declining consumer and business confidence, fluctuatingcommodity prices, increased unemployment and other challenges affecting theglobal economy.  In addition, our customers may experience deteriorationof their businesses, cash flow shortages, and difficulty obtaining financing.If we are unable to implement business strategies to effectively respond todecreased demand for our products, our financial position, cash flows andresults of operations would be adversely affected.

 

***We face many competitors, several of which have greaterfinancial and other resources.***

 

We facecompetition in each of our business segments from companies that produce thesame type of products that we produce or that produce lower priced alternativeproducts that customers may use instead of our products. Some of ourcompetitors have greater financial, sales and marketing, or research anddevelopment resources than we do. Greater financial resources and productdevelopment capabilities may also allow our competitors to respond more quicklyto new opportunities or changes in customer requirements.

 

***Our operating results are likely to fluctuate.***

 

Ouroperating results are subject to substantial quarterly and annual fluctuationsdue to a number of factors, many of which are beyond our control. Results couldbe adversely affected by general economic conditions causing a downturn in themarket for paper products.  Additional factors that could affect ourresults include, among others, the relative strength of the Euro versus theU.S. dollar, changes in the market price of pulp, the effects of competitivepricing pressures, changes in average selling prices of our products,production capacity levels and manufacturing yields, availability and cost ofproducts from our suppliers, the gain or loss of significant customers, ourability to develop, introduce and market new products and technologies on atimely basis, changes in the mix of products produced and sold, seasonalcustomer demand,  increasing interest rates and environmental costs. Thetiming and effect of the foregoing factors are difficult to predict, and theseor other factors could materially adversely affect our quarterly or annualoperating results.

 

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***The availability of andprices for raw materials and energy will significantly impact our business.***

 

We purchasea substantial portion of the raw materials and energy necessary to produce ourproducts on the open market, and, as a result, the price and other terms of thosepurchases are subject to change based on factors such as worldwide supply anddemand and government regulation. We do not have significant influence over ourraw material or energy prices and our ability to pass increases in those pricesalong to purchasers of our products may be challenged, unless those increasescoincide with increased demand for the product. Therefore, raw material orenergy prices could increase at the same time that prices for our products aresteady or decreasing. In addition, we may not be able to recoup other costincreases we may experience, such as those resulting from inflation or fromincreases in wages or salaries or increases in health care, pension or otheremployee benefits costs, insurance costs or other costs.

 

An interruptionin supply of either a latex specialty grade or of specialty softwood pulp toour technical products business, each of which we currently obtain from asingle source, could disrupt and eventually cause a shutdown of production ofcertain technical products.

 

***We cannot be certain thatour net operating losses (***“NOLs”) ***will continue to be available tooffset our tax liability and other tax planning strategies may not beeffective.***

 

As of December 31,2009, we had approximately $65.3 million of U.S. Federal and $75.4 million ofU.S. State tax NOLs which may be used to offset taxable income in the future.In order to utilize the NOLs, we must generate consolidated taxable income. TheNOLs will expire in various amounts, if not used, between 2024 and 2029. Theavailability of NOLs to offset taxable income could also be substantiallyreduced if we were to undergo an “ownership change” within the meaning of Section 382(g)(1) ofthe Internal Revenue Code. We will be treated as having had an “ownershipchange” if there is more than a 50% increase in stock ownership during athree-year “testing period” by “5% stockholders.” The availability of our NOLsto offset taxable income following an “ownership change” would be based on themarket value of our common stock multiplied by the Internal Revenue Codelong-term tax exempt rate.

 

Inaccordance with Accounting Standards Codification (“ASC”) Topic 740, *Income Taxes* (“ASC Topic 740”), as of December 31,2009, we have recorded a liability of $9.5 million for uncertain tax positionswhere we believe it is “more likely than not” that the benefit reported on ourincome tax return will not be realized. There can be no assurance, however,that the actual amount of unrealized deductions will not exceed the amounts wehave recognized for uncertain tax positions.

 

We derivesubstantial tax benefits from our corporate structure.  Such benefits are subject to challenge uponaudit by taxing authorities in the jurisdictions in which we operate.  There can be no assurance that the taxbenefits of our tax structure would survive a challenge by these taxauthorities.  If the tax benefits of ourcorporate structure are not realized, it could have a material adverse effecton our results of operations, cash flows and financial position.

 

***We have significant obligations for pension and otherpostretirement benefits.***

 

We havesignificant obligations for pension and other postretirement benefits whichcould require future funding beyond that which we have funded in the past orwhich we currently anticipate. At December 31, 2009, our projected pensionbenefit obligations were $234.7 million and exceeded the fair value of pensionplan assets by approximately $66.5 million. In 2009, total contributions to ourpension trusts were $10.2 million. At December 31, 2009, ourprojected other postretirement benefit obligations were $37.9 million.  No assets have been set aside to satisfy ourother postretirement benefit obligations.  In 2009, we made payments forpostretirement benefits other than pensions of $2.7 million. A materialincrease in funding requirements or benefit payments could have a materialadverse effect on our cash flows.

 

***The outcome of legal actions and claims may adverselyaffect us.***

 

We areinvolved in legal actions and claims arising in the ordinary course of ourbusiness. The outcome of such legal actions and claims against us cannot bepredicted with certainty. The legal actions and claims against us could have amaterial adverse effect on our financial condition, results of operations andliquidity.

 

***Labor interruptions would adversely affect ourbusiness.***

 

Substantiallyall of our hourly paid employees are unionized. In addition, some of our keycustomers and suppliers are also unionized.  As of December 31, 2009,we have approximately 300 hourly employees covered by collective bargainingagreements that have expired or will expire within the next 12-months. Strikes, lockouts or other work stoppages or slow downs involving ourunionized employees could have a material adverse effect on us.

 

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***Future dividends on ourcommon stock may be restricted or eliminated.***

 

For the yearended December 31, 2009, we paid cash dividends of $0.40 per common shareor approximately $5.9 million. Dividends are declared at the discretion of ourboard of directors, and future dividends will depend on our future earnings,cash flow, financial requirements and other factors.  Our ability to paycash dividends on our common stock is limited under the terms of both our bankcredit agreement and the indenture for our $225 million of ten-year seniornotes due November 2014 (the “Senior Notes”).  As of December 31,2009, under the most restrictive terms of these agreements, our ability to paycash dividends on our common stock is limited to a total of $8 million ina 12-month period. There can be no assurance that we will continue to paydividends in the future.

 

***Changes in internationalconditions could adversely affect our business and results of operations.***

 

Our operating results and business prospectscould be adversely affected by risks related to the countries outside theUnited States in which we have manufacturing facilities or sell our products,including Germany, Canada, China, Brazil and elsewhere.  Downturns in economic activity, adverse taxconsequences, fluctuations in the value of local currency versus the U.S.dollar, or any change in social, political or labor conditions in any of thesecountries or regions could negatively affect our financial results.

 

***If we have a catastrophic loss orunforeseen or recurring operational problems at any of our facilities, we couldsuffer significant lost production and/or cost increases.***

 

Our fine paper and technical products businesses maysuffer catastrophic loss due to fire, flood, terrorism, mechanical failure, orother natural or man-made events.  If any of our facilities were toexperience a catastrophic loss, it could disrupt our operations, delayproduction, delay or reduce shipments, reduce revenue, and result insignificant expenses to repair or replace the facility.  These expensesand losses may not be adequately covered by property or business interruptioninsurance.  Even if covered by insurance, our inability to deliver ourproducts to customers, even on a short-term basis, may cause us to lose marketshare on a more permanent basis.

 

***Fluctuations in currency exchange rates could adverselyaffect our results.***

 

Exchangerate fluctuations for the Euro do not have a material effect on the operationsor cash flows of our German technical products business.  Our Germantechnical products business incurs most of its costs and sells most of itsproduction in Europe and, therefore, its operations and cash flows are notmaterially affected by changes in the exchange rate of the Euro relative to theU.S. dollar. Changes in the Euro exchange rate relative to the U.S. dollarwill, however, have an effect on our reported results of operations.

 

In addition,because we transact business in other foreign countries, some of our revenuesand expenses are denominated in a currency other than the local currency of ouroperations. As a result, changes in exchange rates between the currency inwhich the transaction is denominated and the local currency of our operationsinto which the transaction is being recorded can impact the amount of localcurrency recorded for such transaction. This can result in more or less localcurrency revenues or costs related to such transaction, and thus have an effecton our reported income before income taxes.

 

***Our activities are subject to extensive governmentregulation, which could increase our costs, cause us to incur liabilities andadversely affect the manufacturing and marketing of our products.***

 

Ouroperations are subject to federal, state and local laws, regulations andordinances in the United States and Germany relating to various environmental,health and safety matters. The nature of our operations requires that we investcapital and incur operating costs to comply with those laws, regulations andordinances and exposes us to the risk of claims concerning non-compliance withenvironmental, health and safety laws or standards. We cannot assure thatsignificant additional expenditures will not be required to maintain compliancewith, or satisfy potential claims arising from, such laws, regulations andordinances. Future events, such as changes in existing laws and regulations orcontamination of sites owned, operated or used for waste disposal by us(including currently unknown contamination and contamination caused by priorowners and operators of such sites or other waste generators) may give rise toadditional costs that could require significantly higher capital expendituresand operating costs, which would reduce the funds otherwise available foroperations, capital expenditures, future business opportunities or otherpurposes.

 

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***We are subject to risks associated with possible climate changelegislation and various cost and manufacturing issues associated with suchlegislation.***

 

Greenhouse gas (GHG) emissions haveincreasingly become the subject of political and regulatory focus. Concern overpotential climate change, including global warming, has led to legislative andregulatory initiatives directed at limiting GHG emissions. For example,legislators in the United States are considering laws that would create a “cap-and-trade”regime that would establish a limit (or cap) on overall GHG emissions andcreate a market for the purchase and sale of emissions permits or “allowances.”  All the states in which we operate arecurrently considering GHG legislation or regulations, either individuallyand/or as part of regional initiatives, that are independent of any federalproposals. While not all are likely to become law it is reasonably possible thatadditional climate change related mandates will be forthcoming, and it isexpected that they may adversely impact our costs by increasing energy costsand raw material prices, requiring operational or equipment modifications toreduce emissions, requiring the purchase of carbon offsets and creating coststo comply with regulations or to mitigate the financial consequences of a “capand trade” regime.

 

**Risks Relating to Our Indebtedness**

 

***Wemay not be able to fund our future capital requirements internally or obtainthird-party financing.***

 

We may be required or choose toobtain additional debt or equity financing to meet our future working capitalrequirements, as well as to fund capital expenditures and acquisitions. To theextent we must obtain financing from external sources to fund our capitalrequirements, we cannot guarantee financing will be available on favorableterms, if at all.  As of December 31, 2009, we have required debtpayments of $29.7 million and $226.8 million during the years ended December 31,2013 and 2014, respectively.  Such required debt payments includeapproximately $26.2 million in November 2013 upon termination of our bankcredit agreement and $225 million on the Senior Notes in November 2014.

 

***Wemay not be able to generate a sufficient amount of cash flow to meet our debtobligations, including the Senior Notes.***

 

Our ability to make scheduledpayments or to refinance our obligations with respect to the Senior Notes, ourother debt and our other liabilities will depend on our financial and operatingperformance, which, in turn, is subject to prevailing economic conditions andto certain financial, business and other factors beyond our control. If ourcash flow and capital resources are insufficient to fund our debt obligations andother liabilities, we could face substantial liquidity problems and may beforced to reduce or delay scheduled expansions and capital expenditures, sellmaterial assets or operations, obtain additional capital or restructure ourdebt. We cannot assure that our operating performance, cash flow and capitalresources will be sufficient to repay our debt in the future. In the event thatwe are required to dispose of material assets or operations or restructure ourdebt to meet our debt and other obligations, we can make no assurances as tothe terms of any such transaction or how quickly any such transaction could becompleted.

 

If we cannot make scheduled paymentson our debt, we will be in default and, as a result:

 

·      ourdebt holders could declare all outstanding principal and interest to be due andpayable;

 

·      oursenior secured lenders could terminate their commitments and commenceforeclosure proceedings against our assets; and

 

·      wecould be forced into bankruptcy or liquidation.

 

If our operating performancedeclines in the future or we breach our covenants under the revolving creditfacility, we may need to obtain waivers from the required lenders under ourrevolving credit facility to avoid being in default. We may not be able toobtain these waivers. If this occurs, we would be in default under therevolving credit facility.

 

***Wehave significant indebtedness which subjects us to restrictive covenantsrelating to the operation of our business.***

 

As of December 31, 2009, we had$225 million of Senior Notes, a term loan of $40.0 million, $12.9 millionin German revolving line of credit borrowings and $12.5 million of projectfinancing outstanding. In addition, our borrowing base under our bank creditagreement was approximately $90 million and $27.9 million of senior securedrevolver borrowings were outstanding. Our leverage could have importantconsequences. For example, it could:

 

·      makeit difficult for us to satisfy our financial obligations, including makingscheduled principal and interest payments on the Senior Notes and our otherindebtedness;

 

·      placeus at a disadvantage to our competitors;

 

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·      requireus to dedicate a substantial portion of our cash flow from operations toservice payments on our indebtedness, thereby reducing funds available forother purposes;

 

·      increaseour vulnerability to a downturn in general economic conditions or the industryin which we operate;

 

·      limitour ability to obtain additional financing for working capital, capitalexpenditures, acquisitions and general corporate and other purposes; and

 

·      limitour ability to plan for and react to changes in our business and the industryin which we operate.

 

Theterms of our indebtedness, including our bank credit agreement and theindenture governing the Senior Notes, contain covenants restricting our abilityto, among other things, incur certain additional debt, make specifiedrestricted payments and capital expenditures, pay dividends, authorize or issuecapital stock, enter into transactions with our affiliates, consolidate ormerge with or acquire another business, sell certain of our assets orliquidate, dissolve or wind-up our company. At December 31, 2009, underthe most restrictive terms of these agreements, our ability to pay cashdividends on our common stock is limited to a total of $8 million in a 12-monthperiod. In addition, the terms of our bank credit agreement require us toachieve and maintain compliance with a fixed charge coverage ratio ifavailability under the bank credit agreement is less than $20 million.These restrictions may limit our ability to engage in activities which couldexpand our business, including obtaining future financing, making neededcapital expenditures or taking advantage of business opportunities such asstrategic acquisitions and dispositions.

 

Our revolving credit facilityaccrues interest at variable rates. As of December 31, 2009, we had $27.9million of senior secured revolver borrowings outstanding, $1.6 million inoutstanding letters of credit and $60.6 million of remaining availability. Wemay reduce our exposure to rising interest rates by entering into interest ratehedging arrangements, although those arrangements may result in us incurringhigher interest expenses than we would incur without the arrangements. Ifinterest rates increase in the absence of such arrangements, we will need todedicate more of our cash flow from operations to make payments on our debt.For more information on our liquidity, see “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources.”

 

***Ourfailure to comply with the covenants contained in our revolving credit facilityor the indenture governing the Senior Notes could result in an event of defaultthat could cause acceleration of our indebtedness.***

 

Our failure to comply with thecovenants and other requirements contained in the indenture governing theSenior Notes, our revolving credit facility or our other debt instruments couldcause an event of default under the relevant debt instrument. The occurrence ofan event of default could trigger a default under our other debt instruments,prohibit us from accessing additional borrowings and permit the holders of thedefaulted debt to declare amounts outstanding with respect to that debt to beimmediately due and payable. Our assets or cash flows may not be sufficient tofully repay borrowings under our outstanding debt instruments, and we may beunable to refinance or restructure the payments on indebtedness on favorableterms, or at all.

 

***Despite our indebtedness levels, we and our subsidiaries may be able toincur substantially more indebtedness, which may increase the risks created byour substantial indebtedness.***

 

Because the terms of our bank creditagreement and the indenture governing the Senior Notes do not fully prohibit usor our subsidiaries from incurring additional indebtedness, we and oursubsidiaries may be able to incur substantial additional indebtedness in thefuture, some of which may be secured. If we or any of our subsidiaries incuradditional indebtedness, the related risks that we and they now face mayintensify.

 

***Ourbank credit agreement is secured by a majority of our North American assets.***

 

Our bank credit agreement, asamended, is secured by a majority of our North American assets, including thecapital stock of our subsidiaries and is guaranteed by Neenah Paper Company ofCanada, a wholly owned subsidiary (“Neenah Canada”).  Neenah Germany isnot a borrower or guarantor with respect to the bank credit agreement. However, we have pledged 65 percent of our equity interest in Neenah Germany assecurity for our obligations under the bank credit agreement.

 

Availability under our bank creditagreement will fluctuate over time depending on the value of our inventory,receivables and various capital assets. An extended work stoppage ordecline in sales volumes would result in a decrease in the value of the assetssecuring the bank credit agreement. A reduction in availability under the bankcredit agreement could have a material adverse effect on our liquidity.

 

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***Changes in credit ratings issued bynationally recognized statistical rating organizations could adversely affectour cost of financing and have an adverse effect on the market price of oursecurities.***

 

Adowngrade of our credit ratings below current levels (Moody’s Investors Service— B1, Standard & Poor’s — B+) may reduce our access to the capitalmarkets, have an adverse effect on the market price of our securities andincrease our cost of borrowing.

 

***We depend on our subsidiaries to generate cash flow to meet our debtservice obligations, including payments on the Senior Notes.***

 

We conduct a substantial portion ofour business through our subsidiaries. Consequently, our cash flow and abilityto service our debt obligations, including the Senior Notes, depend upon theearnings of our subsidiaries and the distribution of those earnings to us, orupon loans, advances or other payments made by these entities to us. Theability of these entities to pay dividends or make other payments or advancesto us will be subject to applicable laws and contractual restrictions containedin the instruments governing their debt, including our revolving creditfacility and the indenture governing the Senior Notes. These limitations arealso subject to important exceptions and qualifications.

 

The ability of our subsidiaries togenerate sufficient cash flow from operations to allow us to make scheduledpayments on our debt, including the Senior Notes, will depend upon their futurefinancial performance, which will be affected by a range of economic,competitive and business factors, many of which are outside of our control. Ifour subsidiaries do not generate sufficient cash flow from operations to helpus satisfy our debt obligations, including payments on the Senior Notes, we mayhave to undertake alternative financing plans, such as refinancing orrestructuring our debt, selling assets, reducing or delaying capitalexpenditures or seeking to raise additional capital. Refinancing may not bepossible, and any assets may not be saleable, or, if sold, we may not realizesufficient amounts from those sales. Additional financing may not be availableon acceptable terms, if at all, or we may be prohibited from incurring it, ifavailable, under the terms of our various debt instruments then ineffect.  Our inability to generate sufficient cash flow to satisfy ourdebt obligations or to refinance our obligations on commercially reasonableterms would have an adverse effect on our business, financial condition andresults of operations, as well as on our ability to satisfy our obligations onthe Senior Notes. The amount of earnings that our operating subsidiaries areable to distribute to us as dividends, or otherwise, may not be adequate for usto service our debt obligations.

 

**FORWARD-LOOKINGSTATEMENTS**

 

Certain statements in Annual Reporton Form 10-K may constitute “forward-looking” statements as defined in Section 27Aof the Securities Act of 1933 (the “Securities Act”), Section 21E of theSecurities Exchange Act of 1934 (the “Exchange Act”), the Private SecuritiesLitigation Reform Act of 1995 (the “PSLRA”), or in releases made by the SEC,all as may be amended from time to time. Statements contained in this annualreport that are not historical facts may be forward-looking statements withinthe meaning of the PSLRA. Any such forward-looking statements reflect ourbeliefs and assumptions and are based on information currently available to us.Forward-looking statements are only predictions and involve known and unknownrisks, uncertainties and other factors that may cause our actual results, performanceor achievements, or industry results, to be materially different from anyfuture results, performance or achievements expressed or implied by suchforward-looking statements. These cautionary statements are being made pursuantto the Securities Act, the Exchange Act and the PSLRA with the intention ofobtaining the benefits of the “safe harbor” provisions of such laws. TheCompany cautions investors that any forward-looking statements we make are notguarantees or indicative of future performance. For additional informationregarding factors that may cause our results of operations to differ materiallyfrom those presented herein, please see “Risk Factors” contained in this AnnualReport on Form 10-K and as are detailed from time to time in other reportswe file with the SEC.

 

You can identify forward-lookingstatements as those that are not historical in nature, particularly those thatuse terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “contemplate,”“estimate,” “believe,” “plan,” “project,” “predict,” “potential” or “continue,”or the negative of these, or similar terms. In evaluating these forward-lookingstatements, you should consider the following factors, as well as otherscontained in our public filings from time to time, which may cause our actualresults to differ materially from any forward-looking statement:

 

·      fluctuations in global equity andfixed-income markets;

 

·      capital and credit market volatility,which have reached unprecedented levels in 2008 and 2009;

 

·      the competitive environment;

 

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·      fluctuations in (i) commodityprices, (particularly for pulp, energy and latex), (ii) exchange rates (inparticular changes in the U.S. dollar/Euro currency exchange rates) and (iii) interestrates;

 

·      the ability to realize anticipated costsavings in our business;

 

·      the cost or availability of raw materialsand energy;

 

·      unanticipated expenditures related to thecost of compliance with environmental and other governmental regulations;

 

·      our ability to control costs andimplement measures designed to enhance operating efficiencies;

 

·      the loss of current customers or theinability to obtain new customers;

 

·      increases in the funding requirements forour pension and postretirement liabilities;

 

·      changes in asset valuations includingwrite-downs of assets including fixed assets, inventory, accounts receivable,deferred tax assets or other assets for impairment or other reasons;

 

·      our existing and future indebtedness;

 

·      strikes, labor stoppages and changesin our collective bargaining agreements and relations with our employees andunions;

 

·      other risks that are detailed from timeto time in reports we file with the SEC; and

 

·      other factors described under “Risk Factors”.

 

You are cautioned not to unduly relyon such forward-looking statements, which speak only as of the date made, whenevaluating the information presented in this information statement.

 

**Item 1B.****        ****Unresolved Staff Comments**

 

None.

 

**Item 2.****           ****Properties**

 

Ourprincipal executive offices are located in the Atlanta, Georgia suburb ofAlpharetta, Georgia, and we operate a research and development laboratory inthe nearby suburb of Roswell, Georgia. We own and operate four paper mills inthe United States that produce printing and writing, text, cover, durablesaturated and coated substrates and other specialty papers for a variety of enduses. We own and operate three paper mills in Germany that producetransportation and other filter media, wall coverings and durable and saturatedsubstrates. We lease a Fine Paper distribution center which is operated for usby a third party logistics firm.  We alsoown the Woodlands.  On March 1, 2010, we announced thatNeenah Canada had signed a definitive agreement to sell the Woodlands forC$82.5 million ($78.6 million). See Note 17 of Notes to Consolidated FinancialStatements, “Subsequent Event.”

 

We believe that each of thesefacilities is adequately maintained and is suitable for conducting ouroperations and business.  We manage machine operating schedules at ourmanufacturing locations to fulfill customer orders in a timely manner andcontrol inventory levels.

 

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As of December 31, 2009,following are the locations of our principal facilities and operating equipmentand the products produced at each location. All the facilities are owned by us,except as otherwise noted:

 
| **Location**                                 | ** ** | **Equipment/Resources**                                                                             | ** ** | **Products**                                                                                     |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|
| Fine Paper business:                         |       |                                                                                                |       |                                                                                             |
| Appleton Mill  Appleton, Wisconsin           |       | Two paper machines; paper  finishing equipment                                                      |       | Printing and writing, text,  cover and other specialty papers                                    |
| Converting Center  Neenah, Wisconsin         |       | Paper finishing equipment                                                                           |       | Printing and writing, text,  cover and other specialty papers                                    |
| Neenah Mill  Neenah, Wisconsin               |       | Two paper machines; paper  finishing equipment                                                      |       | Printing and writing, text,  cover and other specialty papers                                    |
| Whiting Mill  Whiting, Wisconsin             |       | Four paper machines; paper  finishing equipment                                                     |       | Printing and writing, text,  cover and other specialty papers                                    |
|                                         |       |                                                                                                |       |                                                                                             |
| Technical Products business:                 |       |                                                                                                |       |                                                                                             |
| Munising Mill  Munising, Michigan            |       | Two paper machines; two off  line saturators; three off line coaters; specialty finishing equipment |       | Tapes, abrasives, premask,  medical packaging and other durable, saturated and coated substrates |
| Bruckmühl Mill  Bruckmühl, Germany |       | One paper machine; two  saturators; one laminator; finishing equipment                              |       | Masking tape backings and  abrasive backings                                                     |
| Lahnstein Mill  Lahnstein, Germany           |       | One paper machine; three  impregnating and coating machines; two calendars; finishing equipment     |       | Printing media, nonwoven  wall coverings and durable substrates                                  |
| Weidach Mill  Feldkirchen-Westerham, Germany |       | Two paper machines; three  saturators; one meltblowing machine; specialty finishing equipment       |       | Vacuum cleaner, industrial  and transportation filter media                                      |

 

See Note 7 “Debt” of Notes toConsolidated Financial Statements for a description of the materialencumbrances attached to the properties described in the table above.  In May 2009, we permanently closed ourfine paper mill located in Ripon, California (the “Ripon Mill”).  As of December 31, 2009, we havedisposed of substantially all of the Ripon Mill’s manufacturing equipment andare actively marketing the land and building. See Note 3 “Closure of the RiponMill” of Notes to Consolidated Financial Statements.

 

As of December 31, 2009,following are the locations of our owned and leased office and laboratory spaceand the functions performed at each location.

 
| **Administrative Location** | ** ** | **Office/Other Space** | ** ** | **Function**                                         |
|----------------------------------|------------|-----------------------------|------------|------------------------------------------------------|
| Alpharetta, Georgia              |       | Leased Office Space         |       | Corporate Headquarters and  Administration and Sales |
| Roswell, Georgia                 |       | Leased Laboratory Space     |       | Research and Development  for our paper businesses   |
| Appleton, Wisconsin (1)          |       | Leased Office Space         |       | Administration and Sales                             |
| Neenah, Wisconsin                |       | Owned Office Space          |       | Administration and Sales                             |

 

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(1)   The lease on the Appleton, Wisconsin locationexpired on January 1, 2010 and was not renewed.

 

**Item 3.****           ****Legal Proceedings**

 

We are involved in certain legalactions and claims arising in the ordinary course of business. While theoutcome of those legal actions and claims cannot be predicted with certainty,we believe that the outcome of any such claim which is pending or threatened,either individually or on a combined basis, will not have a material adverseeffect on our financial condition, results of operations or liquidity.

 

**Item 4.****           ****(Removed and Reserved)**

 

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**PART II**

 

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

 

Neenah common stock is listed on theNew York Stock Exchange and is traded under the ticker symbol NP. Trading, asreported on the New York Stock Exchange, Inc. Composite Transactions Tape,and dividend information follows:

 
|            |   | **Common Stock********Market Price** |       | **Dividends** |   |
|-----------------|--------|------------------------------------------------|------------|---------------|--------|
|            |   | **High**                                       | ** ** | **Low**       |   | **Declared** |   |
| 2009            |   |                                           |       |          |   |   |   |
| Fourth  quarter |   | $                                              | 15.50      |          | $      | 9.32 |   | $ | 0.10 |   |
| Third  quarter  |   | $                                              | 12.62      |          | $      | 6.56 |   | $ | 0.10 |   |
| Second  quarter |   | $                                              | 10.63      |          | $      | 3.33 |   | $ | 0.10 |   |
| First  quarter  |   | $                                              | 9.51       |          | $      | 3.26 |   | $ | 0.10 |   |
|            |   |                                           |       |          |   |   |   |
| 2008            |   |                                           |       |          |   |   |   |
| Fourth  quarter |   | $                                              | 20.04      |          | $      | 4.90 |   | $ | 0.10 |   |
| Third  quarter  |   | $                                              | 23.70      |          | $      | 14.28 |   | $ | 0.10 |   |
| Second  quarter |   | $                                              | 27.41      |          | $      | 16.33 |   | $ | 0.10 |   |
| First  quarter  |   | $                                              | 29.62      |          | $      | 22.95 |   | $ | 0.10 |   |

 

Dividends are declared at thediscretion of the board of directors, and future dividends will depend on ourfuture earnings, cash flow, financial requirements and other factors. Ourability to pay cash dividends on our common stock is limited under the terms ofboth our bank credit agreement and our Senior Notes. As of December 31,2009, under the most restrictive terms of these agreements, our ability to paycash dividends on our common stock is limited to a total of $8 million ina 12-month period. For the year ended December 31, 2009, we paid cashdividends of $0.40 per common share or approximately $5.9 million. For the yearended December 31, 2008, we paid cash dividends of $0.40 per common shareor approximately $6.0 million.

 

As of February 26, 2010, Neenahhad approximately 2,300 holders of record of its common stock.  Theclosing price of Neenah’s common stock on February 26, 2010 was $14.17.

 

Purchases of Equity Securities:

 
| **Period**              | ** ** | **Total Number of Shares  Purchased** | ** ** | **Average Price Paid  Per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under  Publicly Announced  Plans or Programs** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 2009       |       | —                                               |       | $                                                | —     |                                                                                                                                 | —     |                                                                                                                                                    | —     |   |
| November 2009(a)   |       | 833                                                  |       | $                                                | 10.55      |                                                                                                                                 | —     |                                                                                                                                                    | —     |   |
| December 2009  (a) |       | 3,745                                                |       | $                                                | 13.99      |                                                                                                                                 | —     |                                                                                                                                                    | —     |   |

 

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(a)   Transactionsrepresent the purchase of vested restricted shares from employees to satisfyminimum tax withholding requirements upon vesting of stock-based awards. Noneof these transactions were made in the open market. The average price paid isbased upon the closing sales price on the New York Stock Exchange on the dateof the transaction.  Such purchases are held as treasury shares. 

 

***EquityCompensation Plans***

 

The following table providesinformation about our equity compensation plans as of December 31, 2009:

 
| **Plan Category**                                           | ** ** | **Number of securities  to be issued upon exercise  of outstanding options,  warrants and rights  (a)** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 2,269,848                                                                                                                             |       | $                                                                                                 | 23.60      |                                                                                                                                                                           | 1,960,000  |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                |       | —                                                                                            |       | —                                                                                                                                                                         |       |
| Total                                                       |       | 2,269,848                                                                                                                             |       | $                                                                                                 | 23.60      |                                                                                                                                                                           | 1,960,000  |   |

 

For further information regardingour equity compensation plans, refer to Note 9, “Stock Compensation Plans” ofNotes to Consolidated Financial Statements.

 

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**Item 6.****           ****Selected Financial Data**

 

Thefollowing table sets forth our selected historical financial and other data.You should read the information set forth below in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour historical consolidated financial statements and the notes to thoseconsolidated financial statements included elsewhere in this Annual Report. Thestatement of operations data for the years ended December 31, 2009, 2008and 2007 and the balance sheet data as of December 31, 2009 and 2008 setforth below are derived from our audited historical consolidated financialstatements included elsewhere in this Annual Report. The balance sheet data asof December 31, 2007, 2006 and 2005 and the statement of operations datafor the years ended December 31, 2006 and 2005 set forth below are derivedfrom our historical consolidated financial statements not included in thisAnnual Report.

 

During the three months ended September 30, 2009, we identifiedand restated the December 31, 2008, 2007, 2006 and 2005 consolidatedbalance sheet data for the following errors: (i) an overstatement ofCanadian deferred tax assets and unrealized foreign currency translation gainswithin stockholders’ equity and (ii) an understatement of the liabilityfor uncertain tax positions and deferred tax assets as a result of errorsidentified in prior year income tax returns.  Interest associated with theuncertain tax positions noted above was immaterial for all historical years. We believe the effects of these prior year corrections individually andin the aggregate are immaterial to any prior year consolidated financial statements. The net effect of these corrections on the consolidated balance sheet data ispresented in the following table. See Note 1 of Notes to Consolidated FinancialStatements, “Background and Basis of Presentation — Prior Year Adjustments.”

 
| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(Dollars in millions)**   | ** ** |
| **Consolidated Balance Sheet Data** |       |                        |       |   |   |   |   |   |   |   |   |
| Working capital                     |       | $                           | —     |   | $ | (0.6 | ) | $ | 0.2 |   | $ | — |   | $ | — |   |
| Total assets                        |       | —                      |       | 5.4 |   | 5.0 |   | (2.2 | ) | (2.2 | ) |
| Total liabilities                   |       | —                      |       | 12.7 |   | 12.3 |   | — |   | — |   |
| Total stockholders’ equity     |       | —                      |       | (7.3 | ) | (7.3 | ) | (2.2 | ) | (2.2 | ) |
|                                     |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                        | ** ** | **Year Ended December 31,**                 | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                         | ** ** | **2008** | ** ** | **2007 (e)** | ** ** | **2006 (f)** | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **(Dollars in millions, except per share data)** | ** ** |
| **Consolidated Statement of  Operations Data**                    |       |                                             |       |   |   |   |   |   |   |   |   |
| Net sales                                                         |       | $                                                | 573.9      |   | $ | 732.3 |   | $ | 767.0 |   | $ | 405.0 |   | $ | 352.8 |   |
| Cost of products sold                                             |       | 472.3                                            |       | 633.2 |   | 635.5 |   | 305.4 |   | 250.0 |   |
| Gross profit                                                      |       | 101.6                                            |       | 99.1 |   | 131.5 |   | 99.6 |   | 102.8 |   |
| Selling, general and administrative expenses                      |       | 69.1                                             |       | 75.2 |   | 79.3 |   | 54.4 |   | 40.9 |   |
| Other (income) expense - net                                      |       | (1.0                                             | )          | (11.3 | ) | (1.7 | ) | (0.5 | ) | 0.1 |   |
| Restructuring costs (a)                                           |       | 17.1                                             |       | — |   | — |   | — |   | — |   |
| Goodwill and other intangible asset impairment charge  (b)        |       | —                                           |       | 54.5 |   | — |   | — |   | — |   |
| Operating income (loss)                                           |       | 16.4                                             |       | (19.3 | ) | 53.9 |   | 45.7 |   | 61.8 |   |
| Interest expense - net                                            |       | 23.2                                             |       | 25.0 |   | 25.4 |   | 16.9 |   | 18.4 |   |
| Income (loss) from continuing operations before  income taxes     |       | (6.8                                             | )          | (44.3 | ) | 28.5 |   | 28.8 |   | 43.4 |   |
| Provision (benefit) for income taxes                              |       | (5.0                                             | )          | 3.0 |   | (3.7 | ) | 9.4 |   | 16.3 |   |
| Income (loss) from continuing operations                          |       | (1.8                                             | )          | (47.3 | ) | 32.2 |   | 19.4 |   | 27.1 |   |
| Income (loss) from discontinued operations  (c) (d) (i) |       | 0.6                                              |       | (111.2 | ) | (22.0 | ) | 43.1 |   | (56.8 | ) |
| Net income (loss)                                                 |       | $                                                | (1.2       | ) | $ | (158.5 | ) | $ | 10.2 |   | $ | 62.5 |   | $ | (29.7 | ) |
|                                                              |       |                                             |       |   |   |   |   |   |   |   |   |
| Earnings from continuing operations per basic  share              |       | $                                                | (0.12      | ) | $ | (3.23 | ) | $ | 2.17 |   | $ | 1.31 |   | $ | 1.32 |   |
|                                                              |       |                                             |       |   |   |   |   |   |   |   |   |
| Earnings from continuing operations per diluted  share            |       | $                                                | (0.12      | ) | $ | (3.23 | ) | $ | 2.13 |   | $ | 1.31 |   | $ | 1.31 |   |
|                                                              |       |                                             |       |   |   |   |   |   |   |   |   |
| Cash dividends per common share                                   |       | $                                                | 0.40       |   | $ | 0.40 |   | $ | 0.40 |   | $ | 0.40 |   | $ | 0.40 |   |
|                                                              |       |                                             |       |   |   |   |   |   |   |   |   |
| **Other Financial Data**                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Net cash flow provided by (used for):                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Operating activities                                              |       | $                                                | 64.9       |   | $ | 13.1 |   | $ | 69.5 |   | $ | 65.8 |   | $ | 22.8 |   |
| Capital expenditures                                              |       | (8.4                                             | )          | (30.0 | ) | (58.3 | ) | (25.1 | ) | (25.7 | ) |
| Other investing activities (c) (e) (f)                  |       | 0.1                                              |       | (0.4 | ) | (55.1 | ) | (102.6 | ) | (0.1 | ) |
| Financing activities (e) (f)                                 |       | (54.2                                            | )          | 18.2 |   | 43.8 |   | 50.8 |   | (3.6 | ) |
| Ratio of earnings to fixed charges (g) (h)                   |       | —                                           |       | — |   | 2.1 | x | 2.5 | x | 3.3 | x |

 
| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2007 (e)** | ** ** | **2006 (f)** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(Dollars in millions)**   | ** ** |
| **Consolidated Balance Sheet Data** |       |                        |       |   |   |   |   |   |   |   |   |
| Working capital                     |       | $                           | 96.0       |   | $ | 144.3 |   | $ | 120.5 |   | $ | 92.9 |   | $ | 123.9 |   |
| Total assets                        |       | 637.5                       |       | 690.0 |   | 937.8 |   | 742.5 |   | 534.8 |   |
| Long-term debt                      |       | 263.6                       |       | 340.5 |   | 321.2 |   | 282.3 |   | 226.3 |   |
| Total liabilities                   |       | 529.8                       |       | 586.9 |   | 657.1 |   | 559.8 |   | 371.7 |   |
| Total stockholders’ equity     |       | 107.7                       |       | 103.1 |   | 280.7 |   | 182.7 |   | 163.1 |   |
|                                     |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)          In May 2009, we permanently closed theRipon Mill.  The closure resulted in a pre-tax charge of $17.1 millioncomprised of approximately $5.8 million in non-cash charges primarily forlosses related to the carrying value of property, plant and equipment, acurtailment loss of $0.8 million related to postretirement benefit plans inwhich employees of the Ripon Mill participated and cash payments for contractterminations, severances and other employee costs of approximately $10.5million.

 

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(b)         Forthe year ended December 31, 2008, we recognized a pre-tax loss of $52.7million (we did not recognize a tax benefit related to the non tax deductibleloss) to write-off the excess of the carrying value of goodwill assigned toNeenah Germany over the estimated fair value of goodwill. In addition, forthe year ended December 31, 2008, we recognized a non-cash pre-tax chargeof approximately $1.8 million for the impairment of certain trade names andcustomer based intangible assets acquired in the Neenah Germany acquisition.

 

(c)          In February 2008,we committed to a plan to sell our pulp mill in Pictou, Nova Scotia (the “PictouMill”) and approximately 475,000 acres of woodland assets in Nova Scotia (the “Woodlands”). In June 2008, Neenah Canada sold the Pictou Mill to Northern Pulp. NeenahCanada made a payment of approximately $10.3 million to Northern Pulp inconnection with the sale of the Pictou Mill. In addition, we paid approximately$3.3 million of transaction costs. In August 2006, we transferred ourTerrace Bay mill and related woodlands operations to Buchanan in exchange for apayment of approximately $18.6 million.

 

(d)         Forthe year ended December 31, 2009 and 2008, the results of operations ofthe Pictou Mill and the Woodlands and the loss on disposal of the Pictou Millare reported as discontinued operations in the Consolidated Statement ofOperations Data. The consolidated results of operations for all other periodspresented have been restated to reflect the results of operations of theTerrace Bay mill, the Pictou Mill and the Woodlands and the loss on transfer ofthe Terrace Bay mill as discontinued operations.

 

(e)          In March 2007,we acquired the stock of Fox Valley Corporation and its subsidiary, Fox Riverfor approximately $54.7 million in cash. We financed the acquisition through acombination of cash and debt drawn against our existing revolving creditfacility. The results of Fox River are being reported as part of our Fine Papersegment and have been included in our consolidated financial results since theacquisition date.

 

(f)            In October 2006,we purchased the outstanding interests of Neenah Germany from FiberMark, Inc.and FiberMark International Holdings LLC for approximately $220.1 million incash. We financed the acquisition through a combination of cash and debt drawnagainst our existing revolving credit facility. The results of Neenah Germanyare being reported as part of our Technical Products segment and have beenincluded in our consolidated financial results since the acquisition date.

 

(g)         Forpurposes of determining the ratio of earnings to fixed charges, earningsconsist of income before income taxes (less interest) plus fixed charges. Fixedcharges consist of interest expense, including amortization of debt issuancecosts, and the estimated interest portion of rental expense.

 

(h)         For the years ended December 31,2009 and 2008, the deficit of earnings to fixed charges was $6.8 and $44.3million, respectively.

 

(i)             The following table presents theresults of discontinued operations:

 
| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **(Dollars in millions)**        | ** ** |
| Discontinued operations:                                               |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations  (1) (3) (4) (5) (6) |       | $                                | 2.8        |   | $ | (97.8 | ) | $ | (31.6 | ) | $ | 76.3 |   | $ | (92.4 | ) |
| Income (loss) on disposal - Terrace Bay Mill                           |       | —                           |       | — |   | — |   | (6.5 | ) | — |   |
| Income (loss) on disposal - Pictou Mill (1)                            |       | (0.3                             | )          | (29.4 | ) | — |   | — |   | — |   |
| Loss on settlement of post-employment benefit  plans (2)               |       | —                           |       | (53.7 | ) | — |   | — |   | — |   |
| Loss on disposal                                                       |       | (0.3                             | )          | (83.1 | ) | — |   | (6.5 | ) | — |   |
| Income (loss) before income taxes                                      |       | 2.5                              |       | (180.9 | ) | (31.6 | ) | 69.8 |   | (92.4 | ) |
| (Provision) benefit for income taxes                                   |       | (1.9                             | )          | 69.7 |   | 9.6 |   | (26.7 | ) | 35.6 |   |
| Income (loss) from discontinued operations, net of  income taxes       |       | $                                | 0.6        |   | $ | (111.2 | ) | $ | (22.0 | ) | $ | 43.1 |   | $ | (56.8 | ) |

 

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(1)          Duringthe first quarter of 2008, we determined that the estimated value we wouldreceive from a sale of the Pictou Mill indicated that we would not recover thecarrying value of the mill’s long-lived assets. As a result, for the year endedDecember 31, 2008, we recognized aggregate non-cash, pre-tax impairmentcharges of $91.2 million to write-off the carrying value of the Pictou Mill’slong-lived assets. In addition, for the year ended December 31, 2008, werecorded a pre-tax loss of $29.4 million to recognize the loss on disposal ofthe Pictou Mill.

 

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(2)          Inconjunction with the sale of the Pictou Mill, Northern Pulp assumedresponsibility for all pension and other postretirement benefit obligations foractive and retired employees of the mill. We accounted for the transfer of theNova Scotia, Canada defined benefit pension plan (the “Nova Scotia Plan”) toNorthern Pulp as a settlement of postretirement benefit obligations pursuant toASC Topic 715, *Compensation—Retirement Benefits*(“ASCTopic 715”).  For the year ended December 31,2008, we recognized a non-cash, pre-tax settlement loss of $53.7 million forthe reclassification of deferred pension and other postretirement benefitadjustments related to the Nova Scotia Plan from accumulated othercomprehensive income to the loss on disposal of the Pictou Mill.

 

(3)          In December 2007,the Ontario Plan was terminated and all outstanding pension obligations foractive employees were settled through the purchase of annuity contracts orlump-sum payments pursuant to participant elections. For the year ended December 31,2008, Neenah Canada recognized a non-cash pre-tax settlement loss of $38.7million upon termination of the Ontario Plan.

 

(4)          In August 2006, Neenah Canadamade a payment to the pension trust of approximately $10.8 million for thepurchase of annuity contracts to settle its pension liability for currentretirees. As a result, Neenah Canada recognized a pension curtailment andsettlement loss of approximately $26.4 million in the year ended December 31,2006.

 

(5)          In June 2006, Neenah Canadasold approximately 500,000 acres of woodlands in Nova Scotia for gross proceedsof $139.1 million. The transaction resulted in a net pre-tax gain of $131.7million. Neenah Canada immediately recognized approximately $122.6 million ofsuch gain and deferred approximately $9.1 million which was recognized inincome pro-rata through December 2007. For the years ended December 31,2007and 2006, Neenah Canada recognized $6.2 million and $2.9 million,respectively, of such deferred gain in income.

 

(6)          In 2005, we recorded a $53.7 millionnon-cash pre-tax impairment loss to write-off the carrying value of the TerraceBay facility’s tangible long-lived assets. In addition, we recorded a$6.1 million pre-tax charge for exit costs in connection with the closureof the smaller of the two single-line pulp mills at our Terrace Bay facility.

 

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

 

*The followingdiscussion and analysis presents the factors that had a material effect on ourresults of operations during the years ended December 31, 2009, 2008 and2007. Also discussed is our financial position as of the end of those periods.You should read this discussion in conjunction with our consolidated financialstatements and the notes to those consolidated financial statements includedelsewhere in this Annual Report. This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contains forward-lookingstatements. See “Forward-Looking Statements” for a discussion of theuncertainties, risks and assumptions associated with these statements.*

 

**Introduction**

 

This Management’s Discussion andAnalysis of Financial Condition and Results of Operations are intended toprovide investors with an understanding of the historical performance of ourbusiness, its financial condition and its prospects. We will discuss andprovide our analysis of the following:

 

·                  Overviewof Business;

 

·                  BusinessSegments;

 

·                  Resultsof Operations and Related Information;

 

·                  Liquidityand Capital Resources;

 

·                  Adoptionof New Accounting Pronouncements; and

 

·                  CriticalAccounting Policies and Use of Estimates.

 

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**Overview ofBusiness**

 

Weare a leading producer of premium fine papers and technical products. We havetwo primary operations: our fine paper business and our technical productsbusiness. We also own approximately 475,000 acres of timberlands in NovaScotia, Canada (the “Woodlands”). On March 1, 2010, we announced that Neenah Canada had signed adefinitive agreement to sell the Woodlands for C$82.5 million ($78.6 million).See Note 17 of Notes to Consolidated Financial Statements, “Subsequent Event.”

 

Inmanaging our businesses, we believe that achieving and maintaining a leadershipposition in our markets, responding effectively to competitive challenges,employing capital optimally, controlling costs and managing risks are importantto long-term success. Changes in input costs and general economic conditionsalso impact our results. In this discussion and analysis, we will refer tothese factors.

 

·                  *Market Leadership.* Achieving and maintainingmarket leadership through strong brands, product quality and performance,innovation and supply chain management is an important factor in our results.Our fine paper business, with its well-known brands, has long been recognizedas a leading manufacturer of world-class premium writing, text and cover papersused in corporate identity packages, corporate annual reports, invitations,personal stationery and high-end packaging. Our technical products business is alsorecognized as a leading international supplier in the tape, filtration,component materials, graphics and identification and wall covering marketswith products that meet unique and exacting customer requirements.

 

·                  *Competitive Environment.* Our past results have beenand our future prospects will be significantly affected by the competitiveenvironment in which we operate. In most of our markets, our businesses competedirectly with well-known competitors, some of which are larger and morediversified. Our businesses also face competitive pressures from lower valueproducts.

 

·                  *Economic Condition and Input Costs.*The markets for all of our products are affected to a significant degree byeconomic conditions, including fluctuations in exchange rates, particularly forthe Euro. Rapid changes in input costs, particularly for pulp, latex andnatural gas, also affect our results.

 

**BusinessSegments**

 

Our fine paper business is a leadingproducer of premium writing, text, cover and specialty papers used in corporateidentity packages, corporate annual reports, invitations, personal stationeryand high-end packaging. Our products include some of the most recognized andpreferred papers in North America, where we enjoy leading market positions inmany of our product categories. We sell our products primarily to authorizedpaper distributors, converters and specialty businesses, with sales todistributors and distributor-owned paper stores accounting for more thantwo-thirds of sales. We believe that our fine paper manufacturing facilitieslocated in Appleton, Neenah and Whiting, Wisconsin are among the most efficientin their markets and make us one of the lowest cost producers in the productcategories in which we compete.

 

Our technical products business is aleading international producer of transportation and other filter media;durable, saturated and coated base papers for a variety of end uses andnonwoven wall coverings. We sell our technical products globally in 17 productcategories through five SBUs. We focus on categories where we believe we are,or can be, a market leader, which include, among others, the tape, abrasive,transportation and other filtration media, nonwoven wall coverings, medicalpackaging and image transfer technical products markets. We are also a globalsupplier of materials used for customer-specific applications in furniture,book covers and original equipment manufacturers’ products. Our customers arelocated in more than 35 countries. Our technical products manufacturingfacilities are located in Munising, Michigan and near Munich and Frankfurt,Germany.

 

**Results ofOperations and Related Information**

 

In this section, we discuss andanalyze our net sales, income before interest and income taxes (which we referto as “operating income” in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations) and other information relevantto an understanding of our results of operations.

 

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**ExecutiveSummary**

 

***Strategic Initiatives***

 

Since the Spin-Off in 2004, we have completed several initiatives thathave allowed us to succeed in our strategy to transform the Company into a morefocused and larger premium fine paper and technical products company.  In2006, we divested our Terrace Bay pulp operations, acquired the Germantechnical and specialty paper business of FiberMark, Inc. and sold 500,000acres of woodlands in Nova Scotia. In 2007, we purchased Fox Valley Corporationand its subsidiary, Fox River Paper Company, LLC (collectively, “Fox River”) toexpand our fine paper business. In June 2008, Neenah Canada sold ourremaining pulp mill located in Pictou, Nova Scotia to Northern Pulp, whichassumed responsibility for all of the assets and liabilities associated withoperation of the mill.

 

We currently own approximately 475,000 acres of woodlands in NovaScotia, Canada (the “Woodlands”).  On March 1,2010, we announced that Neenah Canada had signed a definitive agreement to sellthe Woodlands. See Note 17, “Subsequent Event” of Notes to ConsolidatedFinancial Statements. We expect the sale of the Woodlands to result in asubstantial gain. The Woodlands operation currently generates revenue through astumpage agreement (the “Stumpage Agreement”) with Northern Pulpwhich allows them to harvest an average of approximately 400,000 metric tons ofsoftwood timber annually from the Woodlands at market prices.  TheStumpage Agreement will be terminated in conjunction with the sale of theWoodlands.  For the years ended December 31, 2009, 2008 and 2007, theresults of the Pictou Mill and the Woodlands are reported as discontinuedoperations.

 

***Results of Continuing Operations***

 

For the year ended December 31,2009, consolidated net sales decreased approximately 22 percent from the prioryear to $573.9 million. The decrease was primarily due to lower volume in bothbusinesses as a result of sharply reduced market demand following severe globaleconomic weakness, particularly in the first half of 2009.  The effect on demand of the global economiccontraction was exacerbated in the first half of 2009 by a sharp decline inconsumption for a number of key end use market segments, including advertising,financial institutions and the transportation and real estate segments andinventory destocking by our direct customers.

 

Despite the lowervolumes, consolidated operating income of $16.4 million for the year ended December 31,2009 increased $35.7 million from the prior year.  Operating results forthe year ended December 31, 2009 include costs of $17.1 million related tothe closure of the Ripon Mill in May 2009. Operating results for the year ended December 31, 2008, include acharge of $54.5 million related to the impairment of goodwill and otherintangible assets, and gains of approximately $6.3 million from the sale ofcertain Fox River assets and $4.3 million from the settlement of certainTerrace Bay postretirement benefits. Excluding such items, consolidatedoperating income as adjusted in 2009 increased $8.9 million from the prior yearprimarily due to reduced spending as a result of initiatives implemented tocontrol operating costs and also lower manufacturing input costs. Thesefavorable factors were only partially offset by the effects of lower volume andreduced paper mill operating schedules.

 

***Results of Discontinued Operations***

 

For the year ended December 31,2009, timber sales to Northern Pulp pursuant to the Stumpage Agreementresulted in net sales from discontinued operations of $3.7 million.  Net sales of discontinued operations for theyear ended December 31, 2008 were $101.9 million primarily from pulp salesat the Pictou Mill in the first six months of 2008. For the year ended December 31,2009, pre-tax income from discontinued operations was $2.5 million.  For the year ended December 31, 2008, werecorded a pre-tax loss from discontinued operations of $180.9 million. The pre-tax loss in 2008 included non-cash charges of $91.2 million towrite-off the long-lived assets of the Pictou Mill and a loss of $83.1 millionon disposal of the Pictou Mill.

 

***Income Taxes***

 

Ingeneral, our effective tax rate differs from the U.S. statutory tax rate of 35percent primarily due to the benefits of our corporate tax structure and theproportion of pre-tax income in jurisdictions with marginal tax rates thatdiffer from the U.S. statutory tax rate. For the year ended December 31, 2009, we recorded an income taxbenefit related to continuing operations of $5.0 million which resulted in aneffective income tax (benefit) rate of approximately (74) percent.  For the year ended December 31, 2008, werecorded an income tax provision related to continuing operations of $3.0million which resulted in an effective income tax rate of approximately 7percent.  Our effective tax rate for theyear ended December 31, 2008 was also significantly affected by the nontax deductible nature of the goodwill impairment charge and an increase in thelimitation on available tax benefits acquired in the Fox Riveracquisition.  Excluding such items, our effective income tax rate for theyear ended December 31, 2008 was approximately 36 percent.

 

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For the year ended December 31,2007, our effective tax rate was approximately 13 percent.  Our effective tax rate for the year ended December 31,2007 was significantly affected by a reduction in German statutory income taxrates effective as of January 1, 2008. Application of the new rates to ourexisting deferred tax assets and liabilities reduced our net deferred taxliabilities at December 31, 2007. The reduction in our net deferred taxliabilities due to the benefit of the tax rate change resulted in an income taxbenefit of $8.8 million for the year ended December 31, 2007 in accordancewith ASC Topic 740. Excluding the impact of the German tax law amendment on ourdeferred tax liabilities and other tax adjustments, our effective tax rate forthe year ended December 31, 2007 was approximately 17 percent.

 

***Analysis of NetSales—Years Ended December 31, 2009, 2008 and 2007***

 

The following table presents net sales by segment, expressedas a percentage of total net sales before intersegment eliminations:

 
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Fine Paper         |       | 45                                         | %          | 46 | % | 48 | % |
| Technical Products |       | 55                                         | %          | 54 | % | 52 | % |
| Total              |       | 100                                        | %          | 100 | % | 100 | % |

 

The following table presents our net sales by segment forthe periods indicated:

 
|                |       |                              |       |     |       |     |       |
|---------------------|------------|-----------------------------------|------------|----------|------------|----------|------------|
| ** **          | ** ** | **Years Ended December 31,** | ** ** |
| ** **          | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net sales**       |       |                              |       |     |       |     |       |
| Fine  Paper         |       | $                                 | 255.6      |     | $          | 335.5    |       | $ | 366.5 |   |
| Technical  Products |       | 318.3                             |       | 396.8    |       | 400.8    |       |
| Intersegment  sales |       | —                            |       | —   |       | (0.3     | )          |
| Consolidated        |       | $                                 | 573.9      |     | $          | 732.3    |       | $ | 767.0 |   |

 

***Commentary:***

 

*Year 2009 versus 2008*

 
| ** **          | ** ** | **For the  Year Ended** | ** ** | **Change  in Net Sales Compared to the Prior Year** | ** ** |
|---------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|
| ** **          | ** ** | **December 31,**   | ** ** | ** **                                          | ** ** | **Change  Due To** | ** ** |
| ** **          | ** ** | **2009**                | ** ** | **2008**                                            | ** ** | **Total  Change** | ** ** | **Volume** | ** ** | **Average  Net Price** | ** ** | **Currency** | ** ** |
| Fine  Paper         |       | $                       | 255.6      |                                                | $          | 335.5 |   | $ | (79.9 | ) | $ | (84.4 | ) | $ | 4.5 |   | $ | — |   |
| Technical  Products |       | 318.3                   |       | 396.8                                               |       | (78.5 | ) | (64.5 | ) | (3.0 | ) | (11.0 | ) |
| Consolidated        |       | $                       | 573.9      |                                                | $          | 732.3 |   | $ | (158.4 | ) | $ | (148.9 | ) | $ | 1.5 |   | $ | (11.0 | ) |

 

Consolidated net sales of $573.9 million for the year ended December 31,2009 were $158.4 million lower than the prior year primarily due to lowervolumes. In addition, results reflected unfavorable currency translationeffects due to the weakening of the Euro versus the U.S. dollar.

 

·                  Net sales inour fine paper business of $255.6 million decreased $79.9 million or 24percent primarily dueto a 25 percent decrease in shipments. We believe that we were able to improve our market share position basedon the AF&PA report of a 27 percent year-over-year industry decline in thepremium writing, text and cover uncoated free sheet paper category. Lower salesvolume reflected a sharp decline in consumption for a number of key end usemarket segments, including advertising, financial institutions and thetransportation and real estate segments. Market demand began to decline in late2008 and continued throughout 2009. Theincrease in average net price reflected the realization of price increases onbranded and non-branded products that were implemented in 2008.  Price increases of approximately threepercent on branded products announced late in 2009 will not meaningfully impactresults until 2010.

 

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·                  Net sales inour technical products business of $318.3 million decreased $78.5 millionor 20 percent, primarilydue to a 16 percent decrease in shipments. Lower sales volume reflected decreased demand in most markets due toweaker economic conditions and inventory destocking by our direct customers,particularly in the first half of 2009. Sales were also lower as a result of unfavorable currency translationeffects due to average Euro/U.S. dollar exchange rates that were five percentlower in 2009 than in the prior year. Net sales were also adversely affected by lower selling prices forcertain products in our European business, particularly Tape and Wall Cover,which were influenced by currency factors for export prices and additional marketcapacity, respectively.

 

*Year 2008 versus 2007*

 
| ** **          | ** ** | **For the Year Ended** | ** ** | **Change in Net Sales Compared to the Prior Year** | ** ** |
|---------------------|------------|------------------------|------------|----------------------------------------------------|------------|
| ** **          | ** ** | **December 31,**  | ** ** | ** **                                         | ** ** | **Change Due To** | ** ** |
| ** **          | ** ** | **2008**               | ** ** | **2007**                                           | ** ** | **Total Change** | ** ** | **Volume** | ** ** | **Average Net Price** | ** ** | **Currency** | ** ** |
| Fine  Paper         |       | $                      | 335.5      |                                               | $          | 366.5 |   | $ | (31.0 | ) | $ | (31.6 | ) | $ | 0.6 |   | $ | — |   |
| Technical  Products |       | 396.8                  |       | 400.8                                              |       | (4.0 | ) | (40.9 | ) | 16.3 |   | 20.6 |   |
| Intersegment  sales |       | —                 |       | (0.3                                               | )          | 0.3 |   | 0.3 |   | — |   | — |   |
| Consolidated        |       | $                      | 732.3      |                                               | $          | 767.0 |   | $ | (34.7 | ) | $ | (72.2 | ) | $ | 16.9 |   | $ | 20.6 |   |

 

Consolidated net sales of $732.3 million in the year ended December 31,2008 were $34.7 million lower than the prior year primarily due to lowervolumes and a less favorable product mix in our fine paper business, partiallyoffset by the realization of price increases and favorable currency translationeffects due to the strengthening of the Euro versus the U.S. dollar.

 

·                  Netsales in our fine paper business of $335.5 million decreased $31.0 millionor 8 percent primarily due to a 9 percent decrease in shipments. The lowervolume was primarily due to an unusually large market decline in 2008 forpremium uncoated free sheet papers as a result of weaker economic conditions,partially offset by incremental sales related to the acquisition of Fox Riverin March 2007. The increase in average net price reflected higher sellingprices for most products that were partially offset by a less favorable mix.The less favorable mix was primarily due to the dilutive nature of therelatively lower priced grades acquired with Fox River.

 

·                  Netsales in our technical products business of $396.8 million decreased$4.0 million or 1 percent, primarily due to lower volumes for certainproducts that were partially offset by favorable currency effects and highernet prices. Average net prices increased approximately 4.1 percent due to amore favorable mix and higher selling prices. The mix improvement reflected anincreased proportion of sales of higher priced products such as filtration andabrasives.  Volumes declined primarily due to weaker economic conditionsand lower export tape sales from Germany as a result of the strengthening ofthe Euro.

 

The following table sets forth line items from ourconsolidated statements of operations as a percentage of net sales for theperiods indicated and is intended to provide a perspective of trends in ourhistorical results:

 
| ** **                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                          |       |                             |       |   |   |   |   |
| Net  sales                                                    |       | 100.0                            | %          | 100.0 | % | 100.0 | % |
| Cost  of products sold                                        |       | 82.3                             |       | 86.5 |   | 82.9 |   |
| Gross  profit                                                 |       | 17.7                             |       | 13.5 |   | 17.1 |   |
| Selling,  general and administrative expenses                 |       | 12.0                             |       | 10.3 |   | 10.3 |   |
| Other  income - net                                           |       | (0.1                             | )          | (1.6 | ) | (0.2 | ) |
| Restructuring  costs                                          |       | 3.0                              |       | — |   | — |   |
| Goodwill  and other intangible asset impairment charge        |       | —                           |       | 7.4 |   | — |   |
| Operating  income (loss)                                      |       | 2.8                              |       | (2.6 | ) | 7.0 |   |
| Interest  expense-net                                         |       | 4.0                              |       | 3.4 |   | 3.3 |   |
| Income  (loss) from continuing operations before income taxes |       | (1.2                             | )          | (6.0 | ) | 3.7 |   |
| Provision  (benefit) for income taxes                         |       | (0.9                             | )          | 0.5 |   | (0.5 | ) |
| Income  (loss) from continuing operations                     |       | (0.3                             | )%         | (6.5 | )% | 4.2 | % |

 

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***Analysis of OperatingIncome — Years Ended December 31, 2009, 2008 and 2007***

 

The following table sets forth our operating income (loss)by segment for the periods indicated:

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating  income (loss)**                  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fine  Paper                                   |       | $                                | 17.5       |   | $ | 34.0 |   | $ | 46.6 |   |
| Technical  Products                           |       | 14.4                             |       | (42.3 | ) | 24.7 |   |
| Unallocated  corporate costs                  |       | (15.5                            | )          | (11.0 | ) | (17.4 | ) |
| Consolidated  Operating Income as Reported    |       | 16.4                             |       | (19.3 | ) | 53.9 |   |
| Adjustments  for Unusual Items                |       |                             |       |   |   |   |   |
| Fine  Paper adjustments                       |       |                             |       |   |   |   |   |
| Closure  of the Ripon Mill                    |       | 17.1                             |       | — |   | — |   |
| Gain  on sale of Fox River Assets             |       | —                           |       | (6.3 | ) | — |   |
| Fox  River integration costs                  |       | —                           |       | — |   | 5.2 |   |
| Total                                         |       | 17.1                             |       | (6.3 | ) | 5.2 |   |
| Technical  Products adjustment                |       |                             |       |   |   |   |   |
| Goodwill  impairment charge                   |       | —                           |       | 54.5 |   | — |   |
| Unallocated  corporate costs adjustment       |       |                             |       |   |   |   |   |
| Settlement  of Terrace Bay retiree litigation |       | —                           |       | (4.3 | ) | 5.2 |   |
| Total  Adjustments                            |       | 17.1                             |       | 43.9 |   | 10.4 |   |
|                                          |       |                             |       |   |   |   |   |
| Consolidated  Operating Income as Adjusted    |       | $                                | 33.5       |   | $ | 24.6 |   | $ | 64.3 |   |

 

Inaccordance with generally accepted accounting principles in the United States (“GAAP”),consolidated operating income (loss) includes the pre-tax effects of unusualitems.  We believe that by adjustingreported operating income (loss) to exclude the effects of these items, theresulting adjusted operating income are on a basis that reflects the results ofour ongoing operations.  We believe thatinvestors gain additional perspective of underlying business trends and resultsby providing a measure of operating results that exclude certain gains andlosses that are not expected to affect future consolidated or segment operatingperformance.  Adjusted operating incomeis not a recognized term under GAAP and should not be considered in isolationor as a substitute for operating income derived in accordance with GAAP.  Other companies may use differentmethodologies for calculating their non-GAAP financial measures and,accordingly, our non-GAAP financial measures may not be comparable to theirmeasures.

 

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***Commentary:***

 

*Year 2009 versus 2008*

 
| ** **                       | ** ** | ** **             | ** ** | **Change in Operating Income (Loss) Compared to the Prior Year** | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------------------------------------------------|------------|
| ** **                       | ** ** | **For the Year Ended** | ** ** | ** **                                                       | ** ** | **Change Due To** | ** ** |
| ** **                       | ** ** | **December 31,**  | ** ** | **Total**                                                        | ** ** | ** ** | ** ** | **Net Price** | ** ** | **Material** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **2009**               | ** ** | **2008**                                                         | ** ** | **Change** | ** ** | **Volume** | ** ** | **(a)** | ** ** | **Costs (b)** | ** ** | **Currency** | ** ** | **Other (c)** | ** ** |
| Fine  Paper (d)                  |       | $                      | 17.5       |                                                             | $          | 34.0 |   | $ | (16.5 | ) | $ | (23.4 | ) | $ | 5.4 |   | $ | 13.3 |   | $ | — |   | $ | (11.8 | ) |
| Technical  Products (e)          |       | 14.4                   |       | (42.3                                                            | )          | 56.7 |   | (23.2 | ) | (6.3 | ) | 12.6 |   | (0.1 | ) | 73.7 |   |
| Unallocated  corporate costs (f) |       | (15.5                  | )          | (11.0                                                            | )          | (4.5 | ) | — |   | — |   | — |   | — |   | (4.5 | ) |
| Consolidated                     |       | $                      | 16.4       |                                                             | $          | (19.3 | ) | $ | 35.7 |   | $ | (46.6 | ) | $ | (0.9 | ) | $ | 25.9 |   | $ | (0.1 | ) | $ | 57.4 |   |

 

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(a)          Includesprice changes, net of changes in product mix.

(b)         Includesprice changes for raw materials and energy.

(c)          Includes $30.7 million of improvementsfrom reductions in other manufacturing costs, distribution, selling, generaland administrative expenses and net improvements of $26.8 million related toitems described in notes (d), (e) and (f).

(d)         Forthe year ended December 31, 2009, results for the Fine Paper segmentinclude a pre-taxcharge of $17.1 million related to the closure of the Ripon Mill.For the year ended December 31, 2008 results include gains of $6.3 millionfrom the sale of certain Fox River assets.

(e)          Forthe year ended December 31, 2008, results for the Technical Productssegment include a non-cash pre-tax goodwill and other intangible assetimpairment charge of $54.5 million.

(f)            For the yearended December 31, 2008, unallocated corporate costs include a gain of$4.3 million for a settlement of certain benefits earned by Terrace Bayretirees.

 

Consolidated operating income of $16.4 million for theyear ended December 31, 2009 increased $35.7 million compared to the prioryear.  Operating results for the yearended December 31, 2009 include costs of $17.1 million related to theclosure of the Ripon Mill in May 2009. Operating results for the year ended December 31, 2008, include acharge of $54.5 million related to the impairment of goodwill and otherintangible assets, and gains of approximately $6.3 million from the sale ofcertain Fox River assets and $4.3 million the settlement of certain Terrace Baypostretirement benefits.  Excluding suchitems, consolidated operating income as adjusted for theyear ended December 31, 2009 increased $8.9 million from the prior year due toactions taken across all businesses to reduce costs and control spending andfrom lower manufacturing input costs, particularly for pulp and latex. Thesefavorable factors were only partially offset by lower volume and reductions inpaper machine operating schedules.

 

·                  Operatingincome for our fine paper business of $17.5 million decreased $16.5 millioncompared to the prior year. Excluding costs of $17.1 million associated with closing the Ripon Milland the gain of approximately $6.3 million in 2008 from assets sales, operatingincome for our fine paper business increased $6.9 million primarily due tolower manufacturing input costs, principally for hardwood pulp, lower operatingand administrative spending due to cost reduction initiatives, includingclosing the Ripon Mill, and higher average net selling prices due to therealization of price increases implemented in 2008.  These favorable factors were partially offsetby the effects of lower volume and reductions in paper machine operatingschedules.

 

·                  Operatingincome for our technical products business of $14.4 million increased $56.7million compared to the prior year.   Excluding the asset impairmentcharge, operating income for our technical products business increased $2.2million from the prior year primarily due to lower spending resulting from the implementation ofcost reduction initiatives and from lower manufacturing input costs,principally for pulp and latex.  Thesefavorable factors were partially offset by lower volume, reduced paper machineoperating schedules and, to a lesser extent, lower average net selling prices.

 

·                  Unallocatedcorporate expenses increased $4.5 million compared to the prior year. Unallocated corporate expense for theyear ended December 31, 2008 included a non-cash gain of approximately$4.3 million related to the settlement of certain postretirement benefits weretained following the sale of our Terrace Bay pulp mill. Excluding thisgain, unallocated corporate expenses were essentially unchanged from the prioryear.

 

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*Year 2008 versus 2007*

 
| ** **                       | ** ** | ** **             | ** ** | **Change in Operating Income (Loss) Compared to the Prior Year** | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------------------------------------------------|------------|
| ** **                       | ** ** | **For the Year Ended** | ** ** | ** **                                                       | ** ** | **Change Due To** | ** ** |
| ** **                       | ** ** | **December 31,**  | ** ** | **Total**                                                        | ** ** | ** ** | ** ** | **Net Price** | ** ** | **Material** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **2008**               | ** ** | **2007**                                                         | ** ** | **Change** | ** ** | **Volume** | ** ** | **(a)** | ** ** | **Costs (b)** | ** ** | **Currency** | ** ** | **Other (c)** | ** ** |
| Fine  Paper (d)                  |       | $                      | 34.0       |                                                             | $          | 46.6 |   | $ | (12.6 | ) | $ | (4.1 | ) | $ | (0.7 | ) | $ | (12.2 | ) | $ | — |   | $ | 4.4 |   |
| Technical  Products (e)          |       | (42.3                  | )          | 24.7                                                             |       | (67.0 | ) | (7.3 | ) | 8.1 |   | (13.7 | ) | 1.9 |   | (56.0 | ) |
| Unallocated  corporate costs (f) |       | (11.0                  | )          | (17.4                                                            | )          | 6.4 |   | — |   | — |   | — |   | — |   | 6.4 |   |
| Consolidated                     |       | $                      | (19.3      | )                                                                | $          | 53.9 |   | $ | (73.2 | ) | $ | (11.4 | ) | $ | 7.4 |   | $ | (25.9 | ) | $ | 1.9 |   | $ | (45.2 | ) |

 

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(a)          Includesprice changes, net of changes in product mix.

(b)         Includesprice changes for raw materials and energy.

(c)          Includes other manufacturing costs, distribution,selling, general and administrative expenses and gains and losses on assetsales.

(d)         For the yearended December 31, 2008, results for the Fine Paper segment include gainsof $6.3 million from the sale of certain Fox River assets.  For the year ended December 31, 2007,results for Fine Paper segment includes costs of approximately $5.2 millionrelated to the integration of the Fox River acquisition.

(e)          For the yearended December 31, 2008, results for the Technical Products segmentinclude a non-cash pre-tax goodwill and other intangible asset impairmentcharge of $54.5 million.

(f)            For the yearended December 31, 2008, unallocated corporate costs include a gain of$4.3 million for a settlement of certain benefits earned by Terrace Bayretirees.  For the year ended December 31,2007, unallocated corporate costs include a loss of approximately $5.2 millionrelated to the settlement of Terrace Bay retiree litigation.

 

For the year ended December 31,2008, we incurred a consolidated operating loss of $19.3 million primarily dueto a non-cash pre-tax goodwill and other intangible asset impairment charge of$54.5 million.  In addition, consolidated operating results for the yearended December 31, 2008 included gains of approximately $6.3 million from the sale ofcertain Fox River assets and $4.3 million the settlement of certain Terrace Baypostretirement benefits.  Operatingresults for the year ended December 31, 2007 include approximately $5.2million for costs related to the integration of the Fox River acquisitionand  $5.2 related to the settlement ofTerrace Bay retiree litigation. Excludingthese items, consolidated operating income as adjusted for the yearended December 31, 2008 decreased $39.7 million compared to 2007 primarilydue to increased manufacturing input costs that exceeded selling priceincreases in both businesses, lower volumes and a less favorable mix ofproducts in our fine paper business.  These unfavorable factors more thanoffset benefits related to improved manufacturing operations and loweradministrative costs.

 

·                  Operatingincome for our fine paper business of $34.0 million decreased $12.6 millionprimarily due to higher manufacturing input costs, principally for hardwoodpulp and energy, a less favorable product mix due to the dilutive effect ofselling relatively lower priced grades acquired in the Fox River acquisitionand lower volumes. These unfavorable factors were only partially offset bygains on asset sales of approximately $6.3 million, higher selling prices,improved manufacturing efficiencies and incremental volume related to theacquisition of Fox River.

 

·                  Ourtechnical products business incurred an operating loss of $42.3 million for thecurrent year due to a non-cash pre-tax goodwill and other intangible assetimpairment charge of $54.5 million.   Excluding the asset impairmentcharge in 2008, operating income for our technical products business of $12.2million decreased $12.5 million from the prior year primarily due to highermanufacturing input costs and lower volume.  The increase in manufacturingcosts primarily reflected higher input prices for energy, pulp and latex andincreased costs in Germany following the start-up of new and rebuiltassets.  These unfavorable factors were partially offset by improvedpricing and mix, improved manufacturing operations and the favorabletranslation impact from a stronger Euro relative to the U.S. dollar.

 

·                  Unallocatedcorporate expenses decreased $6.4 million primarily due to the favorablesettlement of certain employee benefit liabilities that we retained followingthe sale of our Terrace Bay pulp mill and due to decreased spending for othercorporate expenses

 

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***Additional Statement of Operations Commentary:***

 

·                  Forthe years ended December 31, 2009, 2008 and 2007, we incurred $23.4million, $25.0 million and $25.5 million, respectively, of interestexpense.  The decrease in interest expense for 2009 as compared to 2008was due to loweraverage borrowings and lower average interest rates.  In addition, during the fourth quarter of2009, we recognized additional interest expense of approximately $1.4 millionfor costs incurred in conjunction with amending and restating our bank creditagreement and to write-off deferred financing costs associated with ourprevious bank credit agreement.  Thedecrease in net interest expense in 2008 versus 2007 was primarily due to loweraverage interest rates, partially offset by higher average borrowings.

 

·                  In general,our effective tax rate differs from the U.S. statutory tax rate of 35 percentprimarily due to the benefits of our corporate tax structure and the proportionof pre-tax income in jurisdictions with marginal tax rates that differ from theU.S. statutory tax rate.  For the year endedDecember 31, 2009, we recorded an income tax benefit related to continuingoperations of $5.0 million which resulted in an effective income tax (benefit)rate of approximately (74) percent.  Forthe year ended December 31, 2008, we recorded an income tax provisionrelated to continuing operations of $3.0 million which resulted in an effectiveincome tax rate of approximately 7 percent. Our effective tax rate for the year ended December 31, 2008 wasalso significantly affected by the non tax deductible nature of the goodwillimpairment charge and an increase in the limitation on available tax benefitsacquired in the Fox River acquisition.  Excluding such items, oureffective income tax rate for the year ended December 31, 2008 wasapproximately 36 percent.

 

·                  Forthe year ended December 31, 2007, our effective tax rate was approximately13 percent.  Our effective tax rate forthe year ended December 31, 2007 was significantly affected by a reductionin German statutory income tax rates effective as of January 1, 2008.Application of the new rates to our existing deferred tax assets andliabilities reduced our net deferred tax liabilities at December 31, 2007.The reduction in our net deferred tax liabilities due to the benefit of the taxrate change resulted in an income tax benefit of $8.8 million for the yearended December 31, 2007 in accordance with ASC Topic 740. Excluding theimpact of the German tax law amendment on our deferred tax liabilities andother tax adjustments, our effective tax rate for the year ended December 31,2007 was approximately 17 percent..  See “ExecutiveSummary—Income Taxes.” See Note 6 “Income Taxes” of Notes to ConsolidatedFinancial Statements for a reconciliation of our annual effective tax rates.

 

**Liquidity and Capital Resources**

 
| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                  |       |                             |       |   |   |   |   |
| Net  cash flow provided by (used in): |       |                             |       |   |   |   |   |
| Operating  activities                 |       | $                                | 64.9       |   | $ | 13.1 |   | $ | 69.5 |   |
|                                  |       |                             |       |   |   |   |   |
| Investing  activities                 |       |                             |       |   |   |   |   |
| Capital  expenditures                 |       | (8.4                             | )          | (30.0 | ) | (58.3 | ) |
| Other  investing activities           |       | 0.1                              |       | (0.4 | ) | (55.1 | ) |
| Total                                 |       | (8.3                             | )          | (30.4 | ) | (113.4 | ) |
|                                  |       |                             |       |   |   |   |   |
| Financing  activities                 |       | (54.2                            | )          | 18.2 |   | 43.8 |   |
|                                       |            |                                  |            |  |  |  |  |  |  |  |

 

***Operating Cash FlowCommentary***

 

·                  Cashprovided by operating activities of $64.9 million for the year ended December 31,2009 was $51.8 million favorableto cash provided by operating activities of $13.1 million in the prior year.The favorable comparison to the prior year was due to cash provided bydecreased investments in working capital of $27.4 million, including thereceipt of a refund of U.S. income taxes. For the year ended December 31, 2008, cash used for increasedinvestments in working capital was $21.1 million.

 

·                  For the year ended December 31, 2009, we receivedapproximately $10.9 million in refunds of U.S. income taxes.  As of December 31,2009, we had approximately $65.3 million of U.S. Federal and $75.4 million ofU.S. State NOLs that may be carried forward to offset future taxable incomethrough 2029.

 

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·                  Cash provided by operating activities of$13.1 million for the year ended December 31, 2008 was $56.4 million lowerthan cash provided by operating activities in the prior year. The unfavorablecomparison to the prior year was primarily due to an increase in cash used byoperating activities of our discontinued pulp operations of approximately $33.4million, lower earnings (excluding the effects of non-cash items) and increasedinvestments in working capital in 2008.

 

***Investing Commentary:***

 

·                  For the yearended December 31, 2009, cash used in investing activities was $8.3million, a decrease of $22.1 million versus the prior year due to a reduction of $21.6 million in capitalspending.

 

·                  For the yearended December 31, 2008, cash used in investing activities includespayments by Neenah Canada of approximately $10.3 million to Northern Pulp inconnection with the transfer of the Pictou Mill. In addition, we paidapproximately $3.3 million in transaction costs.  Such payments were morethan offset by proceeds of $13.8 million, primarily from the sale of certainFox River assets.

 

·                  We have aggregate planned capital expenditures for2010 of approximately $15 million.  We believe that the level of ourcapital spending for 2010 is consistent with current economic conditions andwill allow us to maintain the efficiency and cost effectiveness of ourmanufacturing assets.

 

·                  For the yearended December 31, 2008, cash used in investing activities was $30.4million, a decrease of $83.0 million versus the prior year.  The decreasein cash used was primarily due to spending of $54.7 million for the acquisitionof Fox River in 2007.  Capital spending for the year ended December 31,2008 was $30.0 million compared to spending of $58.3 million in the 2007. The reduction in capital spending is primarily due to expenditures in 2007 formajor projects to increase capacity and improve efficiency at Neenah Germanyand for capital spending related to our enterprise resource planning system.

 

***Financing Commentary:***

 

In November 2009,we renewed and modified our bank credit agreement by entering into an amendedand restated credit agreement (the “Restated Credit Agreement”).  TheRestated Credit Agreement consists of a $100 million senior secured revolvingcredit facility (the “New Revolver”) and a $40 million senior secured term loan(the “New Term Loan”).  The Restated Credit Agreement matures in November 2013. Under certain conditions, the Company has the ability to increase the size ofthe New Revolver by up to $50 million.  The total amount outstanding underthe Restated Credit Agreement cannot exceed $150 million.

 

Our liquidity requirements are provided by cashgenerated from operations, short- and long-term borrowings and proceeds fromasset sales. Availability under the New Revolver varies over time depending onthe value of our inventory, receivables and various capital assets. As of December 31,2009, we had $27.9 million outstanding under the New Revolver, outstandingletters of credit of $1.0 million and $60.6 million of available credit. Inaddition, we have €6.0 million ($8.6 million, based on exchange rates at December 31,2009) of available credit under a secured €15 million revolving line of creditat Neenah Germany (the “German Line of Credit”).

 

·                  For the year ended December 31,2009, net repayments on our New Revolver and the German Line of Credit were$73.2 million and $4.1 million, respectively. We repaid $7.2 million on aprevious term loan, including amounts repaid with proceeds from the New TermLoan. In addition, we repaid $1.8 million on a €10 million constructionfinancing agreement (the “German Loan Agreement”).

 

·                  We paid aggregate annual cash dividendsof $0.40 per share or approximately $5.9 million, $6.0 million and $6.0 millionfor the years ended December 31, 2009, 2008 and 2007, respectively.

 

·                  For the year ended December 31,2009, cash and cash equivalents increased $2.3 million.

 

·                  For the year ended December 31,2008, we paid approximately $9.4 million to purchase shares of common stock inconnection with a reverse/forward split of issued and outstanding shares ofcommon stock.

 

·                  Our required debt payments through December 31,2010 are $55.6 million.  Such payments include $40 million to prepay theNew Term Loan with proceeds from the sale of the Woodlands, requiredamortization payments on the German Loan Agreement of approximately $1.8million and $12.9 million on our German Line of Credit which we expect to renewin November 2010.

 

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·                  On March 1, 2010, we announced that Neenah Canada had signed adefinitive agreement to sell the Woodlands for C$82.5 million ($78.6 million).Proceeds from the sale will be used to repay the $40 million New Term Loan infull and reduce the balance of revolving loans outstanding under our RestatedCredit Agreement to zero. In addition, approximately $3.1 million in contracttermination payments related to the closure of the Ripon Mill will become dueand payable upon the sale of the Woodlands. Our ability to use proceeds in excess of amounts outstanding under theRestated Credit Agreement is restricted to “permitted uses” as defined in theindenture for the Senior Notes. The transaction is not expected to generate acash tax liability because the tax basis for the Woodlands is approximatelyequal to the sale price. Fees and other costs associated with the transactionare minimal.

 

Managementbelieves that our ability to generate cash from operations and our borrowingcapacity are adequate to fund working capital, capital spending and other cashneeds for the next 12 months. Our ability to generate adequate cash fromoperations beyond 2010 will depend on, among other things, our ability tosuccessfully implement our business strategies, control costs in line withmarket conditions and manage the impact of changes in input prices andcurrencies. We can give no assurance we will be able to successfully implementthese items.

 

***Contractual Obligations***

 

The following table presents the total contractualobligations for which cash flows are fixed or determinable as of December 31,2009:

 
| ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Beyond** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **(In  millions)**                            | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **2014**   | ** ** | **Total**  | ** ** |
| Minimum purchase commitments (a)              |       | $          | 4.4        |       | $          | 0.4        |       | $          | 0.4        |       | $          | 0.4        |       | $          | 0.4        |   | $ | 1.8 |   | $ | 7.8 |   |
| Long-term debt payments                       |       | 55.6       |       | 1.8        |       | 1.7        |       | 29.7       |       | 226.8      |       | 3.6        |       | 319.2      |       |
| Interest payments on long-term debt (b)       |       | 19.6       |       | 18.1       |       | 18.2       |       | 18.0       |       | 16.1       |       | 0.1        |       | 90.1       |       |
| Other post-employment benefit obligations (c) |       | 2.5        |       | 1.7        |       | 2.0        |       | 2.4        |       | 2.7        |       | 18.5       |       | 29.8       |       |
| Operating leases                              |       | 3.0        |       | 2.6        |       | 2.0        |       | 0.8        |       | 0.5        |       | 1.2        |       | 10.1       |       |
| Open purchase orders (d)                      |       | 59.2       |       | —     |       | —     |       | —     |       | —     |       | —     |       | 59.2       |       |
| Contributions to pension trusts               |       | 11.4       |       | 3.4        |       | 3.3        |       | 3.3        |       | 3.3        |       | —     |       | 24.7       |       |
| Liability for uncertain tax positions         |       | 9.5        |       | —     |       | —     |       | —     |       | —     |       | —     |       | 9.5        |       |
| Total contractual obligations                 |       | $          | 165.2      |       | $          | 28.0       |       | $          | 27.6       |       | $          | 54.6       |       | $          | 249.8      |   | $ | 25.2 |   | $ | 550.4 |   |

 

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(a)          The minimumpurchase commitments in 2010 are primarily for natural gas contracts. Althoughwe are primarily liable for payments on the above operating leases and minimumpurchase commitments, based on historical operating performance and forecastedfuture cash flows, we believe our exposure to losses, if any, under thesearrangements is not material.

 

(b)         Interestpayments on long-term debt includes interest on variable rate debt at December 31,2009 weighted average interest rates.

 

(c)          Theabove table includes future payments that we will make for postretirementbenefits other than pensions. Those amounts are estimated using actuarialassumptions, including expected future service, to project the future obligations.

 

(d)         Theopen purchase orders displayed in the table represent amounts we anticipatewill become payable within the next 12 months for goods and services that wehave negotiated for delivery.

 

**A****doption ofNew Accounting Pronouncements**

 

On July 1, 2009, weadopted Statement of Financial Accounting Standards No. 168, *The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles — a replacement of FASBStatement No. 162* (“SFAS No. 168”).  SFAS No. 168established the ASC as the source of authoritative U.S. GAAP to be applied bynongovernmental entities. Rules and interpretive releases of the SEC underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. SFAS No. 168 supersedes all existing non-SEC accountingand reporting standards.  All non-SEC accounting literature not includedin the ASC is non authoritative. The Company’s adoption of SFAS No. 168did not have an effect on its financial position, results of operation or cashflows.

 

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As of January 1, 2009, we adopted the enhanced requiredannual disclosures about plan assets in an employer’s defined benefit pensionor other postretirement plan  in ASCTopic 715. Such enhanced disclosures include, but are not limited to,investment allocation decisions, the inputs and valuation techniques used tomeasure the fair value of plan assets and significant concentrations of riskwithin plan assets.  See Note 8 “Pension and Other PostretirementBenefits—Plan Assets” of Notes to Consolidated Financial Statements.

 

On December 15,2009, we adopted the disclosure requirements of *AccountingStandards Update No. 2009-12* which amends ASC sub-topic 820-10,*Fair Value Measurements and Disclosures*(“ASU No. 2009-12”).**ASU No. 2009-12permits a reporting entity, as a practical expedient, to estimate the fairvalue of an investment using the net asset value per share (or its equivalent)of the investment, if the net asset value per share of the investment (or itsequivalent) is calculated in a manner consistent with the measurementprinciples of ASC Topic 946, *FinancialServices—Investment Companies* as of the reporting entity’smeasurement date.  The adoption of ASU No. 2009-12did not have an effect on our results of operations, financial position or cashflows.

 

**Critical Accounting Policies and Use ofEstimates**

 

Thepreparation of financial statements in conformity with Generally AcceptedAccounting Principles (“GAAP”) in the United States requires estimates andassumptions that affect the reported amounts and related disclosures of assetsand liabilities at the date of the financial statements and net sales andexpenses during the reporting period. Actual results could differ from theseestimates, and changes in these estimates are recorded when known. The criticalaccounting policies used in the preparation of the consolidated financialstatements are those that are important both to the presentation of financialcondition and results of operations and require significant judgments withregard to estimates used. These critical judgments relate to the reportedamounts of assets and liabilities, disclosure of contingent assets andliabilities, and the reported amounts of revenue and expenses.

 

The following summary provides further information about thecritical accounting policies and should be read in conjunction with the notesto the Consolidated Financial Statements. We believe that the consistentapplication of our policies provides readers of our financial statements withuseful and reliable information about our operating results and financialcondition.

 

We havediscussed the application of these critical accounting policies with our Boardof Directors and Audit Committee.

 

***Revenue Recognition***

 

We recognizesales revenue when all of the following have occurred: (1) delivery hasoccurred, (2) persuasive evidence of an agreement exists, (3) pricingis fixed or determinable, and (4) collection is reasonably assured.Delivery is not considered to have occurred until the customer takes title andassumes the risks and rewards of ownership. The timing of revenue recognitionis largely dependent on shipping terms. In general, our shipments aredesignated free on board shipping point and we recognize revenue at the time ofshipment. Sales are reported net of allowable discounts and estimated returns.Reserves for cash discounts, trade allowances and sales returns are estimatedusing historical experience.

 

***Inventories***

 

We valueU.S. inventories at the lower of cost, using the Last-In, First-Out (“LIFO”)method for financial reporting purposes, or market. German inventories arevalued at the lower of cost, using a weighted-average cost method, or market.The First-In, First-Out value of U.S. inventories valued on the LIFO method was$58.2 million and $66.5 million at December 31, 2009 and 2008,respectively and exceeded such LIFO value by $8.7 million and $8.2 million,respectively.  Cost includes labor, materials and production overhead.

 

***Income Taxes***

 

As of December 31,2009, we have recorded aggregate deferred income tax assets of$100.6 million related to temporary differences, and have established avaluation allowance against these deferred income tax assets of $1.5 million.As of December 31, 2008, our aggregate deferred income tax assets were$100.7 million. In determining the need for valuation allowances, weconsider many factors, including specific taxing jurisdictions, sources oftaxable income, income tax strategies and forecasted earnings for the entitiesin each jurisdiction. A valuation allowance would be recognized if, based onthe weight of available evidence, we conclude that it is more likely than notthat some portion or all of the deferred income tax assets will not berealized.

 

As of December 31,2009 and 2008, our liability for uncertain income taxes positions was $9.5million and $12.9 million, respectively.  In evaluating and estimating taxpositions and tax benefits, we consider many factors which may result inperiodic adjustments and which may not accurately anticipate actual outcomes.

 

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***Pension Benefits***

 

Substantiallyall active employees of our U.S. paper operations participate in definedbenefit pension plans and/or defined contribution retirement plans. In July 2007,the Financial Services Commission of Ontario approved our request to settle ourpension obligations for active employees and terminate the Ontario, Canadadefined benefit pension plan (the “Ontario Plan”). In December 2007, theOntario Plan was terminated and all outstanding pension obligations weresettled through the purchase of annuity contracts or lump-sum payments pursuantto participant elections. In conjunction with the sale of the Pictou Mill,Northern Pulp assumed responsibility for the Nova Scotia, Canada defined benefitpension plan (the “Nova Scotia Plan”) and other postretirement benefitobligations for active and retired employees of the mill. The Company accountedfor the transfer of these liabilities as a settlement of postretirement benefitobligations pursuant to ASC Topic 715. Substantially all of Neenah Germany’semployees participate in defined benefit plans designed to provide a monthlypension benefit upon retirement. There is no legal or governmental obligationto fund Neenah Germany’s benefit plans and as such the plans are currentlyunfunded.

 

Our fundingpolicy for qualified defined benefit plans is to contribute assets to fullyfund the accumulated benefit obligation, as required by the Pension ProtectionAct of 2006. Subject to regulatory and tax deductibility limits, any fundingshortfall is to be eliminated over a reasonable number of years. Nonqualifiedplans providing pension benefits in excess of limitations imposed by the taxingauthorities are not funded.

 

Consolidated pension expense for defined benefit pensionplans was $9.2 million, $7.8 million and $49.5 million for the years endedDecember 31, 2009, 2008 and 2007, respectively. Pension expense for the yearended December 31, 2008, excludes a non-cash, pre-tax settlement loss of$53.7 million due to the reclassification of deferred pension and otherpostretirement benefit adjustments related to the transfer of the Nova ScotiaPlan to Northern Pulp from accumulated other comprehensive income to loss fromdiscontinued operations in the consolidated statement of operations. Pension expense for the year ended December 31, 2007, includes $38.7million for losses related to the settlement of pension obligations for activeemployees in the Ontario Plan. In addition, we recognized a reduction inpension expense of $1.2 million related to an amendment to the Fox Riverdefined benefit pension plan to freeze the vested pension benefit for salariedemployees born after December 31, 1957. Pension expense is calculatedbased upon a number of actuarial assumptions applied to each of the definedbenefit plans.

 

The weighted-average expected long-term rate of return onpension fund assets used to calculate pension expense was 7.92 percent, 8.02percent and 7.90 percent for the years ended December 31, 2009, 2008 and2007, respectively. The expected long-term rate of return on pension fundassets held by our pension trusts was determined based on several factors,including input from pension investment consultants and projected long-termreturns of broad equity and bond indices. We also considered the plans’historical 10-year and 15-year compounded annual returns. We anticipate that,on average, actively managed U.S. pension plan assets will generate annuallong-term rates of return of at least 8 percent. Our expected long-term rate ofreturn on the assets in the plans is based on an asset allocation assumption ofabout 60 percent with equity managers, with expected long-term rates of returnof approximately 10 percent, and 40 percent with fixed income managers, with anexpected long-term rate of return of about 6 percent. The actual assetallocation is regularly reviewed and periodically rebalanced to the targetedallocation when considered appropriate. We evaluate our investment strategy andlong-term rate of return on pension asset assumptions at least annually.

 

Pension expense is estimated based on the fair value ofassets rather than a market-related value that averages gains and losses over aperiod of years. Investment gains or losses represent the difference betweenthe expected return calculated using the fair value of the assets and theactual return based on the fair value of assets. The variance between theactual and the expected gains and losses on pension assets is recognized inpension expense more rapidly than it would be if a market-related value forplan assets was used. As of December 31, 2009, our pension plans hadcumulative unrecognized investment losses and other actuarial losses ofapproximately $28.9 million. These unrecognized net losses may increaseour future pension expense if not offset by (i) actual investment returnsthat exceed the assumed investment returns, (ii) other factors, includingreduced pension liabilities arising from higher discount rates used tocalculate our pension obligations or (iii) other actuarial gains,including whether such accumulated actuarial losses at each measurement dateexceed the “corridor” determined under ASC Topic 715.

 

The discount(or settlement) rate that is utilized for determining the present value of futurepension obligations in the U.S. is generally based on the yield for atheoretical basket of AA-rated corporate bonds currently available in themarket place, whose duration matches the timing of expected pension benefitpayments. The discount (or settlement) rate that is utilized for determiningthe present value of future pension obligations in Germany is generally basedon the IBOXX index of AA-rated corporate bonds adjusted to match the timing ofexpected pension benefit payments.  The weighted average discount rateutilized to determine the present value of future pension obligations at December 31,2009 and 2008 was 6.17 percent and 6.80 percent, respectively.

 

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Ourconsolidated pension expense in 2009 is based on the expected weighted-averagelong-term rate of return on assets and the weighted-average discount ratedescribed above and various other assumptions. Pension expense beyond 2009 willdepend on future investment performance, our contributions to the pensiontrusts, changes in discount rates and various other factors related to thecovered employees in the plans.

 

The fair value of the assets in our defined benefit plans atDecember 31, 2009 of approximately $168 million increased approximately$25 million from the fair value of about $143 million at December 31,2008, as investment gains and employer contributions exceeded benefitpayments.  At December 31, 2009, the projected benefit obligations ofour defined benefit plans exceeded the fair value of plan assets byapproximately $66 million which was approximately $5 million smaller thanthe $71 million deficit at December 31, 2008. The accumulated benefitobligation exceeded the fair value of plan assets by approximately $51.3million and $52.8 million at December 31, 2009 and 2008,respectively. Contributions to pension trusts for the year ended December 31,2009 were $10.2 million compared with $7.5 million for the year ended December 31,2008. In addition, we made direct benefit payments for unfunded supplementalretirement benefits of approximately $2.3 million and $2.5 million for theyears ended December 31, 2009 and 2008, respectively.

 

***Impairment of Long-LivedAssets***

 

Property, Plant and Equipment

 

Property, plant and equipment are tested for impairment inaccordance with ASC Topic 360, *Property, Plant, and Equipment*(“ASC Topic 360”), whenever events or changes in circumstances indicate that thecarrying amounts of such —long-lived assets may not be recoverable from futurenet pre-tax cash flows. Impairment testing requires significant managementjudgment including estimating the future success of product lines, future salesvolumes, growth rates for selling prices and costs, alternative uses for theassets and estimated proceeds from disposal of the assets. Impairment testingis conducted at the lowest level where cash flows can be measured and areindependent of cash flows of other assets. An asset impairment would beindicated if the sum of the expected future net pre-tax cash flows from the useof the asset (undiscounted and without interest charges) is less than thecarrying amount of the asset. An impairment loss would be measured based on thedifference between the fair value of the asset and its carrying amount. Wedetermine fair value based on an expected present value technique usingmultiple cash flow scenarios that reflect a range of possible outcomes and arisk free rate of interest are used to estimate fair value.

 

Theestimates and assumptions used in the impairment analysis are consistent withthe business plans and estimates we use to manage our business operations. Theuse of different assumptions would increase or decrease the estimated fairvalue of the asset and would increase or decrease the impairment charge. Actualoutcomes may differ from the estimates.

 

Goodwill andOther Intangible Assets with Indefinite Lives

 

Goodwillarising from a business combination is recorded as the excess of purchase priceand related costs over the fair value of identifiable assets acquired andliabilities assumed in accordance with ASC Topic 805, *Business Combinations*.  All of ourgoodwill was acquired in conjunction with the acquisition of Neenah Germany in October 2006.

 

Under ASCTopic 350, *Intangibles — Goodwill and Other*(“ASC Topic 350”), goodwill is subject toimpairment testing at least annually. A fair-value-based test is applied at thereporting unit level, which is generally one level below the segment level. Thetest compares the fair value of an entity’s reporting units to the carryingvalue of those reporting units. This test requires various judgments andestimates. We estimate the fair value of the reporting unit using a market approachin combination with a probability-weighted discounted operating cash flowapproach for a number of scenarios representing differing operating andeconomic assumptions. We record an adjustment to goodwill for any goodwill thatis determined to be impaired.

 

Impairmentof goodwill is measured as the excess of the carrying amount of goodwill overthe fair values of recognized assets and liabilities of the reporting unit. Wetest goodwill for impairment at least annually on November 30 inconjunction with preparation of our annual business plan, or more frequently ifevents or circumstances indicate it might be impaired.

 

Certaintrade names are estimated to have indefinite useful lives and as such are notamortized.****** Intangibleassets with indefinite lives are annually reviewed for impairment in accordancewith ASC Topic 350.

 

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Other Intangible Assets with Finite Lives

 

Acquired intangible assets with finite useful lives areamortized on a straight-line basis over their respective estimated useful livesto their estimated residual values, and reviewed for impairment in accordancewith ASC Topic 360. Intangible assets consist primarily of customerrelationships, trade names and acquired intellectual property. Such intangibleassets are amortized using the straight-line method over estimated useful livesof between 10 and 15 years.

 

Impairment of Goodwill and Other Intangible Assets

 

Our annual test of goodwill for impairment at November 30,2009, indicated that the carrying amount of goodwill assigned to Neenah Germanywas considered recoverable.  Significantassumptions used in developing the discounted operating cash flow approach wererevenue growth rates and pricing, costs for manufacturing inputs, levels ofcapital investment and estimated cost of capital for high, medium and lowgrowth environments.

 

Our annual test of goodwill for impairment at November 30,2008, indicated that the carrying value of Neenah Germany exceeded itsestimated fair value.  For the year ended December 31, 2008, werecognized a non-cash pre-tax loss of $52.7 million (we did not recognize a taxbenefit related to the non tax deductible loss) for the excess of the carryingvalue of goodwill assigned to Neenah Germany over the estimated fair value ofgoodwill.  The impairment loss wasprimarily due to a substantial increase in the estimated cost of capital weused to calculate the present value of Neenah Germany’s estimated future cashflows which resulted in a substantially lower estimated fair value. The higherestimated cost of capital reflected market/financial conditions at the time theannual impairment test was performed which indicated higher risk premiums fordebt and equity.

 

As of December 31,2009, a one percentage point increase in the estimate for our cost of capitalused in the impairment test would result in an approximately $25 million changein the estimated fair value of the Neenah Germany and a corresponding reductionin the implied value of goodwill but would not result in an impairment ofgoodwill.

 

Our annualtest of other intangible assets for impairment at November 30, 2009,indicated that the carrying amount of such assets was recoverable.  During our annual test of other intangibleassets for impairment, we determined that certain trade names and customerbased intangible assets were also impaired at December 31, 2008.  Forthe year ended December 31, 2008, we recognized a non-cash pre-tax chargeof approximately $1.8 million for the impairment of such assets.

 

***Stock-Based Compensation***

 

We accountfor stock-based compensation in accordance with the fair value recognitionprovisions of ASCTopic 718, *Compensation—Stock Compensation*(“ASC Topic 718”).The amount of stock-based compensation cost recognized is based on the fairvalue of grants that are ultimately expected to vest and is recognized pro-rataover the requisite service period for the entire award.  ASC Topic 718 also requires the reporting ofexcess tax benefits related to the exercise or vesting of stock-based awards ascash provided by financing activities.

 

**Item 7A.****            ****Quantitative and Qualitative Disclosures About Market Risk**

 

As amultinational enterprise, we are exposed to risks such as changes in commodityprices, foreign currency exchange rates, interest rates and environmentalregulation. A variety of practices are employed to manage these risks,including operating and financing activities and, where deemed appropriate, theuse of derivative instruments. Derivative instruments are used only for riskmanagement purposes and not for speculation or trading.

 

Presentedbelow is a description of our most significant risks.

 

***ForeignCurrency Risk***

 

Our reportedoperating results are affected by changes in the exchange rates of the Eurorelative to the U.S. dollar. For the year ended December 31, 2009, ahypothetical 10 percent decrease in the exchange rates of the Euro relative tothe U.S dollar would have decreased our income before income taxes byapproximately $0.7 million.  We do not hedge our exposure to suchexchange risk on reported operating results.

 

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Currency transactional exposures are sensitive to changes inthe exchange rate of the U.S. dollar against the Euro. We performed asensitivity test to quantify the effects that possible changes in the exchangerate of the U.S. dollar would have on pre-tax comprehensive income based on thetransactional exposure at December 31, 2009. The effect is calculated bymultiplying our net monetary asset or liability position by a 10 percent changein the exchange rate of the Euro versus the U.S. dollar. The results of thissensitivity test are as follows.  As of December 31, 2009, a 10percent unfavorable change in the exchange rate of the U.S. dollar against theEuro involving balance sheet transactional exposures would have resulted in netpre-tax losses of approximately $11 million.

 

Finally, the translation of the balance sheets of our Germanoperations from Euros into U.S. dollars also is sensitive to changes in theexchange rate of the U.S. dollar against the Euro. Consequently, we performed asensitivity test to determine if changes in the exchange rate would have asignificant effect on the translation of the balance sheets of our Germanoperations into U.S. dollars. These translation gains or losses are recorded asunrealized translation adjustments (“UTA”, a component of comprehensive income)within stockholders’ equity. The hypothetical change in UTA is calculated bymultiplying the net assets of our German operations by a 10 percent change inthe U.S.$/Euro exchange rates. As of December 31, 2009, a 10 percentunfavorable change in the exchange rate of the U.S. dollar against the Eurowould have decreased our stockholders’ equity by approximately $27 million. Thehypothetical decrease in UTA is based on the difference between the December 31,2009 exchange rate and the assumed exchange rate.

 

***Commodity Risk***

 

**Pulp**

 

We purchasethe wood pulp used to produce our products on the open market, and, as aresult, the price and other terms of those purchases are subject to change basedon factors such as worldwide supply and demand and government regulation. We donot have significant influence over the price paid for our wood pulp purchases.Therefore, an increase in wood pulp prices could occur at the same time thatprices for our products are decreasing and have an adverse effect on ourresults of operations, financial position and cash flows.

 

Based on2009 pulp purchases, a 10 percent increase in the average market price for pulp(approximately $65 per ton) would have increased our annual costs for pulppurchases by approximately $15 million.

 

**Other Manufacturing Inputs**

 

We purchase a substantial portion of the other manufacturinginputs necessary to produce our products on the open market, and, as a result,the price and other terms of those purchases are subject to change based onfactors such as worldwide supply and demand and government regulation. We donot have significant influence over our costs for such manufacturing inputs.Therefore, an increase in other manufacturing inputs could occur at the sametime that prices for our products are decreasing and have an adverse effect onour results of operations, financial position and cash flows.

 

While webelieve that alternative sources of critical supplies would be available, an interruptionin supply of either single source specialty grade latex or specialty softwoodpulp to our technical products business could disrupt and eventually cause ashutdown of production of certain technical products.

 

We generatesubstantially all of the electrical energy used by our Munising mill andapproximately 20 percent of the electrical energy at our Bruckmühl and Appletonmills. Availability of energy is not expected to be a problem in theforeseeable future, but the purchase price of such energy can and likely willfluctuate significantly based on fluctuations in demand and other factors.There is no assurance that that we will be able to obtain electricity ornatural gas purchases on favorable terms in the future.

 

***Interest Rate Risk***

 

We are exposedto interest rate risk on our fixed rate debt and our variable rate bankdebt.  At December 31, 2009, we had $238.4 million of fixed ratedebt outstanding and $80.8 million of variable rate borrowings outstanding. Weare exposed to fluctuations in the fair value of our fixed rate long-term debtresulting from changes in market interest rates, but not to fluctuations in ourearnings or cash flows. At December 31, 2009, the fair market value of ourfixed rate debt was $221.5 million based upon the quoted market price ofthe Senior Notes or rates currently available to us for debt of the sameremaining maturities. A 100 basis point increase in interest rates wouldincrease our annual interest expense on outstanding variable rate borrowings byapproximately $0.6 million.

 

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We could inthe future, reduce our exposure to interest rate fluctuations on our variablerate debt by entering into interest rate hedging arrangements, although thosearrangements could result in us incurring higher costs than we would incurwithout the arrangements.

 

***Environmental Regulation/Climate Change Legislation***

 

Our manufacturing operations are subject to extensiveregulation primarily by U.S., Germany and other international authorities. Wehave made significant capital expenditures to comply with environmental laws, rules andregulations. Due to changes in environmental laws and regulations, includingpotential future legislation to limit GHG emissions, the application of suchregulations and changes in environmental control technology, we are not able topredict with certainty the amount of future capital spending to be incurred forenvironmental purposes. Taking these uncertainties into account, we haveplanned capital expenditures for environmental projects during the period 2010through 2012 of approximately $1 million to $2 million annually.

 

We believethese risks can be managed and will not have a material adverse effect on ourbusiness or our consolidated financial position, results of operations or cashflows.

 

**Item 8.****               ****Financial Statements and Supplementary Data**

 

Theinformation required in Item 8 is contained in and incorporated herein byreference from pages F-1 through F-52 of this Annual Report on Form 10-K.

 

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

 

None.

 

**Item 9A.****            ****Controls and Procedures**

 

***Conclusion Regarding theEffectiveness of Disclosure Controls and Procedures***

 

The Company’s management, with the participation of itsChief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the Exchange Act)) as of the end of theperiod covered by this report. Based on such evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of such period, the Company’s disclosure controls and procedures areeffective in recording, processing, summarizing and reporting, on a timelybasis, information required to be disclosed by the Company in the reports thatit files or submits under the Exchange Act and are effective in ensuring thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

***Management’s Annual Report on Internal Control OverFinancial Reporting***

 

The Company’smanagement is responsible for establishing and maintaining effective internalcontrol over financial reporting as defined in Rules 13a-15(f) or15a-15(f) under the Securities Exchange Act of 1934. The Company’sinternal control over financial reporting is designed to provide reasonableassurance to the Company’s management and board of directors regarding thepreparation and fair presentation of published financial statements.

 

Because ofits inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2009. The scope of management’s assessment ofthe effectiveness of internal control over financial reporting includes all ofthe Company’s businesses.  In making this assessment, management used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control—Integrated Framework.  Based uponits assessment, management believes that as of December 31, 2009, theCompany’s internal controls over financial reporting were effective.

 

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A materialweakness is a significant control deficiency, or a combination of significantcontrol deficiencies, such that there is a reasonable possibility that amaterial misstatement of the Company’s annual or interim financial statementswill not be prevented or detected on a timely basis.

 

*Controls Over Income Tax Accounting:* Asdiscussed in our Annual Report on Form 10-K for the year ended December 31,2008, as of December 31, 2008 and 2007 the Company did not maintaineffective controls over the determination and reporting of the provision forincome taxes and related income tax balances. At December 31, 2008, therewere certain auditor identified misstatements in our December 31, 2008deferred tax balances.  These misstatements were the result of a failurein the operating effectiveness of our underlying control activities related tothe preparation and review of the provision for income taxes and related incometax balances.

 

***Remediation and Changes in Internal Controls***

 

During 2009,the following remedial actions were implemented to address our materialweakness:

 

·                  weimproved communications between a major public accounting firm engaged toprepare and analyze our income tax provision and our management personnelresponsible for reviewing and approving our income tax provision;

·                  themajor public accounting firm is utilizing additional quality control proceduresand resources in the preparation and analysis of our income tax provision andincome tax accounts;

·                  wereviewed prior year tax returns to determine if additional accruals wererequired for uncertain tax positions;

·                  weexpanded the number of management personnel utilized to test and review the taxstrategies and assumptions supporting our income tax provision and income taxaccounts; and

·                  TheAudit Committee of our Board of Directors is meeting regularly with managementpersonnel to monitor the progress of our remediation efforts.

 

As a resultof the implementation of these processes, management believes that theconsolidated financial statements are fairly stated in all material respects asof and for the year ended December 31, 2009.  Management hasconcluded that the design and operation of our internal controls over financialreporting as it relates to accounting for income taxes were effective at December 31,2009 and that the material weakness in accounting for income taxes has beenremediated.

 

The effectiveness of internal control over financialreporting as of December 31, 2009, has been audited by Deloitte &Touche LLP, the independent registered public accounting firm who also auditedthe Company’s consolidated financial statements. Deloitte & Touche’sattestation report on the Company’s internal control over financial reportingis included herein. See “Item 15 — Exhibits and Financial Statement Schedules.”

 

NeenahPaper, Inc

March 10,2010

 

***Changes in Internal Control Over Financial Reporting***

 

Changes inthe Company’s internal control over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)during the three months ended December 31, 2009 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting have been described in Remediation and Changesin Internal Controls above.

 

**Item 9B.****            ****Other Information**

 

None.

 

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** **

**PART III**

** **

**Item 10.****             ****Directorsand Executive Officers of the Registrant**

 

Information relating to nominees for director of Neenah andcompliance with Section 16(a) of the Securities Exchange Act of 1934is set forth under the captions “Election of Directors,” “Meetings andCommittees of the Board of Directors,” “Corporate Governance” and “Section 16(a) BeneficialOwnership Reporting Compliance,” respectively, in the Proxy Statement for theAnnual Meeting of Stockholders to be held on May 19, 2010. Suchinformation is incorporated herein by reference. The definitive Proxy Statementwill be filed with the Securities and Exchange Commission no later than120 days after December 31, 2009. Information relating to theexecutive officers of Neenah, pursuant to Instruction 3 of Item 401(b) ofRegulation S-K and General Instruction G(3) of Form 10-K, is setforth at Part I, Item 4A of this report under the caption “Executive Officersof the Registrant.” Such information is incorporated herein by reference.

 

***Code of Ethics***

 

The Neenah Paper, Inc. Code of Business Conduct andEthics, applies to all directors, officers and employees of Neenah. The Code ofBusiness Conduct and Ethics meets the requirements of a “code of ethics” asdefined by Item 406 of Regulation S-K, and applies to our Chief ExecutiveOfficer, Chief Financial Officer (our principal financial officer) and VicePresident — Controller (our principal accounting officer), as well as all otheremployees, as indicated above. The Code of Business Conduct and Ethics alsomeets the requirements of a code of conduct under New York Stock Exchangelisting standards. The Code of Business Conduct and Ethics is posted on our website at www.neenah.com under the links “Investor Relations—CorporateGovernance— Code of Ethics” and print copies are available upon request withoutcharge. You can request print copies by contacting our General Counsel inwriting at Neenah Paper, Inc., 3460 Preston Ridge Road, Suite 600,Alpharetta, Georgia 30005 or by telephone at 678-566-6500. The Company intendsto disclose any amendments to the Code of Business Conduct and Ethics, as wellas any waivers for executive officers or directors, on our web site atwww.neenah.com.

 

**Item 11.****             ****ExecutiveCompensation**

 

Informationrequired by this Item 11 relating to executive compensation and other mattersis set forth under the captions “Compensation, Discussion and Analysis,” “AdditionalExecutive Compensation,” “Director Compensation,” and “Compensation CommitteeReport” in the Proxy Statement referred to in Item 10 above. Such informationis incorporated herein by reference.

 

**Item 12.****             ****Security Ownership of Certain Beneficial Owners andManagement**

 

Informationrelating to ownership of common stock of Neenah by certain persons is set forthunder the caption “Security Ownership of Certain Beneficial Owners andManagement” in the Proxy Statement referred to in Item 10 above. Suchinformation is incorporated herein by reference. Information regardingsecurities authorized for issuance under equity compensation plans of Neenah isset forth under the caption “Equity Compensation Plan Information” in the ProxyStatement referred to in Item 10 above. Such information is incorporated hereinby reference.

 

**Item 13.****             ****CertainRelationships and Related Transactions and Director Independence.**

 

Informationrelating to existing or proposed relationships or transactions between Neenahand any affiliate of Neenah is set forth under the caption “CertainRelationships and Related Transactions” in the Proxy Statement referred to inItem 10 above. Such information is incorporated herein by reference.

 

**Item 14.****             ****PrincipalAccountant Fees and Services**

 

Informationrelating to Neenah’s principal accounting fees and services is set forth underthe caption “Independent Registered Public Accounting Firm Fees and Services”in the Proxy Statement referred to in Item 10 above. Such information isincorporated herein by reference.

 

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**PART IV**

 

**Item 15.****             ****Exhibitsand Financial Statement Schedule**

 

*(a)**   **Documentsfiled as part of this report:*

 

1.*       *ConsolidatedFinancial Statements

 

The following reports and financial statements arefiled herewith on the pages indicated:

 
| ** **                                                                                            | **Page** |
|-------------------------------------------------------------------------------------------------------|----------|
| Report of Independent Registered Public Accounting  Firm on Internal Control over Financial Reporting | F-2      |
| Report of Independent Registered Public Accounting  Firm                                              | F-3      |
| Consolidated Statements of Operations                                                                 | F-4      |
| Consolidated Balance Sheets                                                                           | F-5      |
| Consolidated  Statements of Changes in Stockholders’ Equity                                      | F-6      |
| Consolidated  Statements of Cash Flows                                                                | F-7      |
| Notes to  Consolidated Financial Statements                                                           | F-8      |

 

2.*       *FinancialStatement schedule

 

The following schedule is filed herewith:

 
| Schedule II—Valuation and Qualifying Accounts | F-52 |
|----------------------------------------------------|------|

 

All otherschedules for which provision is made in the applicable accounting regulationsof the Securities and Exchange Commission are not required under the related instructionsor are inapplicable and, therefore, have been omitted.

 

3.*       *Exhibits

 

See (b) below

 

*(b) **  **Exhibits*

 

Thefollowing exhibits are filed with or incorporated by reference in this report.Where such filing is made by incorporation by reference to a previously filedregistration statement or report, such registration statement or report isidentified in parentheses. We will furnish any exhibit at no cost upon writtenrequest to us at: Investor Relations, Neenah Paper, Inc., 3460 PrestonRidge Road, Suite 600, Alpharetta, Georgia 30005.

 
| **Exhibit** |   | ** **  |
|-------------|--------|-------------|
| **Number**  |   | **Exhibit** |
|        |   |        |   |
|        | 2      |        | Distribution  Agreement dated as of November 20, 2004 between Kimberly-Clark  Corporation and Neenah Paper, Inc. (filed as Exhibit 2.1 to the  Neenah Paper, Inc. Current Report on Form 8-K filed  November 30, 2004 and incorporated herein by reference). |
|        |   |        |   |
|        | 2.1    |        | Sale and  Purchase Agreement dated as of August 9, 2006 by and between  FiberMark, Inc., FiberMark International Holdings LLC, and Neenah  Paper, Inc. (filed as Exhibit 2.1 to the Neenah Paper, Inc.  Current Report on Form 8-K filed October 11, 2006 and incorporated  herein by reference). |
|        |   |        |   |
|        | 2.2    |        | Assignment  of Sale and Purchase Agreement Rights dated October 11, 2006 by and  between Neenah Paper, Inc. and Neenah Paper International, LLC (filed as  Exhibit 2.2 to the Neenah Paper, Inc. Current Report on  Form 8-K filed October 11, 2006 and incorporated herein by  reference). |
|        |   |        |   |
|        | 2.3    |        | Asset  Purchase Agreement dated as of August 4, 2006 by and among Neenah Paper  Company of Canada, NPCC Holding Company, LLC and Eagle Logging Inc. (filed as  Exhibit 2.3 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q filed November 9, 2006 and incorporated herein by  reference). |
|        |   |        |   |
|        | 2.4    |        | Asset  Purchase Agreement dated as of August 4, 2006 by and among Neenah Paper  Company of Canada, NPCC Holding Company, LLC and Terrace Bay Pulp Inc. (filed  as Exhibit 2.4 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q filed November 9, 2006 and incorporated herein by  reference). |

 

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|   | 2.5    |   | Agreement  and Plan of Merger, among Neenah Paper, Inc., and Fox Valley  Corporation, Fox River Paper Company, LLC and AF/CPS Holding Corporation,  dated as of February 5, 2007 (filed as Exhibit 2.1 to the Neenah  Paper, Inc. Current Report on Form 8-K filed March 1, 2007 and  incorporated herein by reference).                                                |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 3.1    |   | Amended  and Restated Certificate of Incorporation of Neenah Paper, Inc. (filed  as Exhibit 3.1 to the Neenah Paper, Inc. Current Report on  Form 8-K filed November 30, 2004 and incorporated herein by  reference).                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 3.2    |   | Amended  and Restated Bylaws of Neenah Paper, Inc. (filed as Exhibit 3.2 to  the Neenah Paper, Inc. Current Report on Form 8-K filed  November 30, 2004 and incorporated herein by reference).                                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 4.1    |   | Indenture  dated as of November 30, 2004 between Neenah Paper, Inc., the  Subsidiary Guarantors named therein and The Bank of New York Trust Company, N.A.,  as Trustee, including Form of 73/8 Senior Note due 2014 (filed as  Exhibit 10.8 to the Neenah Paper, Inc. Current Report on  Form 8-K filed November 30, 2004 and incorporated herein by  reference). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 4.2    |   | Rights Agreement between Neenah Paper, Inc. and  EquiServe Trust Company, N.A., as Rights Agent (filed as Exhibit 4.1 to  the Neenah Paper, Inc. Current Report on Form 8-K filed  November 19, 2004 and incorporated herein by reference.                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 4.3    |   | Form of  Subsidiary Guarantee (included as Exhibit E to Exhibit 4.1).                                                                                                                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 4.4    |   | Form of  73/8% Exchange Senior Notes (filed as  Exhibit 4.5 to the Neenah Paper, Inc. Registration Statement on  Form S-4 filed May 23, 2005 and incorporated herein by reference).                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.1   |   | Corporate  Services Agreement dated as of November 30, 2004 by and between  Kimberly-Clark Corporation and Neenah Paper, Inc. (filed as  Exhibit 10.1 to the Neenah Paper, Inc. Current Report on  Form 8-K filed November 30, 2004 and incorporated herein by  reference).                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.2   |   | Tax  Sharing Agreement dated as of November 30, 2004 by and between  Kimberly-Clark Corporation and Neenah Paper, Inc. (filed as  Exhibit 10.2 to the Neenah Paper, Inc. Current Report on  Form 8-K filed November 30, 2004 and incorporated herein by reference).                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.3   |   | Lease Agreement  dated June 29, 2004 between Neenah Paper, Inc. and Germania  Property Investors XXXIV, L.P. (filed as Exhibit 10.3 to the Neenah  Paper, Inc. Current Report on Form 8-K filed November 30, 2004  and incorporated herein by reference).                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.4   |   | Industrial  Lease Agreement dated October 8, 2004 by and between Neenah  Paper, Inc. and Duke Realty Limited Partnership (filed as  Exhibit 10.4 to the Neenah Paper, Inc. Current Report on  Form 8-K filed November 30, 2004 and incorporated herein by  reference).                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.5*  |   | Neenah  Paper Inc. Supplemental Pension Plan (filed as Exhibit 10.5 to the  Neenah Paper, Inc. Annual Report on Form 10-K for the year ended  December 31, 2004, filed March 31, 2005 and incorporated herein by  reference).                                                                                                                                                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.6*  |   | Neenah  Paper Inc. Supplemental Retirement Contribution Plan (filed as  Exhibit 10.6 to the Neenah Paper, Inc. Annual Report on  Form 10-K for the year ended December 31, 2004, filed  March 31, 2005 and incorporated herein by reference).                                                                                                                                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.7*  |   | Neenah  Paper Inc. Executive Severance Plan (filed as Exhibit 10.7 to the Neenah  Paper, Inc. Annual Report on Form 10-K for the year ended  December 31, 2004, filed March 31, 2005 and incorporated herein by  reference).                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.8*  |   | Neenah  Paper, Inc. Severance Pay Plan (filed as Exhibit 10.8 to the Neenah  Paper, Inc. Annual Report on Form 10-K for the year ended  December 31, 2006, filed March 16, 2007 and incorporated herein by  reference).                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.9   |   | Form of  Pulp Supply Agreement by and between Kimberly-Clark Global Sales and Neenah  Paper, Inc. (filed as Exhibit 10.4 to the Neenah Paper, Inc.  Registration Statement on Form 10, as amended, filed August 26,  2004 and incorporated herein by reference).                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.10  |   | Amendment  to Pulp Supply Agreement between Neenah Paper, Inc. and Kimberly-Clark  Global Sales, Inc. dated as of January 17, 2006 (filed as  Exhibit 10.1 to the Neenah Paper, Inc. Current Report on  Form 8-K filed January 20, 2006 and incorporated herein by  reference).                                                                                    |

 

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|   | 10.11  |   | Amended  and Restated Pulp Supply Agreement dated August 29, 2006 between Neenah  Paper, Inc. and Kimberly-Clark Global Sales, Inc. (filed as  Exhibit 10.1 to the Neenah Paper, Inc. Current Report on  Form 8-K filed September 5, 2006 and incorporated herein by  reference).                                                                                                                                                                             |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.12  |   | Form of  Employee Matters Agreement by and between Kimberly-Clark Corporation and  Neenah Paper, Inc. (filed as Exhibit 10.2 to the Neenah  Paper, Inc. Registration Statement on Form 10, as amended, filed  August 26, 2004 and incorporated herein by reference).                                                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.13  |   | Credit  Agreement dated as of November 30, 2004, by and among Neenah  Paper, Inc., certain of its subsidiaries, the lenders listed therein and  JPMorgan Chase Bank, N.A., as agent for the Lenders (filed as  Exhibit 10.10 to the Neenah Paper, Inc. Annual Report on  Form 10-K for the year ended December 31, 2004, filed  March 31, 2005 and incorporated herein by reference).                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.14  |   | First Amendment and Waiver, dated as of January 31,  2005 to the Credit Agreement dated as of November 30, 2004, by and among  Neenah Paper, Inc., certain of its subsidiaries, the lenders listed  therein and JPMorgan Chase Bank, N.A., as agent for the Lenders (filed as  Exhibit 10.11 to the Neenah Paper, Inc. Annual Report on  Form 10-K for the year ended December 31, 2004, filed  March 31, 2005 and incorporated herein by reference).    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.15  |   | Second  Amendment and Waiver, dated as of May 9, 2006 to the Credit Agreement  dated as of November 30, 2004, by and among, Neenah Paper, Inc.,  certain of its subsidiaries, the lenders listed therein and JPMorgan Chase  Bank N.A., as agent for the Lenders (filed as Exhibit 10.1 to the Neenah  Paper, Inc. Quarterly Report on Form 10-Q for the three months  ended June 30, 2006, filed August 9, 2006 and incorporated herein  by reference). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.16  |   | Third  Amendment, dated as of October 3, 2006, to Credit Agreement dated as of  November 30, 2004, by and among Neenah Paper, Inc., certain of its  subsidiaries, the lenders listed therein and JPMorgan Chase Bank, N.A., as  agent for the Lenders (filed as Exhibit 10.16 to the Neenah  Paper, Inc. Annual Report on Form 10-K for the year ended December 31,  2006, filed March 16, 2007 and incorporated herein by reference).                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.17  |   | Fourth  Amendment, dated as of March 1, 2007 to Credit Agreement dated as of  November 30, 2004, by and among Neenah Paper, Inc., certain of its  subsidiaries, the lenders listed therein and JPMorgan Chase Bank, N.A., as  agent for the Lenders (filed as Exhibit 10.17 to the Neenah  Paper, Inc. Annual Report on Form 10-K for the year ended  December 31, 2006, filed March 16, 2007 and incorporated herein by  reference).                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.18  |   | Fifth  Amendment, dated as of October 24, 2007 to the Credit Agreement dated as  of November 30, 2004, by and among Neenah Paper, Inc., certain of  its subsidiaries, the lenders listed therein and JPMorgan Chase Bank, N.A.,  as agent for the Lenders (filed as Exhibit 10.1 to the Neenah  Paper, Inc. Quarterly Report on Form 10-Q for the three months  ended September 30, 2007, filed November 8, 2007 and incorporated  herein by reference). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.19  |   | Sixth  Amendment, dated as of May 15, 2008 to the Credit Agreement dated as of  November 30, 2004, by and among Neenah Paper, Inc., certain of its  subsidiaries, the lenders listed therein and JPMorgan Chase Bank, N.A., as  agent for the Lenders (filed as Exhibit 10.1 to the Neenah  Paper, Inc. Quarterly Report on Form 10-Q for the three months ended  June 30, 200, filed August 11, 2008 and incorporated herein by  reference).            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.20* |   | Neenah  Paper, Inc. 2004 Omnibus Stock and Incentive Compensation Plan (filed as  Exhibit 10.12 to the Neenah Paper, Inc. Annual Report on  Form 10-K for the year ended December 31, 2004, filed  March 31, 2005 and incorporated herein by reference).                                                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.21* |   | Neenah  Paper Deferred Compensation Plan approved on December 11, 2006 (filed as  Exhibit 10.1 to the Neenah Paper, Inc. Current Report on  Form 8-K filed December 15, 2006 and incorporated herein by  reference).                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.22* |   | Neenah  Paper Directors’ Deferred Compensation Plan approved on December 11,  2006. (filed as Exhibit 99.1 to the Neenah Paper, Inc. Registration  Statement on Form S-8 filed December 21, 2006 and incorporated  herein by reference).                                                                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.23  |   | Timberland  Purchase and Sale Agreement, dated as of May 5, 2006, by and between  Neenah Paper Company of Canada and Wagner Forest Management, LTD. (filed as  Exhibit 10.2 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q for the three months ended June 30, 2006, filed  August 9, 2006 and incorporated herein by reference).                                                                                                                        |

 

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|   | 10.24  |   | Stumpage Agreement  dated as of June 29, 2006, by and among Neenah Paper Company of Canada,  Atlantic Star Forestry LTD. and Nova Star Forestry LTD. (filed as  Exhibit 10.3 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q for the three months ended June 30, 2006, filed  August 9, 2006 and incorporated herein by reference).                                                                                                                      |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.25  |   | First  Amendment to Purchase and Sale Agreement, dated as of June 29, 2006, by  and between Neenah Paper Company of Canada and Wagner Forest Management, LTD.  (filed as Exhibit 10.4 to the Neenah Paper, Inc. Quarterly Report  on Form 10-Q for the three months ended June 30, 2006, filed  August 9, 2006 and incorporated herein by reference).                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.26  |   | Assignment  and Assumption of Timberland Purchase and Sale Agreement, dated as of  June 29, 2006, by and among Neenah Paper Company of Canada, Wagner  Forest Management, LTD. and Nova Star Forestry LTD. (filed as  Exhibit 10.5 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q for the three months ended June 30, 2006, filed  August 9, 2006 and incorporated herein by reference).                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.27  |   | Assignment  and Assumption of Timberland Purchase and Sale Agreement, dated as of  June 29, 2006, by and among Neenah Paper Company of Canada, Wagner  Forest Management, LTD. and Atlantic Star Forestry LTD. (filed as  Exhibit 10.6 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q for the three months ended June 30, 2006, filed  August 9, 2006 and incorporated herein by reference).                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.28  |   | Amended  and Restated Share Purchase Agreement dated as of June 24, 2008, by and  among Neenah Paper Company of Canada, NPCC Holding Company, LLC, Neenah  Paper, Inc., Azure Mountain Capital Holdings LP, Northern Pulp NS LP,  and Azure Mountain Capital Financial LP (filed as Exhibit 10.2 to the  Neenah Paper, Inc. Quarterly Report on Form 10-Q for the three  months ended June 30, 200, filed August 11, 2008 and incorporated  herein by reference). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.29  |   | Asset  Purchase Agreement dated as of June 24, 2008, by and between Neenah  Paper Company of Canada and Azure Mountain Financial Corporation (filed as  Exhibit 10.3 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q for the three months ended June 30, 200, filed  August 11, 2008 and incorporated herein by reference).                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.30  |   | Asset  Purchase Agreement dated as of June 24, 2008, by and between Neenah  Paper Company of Canada and Northern Pulp Nova Scotia Corporation (filed as  Exhibit 10.4 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q for the three months ended June 30, 200, filed  August 11, 2008 and incorporated herein by reference).                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.31  |   | Stumpage Agreement,  dated as of June 24, 2008, by and between Neenah Paper Company of  Canada, and Northern Pulp Nova Scotia Corporation (filed as Exhibit 10.5  to the Neenah Paper, Inc. Quarterly Report on Form 10-Q for the  three months ended June 30, 200, filed August 11, 2008 and  incorporated herein by reference).                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.32  |   | Subscription  Agreement, dated as of June 24, 2008, by and between Neenah Paper  Company of Canada, and Azure Mountain Capital Financial Corporation (filed as  Exhibit 10.6 to the Neenah Paper, Inc. Quarterly Report on  Form 10-Q for the three months ended June 30, 200, filed  August 11, 2008 and incorporated herein by reference).                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.33  |   | Consent  and Guarantee Agreement Concerning Amended and Restated Pulp Supply  Agreement, dated as of June 19, 2008, by and between Neenah  Paper, Inc. and Kimberly-Clark Global Sales, LLC (filed as  Exhibit 10.7 to the Neenah Paper, Inc. Quarterly Report on Form 10-Q  for the three months ended June 30, 2009, filed August 11, 2008 and  incorporated herein by reference).                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.34  |   | Amended and Restated Credit Agreement dated as of  November 5, 2009 by and among by and  among Neenah Paper, Inc., certain of its subsidiaries, the lenders  listed therein and JPMorgan Chase Bank, N.A., as agent for the Lenders,  (filed herewith).                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 11     |   | Statement  Regarding Computation of Earnings per Share (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 12     |   | Statement  Regarding Computation of Ratio of Earnings to Fixed Charges (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 21     |   | List of  Subsidiaries of Neenah Paper, Inc. (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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|   | 23     |   | Consent of  Deloitte & Touche LLP (filed herewith)                                                                                                                                                                                               |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                      |
|   | 24     |   | Power of  Attorney (filed herewith)                                                                                                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                                      |
|   | 31.1   |   | Certification  of Chief Executive Officer required by Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended  (the “Exchange Act”) (filed herewith).                                          |
|   |   |   |                                                                                                                                                                                                                                                      |
|   | 31.2   |   | Certification  of Chief Financial Officer required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act (filed herewith).                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                      |
|   | 32.1   |   | Certification  of Chief Executive Officer and Chief Financial Officer required by  Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and  Section 1350 of Chapter 63 of Title 18 of the United States Code (filed  herewith). |

 

----

*       Indicatesmanagement contract or compensatory plan or arrangement.

 

(c)    FinancialStatement Schedule

 

See Item 15(a) (2) above

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   |   | NEENAH  PAPER, INC. |
|--------|--------|--------------------------|
|   |   |                     |   |
|   | By:    | /s/ SEAN  T. ERWIN       |
|   |   | Name:                    | Sean T.  Erwin |
|   |   | Title:                   | Chairman  of the Board, President and Chief Executive Officer (in his capacity as a  duly authorized officer of the Registrant and in his capacity as Chief  Executive Officer) |
|   |   | Date:                    | March 10,  2010 |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| /s/ SEAN T. ERWIN       |                           | Chairman  of the Board, President and                |                 |
|-------------------------|--------------------------------|------------------------------------------------------|----------------------|
| Sean T. Erwin           |                           | Chief  Executive Officer                             | March 10,  2010 |
|                    |                           |                                                 |                 |
| /s/ BONNIE C. LIND      |                           | Senior  Vice President, Chief Financial              |                 |
| Bonnie C. Lind          |                           | Officer  and Treasurer (Principal Financial Officer) | March 10,  2010 |
|                    |                           |                                                 |                 |
| /s/ LARRY N. BROWNLEE   |                           | Vice  President — Controller (Principal         |                 |
| Larry N. Brownlee       |                           | Accounting  Officer)                                 | March 10,  2010 |
|                    |                           |                                                 |                 |
| /s/ EDWARD GRZEDZINSKI* |                           | Director                                             | March 10,  2010 |
| Edward Grzedzinski      |                           |                                                 |                 |
|                    |                           |                                                 |                 |
| /s/ MARY ANN LEEPER*    |                           | Director                                             | March 10,  2010 |
| Mary Ann Leeper         |                           |                                                 |                 |
|                    |                           |                                                 |                 |
| /s/ TIMOTHY S. LUCAS    |                           | Director                                             | March 10,  2010 |
| Timothy S. Lucas        |                           |                                                 |                 |
|                    |                           |                                                 |                 |
| /s/ JOHN F. MCGOVERN*   |                           | Director                                             | March 10,  2010 |
| John F. McGovern        |                           |                                                 |                 |
|                    |                           |                                                 |                 |
| /s/ PHILIP C. MOORE*    |                           | Director                                             | March 10,  2010 |
| Philip C. Moore         |                           |                                                 |                 |
|                    |                           |                                                 |                 |
| /s/ STEPHEN M. WOOD     |                           | Director                                             | March 10,  2010 |
| Stephen M. Wood         |                           |                                                 |                 |
|                    |                           |                                                 |                 |
| *By:                    | /s/ STEVEN S. HEINRICHS        |                                                 |                 |   |
|                    | Steven S. Heinrichs            |                                                 |                 |   |
|                    | Senior Vice President, General |                                                 |                 |   |
|                    | Counsel and Secretary          |                                                 |                 |   |
|                    | Attorney-in-fact               |                                                 |                 |   |

 

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**TABLE OF CONTENTS**

** **
| ** **                                                                                            | **Page** |
|-------------------------------------------------------------------------------------------------------|----------|
|                                                                                                  |     |
| Report of Independent Registered Public Accounting Firm  on Internal Control over Financial Reporting | F-2      |
|                                                                                                  |     |
| Report of Independent Registered Public Accounting  Firm                                              | F-3      |
|                                                                                                  |     |
| Consolidated  Statements of Operations                                                                | F-4      |
|                                                                                                  |     |
| Consolidated  Balance Sheets                                                                          | F-5      |
|                                                                                                  |     |
| Consolidated Statements of Changes in Stockholders’  Equity                                      | F-6      |
|                                                                                                  |     |
| Consolidated  Statements of Cash Flows                                                                | F-7      |
|                                                                                                  |     |
| Notes to  Consolidated Financial Statements                                                           | F-8      |
|                                                                                                  |     |
| Schedule II—Valuation and Qualifying Accounts                                                    | F-52     |

 

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Table of Contents

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ONINTERNAL CONTROL OVER FINANCIAL REPORTING**

** **

Tothe Board of Directors and Stockholders ofNeenah Paper, Inc. Alpharetta, Georgia

 

Wehave audited the internal control over financial reporting of Neenah Paper, Inc.and subsidiaries (the “Company”) as of December 31, 2009, based oncriteria established in *InternalControl — Integrated Framework*issued by the Committee ofSponsoring Organizations of the Treadway Commission. The Company’s managementis responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Annual Report onInternal Control Over Financial Reporting. Our responsibility is to express anopinion on the Company’s internal control over financial reporting based on ouraudit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control over financial reporting based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States of America(“generally accepted accounting principles”). A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2009, basedon the criteria established in *InternalControl — Integrated Framework*issued by the Committee ofSponsoring Organizations of the Treadway Commission.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year ended December 31, 2009 of theCompany and our report dated March 10, 2010 expressed an unqualified opinion on those consolidated financialstatements and financial statement schedule.

 

 

/s/ Deloitte & Touche LLP

 

Atlanta, Georgia

March 10, 2010

 

F-2

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

Tothe Board of Directors and Stockholders ofNeenah Paper, Inc. Alpharetta, Georgia

 

Wehave audited the accompanying consolidated balance sheets of Neenah Paper, Inc.and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and therelated consolidated statements of operations, changes in stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2009. Our audits also included the financial statement schedule listed in theIndex at Item 15. These financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on the financial statements and financial statementschedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Neenah Paper, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2009, in conformity with accounting principles generally acceptedin the United States of America. Also, in our opinion, such financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2009, based on the criteriaestablished in *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 10, 2010 expressed an unqualified opinion onthe Company’s internal control over financial reporting.

 

 

/s/ Deloitte & Touche LLP

 

Atlanta, GeorgiaMarch 10, 2010

 

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**NEENAHPAPER, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Inmillions, except share and per share data)**

 
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net sales**                                                      |       | $                                | 573.9      |   | $ | 732.3 |   | $ | 767.0 |   |
| Cost of products sold                                              |       | 472.3                            |       | 633.2 |   | 635.5 |   |
| **Gross profit**                                                   |       | 101.6                            |       | 99.1 |   | 131.5 |   |
| Selling, general and administrative expenses                       |       | 69.1                             |       | 75.2 |   | 79.3 |   |
| Other income - net                                                 |       | (1.0                             | )          | (11.3 | ) | (1.7 | ) |
| Restructuring costs                                                |       | 17.1                             |       | — |   | — |   |
| Goodwill and other intangible asset impairment  charge             |       | —                           |       | 54.5 |   | — |   |
| **Operating income (loss)**                                        |       | 16.4                             |       | (19.3 | ) | 53.9 |   |
| Interest expense                                                   |       | 23.4                             |       | 25.0 |   | 25.5 |   |
| Interest income                                                    |       | (0.2                             | )          | — |   | (0.1 | ) |
| **Income (loss) from continuing  operations before income taxes**  |       | (6.8                             | )          | (44.3 | ) | 28.5 |   |
| Provision (benefit) for income taxes                               |       | (5.0                             | )          | 3.0 |   | (3.7 | ) |
| **Income (loss) from continuing  operations**                      |       | (1.8                             | )          | (47.3 | ) | 32.2 |   |
| Income (loss) from discontinued operations, net of  taxes (Note 5) |       | 0.6                              |       | (111.2 | ) | (22.0 | ) |
| **Net income (loss)**                                              |       | $                                | (1.2       | ) | $ | (158.5 | ) | $ | 10.2 |   |
|                                                               |       |                             |       |   |   |   |   |
| **Earnings (Loss) Per Common Share**                               |       |                             |       |   |   |   |   |
| Basic                                                              |       |                             |       |   |   |   |   |
| Continuing operations                                              |       | $                                | (0.12      | ) | $ | (3.24 | ) | $ | 2.15 |   |
| Discontinued operations                                            |       | 0.04                             |       |   | (7.59 | ) | (1.48 | ) |
|                                                               |       | $                                | (0.08      | ) | $ | (10.83 | ) | $ | 0.67 |   |
| Diluted                                                            |       |                             |       |   |   |   |   |
| Continuing operations                                              |       | $                                | (0.12      | ) | $ | (3.24 | ) | $ | 2.11 |   |
| Discontinued operations                                            |       | 0.04                             |       |   | (7.59 | ) | (1.46 | ) |
|                                                               |       | $                                | (0.08      | ) | $ | (10.83 | ) | $ | 0.65 |   |
|                                                               |       |                             |       |   |   |   |   |
| **Weighted Average Common Shares  Outstanding (in thousands)**     |       |                             |       |   |   |   |   |
| Basic                                                              |       | 14,655                           |       | 14,642 |   | 14,874 |   |
| Diluted                                                            |       | 14,655                           |       | 14,642 |   | 15,141 |   |

 

See Notes to Consolidated Financial Statements

 

F-4

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**NEENAHPAPER, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Inmillions)**

 
| ** **                                                                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                             |       |                  |       |   |   |
| **Current Assets**                                                                                                                     |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                              |       | $                     | 5.6        |   | $ | 3.3 |   |
| Accounts receivable, net                                                                                                               |       | 67.7                  |       | 63.2 |   |
| Inventories                                                                                                                            |       | 70.7                  |       | 88.6 |   |
| Income taxes receivable                                                                                                                |       | 0.8                   |       | 11.2 |   |
| Deferred income taxes                                                                                                                  |       | 61.7                  |       | 65.4 |   |
| Prepaid and other current assets                                                                                                       |       | 13.7                  |       | 19.0 |   |
| Assets held for sale (Note 3 and Note 5)                                                                                               |       | 10.0                  |       | 3.3 |   |
| Total Current Assets                                                                                                                   |       | 230.2                 |       | 254.0 |   |
| **Property, Plant and Equipment — net**                                                                                           |       | 284.4                 |       | 316.2 |   |
| **Deferred Income Taxes**                                                                                                              |       | 37.4                  |       | 35.3 |   |
| **Goodwill (Note 4)**                                                                                                                  |       | 44.9                  |       | 43.8 |   |
| **Intangible assets — net (Note 4)**                                                                                              |       | 27.5                  |       | 28.7 |   |
| **Other Assets**                                                                                                                       |       | 13.1                  |       | 12.0 |   |
| **TOTAL ASSETS**                                                                                                                       |       | $                     | 637.5      |   | $ | 690.0 |   |
|                                                                                                                                   |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                         |       |                  |       |   |   |
| **Current Liabilities**                                                                                                                |       |                  |       |   |   |
| Debt payable within one year                                                                                                           |       | $                     | 55.6       |   | $ | 24.1 |   |
| Accounts payable                                                                                                                       |       | 30.0                  |       | 35.3 |   |
| Accrued expenses                                                                                                                       |       | 48.6                  |       | 50.3 |   |
| Total Current Liabilities                                                                                                              |       | 134.2                 |       | 109.7 |   |
| **Long-term Debt**                                                                                                                     |       | 263.6                 |       | 340.5 |   |
| **Deferred Income Taxes**                                                                                                              |       | 23.7                  |       | 25.4 |   |
| **Noncurrent Employee Benefits and  Other Obligations**                                                                                |       | 108.3                 |       | 111.3 |   |
| **TOTAL LIABILITIES**                                                                                                                  |       | 529.8                 |       | 586.9 |   |
| **Commitments and Contingencies  (Notes 11 and 12)**                                                                                   |       |                  |       |   |   |
| **Stockholders’ Equity**                                                                                                          |       |                  |       |   |   |
| Common stock, par value $0.01 — authorized:  100,000,000 shares; issued and outstanding: 15,085,709 shares and 15,054,852  shares |       | 0.1                   |       | 0.1 |   |
| Treasury stock, at cost: 410,654 shares and 405,744  shares                                                                            |       | (10.2                 | )          | (10.1 | ) |
| Additional paid-in capital                                                                                                             |       | 243.4                 |       | 238.7 |   |
| Accumulated deficit                                                                                                                    |       | (217.1                | )          | (210.0 | ) |
| Accumulated other comprehensive income                                                                                                 |       | 91.5                  |       | 84.4 |   |
| Total Stockholders’ Equity                                                                                                        |       | 107.7                 |       | 103.1 |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                   |       | $                     | 637.5      |   | $ | 690.0 |   |

 

See Notes to Consolidated Financial Statements

 

F-5

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Tableof Contents

 

**NEENAH PAPER, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(In millions, shares in thousands)**

 
| ** **                                           | ** ** | ** **        | ** ** | ** **   | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **        | ** ** |
|------------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------|------------|-----------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                           | ** ** | ** **        | ** ** | ** **   | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**         | ** ** | ** **        | ** ** |
| ** **                                           | ** ** | **Common  Stock** | ** ** | **Treasury** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** |
| ** **                                           | ** ** | **Shares**        | ** ** | **Amount**   | ** ** | **Stock**   | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income**        | ** ** | **Income/(Loss)** | ** ** |
|                                                 |       |              |       |         |       |        |       |            |       |              |       |              |       |              |       |
| Balance,  December 31, 2006                     |       | 14,812            |       | $            | 0.1        |        | $          | (0.1            | )          | $                 | 224.7      |              | $          | (49.7             | )          | $ | 9.9 |   |   |   |
| Net  income                                          |       |              |       |         |       |        |       |            |       | 10.2              |       |              |       | $                 | 10.2       |   |
| Other  comprehensive income (loss)                   |       |              |       |         |       |        |       |            |       |              |       |              |       |              |       |
| Unrealized  foreign currency translation             |       |              |       |         |       |        |       |            |       |              |       | 58.0              |       | 58.0              |       |
| Minimum  pension liability                           |       |              |       |         |       |        |       |            |       |              |       | 30.7              |       | 30.7              |       |
| Loss  on cash flow hedges                            |       |              |       |         |       |        |       |            |       |              |       | (0.1              | )          | (0.1              | )          |
| Dividends  declared                                  |       |              |       |         |       |        |       |            |       | (6.0              | )          |              |       | $                 | 98.8       |   |
| Excess  tax benefits from stock-based compensation   |       |              |       |         |       |        |       | 0.5             |       |              |       |              |       |              |       |
| Stock  options exercised                             |       | 124               |       |         |       |        |       | 3.7             |       |              |       |              |       |              |       |
| Restricted  stock vesting (Note 10)                  |       | 33                |       |         |       | (0.3        | )          |            |       |              |       |              |       |              |       |
| Stock-based  compensation                            |       |              |       |         |       |        |       | 6.4             |       |              |       |              |       |              |       |
|                                                 |       |              |       |         |       |        |       |            |       |              |       |              |       |              |       |
| Balance,  December 31, 2007                     |       | 14,969            |       | 0.1          |       | (0.4        | )          | 235.3           |       | (45.5             | )          | 98.5              |       |              |       |
| Net  income                                          |       |              |       |         |       |        |       |            |       | (158.5            | )          |              |       | $                 | (158.5     | ) |
| Other  comprehensive income (loss)                   |       |              |       |         |       |        |       |            |       |              |       |              |       |              |       |
| Unrealized  foreign currency translation             |       |              |       |         |       |        |       |            |       |              |       | (30.1             | )          | (30.1             | )          |
| Adjustment  to pension and other benefit liabilities |       |              |       |         |       |        |       |            |       |              |       | 16.3              |       | 16.3              |       |
| Loss  on cash flow hedges                            |       |              |       |         |       |        |       |            |       |              |       | (0.3              | )          | (0.3              | )          |
| Dividends  declared                                  |       |              |       |         |       |        |       |            |       | (6.0              | )          |              |       | $                 | (172.6     | ) |
| Excess  tax provision from stock-based compensation  |       |              |       |         |       |        |       | (0.6            | )          |              |       |              |       |              |       |
| Share  purchases                                     |       |              |       |         |       | (9.4        | )          |            |       |              |       |              |       |              |       |
| Restricted  stock vesting (Note 10)                  |       | 86                |       |         |       | (0.3        | )          |            |       |              |       |              |       |              |       |
| Stock-based  compensation                            |       |              |       |         |       |        |       | 4.0             |       |              |       |              |       |              |       |
|                                                 |       |              |       |         |       |        |       |            |       |              |       |              |       |              |       |   |   |   |   |   |
| Balance,  December 31, 2008                     |       | 15,055            |       | 0.1          |       | (10.1       | )          | 238.7           |       | (210.0            | )          | 84.4              |       |              |       |
| Net  loss                                            |       |              |       |         |       |        |       |            |       | (1.2              | )          |              |       | $                 | (1.2       | ) |
| Other  comprehensive income (loss)                   |       |              |       |         |       |        |       |            |       |              |       |              |       |              |       |
| Unrealized  foreign currency translation             |       |              |       |         |       |        |       |            |       |              |       | 4.1               |       | 4.1               |       |
| Adjustment  to pension and other benefit liabilities |       |              |       |         |       |        |       |            |       |              |       | 3.0               |       | 3.0               |       |
| Dividends  declared                                  |       |              |       |         |       |        |       |            |       | (5.9              | )          |              |       | $                 | 5.9        |   |
| Restricted  stock vesting (Note 10)                  |       | 31                |       |         |       | (0.1        | )          |            |       |              |       |              |       |              |       |
| Stock-based  compensation                            |       |              |       |         |       |        |       | 4.7             |       |              |       |              |       |              |       |
|                                                 |       |              |       |         |       |        |       |            |       |              |       |              |       |              |       |   |   |   |   |   |
| Balance,  December 31, 2009                     |       | 15,086            |       | $            | 0.1        |        | $          | (10.2           | )          | $                 | 243.4      |              | $          | (217.1            | )          | $ | 91.5 |   |   |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-6

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Table of Contents

 

**NEENAH PAPER, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In millions)**

 
| ** **                                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **OPERATING ACTIVITIES**                                                                                       |       |                             |       |   |   |   |   |
| Net income (loss)                                                                                              |       | $                                | (1.2       | ) | $ | (158.5 | ) | $ | 10.2 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities:                      |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                                                  |       | 34.5                             |       | 38.6 |   | 45.3 |   |
| Stock-based compensation                                                                                       |       | 4.7                              |       | 4.0 |   | 6.4 |   |
| Deferred income tax provision (benefit)                                                                        |       | (9.4                             | )          | (56.1 | ) | (32.7 | ) |
| Goodwill and other intangible asset impairment  charge (Note 4)                                                |       | —                           |       | 54.5 |   | — |   |
| Asset impairment loss                                                                                          |       | —                           |       | 91.2 |   | — |   |
| Loss on disposal - transfer of the Pictou Mill                                                                 |       | —                           |       | 29.4 |   | — |   |
| Amortization of deferred revenue - transfer of the  Pictou Mill                                                |       | —                           |       | (2.8 | ) | — |   |
| Loss on disposal - transfer of the Pictou Mill  post-employment benefit plans                                  |       | —                           |       | 53.7 |   | — |   |
| Ripon Mill non-cash charges                                                                                    |       | 6.3                              |       | — |   | — |   |
| Gain on curtailment of post employment benefit  plan                                                           |       | —                           |       | (4.3 | ) | — |   |
| Gain on sale of woodlands (Note 5)                                                                             |       | —                           |       | — |   | (6.2 | ) |
| (Gain) loss on other asset dispositions                                                                        |       | 0.2                              |       | (6.3 | ) | (0.8 | ) |
| Net cash provided by (used in) changes in  operating working capital, net of effects of acquisitions (Note 15) |       | 27.4                             |       | (21.1 | ) | 5.9 |   |
| Pension and other post-employment benefits                                                                     |       | 2.4                              |       | (7.6 | ) | 4.1 |   |
| Loss on curtailment and settlement of pension plan  (Note 5)                                                   |       | —                           |       | — |   | 38.7 |   |
| Other                                                                                                          |       | —                           |       | (1.6 | ) | (1.4 | ) |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES**                                                                 |       | 64.9                             |       | 13.1 |   | 69.5 |   |
| **INVESTING ACTIVITIES**                                                                                       |       |                             |       |   |   |   |   |
| Capital expenditures                                                                                           |       | (8.4                             | )          | (30.0 | ) | (58.3 | ) |
| Acquisition of Fox River, net of cash acquired                                                                 |       | —                           |       | — |   | (54.7 | ) |
| Payments in conjunction with the transfer of the  Pictou Mill                                                  |       | —                           |       | (13.6 | ) | — |   |
| Proceeds from asset sales                                                                                      |       | 0.8                              |       | 13.8 |   | — |   |
| Other                                                                                                          |       | (0.7                             | )          | (0.6 | ) | (0.4 | ) |
| **NET CASH USED IN INVESTING  ACTIVITIES**                                                                     |       | (8.3                             | )          | (30.4 | ) | (113.4 | ) |
| **FINANCING ACTIVITIES**                                                                                       |       |                             |       |   |   |   |   |
| Proceeds from issuance of long-term debt                                                                       |       | 45.5                             |       | 53.7 |   | 77.0 |   |
| Debt issuance costs                                                                                            |       | (2.9                             | )          | — |   | — |   |
| Repayments of long-term debt                                                                                   |       | (87.6                            | )          | (34.6 | ) | (34.1 | ) |
| Short-term borrowings                                                                                          |       | 12.2                             |       | 18.7 |   | 8.0 |   |
| Repayments of short-term borrowings                                                                            |       | (15.4                            | )          | (3.3 | ) | (5.0 | ) |
| Cash dividends paid                                                                                            |       | (5.9                             | )          | (6.0 | ) | (6.0 | ) |
| Shares purchases (Note 10)                                                                                     |       | —                           |       | (9.4 | ) | — |   |
| Proceeds from exercise of stock options                                                                        |       | —                           |       | — |   | 3.7 |   |
| Other                                                                                                          |       | (0.1                             | )          | (0.9 | ) | 0.2 |   |
| **NET CASH PROVIDED BY (USED IN)  FINANCING ACTIVITIES**                                                       |       | (54.2                            | )          | 18.2 |   | 43.8 |   |
| **EFFECT OF EXCHANGE RATE CHANGES  ON CASH AND CASH EQUIVALENTS**                                              |       | (0.1                             | )          | — |   | 0.9 |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                                                 |       | 2.3                              |       | 0.9 |   | 0.8 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR**                                                              |       | 3.3                              |       | 2.4 |   | 1.6 |   |
| **CASH AND CASH EQUIVALENTS, END OF  YEAR**                                                                    |       | $                                | 5.6        |   | $ | 3.3 |   | $ | 2.4 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-7

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Table of Contents

 

**NEENAH PAPER INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollars inmillions, except as noted)**

 

**Note 1.Background and Basis of Presentation**

 

***Background***

 

Neenah Paper, Inc. (“Neenah” orthe “Company”), a Delaware corporation, was incorporated in April 2004 incontemplation of the spin-off by Kimberly-Clark Corporation (“Kimberly-Clark”)of its fine paper and technical products businesses in the United States andits pulp business in Canada (collectively, the “Pulp and Paper Business”). In November 2004,Kimberly-Clark completed the distribution of all of the shares of Neenah’scommon stock to the stockholders of Kimberly-Clark (the “Spin-Off”). As aresult of the Spin-Off, Kimberly-Clark transferred all of the assets andliabilities of the Pulp and Paper Business to Neenah. Following the Spin-Off,management began executing a strategy to exit the pulp business and transformthe Company into a manufacturer of specialty papers.

 

The fine paper business is a leadingproducer of premium writing, text, cover and specialty papers used in corporateidentity packages, corporate annual reports, invitations, personal stationeryand high-end packaging for point of sale advertising. The technical products businessis a leading international producer of transportation and other filter media;durable, saturated and coated substrates for a variety of end uses; andnonwoven wall coverings.

 

In August 2006, Neenah Canadatransferred the Terrace Bay, Ontario pulp mill and related woodlands operations(“Terrace Bay”) to certain affiliates of Buchanan Forest Products Ltd. (“Buchanan”).Buchanan acquired substantially all of the assets of Terrace Bay and assumedresponsibility for substantially all of the liabilities related to its futureoperation.  The results of operations of Terrace Bay are reported asdiscontinued operations on the consolidated statements of operations for allyears presented.  See Note 5, “Discontinued Operations — Transfer of theTerrace Bay Mill.”

 

In March 2007, the Companyacquired the stock of Fox Valley Corporation and its subsidiary, Fox RiverPaper Company, LLC (collectively, “Fox River”). The Company financed theacquisition through a combination of cash and debt drawn against its existingrevolving credit facility. At the time of the acquisition, the Fox River assetsconsisted of four U.S. paper mills and various related assets. The results ofFox River are reported as part of the Company’s Fine Paper segment and havebeen included in the Company’s consolidated financial results since theacquisition date.

 

In February 2008, the Companycommitted to a plan to sell its pulp mill in Pictou, Nova Scotia (the “PictouMill”) and approximately 475,000 acres of woodland assets in Nova Scotia (the “Woodlands”). InJune 2008, the Company’s wholly owned subsidiary, Neenah Paper Company ofCanada (“Neenah Canada”) sold the Pictou Mill to Northern Pulp Nova ScotiaCorporation (“Northern Pulp”), a new operating company jointly owned by AtlasHoldings LLC (“Atlas”) and Blue Wolf Capital Management LLC (“Blue Wolf”). Pursuant to the terms of the transaction, Northern Pulp assumed all of theassets and liabilities associated with the Pictou Mill, as well as existingcustomer contracts, supply agreements, labor agreements and pensionobligations. The sale did not include the Woodlands.

 

Managementbelieves it is probable that the sale of the Woodlands will be completed within12 months.  As of December 31, 2009, the assets and liabilities ofthe Woodlands are reported as assets held for sale—discontinued operations onthe consolidated balance sheet.  On March 1, 2010, the Company announced that Neenah Canada hadsigned a definitive agreement to sell the Woodlands to Northern Timber NovaScotia Corporation, a new operating company jointly owned by Atlas and BlueWolf, for C$82.5 million ($78.6 million). See Note 17, “Subsequent Event.” Forthe years ended December 31, 2009 and 2008, the results of operations ofthe Pictou Mill and the Woodlands and the loss on disposal of the Pictou Millare reported as discontinued operations in the consolidated statements ofoperations.  For the year ended December 31,2007, the consolidated results of operations have been restated to reflect theresults of operations of the Pictou Mill and the Woodlands as discontinuedoperations.  See Note 5, “Discontinued Operations — Sale of the PictouMill and the Woodlands.”

 

***Basisof Presentation***

 

The consolidated financialstatements include the financial statements of the Company and its wholly ownedand majority owned subsidiaries. All significant inter-company balances andtransactions have been eliminated in consolidation.

 

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Table of Contents

 

***Prior Year Adjustments***

 

During the three months ended September 30, 2009, the Companyidentified and restated the accompanying December 31, 2008 consolidatedbalance sheet for the following errors: (i) a $7.3 million overstatementof Canadian deferred tax assets and unrealized foreign currency translationgains within stockholders’ equity and (ii) a $12.7 million understatementof the liability for uncertain tax positions and deferred tax assets as aresult of errors identified in prior year income tax returns.  The neteffect of these corrections on the consolidated balance sheet as of December 31,2008 is an increase in current deferred tax assets of $12.1 million, a decreasein long-term deferred tax assets of $6.7 million, an increase of $12.7 millionin accrued expenses and a decrease of $7.3 million in stockholders’equity.  Interest associated with the uncertain tax positions noted abovewas immaterial for all historical years.  In addition, the Companyreclassified $5.3 million from accounts payable to accrued expenses in theaccompanying December 31, 2008 consolidated balance sheet to provideconsistency in the reporting of certain liabilities between its U.S. and Germanoperations and to conform to the current year presentation.  The neteffect of these corrections on the consolidated statements of cash flows forthe years ended December 31, 2008 and 2007 was to decrease the deferredtax benefit by $0.4 million and $5.9 million, respectively, and increase netcash provided by (used in) operating working capital.  The Company believes the effects of theseprior year corrections individually and in the aggregate are immaterial to anyprior year consolidated financial statements.

 

**Note 2.Summary of Significant Accounting Policies**

 

***Useof Estimates***

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States (“GAAP”) requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of net sales and expenses duringthe reporting periods. Actual results could differ from these estimates, andchanges in these estimates are recorded when known. Significant managementjudgment is required in determining the accounting for, among other things,pension and postretirement benefits, retained insurable risks, allowances fordoubtful accounts and reserves for sales returns and cash discounts, purchaseprice allocations, useful lives for depreciation, depletion and amortization,future cash flows associated with impairment testing for tangible andintangible long-lived assets, income taxes, contingencies, inventoryobsolescence and market reserves and valuation of stock-based compensation.

 

***RevenueRecognition***

 

The Company recognizes sales revenuewhen all of the following have occurred: (1) delivery has occurred, (2) persuasiveevidence of an agreement exists, (3) pricing is fixed or determinable, and(4) collection is reasonably assured. Delivery is not considered to haveoccurred until the customer takes title and assumes the risks and rewards ofownership. The timing of revenue recognition is largely dependent on shippingterms. In general, the Company’s shipments are designated free on boardshipping point and revenue is recognized at the time of shipment. Sales arereported net of allowable discounts and estimated returns. Reserves for cashdiscounts, trade allowances and sales returns are estimated using historicalexperience.

 

***Earningsper Share (“EPS”)***

 

The Company computesbasic earnings (loss) per share (“EPS”) in accordance with Accounting StandardsCodification (“ASC”) Topic 260, *Earnings PerShare* (“ASC Topic 260”).  In accordance with ASC Topic 260,share-based awards with non-forfeitable dividends are classified asparticipating securities. In calculating basic earnings per share, this methodrequires net income to be reduced by the amount of dividends declared in thecurrent period for each participating security and by the contractual amount ofdividends or other participation payments that are paid or accumulated for thecurrent period. Undistributed earnings for the period are allocated toparticipating securities based on the contractual participation rights of thesecurity to share in those current earnings assuming all earnings for theperiod are distributed. Holders of restricted stock, restricted stock units (“RSUs”)and RSUs with performance conditions have contractual participation rights thatare equivalent to those of common stockholders. Therefore, the Companyallocates undistributed earnings to restricted stock, RSUs and commonstockholders based on their respective ownership percentage, as of the end ofthe period.

 

ASC Topic 260 alsorequires companies with participating securities to calculate diluted earningsper share using the “Two Class” method. The “Two Class” method requires thedenominator to include the weighted average participating securities along withthe additional share equivalents from the assumed conversion of stock optionscalculated using the “Treasury Stock” method, subject to the anti-dilutionprovisions of ASC Topic 260.  The Company adopted the “Two-Class” methodon January 1, 2009.  For the years ended December 31, 2008 and2007, EPS has been restated to reflect the retroactive application of the “TwoClass” method.

 

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Diluted EPS was calculated to give effect toall potentially dilutive common shares using the “Treasury Stock” method.Outstanding stock options, stock appreciation rights (“SARs”) and certain RSUswith performance conditions represent the only potentially dilutive non-participatingsecurity effects on the Company’s weighted-average shares. For the years ended December 31, 2009, 2008 and 2007, approximately1,700,000, 1,510,000 and 335,000 potentially dilutive options, respectively,were excluded from the computation of dilutive common shares because theexercise price of such options exceeded the average market price of the Company’scommon stock for the period the options were outstanding. In addition, as aresult of the loss from continuing operations for the years ended December 31,2009 and 2008, approximately 160,000 and 130,000 incremental shares resultingfrom the assumed exercise or vesting of potentially dilutive securities wereexcluded from the diluted earnings per share calculation, as the effect wouldhave been anti-dilutive.

 

The following table presentsthe computation of basic and diluted shares of common stock used in thecalculation of EPS (amounts in millions, except share and per share amounts):

 
| ** **                                                                             | ** **                                                 | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------------------------------------------------------|----------------------------------|------------|
| ** **                                                                             | ** **                                                 | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income (loss) from continuing operations                                               |                                                       | $                                | (1.8       | ) | $ | (47.3 | ) | $ | 32.2 |   |
| Less: Distributed and undistributed amounts  allocated to participating securities (a) |                                                       | —                           |       | 0.1 |   | 0.3 |   |
| Income (loss) from continuing operations available  to common stockholders             |                                                       | (1.8                             | )          | (47.4 | ) | 31.9 |   |
| Income (loss) from discontinued operations, net of  income taxes                       |                                                       | 0.6                              |       | (111.2 | ) | (22.0 | ) |
| Net income (loss) available to common stockholders                                     |                                                       | $                                | (1.2       | ) | $ | (158.6 | ) | $ | 9.9 |   |
|                                                                                   |                                                       |                             |       |   |   |   |   |
| Weighted-average basic shares outstanding                                              |                                                       | 14,655                           |       | 14,642 |   | 14,874 |   |
| Add:                                                                                   | Assumed  incremental shares under stock compensation plans |                             | —     |   | — |   | 267 |   |
| Assuming dilution                                                                      |                                                       | 14,655                           |       | 14,642 |   | 15,141 |   |
|                                                                                   |                                                       |                             |       |   |   |   |   |
| **Earnings (Loss) Per Common Share**                                                   |                                                       |                             |       |   |   |   |   |
| Basic                                                                                  |                                                       |                             |       |   |   |   |   |
| Continuing operations                                                                  |                                                       | $                                | (0.12      | ) | $ | (3.24 | ) | $ | 2.15 |   |
| Discontinued operations                                                                |                                                       | 0.04                             |       | (7.59 | ) | (1.48 | ) |
| ** **                                                                             |                                                       | $                                | (0.08      | ) | $ | (10.83 | ) | $ | 0.67 |   |
| Diluted                                                                                |                                                       |                             |       |   |   |   |   |
| Continuing operations                                                                  |                                                       | $                                | (0.12      | ) | $ | (3.24 | ) | $ | 2.11 |   |
| Discontinued operations                                                                |                                                       | 0.04                             |       | (7.59 | ) | (1.46 | ) |
|                                                                                   |                                                       | $                                | (0.08      | ) | $ | (10.83 | ) | $ | 0.65 |   |
|                                                                                        |                                                            |                                  |            |  |  |  |  |  |  |  |  |

 

----

(a)          In accordance with ASC Topic 260, for the years ended December 31,2009 and 2008 undistributed losses have been entirely allocated to commonstockholders due to the fact that the holders of participating securities arenot contractually obligated to share in the losses of the Company.

 

***FinancialInstruments***

 

Cash and cash equivalents includeall cash balances and highly liquid investments with an initial maturity ofthree months or less. The Company places its temporary cash investments withhigh credit quality financial institutions.

 

***Inventories***

 

U.S. inventories are valued at thelower of cost, using the Last-In, First-Out (LIFO) method for financialreporting purposes, or market. German inventories are valued at the lower ofcost, using a weighted-average cost method, or market. The FIFO value of inventoriesvalued on the LIFO method was $58.2 million and $66.5 million at December 31,2009 and 2008, respectively.  Cost includes labor, materials andproduction overhead. For the years ended December 31, 2009 and 2008, theCompany recognized income (expense) of approximately $0.1 million and $(0.1)million, respectively, due to the liquidation of LIFO inventories.

 

F-10

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Table of Contents

 

***ForeignCurrency***

 

Balance sheet accounts of NeenahGermany and Neenah Canada are translated from Euros and Canadian dollars,respectively, into U.S. dollars at period-end exchange rates, and income andexpense accounts are translated at average exchange rates during the period.Translation gains or losses related to net assets located in Germany and Canadaare recorded as unrealized foreign currency translation adjustments withinaccumulated other comprehensive income (loss) in stockholders’ equity. Gainsand losses resulting from foreign currency transactions (transactionsdenominated in a currency other than the entity’s functional currency) areincluded in Other income—net in the consolidated statements of operations.

 

***Property and Depreciation***

 

Property,plant and equipment are stated at cost, less accumulated depreciation. Certaincosts of software developed or obtained for internal use are capitalized. Whenproperty, plant and equipment is sold or retired, the costs and the relatedaccumulated depreciation are removed from the accounts, and the gains or lossesare recorded in other (income) expense—net. For financial reporting purposes,depreciation is principally computed on the straight-line method over theestimated useful asset lives. Weighted average useful lives are approximately33 years for buildings, 9 years for land improvements and17 years for machinery and equipment. For income tax purposes, acceleratedmethods of depreciation are used.

 

Estimated useful lives areperiodically reviewed and, when warranted, changes are made to them. On January 1, 2009, the Company changedthe estimated useful life of its Enterprise Resource Planning software fromfive years to eight years to more accurately reflect its expected futureutilization of the software.  The change in the estimated useful lifereduced depreciation expense for the year ended December 31, 2009 by $1.9million or $0.08 per diluted share.

 

Long-lived assets are reviewed forimpairment whenever events or changes in circumstances indicate that their costmay not be recoverable. An impairment loss would be recognized when estimatedundiscounted future pre-tax cash flows from the use of the asset are less thanits carrying amount. Measurement of an impairment loss is based on the excessof the carrying amount of the asset over its fair value. Fair value isgenerally measured using discounted cash flows. See Note 5 “DiscontinuedOperations — Sale of the Pictou Mill and the Woodlands” for a discussion ofasset impairment losses recorded for the year ended December 31, 2008related to the Pictou Mill’s long-lived assets.

 

The costs of major rebuilds andreplacements of plant and equipment are capitalized, and the cost ofmaintenance performed on manufacturing facilities, composed of labor, materialsand other incremental costs, is charged to operations as incurred. Start-upcosts for new or expanded facilities are expensed as incurred.

 

***Woodlands***

 

As of December 31, 2009 and2008, the Company had $3.8 million and $3.3 million, respectively, in woodlandassets reported at their historical book value on the Consolidated BalanceSheet as assets held for sale. Woodland assets are stated at cost, less theaccumulated cost of timber previously harvested. In accordance with ASC Topic360, *Property,**Plant and Equipment*(“ASC Topic 360”) the Company does not recognize depletion expensefor woodland assets recorded as assets held for sale. See Note 17, “SubsequentEvent.”

 

***Goodwilland Other Intangible Assets***

 

The Company follows the guidance ofASC Topic 805, *Business Combinations*(“ASC Topic 805”), in recording goodwill arising from a business combination asthe excess of purchase price and related costs over the fair value ofidentifiable assets acquired and liabilities assumed.  All of the Company’sgoodwill was acquired in conjunction with the acquisition of the stock of FiberMark Services GmbH &Co. KG and the stock of FiberMark Beteiligungs GmbH (collectively, “NeenahGermany”) in October 2006.

 

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UnderASC Topic 350, *Intangibles - Goodwill and Other*(“ASC Topic 350”), goodwill is subject toimpairment testing at least annually. A fair-value-based test is applied at thereporting unit level, which is generally one level below the segment level. Thetest compares the fair value of an entity’s reporting units to the carryingvalue of those reporting units. This test requires various judgments andestimates. The Company estimates the fair value of the reporting unit using amarket approach in combination with a probability-weighted discounted operatingcash flow approach for a number of scenarios representing differing operatingand economic assumptions. Impairment of goodwill is measured as the excess ofthe carrying amount of goodwill over the fair values of recognized andunrecognized assets and liabilities of the reporting unit. An adjustment togoodwill will be recorded for any goodwill that is determined to be impaired.The Company tests goodwill for impairment at least annually on November 30in conjunction with preparation of its annual business plan, or more frequentlyif events or circumstances indicate it might be impaired. The Company lasttested goodwill for impairment as of November 30, 2009 and no impairmentwas indicated.  An impairment of goodwillwas indicated in the Company’s test of goodwill for impairment as of November 30,2008. See Note 4, “Goodwill and Other Intangible Assets.”

 

Intangible assets with finite usefullives are amortized on a straight-line basis over their respective estimateduseful lives to their estimated residual values, and reviewed for impairment inaccordance with ASC Topic 360. Intangible assets consist primarily of customerrelationships, trade names and acquired intellectual property. Such intangibleassets are amortized using the straight-line method over estimated useful livesof between 10 and 15 years.  Certain trade names are estimated to haveindefinite useful lives and as such are not amortized.  Intangible assetswith indefinite lives are reviewed for impairment annually in accordance withASC Topic 350. See Note 4, “Goodwill and Other Intangible Assets.”

 

***Research Expense***

 

Research and development costs arecharged to expense as incurred and are recorded in “Selling, general andadministrative expenses” on the consolidated statement of operations.  SeeNote 15, “Supplemental Data — Supplemental Statement of Operations Data.”

 

***FairValue of Financial Instruments***

 

The carrying amounts reflected inthe consolidated balance sheets for cash and cash equivalents, accountsreceivable and accounts payable approximate fair value due to their shortmaturities. The fair value of short and long-term debt is estimated using currentmarket prices for the Company’s publicly traded debt or rates currentlyavailable to the Company for debt of the same remaining maturities. Thefollowing table presents the carrying value and the fair value of the Company’sdebt at December 31, 2009 and 2008.

 
| ** **                                                | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **Carrying Value**         | ** ** | **Fair Value**             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Senior Notes (7.375% fixed rate)                          |       | $                               | 225.0      |                            | $          | 208.6 |   | $ | 225.0 |   | $ | 126.5 |   |
| Neenah Germany project financing (3.8% fixed rate)        |       | 12.5                            |       | 12.0                            |       | 14.0 |   | 13.3 |   |
| Revolving bank credit facility (variable rates)           |       | 27.9                            |       | 27.9                            |       | 101.1 |   | 101.1 |   |
| Term Loan (variable rates)                                |       | 40.0                            |       | 40.0                            |       | 7.2 |   | 7.2 |   |
| Neenah Germany revolving line of credit (variable  rates) |       | 12.9                            |       | 12.9                            |       | 17.3 |   | 17.3 |   |
| Other debt (2.9% fixed rate)                              |       | 0.9                             |       | 0.9                             |       | — |   | — |   |
|                                                      |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Long-term debt                                            |       | $                               | 319.2      |                            | $          | 302.3 |   | $ | 364.6 |   | $ | 265.4 |   |

 

***OtherComprehensive Income (Loss)***

 

Comprehensive income (loss)includes, in addition to net income (loss), gains and losses recorded directlyinto stockholders’ equity on the consolidated balance sheet. These gains andlosses are referred to as other comprehensive income items. Accumulated othercomprehensive income (loss) consists of foreign currency translation gains and(losses), deferred gains and (losses) on cash flow hedges, and adjustmentsrelated to pensions and other post-retirement benefits. Income taxes are notprovided for foreign currency translation adjustments related to indefiniteinvestments in Neenah Germany. The Company also does not provide income taxesfor foreign currency translation adjustments for its Canadian operations. For the years ended December 31, 2009 and 2008, the Company did not recorddeferred taxes related to future funds expected to be repatriated upon the saleof the Woodlands because there are no expected tax consequences considering theanticipated proceeds from the disposal of the Woodlands.

 

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Tableof Contents

 

Changes in the components of other comprehensive income(loss) are as follows:

 
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **Pretax  Amount**               | ** ** | **Tax  Effect** | ** ** | **Net  Amount** | ** ** | **Pretax  Amount** | ** ** | **Tax  Effect** | ** ** | **Net  Amount** | ** ** | **Pretax  Amount** | ** ** | **Tax  Effect** | ** ** | **Net  Amount** | ** ** |
| Foreign  currency translation                        |       | $                                | 4.1        |   | $ | — |   | $ | 4.1 |   | $ | (30.1 | ) | $ | — |   | $ | (30.1 | ) | $ | 58.0 |   | $ | — |   | $ | 58.0 |   |
| Adjustment  to pension and other benefit liabilities |       | 4.6                              |       | (1.6 | ) | 3.0 |   | 26.4 |   | (10.1 | ) | 16.3 |   | 48.2 |   | (17.5 | ) | 30.7 |   |
| Deferred  loss on cash flow hedges                   |       | —                           |       | — |   | — |   | (0.5 | ) | 0.2 |   | (0.3 | ) | (0.1 | ) | — |   | (0.1 | ) |
| Other  comprehensive income (loss)                   |       | $                                | 8.7        |   | $ | (1.6 | ) | $ | 7.1 |   | $ | (4.2 | ) | $ | (9.9 | ) | $ | (14.1 | ) | $ | 106.1 |   | $ | (17.5 | ) | $ | 88.6 |   |

 

The components of accumulated other comprehensive income(loss), net of applicable income taxes are as follows:

 
| ** **                                                                                                                          | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Foreign  currency translation                                                                                                       |       | $                     | 112.8      |   | $ | 108.7 |   |
| Adjustment  to pension and other benefit liabilities (net of income tax benefits of $14.0  million and $15.6 million, respectively) |       | (21.3                 | )          | (24.3 | ) |
|                                                                                                                                |       |                  |       |   |   |   |   |
| Accumulated  other comprehensive income                                                                                             |       | $                     | 91.5       |   | $ | 84.4 |   |

 

***Accounting StandardsChanges***

 

On July 1, 2009, theCompany adopted Statement of Financial Accounting Standards No. 168, *The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles — a replacement of FASBStatement No. 162* (“SFAS No. 168”).  SFAS No. 168established the ASC as the source of authoritative U.S. GAAP to be applied bynongovernmental entities. Rules and interpretive releases of the SEC underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. SFAS No. 168 supersedes all existing non-SEC accountingand reporting standards.  All non-SEC accounting literature not includedin the ASC is non authoritative. The Company’s adoption of SFAS No. 168did not have an effect on its financial position, results of operations or cashflows.

 

As of January 1, 2009, the Company adopted the enhancedrequired annual disclosures about plan assets in an employer’s defined benefitpension or other postretirement plan  inASC Topic 715, “*Compensation—Retirement Benefits.*”Such enhanced disclosures include, but are not limited to, investmentallocation decisions, the inputs and valuation techniques used to measure thefair value of plan assets and significant concentrations of risk within planassets.  See Note 8, “Pension and Other Postretirement Benefits—PlanAssets.”

 

On December 15,2009, the Company adopted the disclosure requirements of *AccountingStandards Update No. 2009-12* which amends ASC sub-topic 820-10,*Fair Value Measurements and Disclosures*(“ASU No. 2009-12”).**ASU No. 2009-12permits a reporting entity, as a practical expedient, to estimate the fairvalue of an investment using the net asset value per share (or its equivalent)of the investment, if the net asset value per share of the investment (or itsequivalent) is calculated in a manner consistent with the measurementprinciples of ASC Topic 946, *FinancialServices—Investment Companies* as of the reporting entity’smeasurement date.  The Company’s adoptionof ASU No. 2009-12 did not have an effect on its results of operations,financial position or cash flows.

 

As of December 31,2009, no amendments to the ASC had been issued but not adopted by the Companythat will have or are reasonably likely to have a material effect on itsresults of operations, financial position or cash flows.

 

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**Note 3.  Closure of the Ripon Mill**

 

In May 2009, the Companypermanently closed the Ripon Mill.  The closure resulted in a pre-taxcharge of $17.1 million for the year ended December 31, 2009.  Thecharge was comprised of approximately $5.8 million in non-cash chargesprimarily for losses related to the carrying value of property, plant andequipment, a curtailment loss of $0.8 million related to postretirement benefitplans in which employees of the Ripon Mill participated (see Note 8) and cashpayments for contract terminations and severance and other employee costs ofapproximately $10.5 million.  The Company paid approximately $6.5 millionof such costs in 2009, with the remaining payments in 2010 and beyond.

 

As of December 31, 2009, the remaining long-livedassets of the Ripon Mill, primarily composed of land and buildings, areclassified as Prepaid and other current assets on the consolidated balancesheet.  The Company believes that the sale of such assets will becompleted within 12 months. Assets held for sale are valued at the lower ofcost or fair value less cost to sell. The assets of the Ripon Mill arereported at their aggregate cost of $6.2 million.

 

The Company accounted for the costs associated with theclosure of the Ripon Mill in accordance with ASC Topic 420, *Exit or Disposal Cost Obligations.* As of December 31, 2009, approximately $1.7 million in severance benefitshad been paid to 96 former employees of the Ripon Mill and severance benefitsof approximately $0.1 million due to one former employee of the Ripon Millremained unpaid. The following table presents the status of such closure costsas of and for the year ended December 31, 2009:

 
| ** **                                                    | ** ** | **Severance benefits** | ** ** | **Contract termination  and other costs** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|-----------|------------|
| Amounts  accrued during the year ended December 31, 2009 |       | $                      | 1.8        |                                      | $          | 8.7       |       | $ | 10.5 |   |
| Payments  for the year ended December 31, 2009           |       | (1.7                   | )          | (4.8                                      | )          | (6.5      | )          |
| Accrued  exit costs at December 31, 2009                 |       | $                      | 0.1        |                                      | $          | 3.9       |       | $ | 4.0 |   |

 

**Note 4. Goodwill and Other Intangible Assets**

 

As of December 31, 2009, the Company had goodwill of$44.9 million which is not amortized.  The following table presentschanges in goodwill (all of which relates to the Company’s Technical Productssegment) for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                                | ** ** | **Gross  Amount** | ** ** | **Accumulated  Impairment  Losses** | ** ** | **Net** | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|---------|------------|
| Balance  at December 31, 2006                        |       | $                 | 92.0       |                                | $          | —  |       | $ | 92.0 |   |
| Finalization  of Neenah Germany purchase price allocation |       | 4.0               |       | —                              |       | 4.0     |       |
| Foreign  currency translation                             |       | 10.6              |       | —                              |       | 10.6    |       |
| Balance  at December 31, 2007                        |       | 106.6             |       | —                              |       | 106.6   |       |
| Goodwill  impairment charge                               |       | —            |       | (52.7                               | )          | (52.7   | )          |
| Foreign  currency translation                             |       | (10.1             | )          | —                              |       | (10.1   | )          |
| Balance  at December 31, 2008                        |       | 96.5              |       | (52.7                               | )          | 43.8    |       |
| Foreign  currency translation                             |       | 2.4               |       | (1.3                                | )          | 1.1     |       |
| Balance  at December 31, 2009                        |       | $                 | 98.9       |                                | $          | (54.0   | )          | $ | 44.9 |   |

 

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Table of Contents

 

***Impairment***

 

The Company’s annual test ofgoodwill for impairment at November 30, 2008, indicated that the carryingvalue of Neenah Germany exceeded its estimated fair value.  The Companyestimated fair value using a market approach in combination with aprobability-weighted discounted operating cash flow approach for a number ofscenarios representing differing operating and economic assumptions. Significant assumptions used in developing the discounted operating cash flowapproach were revenue growth rates and pricing, costs for manufacturing inputs,levels of capital investment and estimated cost of capital for high, medium andlow growth environments. The Company measured the estimated fair value ofgoodwill as the excess of the carrying amount of Neenah Germany over the fair valuesof recognized assets and liabilities of the reporting unit.  The Companyrecorded an impairment adjustment to goodwill for the excess of the carryingvalue of goodwill assigned to Neenah Germany over the estimated fair value ofgoodwill.  For the year ended December 31, 2008, the Companyrecognized a pre-tax loss of $52.7 million (the Company did not recognize a taxbenefit related to the non tax deductible loss) for the impairment of goodwillassigned to Neenah Germany. The impairment loss was primarily due to asubstantial increase in the estimated cost of capital the Company used tocalculate the present value of Neenah Germany’s estimated future cash flowswhich resulted in a substantially lower estimated fair value. The higherestimated cost of capital reflected market/financial conditions at the time theannual impairment test was performed which indicated higher risk premiums fordebt and equity.

 

As of December 31, 2009,the carrying amount of goodwill assigned to Neenah Germany was considered recoverable.  As of December 31, 2009, a onepercentage point increase in the Company’s estimate for its cost of capitalused in the impairment test would result in an approximately $25 million changein the estimated fair value of Neenah Germany and a corresponding reduction inthe implied value of goodwill but would not result in an impairment ofgoodwill.

 

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Table of Contents

 

***Other Intangible Assets***

 

As of December 31, 2009, the Company had netidentifiable intangible assets of $27.5 million. All such intangible assetswere acquired in the Neenah Germany and Fox River acquisitions. The followingtable details amounts related to those assets.

 
| ** **                                        | ** ** | **Trade names** | ** ** | **Customer  based  intangibles** | ** ** | **Trade names  and  Trademarks** | ** ** | **Acquired  Technology** | ** ** | **Total  Intangible  Assets** | ** ** |
|---------------------------------------------------|------------|-----------------|------------|----------------------------------|------------|----------------------------------|------------|--------------------------|------------|-------------------------------|------------|
| Cost                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Balance  at December 31, 2006                |       | $               | 7.2        |                             | $          | 16.2                             |       | $                        | 5.3        |                          | $          | 1.1 |   | $ | 29.8 |   |
| Amounts  acquired in the acquisition of Fox River |       | 2.6             |       | —                           |       | 0.3                              |       | —                   |       | 2.9                           |       |
| Foreign  currency translation                     |       | 0.2             |       | 1.7                              |       | 1.3                              |       | 0.1                      |       | 3.3                           |       |
| Balance  at December 31, 2007                |       | $               | 10.0       |                             | $          | 17.9                             |       | $                        | 6.9        |                          | $          | 1.2 |   | $ | 36.0 |   |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Less  : Accumulated amortization                  |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Balance  at December 31, 2006                |       | $               | —     |                             | $          | (0.2                             | )          | $                        | (0.1       | )                             | $          | — |   | $ | (0.3 | ) |
| Amortization                                      |       | —          |       | (1.2                             | )          | (0.6                             | )          | (0.1                     | )          | (1.9                          | )          |
| Foreign  currency translation                     |       | —          |       | (0.1                             | )          | —                           |       | (0.1                     | )          | (0.2                          | )          |
| Balance  at December 31, 2007                |       | $               | —     |                             | $          | (1.5                             | )          | $                        | (0.7       | )                             | $          | (0.2 | ) | $ | (2.4 | ) |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Intangible  assets-net at December 31, 2007  |       | $               | 10.0       |                             | $          | 16.4                             |       | $                        | 6.2        |                          | $          | 1.0 |   | $ | 33.6 |   |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Cost                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Balance  at December 31, 2007                |       | $               | 10.0       |                             | $          | 17.9                             |       | $                        | 6.9        |                          | $          | 1.2 |   | $ | 36.0 |   |
| Purchased  intangibles                            |       | —          |       | —                           |       | 0.2                              |       | —                   |       | 0.2                           |       |
| Impairment  charge                                |       | —          |       | (1.9                             | )          | (0.3                             | )          | —                   |       | (2.2                          | )          |
| Foreign  currency translation                     |       | (0.3            | )          | (0.8                             | )          | (0.3                             | )          | (0.1                     | )          | (1.5                          | )          |
| Balance  at December 31, 2008                |       | $               | 9.7        |                             | $          | 15.2                             |       | $                        | 6.5        |                          | $          | 1.1 |   | $ | 32.5 |   |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Less  : Accumulated amortization                  |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Balance  at December 31, 2007                |       | $               | —     |                             | $          | (1.5                             | )          | $                        | (0.7       | )                             | $          | (0.2 | ) | $ | (2.4 | ) |
| Amortization                                      |       | —          |       | (1.2                             | )          | (0.6                             | )          | (0.1                     | )          | (1.9                          | )          |
| Impairment  charge                                |       | —          |       | 0.4                              |       | —                           |       | —                   |       | 0.4                           |       |
| Foreign  currency translation                     |       | —          |       | —                           |       | —                           |       | 0.1                      |       | 0.1                           |       |
| Balance  at December 31, 2008                |       | $               | —     |                             | $          | (2.3                             | )          | $                        | (1.3       | )                             | $          | (0.2 | ) | $ | (3.8 | ) |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Intangible  assets-net at December 31, 2008  |       | $               | 9.7        |                             | $          | 12.9                             |       | $                        | 5.2        |                          | $          | 0.9 |   | $ | 28.7 |   |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Cost                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Balance  at December 31, 2008                |       | $               | 9.7        |                             | $          | 15.2                             |       | $                        | 6.5        |                          | $          | 1.1 |   | $ | 32.5 |   |
| Foreign  currency translation                     |       | 0.2             |       | 0.3                              |       | 0.1                              |       | 0.1                      |       | 0.7                           |       |
| Balance  at December 31, 2009                |       | $               | 9.9        |                             | $          | 15.5                             |       | $                        | 6.6        |                          | $          | 1.2 |   | $ | 33.2 |   |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Less  : Accumulated amortization                  |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Balance  at December 31, 2008                |       | $               | —     |                             | $          | (2.3                             | )          | $                        | (1.3       | )                             | $          | (0.2 | ) | $ | (3.8 | ) |
| Amortization                                      |       | —          |       | (1.0                             | )          | (0.6                             | )          | (0.2                     | )          | (1.8                          | )          |
| Foreign  currency translation                     |       | —          |       | (0.1                             | )          | —                           |       | —                   |       | (0.1                          | )          |
| Balance  at December 31, 2009                |       | $               | —     |                             | $          | (3.4                             | )          | $                        | (1.9       | )                             | $          | (0.4 | ) | $ | (5.7 | ) |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Intangible  assets-net at December 31, 2009  |       | $               | 9.9        |                             | $          | 12.1                             |       | $                        | 4.7        |                          | $          | 0.8 |   | $ | 27.5 |   |
|                                              |       |            |       |                             |       |                             |       |                     |       |                          |       |
| Weighted  Average Amortization Period (Years)     |       | Not amortized   |       | 15                               |       | 10                               |       | 10                       |       | 10                            |       |

 

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Table of Contents

 

The intangible assetsacquired in the Fox River acquisition are reported within the Fine Papersegment.  See Note 14, “Business Segment and Geographic Information.” Aggregate amortization expense of acquired intangible assets for the yearsended December 31, 2009, 2008 and 2007 was $1.8 million, $1.9 million and$1.9 million, respectively.  Estimated annual amortization expense foreach of the next five years is approximately $1.8 million.

 

The Company’s annual test of other intangible assets forimpairment at November 30, 2009, indicated that the carrying amount ofsuch intangible assets was recoverable. The Company determined during its annualtest of intangible assets for impairment at November 30, 2008 that certaintrade names and customer based intangible assets acquired in the Neenah Germanyacquisition were impaired at December 31, 2008.  For the year ended December 31,2008, the Company recognized a non-cash pre-tax charge of approximately $1.8million for the impairment of such intangible assets.

 

**Note 5. Discontinued Operations**

 

***Sale of the Pictou Milland the Woodlands***

 

As of December 31, 2006, the Company’s pulp operationsconsisted of the Pictou Mill and the Woodlands. The Company considered its pulpoperations as non-strategic assets and sought opportunities to reduce itsexposure to the cyclical commodity pulp business. In the first quarter of 2007,the Company engaged a nationally known investment banking firm to identifybuyers interested in acquiring the Pictou Mill and/or the Woodlands. Throughout2007, the Company actively pursued opportunities to maximize the value of theseassets through a sale or divesture, however, as of December 31, 2007, theCompany did not believe it was probable that the assets could be sold within 12months.

 

In February 2008, Atlas was identified as a partyinterested in acquiring the Pictou Mill. The transaction with Atlas did notinclude the Woodlands. At that time, the Company committed to a plan to sellthe Pictou Mill to Atlas and to separately pursue purchasers of the Woodlands.In June 2008, Neenah Canada completed the sale of the Pictou Mill toNorthern Pulp, a new operating company jointly owned by Atlas Holdings LLC andBlue Wolf Capital Management LLC.  In connection with the transfer of thePictou Mill, Neenah Canada made payments of approximately $10.3 million toNorthern Pulp. In addition, the Company incurred transaction costs of approximately$3.3 million. Pursuant to the terms of the transaction, Northern Pulp assumedall of the assets and liabilities associated with the Pictou Mill, as well asexisting customer contracts, supply agreements (including a pulp supplyagreement with Kimberly-Clark), labor agreements and pension obligations.

 

In conjunction with thesale of the Pictou Mill, the Company entered into a stumpage agreement(the “Stumpage Agreement”) which allows Northern Pulp to harvest anaverage of approximately 400,000 metric tons of softwood timber annually fromthe Woodlands. The Stumpage Agreement is for a term of ten years andNorthern Pulp has the option to extend the agreement for an additional threeyears.  For calendar year 2008, Northern Pulp paid a nominal amount for approximately236,000 metric tons of softwood timber harvested under the Stumpage Agreement. As a result, the Company recorded $2.8 million in deferred revenue for theestimated fair value of the timber to be harvested by Northern Pulp in calendar2008.  For the year ended December 31, 2008, the Company recognizedall of such deferred revenue. For timber purchases during calendar year 2009,Northern Pulp paid the stumpage rate charged by the Nova Scotia provincialgovernment for harvesting on government licensed lands. The price paid fortimber purchases during the remainder of the Stumpage Agreement will bebased on an agreed upon formula for estimating market prices. The Companybelieves the Stumpage Agreement prices for calendar year 2009 and beyondrepresent market rates.  Northern Pulp has agreed to pay substantially allcosts associated with maintaining the Woodlands and harvesting thetimber.  The Stumpage Agreement will be terminated in conjunction with thesale of the Woodlands.

 

During the first quarter of 2008, the Company determinedthat the estimated value it would receive from a sale of the Pictou Millindicated that it would not recover the carrying value of the mill’s long-livedassets. As a result, the Company recognized aggregate non-cash, pre-taximpairment charges of $91.2 million to write-off the carrying value of thePictou Mill’s long-lived assets. In addition, for the year ended December 31,2008, the Company recorded a pre-tax loss of $29.4 million to recognize theloss on disposal of the Pictou Mill.

 

In conjunction with the saleof the Pictou Mill, Northern Pulp assumed responsibility for all pension andother postretirement benefit obligations for active and retired employees ofthe mill. The Company accounted for the transfer of the Nova Scotia, Canadadefined benefit pension plan (the  “NovaScotia Plan”) as a settlement of postretirement benefit obligations pursuant to ASC Topic 715. Forthe year ended December 31, 2008, the Company recognized a non-cash,pre-tax settlement loss of $53.7 million for the reclassification of deferredpension and other postretirement benefit adjustments related to the Nova ScotiaPlan from accumulated other comprehensive income to loss from discontinuedoperations in the consolidated statement of operations.

 

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On March 1, 2010, theCompany announced that Neenah Canada had signed a definitive agreement to sellthe Woodlands.  See Note 17, “Subsequent Event.”  As of December 31, 2009 and 2008, theWoodlands are reported as assets held for sale on the consolidated balancesheet. The results of operations of the Pictou Mill and the Woodlands and theloss on disposal of the Pictou Mill are reported as discontinued operations inthe consolidated statements of operations for all years presented. Assets heldfor sale are valued at the lower of cost or fair value less cost to sell. As ofDecember 31, 2009 and 2008, the assets of the Woodlands are reported attheir historical book cost of $3.8 million and $3.3 million, respectively.

 

***Transfer of the TerraceBay Mill***

 

In August 2006, Neenah Canada transferred Terrace Bayto Buchanan, which assumed responsibility for substantially all liabilitiesrelated to the future operation of Terrace Bay.  At closing, Neenah Canadaretained certain working capital amounts and pension and long-term disabilityobligations for current and former mill employees and postretirement medicaland life insurance obligations for current retirees.

 

As a closing condition of the agreement to transfer TerraceBay to Buchanan, Neenah Canada initiated plans to curtail and settle itsOntario, Canada defined benefit pension plan (the “Ontario Plan”). In December 2007,the Ontario Plan was terminated and all outstanding pension obligations foractive employees were settled through the purchase of annuity contracts orlump-sum payments pursuant to participant elections. For the year ended December 31,2007, Neenah Canada recognized a non-cash pre-tax settlement loss of $38.7million upon termination of the Ontario Plan.

 

During the first quarter of 2008, Neenah Canada paidapproximately $5.0 million to settle litigation related to the reduction and/orelimination of certain retiree benefits following the transfer of Terrace Bayto Buchanan.  In conjunction with the settlement, Neenah Canada agreed tocontinue certain retiree life insurance benefits at a reduced rate in thefuture.  As a result of the settlement, for the year ended December 31,2008, Neenah Canada recorded a curtailment gain of approximately $4.3 millionwhich is recorded in other income-net on the consolidated statement ofoperations.  For all years presented, theresults of operations of Terrace Bay are reflected as discontinued operationsin the consolidated statements of operations.

 

The following table presents the results of discontinuedoperations:

 
| ** **                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  sales, net of intersegment sales (a)                        |       | $                                | 3.7        |   | $ | 101.9 |   | $ | 223.5 |   |
|                                                             |       |                             |       |   |   |   |   |
| Discontinued  operations:                                        |       |                             |       |   |   |   |   |
| Income  (loss) from operations                                   |       |                             |       |   |   |   |   |
| Pictou  Mill and the Woodlands (b)                               |       | $                                | 2.8        |   | $ | (97.8 | ) | $ | 13.3 |   |
| Terrace  Bay (c)                                                 |       | —                           |       | — |   | (44.9 | ) |
| Income  (loss) from operations                                   |       | 2.8                              |       | (97.8 | ) | (31.6 | ) |
|                                                             |       |                             |       |   |   |   |   |
| Loss  on disposal - Pictou Mill                                  |       | (0.3                             | )          | (29.4 | ) | — |   |
| Loss  on settlement of post-employment benefit plans             |       | —                           |       | (53.7 | ) | — |   |
| Loss  on disposal                                                |       | (0.3                             | )          | (83.1 | ) | — |   |
| Income  (loss) before income taxes                               |       | 2.5                              |       | (180.9 | ) | (31.6 | ) |
| (Provision)  benefit for income taxes                            |       | (1.9                             | )          | 69.7 |   | 9.6 |   |
| Income  (loss) from discontinued operations, net of income taxes |       | $                                | 0.6        |   | $ | (111.2 | ) | $ | (22.0 | ) |

 

----

(a)          For theyears ended December 31, 2009 and 2008, represent net sales of the PictouMill and the Woodlands only.

(b)         For the yearended December 31, 2008, the loss from operations includes aggregatenon-cash, pre-tax impairment charges of $91.2 million to write-off the carryingvalue of the Pictou Mill’s long-lived assets.

(c)          For the yearended December 31, 2007, the loss from operations includes a loss of $38.7million related to the settlement of the Ontario Plan.

 

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Table ofContents

 

**Note 6.Income Taxes**

 

The Company accounts forincome taxes in accordance with ASC Topic 740, *Income Taxes*(“ASC Topic 740”).  Income tax expense(benefit) represented (73.5) percent, 6.8 percent and (13.0) percent of income(loss) from continuing operations before income taxes for the years endedDecember 31, 2009, 2008 and 2007, respectively. The following tablepresents the principal reasons for the difference between the effective incometax provision (benefit) rate and the U.S. federal statutory income taxprovision (benefit) rate:

 
| ** **                                                           | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| U.S.  federal statutory income tax provision (benefit)               |       | (35.0                            | )%         | $ | (2.4 | ) | (35.0 | )% | $ | (15.5 | ) | 35.0 | % | $ | 10.0 |   |
| U.S.  state income taxes, net of federal income tax effect           |       | (3.3                             | )%         | (0.2 | ) | 0.5 | % | 0.2 |   | 0.8 | % | 0.2 |   |
| Uncertain  income tax positions                                      |       | 39.1                             | %          | 2.7 |   | — |   | — |   | — |   | — |   |
| Nondeductible  goodwill and other intangible asset impairment charge |       | —                           |       | — |   | 33.0 | % | 14.6 |   | — |   | — |   |
| Limitation  on tax benefits available to Fox River                   |       | —                           |       | — |   | 8.8 | % | 3.9 |   | — |   | — |   |
| Enacted  German tax law changes                                      |       | —                           |       | — |   | — |   |   |   | (30.7 | )% | (8.8 | ) |
| Foreign  tax rate differences                                        |       | (47.2                            | )%         | (3.2 | ) | 1.0 | % | 0.4 |   | (10.6 | )% | (3.0 | ) |
| Other  differences—net                                          |       | (27.1                            | )%         | (1.9 | ) | (1.5 | )% | (0.6 | ) | (7.5 | )% | (2.1 | ) |
|                                                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Effective  income tax provision (benefit)                            |       | (73.5                            | )%         | $ | (5.0 | ) | 6.8 | % | $ | 3.0 |   | (13.0 | )% | $ | (3.7 | ) |

 

The Company’s effectiveincome tax (benefit) rate can be affected by many factors, including but notlimited to, changes in the mix of earnings in taxing jurisdictions withdiffering statutory rates, changes in corporate structure as a result ofbusiness acquisitions and dispositions, changes in the valuation of deferredtax assets and liabilities, the results of audit examinations of previouslyfiled tax returns and changes in tax laws. During the year endedDecember 31, 2007, German tax laws were amended to reduce statutory incometax rates effective as of January 1, 2008. Application of the new rates tothe Company’s existing deferred tax assets and liabilities reduced theCompany’s net deferred tax liabilities at December 31, 2007. The reductionin the Company’s net deferred tax liabilities due to the benefit of the enactedtax rate change resulted in an income tax benefit of $8.8 million for the yearended December 31, 2007 in accordance with ASC Topic 740.

 

The following tablepresents the U.S. and foreign components of income (loss) from continuingoperations before income taxes:

 
| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income  (loss) from continuing operations before income taxes: |       |                             |       |   |   |   |   |
| U.S.                                                           |       | $                                | (13.3      | ) | $ | 3.1 |   | $ | 6.6 |   |
| Foreign                                                        |       | 6.5                              |       | (47.4 | ) | 21.9 |   |
| Total                                                          |       | $                                | (6.8       | ) | $ | (44.3 | ) | $ | 28.5 |   |

 

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Table of Contents

 

The following tablepresents the components of the provision (benefit) for income taxes:

 
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                             |       |   |   |   |   |
| Provision  (benefit) for income texes:      |       |                             |       |   |   |   |   |
| Current:                                    |       |                             |       |   |   |   |   |
| Federal                                     |       | $                                | 2.5        |   | $ | 0.9 |   | $ | 9.9 |   |
| State                                       |       | 1.0                              |       | (0.4 | ) | 1.1 |   |
| Foreign                                     |       | 1.9                              |       | 1.2 |   | 6.1 |   |
| Total  current tax provision                |       | 5.4                              |       | 1.7 |   | 17.1 |   |
| Deferred:                                   |       |                             |       |   |   |   |   |
| Federal                                     |       | (7.5                             | )          | 3.9 |   | (9.8 | ) |
| State                                       |       | (0.6                             | )          | 1.3 |   | (0.9 | ) |
| Foreign                                     |       | (2.3                             | )          | (3.9 | ) | (10.1 | ) |
| Total  deferred tax provision (benefit)     |       | (10.4                            | )          | 1.3 |   | (20.8 | ) |
| Total  provision (benefit) for income taxes |       | $                                | (5.0       | ) | $ | 3.0 |   | $ | (3.7 | ) |

 

The Company has electedto treat its Canadian operations as a branch for U.S. income tax purposes.Therefore, the amount of income (loss) before income taxes from Canadianoperations are included in the Company’s consolidated U.S. income tax returnsand such amounts are subject to U.S. income taxes.

 

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The asset and liabilityapproach is used to recognize deferred tax assets and liabilities for theexpected future tax consequences of temporary differences between the carryingamounts and the tax bases of assets and liabilities. The components of deferredtax assets and liabilities are as follows:

 
| ** **                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Net  current deferred income tax assets                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Canadian  timberlands                                                 |       | $                     | 28.2       |   | $ | 28.2 |   |
| Intangible  assets                                                    |       | 20.1                  |       | 19.9 |   |
| Net  operating losses                                                 |       | 7.7                   |       | 10.9 |   |
| Accrued  liabilities                                                  |       | 3.9                   |       | 4.5 |   |
| Employee  benefits                                                    |       | 1.3                   |       | 2.2 |   |
| Inventory                                                             |       | (0.1                  | )          | (1.2 | ) |
| Other                                                                 |       | 1.3                   |       | 0.9 |   |
| Net  current deferred income tax assets before valuation allowance    |       | 62.4                  |       | 65.4 |   |
| Valuation  allowance                                                  |       | (0.7                  | )          | — |   |
| Net  current deferred income tax assets                               |       | 61.7                  |       | 65.4 |   |
|                                                                  |       |                  |       |   |   |
| Net  noncurrent deferred income tax assets                            | ** ** | ** **            | ** ** | ** ** | ** ** |
| Employee  benefits                                                    |       | 32.3                  |       | 24.7 |   |
| Net  operating losses and tax credits                                 |       | 28.0                  |       | 35.9 |   |
| Other  long-term obligations                                          |       | 0.6                   |       | 0.8 |   |
| Accumulated  depreciation                                             |       | (22.7                 | )          | (23.9 | ) |
| Other                                                                 |       | —                |       | (2.2 | ) |
| Net  noncurrent deferred income tax assets before valuation allowance |       | 38.2                  |       | 35.3 |   |
| Valuation  allowance                                                  |       | (0.8                  | )          | — |   |
| Net  noncurrent deferred income tax assets                            |       | 37.4                  |       | 35.3 |   |
|                                                                  |       |                  |       |   |   |
| Total  deferred income tax assets                                     |       | $                     | 99.1       |   | $ | 100.7 |   |
|                                                                  |       |                  |       |   |   |
| Net  noncurrent deferred income tax liability                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accumulated  depreciation                                             |       | $                     | 22.8       |   | $ | 21.0 |   |
| Intangibles                                                           |       | 6.2                   |       | 6.8 |   |
| Interest  limitation                                                  |       | (3.2                  | )          | (1.7 | ) |
| Employee  benefits                                                    |       | (1.7                  | )          | 0.5 |   |
| Other                                                                 |       | (0.4                  | )          | (1.2 | ) |
| Net  noncurrent deferred income tax liabilities                       |       | $                     | 23.7       |   | $ | 25.4 |   |

 

As of December 31,2009, a valuation allowance of $1.5 million has been provided on deferredincome tax assets. In determining the need for valuation allowances, theCompany considers many factors, including specific taxing jurisdictions,sources of taxable income, income tax strategies and forecasted earnings forthe entities in each jurisdiction. A valuation allowance is recognized if,based on the weight of available evidence, the Company concludes that it ismore likely than not that some portion or all of the deferred income tax assetwill not be realized.

 

As of December 31,2009, the Company had $65.3 million of U.S. Federal and $75.4 million of U.S.State net operating losses, substantially all of which may be carried forwardto offset future taxable income through 2029. The Company also haspreacquisition and recognized built-in carryovers of approximately $16.1million, net of expected limitations. In addition, the Company has $2.8 millionof AMT carryovers, which can be carried forward indefinitely.

 

No provision for U.S.income taxes has been made for undistributed earnings of certain of theCompany’s foreign subsidiaries which have been indefinitely reinvested. TheCompany is unable to estimate the amount of U.S. income taxes that would bepayable if such undistributed foreign earnings were repatriated.

 

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Table of Contents

 

The following is atabular reconciliation of the total amounts of uncertain tax positions as ofand for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                        | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Balance  at January 1,                       |       | $                                         | 12.9       |   | $ | 13.3 |   | $ | — |   |
| Initial  adoption                                 |       | —                                    |       | — |   | 12.9 |   |
| Increase  in prior period tax positions           |       | 4.2                                       |       | 0.2 |   | — |   |
| Decrease  in prior period tax positions           |       | (0.1                                      | )          | (1.0 | ) | (5.5 | ) |
| Increase  in current period tax positions         |       | 0.5                                       |       | 0.4 |   | 5.9 |   |
| Decrease  due to settlements with tax authorities |       | (8.0                                      | )          | — |   | — |   |
|                                              |       |                                      |       |   |   |   |   |
| Balance  at December 31,                     |       | $                                         | 9.5        |   | $ | 12.9 |   | $ | 13.3 |   |

 

If recognized,approximately $2.1 million of the benefit for uncertain tax positions atDecember 31, 2009 would favorably affect the Company’s effective tax ratein future periods. The Company does not anticipate that the expiration of thestatute of limitations or the settlement of audits in the next 12 months willresult in liabilities for uncertain income tax positions that are materiallydifferent than the amounts accrued as of December 31, 2009.

 

Tax years 2004 through2008 are subject to examination by federal and state tax authorities in theUnited States, federal and provincial tax authorities in Canada and federal andmunicipal tax authorities in Germany. During 2009, the Company settled InternalRevenue Service (the “IRS”) examinations of the 2004, 2005 and 2006 taxyears.  As of December 31, 2009, the2007 and 2008 tax years are being audited by the IRS; the 2005, 2006 and 2007tax years are being audited by German tax authorities and the 2004, 2005, 2006and 2007 tax years are being audited by Canadian tax authorities.

 

The Company recognizesaccrued interest and penalties related to uncertain income tax positions in theProvision (benefit) for income taxes on the consolidated statements ofoperations. As of December 31, 2009 and 2008, the Company had $0.7 millionand $0.1 million, respectively, accrued for interest related to uncertainincome tax positions.

 

**Note 7.Debt**

 

Long-term debt consistedof the following:

 
| ** **                                                                                                             | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Senior  Notes (7.375% fixed rate) due 2014                                                                             |       | $                     | 225.0      |   | $ | 225.0 |   |
| Revolving  bank credit facility (variable rates), due 2013                                                             |       | 27.9                  |       | 101.1 |   |
| Term  Loan (variable rates), due 2013                                                                                  |       | 40.0                  |       | 7.2 |   |
| Neenah  Germany project financing (3.8% fixed rate) due in 16 equal semi-annual  installments beginning June 2009 |       | 12.5                  |       | 14.0 |   |
| Neenah  Germany revolving line of credit (variable rates)                                                              |       | 12.9                  |       | 17.3 |   |
| Other  debt (2.9% fixed rate) due in November 2010                                                                |       | 0.9                   |       | — |   |
| Total  Debt                                                                                                            |       | 319.2                 |       | 364.6 |   |
| Less:  Debt payable within one year                                                                                    |       | 55.6                  |       | 24.1 |   |
| Long-term  debt                                                                                                        |       | $                     | 263.6      |   | $ | 340.5 |   |

 

***Senior Unsecured Notes***

 

On November 30,2004, the Company completed an underwritten offering of ten-year seniorunsecured notes (the “Senior Notes”) at an aggregate face amount of $225 million.Interest on the Senior Notes is payable May 15 and November 15 ofeach year. The Senior Notes are fully and unconditionally guaranteed bysubstantially all of the Company’s subsidiaries, with the exception of NeenahGermany.

 

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***Amended andRestated Secured Revolving Credit Facility***

 

On November 5, 2009, the Company renewed andmodified its Bank Credit Agreement by entering into an amended and restatedcredit agreement (as amended and restated, the “Restated Credit Agreement”) byand among the Company, certain of its subsidiaries as co-borrowers, NeenahCanada, as guarantor, the lenders listed in the Restated Credit Agreement andJPMorgan Chase Bank, N.A., as agent for the lenders.  The Restated CreditAgreement consists of a $100 million senior, secured revolving credit facility(the “New Revolver”) and (ii) a $40 million senior secured term loan(the “New Term Loan”).  The Company’s ability to borrow under the NewRevolver is limited to the lowest of (a) $100 million; (b) theCompany’s borrowing base (as determined in accordance with the Restated CreditAgreement) and (c) the applicable cap on the amount of “credit facilities”under the indenture for the Senior Notes.  In addition, under certainconditions, the Company has the ability to increase the size of the NewRevolver by up to $50 million. The total commitment under the RestatedCredit Agreement cannot exceed $150 million. The Restated Credit Agreementterminates on November 30, 2013.

 

The New Revolver bears interest at either (1) aprime rate-based index plus a percentage ranging from 2.00% to 2.50%, or(2) LIBOR plus a percentage ranging from 3.50% to 4.00%, depending uponthe amount of availability under the New Revolver.  Upon the sale of theWoodlands, these percentages will each be reduced by 0.25%.  See Note 17, “Subsequent Event.” The sale ofthe Ripon Mill will reduce such percentages by an additional 0.25%. The NewTerm Loan will bear interest at either (A) a prime rate-based index plus2.75%, or (B) LIBOR plus 4.25%.  Interest is computed based on actualdays elapsed in a 360-day year, payable monthly in arrears for prime-rate basedloans, or payable monthly in arrears and at the end of the applicable interestperiod for LIBOR loans.  The Company is also required to pay a monthlyfacility fee on the unused amount of the New Revolver commitment, calculated atthe per annum rate of 0.50% while the New Term Loan remains outstanding, andafter the New Term Loan has been repaid in full, at a per annum rate rangingbetween 0.50% and 0.75%, depending upon usage under the New Revolver.

 

The Restated Credit Agreement is secured bysubstantially all of the assets of the Company and the subsidiary borrowers,including the capital stock of such subsidiaries, and is guaranteed by NeenahCanada.  Neenah Canada’s guaranty is secured by substantially all of thatsubsidiary’s assets.  Neenah Germany is not obligated with respect to theRestated Credit Agreement, either as a borrower or a guarantor; however, theCompany has directly or indirectly pledged 65% of its equity interest in NeenahGermany as security for the obligations of the Company and its subsidiaries underthe Restated Credit Agreement.

 

The weighted-average interest rate on outstanding NewRevolver borrowings as of December 31, 2009 was 4.6 percent per annum.Interest on amounts borrowed under the New Revolver is paid monthly. Amountsoutstanding under the New Revolver may be repaid, in whole or in part, at anytime without premium or penalty except for specified make-whole payments onLIBOR-based loans.  All principal amounts outstanding under the NewRevolver are due and payable on the date of termination of the Restated CreditAgreement. Borrowing availability under the New Revolver is reduced byoutstanding letters of credit and reserves for certain other items as definedin the Restated Credit Agreement. Availability under the Restated Credit Agreementwill fluctuate over time depending on the value of the Company’s inventory,receivables and various capital assets. As of December 31, 2009, theCompany had approximately $2.0 million of letters of credit and other itemsoutstanding which reduced availability and $60.6 million of borrowingavailability under the New Revolver.  TheCompany’s borrowing base will be reduced by approximately $9.1 million upon thesale of the remaining assets of the Ripon Mill and its ability to use proceedsfrom the sale is restricted to “permitted uses” as defined in the indenture forthe Senior Notes.

 

The weighted-average interest rate on outstanding NewTerm Loan borrowings as of December 31, 2009 was 4.5 percent perannum.  Commencing April 30, 2010,the Company will be required to make quarterly principal payments on the NewTerm Loan of $1.25 million per quarter with a final payment of $21.25 millionin November 2013. The Company is required to use proceeds from the sale ofthe Woodlands to prepay the New Term Loan. On March 1, 2010, the Company announced that Neenah Canada hadsigned a definitive agreement to sell the Woodlands and therefore hasclassified the New Term Loan as Debt payable within one year on theconsolidated balance sheet as of December 31, 2009.  See Note 17, “Subsequent Event.” The Companyused a portion of the New Term Loan proceeds to repay the Term Loan (see below)in full.

 

The Restated Credit Agreement contains events ofdefault customary for financings of this type, including failure to pay principalor interest, materially false representations or warranties, failure to observecovenants and other terms of the Restated Credit Agreement, cross-defaults tocertain other indebtedness, bankruptcy, insolvency, various ERISA violations,the incurrence of material judgments and changes in control.

 

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Tableof Contents

 

The Restated Credit Agreement contains covenants withwhich the Company must comply during the term of the agreement.  Amongother things, such covenants restrict the Company’s ability to incur certainadditional debt, make specified restricted payments and capital expenditures,authorize or issue capital stock, enter into transactions with affiliates,consolidate or merge with or acquire another business, sell certain of itsassets, or dissolve or wind up.  In addition, the terms of the RestatedCredit Agreement require the Company to achieve and maintain compliance with afixed charge coverage ratio if availability under the Restated Credit Agreementis less than $20 million. At December 31, 2009, the Company was incompliance with all covenants.

 

The Company’s ability to pay cash dividends on itscommon stock is limited under the terms of both the Restated Credit Agreementand the Senior Notes. At December 31, 2009, under the most restrictiveterms of these agreements, the Company’s ability to pay cash dividends on itscommon stock is limited to a total of $8 million in a 12-month period.

 

***Previous SecuredRevolving Credit Facility***

 

On November 30, 2004, the Company entered into aCredit Agreement by and among the Company, certain of its subsidiaries and thelenders listed in the Credit Agreement (the “Credit Agreement”). Under theCredit Agreement, the Company had a secured revolving credit facility (the“Revolver”) that provided for borrowings of up to $150 million. The CreditAgreement was secured by substantially all of the Company’s assets, includingthe capital stock of its subsidiaries and was guaranteed by Neenah Canada. TheCredit Agreement was originally scheduled to terminate on November 30,2008.

 

Following several amendments, as of December 31,2008, the Credit Agreement (as amended, the “Amended Credit Agreement”)provided for a secured revolving credit facility (the “Amended Revolver”) thatprovided for borrowings of up to $210 million. The Company’s ability to borrowunder the Amended Revolver was limited to the lowest of (a) $210 million,(b) the Company’s borrowing base (as determined in accordance with theAmended Credit Agreement), and (c) the applicable cap on the amount of“credit facilities” under the indenture for the Senior Notes. The terminationdate of the Amended Credit Agreement was extended to November 30, 2010.

 

As of December 31, 2008, the interest rateapplicable to borrowings under the Amended Revolver was either (1) thePrime Rate plus a percentage ranging from 0 percent to 2.00 percent or(2) LIBOR plus a percentage ranging from 1.25 percent to 3.50 percent.Interest was computed based on actual days elapsed in a 360-day year, payablemonthly in arrears for base rate loans, or payable monthly in arrears and atthe end of the applicable interest period for LIBOR loans. The commitment wassubject to an annual facility fee of 0.25 percent on the average daily unusedamount of the commitment.  Theweighted-average interest rate on outstanding Revolver borrowings as ofDecember 31, 2008 was 3.6 percent per annum.

 

The Amended Credit Agreement was secured bysubstantially all of the assets of the Company and the subsidiary borrowers,including the capital stock of such subsidiaries, and was guaranteed by NeenahCanada. Neenah Canada’s guarantee was secured by substantially all of thatsubsidiary’s assets.  Neenah Germany was not a borrower or guarantor withrespect to the Amended Revolver.  However, the Company pledged 65 percentof its equity interest in Neenah Germany as security for the obligations of theCompany and its subsidiaries under the Amended Credit Agreement.

 

***Previous Term Loan***

 

In March 2007, the Company entered into anagreement by and among the Company, certain of its subsidiaries and JP MorganChase Bank, N.A. (the “Term Loan Agreement”) to borrow up to $25 million (the“Term Loan”). As of December 31, 2008, the weighted-average interest rateon outstanding Term Loan borrowings was 3.6 percent per annum. For the yearended December 31, 2008, the Company used proceeds from the sale of FoxRiver assets to prepay approximately $9.5 million in Term Loanborrowings.  In June 2008, the Company entered into the FirstAmendment (the “First Amendment”) to the Term Loan.  The First Amendmentreduced required amortization payments to $1.25 million per quarter.  TheTerm Loan was repaid in November 2009 with proceeds from the New TermLoan.

 

The Company accounted for the modification of theAmended Credit Agreement and the termination of the Term Loan Agreement as anextinguishment of debt in accordance with ASC Topic 470, “*Debt.*” As a result, for the year endedDecember 31, 2009, the Company recognized within interest expenseapproximately $1.4 million for costs incurred in conjunction with modifying theAmended Credit Agreement and for the loss on extinguishment of the Term LoanAgreement.  The Company capitalizedapproximately $2.3 million of debt issuance costs associated with the RestatedCredit Agreement.  Such costs will beamortized over the term of the Restated Credit Agreement.

 

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***Other Debt***

 

In December 2006, Neenah Germany entered into an agreement withHypoVereinsbank and IKB Deutsche Industriebank AG to provide €10.0 million ofproject financing with a term of 10 years for the construction of asaturator.  Principal outstanding underthe agreement may be repaid at any time without penalty.  Interest on amounts outstanding is based onactual days elapsed in a 360-day year and is payable semi-annually. As ofDecember 31, 2009, €8.8 million ($12.5 million) was outstanding under thisagreement.

 

Neenah Germany has a revolving line of credit (the “German Line ofCredit”) with HypoVereinsbank that provides for borrowings of up to €15 millionfor general corporate purposes. The German Line of Credit is secured by thedomestic accounts receivable of Neenah Germany. As of December 31, 2009 and2008, the weighted-average interest rate on outstanding Line of Creditborrowings was 4.1 percent per annum and 5.7 percent per annum,respectively.  In November 2009, NeenahGermany extended the termination date for the German Line of Credit to November30, 2010.  Neenah Germany has the abilityto borrow in either Euros or U.S. dollars. Interest is computed on U.S. dollars loans at the rate of 8.5 percentper annum and on Euro loans at EURIBOR plus a margin of 1.5 percent.  Interest is payable quarterly and principalmay be repaid at any time without penalty. As of December 31, 2009, €8.9 million ($12.9 million, based on exchangerates at December 31, 2009) was outstanding under the Line of Credit and €6.0million ($8.6 million, based on exchange rates at December 31, 2009) of creditwas available. Neenah Germany’s ability to pay dividends ortransfer funds to the Company is limited under the terms of the German Line ofCredit, to not exceed certain limits defined in the agreement withoutlender approval or repayment of the amount outstanding under the line, whichwas $€8.9 million($12.9 million, based on exchange rates at December 31, 2009) at December 31,2009.  In addition, the terms of the German Line of Credit require NeenahGermany to maintain a ratio of stockholder’s equity to total assets equal to orgreater than 45 percent.  The Company was in compliance with allprovisions of the agreement as of December 31, 2009.

 

***Principal Payments***

 

The following table presents the Company’s required debt payments:

 
| ** **    | ** ** | **2010(a)** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013(b)** | ** ** | **2014(c)** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------|------------|-------------|------------|----------|------------|----------|------------|-------------|------------|-------------|------------|----------------|------------|-----------|------------|
| Debt payments |       | $           | 55.6       |     | $          | 1.8      |       | $           | 1.7        |        | $          | 29.7           |       | $         | 226.8      |   | $ | 3.6 |   | $ | 319.2 |   |
|               |            |             |            |          |            |          |            |             |            |             |            |                |            |           |            |  |  |  |  |  |  |  |

 

----

(a)   Includes New Term Loan prepayment of $40.0 million.

(b)   Includes principal payments on the Company’s revolving bank creditfacility of $26.2 million.

(c)   Includes principal payments on the Senior Notes of $225.0 million.

 

**Note 8. Pension and Other Postretirement Benefits**

 

***Pension Plans***

 

Substantially all active employees of the Company’s U.S. paperoperations participate in defined benefit pension plans and/or definedcontribution retirement plans. Neenah Germany has defined benefit plansdesigned to provide a monthly pension upon retirement for substantially all itsemployees in Germany.  In addition, theCompany maintains a supplemental retirement contribution plan (the “SERP”) whichis a non-qualified defined benefit plan. The Company provides benefits underthe SERP to the extent necessary to fulfill the intent of its defined benefitretirement plans without regard to the limitations set by the Internal RevenueCode on qualified defined benefit plans. The Company has no legal orgovernmental obligation to fund the SERP and as such the plan is currentlyunfunded.

 

The closure of the Ripon Mill (See Note 3, “Closure of the Ripon Mill”)resulted in the elimination of expected years of future service for millemployees eligible to participate in the Company’s defined benefit pensionplans and postretirement medical plan. In accordance with ASC Topic 715, the Company measured the assets andliabilities of the affected postretirement plans as of May 31, 2009 andrecognized an aggregate curtailment loss of approximately $0.8 million for theyear ended December 31, 2009.

 

In conjunction with the transfer of Terrace Bay to Buchanan, NeenahCanada initiated plans to curtail and settle the Ontario Plan.  In December 2007, the Company terminated theOntario Plan and settled all outstanding pension obligations for activeemployees through the purchase of annuity contracts or lump-sum paymentspursuant to participant elections. For the year ended December 31, 2007, NeenahCanada recognized a non-cash pre-tax settlement loss of $38.7 million upontermination of the Ontario Plan. No additional funding was required to settlethe Ontario Plan. See Note 5, “Discontinued Operations — Transfer of theTerrace Bay Mill.”

 

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In November 2007,the Company amended the Fox River defined benefit pension plan to freeze thevested pension benefit for salaried employees born after December 31,1957.  The affected employees were transferred to the Company’s definedcontribution retirement plan. The pension benefit for salaried employees of FoxRiver born on or before December 31, 1957 was unaffected.  For theyear ended December 31, 2007, the Company recognized a reduction inpension expense of approximately $1.2 million related to the amendment.

 

The Company’s fundingpolicy for qualified defined benefit plans for its U.S. paper operations is tocontribute assets to fully fund the accumulated benefit obligation. Subject toregulatory and tax deductibility limits, any funding shortfall is to beeliminated over a reasonable number of years. Nonqualified plans providingpension benefits in excess of limitations imposed by taxing authorities are notfunded. There is no legal or governmental obligation to fund Neenah Germany’sbenefit plans and as such the Neenah Germany defined benefit plans arecurrently unfunded.

 

The Company uses the fairvalue of pension plan assets to determine pension expense, rather thanaveraging gains and losses over a period of years. Investment gains or lossesrepresent the difference between the expected return calculated using the fairvalue of the assets and the actual return based on the fair value of assets.The Company’s pension obligations are measured annually as of December 31.As of December 31, 2009, the Company’s pension plans had cumulativeunrecognized investment losses and other actuarial losses of approximately$28.9 million recorded in accumulated other comprehensive income.

 

***Other Postretirement Benefit Plans***

 

The Company providescontributory health care and life insurance benefit plans to active employeesof the Company and certain former employees. U.S. employees who are eligible to retire and continue coverage inretirement are offered contributory postretirement health and life insurancebenefits. The Company also offers retiree life insurance coverage on acontributory basis to certain Terrace Bay Mill retirees. In conjunction withthe sale of the Pictou Mill, Northern Pulp assumed responsibility for allhealth care and life insurance benefit plans for active and retired employeesof the mill.

 

In the fourth quarter of2007, Neenah Canada settled a class action lawsuit brought by certain retiredemployees of Neenah Canada by agreeing to pay the plaintiffs approximately 5.5million Canadian Dollars for a full and complete dismissal of all claims forretiree health and medical benefits against Neenah Canada and the Company. Neenah Canada also agreed to continue certain retiree life insurance benefitsat a reduced rate in the future.  For the year ended December 31,2007, Neenah Canada recorded a charge related to the litigation settlement of$5.2 million.

 

The Company’s obligationsfor postretirement benefits other than pensions are measured annually as ofDecember 31. At December 31, 2009, the assumed inflationary pre-65and post-65 health care cost trend rates used to determine year-end obligationsand costs for the year ended December 31, 2010 were 8.7 percent graduallydecreasing to an ultimate rate of 4.5 percent in 2027. The assumed inflationarypre-65 and post-65 health care cost trend rates used to determine obligationsat December 31, 2008 and cost for the year ended December 31, 2009were 9.0 percent gradually decreasing to an ultimate rate of 5.0 percent in2023.

 

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The following tablereconciles the benefit obligations, plan assets, funded status and netliability information of the Company’s pension and other benefit plans.

 
| ** **                                                         | ** ** | **Pension Benefits**             | ** ** | **Postretirement Benefits   Other than Pensions** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                         | ** ** | **2009**                         | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Change  in Benefit Obligation:                                     | ** ** | ** **                       | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit  obligation at beginning of year                           |       | $                                | 214.2      |                                              | $          | 407.4 |   | $ | 36.8 |   | $ | 55.2 |   |
| Service  cost                                                      |       | 4.5                              |       | 6.8                                               |       | 1.9 |   | 2.2 |   |
| Interest  cost                                                     |       | 14.3                             |       | 18.5                                              |       | 2.5 |   | 2.5 |   |
| Currency                                                           |       | 0.9                              |       | (14.6                                             | )          | 0.5 |   | (1.6 | ) |
| Actuarial  loss (gain)                                             |       | 11.9                             |       | (13.8                                             | )          | (1.5 | ) | (1.3 | ) |
| Benefit  payments from plans                                       |       | (10.6                            | )          | (15.0                                             | )          | (2.7 | ) | (8.9 | ) |
| Curtailments                                                       |       | (0.5                             | )          | —                                            |       | 0.4 |   | — |   |
| Divestitures                                                       |       | —                           |       | (175.1                                            | )          | — |   | (11.3 | ) |
| Benefit  obligation at end of year                                 |       | $                                | 234.7      |                                              | $          | 214.2 |   | $ | 37.9 |   | $ | 36.8 |   |
| Change  in Plan Assets:                                            | ** ** | ** **                       | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair  value of plan assets at beginning of year                    |       | $                                | 142.9      |                                              | $          | 343.6 |   | $ | — |   | $ | — |   |
| Actual  gain (loss) on plan assets                                 |       | 23.3                             |       | (20.4                                             | )          | — |   | — |   |
| Employer  contributions                                            |       | 10.2                             |       | 7.5                                               |       | — |   | — |   |
| Currency                                                           |       | —                           |       | (11.7                                             | )          | — |   | — |   |
| Benefit  payments                                                  |       | (8.2                             | )          | (12.6                                             | )          | — |   | — |   |
| Divestitures                                                       |       | —                           |       | (160.6                                            | )          | — |   | — |   |
| Other                                                              |       | —                           |       | (2.9                                              | )          | — |   | — |   |
| Fair  value of plan assets at end of year                          |       | $                                | 168.2      |                                              | $          | 142.9 |   | $ | — |   | $ | — |   |
| Reconciliation  of Funded Status                                   | ** ** | ** **                       | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair  value of plan assets                                         |       | $                                | 168.2      |                                              | $          | 142.9 |   | $ | — |   | $ | — |   |
| Projected  benefit obligation                                      |       | 234.7                            |       | 214.2                                             |       | 37.9 |   | 36.8 |   |
| Net  liability recognized in statement of financial position       |       | $                                | (66.5      | )                                                 | $          | (71.3 | ) | $ | (37.9 | ) | $ | (36.8 | ) |
| Amounts  recognized in statement of financial position consist of: |       |                             |       |                                              |       |   |   |   |   |
| Current  liabilities                                               |       | $                                | (2.2       | )                                                 | $          | (2.6 | ) | $ | (2.6 | ) | $ | (2.5 | ) |
| Noncurrent  liabilities                                            |       | (64.3                            | )          | (68.7                                             | )          | (35.3 | ) | (34.3 | ) |
| Net  amount recognized                                             |       | $                                | (66.5      | )                                                 | $          | (71.3 | ) | $ | (37.9 | ) | $ | (36.8 | ) |

 

Amounts recognized inaccumulated other comprehensive income consist of:

 
| ** **                                                  | ** ** | **Pension Benefits**  | ** ** | **Postretirement Benefits Other   than Pensions** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------------------|------------|
| ** **                                                  | ** ** | **December 31,** | ** ** |
| ** **                                                  | ** ** | **2009**              | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                  | ** ** | ** **            | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accumulated  actuarial loss                                 |       | $                     | 28.3       |                                              | $          | 30.9 |   | $ | 3.3 |   | $ | 5.0 |   |
| Prior  service cost                                         |       | 0.6                   |       | 0.9                                               |       | 2.4 |   | 3.1 |   |
| Total  recognized in accumulated other comprehensive income |       | $                     | 28.9       |                                              | $          | 31.8 |   | $ | 5.7 |   | $ | 8.1 |   |

 

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Summary disaggregatedinformation about the pension plans follows:

 
| ** **                      | ** ** | **December 31,**  | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **Assets  Exceed ABO** | ** ** | **ABO  Exceed Assets** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **2009**               | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Projected  benefit obligation   |       | $                      | 94.6       |   | $ | 104.6 |   | $ | 140.1 |   | $ | 109.6 |   | $ | 234.7 |   | $ | 214.2 |   |
| Accumulated  benefit obligation |       | 82.0                   |       | 90.8 |   | 137.5 |   | 104.9 |   | 219.5 |   | 195.7 |   |
| Fair  value of plan assets      |       | 82.9                   |       | 91.4 |   | 85.3 |   | 51.5 |   | 168.2 |   | 142.9 |   |
|                                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Components ofNet Periodic Benefit Cost***

 
| ** **                                                  | ** ** | **Pension Benefits**             | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                  | ** ** | **2009**                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service  cost                                               |       | $                                | 4.5        |                                             | $          | 6.8 |   | $ | 9.2 |   | $ | 1.9 |   | $ | 2.2 |   | $ | 2.4 |   |
| Interest  cost                                              |       | 14.3                             |       | 18.5                                             |       | 28.1 |   | 2.5 |   | 2.5 |   | 2.5 |   |
| Expected  return on plan assets(a)                          |       | (11.3                            | )          | (19.8                                            | )          | (32.0 | ) | — |   | — |   | — |   |
| Recognized  net actuarial loss                              |       | 1.4                              |       | 1.4                                              |       | (0.2 | ) | 0.3 |   | 1.3 |   | — |   |
| Amortization  of unrecognized transition asset              |       | —                           |       | (0.1                                             | )          | 1.8 |   | — |   | — |   | (6.7 | ) |
| Amortization  of prior service cost                         |       | 0.1                              |       | 1.0                                              |       | 5.0 |   | 0.4 |   | (5.0 | ) | 3.8 |   |
| Cost  of contractual termination benefits                   |       | —                           |       | —                                           |       | 0.1 |   | — |   | — |   | — |   |
| Amount  of curtailment (gain) loss recognized               |       | 0.2                              |       | —                                           |       | (1.2 | ) | 0.6 |   | — |   | — |   |
| Amount  of settlement loss recognized                       |       | —                           |       | —                                           |       | 38.7 |   | — |   | — |   | 5.0 |   |
| Net  periodic benefit cost (credit)                         |       | 9.2                              |       | 7.8                                              |       | 49.5 |   | 5.7 |   | 1.0 |   | 7.0 |   |
| Less:  Cost related to discontinued operations (b)(c)       |       | —                           |       | 1.9                                              |       | 46.0 |   | — |   | 0.6 |   | 1.1 |   |
| Net  periodic benefit cost related to continuing operations |       | $                                | 9.2        |                                             | $          | 5.9 |   | $ | 3.5 |   | $ | 5.7 |   | $ | 0.4 |   | $ | 5.9 |   |

 

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(a)          The expected return on plan assets is determined bymultiplying the fair value of plan assets at the prior year-end (adjusted forestimated current year cash benefit payments and contributions) by the expectedlong-term rate of return.

(b)         In conjunction with the transfer of the Terrace Baymill to Buchanan and as a closing condition of the agreement, the Companyinitiated plans to curtail and settle the Ontario Plan.  The pension costrelated to the operations of the Terrace Bay mill has been classified as Lossfrom discontinued operations on the consolidated statements ofoperations.  Pension expense for the year ended December 31, 2007includes settlement/curtailment losses related to the Ontario Plan of $38.7million.

(c)          Pursuant to the terms of the transfer agreement,Buchanan assumed responsibility for postretirement medical and life insurancebenefits for active employees at the Terrace Bay mill.

 

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Table of Contents

 

***Other Changes in Plan Assets and Benefit ObligationsRecognized in Other Comprehensive Income***

 
| ** **                                                                    | ** ** | **Pension Benefits**             | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                    | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                                    | ** ** | **2009**                         | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  periodic benefit expense                                                 |       | $                                | 9.2        |                                             | $          | 7.8 |   | $ | 5.7 |   | $ | 1.0 |   |
|                                                                          |       |                             |       |                                             |       |   |   |   |   |
| Accumulated  actuarial gain                                                   |       | (2.6                             | )          | (14.5                                            | )          | (1.7 | ) | (7.6 | ) |
| Prior  service cost (credit)                                                  |       | (0.3                             | )          | (9.6                                             | )          | (0.7 | ) | 5.3 |   |
| Transition  asset                                                             |       | —                           |       | 0.1                                              |       | — |   | — |   |
| Total  recognized in other comprehensive income                               |       | (2.9                             | )          | (24.0                                            | )          | (2.4 | ) | (2.3 | ) |
| Total  recognized in net periodic benefit cost and other comprehensive income |       | $                                | 6.3        |                                             | $          | (16.2 | ) | $ | 3.3 |   | $ | (1.3 | ) |

 

The estimated netactuarial loss and  prior service cost for the defined benefit pensionplans expected to be amortized from accumulated other comprehensive income intonet periodic benefit cost over the next fiscal year are $1.1 million and $0.1million, respectively. The estimated prior service cost for postretirementbenefits other than pension expected to be amortized from accumulated othercomprehensive income into net periodic benefit cost over the next fiscal yearis $0.4 million.

 

***Weighted-Average Assumptions Used to Determine BenefitObligations at December 31***

 
| ** **                     | ** ** | **Pension Benefits** | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|--------------------------------|------------|---------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                     | ** ** | **2009**                  | ** ** | **2008**                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Discount  rate                 |       | 6.17                      | %          | 6.80                                                            | %          | 5.92 | % | 6.82 | % |
| Rate  of compensation increase |       | 3.91                      | %          | 3.42                                                            | %          | — |   | — |   |

 

***Weighted-Average Assumptions Used to Determine Net PeriodicBenefit Cost for Years Ended December 31***

*** ***
| ** **                                | ** ** | **Pension Benefits**                  | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                | ** ** | **2009**                                   | ** ** | **2008**                                                        | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Discount  rate                            |       | 6.80                                       | %          | 6.10                                                            | %          | 5.25 | % | 6.00 | % | 6.00 | % | 5.66 | % |
| Expected  long-term return on plan assets |       | 7.92                                       | %          | 8.02                                                            | %          | 7.90 | % | — |   | — |   | — |   |
| Rate  of compensation increase            |       | 3.43                                       | %          | 3.30                                                            | %          | 3.29 | % | — |   | — |   | — |   |

 

***Expected Long-Term Rate of Return and Investment Strategies***

 

The expected long-termrate of return on pension fund assets held by the Company’s pension trusts wasdetermined based on several factors, including input from pension investmentconsultants and projected long-term returns of broad equity and bond indices.Also considered were the plans’ historical 10-year and 15-year compoundedannual returns. It is anticipated that, on average, actively managed U.S.pension plan assets will generate annual long-term rates of return of at least8 percent. The expected long-term rate of return on the assets in the plans wasbased on an asset allocation assumption of about 60 percent with equitymanagers, with expected long-term rates of return of approximately 10 percent,and 40 percent with fixed income managers, with an expected long-term rate ofreturn of about 6 percent. The actual asset allocation is regularly reviewedand periodically rebalanced to the targeted allocation when consideredappropriate.

 

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***Plan Assets —******Fair Value Measurements***

 

The Company measures thefair value of pension plan assets in accordance with ASC Topic 820, *Fair Value Measurements and Disclosures* (“ASC Topic 820”)which establishes a framework for measuring fair value.  ASC Topic 820 providesa fair value hierarchy that prioritizes the inputs to valuation techniques usedto measure fair value. The hierarchy gives the highest priority to unadjustedquoted prices in active markets for identical assets or liabilities (Level 1measurements) and the lowest priority to unobservable inputs (Level 3measurements). The three levels of the fair value hierarchy under ASC Topic 820are described below:

 
| Level 1 |   | Inputs to the valuation  methodology are unadjusted quoted prices for identical assets or liabilities  in active markets that the plan has the ability to access. |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                              |
| Level 2 |   | Inputs to the valuation  methodology include:                                                                                                                     |
|    |   |                                                                                                                                                              |
|    |   | ·      Quoted  prices for similar assets or liabilities in active markets;                                                          |
|    |   |                                                                                                                                                              |
|    |   | ·      Quoted  prices for identical or similar assets or liabilities in inactive markets;                                           |
|    |   |                                                                                                                                                              |
|    |   | ·      Inputs  other than quoted prices that are observable for the asset or liability;                                             |
|    |   |                                                                                                                                                              |
|    |   | ·      Inputs that are derived principally  from or corroborated by observable market data by correlation or other means.           |

 

If the asset or liabilityhas a specified (contractual) term, the Level 2 input must be observable forsubstantially the full term of the asset or liability.

 
| Level 3 |   | Inputs to the valuation  methodology are unobservable and significant to the fair value measurement. |
|---------|--------|------------------------------------------------------------------------------------------------------|

 

The asset’s fair valuemeasurement level within the fair value hierarchy is based on the lowest levelof any input that is significant to the fair value measurement. Valuationtechniques attempt to maximize the use of observable inputs and minimize theuse of unobservable inputs.

 

The following table setsforth by level, within the fair value hierarchy, the fair value of the Company’spension plan assets as of December 31, 2009:

 
| ** **                  | ** ** | **Assets at Fair Value as of December 31, 2009** | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|
| ** **                  | ** ** | **Level 1**                                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Equity  securities:         |       |                                                  |       |   |   |   |   |   |   |
| Domestic                    |       | $                                                     | —     | ** ** | **$** | 69.3 |   | $ | — |   | $ | 69.3 |   |
| International               |       | —                                                |       | 30.1 |   | — |   | 30.1 |   |
| Fixed  income securities    |       | —                                                |       | 62.1 |   | — |   | 62.1 |   |
| Cash  and equivalents       |       | 6.7                                                   |       | — |   | — |   | 6.7 |   |
|                        |       |                                                  |       |   |   |   |   |   |   |
| Total  assets at fair value |       | $                                                     | 6.7        |   | $ | 161.5 |   | $ | — |   | $ | 168.2 |   |

 

Pension plan assetallocations are as follows:

 
| ** **                   | ** ** | **Percentage of Plan Assets  At December 31,** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Asset Category**           |       |                                                                    |       |   |   |   |   |
| Equity  securities           |       | 59                                                                      | %          | 55 | % | 61 | % |
| Debt  securities             |       | 37                                                                      | %          | 44 | % | 35 | % |
| Cash  and money-market funds |       | 4                                                                       | %          | 1 | % | 4 | % |
| Total                        |       | 100                                                                     | %          | 100 | % | 100 | % |

 

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The Company’s investment objectives for pension plan assetsis to ensure, over the long-term life of the pension plans, an adequate pool ofassets to support the benefit obligations to participants, retirees, andbeneficiaries.  Specifically, theseobjectives include the desire to: (a) invest assets in a manner such thatfuture assets are available to fund liabilities, (b) maintain liquiditysufficient to pay current benefits when due and (c) diversify, over time,among asset classes so assets earn a return reasonable with acceptable risk ofcapital.

 

The target investment allocation and permissible allocationrange for plan assets by category are as follows:

 
| **Asset Category**             | ** ** | **Strategic Target** | ** ** | **Permitted  Range** | ** ** |
|--------------------------------|------------|----------------------|------------|----------------------|------------|
| Equity securities              |       | 65                   | %          | 60-70                | %          |
| Debt securities / Fixed Income |       | 35                   | %          | 30-40                | %          |

 

As of December 31, 2009, no company or group ofcompanies in a single industry represented more than five percent of planassets.

 

The Company’s investments assumptions are established by aninvestment committee composed of members of senior management and are validatedperiodically against actual investment returns. As of December 31, 2009, the Company’s investment assumptions areas follows:

 

(a)          the planshould be substantially fully invested at all times because substantial cashholdings will reduce long-term rates of return;

(b)         equityinvestments will provide greater long-term returns than fixed incomeinvestments, although with greater short-term volatility;

(c)          it isprudent to diversify the plan investment across major asset classes;

(d)         allocating aportion of plan assets to foreign equities will increase portfoliodiversification, decrease portfolio risk and provide the potential forlong-term returns;

(e)          investmentmanagers with active mandates can reduce portfolio risk below market risk andpotentially add value through security selection strategies, and that asubstantial portion of plan assets should be allocated to such active mandates;

(f)            a componentof  passive, indexed management canbenefit the plans through greater diversification and lower cost, and that aportion of the plan assets should be allocated to such passive mandates, and

(g)         it isappropriate to retain more than one investment manager, given the size of theplans, provided that such managers offer asset class or style diversification.

 

For the years ended December 31, 2009, 2008 and 2007,no plan assets were invested in the Company’s securities.

 

***Cash Flows***

 

At December 31, 2009, the Company expects to make aggregate contributions topension trusts and payments of pension benefits for unfunded pension plans ofapproximately $14 million (based on exchange rates at December 31, 2010).

 

***Future Benefit Payments***

 

The following benefit payments, which reflect expectedfuture service, as appropriate, are expected to be paid:

 
| ** **             | ** ** | **Pension Plans** | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|------------------------|------------|------------------------|------------|-----------------------------------------------------------------|------------|
| 2010                   |       | $                      | 11.4       |                                                            | $          | 2.5 |   |
| 2011                   |       | 11.8                   |       | 1.7                                                             |       |
| 2012                   |       | 12.4                   |       | 2.0                                                             |       |
| 2013                   |       | 13.8                   |       | 2.4                                                             |       |
| 2014                   |       | 13.8                   |       | 2.7                                                             |       |
| Years 2015 — 2019 |       | 82.3                   |       | 18.5                                                            |       |
|                        |            |                        |            |                                                                 |            |  |  |

 

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*** ***

***Health Care Cost Trends***

 

Assumed health care cost trend rates affect the amountsreported for postretirement health care benefit plans. A one-percentage-pointchange in assumed health care cost trend rates would have the followingeffects:

 
| ** **                                               | ** ** | **One Percentage-Point** | ** ** |
|----------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                               | ** ** | **Increase**                  | ** ** | **Decrease** | ** ** |
| Effect on total of service and  interest cost components |       | $                             | —     |   | $ | — |   |
| Effect on post-retirement benefit  obligation            |       | 0.4                           |       | (0.5 | ) |
|                                                          |            |                               |            |  |  |  |  |

 

***Defined ContributionRetirement Plans***

 

The Company’s contributions to its defined contributionretirement plans are primarily based on the age and compensation of coveredemployees.  Contributions to these plans, all of which were charged toexpense, were $1.4 million in 2009, $1.6 million in 2008 and $1.2 millionin 2007. In addition, the Company maintains a supplemental retirement contributionplan (the “SRCP”) which is a non-qualified, unfunded defined contribution plan.The Company provides benefits under the SRCP to the extent necessary to fulfillthe intent of its defined contribution retirement plans without regard to thelimitations set by the Internal Revenue Code on qualified defined contributionplans.  For each of the years ended December 31, 2009, 2008 and 2007,the Company recognized expense related to the SRCP of less than $0.1 million.

 

***Investment Plans***

 

The Company provides voluntary contribution investment plansto substantially all North American employees. Under the plans, the Companymatches a portion of employee contributions. For the years ended December 31,2009, 2008 and 2007, costs charged to expense for company matching contributionsunder these plans were $1.5 million, $1.8 million and $1.7 million,respectively.

 

**Note 9. Stock Compensation Plans**

 

The Company establishedthe 2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”) in December 2004and reserved 3,500,000 shares of $0.01 par value common stock (“Common Stock”)for issuance under the Omnibus Plan. Pursuant to the terms of the Omnibus Plan,the compensation committee of the Company’s board of directors may grantvarious types of equity-based compensation awards, including incentive andnonqualified stock options, SARs, restricted stock, RSUs, RSUs with performanceconditions (“Performance Shares”) and performance units, in addition to certaincash-based awards. All grants under the Omnibus Plan will be made at fairmarket value and no grant may be repriced. In general, the options expireten years from the date of grant and vest over a three-year serviceperiod. As of December 31, 2009, approximately 1,960,000 shares of CommonStock were reserved for future issuance under the Omnibus Plan. As of December 31,2009, the number of shares available for future issuance was not reduced byoutstanding SARs because the closing market price for the Company’s commonstock was less than the exercise price of all outstanding SARs. The Companyaccounts for stock-based compensation pursuant to the fair value recognitionprovisions of ASC Topic 718, *Compensation—StockCompensation*(“ASC Topic718”).

 

ASCTopic 718 requires the reporting of excess tax benefits related to theexercise or vesting of stock-based awards as cash provided by financingactivities. For the years ended December 31, 2009, 2008 and 2007, theCompany recognized excess tax benefits (costs) related to the exercise orvesting of stock-based awards of approximately $(0.2) million, $(0.7) millionand $0.5 million, respectively.

 

***Valuation and Expense Information Under ASC Topic 718***

 

Substantially all stock-based compensation expense has beenrecorded in selling, general and administrative expenses.  The following table summarizes stock-basedcompensation costs and related income tax benefits.

 
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Stock-based  compensation expense                    |       | $                                | 4.7        |   | $ | 4.0 |   | $ | 6.4 |   |
| Income  tax benefit                                  |       | (1.8                             | )          | (1.5 | ) | (2.5 | ) |
| Stock-based  compensation, net of income tax benefit |       | $                                | 2.9        |   | $ | 2.5 |   | $ | 3.9 |   |

 

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The following table summarizes total compensation costsrelated to the Company’s equity awards and amounts recognized in the year endedDecember 31, 2009.

 
| ** **                                                    | ** ** | **Stock Options** | ** ** | **Restricted Stock** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| Unrecognized  compensation cost — December 31, 2008 |       | $                 | 1.5        |                 | $          | 1.6 |   |
| Add:  Grant date fair value current year grants               |       | 1.8               |       | 2.6                  |       |
| Less:  Compensation expense recognized                        |       | 1.9               |       | 2.8                  |       |
| Unrecognized  compensation cost — December 31, 2009 |       | $                 | 1.4        |                 | $          | 1.4 |   |
|                                                          |       |              |       |                 |       |
| Expected  amortization period (in years)                      |       | 1.9               |       | 1.7                  |       |

 

***Stock Options***

 

For the year ended December 31, 2009, the Companyawarded nonqualified stock options to Long-Term Incentive Plan (the “LTIP”)participants to purchase approximately 698,000 shares of common stock (subjectto forfeiture due to termination of employment and other conditions).  Inaddition, the Company awarded to non-employee members of its board of directorsnonqualified stock options to purchase 32,000 shares of common stock. Forthe year ended December 31, 2009, the weighted-average exercise price ofsuch nonqualified stock option awards was $8.19 per share. The exercise priceof the options was equal to the market price of the Company’s common stock onthe date of grant.  Options awarded to LTIP participants expire in tenyears and one-third vest on each of the first three anniversaries of the dateof grant.  Options awarded to non-employee members of the board ofdirectors expire in ten years and vest on the first anniversary of the date ofgrant. The weighted-average grant date fair value for stock options granted forthe years ended December 31, 2009 and 2008 was $2.67 per share and $6.30per share, respectively, and was estimated using the Black-Scholes optionvaluation model with the following assumptions:

 
| ** **             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Expected life in years |       | 5.9                                        |       | 5.9 |   |
| Interest rate          |       | 2.4                                        | %          | 3.4 | % |
| Volatility             |       | 51.6                                       | %          | 31.5 | % |
| Dividend yield         |       | 4.9                                        | %          | 1.9 | % |

 

For stock option awards granted in 2009, expected volatility was based on theCompany’s historical stock price performance.  For stock optionawards granted in 2008, expected volatility was estimated by reference to thehistorical stock price performance of a peer group of companies. The expectedterm was estimated based upon historical data for Kimberly-Clark stock optionawards. The risk-free interest rate was based on the yield on U.S. Treasurybonds with a remaining term approximately equivalent to the expected term ofthe stock option award. Forfeitures were estimated at the date of grant.

 

The following table summarizes stock option activity underthe Omnibus Plan for the year ended December 31, 2009:

 
| ** **                                         | ** **                   | **Number of  Stock Options** | ** ** | **Weighted-Average Exercise Price** | ** ** |
|----------------------------------------------------|------------------------------|------------------------------|------------|-------------------------------------|------------|
| Options  outstanding — December 31, 2008 |                         | 1,622,045                    |       | $                                   | 30.81      |   |
| Add:                                               | Options  granted             |                         | 730,150    |                                | $          | 8.19 |   |
| Less:                                              | Options  forfeited/cancelled |                         | 82,347     |                                | $          | 29.04 |   |
| Options  outstanding — December 31, 2009 |                         | 2,269,848                    |       | $                                   | 23.60      |   |

 

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The status of outstanding and exercisable stock options asof December 31, 2009, summarized by exercise price follows:

 
| ** **          | ** ** | **Options Vested or Expected to Vest** | ** ** | **Options Exercisable**                                       | ** ** |
|---------------------|------------|----------------------------------------|------------|---------------------------------------------------------------|------------|
| **Exercise  Price** | ** ** | **Number of  Options**                 | ** ** | **Weighted-Average   Remaining   Contractual Life   (Years)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Aggregate   Intrinsic   Value(a)** | ** ** | **Number of   Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Aggregate   Intrinsic   Value(a)** | ** ** |
| $7.41  - $21.13     |       | 845,564                                |       | 9.2                                                           |       | $ | 9.82 |   | $ | 4.1 |   | 83,110 |   | $ | 15.72 |   | $ | 0.1 |   |
| $24.01  - $29.43    |       | 383,500                                |       | 5.5                                                           |       | $ | 26.50 |   | — |   | 308,307 |   | $ | 26.69 |   | — |   |
| $30.15  - $34.61.   |       | 689,180                                |       | 4.4                                                           |       | $ | 32.71 |   | — |   | 685,847 |   | $ | 32.71 |   | — |   |
| $35.92  - $42.24    |       | 331,193                                |       | 4.3                                                           |       | $ | 37.34 |   | — |   | 286,533 |   | $ | 37.40 |   | — |   |
|                |       | 2,249,437                              |       | 6.4                                                           |       | $ | 23.73 |   | $ | 4.1 |   | 1,363,797 |   | $ | 31.30 |   | $ | 0.1 |   |

 

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(a)          Representsthe total pre-tax intrinsic value as of December 31, 2009 that optionholders would have received had they exercised their options as of suchdate.  The pre-tax intrinsic value is based on the closing market pricefor the Company’s common stock of $13.95 on December 31, 2009.

 

No stock options were exercised for the years ended December 31,2009 and 2008.  The aggregate pre-taxintrinsic value of stock options exercised for the year ended December 31,2007 was $1.5 million.

 

The following table summarizes the status of the Company’sunvested stock options as of December 31, 2009 and activity for the yearthen ended:

 
| ** **                                 | ** ** | **Number of  Stock Options** | ** ** | **Weighted-Average Grant Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| Outstanding  — December 31, 2008 |       | 414,828                      |       | $                                          | 6.98       |   |
| Add:  Options granted                      |       | 730,150                      |       | $                                          | 2.67       |   |
| Less:  Options vested                      |       | 228,210                      |       | $                                          | 5.54       |   |
| Less:  Options forfeited/cancelled         |       | 10,717                       |       | $                                          | 8.43       |   |
| Outstanding  — December 31, 2009 |       | 906,051                      |       | $                                          | 3.85       |   |

 

As of December 31, 2009, certain participants met ageand service requirements that allowed their options to qualify for acceleratedvesting upon retirement. As of December 31, 2009, there were approximately261,500 stock options subject to accelerated vesting that such participantswould have been eligible to exercise if they had retired as of such date. Theaggregate grant date fair value of options subject to accelerated vesting was$1.0 million. For the year ended December 31, 2009, stock-basedcompensation expense for such options was $0.6 million. For the year ended December 31,2009, the aggregate grant date fair value of options vested, including optionssubject to accelerated vesting, was $2.3 million.  Stock options thatreflect accelerated vesting for expense recognition become exercisableaccording to the contract terms of the stock option grant.

 

In January 2009, the Compensation Committee of theBoard of Directors approved the conversion of approximately 1,105,000outstanding non-qualified stock options with an exercise price in excess of$25.00 per share to an equal number of SARs.  Upon exercise, the holder ofan SAR will receive common shares equal to the number of SARs exercisedmultiplied by a fraction where the numerator is equal to the market price atthe time of exercise minus the exercise price of the SAR and the denominator isequal to the market price at the time of exercise.  TheSARs can only be settled for shares of Common Stock and the Company will notreceive any cash proceeds upon exercise.  All other contractual terms ofthe SARs are unchanged from those of the stock options converted.  At thedate of conversion the fair value of the SARs was equal to the fair value ofthe stock options exchanged.  As a result, the Company did not recognizeany additional compensation expense due to the conversion.

 

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***Performance Shares***

 

For the year ended December 31, 2009, the Company granted target awards of216,400 Performance Shares to LTIP participants. The measurement period for thePerformance Shares is January 1, 2009 through December 31, 2011.Common Stock equal to between 30 percent and 250 percent of the performanceshare target will be awarded based on the Company’s growth in earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) minus a capital chargeand total return to shareholders relative to a peer group of companies and theRussell 2000® Value small cap index. The weighted-average grant date fair valuefor the Performance Shares was $10.59 per share (which represents the grantdate market price of the Company’s Common Stock of $7.41 per share multipliedby the probability weighted expected payout of approximately 1.43 shares ofCommon Stock for each Performance Share) and was estimated using a “Monte Carlo”simulation technique. Compensation cost is recognized pro rata over the vestingperiod.

 

***RSUs***

 

For the year ended December 31, 2009, the Companyawarded 17,920 RSUs to non-employee members of the Company’s board of directors(“Director Awards”).  The weighted average grant date fair value of suchawards was $8.04 per share.  Director Awards vest one year from the dateof grant. During the vesting period, the holders of Director Awards areentitled to dividends, but the shares do not have voting rights and areforfeited in the event the holder is no longer a member of the board ofdirectors. In addition, the Company issued 742 RSUs in lieu of dividends onRSUs held by non U.S employees and a non-U.S. member of the board of directors.

 

The following table summarizes the activity of the Company’sunvested stock-based awards (other than stock options) for the year ended December 31,2009:

 
| ** **                                    | ** ** | **Restricted   Stock** | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** | **Performance  Shares/RSUs** | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------------------------------|------------|------------------------------|------------|----------------------------------------------|------------|
| Outstanding  — December 31, 2008    |       | 574                    |       | $                                            | 34.28      |                         | 152,811    |                                         | $          | 27.69 |   |
| Add:  Shares granted(a)                       |       | —                 |       | —                                       |       | 235,062                      |       | $                                            | 10.39      |   |
| Less:  Shares vested                          |       | 574                    |       | $                                            | 34.28      |                         | 30,857     |                                         | $          | 30.80 |   |
| Less:  Shares expired or cancelled            |       | —                 |       | —                                       |       | 14,802                       |       | $                                            | 22.32      |   |
| Outstanding  — December 31, 2009(b) |       | —                 |       |                                         | —     |                         | 342,214    |                                         | $          | 15.76 |   |

 

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(a)          Includes thegrant of 742 RSUs to non-U.S. employees and directors in lieu of cashdividends.  Such dividends-in-kind vest concurrently with the underlyingRSU.

(b)         Theaggregate pre-tax intrinsic value of RSUs and Performance Shares as of December 31,2009 was $0.9 million and $1.7 million, respectively.  The aggregatepre-tax intrinsic value of Performance Shares was calculated on the shares thatwould be issued based on the Company’s achievement of performance targets ifthe performance period ended at December 31, 2009.

 

The aggregate pre-tax intrinsic value of restricted stockand RSUs that vested for the years ended December 31, 2009, 2008 and 2007was $0.4 million, $1.1 million and $1.3 million, respectively.

 

**Note 10. Stockholders’ Equity**

 

***Common Stock***

 

The Company has authorized 100 million shares of CommonStock. Holders of the Company’s Common Stock are entitled to one vote pershare.

 

For the years ended December 31, 2009, 2008 and 2007,the Company acquired 4,910 shares, 31,652 shares and 11,445 shares of CommonStock, respectively, at a cost of approximately $0.1 million, $0.3 million and$0.3 million, respectively, for shares surrendered by employees to pay taxesdue on vested restricted stock awards.  In addition, in connection with theacquisition of Fox River, the Company acquired 100 shares of Common Stock witha fair market value of approximately four thousand dollars.

 

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On March 12, 2008, the Company’s shareholders approveda reverse/forward split of the issued and outstanding shares of CommonStock.  The reverse/forward split consisted of a 1-for-50 reverse split ofCommon Stock followed immediately by a 50-for-1 forward split of Common Stock.Holdings of stockholders with fewer than 50 shares of Common Stock prior to thesplit were converted into fractional shares.  Such fractional shares werepurchased by the Company for $24.99 per share. The Company purchased 360,548shares of Common Stock at a total cost of approximately $9.4 million includingtransaction costs.  The reverse/forward split resulted in a significantreduction in shareholder record keeping and mailing expenses and provided holdersof fewer than 50 shares with a cost-effective way to efficiently dispose oftheir investment.

 

Each share of Common Stock contains a preferred stockpurchase right that is associated with the share.  These preferred stockpurchase rights are transferred only with shares of Common Stock.  Thepreferred stock purchase rights become exercisable and separately certificatedonly upon a “Rights Distribution Date” as that term is defined in thestockholder rights agreement adopted by the Company at the time of theSpin-Off.  In general, a Rights Distribution Date occurs ten business daysfollowing either of these events: (i) a person or group has acquired orobtained the right to acquire beneficial ownership of 15 percent or more of theoutstanding shares of our Common Stock then outstanding or (ii) a tenderoffer or exchange offer is commenced that would result in a person or groupacquiring 15 percent or more of the outstanding shares of our Common Stock thenoutstanding.

 

***Preferred Stock***

 

The Company has authorized 20 million shares of $0.01par value preferred stock. The preferred stock may be issued in one or moreseries and with such designations and preferences for each series as shall bestated in the resolutions providing for the designation and issue of each suchseries adopted by the board of directors of the Company. The board of directorsis authorized by the Company’s articles of incorporation to determine thevoting, dividend, redemption and liquidation preferences pertaining to eachsuch series. No shares of preferred stock have been issued by the Company.

 

**Note 11. Commitments**

 

***Leases***

 

The future minimum obligations under operating leases havinga noncancelable term in excess of one year as of December 31, 2009, are asfollows:

 
| 2010                              |   | $      | 3.0    |   |
|-----------------------------------|--------|--------|--------|--------|
| 2011                              |   | 2.6    |   |
| 2012                              |   | 2.0    |   |
| 2013                              |   | 0.8    |   |
| 2014                              |   | 0.5    |   |
| Thereafter                        |   | 1.2    |   |
|                              |   |   |   |
| Future  minimum lease obligations |   | $      | 10.1   |   |

 

The following table presents the Company’s rent expenseunder operating leases for the years ended December 31, 2009, 2008 and2007:

 
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Rent expense                                      |       | $                                          | 2.5        |   | $ | 3.3 |   | $ | 3.0 |   |
| Less: Amounts related to  discontinued operations |       | —                                     |       | 0.5 |   | 1.0 |   |
| Rent expense related to continuing  operations    |       | $                                          | 2.5        |   | $ | 2.8 |   | $ | 2.0 |   |

 

***Purchase Commitments***

 

The Company has certain minimum purchase commitments, noneof which are individually material, that extend beyond December 31, 2009.Commitments under these contracts are approximately $4.4 million in 2010,$0.4 million in 2011, $0.4 million in 2012, $0.4 million in 2013and $0.4 million in 2014.

 

Although the Company is primarily liable for payments on theabove-mentioned leases and purchase commitments, management believes exposureto losses, if any, under these arrangements is not material.

 

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**Note 12.  Contingencies and LegalMatters**

 

***Litigation***

 

The Company is involvedin certain legal actions and claims arising in the ordinary course of business.While the outcome of these legal actions and claims cannot be predicted withcertainty, it is the opinion of management that the outcome of any such claimwhich is pending or threatened, either individually or on a combined basis,will not have a material adverse effect on the consolidated financialcondition, results of operations or liquidity of the Company.

 

***Indemnifications***

 

Pursuant to aDistribution Agreement, an Employee Matters Agreement and a Tax SharingAgreement, the Company has agreed to indemnify Kimberly-Clark for certainliabilities or risks related to the Spin-Off. Many of the potentialindemnification liabilities under these agreements are unknown, remote orhighly contingent. Furthermore, even in the event that an indemnification claimis asserted, liability for indemnification is subject to determination underthe terms of the applicable agreement. For these reasons, the Company is unableto estimate the maximum potential amount of the possible future liability underthe indemnity provisions of these agreements. However, the Company accrues forany potentially indemnifiable liability or risk under these agreements forwhich it believes a future payment is probable and a range of loss can bereasonably estimated. As of December, 2009, management believes the Company’sliability under such indemnification obligations was not material to theconsolidated financial statements.

 

***Environmental, Health andSafety Matters***

 

The Company is subject to federal, state and local laws,regulations and ordinances relating to various environmental, health and safetymatters. The Company is in compliance with, or is taking actions designed toensure compliance with, these laws, regulations and ordinances. However, thenature of the Company’s business exposes it to the risk of claims with respectto environmental, health and safety matters, and there can be no assurance thatmaterial costs or liabilities will not be incurred in connection with suchclaims. Except for certain orders issued by environmental, health and safetyregulatory agencies, with which management believes the Company is incompliance and which management believes are immaterial to the results ofoperations of the Company’s business, Neenah is not currently named as a partyin any judicial or administrative proceeding relating to environmental, healthand safety matters.

 

While the Company has incurred in the past several years,and will continue to incur, capital and operating expenditures in order tocomply with environmental, health and safety laws, regulations and ordinances,management believes that the Company’s future cost of compliance withenvironmental, health and safety laws, regulations and ordinances, and itsexposure to liability for environmental, health and safety claims will not havea material adverse effect on its financial condition, results of operations orliquidity. However, future events, such as changes in existing laws andregulations or contamination of sites owned, operated or used for wastedisposal by the Company (including currently unknown contamination andcontamination caused by prior owners and operators of such sites or other wastegenerators) may give rise to additional costs which could have a materialadverse effect on the Company’s financial condition, results of operations orliquidity.

 

The Company incurs capital expenditures necessary to meetlegal requirements and otherwise relating to the protection of the environmentat its facilities in the United States and internationally. For these purposes,the Company has planned capital expenditures for environmental projects duringthe period 2010 through 2012 of approximately $1 million to $2 millionannually. The Company’s anticipated capital expenditures for environmentalprojects are not expected to have a material adverse effect on our financialcondition, results of operations or liquidity.

 

***Employees and LaborRelations***

 

As of December 31, 2009, the Company had approximately1,700 regular full-time employees of whom 675 hourly and 325 salaried employeeswere located in the United States and 450 hourly and 250 salariedemployees were located in Germany.  As of December 31, 2009, theCompany has approximately 300 hourly employees covered by collective bargainingagreements that have expired or will expire within the next 12-months. The Company believes it has satisfactory relations with its employees coveredby such collective bargaining agreements and does not expect the negotiation ofnew collective bargaining agreements to have a material effect on its resultsof operations or cash flows.

 

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Hourly employees at theWhiting, Neenah, Munising and Appleton paper mills are represented by theUnited Steelworkers Union (the “USW”). The collective bargaining agreement forthe Munising paper mill expired on July 14, 2009. The Company is currentlynegotiating a new labor agreement for the mill with the USW. In December 2009,the Company and the USW signed a new collective bargaining agreement for theWhiting paper mill that is effective through January 31, 2013. In October 2009,the Company and the USW signed a new collective bargaining agreement for theNeenah paper mill that is effective through June 30, 2013. The collectivebargaining agreement for the Appleton paper mill expires on May 31, 2010.Separately, the Neenah, Whiting and Munising paper mills have bargained jointlywith the union on pension matters. The agreement on pension matters will remainin effect through 2019.

 

Approximately 50 percentof salaried employees and 80 percent of hourly employees of Neenah Germany areeligible to be represented by the Mining, Chemicals and Energy Trade Union,Industriegewerkschaft Bergbau, Chemie and Energie (the “IG BCE”).  Thecollective bargaining agreement covering union employees of Neenah Germany isnegotiated by the IG BCE and a national trade association representing allemployers in the industry.  Union membership is voluntary and under Germanlaw does not need to be disclosed to the Company. As a result, the number ofemployees covered by the collective bargaining agreement that expires in August 2010cannot be determined.

 

**Note 13. Transactions withKimberly-Clark**

 

For the years ended December 31, 2008 and 2007, theCompany sold softwood and hardwood pulp to Kimberly-Clark from the Pictou pulpmill. Net sales for the pulp sold to Kimberly-Clark for the years ended December 31,2008 and 2007 was $37 million and $115 million, respectively.  All suchrevenue is reported as results of discontinued operations on the consolidatedstatements of operations.

 

***Pulp Supply Agreement***

 

In conjunction with the sale of the Pictou Mill, NorthernPulp assumed responsibility for pulp sales to Kimberly-Clark pursuant to a pulpsupply agreement (the “Pulp Supply Agreement”). The Company guaranteed certain obligations under thePulp Supply Agreement; however, in the event that Northern Pulp andKimberly-Clark entered into an amended agreement or made other material changesto the Pulp Supply Agreement, the Company’s guarantee obligations cease. In January 2009, Northern Pulp and Kimberly-Clark entered into a new pulpsupply agreement thereby terminating the Company’s guarantee obligations.

 

**Other Agreements with Kimberly-Clark**

 

The Company also entered into a (i) Distribution Agreement,(ii) Employee Matters Agreement, (iii) Corporate Services Agreementand (iv) Tax Sharing Agreement with Kimberly-Clark in connection with theSpin-Off.  These agreements provided for, among other things, (i) theprincipal corporate transactions required to effect the separation of the Pulpand Paper Business from Kimberly-Clark, cross-indemnities principally designedto place financial responsibility for the obligations and liabilities of thePulp and Paper Business with the Company and financial responsibility for theobligations and liabilities of Kimberly-Clark’s retained businesses withKimberly-Clark, (ii) employee liability transfers to the Company andretention of certain employment liabilities by Kimberly-Clark, (iii) varioustransitional corporate support services and (iv) the Company’s andKimberly-Clark’s respective rights, responsibilities and obligations after theSpin-Off with respect to taxes attributable to the Company’s business, as wellas any taxes incurred by Kimberly-Clark as a result of the failure of theSpin-Off to qualify for tax-free treatment under Section 355 of the Code.

 

The descriptions above are summaries of the principalprovisions of the various agreements and are qualified in their entirety by therespective agreements.

 

**Note 14. Business Segment andGeographic Information**

 

The Company reports its operations in two segments: FinePaper and Technical Products. The fine paper business is a leading producer ofpremium writing, text, cover and specialty papers. The technical productsbusiness is a leading international producer of filtration media, durable,saturated and coated substrates for a variety of end uses; and nonwoven wallcoverings.  Each segment employs different technologies and marketingstrategies.  Disclosure of segment information is on the same basis thatmanagement uses internally for evaluating segment performance and allocatingresources.  Transactions between segments are executed at market pricesand such transactions are eliminated in consolidation. The costs of sharedservices, and other administrative functions managed on a common basis, areallocated to the segments based on usage, where possible, or other factorsbased on the nature of the activity.  General corporate expenses that donot directly support the operations of the business segments are shown asUnallocated corporate costs. The accounting policies of the reportableoperating segments are the same as those described in Note 2, “Summary ofSignificant Accounting Policies.”

 

F-38

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Table ofContents

 

***BusinessSegments***

*** ***
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net sales**      |       |                             |       |   |   |   |   |
| Fine Paper         |       | $                                | 255.6      |   | $ | 335.5 |   | $ | 366.5 |   |
| Technical Products |       | 318.3                            |       | 396.8 |   | 400.8 |   |
| Intersegment sales |       | —                           |       | — |   | (0.3 | ) |
| Consolidated       |       | $                                | 573.9      |   | $ | 732.3 |   | $ | 767.0 |   |

 
| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating income (loss)**      |       |                             |       |   |   |   |   |
| Fine  Paper (a)                  |       | $                                | 17.5       |   | $ | 34.0 |   | $ | 46.6 |   |
| Technical  Products (b)          |       | 14.4                             |       | (42.3 | ) | 24.7 |   |
| Unallocated  corporate costs (c) |       | (15.5                            | )          | (11.0 | ) | (17.4 | ) |
| Consolidated                     |       | $                                | 16.4       |   | $ | (19.3 | ) | $ | 53.9 |   |

 

----

(a)          Operating earnings forthe year ended December 31, 2009 include costs related to the closure ofthe Ripon Mill of $17.1 million.

(b)         Theoperating loss for the year ended December 31, 2008 includes a non-cashpre-tax goodwill and other intangible asset impairment charge of $54.5 million.

(c)          Unallocatedcorporate costs for the year ended December 31, 2008 include a gain ofapproximately $4.3 million related to the settlement certain post-employmentobligations for Terrace Bay retirees.

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Depreciation and amortization** |       |                             |       |   |   |   |   |
| Fine  Paper                       |       | $                                | 10.7       |   | $ | 11.4 |   | $ | 11.3 |   |
| Technical  Products               |       | 17.8                             |       | 18.9 |   | 17.2 |   |
| Pulp                              |       | —                           |       | 1.9 |   | 10.7 |   |
| Corporate                         |       | 6.0                              |       | 6.4 |   | 6.1 |   |
| Total                             |       | 34.5                             |       | 38.6 |   | 45.3 |   |
| Less:  Discontinued operations    |       | —                           |       | 1.9 |   | 10.7 |   |
| Total  Continuing Operations      |       | $                                | 34.5       |   | $ | 36.7 |   | $ | 34.6 |   |

 
| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Capital expenditures**       |       |                             |       |   |   |   |   |
| Fine  Paper                    |       | $                                | 4.0        |   | $ | 8.9 |   | $ | 9.5 |   |
| Technical  Products            |       | 4.3                              |       | 15.0 |   | 39.5 |   |
| Pulp                           |       | —                           |       | 1.4 |   | 5.4 |   |
| Corporate                      |       | 0.1                              |       | 4.7 |   | 3.9 |   |
| Total                          |       | 8.4                              |       | 30.0 |   | 58.3 |   |
| Less:  Discontinued operations |       | —                           |       | 1.4 |   | 5.4 |   |
| Total  Continuing Operations   |       | $                                | 8.4        |   | $ | 28.6 |   | $ | 52.9 |   |

 

F-39

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Table of Contents

 
| ** **            | ** ** | **December 31,** | ** ** |
|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Total Assets**      |       |                  |       |   |   |
| Fine  Paper           |       | $                     | 166.3      |   | $ | 190.7 |   |
| Technical  Products   |       | 353.4                 |       | 366.6 |   |
| Assets  held for sale |       | 10.0                  |       | 3.3 |   |
| Corporate  and other  |       | 107.8                 |       | 129.4 |   |
| Total                 |       | $                     | 637.5      |   | $ | 690.0 |   |

 

***GeographicInformation***

 
| ** **             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net sales**          |       |                             |       |   |   |   |   |
| United  States         |       | $                                | 360.9      |   | $ | 467.3 |   | $ | 502.9 |   |
| Europe                 |       | 213.0                            |       | 265.0 |   | 264.4 |   |
| Intergeographic  items |       | —                           |       | — |   | (0.3 | ) |
| Consolidated           |       | $                                | 573.9      |   | $ | 732.3 |   | $ | 767.0 |   |

*** ***
| ** **       | ** ** | **December 31,** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Total Assets** |       |                  |       |   |   |
| United  States   |       | $                     | 330.9      |   | $ | 371.8 |   |
| Canada           |       | 5.4                   |       | 3.3 |   |
| Europe           |       | 301.2                 |       | 314.9 |   |
| Total            |       | $                     | 637.5      |   | $ | 690.0 |   |

 

Net sales are attributed to geographic areas based on thephysical location of the entities. Segment identifiable assets are those thatare directly used in the segments operations. Corporate assets are primarilycash, deferred income taxes and deferred financing costs.

 

***Concentrations***

 

For the years ended December 31, 2009, 2008 and 2007,sales to the fine paper business’s two largest customers (both of which aredistributors) represented approximately 30 percent of its total sales. For theyears ended December 31, 2009, 2008 and 2007, no single customer accountedfor more than 10 percent of the Company’s consolidated revenue. Except forcertain specialty latex grades and specialty softwood pulp used by TechnicalProducts, management is not aware of any significant concentration of businesstransacted with a particular supplier that could, if suddenly eliminated, havea material adverse affect on its operations. An interruption in supply of alatex specialty grade or of specialty softwood pulp could disrupt andeventually cause a shutdown of production of certain technical products.

 

**Note 15.Supplemental Data**

 

***SupplementalStatement of Operations Data***

*** ***
| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Summary of Advertising and Research Expenses** | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advertising  expense                             |       | $                                | 6.5        |   | $ | 8.7 |   | $ | 10.3 |   |
| Research  expense                                |       | 5.5                              |       | 6.5 |   | 6.4 |   |
|                                                  |            |                                  |            |  |  |  |  |  |  |  |

 

F-40

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Table of Contents

 
| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Summary of Other (Income) Expense - net**                | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Gain)  loss on property disposals                         |       | $                                | 0.2        |   | $ | (6.3 | ) | $ | 0.4 |   |
| Net  gain from risk management activities                  |       | (0.1                             | )          | (0.7 | ) | (4.4 | ) |
| Litigation  settlement                                     |       | —                           |       | — |   | 5.2 |   |
| Terrace  Bay employee benefits                             |       | 0.7                              |       | (4.4 | ) | (3.4 | ) |
| Other  income - net                                        |       | (1.0                             | )          | (1.4 | ) | (2.3 | ) |
| Total  other income - net                                  |       | (0.2                             | )          | (12.8 | ) | (4.5 | ) |
| Less:  (Income) expense related to discontinued operations |       | 0.8                              |       | (1.5 | ) | (2.8 | ) |
| Other  income - net related to continuing operations       |       | $                                | (1.0       | ) | $ | (11.3 | ) | $ | (1.7 | ) |

 

***SupplementalBalance Sheet Data***

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Summary of Accounts Receivable— net**              |       |                  |       |   |   |
| Accounts  Receivable:                                     |       |                  |       |   |   |
| From  customers                                           |       | $                     | 69.4       |   | $ | 64.7 |   |
| Other                                                     |       | 0.2                   |       | 0.2 |   |
| Less  allowance for doubtful accounts and sales discounts |       | (1.9                  | )          | (1.7 | ) |
| Total                                                     |       | $                     | 67.7       |   | $ | 63.2 |   |

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Summary of Inventories**     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Inventories  by Major Class:   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Raw  materials                 |       | $                     | 16.6       |   | $ | 21.8 |   |
| Work  in progress              |       | 11.7                  |       | 13.0 |   |
| Finished  goods                |       | 49.4                  |       | 59.0 |   |
| Supplies  and other            |       | 1.7                   |       | 3.0 |   |
|                           |       | 79.4                  |       | 96.8 |   |
| Excess  of FIFO over LIFO cost |       | (8.7                  | )          | (8.2 | ) |
| Total                          |       | $                     | 70.7       |   | $ | 88.6 |   |

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Summary of Prepaid and Other Current Assets** | ** ** | ** **            | ** ** | ** ** | ** ** |
| Prepaid  and other current assets               |       | $                     | 7.6        |   | $ | 11.8 |   |
| Spare  parts                                    |       | 5.5                   |       | 6.6 |   |
| Receivable  from FiberMark for German taxes     |       | 0.6                   |       | 0.6 |   |
| Total                                           |       | $                     | 13.7       |   | $ | 19.0 |   |

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Assets Held for Sale**                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| The  Woodlands (Note 5)                                  |       | $                     | 3.8        |   | $ | 3.3 |   |
| Ripon  Mill property, plant and equipment - net (Note 3) |       | 6.2                   |       | — |   |
| Total                                                    |       | $                     | 10.0       |   | $ | 3.3 |   |

 

F-41

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Table of Contents

 
| ** **                                              | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Summary of Property, Plant and Equipment — Net** | ** ** | ** **            | ** ** | ** ** | ** ** |
| Land  and land improvements                             |       | $                     | 21.9       |   | $ | 23.9 |   |
| Buildings                                               |       | 97.8                  |       | 99.9 |   |
| Machinery  and equipment                                |       | 445.1                 |       | 439.1 |   |
| Construction  in progress                               |       | 4.8                   |       | 12.5 |   |
|                                                    |       | 569.6                 |       | 575.4 |   |
| Less  accumulated depreciation and depletion            |       | 285.2                 |       | 259.2 |   |
| Net  Property, Plant and Equipment                      |       | $                     | 284.4      |   | $ | 316.2 |   |

 

Depreciation expense for the years ended December 31,2009, 2008 and 2007 was $30.1 million, $34.7 million and $41.6 million,respectively. For the year ended December 31, 2009, less than $0.1 millionin interest expense was capitalized as part of the cost of capitalprojects.  Interest expense capitalizedas part of the costs of capital projects was $0.5 million and $0.3 million forthe years ended December 31, 2008 and 2007, respectively.

 
| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Summary of Accrued Expenses**               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accrued  salaries and employee benefits       |       | $                     | 18.2       |   | $ | 19.0 |   |
| Liability  for uncertain income tax positions |       | 9.5                   |       | 12.9 |   |
| Accrued  interest                             |       | 2.1                   |       | 2.1 |   |
| Accrued  restructuring costs (Note 3)         |       | 4.0                   |       | 1.7 |   |
| Accrued  income taxes                         |       | 0.4                   |       | 1.3 |   |
| Other                                         |       | 14.4                  |       | 13.3 |   |
| Total                                         |       | $                     | 48.6       |   | $ | 50.3 |   |

 
| ** **                                                         | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Summary of Noncurrent Employee Benefits and Other  Obligations** | ** ** | ** **            | ** ** | ** ** | ** ** |
| Pension  benefits                                                  |       | $                     | 64.3       |   | $ | 68.7 |   |
| Post-employment  benefits other than pensions (a)                  |       | 40.7                  |       | 39.1 |   |
| Other                                                              |       | 3.3                   |       | 3.5 |   |
| Total                                                              |       | $                     | 108.3      |   | $ | 111.3 |   |

 

----

(a)          Includes$5.4 million and $4.8 million in long-term disability benefits due to TerraceBay retirees as of December 31, 2009 and 2008, respectively.

 

F-42

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Table of Contents

 

***SupplementalCash Flow Data***

 
| ** **                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net cash provided by (used in) changes in working capital,  net of effects of acquisitions** | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts  receivable                                                                           |       | $                                | (4.5       | ) | $ | 48.7 |   | $ | (14.3 | ) |
| Inventories                                                                                    |       | 17.7                             |       | (2.4 | ) | (1.1 | ) |
| Income  taxes receivable                                                                       |       | 9.8                              |       | (10.6 | ) | — |   |
| Prepaid  and other current assets                                                              |       | 1.4                              |       | 2.6 |   | (3.3 | ) |
| Accounts  payable                                                                              |       | (4.5                             | )          | (33.3 | ) | 2.8 |   |
| Accrued  expenses                                                                              |       | 6.6                              |       | (23.6 | ) | 13.1 |   |
| Foreign  currency effects on working capital                                                   |       | 0.9                              |       | (2.5 | ) | 8.7 |   |
| Total                                                                                          |       | $                                | 27.4       |   | $ | (21.1 | ) | $ | 5.9 |   |

 
| ** **                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cash  paid during the year for interest, net of interest expense capitalized |       | $                                | 20.2       |   | $ | 23.0 |   | $ | 23.7 |   |
| Cash  paid (received) during the year for income taxes, net of refunds       |       | (7.7                             | )          | 6.6 |   | 6.2 |   |
| Non-cash  investing activities:                                              |       |                             |       |   |   |   |   |
| Liability  for equipment acquired                                            |       | 1.8                              |       | 2.7 |   | 3.9 |   |
|                                                                              |            |                                  |            |  |  |  |  |  |  |  |

 

**Note 16. Condensed Consolidating FinancialInformation**

 

Neenah Paper Company of Canada, Neenah Paper Michigan, Inc.and Neenah Paper Sales, Inc. (the “Guarantor Subsidiaries”) guarantee theCompany’s Senior Notes. The Guarantor Subsidiaries are 100 percent owned by theCompany and all guarantees are full and unconditional.  The followingcondensed consolidating financial information is presented in lieu ofconsolidated financial statements for the Guarantor Subsidiaries as of December 31,2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007.

 

F-43

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe Year Ended December 31, 2009**

 
| ** **                                                        | ** ** | **Neenah   Paper, Inc** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Consolidating   Adjustments** | ** ** | **Consolidated   Amounts** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| **Net sales**                                                     |       | $                       | 248.2      |                         | $          | 112.4                              |       | $                               | 213.3      |                       | $          | — |   | $ | 573.9 |   |
| Cost  of products sold                                            |       | 186.2                   |       | 92.6                         |       | 193.5                              |       | —                          |       | 472.3                      |       |
| **Gross profit**                                                  |       | 62.0                    |       | 19.8                         |       | 19.8                               |       | —                          |       | 101.6                      |       |
| Selling,  general and administrative expenses                     |       | 45.4                    |       | 10.0                         |       | 13.7                               |       | —                          |       | 69.1                       |       |
| Restructuring  costs                                              |       | (0.4                    | )          | 17.1                         |       | 0.4                                |       | —                          |       | 17.1                       |       |
| Other  (income) expense - net                                     |       | 0.1                     |       | 0.9                          |       | (2.0                               | )          | —                          |       | (1.0                       | )          |
| **Operating income (loss)**                                       |       | 16.9                    |       | (8.2                         | )          | 7.7                                |       | —                          |       | 16.4                       |       |
| Equity  in earnings of subsidiaries                               |       | (2.5                    | )          | —                       |       | —                             |       | 2.5                             |       | —                     |       |
| Interest  expense-net                                             |       | 21.4                    |       | 0.8                          |       | 1.0                                |       | —                          |       | 23.2                       |       |
| **Income (loss) from continuing operations before income  taxes** |       | (2.0                    | )          | (9.0                         | )          | 6.7                                |       | (2.5                            | )          | (6.8                       | )          |
| Benefit  for income taxes                                         |       | (0.8                    | )          | (4.0                         | )          | (0.2                               | )          | —                          |       | (5.0                       | )          |
| **Income (loss) from continuing operations**                      |       | (1.2                    | )          | (5.0                         | )          | 6.9                                |       | (2.5                            | )          | (1.8                       | )          |
| Income  from discontinued operations, net of income tax provision |       | —                  |       | 0.6                          |       | —                             |       | —                          |       | 0.6                        |       |
| **Net income (loss)**                                             |       | $                       | (1.2       | )                            | $          | (4.4                               | )          | $                               | 6.9        |                       | $          | (2.5 | ) | $ | (1.2 | ) |

 

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**For the Year Ended December 31, 2008**

 
| ** **                                                        | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                                     |       | $                            | 284.2      |                        | $          | 183.1                             |       | $                              | 265.0      |                      | $          | — |   | $ | 732.3 |   |
| Cost of products sold                                             |       | 230.1                        |       | 161.1                       |       | 242.0                             |       | —                         |       | 633.2                     |       |
| **Gross profit**                                                  |       | 54.1                         |       | 22.0                        |       | 23.0                              |       | —                         |       | 99.1                      |       |
| Selling, general and  administrative expenses                     |       | 47.6                         |       | 12.3                        |       | 15.3                              |       | —                         |       | 75.2                      |       |
| Goodwill and other intangible  asset impairment charge            |       | —                       |       | —                      |       | 54.5                              |       | —                         |       | 54.5                      |       |
| Other income (expense) - net                                      |       | 0.6                          |       | (10.9                       | )          | (1.0                              | )          | —                         |       | (11.3                     | )          |
| **Operating income  (loss)**                                      |       | 5.9                          |       | 20.6                        |       | (45.8                             | )          | —                         |       | (19.3                     | )          |
| Equity in losses of subsidiaries                                  |       | 146.7                        |       | —                      |       | —                            |       | (146.7                         | )          | —                    |       |
| Interest expense-net                                              |       | 21.6                         |       | 1.9                         |       | 1.5                               |       | —                         |       | 25.0                      |       |
| **Income (loss)  from continuing operations before income taxes** |       | (162.4                       | )          | 18.7                        |       | (47.3                             | )          | 146.7                          |       | (44.3                     | )          |
| Provision (benefit) for income  taxes                             |       | (3.9                         | )          | 9.5                         |       | (2.6                              | )          | —                         |       | 3.0                       |       |
| **Income (loss)  from continuing operations**                     |       | (158.5                       | )          | 9.2                         |       | (44.7                             | )          | 146.7                          |       | (47.3                     | )          |
| Loss from discontinued operations,  net of income tax benefit     |       | —                       |       | (111.2                      | )          | —                            |       | —                         |       | (111.2                    | )          |
| **Net income (loss)**                                             |       | $                            | (158.5     | )                           | $          | (102.0                            | )          | $                              | (44.7      | )                         | $          | 146.7 |   | $ | (158.5 | ) |

 

F-44

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**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**For the Year Ended December 31, 2007**

 
| ** **                                                    | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                                 |       | $                            | 222.8      |                        | $          | 280.2                             |       | $                              | 264.3      |                      | $          | (0.3 | ) | $ | 767.0 |   |
| Cost of products sold                                         |       | 157.0                        |       | 251.2                       |       | 227.6                             |       | (0.3                           | )          | 635.5                     |       |
| **Gross profit**                                              |       | 65.8                         |       | 29.0                        |       | 36.7                              |       | —                         |       | 131.5                     |       |
| Selling, general and  administrative expenses                 |       | 42.0                         |       | 21.9                        |       | 15.4                              |       | —                         |       | 79.3                      |       |
| Other income - net                                            |       | (0.1                         | )          | (1.0                        | )          | (0.6                              | )          | —                         |       | (1.7                      | )          |
| **Operating income**                                          |       | 23.9                         |       | 8.1                         |       | 21.9                              |       | —                         |       | 53.9                      |       |
| Equity in earnings of subsidiaries                            |       | (9.2                         | )          | —                      |       | —                            |       | 9.2                            |       | —                    |       |
| Interest expense-net                                          |       | 22.6                         |       | 2.8                         |       | —                            |       | —                         |       | 25.4                      |       |
| **Income from  continuing operations before income taxes**    |       | 10.5                         |       | 5.3                         |       | 21.9                              |       | (9.2                           | )          | 28.5                      |       |
| Provision (benefit) for income  taxes                         |       | 0.3                          |       | —                      |       | (4.0                              | )          | —                         |       | (3.7                      | )          |
| **Income from  continuing operations**                        |       | 10.2                         |       | 5.3                         |       | 25.9                              |       | (9.2                           | )          | 32.2                      |       |
| Loss from discontinued operations,  net of income tax benefit |       | —                       |       | (22.0                       | )          | —                            |       | —                         |       | (22.0                     | )          |
| **Net income (loss)**                                         |       | $                            | 10.2       |                        | $          | (16.7                             | )          | $                              | 25.9       |                      | $          | (9.2 | ) | $ | 10.2 |   |

 

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Table of Contents

 

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**As ofDecember 31, 2009**

 
| ** **                                             | ** ** | **Neenah   Paper, Inc** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating   Adjustments** | ** ** | **Consolidated   Amounts** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| **ASSETS**                                             |       |                    |       |                        |       |                              |       |                            |       |                       |       |
| **Current assets**                                     |       |                    |       |                        |       |                              |       |                            |       |                       |       |
| Cash  and cash equivalents                             |       | $                       | 2.1        |                        | $          | 2.0                               |       | $                               | 1.5        |                       | $          | — |   | $ | 5.6 |   |
| Accounts  receivable - net                             |       | 23.8                    |       | 16.1                        |       | 27.8                              |       | —                          |       | 67.7                       |       |
| Inventories                                            |       | 38.1                    |       | 8.9                         |       | 23.7                              |       | —                          |       | 70.7                       |       |
| Income  taxes receivable                               |       | 0.3                     |       | 0.5                         |       | —                            |       | —                          |       | 0.8                        |       |
| Deferred  income taxes                                 |       | 4.7                     |       | 57.0                        |       | —                            |       | —                          |       | 61.7                       |       |
| Intercompany  amounts receivable                       |       | 68.7                    |       | 49.4                        |       | —                            |       | (118.1                          | )          | —                     |       |
| Prepaid  and other current assets                      |       | 5.2                     |       | 1.7                         |       | 6.8                               |       | —                          |       | 13.7                       |       |
| Assets  held for sale                                  |       | —                  |       | 10.0                        |       | —                            |       | —                          |       | 10.0                       |       |
| Total  current assets                                  |       | 142.9                   |       | 145.6                       |       | 59.8                              |       | (118.1                          | )          | 230.2                      |       |
| Property,  plant and equipment at cost                 |       | 262.2                   |       | 99.5                        |       | 207.9                             |       | —                          |       | 569.6                      |       |
| Less  accumulated depreciation                         |       | 180.3                   |       | 62.9                        |       | 42.0                              |       | —                          |       | 285.2                      |       |
| Property,  plant and equipment — net              |       | 81.9                    |       | 36.6                        |       | 165.9                             |       | —                          |       | 284.4                      |       |
| **Investments in subsidiaries**                        |       | 280.5                   |       | —                      |       | —                            |       | (280.5                          | )          | —                     |       |
| **Deferred Income Taxes**                              |       | 10.9                    |       | 26.5                        |       | —                            |       | —                          |       | 37.4                       |       |
| **Goodwill**                                           |       | —                  |       | —                      |       | 44.9                              |       | —                          |       | 44.9                       |       |
| **Intangible assets**                                  |       | 2.9                     |       | —                      |       | 24.6                              |       | —                          |       | 27.5                       |       |
| **Other Assets**                                       |       | 6.5                     |       | 0.1                         |       | 6.5                               |       | —                          |       | 13.1                       |       |
| **TOTAL ASSETS**                                       |       | $                       | 525.6      |                        | $          | 208.8                             |       | $                               | 301.7      |                       | $          | (398.6 | ) | $ | 637.5 |   |
|                                                   |       |                    |       |                        |       |                              |       |                            |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**          |       |                    |       |                        |       |                              |       |                            |       |                       |       |
| **Current liabilities**                                |       |                    |       |                        |       |                              |       |                            |       |                       |       |
| Debt  payable within one year                          |       | $                       | 40.9       |                        | $          | —                            |       | $                               | 14.7       |                       | $          | — |   | $ | 55.6 |   |
| Accounts  payable                                      |       | 16.3                    |       | 5.3                         |       | 8.4                               |       | —                          |       | 30.0                       |       |
| Intercompany  amounts payable                          |       | 49.4                    |       | 68.7                        |       | —                            |       | (118.1                          | )          | —                     |       |
| Accrued  expenses                                      |       | 23.6                    |       | 14.8                        |       | 10.2                              |       | —                          |       | 48.6                       |       |
| Total  current liabilities                             |       | 130.2                   |       | 88.8                        |       | 33.3                              |       | (118.1                          | )          | 134.2                      |       |
| **Long-term Debt**                                     |       | 252.9                   |       | —                      |       | 10.7                              |       | —                          |       | 263.6                      |       |
| **Deferred Income Taxes**                              |       | —                  |       | —                      |       | 23.7                              |       | —                          |       | 23.7                       |       |
| **Noncurrent Employee Benefits and Other Obligations** |       | 34.8                    |       | 38.7                        |       | 34.8                              |       | —                          |       | 108.3                      |       |
| **TOTAL LIABILITIES**                                  |       | 417.9                   |       | 127.5                       |       | 102.5                             |       | (118.1                          | )          | 529.8                      |       |
| **STOCKHOLDERS’ EQUITY**                          |       | 107.7                   |       | 81.3                        |       | 199.2                             |       | (280.5                          | )          | 107.7                      |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       | $                       | 525.6      |                        | $          | 208.8                             |       | $                               | 301.7      |                       | $          | (398.6 | ) | $ | 637.5 |   |

 

F-46

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Table of Contents

** **

**CONDENSED CONSOLIDATING BALANCE SHEET**

**As of December 31, 2008**

 
| ** **                                              | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **ASSETS**                                              |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| **Current assets**                                      |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| Cash and cash equivalents                               |       | $                            | 1.9        |                        | $          | 1.1                               |       | $                              | 0.3        |                      | $          | — |   | $ | 3.3 |   |
| Accounts receivable, net                                |       | 22.4                         |       | 12.9                        |       | 27.9                              |       | —                         |       | 63.2                      |       |
| Inventories                                             |       | 45.8                         |       | 11.2                        |       | 31.6                              |       | —                         |       | 88.6                      |       |
| Income taxes receivable                                 |       | 11.2                         |       | —                      |       | —                            |       | —                         |       | 11.2                      |       |
| Deferred income taxes                                   |       | 3.5                          |       | 61.9                        |       | —                            |       | —                         |       | 65.4                      |       |
| Intercompany amounts receivable                         |       | 69.6                         |       | 55.6                        |       | —                            |       | (125.2                         | )          | —                    |       |
| Prepaid and other current assets                        |       | 5.5                          |       | 5.4                         |       | 8.1                               |       | —                         |       | 19.0                      |       |
| Assets held for sale—discontinued  operations      |       | —                       |       | 3.3                         |       | —                            |       | —                         |       | 3.3                       |       |
| Total current assets                                    |       | 159.9                        |       | 151.4                       |       | 67.9                              |       | (125.2                         | )          | 254.0                     |       |
| Property, plant and equipment, at  cost                 |       | 261.7                        |       | 113.4                       |       | 200.3                             |       | —                         |       | 575.4                     |       |
| Less accumulated depreciation                           |       | 169.1                        |       | 62.1                        |       | 28.0                              |       | —                         |       | 259.2                     |       |
| Property, plant and equipment —  net               |       | 92.6                         |       | 51.3                        |       | 172.3                             |       | —                         |       | 316.2                     |       |
| **Investments In  Subsidiaries**                        |       | 292.9                        |       | —                      |       | —                            |       | (292.9                         | )          | —                    |       |
| **Deferred Income  Taxes**                              |       | 9.6                          |       | 25.6                        |       | 0.1                               |       | —                         |       | 35.3                      |       |
| **Goodwill**                                            |       | —                       |       | —                      |       | 43.8                              |       | —                         |       | 43.8                      |       |
| **Intangible  Assets—net**                         |       | 3.0                          |       | —                      |       | 25.7                              |       | —                         |       | 28.7                      |       |
| **Other Assets**                                        |       | 6.8                          |       | 0.1                         |       | 5.1                               |       | —                         |       | 12.0                      |       |
| **TOTAL ASSETS**                                        |       | $                            | 564.8      |                        | $          | 228.4                             |       | $                              | 314.9      |                      | $          | (418.1 | ) | $ | 690.0 |   |
|                                                    |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**          |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| **Current  liabilities**                                |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| Debt payable within one year                            |       | $                            | 5.0        |                        | $          | —                            |       | $                              | 19.1       |                      | $          | — |   | $ | 24.1 |   |
| Accounts payable                                        |       | 17.4                         |       | 3.2                         |       | 14.7                              |       | —                         |       | 35.3                      |       |
| Intercompany amounts payable                            |       | 55.6                         |       | 69.6                        |       | —                            |       | (125.2                         | )          | —                    |       |
| Accrued expenses                                        |       | 21.8                         |       | 17.1                        |       | 11.4                              |       | —                         |       | 50.3                      |       |
| Total current liabilities                               |       | 99.8                         |       | 89.9                        |       | 45.2                              |       | (125.2                         | )          | 109.7                     |       |
| **Long-term Debt**                                      |       | 328.3                        |       | —                      |       | 12.2                              |       | —                         |       | 340.5                     |       |
| **Deferred Income  Taxes**                              |       | —                       |       | —                      |       | 25.4                              |       | —                         |       | 25.4                      |       |
| **Noncurrent  Employee Benefits and Other Obligations** |       | 33.6                         |       | 44.3                        |       | 33.4                              |       | —                         |       | 111.3                     |       |
| **TOTAL LIABILITIES**                                   |       | 461.7                        |       | 134.2                       |       | 116.2                             |       | (125.2                         | )          | 586.9                     |       |
| **STOCKHOLDERS’  EQUITY**                          |       | 103.1                        |       | 94.2                        |       | 198.7                             |       | (292.9                         | )          | 103.1                     |       |
| **TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY**    |       | $                            | 564.8      |                        | $          | 228.4                             |       | $                              | 314.9      |                      | $          | (418.1 | ) | $ | 690.0 |   |

 

F-47

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Table of Contents

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**For theYear Ended December 31, 2009**

 
| ** **                                                                                                              | ** ** | **Neenah Paper, Inc** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-  Guarantor Subsidiaries** | ** ** | **Consolidating Adjustments** | ** ** | **Consolidated Amounts** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|----------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| **OPERATING ACTIVITIES**                                                                                                |       |                  |       |                       |       |                             |       |                          |       |                     |       |
| Net  income (loss)                                                                                                      |       | $                     | (1.2       | )                          | $          | (4.4                             | )          | $                             | 6.9        |                     | $          | (2.5 | ) | $ | (1.2 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities Depreciation  and amortization |       | 15.2                  |       | 4.6                        |       | 14.7                             |       | —                        |       | 34.5                     |       |
| Stock-based  compensation                                                                                               |       | 4.7                   |       | —                     |       | —                           |       | —                        |       | 4.7                      |       |
| Deferred  income tax benefit                                                                                            |       | (2.8                  | )          | (4.4                       | )          | (2.2                             | )          | —                        |       | (9.4                     | )          |
| Ripon  Mill non-cash charges                                                                                            |       | —                |       | 6.3                        |       | —                           |       | —                        |       | 6.3                      |       |
| (Gain)  loss on other asset dispositions                                                                                |       | 0.2                   |       | —                     |       | —                           |       | —                        |       | 0.2                      |       |
| Net  cash provided by changes in operating working capital                                                              |       | 19.9                  |       | 4.7                        |       | 2.8                              |       | —                        |       | 27.4                     |       |
| Equity  in earnings of subsidiaries                                                                                     |       | (2.5                  | )          | —                     |       | —                           |       | 2.5                           |       | —                   |       |
| Pension  and other post-employment benefits                                                                             |       | 4.5                   |       | (2.9                       | )          | 0.8                              |       | —                        |       | 2.4                      |       |
| Other                                                                                                                   |       | (0.9                  | )          | 1.0                        |       | (0.1                             | )          | —                        |       | —                   |       |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                                                           |       | 37.1                  |       | 4.9                        |       | 22.9                             |       | —                        |       | 64.9                     |       |
| **INVESTING ACTIVITIES**                                                                                                |       |                  |       |                       |       |                             |       |                          |       |                     |       |
| Capital  expenditures                                                                                                   |       | (3.4                  | )          | (1.4                       | )          | (3.6                             | )          | —                        |       | (8.4                     | )          |
| Proceeds  from asset sales                                                                                              |       | —                |       | 0.8                        |       | —                           |       | —                        |       | 0.8                      |       |
| Other                                                                                                                   |       | 0.8                   |       | (0.3                       | )          | (1.2                             | )          | —                        |       | (0.7                     | )          |
| **NET CASH USED IN INVESTING ACTIVITIES**                                                                               |       | (2.6                  | )          | (0.9                       | )          | (4.8                             | )          | —                        |       | (8.3                     | )          |
| **FINANCING ACTIVITIES**                                                                                                |       |                  |       |                       |       |                             |       |                          |       |                     |       |
| Proceeds  from issuance of long-term debt                                                                               |       | 42.6                  |       | —                     |       | —                           |       | —                        |       | 42.6                     |       |
| Repayments  of long-term debt                                                                                           |       | (85.8                 | )          | —                     |       | (1.8                             | )          | —                        |       | (87.6                    | )          |
| Short-term  borrowings                                                                                                  |       | 0.9                   |       | —                     |       | 11.3                             |       | —                        |       | 12.2                     |       |
| Repayments  of short-term borrowings                                                                                    |       | —                |       | —                     |       | (15.4                            | )          | —                        |       | (15.4                    | )          |
| Cash  dividends paid                                                                                                    |       | (5.9                  | )          | —                     |       | —                           |       | —                        |       | (5.9                     | )          |
| Other                                                                                                                   |       | (0.1                  | )          | —                     |       | —                           |       | —                        |       | (0.1                     | )          |
| Intercompany  transfers - net                                                                                           |       | 14.0                  |       | (3.1                       | )          | (10.9                            | )          | —                        |       | —                   |       |
| **NET CASH USED IN FINANCING ACTIVITIES**                                                                               |       | (34.3                 | )          | (3.1                       | )          | (16.8                            | )          | —                        |       | (54.2                    | )          |
| **EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH  EQUIVALENTS**                                                       |       | —                |       | —                     |       | (0.1                             | )          | —                        |       | (0.1                     | )          |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                                                           |       | 0.2                   |       | 0.9                        |       | 1.2                              |       | —                        |       | 2.3                      |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF****YEAR**                                                                     |       | 1.9                   |       | 1.1                        |       | 0.3                              |       | —                        |       | 3.3                      |       |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**                                                                              |       | $                     | 2.1        |                       | $          | 2.0                              |       | $                             | 1.5        |                     | $          | — |   | $ | 5.6 |   |

 

F-48

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Table ofContents

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**For the YearEnded December 31, 2008**

** **
| ** **                                                                               | ** ** | **Neenah  Paper,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **OPERATING ACTIVITIES**                                                                 |       |                          |       |                        |       |                              |       |                           |       |                      |       |
| Net  income (loss)                                                                       |       | $                             | (158.5     | )                           | $          | (102.0                            | )          | $                              | (44.7      | )                         | $          | 146.7 |   | $ | (158.5 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities |       |                          |       |                        |       |                              |       |                           |       |                      |       |
| Depreciation  and amortization                                                           |       | 15.4                          |       | 7.4                         |       | 15.8                              |       | —                         |       | 38.6                      |       |
| Stock-based  compensation                                                                |       | 4.0                           |       | —                      |       | —                            |       | —                         |       | 4.0                       |       |
| Deferred  income tax provision (benefit)                                                 |       | 3.1                           |       | (55.2                       | )          | (4.0                              | )          | —                         |       | (56.1                     | )          |
| Goodwill  and other intangible asset impairment charge                                   |       | —                        |       | —                      |       | 54.5                              |       | —                         |       | 54.5                      |       |
| Asset  impairment loss                                                                   |       | —                        |       | 91.2                        |       | —                            |       | —                         |       | 91.2                      |       |
| Loss on  disposal - transfer of the Pictou Mill                                          |       | —                        |       | 29.4                        |       | —                            |       | —                         |       | 29.4                      |       |
| Amortization  of deferred revenue - transfer of the Pictou Mill                          |       | —                        |       | (2.8                        | )          | —                            |       | —                         |       | (2.8                      | )          |
| Loss on  disposal - transfer of the Pictou Mill postretirement benefit plans             |       | —                        |       | 53.7                        |       | —                            |       | —                         |       | 53.7                      |       |
| Gain on  curtailment of postretirement benefit plan                                      |       | —                        |       | (4.3                        | )          | —                            |       | —                         |       | (4.3                      | )          |
| (Gain)  loss on other asset dispositions                                                 |       | 0.4                           |       | (6.7                        | )          | —                            |       | —                         |       | (6.3                      | )          |
| Increase  (decrease) in working capital                                                  |       | (20.2                         | )          | 7.9                         |       | (8.8                              | )          | —                         |       | (21.1                     | )          |
| Equity in  losses of subsidiaries                                                        |       | 146.7                         |       | —                      |       | —                            |       | (146.7                         | )          | —                    |       |
| Pension  and other postretirement benefits                                               |       | (3.8                          | )          | (4.6                        | )          | 0.8                               |       | —                         |       | (7.6                      | )          |
| Other                                                                                    |       | (0.4                          | )          | (1.1                        | )          | (0.1                              | )          | —                         |       | (1.6                      | )          |
| **NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES**                                  |       | (13.3                         | )          | 12.9                        |       | 13.5                              |       | —                         |       | 13.1                      |       |
| **INVESTING ACTIVITIES**                                                                 |       |                          |       |                        |       |                              |       |                           |       |                      |       |
| Capital  expenditures                                                                    |       | (11.2                         | )          | (7.4                        | )          | (11.4                             | )          | —                         |       | (30.0                     | )          |
| Payments  in conjunction with transfer of the Pictou Mill                                |       | —                        |       | (13.6                       | )          | —                            |       | —                         |       | (13.6                     | )          |
| Proceeds  from asset sales                                                               |       | —                        |       | 13.8                        |       | —                            |       | —                         |       | 13.8                      |       |
| Other                                                                                    |       | (1.3                          | )          | 0.8                         |       | (0.1                              | )          | —                         |       | (0.6                      | )          |
| **NET CASH USED IN INVESTING ACTIVITIES**                                                |       | (12.5                         | )          | (6.4                        | )          | (11.5                             | )          | —                         |       | (30.4                     | )          |
| **FINANCING ACTIVITIES**                                                                 |       |                          |       |                        |       |                              |       |                           |       |                      |       |
| Proceeds  from issuance of long-term debt                                                |       | 53.7                          |       | —                      |       | —                            |       | —                         |       | 53.7                      |       |
| Repayments  of long-term debt                                                            |       | (34.6                         | )          | —                      |       | —                            |       | —                         |       | (34.6                     | )          |
| Short-term  borrowings                                                                   |       | —                        |       | —                      |       | 18.7                              |       | —                         |       | 18.7                      |       |
| Repayments  of short-term debt                                                           |       | —                        |       | —                      |       | (3.3                              | )          | —                         |       | (3.3                      | )          |
| Cash  dividends paid                                                                     |       | (6.0                          | )          | —                      |       | —                            |       | —                         |       | (6.0                      | )          |
| Share  purchases                                                                         |       | (9.4                          | )          | —                      |       | —                            |       | —                         |       | (9.4                      | )          |
| Other                                                                                    |       | (0.3                          | )          | (0.6                        | )          | —                            |       | —                         |       | (0.9                      | )          |
| Intercompany  transfers - net                                                            |       | 25.2                          |       | (7.6                        | )          | (17.6                             | )          | —                         |       | —                    |       |
| **NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES**                                  |       | 28.6                          |       | (8.2                        | )          | (2.2                              | )          | —                         |       | 18.2                      |       |
| **NET CHANGE IN CASH AND CASH EQUIVALENTS**                                              |       | 2.8                           |       | (1.7                        | )          | (0.2                              | )          | —                         |       | 0.9                       |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                         |       | (0.9                          | )          | 2.8                         |       | 0.5                               |       | —                         |       | 2.4                       |       |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**                                               |       | $                             | 1.9        |                        | $          | 1.1                               |       | $                              | 0.3        |                      | $          | — |   | $ | 3.3 |   |

 

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** **

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**For the YearEnded December 31, 2007**

 
| ** **                                                                                           | ** ** | **Neenah Paper,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **OPERATING ACTIVITIES**                                                                             |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| Net  income (loss)                                                                                   |       | $                            | 10.2       |                        | $          | (16.7                             | )          | $                              | 25.9       |                      | $          | (9.2 | ) | $ | 10.2 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities             |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| Depreciation  and amortization                                                                       |       | 15.1                         |       | 16.2                        |       | 14.0                              |       | —                         |       | 45.3                      |       |
| Stock-based  compensation                                                                            |       | 5.8                          |       | 0.3                         |       | 0.3                               |       | —                         |       | 6.4                       |       |
| Deferred  income tax provision (benefit)                                                             |       | (4.8                         | )          | (17.8                       | )          | (10.1                             | )          | —                         |       | (32.7                     | )          |
| Gain on  sale of woodlands                                                                           |       | —                       |       | (6.2                        | )          | —                            |       | —                         |       | (6.2                      | )          |
| (Gain)  loss on other asset dispositions                                                             |       | 0.2                          |       | (1.0                        | )          | —                            |       | —                         |       | (0.8                      | )          |
| Net cash  provided by (used in) changes in operating working capital, net of effects of  acquisition |       | 2.5                          |       | 5.3                         |       | (1.9                              | )          | —                         |       | 5.9                       |       |
| Equity in  earnings of subsidiaries                                                                  |       | (9.2                         | )          | —                      |       | —                            |       | 9.2                            |       | —                    |       |
| Pension  and other postretirement benefits                                                           |       | 2.9                          |       | (0.8                        | )          | 2.0                               |       | —                         |       | 4.1                       |       |
| Loss on  curtailment and settlement of pension plan                                                  |       | —                       |       | 38.7                        |       | —                            |       | —                         |       | 38.7                      |       |
| Other                                                                                                |       | 0.1                          |       | (0.1                        | )          | (1.4                              | )          | —                         |       | (1.4                      | )          |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                                        |       | 22.8                         |       | 17.9                        |       | 28.8                              |       | —                         |       | 69.5                      |       |
| **INVESTING ACTIVITIES**                                                                             |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| Capital  expenditures                                                                                |       | (12.9                        | )          | (10.0                       | )          | (35.4                             | )          | —                         |       | (58.3                     | )          |
| Acquisition  of Fox River, net of cash acquired                                                      |       | (54.7                        | )          | —                      |       | —                            |       | —                         |       | (54.7                     | )          |
| Acquisition  of Neenah Germany, net of cash acquired                                                 |       | (1.5                         | )          | —                      |       | —                            |       | —                         |       | (1.5                      | )          |
| Other                                                                                                |       | 0.1                          |       | 0.5                         |       | 0.5                               |       | —                         |       | 1.1                       |       |
| **NET CASH USED IN INVESTING ACTIVITIES**                                                            |       | (69.0                        | )          | (9.5                        | )          | (34.9                             | )          | —                         |       | (113.4                    | )          |
| **FINANCING ACTIVITIES**                                                                             |       |                         |       |                        |       |                              |       |                           |       |                      |       |
| Proceeds  from issuance of long-term debt                                                            |       | 63.6                         |       | —                      |       | 13.4                              |       | —                         |       | 77.0                      |       |
| Repayments  of long-term debt                                                                        |       | (34.1                        | )          | —                      |       | —                            |       | —                         |       | (34.1                     | )          |
| Short-term  borrowings                                                                               |       | —                       |       | —                      |       | 8.0                               |       | —                         |       | 8.0                       |       |
| Repayments  of short-term borrowings                                                                 |       | —                       |       | —                      |       | (5.0                              | )          | —                         |       | (5.0                      | )          |
| Cash  dividends paid                                                                                 |       | (6.0                         | )          | —                      |       | —                            |       | —                         |       | (6.0                      | )          |
| Proceeds  from exercise of stock options                                                             |       | 3.7                          |       | —                      |       | —                            |       | —                         |       | 3.7                       |       |
| Other                                                                                                |       | 0.2                          |       | —                      |       | —                            |       | —                         |       | 0.2                       |       |
| Intercompany  transfers - net                                                                        |       | 17.8                         |       | (6.4                        | )          | (11.4                             | )          | —                         |       | —                    |       |
| **NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES**                                              |       | 45.2                         |       | (6.4                        | )          | 5.0                               |       | —                         |       | 43.8                      |       |
| **EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH  EQUIVALENTS**                                    |       | —                       |       | 0.3                         |       | 0.6                               |       | —                         |       | 0.9                       |       |
| **NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                             |       | (1.0                         | )          | 2.3                         |       | (0.5                              | )          | —                         |       | 0.8                       |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                                     |       | 0.1                          |       | 0.5                         |       | 1.0                               |       | —                         |       | 1.6                       |       |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**                                                           |       | $                            | (0.9       | )                           | $          | 2.8                               |       | $                              | 0.5        |                      | $          | — |   | $ | 2.4 |   |

 

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**Note 17. Subsequent Event**

 

On March 1, 2010,the Company announced that Neenah Canada had signed a definitive agreement tosell the Woodlands to Northern Timber Nova Scotia Corporation, a new operatingcompany jointly owned by Atlas and Blue Wolf, for C$82.5 million ($78.6million).  The Company will receive theproceeds at the time of closing, which is expected to occur before March 31,2010. Proceeds from the sale will be used to repay the $40 million New TermLoan in full and reduce the balance of revolving loans outstanding under ourRestated Credit Agreement to zero. In addition, approximately $3.1 million incontract termination payments related to the closure of the Ripon Mill willbecome due and payable upon the sale of the Woodlands.  The Company’s ability to use proceeds inexcess of amounts outstanding under the Restated Credit Agreement is restrictedto “permitted uses” as defined in the indenture for the Senior Notes. Thetransaction is expected to result in a pre-tax gain of approximately $75million which will be recognized at the time of closing. The transaction is notexpected to generate a cash tax liability because the tax basis for theWoodlands is approximately equal to the sale price. The sale will result in theCompany’s substantially complete liquidation of its Canadian operations. Inaccordance with ASC Topic 830, *Foreign Currency Matters*,the gain on sale will also include the reclassification from accumulated othercomprehensive income of $88 million in deferred foreign currency translationgains.  Fees and other costs associatedwith the transaction are minimal.

 

**Note 18. Unaudited Quarterly Data**

 
| ** **                                                    | ** ** | **2009 Quarters** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **First**         | ** ** | **Second (a)** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Year (a)** | ** ** |
| Net  Sales                                                    |       | $                 | 134.1      |   | $ | 135.2 |   | $ | 150.1 |   | $ | 154.5 |   | $ | 573.9 |   |
| Gross  Profit                                                 |       | 20.5              |       | 24.2 |   | 28.3 |   | 28.6 |   | 101.6 |   |
| Operating  Income (Loss)                                      |       | 4.9               |       | (10.5 | ) | 10.7 |   | 11.3 |   | 16.4 |   |
| Income  (Loss) From Continuing Operations                     |       | (0.7              | )          | (8.6 | ) | 3.4 |   | 4.1 |   | (1.8 | ) |
| Earnings  (Loss) Per Common Share From Continuing Operations: |       |              |       |   |   |   |   |   |   |   |   |
| Basic                                                         |       | $                 | (0.05      | ) | $ | (0.58 | ) | $ | 0.23 |   | $ | 0.28 |   | $ | (0.12 | ) |
| Diluted                                                       |       | $                 | (0.05      | ) | $ | (0.58 | ) | $ | 0.23 |   | $ | 0.28 |   | $ | (0.12 | ) |

 
| ** **                                                    | ** ** | **2008 Quarters** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **First**         | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth (b)** | ** ** | **Year (b)** | ** ** |
| Net  Sales                                                    |       | $                 | 205.6      |   | $ | 194.5 |   | $ | 185.6 |   | $ | 146.6 |   | $ | 732.3 |   |
| Gross  Profit                                                 |       | 34.2              |       | 28.9 |   | 25.0 |   | 11.0 |   | 99.1 |   |
| Operating  Income (Loss)                                      |       | 17.9              |       | 14.2 |   | 12.3 |   | (63.7 | ) | (19.3 | ) |
| Income  (Loss) From Continuing Operations                     |       | 8.5               |       | 6.2 |   | 5.0 |   | (67.0 | ) | (47.3 | ) |
| Earnings  (Loss) Per Common Share From Continuing Operations: |       |              |       |   |   |   |   |   |   |   |   |
| Basic                                                         |       | $                 | 0.58       |   | $ | 0.43 |   | $ | 0.34 |   | $ | (4.58 | ) | $ | (3.24 | ) |
| Diluted                                                       |       | $                 | 0.57       |   | $ | 0.42 |   | $ | 0.34 |   | $ | (4.58 | ) | $ | (3.24 | ) |

 

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(a)          Includescosts related to the closure of the Ripon Mill of $17.1 million.

(b)         Includesnon-cash pre-tax goodwill and other intangible asset impairment charge of $54.5million.

 

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**SCHEDULEII**

 

**NEENAH PAPER, INC. AND SUBSIDIARIES**

**SCHEDULE OF VALUATION AND QUALIFYINGACCOUNTS**

**(Dollars in millions)**

** **
| **Description**                                      | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged  to Other  Accounts** | ** ** | **Write-offs  and  Reclassifications** | ** ** | **Balance at  End of Period** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|
| December 31, 2009                               |       |                                           |       |                                          |       |                                 |       |                                   |       |                                         |       |
| Allowances deducted from assets to  which they apply |       |                                           |       |                                          |       |                                 |       |                                   |       |                                         |       |
| Allowance for doubtful accounts                      |       | $                                              | 1.1        |                                          | $          | 0.3                                  |       | $                                      | —     |                                         | $          | (0.2 | )(a) | $ | 1.2 |   |
| Allowances for sales discounts                       |       | 0.6                                            |       | 0.1                                           |       | —                               |       | —                                 |       | 0.7                                          |       |
| Deferred income tax valuation  allowance             |       | —                                         |       | 1.5                                           |       | —                               |       | —                                 |       | 1.5                                          |       |
| December 31, 2008                               |       |                                           |       |                                          |       |                                 |       |                                   |       |                                         |       |
| Allowances deducted from assets to  which they apply |       |                                           |       |                                          |       |                                 |       |                                   |       |                                         |       |
| Allowance for doubtful accounts                      |       | $                                              | 1.1        |                                          | $          | 0.4                                  |       | $                                      | (0.1       | )                                            | $          | (0.3 | )(a) | $ | 1.1 |   |
| Allowances for sales discounts                       |       | 1.0                                            |       | (0.5                                          | )          | 0.1                                  |       | —                                 |       | 0.6                                          |       |
| December 31, 2007                               |       |                                           |       |                                          |       |                                 |       |                                   |       |                                         |       |
| Allowances deducted from assets to  which they apply |       |                                           |       |                                          |       |                                 |       |                                   |       |                                         |       |
| Allowance for doubtful accounts                      |       | $                                              | 3.6        |                                          | $          | 0.1                                  |       | $                                      | —     |                                         | $          | (2.6 | )(a) | $ | 1.1 |   |
| Allowances for sales discounts                       |       | 0.8                                            |       | 0.2                                           |       | —                               |       | —                                 |       | 1.0                                          |       |

 

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(a)          Principallyuncollectible receivables written off

 

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