**FORM 10-Q**

**SECURITIESAND EXCHANGE COMMISSION**

### **Washington, D.C.  20549**

**(Mark One)**
| **x**   **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                 |   | ** ** |
| **For the  quarterly period ended March 31, 2007**                                                         |
| ** **                                                                                                 |
| **OR**                                                                                                     |
| ** **                                                                                                 |
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                 |   |   |

 

### **Forthe transition period from                        to**

RegistrationNumber:  **333-114032**

**BLUERIDGE PAPER PRODUCTS INC.**

(Exact name ofregistrant as specified in charter)

| **Delaware**              | ** ** | **56-2136509**                   |
|---------------------------|------------|----------------------------------|
| (State of  incorporation) |       | (I.R.S. Employer  Identification |
|                      |       | Number)                          |

 

## **41 MAIN STREETCANTON, NORTH CAROLINA  28716**

(Address ofprincipal executive office)

Registrant’stelephone number, including area code:  **828-454-0676**

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes         x           No           o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):

# Large Accelerated Filer  o                 AcceleratedFiler  o                            Non-AcceleratedFiler  x

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).                 Yes         o            No           x

The number of commonshares outstanding at March 31, 2007 was 1,000.

 

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**BLUERIDGE PAPER PRODUCTS INC.**

**ANDSUBSIDIARIES**
|          |      | INDEX                                                                                                                                 |
|----------|-----------|---------------------------------------------------------------------------------------------------------------------------------------|
|     |      |                                                                                                                                  |
| PART 1.  |      | FINANCIAL INFORMATION                                                                                                                 |
|     |      |                                                                                                                                  |
|     | Item 1.   | Financial  Statements                                                                                                                 |
|     |      |                                                                                                                                  |
|     |      | Condensed  Consolidated Balance Sheets, March 31, 2007 (unaudited) and December 31, 2006  (derived from audited financial statements) |
|     |      |                                                                                                                                  |
|     |      | Condensed  Consolidated Statements of Operations, Three Months Ended March 31, 2007 and  2006 (unaudited)                             |
|     |      |                                                                                                                                  |
|     |      | Condensed  Consolidated Statements of Cash Flows, Three Months Ended March 31, 2007 and  2006 (unaudited)                             |
|     |      |                                                                                                                                  |
|     |      | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                     |
|     |      |                                                                                                                                  |
|     | Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           |
|     |      |                                                                                                                                  |
|     | Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk                                                                           |
|     |      |                                                                                                                                  |
|     | Item 4.   | Controls and  Procedures                                                                                                              |
|     |      |                                                                                                                                  |
| PART II. |      | OTHER INFORMATION                                                                                                                     |
|     |      |                                                                                                                                  |
|     | Item  1A. | Risk  Factors                                                                                                                         |
|     |      |                                                                                                                                  |
|     | Item  6.  | Exhibits                                                                                                                              |

 

2

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**PART 1.FINANCIAL INFORMATION**

**ITEM 1.  FINANCIALSTATEMENTS**

**BLUE RIDGE PAPER PRODUCTS INC.**

**Condensed Consolidated Balance Sheets**

**March 31,2007 and December 31, 2006**

**(Dollars inthousands)**

**(unaudited)**
| ** **                                                                                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **Assets**                                                                                                                      |       |               |       |                  |       |
| Current assets:                                                                                                                 |       |               |       |                  |       |
| Cash                                                                                                                            |       | $                  | 1,192      |                  | $          | 1,834 |   |
| Accounts  receivable, net of allowance for doubtful accounts and discounts of $1,197  and $1,507 in 2007 and 2006, respectively |       | 60,123             |       | 56,263                |       |
| Inventories                                                                                                                     |       | 52,125             |       | 57,469                |       |
| Prepaid expenses                                                                                                                |       | 2,338              |       | 2,306                 |       |
| Deferred tax  asset                                                                                                             |       | 4,489              |       | 4,385                 |       |
| Total current  assets                                                                                                           |       | 120,267            |       | 122,257               |       |
| Property, plant,  and equipment, net of accumulated depreciation of $124,094 and $120,202 in  2007 and 2006, respectively       |       | 190,897            |       | 190,792               |       |
| Deferred  financing costs, net                                                                                                  |       | 3,150              |       | 3,564                 |       |
| Other assets                                                                                                                    |       | 30                 |       | 44                    |       |
| Total assets                                                                                                                    |       | $                  | 314,344    |                  | $          | 316,657 |   |
| **Liabilities  and Stockholder’s Deficit**                                                                                 |       |               |       |                  |       |
| Current liabilities:                                                                                                            |       |               |       |                  |       |
| Current portion  of senior debt                                                                                                 |       | $                  | 44         |                  | $          | 43 |   |
| Current portion  of capital lease obligations                                                                                   |       | 789                |       | 965                   |       |
| Accounts payable                                                                                                                |       | 32,837             |       | 43,498                |       |
| Accrued expenses  and other current liabilities                                                                                 |       | 31,517             |       | 33,383                |       |
| Interest payable                                                                                                                |       | 5,793              |       | 1,884                 |       |
| Total current  liabilities                                                                                                      |       | 70,980             |       | 79,773                |       |
| Senior debt, net of  current portion                                                                                            |       | 162,020            |       | 159,876               |       |
| Parent Pay-In-Kind  (PIK) Senior Subordinated Note                                                                              |       | 48,514             |       | 48,514                |       |
| Capital lease  obligations, net of current portion                                                                              |       | 1,942              |       | 2,629                 |       |
| Pension and postretirement  benefits                                                                                            |       | 23,920             |       | 24,027                |       |
| Deferred tax liability                                                                                                          |       | 4,489              |       | 4,385                 |       |
| Other liabilities                                                                                                               |       | 1,243              |       | 1,205                 |       |
| Total  liabilities                                                                                                              |       | 313,108            |       | 320,409               |       |
| Obligation to redeem  ESOP shares                                                                                               |       | 29,715             |       | 29,723                |       |
| Obligation to redeem  restricted stock units of Parent                                                                          |       | 1,312              |       | 1,235                 |       |
| Commitments and  contingencies (See notes)                                                                                      |       |               |       |                  |       |
| Stockholder’s deficit:                                                                                                     |       |               |       |                  |       |
| Common stock  (par value $0.01, 1,000 shares authorized and outstanding in 2007 and 2006,  respectively)                        |       | —             |       | —                |       |
| Additional  paid-in capital                                                                                                     |       | 64,196             |       | 64,213                |       |
| Accumulated deficit                                                                                                             |       | (81,311            | )          | (86,255               | )          |
| Accumulated  other comprehensive loss                                                                                           |       | (3,299             | )          | (3,299                | )          |
|                                                                                                                            |       | (20,414            | )          | (25,341               | )          |
| Receivable from  Parent                                                                                                         |       | (9,377             | )          | (9,369                | )          |
| Total  stockholder’s deficit                                                                                               |       | (29,791            | )          | (34,710               | )          |
| Total liabilities and  stockholder’s deficit                                                                               |       | $                  | 314,344    |                  | $          | 316,657 |   |

 

See accompanying notes to condensed consolidated financialstatements.

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**BLUE RIDGE PAPER PRODUCTS INC.**

**Condensed Consolidated Statements of Operations**

**Three MonthsEnded March 31, 2007 and 2006**

**(Dollars inthousands)**

**(unaudited)**
| ** **                                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                             |       | $        | 155,011    |     | $          | 140,107 |   |
| Cost of goods sold:                                                   |       |     |       |     |       |
| Cost of goods  sold, excluding depreciation and amortization          |       | 133,673  |       | 127,801  |       |
| Depreciation and  amortization                                        |       | 3,866    |       | 3,604    |       |
| Gross profit                                                          |       | 17,472   |       | 8,702    |       |
| Selling, general and  administrative expenses                         |       | 7,150    |       | 5,789    |       |
| Depreciation and  amortization                                        |       | 27       |       | 58       |       |
| ESOP expense                                                          |       | —   |       | 1,116    |       |
| Profit-sharing expense                                                |       | 549      |       | —   |       |
| Operating profit                                                      |       | 9,746    |       | 1,739    |       |
| Other income (expense):                                               |       |     |       |     |       |
| Interest  expense, excluding amortization of deferred financing costs |       | (4,386   | )          | (4,475   | )          |
| Amortization of  deferred financing costs                             |       | (414     | )          | (370     | )          |
| Government grant  income                                              |       | —   |       | 206      |       |
| Gain (loss) on  equity method investment                              |       | (2       | )          | 4        |       |
|                                                                  |       | (4,802   | )          | (4,635   | )          |
| Profit (loss)  before income taxes                                    |       | 4,944    |       | (2,896   | )          |
| Income tax                                                            |       | —   |       | —   |       |
| Net income (loss)                                                     |       | $        | 4,944      |     | $          | (2,896 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

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**BLUE RIDGE PAPER PRODUCTS INC.**

**Condensed Consolidated Statements of Cash Flows**

**Three MonthsEnded March 31, 2007 and 2006**

**(Dollars inthousands)**

**(unaudited)**
| ** **                                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                   |       |     |       |     |       |
| Net income  (loss)                                                                                       |       | $        | 4,944      |     | $          | (2,896 | ) |
| Adjustment to  reconcile net income (loss) to net cash provided by (used in) operating  activities:      |       |     |       |     |       |
| Depreciation and  amortization                                                                           |       | 3,893    |       | 3,662    |       |
| Compensation  expense for Parent restricted stock                                                        |       | —   |       | 13       |       |
| Amortization of  deferred financing costs                                                                |       | 414      |       | 370      |       |
| ESOP expense                                                                                             |       | —   |       | 1,116    |       |
| Parent PIK  Senior Subordinated Note for interest                                                        |       | 1,092    |       | 1,000    |       |
| Changes in  operating assets and liabilities:                                                            |       |     |       |     |       |
| Accounts  receivable, net                                                                                |       | (3,860   | )          | (2,172   | )          |
| Inventories                                                                                              |       | 5,344    |       | 2,635    |       |
| Prepaid expenses                                                                                         |       | (32      | )          | (261     | )          |
| Accounts payable                                                                                         |       | (6,106   | )          | (4,247   | )          |
| Accrued expenses  and other current liabilities                                                          |       | (1,866   | )          | (5,373   | )          |
| Interest payable                                                                                         |       | 2,817    |       | 2,704    |       |
| Pension and  postretirement benefits                                                                     |       | (107     | )          | 701      |       |
| Other assets and  liabilities                                                                            |       | 53       |       | 379      |       |
| Net cash  provided by (used in) operating activities                                                     |       | 6,586    |       | (2,369   | )          |
| Cash flows used in  investing activities:                                                                |       |     |       |     |       |
| Additions to  property, plant, and equipment                                                             |       | (3,998   | )          | (2,134   | )          |
| Net cash used in  investing activities                                                                   |       | (3,998   | )          | (2,134   | )          |
| Cash flows from  financing activities:                                                                   |       |     |       |     |       |
| Repurchase of  Parent common and preferred stock                                                         |       | 44       |       | (3       | )          |
| Proceeds from  borrowings under line of credit                                                           |       | 30,348   |       | 39,701   |       |
| Repayment of  borrowings under line of credit                                                            |       | (28,193  | )          | (36,926  | )          |
| Repayments of  long-term debt and capital lease obligations                                              |       | (874     | )          | (171     | )          |
| Other financing  activities                                                                              |       | (4,555   | )          | 1,188    |       |
| Net cash  provided by (used in) financing activities                                                     |       | (3,230   | )          | 3,789    |       |
| Net decrease in  cash                                                                                    |       | (642     | )          | (714     | )          |
| Cash, beginning of  period                                                                               |       | 1,834    |       | 2,110    |       |
| Cash, end of period                                                                                      |       | $        | 1,192      |     | $          | 1,396 |   |
| Supplemental  disclosures of cash flow information:                                                      |       |     |       |     |       |
| Cash paid for interest,  including capitalized interest of $749 and $217 in 2007 and 2006,  respectively |       | $        | 1,227      |     | $          | 896 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollarsin thousands)**

**(1)  Basis of Presentation**

The accompanying unaudited condensed consolidated interim financial statementshave been prepared in accordance with Regulation S-X related to interimperiod financial statements and, in the opinion of management, include alladjustments (consisting only of normal recurring accruals) that are necessaryfor the fair presentation of results for the interim periods.  Results for the three months ended March 31,2007 may not necessarily be indicative of full-year results.  It is suggested that these condensedconsolidated interim financial statements be read in conjunction with theaudited consolidated financial statements of Blue Ridge PaperProducts Inc. (the “Company”) included in our annual report on Form 10-Kfor the year ended December 31, 2006.

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make a numberof estimates and assumptions relating to the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements.  These estimatesand assumptions also affect the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

**(2) Liquidity**

The Company’s workingcapital needs are satisfied through its revolving credit facility, whichexpires December 15, 2008.  On September15, 2004, the credit agreement was amended to increase the facility from$45,000 to $50,000 on a permanent basis. The credit agreement requires that the Company meet certain financialcovenants, including a minimum borrowing availability threshold and a fixedcharge coverage ratio.  On August 5,2005, the credit agreement was amended to include specified foreign accountdebtors as eligible accounts borrowing base availability.  On March 15, 2006, the credit agreement wasamended on a permanent basis to change the minimum borrowing availabilitythreshold from $7,500 to $5,000.  Forfurther discussion, see the Company’s annual report on Form 10-K for the yearended December 31, 2006.  In addition,the Company must meet certain affirmative and negative operatingcovenants.  In the event of default or ifthe outstanding balance of the revolving credit facility is greater than$25,000, the borrowing availability falls below $5,000 and the fixed chargecoverage ratio is less than 1.1 to 1.0, the credit agreement provides foractivation of controlled bank accounts to apply daily cash collections towardthe outstanding revolving loan balance. Management believes the existing credit facility is adequate for the Company’scurrent cash flow needs.  Continuedcompliance with debt covenants and sufficient liquidity is dependent uponbusiness operations consistent with management’s plan for the fiscal yearending December 31, 2007 (“fiscal year 2007”). However, uncertainties exist within the Company’s markets that include,but are not limited to, availability and pricing of raw materials and energy,unforeseen disruption in plant operations, labor disputes, significantcompetition, relationships with large customers, product demand, environmentalcompliance, litigation, loss of key managers and exposures to interest ratechanges.

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The borrowingavailabilities at March 31, 2007 and December 31, 2006 are as follows:
|                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                     |       |               |       |                  |       |
| Borrowing base                           |       | $                  | 65,710     |                  | $          | 61,605 |   |
| Credit agreement  restriction            |       | (5,000             | )          | (5,000                | )          |
| Suppressed  availability (1)             |       | (10,710            | )          | (6,605                | )          |
| Line  availability not to exceed $50,000 |       | 50,000             |       | 50,000                |       |
| Revolver balance                         |       | (36,390            | )          | (34,235               | )          |
| Letters of  credit                       |       | (5,691             | )          | (5,691                | )          |
| Total  availability                      |       | $                  | 7,919      |                  | $          | 10,074 |   |

 

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(1)                                  Theexcess of the value of the assets collateralized over the maximum line ofcredit after subtracting the credit agreement restriction.

**(3)  Inventories**

Components of inventory at March31, 2007 and December 31, 2006 are as follows:
|                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                  |       |               |       |                  |       |
| Raw materials         |       | $                  | 19,105     |                  | $          | 18,219 |   |
| Work in progress      |       | 15,952             |       | 18,173                |       |
| Finished goods:       |       |               |       |                  |       |
| Paper and  paperboard |       | 11,915             |       | 15,122                |       |
| Cartons               |       | 5,153              |       | 5,955                 |       |
| Total                 |       | $                  | 52,125     |                  | $          | 57,469 |   |

 

**(4) Debt**

*9.5% Senior Secured Notes*

On December 17, 2003, theCompany issued $125.0 million of senior secured notes (the “Notes”) through aprivate placement offering under Rule 144A.  The Notes have a term of fiveyears, are due on December 15, 2008 and bear interest at a stated rate of 9.5%,which is payable semi-annually in arrears on June 15 and December 15.  TheNotes are collateralized by a senior secured interest in substantially all ofthe Company’s tangible and intangible assets and have a subordinated securedinterest in the outstanding trade accounts receivable and inventories. The Company has the right to redeem the Notes at 104.75% and 100.00%, plusaccrued interest on or after December 15, 2006 and December 15, 2007,respectively.  Terms of the indenture under which the Notes have beenissued contain certain covenants, including limitations on certain restrictedpayments and the incurrence of additional indebtedness.

*Revolving Credit Facility*

On December 17,2003, the Company entered into a revolving credit facility with a financialinstitution, which provided for maximum borrowings of $45,000, subject to aborrowing base calculated using eligible accounts receivable and inventories.  On September 15, 2004, the credit agreementwas amended to increase the maximum borrowings to $50,000 on a permanentbasis.  On August 5, 2005, the creditagreement was amended to include specified foreign account debtors as eligibleaccounts in determining borrowing base availability.  On March 15, 2006, the credit agreement wasamended on a permanent basis to change the minimum borrowing availabilitythreshold from $7,500 to $5,000.  Therevolving credit facility is collateralized by a senior secured interest in theCompany’s outstanding trade accounts receivable and inventories and by asubordinated secured interest in substantially all of the Company’s tangibleand

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intangible assets.  The revolving credit facility matures onDecember 15, 2008, and requires the Company to pay an annual fee of 0.375%on the unused facility amount.  TheCompany had an outstanding balance of $36,390 and $34,235 at March 31, 2007 andDecember 31, 2006, respectively, and letters of credit outstanding as of March31, 2007 and December 31, 2006 were $5,691. The maximum borrowing availability at March 31, 2007 was $7,919, subjectto the availability restriction described in Note 2.  The interest rate on the revolving creditfacility at each of March 31, 2007 and December 31, 2006 was 7.53%.  This is a blended rate of LIBOR contractsplus margin.

*ParentPIK Senior Subordinated Note*

Blue Ridge Holding Corp.(the “Parent”) partially financed the acquisition of the Canton System with aPIK Senior Subordinated Note payable to International Paper Corporation in theprincipal amount of $30,000, wherein interest would accrue on the unpaidprincipal balance at a rate of 9% per annum until May 14, 2007.  OnNovember 14, 2003, the Company entered into an agreement with InternationalPaper to extend the maturity date of the Parent PIK Senior Subordinated Note toMay 14, 2009 in return for a principal payment of $7,000.  This paymentwas made on December 17, 2003 with proceeds from the sale of the Notes. On each semi-annual interest payment date (March 31 and September 30), theParent records interest on this note by issuing “Secondary Notes,” which bearsubstantially the same terms as the original Parent PIK Senior SubordinatedNotes.  Payments of principal and interest under the Parent PIK SeniorSubordinated Note are legal obligations of the Parent and have not beenguaranteed in any way by the Company.  In addition, under certaincircumstances, primarily future Parent equity transactions transferring atleast 50% of the common stock to a third party, payment by the Parent of theParent PIK Senior Subordinated Note is triggered prior to its maturity. The Parent is dependent on the Company to service the debt in itsentirety.  The entire amount is due on May 14, 2009.

**(5)  Retirement Plans**

*PensionPlan*

The components of netperiodic benefit costs relating to the Company’s pension plan are as followsfor the three-month periods ended March 31, 2007 and 2006:
|                                     | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Service cost                        |       | $                                | 435        |   | $ | 409 |   |
| Interest cost                       |       | 315                              |       | 251 |   |
| Expected return on  assets          |       | (319                             | )          | (264 | ) |
| Amortization of prior  service cost |       | (16                              | )          | (16 | ) |
| Amortization of  actuarial loss     |       | 123                              |       | 118 |   |
| Total net periodic benefits costs   |       | $                                | 538        |   | $ | 498 |   |

 

Management is primarilyresponsible for determining the cost of pension benefits for this plan. Management considered a number of factors, including consulting with anactuarial firm, when determining this cost. The Company estimates its benefits payments in fiscal year 2007 will beapproximately $438.  Benefits paymentsfor the fiscal year ended December 31, 2006 (“fiscal year 2006”) were $382.

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*PostretirementMedical Plan*

The components of netperiodic benefit costs relating to the Company’s postretirement medical planare as follows for the three-month periods ended March 31, 2007 and 2006:
|                                     | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Service cost                        |       | $                                | 135        |   | $ | 118 |   |
| Interest cost                       |       | 288                              |       | 227 |   |
| Amortization of prior  service cost |       | (100                             | )          | (100 | ) |
| Amortization of  actuarial loss     |       | 20                               |       | — |   |
| Total net periodic benefits costs   |       | $                                | 343        |   | $ | 245 |   |

 

Managementis primarily responsible for determining the cost of postretirement medicalbenefits for this plan.  Management considered a number of factors,including consulting with an actuarial firm, when determining this cost.  The Company estimates its benefits paymentsfor fiscal year 2007 will be approximately $644.  Benefits payments for fiscal year 2006 were$428.

**(6)  Recent Accounting Developments**

In June 2006, the FASBissued FAS Interpretation No. 48 (FIN 48) “Accounting for Uncertainty in IncomeTaxes,” which clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with SFAS 109, “Accountingfor Income Taxes.”  The accounting provisions of FIN 48 prescribe arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  This interpretation establishes a consistent threshold forrecognizing current and deferred taxes.  The Company adopted theprovisions of FIN 48 effective January 1, 2007.  The adoption of FIN 48did not have a material effect on the Company’s financial statements or resultsof operations.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157 (“Statement 157”),“Fair Value Measurements.”  Statement 157 establishes a framework formeasuring fair value in generally accepted accounting principles and enhancesdisclosures about fair value measurements.  Statement 157 applies whenother accounting pronouncements require fair value measurements; it does notrequire new fair value measurements.  Statement 157 applies to interimreporting and will be effective for the Company in the first quarter of thefiscal year ending December 31, 2008.  The Company is currently evaluatingthe effects of Statement 157 but does not anticipate that it will have amaterial effect on its consolidated financial statements.

On September 8, 2006, theFASB released FASB Staff Position (FSP AUG AIR-1), “Accounting for PlannedMajor Maintenance Activities,” which prohibits the use of the “accrue inadvance” method of accounting for planned major maintenance activities inannual and interim financial reporting periods.  The guidance in FSP AUGAIR-1 is effective for the first fiscal year beginning after December 15,2006.  The Company does not use the “accrue in advance” method ofaccounting for planned major maintenance; therefore, the provisions of FSP AUGAIR-1 have no effect on the Company’s financial statements.

On September 29, 2006,the FASB issued FASB Statement No. 158 (“Statement 158”), “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—AnAmendment of FASB Statements Nos. 87, 88, 106 and 132R.”  This newstandard requires an employer to: (a) recognize in its 

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statement of financialposition an asset for a plan’s overfunded status or a liability for a plan’sunderfunded status; (b) measure a plan’s assets and its obligations thatdetermine its funded status as of the end of the employer’s fiscal year (withlimited exceptions); and (c) recognize changes in the funded status of adefined benefit postretirement plan in the year in which the changesoccur.  Those changes will be reported in comprehensive income.  Therequirement to recognize the funded status of a benefit plan and the disclosurerequirements are effective as of the end of the fiscal year ending after June15, 2007, for entities with non-publicly traded equity securities as defined byStatement 158.  The Company will adopt the provisions of Statement 158 inDecember 2007 and is currently evaluating the impact on its consolidatedfinancial statements.  Based onpreliminary information from the Company’s actuaries, the Company expects theadoption of this new accounting guidance to increase stockholder’s deficit, netof tax, by approximately $3,000, to $4,000 as of December 31, 2007.

**(7)  Commitments and Contingencies**

*(a)  Purchase Commitments*

The Company hasagreements with suppliers of wood pulp and wood chips.  The terms of one of the agreements requireminimum volume purchases of 815,000 tons of chips each contract year during thecontract five-year period.  This woodchip agreement is with International Paper, which supplies the wood chipsthrough two of its subsidiaries (see Note 14 to our consolidated financialstatements included in our annual report for fiscal year 2006, for furtherdiscussion).  As of March 31, 2007, theCompany has minimal commitments to purchase wood chips of approximately $58,617over the remaining terms of the agreements.

*(b)Labor Agreements*

The Company maintainscollective bargaining labor agreements with local unions at all manufacturingfacilities.  Approximately 74% of theCompany’s employees are subject to the agreements.  A new Master Labor Agreement, accompanied bylocal supplements, was negotiated with United Steel, Paper and Forestry,Rubber, Manufacturing, Energy, Allied Industrial and Service WorkersInternational Union (USW) and ratified in July 2006.  The term of the labor agreement extendsthrough May 13, 2009.

*(c)  Litigation, Claims and Assessments*

On April 15, 2003, alawsuit seeking class action certification was filed in the Circuit Court forCocke County, Tennessee, in which the Company is a defendant.  The lawsuit was brought on behalf ofapproximately 300 residents owning property adjoining the Pigeon River uponwhich the Canton Mill is located, and into which the Company has a permit todischarge.  The plaintiffs sought damagesfor private nuisance for the period commencing June 1, 1999, and thereafteruntil the date of trial.  The plaintiffsin this action alleged that the discharge of (colored) water from the CantonMill resulted in a nuisance (diminution of property value), but did not containany allegation relating to health or safety matters.  The demand for damages was limited to amaximum of $74 (exclusive of interest and costs) per individual landowner, orcollectively a total of $22,200.

On August 17, 2005, aCocke County Court jury ruled in favor of the Plaintiff class awarding $2,000for nuisance damages with no punitive damages being awarded.  In January 2007, the Tennessee Court ofAppeals Eastern Section in Knoxville, Tennessee ruled in favor of the juryverdict.  A petition to review the Courtof Appeals ruling has been made to the Tennessee Supreme Court.  In accordance with the requirements ofStatement of Financial Accounting Standards No. 5, “Accounting forContingencies” a reserve of $2,000 was established to recognize the potentialliability and is included in accrued expenses and other current liabilities inthe accompanying condensed consolidated balance sheets.

10

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On October 11, 2005, theCompany was sued by the same plaintiff group in a lawsuit for the same cause ofaction in the Circuit Court for Cocke County, Tennessee, after which theCompany removed the case to federal court. On September 19, 2006, the case was remanded back to Tennessee statecourt.  The Company’s Tennessee counseladvises that it is unlikely this case will be tried until a finalnon-appealable decision is reached in the first lawsuit.

On June 6, 2006, theParent received notices of tax assessment for corporate and franchise tax fortax years 1999 through 2004 in the aggregate amount of $806.  The Parent formally protested the taxassessment on July 5, 2006.  On January4, 2007, the Parent received revised assessments.  The reassessed aggregate amount is $665,consisting of $361 in taxes, $87 in interest and $217 in penalties for the fullsix-year period.  The Company has notrecorded a liability for any amount related to this assessment because theultimate loss, if any, associated with the assessment is not consideredprobable or estimable.

The Company is subject toother litigation in the normal course of business.  In the opinion of management, the Company’sliability, if any, under this pending litigation will not materially impact itsfinancial condition.

*(d)  Employment Contracts*

The Company hasemployment and compensation agreements with certain executive officers andmanagement personnel.  The agreementsgenerally have terms of three to five years, unless the employee is terminatedfor cause or the employee terminates employment for good reason, and providefor severance benefits in certain circumstances.  The agreements also include a cash bonus,which is a formula bonus based on the Company meeting certain performancegoals.

*(e)  Environmental Liabilities*

As part of itsenvironmental management program, the Company has recognized obligations forclosure of landfills by accruing the obligations for closure or removal inaccordance with the requirements of SFAS No. 143, “Accounting for AssetRetirement Obligations.”  The Company hadaccrued approximately $1,243 and $1,205 for closure of landfills as of March31, 2007 and December 31, 2006, respectively.

The normal conduct ofbusiness subjects the Company to various federal, state and local laws andregulations.  Although potential costsdue to existing or new laws could be significant, management currently believesthat the outcome of any such matters will not have a material adverse effect onthe Company’s consolidated financial position.

**(8)  Income Tax**

Effective January 1,2007, the Company adopted the provisions of FIN 48.  The application of FIN 48 resulted in noadjustment or recording of a liability for unrecognized income taxbenefits.  In addition, future changes inthe unrecognized tax benefit will have no impact on the effective tax rate dueto existence of the valuation allowance. (For more information regarding the valuation allowance, please refer to2006 Form 10-K Footnote 9).

The Company is subject toincome tax in the United States and numerous state taxing jurisdictions.  The Company is not currently underexamination by any taxing jurisdiction and has not received notification ofintent to audit.  Federal and stateincome tax returns are generally open for examination for three years from thedate of filing.  The Company has notconsented to an extension for the periods available for assessment 

11

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of income tax with anytaxing jurisdictions.  The Company didnot record income tax expense for the three-month period ended March 31, 2007as the Company continues to maintain a full valuation allowance due to ahistory of net losses.

**(9)  Segment Information**

The Company’s managementmakes financial decisions and allocates resources based on sales and operatingincome of two segments: paper and packaging. The Company does not allocate selling, research and administrationexpenses to each segment, but management uses operating income to measure theperformance of the segments.  Thefinancial information attributed to these segments is included in the followingtable:
|                                | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Net sales:**                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Paper                          |       | $                                                    | 62,529     |   | $ | 57,175 |   |
| Packaging                      |       | 92,482                                               |       | 82,932 |   |
| Corporate                      |       | —                                               |       | — |   |
| Total                          |       | $                                                    | 155,011    |   | $ | 140,107 |   |
| **Operating income/(loss):**   | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Paper                          |       | $                                                    | 9,028      |   | $ | 4,259 |   |
| Packaging                      |       | 8,444                                                |       | 4,443 |   |
| Corporate                      |       | (7,726                                               | )          | (6,963 | ) |
| Total                          |       | $                                                    | 9,746      |   | $ | 1,739 |   |
| **Depreciation/amortization:** | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Paper                          |       | $                                                    | 2,963      |   | $ | 2,753 |   |
| Packaging                      |       | 903                                                  |       | 851 |   |
| Corporate                      |       | 27                                                   |       | 58 |   |
| Total                          |       | $                                                    | 3,893      |   | $ | 3,662 |   |
| **Total assets:**              | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Paper                          |       | $                                                    | 209,287    |   | $ | 203,589 |   |
| Packaging                      |       | 92,362                                               |       | 93,971 |   |
| Corporate                      |       | 12,695                                               |       | 13,057 |   |
| Total                          |       | $                                                    | 314,344    |   | $ | 310,617 |   |
| **Capital expenditures:**      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Paper                          |       | $                                                    | 2,746      |   | $ | 1,844 |   |
| Packaging                      |       | 503                                                  |       | 250 |   |
| Corporate                      |       | 749                                                  |       | 40 |   |
| Total                          |       | $                                                    | 3,998      |   | $ | 2,134 |   |

 

The accounting policies of the segments are the same asthose described in the summary of significant accounting policies.  The corporate segment includes all sellingand administrative expenses.

The Company’s identifiable product lines are packagingand paper products.  Packaging segmentproducts include polymer-coated paperboard and converted packaging, includinggable top cartons and coated paperboard used in the production of ovenable foodtrays, paper cups and other coated packaging. Paper segment products include envelope paper, specialty paper, offsetprinting paper and uncoated paperboard. The Company’s manufacturing operations are all located in the UnitedStates.

For the three monthsended March 31, 2007, the Company’s gross sales by destination wereconcentrated in the following geographic markets: North America, approximately95.7%; Europe, approximately 4.1%; and Asia, approximately 0.2%.

 

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**(10)  Stock-Based Compensation**

The Company offersrestricted share awards as stock-based compensation to select employees.  Restricted stock awards are generally subjectto forfeiture if an employee terminates employment prior to vesting.  Outstanding blocks of restricted stock grantsas of December 31, 2006 were all fully vested. In February 2007, awards totaling 245,000 shares were granted under theBlue Ridge Holding Corp. 2005 Employee Stock Unit Plan to select employees ofthe Company that will cliff-vest five years from the date of grant.

The Company hasclassified the awards as equity awards under the provisions of SFAS 123(R)where compensation expense is adjusted for estimated forfeitures and isrecognized on a straight-line basis over the requisite service period of theaward.  The Company estimated futureforfeiture rates based on its historical experience during the preceding fiscalyears.

The value of share-basedpayment awards was determined using an independent valuation.  This valuation considered the Company’s 2006performance and share value was determined to be $6.49 per share.  For the three months ended March 31, 2007,the Company recognized $53 in stock-based compensation.

The following tablesummarizes the changes in the number of shares of restricted stock for thethree months ended March 31, 2007 (*dollarsin thousands):*
|                                                                          | ** ** | ** ** | ** ** | **Aggregate**       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                                                               | ** ** | **Shares** | ** ** | **fair value** | ** ** |
| Outstanding at  December 31, 2006                                        |       | 190,356    |       | $                   | 1,235      |   |
| Canceled and  other                                                      |       | 3,640      |       | 24                  |       |
| Outstanding at  March 31, 2007                                           |       | 193,996    |       | $                   | 1,259      |   |
| Add:                                                                     |       |       |       |                |       |
| Accrued portion  of unvested stock grant                                 |       |       |       | 53                  |       |
| Obligation to  redeem restricted stock units of Parent at March 31, 2007 |       | 193,996    |       | $                   | 1,312      |   |

 

In April 2007, theCompany repurchased 108,499 restricted shares for $704.  The shares were issued in 2006 as part of ablock of 157,458 shares that were granted in years 1999 through 2002.

# **ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

#### **FORWARD-LOOKINGSTATEMENTS**

This filing includes “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  Forward-looking statements arethose that do not relate solely to historical fact.  They include, but are not limited to, anystatement that may predict, forecast, indicate or imply future results,performance, achievements or events. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,”“intend,” “project,” “plan,” “will” or words or phrases of similar meaning.

These forward-lookingstatements are not guarantees of future performance.  Forward-looking statements are based onmanagement’s expectations that involve risks and uncertainties, including, butnot limited to, economic, competitive, governmental and technological factorsoutside of our control, that may cause actual results to differ materially fromtrends, plans or expectations set forth in the forward-looking statements.  Given these risks and uncertainties, actualfuture results may be materially different from what we plan or expect.  We will not update these forward-lookingstatements even if our situation changes in the future.

#### **QUARTERLYOVERVIEW; COMPARISON TO IMMEDIATELY PRECEDING QUARTER**

 

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We reported a net profitof $4.9 million for the first quarter ended March 31, 2007.  This compared to a net profit of $2.2 millionfor the fourth quarter ended December 31, 2006 and a net loss of $2.9 millionfor the first quarter ended March 31, 2006. Total net sales for the first quarter ended March 31, 2007 were $155.0million compared to $140.4 million and $140.1 million in the fourth quarterended December 31, 2006 and first quarter ended March 31, 2006, respectively.

Our turnaround continuedto gain momentum and, as a result, we recorded our most profitable quarter inseven years.  Continued strongproductivity, record shipments and moderating input costs all contributed toour improved profitability.

Uncoated paper shipmentstotaled 73,108 tons in the first quarter ended March 31, 2007 compared to69,150 tons in the fourth quarter ended December 31, 2006.  Average pricing in the first quarter endedMarch 31, 2007 decreased 1.8% compared to the fourth quarter ended December 31,2006 reflecting slightly lower backlogs; however, announced reductions inindustry capacity should help the market to tighten somewhat over the next fewmonths.  Average pricing increased 7.9%when compared to the first quarter ended March 31, 2006.

Packaging segmentshipments for the first quarter ended March 31, 2007 increased 8.0% whencompared to the fourth quarter ended December 31, 2006 and increased 3.2% whencompared to the first quarter ended March 31, 2006.  Pricing for the packaging segment for thefirst quarter ended March 31, 2007 increased 4.2% over the fourth quarter endedDecember 31, 2006.  On January 15, 2007,we announced a price increase of $40 to $60 per ton (depending on the grade)for our coated board products.  OnFebruary 26, 2007, we announced a price increase of 8% to 10% (depending on thegrade) for our gable top carton products. The effective dates for each of these increases will be determined byour contractual obligations.

Raw material costsincreased in the first quarter ended March 31, 2007 compared to the fourthquarter ended December 31, 2006 by approximately $1.2 million.  This increase was primarily due to increasesin the costs of wood chips and chemicals, partially offset by a decrease in thecost of polyethylene.

On March 26, 2007, weannounced that we are engaged in preliminary discussions with the Rank Grouppursuant to a non-binding letter of intent regarding a potential transactioninvolving the sale of Blue Ridge Paper Products Inc.  The Rank Group is the owner of Carter HoltHarvey Ltd. group of companies, headquartered in New Zealand, and EvergreenPackaging Inc. (formerly the Beverage Packaging Division of InternationalPaper).  In the first quarter ended March31, 2007, we incurred legal and professional fees of $0.3 million associatedwith this potential transaction.

Profit sharing totalingapproximately $0.5 million was earned by our qualified employees in the firstquarter ended March 31, 2007.

We conducted an extendedpulp mill outage at the Canton mill in April. We anticipate that increased maintenance and purchased fiber costsassociated with this 14-day outage will likely result in a small loss in the2007 second quarter.

#### **Resultsof Operations**

The following table setsforth certain sales and operating data for our business segments for theperiods indicated:

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** **

(Dollars in millions,except per ton amounts)
|                                                                | ** ** | **Three-Month Period**   | ** ** |
|----------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                     | ** ** | **Ended March 31.** | ** ** |
| ** **                                                     | ** ** | **2007**                      | ** ** | **2006** | ** ** |
|                                                           |       |                          |       |   |   |
| Net sales:                                                     |       |                          |       |   |   |
| Packaging                                                      |       | $                             | 92.5       |   | $ | 82.9 |   |
| Paper                                                          |       | 62.5                          |       | 57.2 |   |
| Total                                                          |       | $                             | 155.0      |   | $ | 140.1 |   |
|                                                           |       |                          |       |   |   |
| Segments’  operating profit:                              |       |                          |       |   |   |
| Packaging                                                      |       | $                             | 8.4        |   | $ | 4.4 |   |
| Paper                                                          |       | 9.0                           |       | 4.3 |   |
| Total segments operating profit, excluding corporate  expenses |       | 17.4                          |       | 8.7 |   |
|                                                           |       |                          |       |   |   |
| Corporate expense                                              |       | 7.7                           |       | 7.0 |   |
| Total operating profit                                         |       | $                             | 9.7        |   | $ | 1.7 |   |
|                                                           |       |                          |       |   |   |
| Percentage of  net sales:                                      |       |                          |       |   |   |
| Packaging                                                      |       | 59.7                          | %          | 59.2 | % |
| Paper                                                          |       | 40.3                          | %          | 40.8 | % |
| Total                                                          |       | 100.0                         | %          | 100.0 | % |
|                                                           |       |                          |       |   |   |
| Segments’  operating margin:                              |       |                          |       |   |   |
| Packaging                                                      |       | 9.1                           | %          | 5.3 | % |
| Paper                                                          |       | 14.4                          | %          | 7.5 | % |
| Total                                                          |       | 11.2                          | %          | 6.2 | % |
|                                                           |       |                          |       |   |   |
| Shipments  (tons):                                             |       |                          |       |   |   |
| Packaging                                                      |       | 70,771                        |       | 68,596 |   |
| Paper                                                          |       | 79,229                        |       | 77,897 |   |
| Total                                                          |       | 150,000                       |       | 146,493 |   |
|                                                           |       |                          |       |   |   |
| Average price ($ per ton):                                |       |                          |       |   |   |
| Packaging                                                      |       | $                             | 1,307      |   | $ | 1,209 |   |
| Paper                                                          |       | 789                           |       | 734 |   |
| Average price                                                  |       | $                             | 1,033      |   | $ | 956 |   |

 

**THREEMONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006**

*NetSales.*   Net sales forthe three-month period ended March 31, 2007, or the 2007 three-month period,increased $14.9 million or 10.6% to $155.0 million compared to $140.1 millionfor the three-month period ended March 31, 2006, or the 2006 three-monthperiod.

Net sales for ourpackaging segment for the 2007 three-month period increased $9.6 million or11.6% to $92.5 million compared to $82.9 million for the 2006 three-monthperiod.  For the 2007 three-month period,our packaging segment sold 70,771 tons of coated and converted paperboardproducts at an average price of $1,307 per ton, compared to 68,596 tons soldfor the 2006 three-month period at an average price of $1,209 per ton.  The increase in packaging segment sales isattributable to a 3.2% increase in volume shipped and a 8.1% increase in averagerevenue per ton shipped.

Net sales for our papersegment for the 2007 three-month period increased $5.3 million or 9.3% to $62.5million compared to $57.2 million in the 2006 three-month period.  Net sales volume in our paper segment increased1,332 tons to 79,229 tons shipped in the 2007 three-month period as compared to77,897 tons 

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shipped in the 2006three-month period.  Approximately 81.1%or $4.3 million of the net sales increase in the 2007 three-month periodreflects improved pricing for our products. The remaining increase in net sales reflects increased sales of uncoatedpaper produced at our Canton, North Carolina facility.  Average pricing in our paper segment improvedto $789 per ton shipped in the 2007 three-month period as compared to $734 perton shipped in the 2006 three-month period.

*OperatingProfit*.  Total segmentoperating profit increased $8.7 million to $17.4 million in the 2007three-month period compared to an operating profit of $8.7 million for the 2006three-month period.  As a percentage ofsales, total segments operating profit increased to 11.2% in the 2007three-month period from 6.2% in the 2006 three-month period.

The following table setsforth significant items that increased (decreased) total segments’ operatingprofit (*in millions*):
| **Segments’  Operating Profit**      | ** ** | **Three-Month Period Ended   March 31, 2007** | ** ** | **Three-Month Period Ended   March 31, 2006** | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------|------------|
|                                      |       | $                                                                      | 17.4       |                                                                   | $          | 8.7        |       | $ | 8.7 |   |
| Product pricing  improvement              |       | $                                                                      | 9.0        |                                                                   |
|                                      |       |                                                                   |       |
| Productivity  improvements                |       | 0.9                                                                    |       |
|                                      |       |                                                                   |       |
| Major raw material  cost improvements     |       | 0.9                                                                    |       |
|                                      |       |                                                                   |       |
| Increased wage  and benefit costs         |       | (2.4                                                                   | )          |
|                                      |       |                                                                   |       |
| Increased  by-product sales               |       | 1.2                                                                    |       |
|                                      |       |                                                                   |       |
| Other miscellaneous  and offsetting items |       | (0.9                                                                   | )          |
|                                      |       |                                                                   |       |
| Total                                     |       | $                                                                      | 8.7        |                                                                   |
|                                           |            |                                                                        |            |                                                                        |            |            |            |  |  |  |

 

Operating profitfor our packaging segment increased $4.0 million or 93.2% in the 2007three-month period to $8.4 million or 9.1% of packaging segment sales, comparedto $4.4 million or 5.3% of packaging segment sales for the 2006 three-monthperiod.  The increase in operating profitfor our packaging segment was due primarily to (i) a $4.7 million improvementin pricing for our products sold; (ii) improved productivity of approximately$1.3 million; (iii) a $1.7 million decrease in purchase costs of plastic/resin,our primary raw material used at our Waynesville converting facility; (iv) a$0.2 million decrease in other major raw material costs for the division; and(v) a $0.7 million increase in sales of scrap and waste sold as aby-product.  The increase in packagingsegment operating profit in the 2007 three-month period was partially offset by(a) an increase of $1.6 million in costs incurred for wages and benefits; (b) a$2.2 million increase in costs of internally produced board received from theCanton mill and passed on to the packaging division through interdivisionaltransfer costs; and (c) other miscellaneous and offsetting variances totaling$0.6 million.

Operating profitfor our paper segment increased $4.7 million in the 2007 three-month period to$9.0 million or 14.4% of paper segment sales, compared to an operating profitof $4.3 million or 7.5% of paper segment sales for the 2006 three-monthperiod.  The increase in operating profitfor our paper segment was due primarily to (i) increased pricing on uncoatedpaper sales of $4.3 million; (ii) a $2.2 million decrease in costs ofinternally produced board and passed on to the packaging division throughinterdivisional transfer costs; 

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and (iii) improvedrevenue from the sale of our primary by-products produced at our Canton, NorthCarolina facility, tall oil and turpentine, of approximately $0.5 million.  The increase in paper segment operatingprofit in the 2007 three-month period was partially offset by (a) costincreases of approximately $1.0 million on many of our primary raw materialsincluding wood chips, purchased pulp and chemicals; (b) reduced productivity inthe 2007 three-month period of $0.4 million reflecting reduced paper productionas compared to the 2006 three-month period; (c) an increase of $0.8 million incosts incurred for wages and benefits; and (d) other miscellaneous andoffsetting variances totaling $0.1 million.

*Selling,General and Administrative Expenses. *Totalselling, general and administrative expenses increased $1.4 million or 24.1% to$7.2 million in the 2007 three-month period compared to $5.8 million for the2006 three-month period.  The increase inselling, general and administrative expenses was primarily attributable to (i)a $0.3 million increase in corporate wages and benefits cost in the 2007three-month period as compared to the 2006 three-month period; (ii) $0.3million in due diligence expenses related to the potential sale of the company;and (iii) other miscellaneous and offsetting variances totaling $0.8 million.

*Depreciationand Amortization Expense (non-operations).*  Depreciation and amortization expensesunrelated to operations was less than $0.1 million for both the 2007three-month and 2006 three-month periods.

*ESOPExpense. *ESOP expensedecreased $1.1 million or 100.0% to $0.0 million in 2007 compared to $1.1 millionin 2006.  The decrease in the 2007three-month period reflects the completion of the seven-year share distributioninto the ESOP, which began in May 1999 and ended in May 2006.  Going forward, ESOP expense will no longer beincurred.  Future events, such as ourobligation to repurchase certain shares of common stock held by retirees andformer employees when put to us have already been expensed.

*ProfitSharing Expense.* Profit sharing expense increased to $0.5 million in the 2007 three-monthperiod compared to $0.0 million in the 2006 three-month period.  Profit sharing expense reflects thedistribution of 10% of our pre-tax net income to our ESOP employees and isdistributed based on quarterly results. All ESOP employees, both hourly and salaried, share equally in thedistribution.  This expense is onlypayable to our employees when there is a year-to-date as well as a currentquarter net income.  In the 2006three-month period, this expense was not applicable.

*Interestand Amortization Expenses.  *Interestand amortization expenses remained unchanged at $4.8 million for the 2007three-month period compared to $4.8 million for 2006 three-month period.  The 2007 three-month period includes acorrection of a prior period uncorrected misstatement related to capitalizationof interest under SFAS 34.  Managementevaluated the prior period uncorrected misstatement using the dual method asprescribed in SAB 108 evaluating materiality under the guidance provided in SAB99 and concluded that the correction of the prior period uncorrectedmisstatement was clearly immaterial to prior years and to current yearconsolidated financial statements.  Thedecrease in interest expense as a result of this adjustment was offset by anincrease in interest cost incurred on the revolving credit facility and the PIKSenior Subordinated Note.

#### **LIQUIDITYAND CAPITAL RESOURCES**

Our principal liquidityrequirements are to service our debt and fund our operations and capitalexpenditure needs.  Our total seniordebt, defined as total debt less the Parent PIK Senior Subordinated Note, atMarch 31, 2007 was approximately $164.8 million.  Subject to our performance, which ifadversely affected could affect the availability of funds, we expect to be ableto meet our liquidity requirements for the remainder of fiscal 2007 throughcash provided by operations and through borrowings available under our workingcapital facility.  We cannot assure you,however, that this will be the case.  Weentered into a $45.0 million 

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revolving credit facilityin December 2003.  On September 15, 2004,the credit agreement was amended to increase the facility from $45.0 million to$50.0 million on a permanent basis.  OnAugust 5, 2005, the credit agreement was amended to include specified foreignaccount debtors as eligible accounts in determining borrowing baseavailability.  On March 15, 2006, therevolving credit agreement was amended on a permanent basis to change theminimum borrowing availability threshold from $7.5 million to $5.0million.  The maximum borrowingavailability at March 31, 2007 and December 31, 2006 was $7.9 million and $10.1million, respectively.  The revolvingcredit facility contains covenant restrictions, which require covenantavailability to exceed $5.0 million (as amended March 15, 2006).  If the covenant availability does not meetthe required minimum availability, a fixed charge coverage ratio covenant of1.1 to 1.0 will be triggered.  As ofMarch 31, 2007, we had a covenant availability of $23.6 million, which is $18.6million in excess of the required minimum.

Summary of Cash Flow ($in millions):
|                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net cash  provided by (used in) operating activities |       | $                                                    | 6.6        |   | $ | (2.4 | ) |
| Net cash used in  investing activities               |       | (4.0                                                 | )          | (2.1 | ) |
| Net cash  provided by (used in) financing activities |       | (3.2                                                 | )          | 3.8 |   |
| Net decrease in  cash                                |       | $                                                    | (0.6       | ) | $ | (0.7 | ) |
|                                                 |       |                                                 |       |   |   |
| Cash balance                                         |       | $                                                    | 1.2        |   | $ | 1.4 |   |

 

The cash provided byoperations was $6.6 million for the 2007 three-month period.  The cash provided by operations was primarilyattributable to a net income of $4.9 million for the 2007 three-month periodand changes in working capital.

The cash used ininvesting activities for the 2007 three-month period was $4.0 million.  Capital spending for the 2007 three-monthperiod was $4.0 million, which included $0.2 million for capitalized interestand $1.4 million for environmental projects. For the fiscal year ending December 31, 2007, we currently estimate thatour capital spending will be approximately $22.4 million.

Net cash used infinancing activities was $3.2 million for the 2007 three-month period, which isprimarily attributable to a reduction in outstanding checks within otherfinancing activities in the statement of cash flows.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

Weare exposed to certain market risks, including interest rate risk.  Risk exposure relating to this market risk issummarized below.  This informationshould be read in connection with the condensed consolidated financialstatements and the related notes thereto included elsewhere in this quarterlyreport on Form 10-Q. We manage interest cost using a combination offixed and variable rate debt.  As ofMarch 31, 2007, we have $125.0 million of Notes outstanding at a 9.5% fixedrate of interest and a $50.0 million working capital credit facility atvariable rates of interest.  As of March31, 2007, approximately $36.4 million was outstanding under our working capitalcredit facility consisting of short-term interest rates of 0.25% overApplicable Revolver Index Margin and 2.00% over Applicable Revolver LiborMargin, as defined.  Our working capitalfacility, as amended June 9, 2006, offers two options for interest rates:  Applicable Revolver Libor margin ranging from1.50% - 2.00% or Applicable Revolver Index Margin ranging from 0.00% -0.25%.  The rate is based on revolveravailability.  At the end of March 2007,we were approximately at the 

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high-point of theinterest rate grid for Libor and Index Margins. In addition, as of March 31, 2007, we have a $0.7 million mortgage notewith a maximum interest rate of 5.5% and a remaining duration of four years.

#### **ITEM4. CONTROLS AND PROCEDURES**

(A) Evaluation ofDisclosure Controls and Procedures

Our chiefexecutive officer and chief financial officer have evaluated the effectivenessof our disclosure controls and procedures (as defined in Rule 13a-15(e) and15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as of the end of the period covered by this report.  Our chief executive officer and chieffinancial officer have concluded that all material information required to bedisclosed by us in this quarterly report on Form 10-Q was recorded, processed,summarized, reported and properly disclosed in the time periods specified inthe rules and regulations of the Securities and Exchange Commission, and thatsuch information was accumulated and communicated to our management (includingour chief executive officer and chief financial officer) to allow timelydecisions regarding required disclosure. Based on their evaluation, our chief executive officer and chieffinancial officer have concluded that, as of March 31, 2007, we are incompliance with Rule 139-15(e) of the Exchange Act.

(B) Changes inInternal Controls Over Financial Reporting

There have been nosignificant changes in our internal controls over financial reporting duringthe three months ended March 31, 2007 that have materially affected or arereasonably likely to materially affect our internal control over financialreporting.

**PART II.  OTHER INFORMATION**

#### **ITEM1A.  RISK FACTORS**

The risk factors includedin our Annual Report on Form 10-K for the fiscal year ended December 31, 2006have not materially changed.

#### **ITEM6. EXHIBITS**

(a) Exhibits required by Item 601 of Regulation S-K

31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Actof 2002

31.2 Certification of CFOpursuant to Section 302 of Sarbanes-Oxley Act of 2002

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## **SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

**BLUERIDGE PAPER PRODUCTS INC.**
| Date: May 10, 2007 |                                 |
|--------------------|--------------------------------------|
|               |                                 |
| ** **         | **/S/  JOHN B. WADSWORTH**           | ** ** |
|               | John B. Wadsworth                    |
|               | Chief Financial  Officer             |
|               |                                 |
|               | (On behalf of  the Registrant and as |
|               | Principal  Financial Officer)        |

 

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### EXHIBIT INDEX

TO

FORM 10-Q

OF

BLUE RIDGE PAPER PRODUCTSINC.

FOR THE QUARTERLY PERIODENDED MARCH 31, 2007

Pursuant to Section102(d) of Regulation S-T

(17 C.F.R. Section232.102(d))

The following exhibitsare filed as part of this report:

31.1                           Certificationof CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2                           Certificationof CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002

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