**FORM 10-Q**

**SECURITIESAND EXCHANGE COMMISSION**

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

**(MarkOne)**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE**  |
|------------|------------|---------------------------------------------------------------|
| ** ** | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                           |
| ** ** | ** ** | ** **                                                    |
| ** ** | ** ** | **For the quarterly period ended June 30, 2007**              |
| ** ** | ** ** | ** **                                                    |
| ** ** | ** ** | **OR**                                                        |
|       |       |                                                          |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |
| ** ** | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                           |

 

### **For the transition period from                     to                                   **

**Registration Number:  333-114032**

**BLUERIDGE PAPER PRODUCTS INC.**

(Exact name of registrant as specified in charter)

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

 

## **41 MAIN STREET**

**CANTON,NORTH CAROLINA  28716**

(Address of principal executive office)

Registrant’s telephone number, including areacode:  **828-454-0676**

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.
| Yes |   | x | No | o |
|-----|--------|---|----|---|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  (Checkone):
| Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer x |
|--------------------------------|--------------------------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes |   | o | No | x |
|-----|--------|---|----|---|

 

The number of commonshares outstanding at June 30, 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, June 30, 2007 (unaudited) and December 31, 2006 (derived from  audited financial statements) |   |
|     |   |                   |   |   |   |
|     |   |                   |   | Condensed  Consolidated Statements of Operations, Three Months Ended June 30, 2007 and  2006 (unaudited), Six Months Ended June 30, 2007 and 2006 (unaudited) |   |
|     |   |                   |   |   |   |
|     |   |                   |   | Condensed  Consolidated Statements of Cash Flows, Six Months Ended June 30, 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  5.               |   | Other  Information |   |
|     |   |                   |   |   |   |
|     |   | Item  6.               |   | Exhibits |   |
|          |        |                        |  |  |  |  |  |

 

 

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|             | ** ** | **PART 1.  FINANCIAL INFORMATION** |
|-------------|------------|------------------------------------|
|        | ** ** | ** **                         |
| **ITEM 1.** | ** ** | **FINANCIAL STATEMENTS**           |

** **

**BLUE RIDGEPAPER PRODUCTS INC.**

**CondensedConsolidated Balance Sheets**

**June 30, 2007 and December 31, 2006**

**(Dollars in thousands)**

**(unaudited)**
| ** **                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Assets**                                                                                                                      |       |              |       |                  |       |
| Current assets:                                                                                                                 |       |              |       |                  |       |
| Cash                                                                                                                            |       | $                 | 1,061      |                  | $          | 1,834 |   |
| Accounts  receivable, net of allowance for doubtful accounts and discounts of $1,137  and $1,507 in 2007 and 2006, respectively |       | 55,525            |       | 56,263                |       |
| Inventories                                                                                                                     |       | 52,882            |       | 57,469                |       |
| Prepaid expenses                                                                                                                |       | 1,757             |       | 2,306                 |       |
| Deferred tax  asset                                                                                                             |       | 4,679             |       | 4,385                 |       |
| Total current  assets                                                                                                           |       | 115,904           |       | 122,257               |       |
| Property, plant, and  equipment, net of accumulated depreciation of $128,089 and $120,202 in 2007  and 2006, respectively       |       | 191,525           |       | 190,792               |       |
| Deferred financing  costs, net                                                                                                  |       | 2,726             |       | 3,564                 |       |
| Other assets                                                                                                                    |       | 21                |       | 44                    |       |
| Total assets                                                                                                                    |       | $                 | 310,176    |                  | $          | 316,657 |   |
| **Liabilities  and Stockholder’s Deficit**                                                                                 |       |              |       |                  |       |
| Current liabilities:                                                                                                            |       |              |       |                  |       |
| Current portion  of senior debt                                                                                                 |       | $                 | 45         |                  | $          | 43 |   |
| Current portion  of capital lease obligations                                                                                   |       | 736               |       | 965                   |       |
| Accounts payable                                                                                                                |       | 37,128            |       | 43,498                |       |
| Accrued expenses  and other current liabilities                                                                                 |       | 32,176            |       | 33,383                |       |
| Interest payable                                                                                                                |       | 1,776             |       | 1,884                 |       |
| Total current  liabilities                                                                                                      |       | 71,861            |       | 79,773                |       |
| Senior debt, net of  current portion                                                                                            |       | 162,013           |       | 159,876               |       |
| Parent Pay-In-Kind  (PIK) Senior Subordinated Note                                                                              |       | 50,696            |       | 48,514                |       |
| Capital lease  obligations                                                                                                      |       | 2,164             |       | 2,629                 |       |
| Pension and  postretirement benefits                                                                                            |       | 24,545            |       | 24,027                |       |
| Deferred tax liability                                                                                                          |       | 4,679             |       | 4,385                 |       |
| Other liabilities                                                                                                               |       | 1,273             |       | 1,205                 |       |
| Total liabilities                                                                                                               |       | 317,231           |       | 320,409               |       |
| Obligation to redeem  ESOP shares                                                                                               |       | 29,692            |       | 29,723                |       |
| Obligation to redeem  restricted stock units of Parent                                                                          |       | 598               |       | 1,235                 |       |
| Commitments and  contingencies (See notes)                                                                                      |       |              |       |                  |       |
| Stockholder’s deficit:                                                                                                     |       |              |       |                  |       |
| Common stock  (par value $0.01, 1000 shares authorized and outstanding in 2007 and 2006,  respectively)                         |       | —            |       | —                |       |
| Additional  paid-in capital                                                                                                     |       | 65,013            |       | 64,213                |       |
| Accumulated  deficit                                                                                                            |       | (88,872           | )          | (86,255               | )          |
| Accumulated  other comprehensive loss                                                                                           |       | (3,299            | )          | (3,299                | )          |
|                                                                                                                            |       | (27,158           | )          | (25,341               | )          |
| Receivable from  Parent                                                                                                         |       | (10,187           | )          | (9,369                | )          |
| Total  stockholder’s deficit                                                                                               |       | (37,345           | )          | (34,710               | )          |
| Total liabilities and  stockholder’s deficit                                                                               |       | $                 | 310,176    |                  | $          | 316,657 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

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**BLUE RIDGEPAPER PRODUCTS INC.**

**CondensedConsolidated Statements of Operations**

**Three- and Six-Month Periods Ended June 30, 2007 and 2006**

**(Dollars in thousands)**

**(unaudited)**
| ** **                                                            | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                      | ** ** | **June 30,**                    | ** ** |
| ** **                                                            | ** ** | **2007**                               | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                                             |       | $                                      | 144,298    |                                 | $          | 144,856 |   | $ | 299,309 |   | $ | 284,963 |   |
| Cost of goods  sold:                                                  |       |                                   |       |                                 |       |   |   |   |   |
| Cost of goods sold, excluding depreciation and amortization           |       | 133,004                                |       | 128,700                              |       | 266,677 |   | 256,501 |   |
| Depreciation and amortization                                         |       | 3,963                                  |       | 3,634                                |       | 7,829 |   | 7,238 |   |
| Gross profit                                                          |       | 7,331                                  |       | 12,522                               |       | 24,803 |   | 21,224 |   |
| Selling, general  and administrative expenses                         |       | 9,245                                  |       | 6,107                                |       | 16,395 |   | 11,896 |   |
| Depreciation and  amortization                                        |       | 31                                     |       | 28                                   |       | 58 |   | 86 |   |
| ESOP expense                                                          |       | —                                 |       | 511                                  |       | — |   | 1,627 |   |
| Profit-sharing  expense                                               |       | —                                 |       | —                               |       | 549 |   | — |   |
| Operating profit (loss)                                               |       | (1,945                                 | )          | 5,876                                |       | 7,801 |   | 7,615 |   |
| Other income  (expense):                                              |       |                                   |       |                                 |       |   |   |   |   |
| Interest expense, excluding amortization of deferred  financing costs |       | (5,191                                 | )          | (4,481                               | )          | (9,578 | ) | (8,956 | ) |
| Amortization of deferred financing costs                              |       | (425                                   | )          | (381                                 | )          | (838 | ) | (751 | ) |
| Government grant income                                               |       | —                                 |       | 979                                  |       | — |   | 1,185 |   |
| Gain on equity method investment                                      |       | —                                 |       | —                               |       | (2 | ) | 4 |   |
|                                                                  |       | (5,616                                 | )          | (3,883                               | )          | (10,418 | ) | (8,518 | ) |
| Profit (loss) before income taxes                                     |       | (7,561                                 | )          | 1,993                                |       | (2,617 | ) | (903 | ) |
| Income tax                                                            |       | —                                 |       | —                               |       | — |   | — |   |
| Net income  (loss)                                                    |       | $                                      | (7,561     | )                                    | $          | 1,993 |   | $ | (2,617 | ) | $ | (903 | ) |

 

Seeaccompanying notes to condensed consolidated financial statements.

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**BLUE RIDGEPAPER PRODUCTS INC.**

**Condensed Consolidated Statements ofCash Flows**

**Six Months Ended June 30, 2007 and 2006**

**(Dollars in thousands)**

**(unaudited)**
| ** **                                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                   |       |     |       |     |       |
| Net loss                                                                                                 |       | $        | (2,617     | )        | $          | (903 | ) |
| Adjustment to reconcile net loss to net cash  provided by operating activities:                          |       |     |       |     |       |
| Depreciation and amortization                                                                            |       | 7,887    |       | 7,324    |       |
| Compensation expense for Parent restricted stock                                                         |       | 132      |       | 25       |       |
| Amortization of deferred financing costs                                                                 |       | 838      |       | 751      |       |
| ESOP expense                                                                                             |       | —   |       | 1,627    |       |
| Gain on sale of assets                                                                                   |       | —   |       | (17      | )          |
| Parent PIK Senior Subordinated Note for interest                                                         |       | 1,141    |       | 2,044    |       |
| Changes in operating assets and liabilities:                                                             |       |     |       |     |       |
| Accounts receivable, net                                                                                 |       | 738      |       | (4,793   | )          |
| Inventories                                                                                              |       | 4,587    |       | 3,841    |       |
| Prepaid expenses                                                                                         |       | 549      |       | (501     | )          |
| Insurance proceeds receivable                                                                            |       | —   |       | 291      |       |
| Income tax receivable                                                                                    |       | —   |       | 50       |       |
| Accounts payable                                                                                         |       | (2,275   | )          | (5,288   | )          |
| Accrued expenses and other current liabilities                                                           |       | (1,207   | )          | (4,363   | )          |
| Interest payable                                                                                         |       | 932      |       | (46      | )          |
| Pension and postretirement benefits                                                                      |       | 518      |       | 1,136    |       |
| Other assets and liabilities                                                                             |       | 92       |       | (625     | )          |
| Net cash provided by operating activities                                                                |       | 11,315   |       | 553      |       |
| Cash flows used  in investing activities:                                                                |       |     |       |     |       |
| Additions to property, plant, and equipment                                                              |       | (8,619   | )          | (5,253   | )          |
| Proceeds from sale of property, plant, and equipment                                                     |       | (1       | )          | 17       |       |
| Net cash used in investing activities                                                                    |       | (8,620   | )          | (5,236   | )          |
| Cash flows from  financing activities:                                                                   |       |     |       |     |       |
| Repurchase of Parent common and preferred stock                                                          |       | (818     | )          | (3       | )          |
| Proceeds from borrowings under line of credit                                                            |       | 62,104   |       | 75,610   |       |
| Repayment of borrowings under line of credit                                                             |       | (59,944  | )          | (71,187  | )          |
| Repayments of long-term debt and capital lease  obligations                                              |       | (715     | )          | (344     | )          |
| Other financing activities                                                                               |       | (4,095   | )          | (755     | )          |
| Net cash provided by (used in) financing activities                                                      |       | (3,468   | )          | 3,321    |       |
| Net decrease in cash                                                                                     |       | (773     | )          | (1,362   | )          |
| Cash, beginning  of period                                                                               |       | 1,834    |       | 2,110    |       |
| Cash, end of  period                                                                                     |       | $        | 1,061      |     | $          | 748 |   |
| Supplemental  disclosures of cash flow information:                                                      |       |     |       |     |       |
| Cash paid for  interest, including capitalized interest of $865 and $461 in 2007 and 2006,  respectively |       | $   | 7,958      |     | $     | 7,420 |   |

 

See accompanying notes 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 financialstatements have been prepared in accordance with Regulation S-X related tointerim period financial statements and, in the opinion of management, includeall adjustments (consisting only of normal recurring accruals) that arenecessary for the fair presentation of results for the interim periods.  Results for the three months and six months endedJune 30, 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 Paper Products Inc.(the “Company”) included in our annual report on Form 10-K for the year endedDecember 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.  Theseestimates and assumptions also affect the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

**(2)  Subsequent Event**

On July 31, 2007, theCompany’s parent, Blue Ridge Holding Corp. (the “Parent”), merged with and intoPackaging Holdings Inc. (“NewCo”), a wholly owned subsidiary of EvergreenPackaging Inc. (“Evergreen”), with the Parent surviving (referred to herein asthe “Merger”).  The Merger wasconsummated in accordance with the terms and conditions of the Agreement andPlan of Merger, dated as of June 13, 2007, as amended, by and among Rank GroupLimited (“Rank Group”), NewCo, the Parent and, solely in its capacity as theStockholder Representative, KPS Special Situations Fund, L.P. (referred toherein as the “Merger Agreement”).  Priorto the consummation of the Merger, Rank Group transferred ownership of NewCo toits affiliate, Evergreen.

As a result of theconsummation of the Merger, in accordance with the terms and conditions of theMerger Agreement, a change of control occurred in the voting shares of commonstock of the Company indirectly beneficially owned immediately before theMerger.  The total consideration payableunder the Merger Agreement was $338,000, subject to adjustment.  All of the voting shares of common stock ofthe Parent are currently held by Evergreen. Evergreen financed the amounts to be paid upon consummation of theMerger through borrowings under an existing loan facility and loaned theamounts payable in the Merger Agreement to the Parent.  For further discussion, see the Company’sCurrent Report on Form 8-K filed with the Securities and Exchange Commission(the “SEC”) on July 31, 2007.

**(3) 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 availability thresholdfrom $7,500 to $5,000.  On July 31, 2007,in connection with the consummation of the Merger, the credit agreement wasfurther amended to waive any default or other right that would otherwise resultfrom the change of control arising from the consummation of the Merger.  In addition, on August 1, 2007, the creditagreement was amended with respect to certain restrictive paymentcovenants.  Copies of Amendment Nos. 9and 10 to the credit agreement are filed as Exhibits 10.1 and 10.2,respectively, to this Quarterly Report on Form 10-Q.  The 

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Company must meet certainaffirmative and negative operating covenants. In the event of default or if the outstanding balance of the revolvingcredit facility is greater than $25,000, the borrowing availability falls below$5,000 and the fixed charge coverage ratio is less than 1.1 to 1.0, the creditagreement provides for activation of controlled bank accounts to apply dailycash collections toward the outstanding revolving loan balance.  Management believes the existing creditfacility is adequate for the Company’s current cash flow needs.  Continued compliance with debt covenants andsufficient liquidity is dependent upon business operations consistent withmanagement’s plan for the fiscal year ending December 31, 2007 (“fiscal year2007”).  However, uncertainties existwithin the Company’s markets that include, but are not limited to, availabilityand pricing of raw materials and energy, unforeseen disruption in plantoperations, labor disputes, significant competition, relationships with largecustomers, product demand, environmental compliance, litigation, loss of keymanagers and exposures to interest rate changes.  For further discussion, see the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006 (“fiscal year2006”) and its Current Report on Form 8-K filed with the SEC on July 31, 2007.

The borrowing availabilities at June 30, 2007 andDecember 31, 2006 are as follows:
|                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                                     |       |              |       |                  |       |
| Borrowing base                           |       | $                 | 57,083     |                  | $          | 61,605 |   |
| Credit agreement  restriction            |       | (5,000            | )          | (5,000                | )          |
| Suppressed  availability (1)             |       | (2,083            | )          | (6,605                | )          |
| Line  availability not to exceed $50,000 |       | 50,000            |       | 50,000                |       |
| Revolver balance                         |       | (36,395           | )          | (34,235               | )          |
| Letters of  credit                       |       | (5,691            | )          | (5,691                | )          |
| Total  availability                      |       | $                 | 7,914      |                  | $          | 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.

**(4)  Inventories**

Components of inventory at June30, 2007 and December 31, 2006 are as follows:
|                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|-------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                 |       |              |       |                  |       |
| Raw materials        |       | $                 | 18,598     |                  | $          | 18,219 |   |
| Work in progress     |       | 16,024            |       | 18,173                |       |
| Finished goods:      |       |              |       |                  |       |
| Paper and paperboard |       | 13,154            |       | 15,122                |       |
| Cartons              |       | 5,106             |       | 5,955                 |       |
| Total                |       | $                 | 52,882     |                  | $          | 57,469 |   |

 

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** **

**(5) Debt**

*9.5% Senior Secured Notes*

On December 17, 2003, theCompany issued an aggregate principal amount of $125,000 of its senior securednotes due 2008 (the “Notes”) through a private placement under Rule 144A. The Notes have a term of five years, are due on December 15, 2008 and bearinterest at a stated rate of 9.5%, which is payable semi-annually in arrears onJune 15 and December 15.  The Notes are collateralized by a senior securedinterest in substantially all of the Company’s tangible and intangible assetsand have a subordinated secured interest in the outstanding trade accountsreceivable and inventories.  The Company has the right to redeem the Notesat 104.75% and 100.00%, plus accrued interest, on or after December 15, 2006and December 15, 2007, respectively.  If the Company has a change ofcontrol as defined in the indenture governing the Notes, dated December 17,2003, among the Company, the guarantors named therein and U.S. Bank NationalAssociation, as Trustee and as Collateral Agent (the “Indenture”), the Companymust give holders of the Notes the opportunity to sell to the Company theirNotes at 101% of their face value, plus accrued and unpaid interest.  Terms of the Indenture under which the Noteshave been issued contain certain covenants, including limitations on certainrestricted payments and the incurrence of additional indebtedness.  As a result of the consummation of theMerger, the Company anticipates making a change of control offer to repurchaseits Notes in accordance with the terms of the Indenture.

*Revolving Credit Facility*

On December 17, 2003, the Company entered into arevolving credit facility with a financial institution, which provided formaximum borrowings of $45,000, subject to a borrowing base calculated usingeligible accounts receivable and inventories. On September 15, 2004, the credit agreement was amended to increase themaximum borrowings to $50,000 on a permanent basis.  On August 5, 2005, the credit agreement wasamended to include specified foreign account debtors as eligible accounts indetermining borrowing base availability. On July 31, 2007, in connection with the consummation of the Merger, thecredit agreement was further amended to waive any default or other right thatwould otherwise result from the change of control arising from the consummationof the Merger.  In addition, on August 1,2007, the credit agreement was amended with respect to certain restrictivepayment covenants and the commitment termination date was extended to July 31,2010.  The revolving credit facility iscollateralized by a senior secured interest in the Company’s outstanding tradeaccounts receivable and inventories and by a subordinated secured interest insubstantially all of the Company’s tangible and 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 $36,395 and $34,235 at June 30, 2007 andDecember 31, 2006, respectively, and letters of credit outstanding as of June30, 2007 and December 31, 2006 were $5,691. The maximum borrowing availability at June 30, 2007 was $7,914, subjectto the availability restriction described in Note 2.  The interest rate on the revolving creditfacility at June 30, 2007 and December 31, 2006 was 7.34% and 7.53%, respectively.  This is a blended rate of LIBOR contractsplus margin.

*ParentPIK Senior Subordinated Note*

The Parent partiallyfinanced the acquisition of the Company’s Assets with a Pay-in-Kind (“PIK”)Senior Subordinated Note payable to International Paper Corporation (“InternationalPaper”) in the principal amount of $30,000, wherein interest would accrue onthe unpaid principal balance at a rate of 9% per annum until May 14,2007.  On November 14, 2003, the Company entered into an agreement withInternational Paper to extend the maturation date of the Parent PIK SeniorSubordinated Note to May 14, 2009 in return for a principal payment of$7,000.  This payment was made on December 17, 2003 with proceeds from thesale of the Notes.  On each semi-annual interest payment date (March 31and September 30), the Parent records interest on this note by issuing “SecondaryNotes,” which bear substantially the same terms as the original Parent PIKSenior Subordinated Note.  Payments of principal and interest under theParent PIK Senior Subordinated Note are legal obligations of the Parent andhave not been guaranteed in any way by the

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Company.  However,the Parent will be dependent upon the Company to settle theseobligations.  In addition, under certain circumstances, primarily futureParent equity transactions transferring at least 50% of the common stock to athird party, payment by the Parent of the Parent PIK Senior Subordinated Noteis triggered prior to its maturity.  Inconnection with the consummation of the Merger, the Rank Group arranged for theParent’s outstanding PIK Senior Subordinated Note previously held in the nameof International Paper to be transferred by International Paper to an affiliateof the Rank Group.

**(6)  Retirement Plans**

*PensionPlan*

The components of netperiodic benefit costs relating to the Company’s pension plan are as follows:
|                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                        |       | $                                | 435        |                           | $          | 409 |   | $ | 870 |   | $ | 818 |   |
| Interest cost                       |       | 315                              |       | 251                            |       | 630 |   | 502 |   |
| Expected return on  assets          |       | (319                             | )          | (264                           | )          | (638 | ) | (528 | ) |
| Amortization of prior  service cost |       | (16                              | )          | (16                            | )          | (32 | ) | (32 | ) |
| Amortization of  actuarial loss     |       | 123                              |       | 118                            |       | 246 |   | 236 |   |
| Total net periodic benefits costs   |       | $                                | 538        |                           | $          | 498 |   | $ | 1,076 |   | $ | 996 |   |

 

Management is responsiblefor determining the cost of pension benefits for this plan.  Managementconsiders a number of factors, including consulting with an actuarial firm,when determining this cost.  The Companyestimates its benefits payments in fiscal year 2007 will be approximately $438.  Benefits payments in fiscal year endedDecember 31, 2006 were $382.

*PostretirementMedical Plan*

The components of netperiodic benefit costs relating to the Company’s postretirement medical planare as follows:
|                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                        |       | $                                | 225        |                           | $          | 118 |   | $ | 360 |   | $ | 236 |   |
| Interest cost                       |       | 474                              |       | 227                            |       | 762 |   | 454 |   |
| Amortization of prior  service cost |       | (139                             | )          | (100                           | )          | (239 | ) | (200 | ) |
| Amortization of  actuarial loss     |       | 122                              |       | —                         |       | 142 |   | — |   |
| Total net periodic benefits costs   |       | $                                | 682        |                           | $          | 245 |   | $ | 1,025 |   | $ | 490 |   |

 

Management is responsiblefor determining the cost of postretirement medical benefits for thisplan.  Management considers a number of factors, including consulting withan actuarial firm, when determining this cost. The Company estimates its benefits payments for the fiscal year endingDecember 31, 2007 will be approximately $644. Benefits payments for the fiscal year ended December 31, 2006 were $428.

**(7)  Recent Accounting Developments**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FAS Interpretation No. 48(“FIN 48”) “*Accounting for Uncertainty inIncome Taxes*,” which clarifies the accounting for uncertainty inincome 

9

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taxes recognized in anentity’s financial statements in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 109, “*Accountingfor Income Taxes*.”  The accounting provisions of FIN 48prescribe a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  This interpretation establishes a consistentthreshold for recognizing current and deferred taxes.  The Company adoptedthe provisions of FIN 48 effective January 1, 2007.  The adoption of FIN48 did not have a material effect on the Company’s consolidated financialstatements or results of operations.

In September 2006, theFASB issued SFAS No. 157, “*Fair ValueMeasurements*.”  SFAS No. 157 establishes a framework formeasuring fair value in generally accepted accounting principles and enhancesdisclosures about fair value measurements.  SFAS No. 157 applies whenother accounting pronouncements require fair value measurements; it does notrequire new fair value measurements.  SFAS No. 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 SFAS No. 157 but does not anticipate that it will have amaterial effect on its consolidated financial statements.

On September 8, 2006, theFASB released Staff Position (FSP AUG AIR-1), “*Accountingfor Planned Major Maintenance Activities*,” which prohibits the useof the “accrue in advance” method of accounting for planned major maintenanceactivities in annual and interim financial reporting periods.  Theguidance in FSP AUG AIR-1 is effective for the first fiscal year beginningafter December 15, 2006.  The Company does not use the “accrue in advance”method of accounting for planned major maintenance; therefore, the provisionsof FSP AUG AIR-1 had no effect on the Company’s consolidated financialstatements.

On September 29, 2006,the FASB issued SFAS No. 158, “*Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—AnAmendment of FASB Statements No. 87, 88, 106 and 132R*.”  Thisnew standard requires an employer to: (a) recognize in its statement offinancial position an asset for a plan’s overfunded status or a liability for aplan’s underfunded 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 a fiscal year ending after June 15,2007, for entities with non-publicly traded equity securities as defined bySFAS No. 158.  The Company will adopt the provisions of SFAS No. 158 inDecember 2007 and is currently evaluating the impact on its consolidatedfinancial statements.  Based on preliminaryinformation from the Company’s actuaries, the Company expects the adoption ofthis new accounting guidance to increase stockholder’s deficit, net of tax, byapproximately $3,000, to $4,000 as of December 31, 2007.

**(8)  Commitments and Contingencies**

*(a)  Purchase Commitments*

The Company has agreementswith suppliers of wood pulp and wood chips. The terms of one of the agreements require minimum volume purchases of815,000 tons of chips each contract year during the contract’s five-yearperiod.  The agreement was extended for afive-year period that began in May 2004 and the Company has the right to extendthe agreement for an additional five years commencing in May 2009.  This wood chip agreement is withInternational Paper, which supplies the wood chips through two of itssubsidiaries (see Note 14 to our consolidated financial statements included inour Annual Report on Form 10-K for fiscal year 2006, for furtherdiscussion).  As of June 30, 2007, theCompany has commitments to purchase wood chips of approximately $51,717 overthe remaining terms of the agreements.

10

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*(b)Labor Agreements*

The Company maintainscollective bargaining labor agreements with local unions at all manufacturingfacilities.  Approximately 80% of theCompany’s employees are subject to such 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.  In connectionwith the consummation of the Merger, NewCo entered into letter agreements withUSW dated (i) June 13, 2007 addressing the termination of the Company’sEmployee Stock Ownership Plan, dated May 14, 1999 (the “ESOP”) and (ii) July25, 2007, amending in certain respects the Master Labor Agreement.  As a result of the Merger, the shares ofcommon stock owned by the ESOP were cancelled and the ESOP Trustee, on behalfof each ESOP participant, received an amount of cash as calculated pursuant tothe Merger Agreement.  The ESOP Trusteeis in the process of distributing the cash to the ESOP participants ascontemplated by the Merger Agreement. Copies of the letter agreements are filed as Exhibits 10.3 and 10.4,respectively, to this Quarterly Report on Form 10-Q.

*(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 Company’s Canton Mill is located, and into which the Company has apermit to discharge.  The plaintiffssought damages for private nuisance for the period commencing June 1, 1999, andthereafter until the date of trial.  Theplaintiffs in this action alleged that the discharge of (colored) water fromthe Canton Mill resulted in a nuisance (diminution of property value), but didnot contain any 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 jury verdict.  In June 2007, a petition to review the Courtof Appeals ruling was made to the Tennessee Supreme Court.  On July 18, 2007, the Tennessee Supreme Courtdenied the petition.  The Company isdeciding whether to file an appeal to the U.S. Supreme Court.  If an appeal is not filed, the judgment mustbe paid by August 18, 2007.  Inaccordance with the requirements of SFAS No. 5, “*Accounting for Contingencies*,” a liability of $2,000 wasestablished to recognize the potential liability and is included in accruedexpenses and other current liabilities in the accompanying condensedconsolidated balance sheets.  In June2007, the Company accrued interest of $409 related to the aforementionedlitigation.

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 has hired a new legalteam and is implementing a new strategy to defend the new lawsuit.  The Company has not recorded a liabilityrelated to this litigation as the ultimate loss, if any, is not consideredprobable or estimable.

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.    

11

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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 incentive-bonus based on the Company meeting certainperformance goals.

*(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 Asset Retirement Obligations*.”  The Company had accrued approximately $1,273and $1,205 for closure of landfills as of June 30, 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.

**(9)  Income Tax**

The Company is subject toU.S. federal income tax 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 state incometax returns are generally open for examination for three years from the date offiling.  The Company has not consented toan extension for the periods available for assessment of income tax with anytaxing jurisdictions.  The Company didnot record income tax expense for the three or six-month periods ended June 30,2007 and 2006.  The Company continues tomaintain a full valuation allowance due to a history of net losses.

**(10)  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, general and administrationexpenses to each segment.  The financialinformation attributed to these segments is included in the following table:

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| ** **                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net sales:**                 |       |                                                |       |                                              |       |   |   |   |   |
| Paper                          |       | $                                                   | 56,270     |                                              | $          | 59,559 |   | $ | 118,799 |   | $ | 116,734 |   |
| Packaging                      |       | 88,028                                              |       | 85,297                                            |       | 180,510 |   | 168,229 |   |
| Total                          |       | $                                                   | 144,298    |                                              | $          | 144,856 |   | $ | 299,309 |   | $ | 284,963 |   |
|                           |       |                                                |       |                                              |       |   |   |   |   |
| **Operating income (loss):**   |       |                                                |       |                                              |       |   |   |   |   |
| Paper                          |       | $                                                   | 1,299      |                                              | $          | 6,600 |   | $ | 10,328 |   | $ | 10,859 |   |
| Packaging                      |       |  6,032                                         |       | 5,922                                             |       | 14,475 |   | 10,364 |   |
| Corporate                      |       | (9,276                                              | )          | (6,646                                            | )          | (17,002 | ) | (13,608 | ) |
| Total                          |       | $                                                   | (1,945     | )                                                 | $          | 5,876 |   | $ | 7,801 |   | $ | 7,615 |   |
|                           |       |                                                |       |                                              |       |   |   |   |   |
| **Depreciation/amortization:** |       |                                                |       |                                              |       |   |   |   |   |
| Paper                          |       | $                                                   | 3,029      |                                              | $          | 2,776 |   | $ | 5,993 |   | $ | 5,529 |   |
| Packaging                      |       |  934                                           |       | 858                                               |       | 1,836 |   | 1,709 |   |
| Corporate                      |       | 31                                                  |       | 28                                                |       | 58 |   | 86 |   |
| Total                          |       | $                                                   | 3,994      |                                              | $          | 3,662 |   | $ | 7,887 |   | $ | 7,324 |   |
|                           |       |                                                |       |                                              |       |   |   |   |   |
| **Capital expenditures:**      |       |                                                |       |                                              |       |   |   |   |   |
| Paper                          |       | $                                                   | 2,995      |                                              | $          | 2,204 |   | $ | 5,741 |   | $ | 4,048 |   |
| Packaging                      |       | 1,511                                               |       | 915                                               |       | 2,013 |   | 1,165 |   |
| Corporate                      |       | 116                                                 |       | —                                            |       | 865 |   | 40 |   |
| Total                          |       | $                                                   | 4,621      |                                              | $          | 3,119 |   | $ | 8,619 |   | $ | 5,253 |   |
|                           |       |                                                |       |                                              |       |   |   |   |   |
| **Total assets:**              |       |                                                |       |                                              |       |   |   |   |   |
| Paper                          |       | $                                                   | 205,928    |                                              | $          | 204,144 |   | $ | 205,928 |   | $ | 204,144 |   |
| Packaging                      |       | 92,415                                              |       | 93,277                                            |       | 92,415 |   | 93,277 |   |
| Corporate                      |       | 11,833                                              |       | 13,919                                            |       | 11,833 |   | 13,919 |   |
| Total                          |       | $                                                   | 310,176    |                                              | $          | 311,340 |   | $ | 310,176 |   | $ | 311,340 |   |

 

The accounting policiesof the segments are the same as those generally in the summary of significantaccounting policies.  The corporate segmentincludes all selling, general and administrative expenses.

The Company’sidentifiable product lines are packaging and paper products.  Packaging segment products includepolymer-coated paperboard and converted packaging, including gable top cartonsand coated paperboard used in the production of ovenable food trays, paper cupsand other coated packaging.  Papersegment products include envelope paper, specialty paper, offset printing paperand uncoated paperboard.  The Company’smanufacturing operations are all located in the United States.

**(11)  Stock-Based Compensation**

Prior to the consummationof the Merger, the Company offered restricted share awards as stock-basedcompensation to select employees. Restricted stock awards are generally subject to forfeiture ifemployment terminates prior to vesting. Outstanding blocks of restricted stock grants as of December 31, 2006were all fully vested.

In February 2007, awardstotaling 245,000 shares were granted to select employees of the Company thatwill cliff-vest five years from the date of grant.  The Company has classified the awards asequity awards under the provisions of SFAS 123(R) and compensation expense isadjusted for estimated forfeitures and is recognized on a straight-line basisover the requisite service period of the award. The Company estimated future forfeiture rates based on its historicalexperience during the preceding fiscal years.

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The value of share-basedpayment awards was determined using an independent valuation.  The valuation considered the Company’sperformance and share value for fiscal year 2006, which was determined to be$6.49 per share.  For the three monthsand six months ended June 30, 2007, the Company recognized $53 and $132,respectively, in stock-based compensation expense.

As a result of theconsummation of the Merger, each restricted stock unit outstanding immediatelyprior to the effective time of the Merger vested and became free of any lapserestriction at or prior to the Merger.  Inaddition, each restrictive stock unit was cancelled and each holder wasentitled to receive an amount of cash as calculated pursuant to the MergerAgreement.

The following tablesummarizes the changes in the number of shares of restricted stock for the sixmonths ended June 30, 2007 (*dollars inthousands):*
|                                                                         | ** ** | ** ** | ** ** | **Aggregate**       | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                                                              | ** ** | **Shares** | ** ** | **fair value** | ** ** |
| Outstanding at December  31, 2006                                       |       | 190,356    |       | $                   | 1,235      |   |
| Exercised                                                               |       | (122,114   | )          | (793                | )          |
| Cancelled and other                                                     |       | 3,640      |       | 24                  |       |
| Outstanding at June 30,  2007                                           |       | 71,882     |       | $                   | 466        |   |
| Add:                                                                    |       |       |       |                |       |
| Amortized portion of  unvested stock grant                              |       |       |       | 132                 |       |
| Obligation to redeem restricted stock units of Parent at June 30,  2007 |       | 71,882     |       | $                   | 598        |   |

# ** **

# **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**

We reported a net loss of$7.6 million for the second quarter ended June 30, 2007.  This compared to a net profit of $4.9 millionfor the first quarter ended March 31, 2007 and a net profit of $2.0 million forthe second quarter ended June 30, 2006. Total net sales for the second quarter ended June 30, 2007 were $144.3million compared to $155.5 million and $144.9 million in the first quarterended March 31, 2007 and second quarter ended June 30, 2006, respectively.

In the second quarterended June 30, 2007, we incurred legal and professional fees of $1.6 millionassociated with the consummation of the Merger, as described below in furtherdetail, compared to $0.3 million in the first quarter ended March 31, 2007.

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The Canton Mill conductedits annual planned pine pulp mill outage and corresponding planned outage ofNumber 10 recovery boiler in the second quarter ended June 30, 2007.  This outage was longer than a normal pulpmill and recovery boiler outage due to planned tube replacements in therecovery boiler.  In addition, our paperboardmachine was down for planned maintenance along with a planned outage of one ofour uncoated freesheet paper machines. The total cost of these planned outages was approximately $6.7 million.  There was not a corresponding pulp milloutage in the first quarter ended March 31, 2007.  In addition to the outage costs, ourmaintenance costs for the second quarter ended June 30, 2007 were $0.9 millionabove the first quarter ended March 31, 2007 due to timing of scheduledmaintenance projects.

Packaging segmentshipments for the second quarter ended June 30, 2007 decreased 4.0% whencompared to the first quarter ended March 31, 2007.  Pricing for the packaging segment for thesecond quarter ended June 30, 2007 decreased 0.8% over the first quarter endedMarch 31, 2007.

Uncoated paper shipmentstotaled 67,294 tons in the second quarter ended June 30, 2007 compared to73,108 tons in the first quarter ended March 31, 2007.  Average pricing in the second quarter endedJune 30, 2007 was flat when compared to the first quarter ended March 31, 2007.

Raw material and energycosts increased in the second quarter ended June 30, 2007 compared to the firstquarter ended March 31, 2007 by approximately $1.0 million.  This increase was primarily due to increasesin the cost of polyethylene and fuel oil.

**Recent Event**

On July 31, 2007, ourparent, Blue Ridge Holding Corp., merged with and into Packaging Holdings Inc.,or NewCo, a wholly owned subsidiary of Evergreen Packaging Inc., or Evergreen,with our parent surviving (referred to herein as the Merger).  The Merger was consummated in accordance withthe terms and conditions of the Agreement and Plan of Merger, dated as of June13, 2007, as amended, by and among Rank Group, NewCo, Blue Ridge Holding Corp.and, solely in its capacity as the Stockholder Representative, KPS SpecialSituations Fund, L.P. (referred to herein as the Merger Agreement).  Prior to the closing, Rank Group transferredownership of NewCo to its affiliate, Evergreen.

As a result of theconsummation of the Merger, in accordance with the terms and conditions of theMerger Agreement, a change of control occurred in our voting shares of commonstock indirectly beneficially owned immediately before the Merger.  The total consideration payable under theMerger Agreement was $338.0 million, subject to adjustment.  All of the voting shares of common stock ofour parent are currently held by Evergreen. Evergreen financed the amounts to be paid upon consummation of theMerger through borrowings under an existing loan facility and loaned theamounts payable in the Merger Agreement to our parent.

 

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#### **Resultsof Operations**

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

 
|                                                                 | ** ** | **Three-Month Period**  | ** ** | **Six-Month Period**    | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                      | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                                                      | ** ** | **2007**                     | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                            |       |                         |       |                         |       |   |   |   |   |
| Net sales:                                                      |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                       |       | $                            | 88.0       |                         | $          | 85.3 |   | $ | 180.5 |   | $ | 168.2 |   |
| Paper                                                           |       | 56.3                         |       | 59.6                         |       | 118.8 |   | 116.7 |   |
| Total                                                           |       | $                            | 144.3      |                         | $          | 144.9 |   | $ | 299.3 |   | $ | 284.9 |   |
|                                                            |       |                         |       |                         |       |   |   |   |   |
| Segments'  operating profit:                                    |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                       |       | $                            | 6.0        |                         | $          | 6.0 |   | $ | 14.5 |   | $ | 10.4 |   |
| Paper                                                           |       | 1.3                          |       | 6.5                          |       | 10.3 |   | 10.8 |   |
| Total segments' operating profit, excluding  corporate expenses |       | $                       | 7.3        |                         | $     | 12.5 |   | $  | 24.8 |   | $  | 21.2 |   |
|                                                            |       |                         |       |                         |       |   |   |   |   |
| Corporate expense                                               |       | 9.2                          |       | 6.6                          |       | 17.0 |   | 13.6 |   |
| Total operating profit (loss)                                   |       | $                            | (1.9       | )                            | $          | 5.9 |   | $ | 7.8 |   | $ | 7.6 |   |
|                                                            |       |                         |       |                         |       |   |   |   |   |
| Percentage of  net sales:                                       |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                       |       | 61.0                         | %          | 58.9                         | %          | 60.3 | % | 59.0 | % |
| Paper                                                           |       | 39.0                         | %          | 41.1                         | %          | 39.7 | % | 41.0 | % |
| Total                                                           |       | 100.0                        | %          | 100.0                        | %          | 100.0 | % | 100.0 | % |
|                                                            |       |                         |       |                         |       |   |   |   |   |
| Segments'  operating margin:                                    |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                       |       | 6.8                          | %          | 7.0                          | %          | 8.0 | % | 6.2 | % |
| Paper                                                           |       | 2.3                          | %          | 10.9                         | %          | 8.7 | % | 9.3 | % |
| Average margin                                                  |       | 5.1                          | %          | 8.6                          | %          | 8.3 | % | 7.4 | % |
|                                                            |       |                         |       |                         |       |   |   |   |   |
| Shipments  (tons):                                              |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                       |       | 67,894                       |       | 72,137                       |       | 138,666 |   | 140,733 |   |
| Paper                                                           |       | 70,924                       |       | 74,837                       |       | 150,153 |   | 152,734 |   |
| Total                                                           |       | 138,818                      |       | 146,974                      |       | 288,819 |   | 293,467 |   |
|                                                            |       |                         |       |                         |       |   |   |   |   |
| Average price ($ per ton):                                 |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                       |       | $                            | 1,296      |                         | $          | 1,182 |   | $ | 1,302 |   | $ | 1,195 |   |
| Paper                                                           |       | 794                          |       | 796                          |       | 791 |   | 764 |   |
| Average price                                                   |       | $                            | 1,039      |                         | $          | 986 |   | $ | 1,036 |   | $ | 971 |   |

 

**THREEMONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006**

*NetSales.*  Net sales forthe three-month period ended June 30, 2007, or the 2007 three-month period,decreased $0.6 million, or 0.4%, to $144.3 million compared to $144.9 millionfor the three-month period ended June 30, 2006, or the 2006 three-month period.

Net sales for ourpackaging segment for the 2007 three-month period increased $2.7 million, or3.2%, to $88.0 million compared to $85.3 million for the 2006 three-monthperiod.  For the 2007 three-month period,our packaging segment sold 67,894 tons of coated and converted paperboardproducts at an average price of $1,296 per ton, compared to 72,137 tons soldfor the 2006 three-month period at an average price of $1,182 per ton.  The increase in packaging segment sales isattributable to a 9.6% increase in the average revenue per ton shipped,reflecting improved pricing for both our cartons and non-converted coatedboard.  Partially offsetting the improvedaverage revenue per unit was a 5.9% decrease in total volume shipped,reflecting reduced volume of sales for our non-converted coated board.  

Net sales for ourpaper segment for the 2007 three-month period decreased $3.3 million, or 5.5%,to $56.3 million compared to $59.6 million in the 2006 three-month period.  Net sales volume in our paper segmentdecreased 3,913 tons to 70,924 tons shipped in the 2007 three-month period ascompared to 74,837 tons shipped in the 2006 three-month period.  Approximately 93.9%, or $3.1 million, of thenet sales decrease in 

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the 2007 three-monthperiod reflects reduced shipment volume in the 2007 three-month period that wasprimarily brought about through lower operating efficiency at our Canton, NorthCarolina manufacturing facility, which we believe has currently beenremedied.  Average pricing in our papersegment declined to $794 per ton shipped in the 2007 three-month period ascompared to $796 per ton shipped in the 2006 three-month period.

*OperatingProfit*.  Total segments’operating profit decreased $5.2 million to $7.3 million in the 2007 three-monthperiod compared to an operating profit of $12.5 million for the 2006three-month period.  As a percentage ofsales, total segments’ operating profit decreased to 5.1% in the 2007three-month period from 8.6% 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   June 30, 2007** | ** ** | **Three-Month Period Ended   June 30, 2006** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|
|                                          |       | $                                                                     | 7.3        |                                                                  | $          | 12.5       |       | $ | (5.2 | ) |
|                                               |            |                                                                       |            |                                                                       |            |            |            |  |  |  |

 
| Product pricing improvement                               |   | $      | 5.3    |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
|                                                      |   |   |   |
| Productivity and sales  reductions                        |   | (2.3   | )      |
|                                                      |   |   |   |
| Decrease in outbound  transportation costs                |   | 1.2    |   |
|                                                      |   |   |   |
| Additional expenditures  for repairs and maintenance      |   | (2.4   | )      |
|                                                      |   |   |   |
| Increased costs for our  wood fiber input                 |   | (0.9   | )      |
|                                                      |   |   |   |
| Plastic resin costs  used at Waynesville coating facility |   | (1.7   | )      |
|                                                      |   |   |   |
| Increased chemical and  other raw material costs          |   | (2.8   | )      |
|                                                      |   |   |   |
| Increased wage and  benefit costs                         |   | (2.7   | )      |
|                                                      |   |   |   |
| Other miscellaneous and  offsetting items                 |   | 1.1    |   |
|                                                      |   |   |   |
| Total                                                     |   | $      | (5.2   | )      |

 

Operating profitfor our packaging segment remained constant at $6.0 million, or 6.8%, ofpackaging segment sales for the 2007 three-month period, compared to $6.0million, or 7.0%, of packaging segment sales for the 2006 three-monthperiod.  Significant items that increasedoperating profit for our packaging segment in the 2007 three-month period were:(i) increased pricing on coated board sales of $1.7 million and on convertedcarton sales of $3.9 million; (ii) a $0.4 million decrease in outboundtransportation costs due to moderating fuel costs; and (iii) othermiscellaneous and offsetting variances totaling $0.5 million.  The increase in packaging segment operatingprofit in the 2007 three-month period was offset by: (i) a $1.7 millionincrease in purchase costs of plastic/resin, our primary raw material used atour Waynesville converting facility; (ii) a $2.4 million increase in costs ofinternally produced board received from our Canton, North Carolina mill (the “CantonMill”) and passed on to the packaging division through interdivisional transfercosts; (iii) an increase of $0.5 million in repair material and service costs;(iv) an 

17

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increase of $1.6million in costs incurred for wages and benefits; and (v) an approximate $0.2million increase in cost of chemicals and packing materials utilized in ourmanufacturing process.

Operating profitfor our paper segment decreased $5.3 million in the 2007 three-month period to$1.3 million, or 2.3%, of paper segment sales, compared to an operating profitof $6.5 million, or 10.9%, of paper segment sales for the 2006 three-monthperiod.  The decrease in operating profitfor our paper segment was due primarily to: (i) lower pricing on uncoated papersales of $0.3 million; (ii) reduced productivity and sales volume ofapproximately $2.3 million; (iii) a $3.5 million increase in the cost of woodchips and chemicals used as primary raw material at our Canton Mill; (iv) a$1.1 million increase in costs incurred for wages and benefits; and (v) anincrease of $1.9 million in repair material and service costs.  The decrease in paper segment operatingprofit in the 2007 three-month period was partially offset by: (i) a $0.8million decrease in outbound transportation costs due to moderating fuel costs;(ii) increased transfer revenue for the rawstock sent to our Waynesvillefacility of $2.2 million; and (iii) other miscellaneous and offsettingvariances totaling $0.8 million.

*Selling,General and Administrative Expenses.  *Totalselling, general and administrative expenses increased $3.1 million, or 50.8%,to $9.2 million in the 2007 three-month period compared to $6.1 million for the2006 three-month period.  The increasewas primarily attributable to: (i) legal and professional fees of $1.6 millionincurred in the 2007 three-month period with respect to the consummation of theMerger; (ii) increased benefit costs of approximately $0.2 million; (iii) anincrease of $0.3 million in bad debt expenses related to our trade receivablesin the 2007 three-month period as compared to the 2006 three-month period; (iv)consulting service costs of $0.4 million incurred in the 2007 three-monthperiod to support the implementation of our product tracking system upgrade;and (v) other miscellaneous offsetting variances totaling $0.6 million.

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

*ESOPExpense.  *ESOP expensedecreased $0.5 million, or 100.0%, to $0.0 million in 2007 compared to $0.5million in 2006.  The decrease in the2007 three-month period reflects the completion of the seven-year sharedistribution into the ESOP, which began in May 1999 and concluded in May2006.  Going forward, ESOP expense shouldno longer be incurred by us.  As a resultof the consummation of the Merger, the shares of common stock owned by the ESOPwere cancelled and the ESOP Trustee, on behalf of each ESOPparticipant, received an amount of cash as calculated pursuant to theMerger Agreement.  The ESOP Trustee is inthe process of distributing the cash to the ESOP participants as contemplated bythe Merger Agreement**.**

*Interestand Amortization Expenses. *Interestand amortization expenses increased $0.7 million to $5.6 million for the 2007three-month period compared to $4.9 million for 2006 three-month period.  In June 2007, we recognized interest expenseof $0.4 million associated with the on-going environmental litigation.  In December 2006, we converted an operatinglease to a capital lease resulting in additional related interest of $0.1million.  In addition, our averagerevolver facility balance and Parent PIK Senior Subordinated Note were higheradding $0.1 million to interest expense, as well as an increase of $0.1 millionin capitalized interest expense.  Inconnection with the consummation of the Merger, the Rank Group arranged for ourparent’s PIK Senior Subordinated Note previously held in the name ofInternational Paper to be transferred by International Paper to an affiliate ofthe Rank Group.

*GovernmentGrant Income*.  In the2007 three-month period, we did not recognize any government grant income ascompared to $1.0 million government grant income recognized in the 2006three-month period.  The grant moneyreceived in the 2006 three-month period was used to repair and more permanentlyprotect our wastewater facility, which also serves the Town of Canton, NorthCarolina.

18

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*IncomeTax Expense.*  There wasno income tax expense recorded in either the 2007 three-month period or the2006 three-month period.

**SIXMONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006**

*NetSales. *Net sales forthe six months ended June 30, 2007, or the 2007 six-month period, increased to$299.3 million, or 5.1%*,*comparedto**$284.9 million for the sixmonths ended June 30, 2006, or the 2006 six-month period.  This increase in total revenue isattributable to an increase in the average weighted revenue per ton shipped to$1,036 per ton in the 2007 six-month period from $971 per ton in the 2006six-month period.  This increase inaverage revenue per ton sold resulted primarily from improved pricing on ourmajor grade lines in the packaging segment: coated board and cartons.  The increase in average weighted revenue perunit sold resulted in an approximate $18.8 million increase in total revenue inthe 2007 six-month period as compared to the 2006 six-month period.  Total sales volume decreased by 4,648 tons,or 1.6%, to 288,819 tons in the 2007 six-month period compared to 293,467 tonsfor the 2006 six-month period.

Net sales for ourpackaging segment for the 2007 six-month period increased $12.3 million, or7.3%, to $180.5 million compared to $168.2 million for the 2006 six-monthperiod.  The increase in net sales isattributable to: (i) an average net sales price per ton increase of 7.0% forcartons and 4.4% for non-converted coated paperboard in the 2007 six-monthperiod compared to the 2006 six-month period; and (ii) an 8.9% increase involume of our converted carton shipments in the 2007 six-month period ascompared to the 2006 six-month period. The increase in net sales was partially offset by a decrease in shipmentvolume for our non-converted coated paperboard of 10.2% in the 2007 six-monthperiod as compared to the 2006 six-month period.

Sales for our papersegment for the 2007 six-month period increased by $2.1 million, or 1.8%, to$118.8 million compared to $116.7 million for the 2006 six-month period.  This increase was attributable to animprovement in our average net sales price per ton for our products sold,partially offset by a decrease in the volume of products shipped.  Our average net sales price per ton increased3.5% for our paper grades and 0.5% for uncoated paperboard in the 2007six-month period as compared to the 2006 six-month period.  Total segment outside shipment volumedecreased 2,581 tons or, 1.7%, to 150,153 tons in the 2007 six-month period ascompared to 152,734 tons in the 2006 six-month period.  The decrease in the paper segment shipmentvolume reflects reduced productivity at our Canton Mill.

*Operating Profit*.  Total segments’ operating profit increased$3.6 million to $24.8 million in the 2007 six-month period compared to anoperating profit of $21.2 million for the 2006 six-month period.  As a percentage of sales, total segments’operating profit increased to 8.3% in the 2007 six-month period from 7.4% inthe 2006 six-month period.

 

19

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Thefollowing table sets forth significant items that increased (decreased) totalsegments’ operating profit:

 
| **Segments’ Operating Profit** | ** ** | **Six-Month Period Ended   June 30, 2007** | ** ** | **Six-Month Period Ended   June 30, 2006** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------|------------|
|                                          |       | $                                                                   | 24.8       |                                                                | $          | 21.2       |       | $ | 3.6 |   |
|                                               |            |                                                                     |            |                                                                     |            |            |            |  |  |  |

 
| Product pricing  improvement                                                |   | $      | 14.0   |   |
|-----------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                        |   |   |   |
| Productivity and  sales reductions (net)                                    |   | (0.7   | )      |
|                                                                        |   |   |   |
| Increased wage  and benefit costs                                           |   | (5.1   | )      |
|                                                                        |   |   |   |
| Decrease in  outbound transportation costs                                  |   | 2.0    |   |
|                                                                        |   |   |   |
| Increased wood  fiber costs                                                 |   | (2.0   | )      |
|                                                                        |   |   |   |
| Major raw  material costs (plastic resin, chemicals, and packing materials) |   | (3.6   | )      |
|                                                                        |   |   |   |
| Increased  by-product sales                                                 |   | 3.0    |   |
|                                                                        |   |   |   |
| Additional  expenditures for repairs and maintenance                        |   | (2.9   | )      |
|                                                                        |   |   |   |
| Change in  inventory valuation                                              |   | (0.1   | )      |
|                                                                        |   |   |   |
| Other  miscellaneous and offsetting items                                   |   | (1.0   | )      |
|                                                                        |   |   |   |
| Total                                                                       |   | $      | 3.6    |   |

 

Operating profitfor our packaging segment in the 2007 six-month period increased $4.1 millionto $14.5 million compared to $10.4 million for the 2006 six-month period.  The increase was primarily due to: (i)increases in the average net selling prices for coated paperboard and cartonproducts of 4.4% and 7.0%, respectively, compared to the 2006 six-month period,adding $10.2 million to revenues and operating profit for the 2007 six-monthperiod as compared to the 2006 six-month period; (ii) increased productivityand sales volume of approximately $1.6 million; (iii) improved transportationmanagement and reduced fuel costs resulting in a decline of $0.9 million inoutbound freight expense and a corresponding increase in operating profit forthe 2007 six-month period; and (iv) a $2.2 million increase in sales of scrapand waste sold as a by-product.  Theincrease in packaging segment operating profit in the 2007 six-month period waspartially offset by: (i) a $0.6 million increase in purchase costs ofplastic/resin, our primary raw material used at our Waynesville convertingfacility; (ii) an increase of $0.7 million in repair material and servicecosts; (iii) a $3.2 million increase in our wage and benefits costs; (iv)increased transfer cost of rawstock paperboard of $4.2 million; (v) anapproximate $0.2 million increase in cost of chemicals and packing materialsutilized in our manufacturing process; (vi) impact of change in inventoryvaluation in the 2007 six-month period of $0.7 million; and (vii) othermiscellaneous and offsetting items totaling $1.2 million.

Operating profitfor our paper segment decreased $0.5 million in the 2007 six-month period to$10.3 million as compared to $10.8 million for the 2006 six-month period.  The decrease in operating profit for ourpaper segment was due primarily to: (i) reduced productivity and sales volumeof approximately $2.3 million; (ii) an approximate $2.8 million increase incost of chemicals and other materials utilized in our manufacturing process;(iii) a $2.0 million increase in the cost of wood chips, our primary rawmaterial at our Canton Mill; (iv) increased wage and benefits costs of $1.9million; and (v) an increase of $2.2 million in repair material and servicecosts.  The decrease in paper segmentoperating profit in the 2007 six-month period was partially 

20

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offset by: (i)increased pricing on paper sales of $3.8 million; (ii) increased transfer costfor the rawstock sent to our Waynesville facility of $4.3 million; (iii)improved transportation management and reduced fuel costs resulting in adecline of $1.1 million in outbound freight expense and a correspondingincrease in operating profit for the 2007 six-month period; (iv) impact ofchange in inventory valuation in the 2007 six-month period of $0.6 million; (v)improved by-product revenue of $0.8 million; and (vi) other miscellaneous andoffsetting variances totaling $0.1 million.

*Selling,General and Administrative Expenses.  *Totalselling, general and administrative expenses increased $4.5 million, or 37.8%,to $16.4 million in the 2007 six-month period compared to $11.9 million for the2006 six-month period.  The increase wasprimarily attributable to: (i) legal and professional fees of $1.9 million incurredin the 2007 six-month period with respect to the consummation of the Merger;(ii) increased salary payroll and benefit costs of approximately $0.6 million;(iii) consulting service costs of $0.5 million incurred in the 2007 six-monthperiod to support the implementation of our product tracking system upgrade;(iv) an increase of $0.6 million in bad debt expenses related to our tradereceivables in the 2007 six-month period as compared to the 2006 six-monthperiod; (v) a $0.5 million profit sharing distribution to our employees thatwas earned in the first quarter of fiscal year 2007; and (vi) othermiscellaneous offsetting variances totaling $0.4 million.

*Depreciation and Amortization Expense (non-operations).*  Depreciation and amortization expensesunrelated to manufacturing remained constant at $0.1 million in the 2007six-month period compared to $0.1 million in the 2006 six-month period.

*ESOPExpense. *ESOP expensedecreased $1.6 million, or 100.0%, to $0.0 million in the 2007 six-month periodcompared to $1.6 million in the 2006 six-month period.  The decrease reflects the completion of theseven-year share distribution into the ESOP, which began in May 1999 andconcluded in May 2006.   Going forward,ESOP expense should no longer be incurred by us.  As a result of the consummation of theMerger, the shares of common stock owned by the ESOP were cancelled and theESOP Trustee, on behalf of each ESOP participant, receivedan amount of cash as calculated pursuant to the Merger Agreement.  The ESOP Trustee is in the process ofdistributing the cash to the ESOP participants as contemplated by the MergerAgreement**.**

*Interestand Amortization Expenses.  *Interestand amortization expenses increased $0.7 million to $10.4 million for the 2007six-month period compared to $9.7 million for the 2006 six-month period.  This increase is primarily attributable torecognized interest of $0.4 million associated with the on-going environmentallitigation.  In December 2006, we converteda lease to capital resulting in additional related interest of $0.2 million,and miscellaneous interest income contributed $0.1 million.  In addition, our average revolver facilityand Parent PIK Senior Subordinated Note increased causing an increase tointerest expense by $0.4 million, which was offset by an increase of $0.4 millionin capitalized interest expense.  Inconnection with the consummation of the Merger, the Rank Group arranged for ourparent’s PIK Senior Subordinated Note previously held in the name ofInternational Paper to be transferred by International Paper to an affiliate ofthe Rank Group.

*GovernmentGrant Income.*  In the2007 six-month period, we did not recognize any government grant income ascompared to $1.2 million government grant income recognized in the 2006six-month period.  The grant moneyreceived in the 2006 six-month period was used to repair and more permanentlyprotect our wastewater facility, which also serves the Town of Canton, NorthCarolina.

*IncomeTax Expense.*  There wasno income tax expense recorded in either the 2007 six-month period or 2006six-month period since we had a year-to-date net loss in both of the periods.

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#### **LIQUIDITYAND CAPITAL RESOURCES**

Our principal liquidity requirements are to serviceour debt and fund our operations and capital expenditure needs.  Our total senior debt, defined as total debtless the Parent PIK Senior Subordinated Note, at June 30, 2007 wasapproximately $165.0 million.  Subject toour performance, which if adversely affected could affect the availability offunds, we expect to be able to meet our liquidity requirements for theremainder of fiscal year 2007 through cash provided by operations and throughborrowings available under our working capital facility.  We cannot assure you, however, that this willbe the case.  We entered into a $45.0million revolving credit facility in December 2003.  On September 15, 2004, the credit agreementwas amended to increase the facility from $45.0 million to $50.0 million on apermanent basis.  On August 5, 2005, thecredit agreement was amended to include specified foreign account debtors aseligible accounts in determining borrowing base availability.  On March 15, 2006, the revolving creditagreement was amended on a permanent basis to change the minimum borrowingavailability threshold from $7.5 million to $5.0 million.  On July 31, 2007, in connection with theconsummation of the Merger, the credit agreement was further amended to waiveany default or other right that would otherwise result from the change ofcontrol arising from the consummation of the Merger.  In addition, on August 1, 2007, the creditagreement was amended with respect to certain restrictive paymentcovenants.  Copies of Amendment Nos. 9and 10 are filed as Exhibits 10.1 and 10.2, respectively, to this QuarterlyReport on Form 10-Q.  The maximumborrowing availability at June 30, 2007 and December 31, 2006 was $7.9 millionand $10.1 million, respectively.  Therevolving credit facility contains covenant restrictions, which requirecovenant availability 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 of June30, 2007, we had a covenant availability of $15.0 million, which is $10.0million in excess of the required minimum.

Summary of Cash Flow (inmillions):
|                                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Net cash  provided by operating activities           |       | $                                                 | 11.3       |   | $ | 0.6 |   |
| Net cash used in  investing activities               |       | (8.6                                              | )          | (5.2 | ) |
| Net cash  provided by (used in) financing activities |       | (3.5                                              | )          | 3.3 |   |
| Net decrease in  cash                                |       | $                                                 | (0.8       | ) | $ | (1.3 | ) |
|                                                 |       |                                              |       |   |   |
| Cash balance                                         |       | $                                                 | 1.1        |   | $ | 0.7 |   |

 

The cash provided byoperations was $11.3 million for the 2007 six-month period.  The cash provided by operations was primarilyattributable to changes in working capital.

The cash used ininvesting activities for the 2007 six-month period was $8.6 million.  Capital spending for the 2007 six-monthperiod was $8.6 million, which included $0.3 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 $3.5 million for the 2007 six-month period, which isprimarily attributable to a reduction in outstanding checks within otherfinancing activities in the statement of cash flows.

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**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 in Part I, Item 1 to thisQuarterly Report on Form 10-Q.  Wemanage interest cost using a combination of fixed and variable rate debt.  As of June 30, 2007, we have $125.0 millionof Notes outstanding at a 9.5% fixed rate of interest and a $50.0 millionworking capital credit facility at variable rates of interest.  As of June 30, 2007, approximately $36.4million was outstanding under our working capital credit facility consisting ofshort-term interest rates of 0.25% over Applicable Revolver Index Margin and2.00% over Applicable Revolver Libor Margin, as defined.  Our working capital facility, as amended June9, 2006, offers two options for interest rates: Applicable Revolver Libor margin ranging from 1.50% - 2.00% orApplicable Revolver Index Margin ranging from 0.00% - 0.25%.  The rate is based on revolveravailability.  As of June 30, 2007, wewere approximately at the mid-point of the interest rate grid for Libor andIndex Margins.  In addition, as of June30, 2007, we have a $0.7 million mortgage note with a maximum interest rate of5.5% 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 SEC, and that such information was accumulatedand communicated to our management (including our chief executive officer andchief financial officer) to allow timely decisions regarding requireddisclosure.  Based on their evaluation, ourchief executive officer and chief financial officer have concluded that, as ofJune 30, 2007, we are in compliance with Rule 13a-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 June 30, 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 fiscal year 2006 have not materiallychanged, except as described below:

**Exposure to interest rate changesand other types of capital market volatility could increase our financingcosts.**

We require bothshort-term and long-term financing to fund our operations, including capitalexpenditures.  A portion of our financingwill potentially come from the Rank Group in New Zealand and its bankingfacilities.  Changes in international anddomestic capital markets could affect the cost or availability offinancing.  In addition, we are exposedto changes in interest rates with respect to floating rate debt and in 

23

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determining the interestrate of any new debt issues.  Changes inthe international and domestic capital markets or prevailing interest rates canincrease or decrease the cost or availability of financing.

#### **ITEM5. OTHER INFORMATION**

On August 9, 2007, thefollowing actions occurred: (1) Richard A. Lozyniak resigned from the AuditCommittee and the Compensation Committee of our Board of Directors; (2) AllenHugli was elected to the Audit Committee and Compensation Committee of ourBoard of Directors; (3) Thomas Degnan was designated as the Chair of both theAudit Committee and Compensation Committee our Board of Directors; and AllenHugli was designated as the financial expert for the Audit Committee.  Messrs. Hugli and Degnan are currentlymembers of our Board of Directors.

Our Board of Directorshas approved the Ninth Amendment to the Retirement Plan for Salaried Employeesof Blue Ridge Paper Products Inc., which amends certain pre-retirement survivorannuity coverage provisions for our current or former employees who hadformerly participated in the Champion International Corporation SalariedRetirement Plan.

#### **ITEM6. EXHIBITS**

| (a)    |   | Exhibits required by Item 601 of Regulation S-K.                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                         |
| 10.1   |   | Amendment No. 9 to the Credit Agreement, dated as of  July 31, 2007, by and among the Company, General Electric Capital  Corporation, the other Credit Parties signatory thereto and the other Lenders  signatory thereto.   |
|   |   |                                                                                                                                                                                                                         |
| 10.2   |   | Amendment No. 10 to the Credit Agreement, dated as  of August 1, 2007, by and among the Company, General Electric Capital  Corporation, the other Credit Parties signatory thereto and the other Lenders  signatory thereto. |
|   |   |                                                                                                                                                                                                                         |
| 10.3   |   | Letter agreement between Packaging Holdings Inc. and  United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied  Industrial and Service Workers International Union dated June 13, 2007.                       |
|   |   |                                                                                                                                                                                                                         |
| 10.4   |   | Letter agreement between Packaging Holdings Inc. and  United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied  Industrial and Service Workers International Union dated July 25, 2007.                       |
|   |   |                                                                                                                                                                                                                         |
| 10.5   |   | Ninth Amendment to the Retirement Plan for Salaried  Employees of Blue Ridge Paper Products Inc.                                                                                                                             |
|   |   |                                                                                                                                                                                                                         |
| 31.1   |   | Certification of CEO pursuant to Section 302 of  Sarbanes-Oxley Act of 2002.                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                         |
| 31.2   |   | Certification of CFO pursuant 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: August 14, 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 JUNE 30, 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:
|   | 10.1   | Amendment No. 9 to the Credit Agreement, dated as of  July 31, 2007, by and among the Company, General Electric Capital  Corporation, the other Credit Parties signatory thereto and the other Lenders  signatory thereto.   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                         |
|   | 10.2   | Amendment No. 10 to the Credit Agreement, dated as  of August 1, 2007, by and among the Company, General Electric Capital  Corporation, the other Credit Parties signatory thereto and the other Lenders  signatory thereto. |
|   |   |                                                                                                                                                                                                                         |
|   | 10.3   | Letter agreement between Packaging Holdings Inc. and  United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied  Industrial and Service Workers International Union dated June 13, 2007.                       |
|   |   |                                                                                                                                                                                                                         |
|   | 10.4   | Letter agreement between Packaging Holdings Inc. and  United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied  Industrial and Service Workers International Union dated July 25, 2007.                       |
|   |   |                                                                                                                                                                                                                         |
|   | 10.5   | Ninth Amendment to the Retirement Plan for Salaried  Employees of Blue Ridge Paper Products Inc.                                                                                                                             |
|   |   |                                                                                                                                                                                                                         |
|   | 31.1   | Certification of CEO pursuant to Section 302 of  Sarbanes-Oxley Act of 2002.                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                         |
|   | 31.2   | Certification of CFO pursuant to Section 302 of  Sarbanes-Oxley Act of 2002.                                                                                                                                                 |

 

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