**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-Q**
| **(Mark One)**                                          |
|---------------------------------------------------------|
| ** **                                              | ** ** |
| **x**                                                   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                              | ** ** |
| **For the  quarterly period ended March 31, 2006** |
| ** **                                              |   |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                    |   |
| **OR**                                                  |

###  

### **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 STREETCANTON, NORTH CAROLINA  28716**(Address of principal executive office)

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

Indicate by check mark whether the registrant (1) has filed allreports 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) hasbeen 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 “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

| Large Accelerated  Filer  o |   | Accelerated  Filer  o |   | Non-Accelerated  Filer  x |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

#  

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

The number ofcommon shares outstanding at March 31, 2006 was 1,000.

 

 

----

**BLUERIDGE PAPER PRODUCTS INC.**

**ANDSUBSIDIARIES**

INDEX

** **
| PART 1.  |     | FINANCIAL INFORMATION                                                                                                                           |   |
|---------------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|          |     |                                                                                                                                            |   |
|          | Item 1.  | Financial Statements                                                                                                                            |   |
|          |     |                                                                                                                                            |   |
|          |     | Condensed Consolidated Balance Sheets, March 31,  2006 (unaudited) and December 31, 2005 (derived from audited financial  statements) |   |
|          |     |                                                                                                                                            |   |
|          |     | Condensed Consolidated Statements of Operations, Three  Months Ended March 31, 2006 and 2005 (unaudited)                                   |   |
|          |     |                                                                                                                                            |   |
|          |     | Condensed Consolidated Statements of Cash Flows, Three  Months Ended March 31, 2006 and 2005 (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                                                                                                                                        |   |
|          |     |                                                                                                                                            |   |
|          |     |                                                                                                                                            |   |

 

**PART 1. FINANCIAL INFORMATION**

 

**ITEM 1.**      **FINANCIAL STATEMENTS**

 

 

2

----

 

**BLUE RIDGE PAPER PRODUCTS INC.**

**Condensed Consolidated Balance Sheets**

**March 31, 2006 and December 31, 2005**

**(Dollars in thousands)**

**(unaudited)**

 
| ** **                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                     | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                |       |               |       |                  |       |
| Cash                                                                                                                           |       | $                  | 1,396      |                  | $          | 2,110 |   |
| Accounts receivable, net of allowance for doubtful  accounts and discounts of $1,213 and $2,298 in 2006 and 2005, respectively |       | 58,174             |       | 56,002                |       |
| Inventories                                                                                                                    |       | 51,353             |       | 53,988                |       |
| Prepaid expenses                                                                                                               |       | 1,290              |       | 1,029                 |       |
| Insurance proceeds receivable                                                                                                  |       | 291                |       | 291                   |       |
| Income tax receivable                                                                                                          |       | 50                 |       | 50                    |       |
| Deferred tax asset                                                                                                             |       | 4,190              |       | 4,448                 |       |
| Total current assets                                                                                                           |       | 116,744            |       | 117,918               |       |
| Property, plant,  and equipment, net of accumulated depreciation of $108,915 and $105,253 in  2006 and 2005, respectively      |       | 188,935            |       | 190,463               |       |
| Deferred  financing costs, net                                                                                                 |       | 4,738              |       | 5,108                 |       |
| Other assets                                                                                                                   |       | 200                |       | 193                   |       |
| Total assets                                                                                                                   |       | $                  | 310,617    |                  | $          | 313,682 |   |
| **Liabilities  and Stockholder’s Equity (Deficit)**                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                           |       |               |       |                  |       |
| Current portion of senior debt                                                                                                 |       | $                  | 42         |                  | $          | 41 |   |
| Current portion of capital lease obligation                                                                                    |       | 566                |       | 595                   |       |
| Accounts payable                                                                                                               |       | 45,858             |       | 48,917                |       |
| Accrued expenses and other current liabilities                                                                                 |       | 28,614             |       | 33,987                |       |
| Interest payable                                                                                                               |       | 5,579              |       | 1,875                 |       |
| Total current liabilities                                                                                                      |       | 80,659             |       | 85,415                |       |
| Senior debt, net  of current portion                                                                                           |       | 162,513            |       | 159,749               |       |
| Parent  Pay-In-Kind (PIK) Senior Subordinated Note                                                                             |       | 44,425             |       | 44,425                |       |
| Capital lease  obligations                                                                                                     |       | 847                |       | 979                   |       |
| Pension and  postretirement benefits                                                                                           |       | 23,379             |       | 22,678                |       |
| Deferred tax  liability                                                                                                        |       | 4,190              |       | 4,448                 |       |
| Other  liabilities                                                                                                             |       | 1,118              |       | 730                   |       |
| Total liabilities                                                                                                              |       | 317,131            |       | 318,424               |       |
| Obligation to  redeem ESOP shares                                                                                              |       | 28,829             |       | 27,716                |       |
| Obligation to  redeem restricted stock units of Parent                                                                         |       | 1,643              |       | 1,631                 |       |
| Commitments and  contingencies (See notes)                                                                                     |       |               |       |                  |       |
| Stockholder’s equity:                                                                                                     |       |               |       |                  |       |
| Common stock (par value $0.01, 1000 shares  authorized and outstanding in 2006 and  2005, respectively)                        |       | —             |       | —                |       |
| Additional paid-in capital                                                                                                     |       | 64,111             |       | 64,121                |       |
| Accumulated deficit                                                                                                            |       | (88,950            | )          | (86,054               | )          |
| Unearned compensation                                                                                                          |       | (13                | )          | (25                   | )          |
| Accumulated other comprehensive loss                                                                                           |       | (4,183             | )          | (4,183                | )          |
| Receivable from Parent                                                                                                         |       | (29,035            | )          | (26,141               | )          |
|                                                                                                                           |       | (7,951             | )          | (7,948                | )          |
| Total stockholder’s equity (deficit)                                                                                      |       | (36,986            | )          | (34,089               | )          |
| Total  liabilities and stockholder’s equity (deficit)                                                                     |       | $                  | 310,617    |                  | $          | 313,682 |   |

 

See accompanyingnotes to consolidated financial statements.

 

3

----

 

**BLUE RIDGEPAPER PRODUCTS INC.**

**CondensedConsolidated Statements of Operations**

**Three Months Ended March 31, 2006 and 2005**

**(Dollars in thousands)**

**(unaudited)**
| ** **                                                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                                                                              |       | $        | 140,107    |     | $          | 128,547 |   |
| Cost of goods sold:                                                                                                    |       |     |       |     |       |
| Cost of goods sold, excluding depreciation and amortization,  flood-related loss and repairs and  insurance recoveries |       | 127,801  |       | 113,195  |       |
| Depreciation and amortization                                                                                          |       | 3,604    |       | 3,904    |       |
| Flood-related  loss and repairs                                                                                        |       | —   |       | 848      |       |
| Insurance recoveries                                                                                                   |       | —   |       | (100     | )          |
| Gross profit                                                                                                           |       | 8,702    |       | 10,700   |       |
| Selling, general  and administrative expenses                                                                          |       | 5,789    |       | 5,147    |       |
| Depreciation and  amortization                                                                                         |       | 58       |       | 436      |       |
| Insurance  recoveries                                                                                                  |       | —   |       | (23      | )          |
| ESOP expense                                                                                                           |       | 1,116    |       | 1,631    |       |
| Profit-sharing  expense                                                                                                |       | —   |       | 80       |       |
| Operating profit                                                                                                       |       | 1,739    |       | 3,429    |       |
| Other income (expense):                                                                                                |       |     |       |     |       |
| Interest expense, excluding amortization of deferred  financing costs                                                  |       | (4,475   | )          | (4,258   | )          |
| Amortization of deferred financing costs                                                                               |       | (370     | )          | (332     | )          |
| Government grant income                                                                                                |       | 206      |       | 1,878    |       |
| Gain on equity method investment                                                                                       |       | 4        |       | —   |       |
|                                                                                                                   |       | (4,635   | )          | (2,712   | )          |
| Profit (loss) before income taxes                                                                                      |       | (2,896   | )          | 717      |       |
| Income tax                                                                                                             |       | —   |       | —   |       |
| Net income  (loss)                                                                                                     |       | $        | (2,896     | )        | $          | 717 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

4

----

 

** **

**BLUE RIDGEPAPER PRODUCTS INC.**

**CondensedConsolidated Statements of Cash Flows**

**Three Months Ended March 31, 2006 and 2005**

**(Dollars in thousands)**

**(unaudited)**
| ** **                                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                  |       |     |       |     |       |
| Net income (loss)                                                                                       |       | $        | (2,896     | )        | $          | 717 |   |
| Adjustment to reconcile net income (loss) to net  cash used in operating activities:                    |       |     |       |     |       |
| Depreciation and amortization                                                                           |       | 3,662    |       | 4,340    |       |
| Compensation expense for Parent restricted stock                                                        |       | 13       |       | 76       |       |
| Amortization of deferred financing costs                                                                |       | 370      |       | 332      |       |
| ESOP expense                                                                                            |       | 1,116    |       | 1,631    |       |
| Parent PIK Senior Subordinated Note for interest                                                        |       | 1,000    |       | 915      |       |
| Changes in operating assets and liabilities:                                                            |       |     |       |     |       |
| Accounts receivable, net                                                                                |       | (2,172   | )          | (10,558  | )          |
| Inventories                                                                                             |       | 2,635    |       | (3,201   | )          |
| Prepaid expenses                                                                                        |       | (261     | )          | 459      |       |
| Insurance proceeds receivable                                                                           |       | —   |       | 4,439    |       |
| Income tax receivable                                                                                   |       | —   |       | 21       |       |
| Accounts payable                                                                                        |       | (4,247   | )          | (10,664  | )          |
| Accrued expenses and other current liabilities                                                          |       | (5,373   | )          | (2,668   | )          |
| Interest payable                                                                                        |       | 2,704    |       | 2,820    |       |
| Pension and postretirement benefits                                                                     |       | 701      |       | 643      |       |
| Other assets and liabilities                                                                            |       | 379      |       | (126     | )          |
| Net cash used in operating activities                                                                   |       | (2,369   | )          | (10,824  | )          |
| Cash flows used  in investing activities:                                                               |       |     |       |     |       |
| Additions to property, plant, and equipment                                                             |       | (2,134   | )          | (2,020   | )          |
| Net cash used in investing activities                                                                   |       | (2,134   | )          | (2,020   | )          |
| Cash flows from  financing activities:                                                                  |       |     |       |     |       |
| Repurchase of Parent common and preferred stock                                                         |       | (3       | )          | (3       | )          |
| Proceeds from borrowings under line of credit                                                           |       | 39,701   |       | 54,050   |       |
| Repayment of borrowings under line of credit                                                            |       | (36,926  | )          | (41,175  | )          |
| Repayments of long-term debt and capital lease  obligations                                             |       | (171     | )          | (147     | )          |
| Other financing activities                                                                              |       | 1,188    |       | —   |       |
| Net cash provided by financing activities                                                               |       | 3,789    |       | 12,725   |       |
| Net decrease in cash                                                                                    |       | (714     | )          | (119     | )          |
| Cash, beginning  of period                                                                              |       | 2,110    |       | 2,466    |       |
| Cash, end of  period                                                                                    |       | $        | 1,396      |     | $          | 2,347 |   |
| Supplemental  disclosures of cash flow information:                                                     |       |     |       |     |       |
| Cash paid for interest, including capitalized  interest of $217 and $79 in 2006 and 2005,  respectively |       | $        | 896        |     | $          | 614 |   |
| Noncash  investing and financing activities:                                                            |       |     |       |     |       |
| Issuance of  restricted stock units                                                                     |       | —   |       | 339      |       |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

5

----

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollarsin thousands)**

**(1) Basis of Presentation**

The accompanyingunaudited condensed consolidated interim financial statements have beenprepared in accordance with Regulation S-X related to interim periodfinancial statements and, in the opinion of management, include all adjustments(consisting only of normal recurring accruals) that are necessary for the fairpresentation of results for the interim periods. Results for the three monthsended March 31, 2006 may not necessarily be indicative of full-yearresults. It is suggested that these condensed consolidated interim financialstatements be read in conjunction with the audited consolidated financialstatements of Blue Ridge Paper Products Inc. (the “Company”) for the yearended December 31, 2005.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make a numberof estimates and assumptions relating to the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements. These estimates and assumptions also affect thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

**(2) Liquidity**

The Company’s working capital needs are satisfiedthrough its $50,000 revolving credit facility, which expires December 15,2008. The credit agreement requires that the Company meet certain financialcovenants, including a minimum borrowing availability threshold and a fixedcharge coverage ratio. At certain times during 2004 and 2005, the creditagreement was amended to reduce the minimum borrowing availability thresholdfrom $15,000 to $5,000 for specified periods of time. On March 15, 2006,the revolving credit agreement was amended on a permanent basis to change theminimum borrowing availability threshold from $7,500 to $5,000. For furtherdiscussion, see the Company’s annual report on Form 10-K for theyear ended December 31, 2005. In addition, the Company must meet certainaffirmative and negative operating covenants. In the event of default or if theoutstanding balance of the revolving credit facility is greater than $25,000,the borrowing availability falls below $5,000 and the fixed charge coverageratio is less than 1.1 to 1.0, the credit agreement provides for activation ofcontrolled bank accounts to apply daily cash collections toward the outstandingrevolving loan balance. Management believes the existing credit facility isadequate for the Company’s current cash flow needs. Continued compliance withdebt covenants and sufficient liquidity is dependent upon business operationsconsistent with management’s plan for 2006. However, uncertainties exist withinthe Company’s markets that include, but are not limited to, availability andpricing of raw materials and energy, unforeseen disruption in plant operations,labor disputes, significant competition, relationships with large customers,product demand, environmental compliance, litigation, loss of key managers andexposures to interest rate changes.

 

6

----

 

The borrowing availability at March 31, 2006 and December 31,2005 are as follows:

|                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**           | ** ** | **2005**              | ** ** |
|                          |       |               |       |                  |       |
| Borrowing base                |       | $                  | 55,024     |                  | $          | 53,629 |   |
| Suppressed  availability      |       | (24                | )          | —                |       |
| Revolver balance              |       | (36,840            | )          | (34,065               | )          |
| Letters of  credit            |       | (6,519             | )          | (6,519                | )          |
| Subtotal                      |       | 11,641             |       | 13,045                |       |
| Credit agreement  restriction |       | (5,000             | )          | (7,500                | )          |
| Borrowing availability        |       | $                  | 6,641      |                  | $          | 5,545 |   |

 

**(3)  Inventories**

Components of inventory at March 31,2006 and December 31, 2005 are as follows:

|                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2006**           | ** ** | **2005**              | ** ** |
|                 |       |               |       |                  |       |
| Raw materials        |       | $                  | 16,229     |                  | $          | 17,411 |   |
| Work in progress     |       | 17,734             |       | 20,113                |       |
| Finished goods:      |       |               |       |                  |       |
| Paper and paperboard |       | 12,559             |       | 12,407                |       |
| Cartons              |       | 4,831              |       | 4,057                 |       |
| Total                |       | $                  | 51,353     |                  | $          | 53,988 |   |

** **

**(4)  Debt**

*9.5% SeniorSecured Notes*

On December 17,2003, the Company sold $125,000 of the 9.5% senior secured notes (the “Notes”)through a private placement offering under Rule 144A. The Notes have aterm of five years, are due on December 15, 2008 and bear interest at astated rate of 9.5%, which is payable semiannually in arrears on June 15and December 15. The Notes are collateralized by a senior secured interestin substantially all of the Company’s tangible and intangible assets and have asubordinated secured interest in the outstanding trade accounts receivable andinventories. The Company has the right to redeem the Notes at 104.75% and100.00%, plus accrued interest on or after December 15, 2006 and December 15,2007, respectively. Terms of the indenture under which the Notes have beenissued contain certain covenants, including limitations on certain restrictedpayments and the incurrence of additional indebtedness.

*RevolvingCredit Facility*

On December 17,2003, the Company entered into a revolving credit facility with a financialinstitution, which provided for maximum borrowings of $45,000, subject to aborrowing base calculated using eligible accounts receivable and inventories. OnSeptember 15, 2004, the credit agreement was amended to increase themaximum borrowings to $50,000 on a permanent basis. On August 5, 2005, thecredit agreement was amended to include specified foreign account debtors aseligible accounts in determining borrowing base availability. The revolvingcredit facility is collateralized by a senior secured interest in the Company’soutstanding trade accounts receivable and inventories and by a subordinatedsecured interest in substantially all of the Company’s tangible and intangible

 

7

----

 

assets. The revolvingcredit facility matures on December 15, 2008, and requires the Company topay an annual fee of 0.375% on the unused facility amount. The Company had anoutstanding balance of $36,840 and $34,065 at March 31, 2006 and December 31,2005, respectively, and letters of credit outstanding as of March 31, 2006and December 31, 2005 were $6,519. The maximum borrowing availability at March 31,2006 was $11,641, subject to the availability restriction described in Note 2. Theinterest rate on the revolving credit facility at March 31, 2006 and December 31,2005 was 7.58% and 7.71%, respectively. This is a blended rate of LIBOR contractsplus margin.

*ParentPIK Senior Subordinated Note*

BlueRidge Holding Corp. (the “Parent”) partially financed the acquisition of theCanton System with a PIK Senior Subordinated Note payable to InternationalPaper in the principal amount of $30,000, wherein interest would accrue on theunpaid principal balance at a rate of 9% per annum until May 14, 2007. On November 14,2003, the Company entered into an agreement with International Paper to extendthe maturation date of the Parent PIK Senior Subordinated 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 the sale of the Notes. On each semi-annual interestpayment date (March 31 and September 30), the Parent records intereston this note by issuing “Secondary Notes”, which bear substantially the sameterms as the original Parent PIK Senior Subordinated Notes. Payments ofprincipal and interest under the Parent PIK Senior Subordinated Note are legalobligations of the Parent and have not been guaranteed in any way by theCompany. However, the Parent will be dependent upon the Company to settle theseobligations in their entirety. In addition, under certain circumstances,primarily future Parent equity transactions transferring at least 50% of thecommon stock to a third party, payment by the Parent of the Parent PIK SeniorSubordinated Note would be triggered prior to its maturity. The entire amountis due on May 14, 2009.

**(5) Retirement Plans**

*PensionPlan*

The components of netperiodic benefit costs relating to the Company’s pension plan are as followsfor the three-month periods ended March 31, 2006 and 2005:

|                                     | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Service cost                        |       | $                                | 409        |   | $ | 370 |   |
| Interest cost                       |       | 251                              |       | 224 |   |
| Expected return  on assets          |       | (264                             | )          | (225 | ) |
| Amortization of  prior service cost |       | (16                              | )          | (13 | ) |
| Amortization of  actuarial loss     |       | 118                              |       | 132 |   |
| Total net periodic  benefits costs  |       | $                                | 498        |   | $ | 488 |   |

 

Management is primarilyresponsible for determining the cost of pension benefits for this plan. Managementconsidered a number of factors, including consulting with an actuarial firm,when determining this cost. The Company estimates its benefits payments infiscal year 2006 will be approximately $326. Benefits payments in fiscal year2005 were $355.

 

8

----

 

*PostretirementMedical Plan*

The components of netperiodic benefit costs relating to the Company’s postretirement medical planare as follows for the three-month period ended March 31, 2006 and 2005:

|                                     | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Service cost                        |       | $                                | 118        |   | $ | 162 |   |
| Interest cost                       |       | 227                              |       | 277 |   |
| Amortization of  prior service cost |       | (100                             | )          | 46 |   |
| Total net periodic  benefits costs  |       | $                                | 245        |   | $ | 485 |   |

 

Management is primarily responsible for determiningthe cost of postretirement medical benefits for this plan. Managementconsidered a number of factors, including consulting with an actuarial firm,when determining this cost. The Company estimates its benefits payments for thefiscal year ending December 31, 2006 will be approximately $388. Benefitspayments for the fiscal year ended December 31, 2005 were $154.

**(6)  RecentAccounting Developments**

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) 123R, “Share-Based Payment,” whichrequires the measurement of all employee share-based payments to employees,including grants of employee stock options, using a fair-value-based method andthe recording of such expense in the Company’s consolidated statement of income.The Company adopted the provisions of SFAS 123R using the prospective methodeffective January 1, 2006. As such, there was no accounting effect on anyoutstanding awards. Upon adoption of SFAS 123R, the Company has only oneshare-based payment arrangement as described in the following paragraph.

Certain management employees have received restrictedstock awards entitling them to receive the Parent’s restricted common stockunits. These units vest over varying periods from one to five years unless theParent’s majority stockholder sells or otherwise disposes of 80% of its sharesor there is a change in control, at which time the restricted stock units vestimmediately. Restricted stock units issued under these arrangements typicallycontain provisions granting the holder the right, upon the occurrence ofcertain events or conditions or for the 90-day period commencing at leastsix months after becoming fully vested, to require the Parent to repurchasesuch fully vested shares of the Parent’s stock underlying the respectiverestricted stock awards at the then-determined fair value, which is based on anappraisal of the Parent’s common stock performed by an independent valuationspecialist. As of March 31, 2006, the Parent had issued a total of 267,088of restricted stock units (net of units canceled), of which 230,300 were fullyvested. The obligation to redeem restricted stock units of the Parent was$1,643 at March 31, 2006, which is recorded in temporary equity on theconsolidated balance sheet. During fiscal year 2005, the Company issued 36,788units, which become fully vested on June 30, 2006. The Company records thefair value of the units issued as unearned compensation as a separate componentof stockholders’ equity and amortizes them to expense over the vesting periodsof the respective units. Amortization of unearned compensation expense recordedin the period ending March 31, 2006 totaled $13. As of March 31,2006, the Company has not repurchased any fully vested shares, and thereforethere is no cash flow effect resulting from the restricted stock units.

In November 2004, the FASBissued SFAS 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4,”which clarifies the types of costs that should be expensed rather thancapitalized as inventory. This statement also clarifies the circumstances underwhich fixed overhead costs associated with operating facilities involved ininventory

 

9

----

 

production should be capitalized.The Company adopted this standard effective January 1, 2006. The adoptionof SFAS 151 did not have a material effect on its financial position or resultsof operations.

**(7)  Commitments and Contingencies**

(a) *Purchase Commitments*

TheCompany has an agreement with International Paper for supply of wood chipsthrough May 2009. The agreement requires minimum volume purchases anddeliveries of 815,000 tons of wood chips during each contract year. These chipsare supplied by two International Paper facilities in South Carolina andTennessee and account for approximately 44% of the total mill requirements. Asof March 31, 2006, the Company had commitments to purchase wood chips ofapproximately $92,870 over the remaining current term of the agreement. In April 2006,the agreement was amended to discontinue the invoicing of in-transit chips tobegin retroactively after the January 2006 invoice. The agreement statesthat title will transfer upon delivery at the Canton mill but risk of loss inthe event of casualty while in-transit will be the responsibility of theCompany.

(b) *Labor Agreements*

The current laboragreement runs from May 14, 1999 through May 14, 2006. Discussionshave been held regarding plans to negotiate a multi-year extension to thisagreement with minimal modifications. Should the new agreement not be concludedprior to the expiration date, the current agreement will continue in full forceand effect until such time as either party gives the other a 10-daynotice of their intent to terminate the agreement. A 60-day temporaryextension to the agreement has been executed to accommodate the parties’scheduling of further discussions.

(c) *Litigation, Claims and Assessments*

On April 15, 2003, a class action lawsuit wasfiled against the Company for the time period June 1, 1999 until the dateof the verdict on behalf of certain owners of property along the Pigeon Riverin Cocke County, Tennessee. The demand for damages by the class participantstotaled approximately $22,500. On August 17, 2005, a jury in the CircuitCourt of Cocke County, Tennessee ruled in favor of the Plaintiffs awarding$2,000 for nuisance damages with no punitive damages being awarded. A reserveof $2,000 was recorded to recognize the potential liability. The Company hasappealed the decision to the Tennessee Court of Appeals Eastern Section inKnoxville, Tennessee.

On October 11, 2005, the Company was sued by thesame plaintiff group for the same cause of action for the time period August 17,2005 until the trial date in a lawsuit filed in the Circuit Court for CockeCounty, Tennessee. The plaintiffs have limited the claim for damages to $4,900.Although the complaint was designed to maintain state jurisdiction, on January 12,2006, the Company removed the case to Federal court. On February 13, 2006,the plaintiffs filed a motion to remand the case back to Tennessee state courtand this motion is pending.

The Company is subject tolitigation that may arise in the normal course of business. In the opinion ofmanagement, the Company’s liability, if any, under any pending litigation willnot materially impact its financial condition or operations.

(d) *Environmental Liabilities*

As part of itsenvironmental management program, the Company recognizes obligations forclosure of landfills in accordance with SFAS No. 143, “Accounting forAsset Retirement Obligations.”  TheCompany had accrued $1,118 and $730 for the closure of landfills at March 31,2006 and December 31, 2005, respectively. An engineering study received inMarch of 2006 revealed that the estimated cost to close the landfill hadincreased by $317. Additionally,

 

10

----

 

the estimatedremaining months to fill decreased by 27 months because of increased usage inthe landfill due to increased production rates at the Canton mill.

**(8)  OtherMatters**

*Flood Lossesand Government Grants*

In 2004, the Company experiencedsignificant losses related to floods caused by Hurricanes Frances and Ivan. Propertydamage losses and related repairs and maintenance from these two floods throughDecember 31, 2005 were $25,124. No additional expenses were recorded ingross profit during the three-month period ended March 31, 2006. For theperiod ended March 31, 2006, the Company had recorded a receivable forinsurance recoveries of $291. On April 17, 2006 the receivable was paid infull.

In the wake of these events, theCompany was awarded three grants for repairs and maintenance of the wastewatertreatment facility located within the Canton mill that is also used by the Townof Canton. The first grant was awarded by FEMA for repairs incurred from thetwo floods. This grant was in the amount of $1,479, all of which was receivedin the first two quarters of 2005. The second grant was awarded by the State ofNorth Carolina in the amount of $4,500 to be paid on a reimbursement basis. Thisgrant provides for flood control repairs and improvements to the wastewatertreatment facilities. The third grant for $500 was awarded under the U.S.Environmental Protection Agency that also provided for flood control repairsand improvements to the wastewater treatment facilities to be paid on areimbursement basis. The Company has recognized these grants to the extent theyhave incurred costs from repairs and improvements resulting in the recognitionof government grant income of $206 in the three-month period ended March 31,2006 and $4,910 in the year ended December 31, 2005. The remaining $1,363is expected to be recognized as income over the next six to nine months ascosts are incurred.

**(9)  Segment Information**

The Company’smanagement makes financial decisions and allocates resources based on sales andoperating income of the paper and packaging segments. Although raw materials,the production processes, distribution methods and the regulatory environmentare similar, management believes it is appropriate to separately disclose thesesegments. The Company does not allocate selling, research and administrationexpenses to each segment, but management uses operating income to measure theperformance of the segments. The financial information attributed to thesesegments is included in the following tables:

 

11

----

 

**Blue Ridge PaperProducts Inc.**

**ThreeMonths Ended March 31, 2006 and 2005**

**(Dollars in Thousands)**
| ** **                     | ** ** | ** ** | ** ** | **Paper** | ** ** | **Packaging** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|--------------------------------|------------|------------|------------|-----------|------------|---------------|------------|---------------|------------|-----------|------------|
| Net sales                      |       | 2006       |       | $         | 57,175     |          | $          | 82,932        |       | —    |       | $ | 140,107 |   |
|                           |       | 2005       |       | 53,914    |       | 74,633        |       | —        |       | 128,547   |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Operating profit               |       | 2006       |       | 4,259     |       | 4,443         |       | (6,963        | )          | 1,739     |       |
|                           |       | 2005       |       | 6,551     |       | 4,149         |       | (7,271        | )          | 3,429     |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Depreciation and  amortization |       | 2006       |       | 2,753     |       | 851           |       | 58            |       | 3,662     |       |
|                           |       | 2005       |       | 3,085     |       | 819           |       | 436           |       | 4,340     |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Total assets                   |       | 2006       |       | 203,589   |       | 93,971        |       | 13,057        |       | 310,617   |       |
|                           |       | 2005       |       | 207,123   |       | 87,833        |       | 16,901        |       | 311,857   |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Capital  expenditures          |       | 2006       |       | 1,844     |       | 250           |       | 40            |       | 2,134     |       |
|                           |       | 2005       |       | 1,587     |       | 433           |       | —        |       | 2,020     |       |
|                                |            |            |            |           |            |               |            |               |            |           |            |  |  |  |

 

#### **ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS 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 are those that do not relate solely tohistorical fact. They include, but are not limited to, any statement that maypredict, forecast, indicate or imply future results, performance, achievementsor 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 statementsare based on management’s expectations that involve risks and uncertainties,including, but not limited to, economic, competitive, governmental andtechnological factors outside of our control, that may cause actual results todiffer materially from trends, plans or expectations set forth in theforward-looking statements. Given these risks and uncertainties, actual futureresults may be materially different from what we plan or expect. We will notupdate these forward-looking statements even if our situation changes in thefuture.

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

We reported a net loss of$2.9 million for the first quarter ended March 31, 2006. This compared toa net loss of $11.6 million for the fourth quarter ended December 31, 2005.Total net sales for the first quarter ended March 31, 2006 were $140.1million, up 10.8% when compared to net sales for the fourth quarter ended December 31,2005.

The uncoated paper marketstrengthened in the first quarter ended March 31, 2006. Shipments in thefirst quarter ended March 31, 2006 exceeded fourth quarter ended December 31,2005 by 2,733 tons or 4.0%. First quarter ended March 31, 2006 averagepricing for uncoated paper grades increased 4.7% when compared to pricing forthe fourth quarter ended December 31, 2005. Pricing in the second quarterending June 30, 2006 is projected to increase

 

12

----

 

over the average pricingfor the first quarter ended March 31, 2006 due to price increasesimplemented on March 27, 2006. These increases included $60 per ton forwhite wove envelope, offset, reply card, multipurpose and tablet grades and $40per ton for envelope kraft.

Shipments in ourpackaging segment for the first quarter ended March 31, 2006 totaled68,596 tons, which was 10.5% above the fourth quarter ended December 31,2005. This increase reflected increased shipments of our non-converted coatedboard grades from 27,585 tons to 35,781 tons. Pricing in the first quarterended March 31, 2006 for our non-converted coated board grades was 7.1%higher than pricing recorded in the fourth quarter ended December 31, 2005.Our carton pricing was up 1.6% in the first quarter ended March 31, 2006when compared to pricing in the fourth quarter ended December 31, 2005.

In the first quarterended March 31, 2006, raw material costs were flat compared to fourthquarter ended December 31, 2005. However, we received moderate costdecreases toward the end of the first quarter ended March 31, 2006 for lowdensity polyethylene, wood chips and caustic soda. Energy costs increased inthe first quarter ended March 31, 2006 due primarily to contractualincreases for coal that were effective January 1, 2006. Transportationcosts decreased approximately $1.2 million in the first quarter ended March 31,2006 compared to the fourth quarter ended December 31, 2005. This wasprimarily due to a reduction in accessorial charges that were at all time highsimmediately following the Gulf Coast hurricanes in the third quarter ended September 30,2005.

The Canton mill conducteda planned hardwood pulp mill outage in the fourth quarter ended December 31,2005. The planned outage had a negative impact on fourth quarter earnings ofapproximately $3.1 million. There was not a corresponding outage in the firstquarter ended March 31, 2006. The Canton mill is scheduled to have a pinepulp mill outage in the second quarter ending June 30, 2006.

#### **Resultsof Operations**

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

 

13

----

** **

**(Dollars inmillions, except per ton amounts)**

 

|                                                                            | ** ** | **Three-Month Period**   | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                 | ** ** | **Ended March 31,** | ** ** |
| ** **                                                                 | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Net Sales:                                                                 |       |                          |       |   |   |
| Packaging                                                                  |       | $                             | 82.9       |   | $ | 74.6 |   |
| Paper                                                                      |       | 57.2                          |       | 53.9 |   |
| Total                                                                      |       | $                             | 140.1      |   | $ | 128.5 |   |
|                                                                       |       |                          |       |   |   |
| Segments’  operating profit:                                          |       |                          |       |   |   |
| Packaging                                                                  |       | $                             | 4.4        |   | $ | 4.1 |   |
| Paper                                                                      |       | 4.3                           |       | 6.6 |   |
| Total segments’ operating profit, excluding  corporate expenses  |       | $                             | 8.7        |   | $ | 10.7 |   |
|                                                                       |       |                          |       |   |   |
| Corporate  expense                                                         |       | 7.0                           |       | 7.3 |   |
| Total operating profit                                                     |       | $                             | 1.7        |   | $ | 3.4 |   |
|                                                                       |       |                          |       |   |   |
| Percentage of  net sales:                                                  |       |                          |       |   |   |
| Packaging                                                                  |       | 59.2                          | %          | 58.1 | % |
| Paper                                                                      |       | 40.8                          | %          | 41.9 | % |
| Total                                                                      |       | 100.0                         | %          | 100.0 | % |
|                                                                       |       |                          |       |   |   |
| Segments’  operating margin:                                          |       |                          |       |   |   |
| Packaging                                                                  |       | 5.3                           | %          | 5.5 | % |
| Paper                                                                      |       | 7.5                           | %          | 12.2 | % |
| Total                                                                      |       | 6.2                           | %          | 8.3 | % |
|                                                                       |       |                          |       |   |   |
| Shipments  (tons):                                                         |       |                          |       |   |   |
| Packaging segment                                                          |       | 68,596                        |       | 63,661 |   |
| Paper segment                                                              |       | 77,897                        |       | 76,073 |   |
| Total                                                                      |       | 146,493                       |       | 139,734 |   |
|                                                                       |       |                          |       |   |   |
| Average price ($  per  ton):                                     |       |                          |       |   |   |
| Packaging segment                                                          |       | $                             | 1,209      |   | $ | 1,172 |   |
| Paper segment                                                              |       | 734                           |       | 709 |   |
| Average price                                                              |       | $                             | 956        |   | $ | 920 |   |

 

**THREEMONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31,2005**

*NetSales.* Net sales forthe three-month period ended March 31, 2006, or the 2006 three-monthperiod, increased $11.6 million or 9.0% to $140.1 million compared to $128.5million for the three-month period ended March 31, 2005, or the 2005three-month period.

Net sales for ourpackaging segment for the 2006 three-month period increased $8.3 million or11.1% to $82.9 million compared to $74.6 million for the 2005 three-monthperiod.  For the 2006 three-month period,our packaging segment sold 68,596 tons of coated and converted paperboardproducts at an average price of $1,209 per ton, compared to 63,661 tons soldfor the 2005 three-month period at an average price of $1,172 per ton.  The increase in packaging segment sales isattributable to a 7.8% increase in volume shipped and a 3.2% increase inaverage revenue per ton shipped.

14

----

Net sales for our paper segment for the 2006 three-month periodincreased $3.3 million or 6.1% to $57.2 million compared to $53.9 million inthe 2005 three-month period. Net sales volume in our paper segment increased1,824 tons to 77,897 tons shipped in the 2006 three-month period as compared to76,073 tons shipped in the 2005 three-month period. Approximately 70.7% or $2.3million of the net sales increase in the 2006 three-month period reflectsimproved pricing for our products. The remaining increase in net sales reflectsincreased outside sales of uncoated board produced at our Canton, NorthCarolina facility. Average pricing in our paper segment improved to $734 perton shipped in the 2006 three-month period as compared to $709 per ton shippedin the 2005 three-month period.

 

*Operating Profit*.   Totalsegment operating profit decreased $2.0 million to $8.7 million in the 2006three-month period compared to an operating profit of $10.7 million for the2005 three-month period. As a percentage of sales, total segments operatingprofit decreased to 6.2% in the 2006 three-month period from 8.3% in the 2005three-month period.

 

Thefollowing table sets forth significant items that increased (decreased) totalsegments’ operating profit:
| ** **                       | ** ** | **Three-Month Period Ended  March 31, 2006** | ** ** | **Three-Month Period Ended  March 31, 2005** | ** ** | **Change** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------|------------|
| Segments’ Operating  Profit |       | $                                                                | 8.7        |                                                             | $          | 10.7       |       | $(2.0 | ) |
|                                  |            |                                                                  |            |                                                                  |            |            |            |  |  |

 
| Product pricing  improvement              |   | $      | 8.1    |   |
|-------------------------------------------|--------|--------|--------|--------|
|                                      |   |   |   |
| Net flood impact in  2005                 |   | 0.8    |   |
|                                      |   |   |   |
| Outbound transportation  costs            |   | (0.5   | )      |
|                                      |   |   |   |
| Major raw material  costs                 |   | (8.1   | )      |
|                                      |   |   |   |
| Increased energy costs                    |   | (1.7   | )      |
|                                      |   |   |   |
| Other miscellaneous and  offsetting items |   | (0.6   | )      |
|                                      |   |   |   |
| Total                                     |   | ($2.0  | )      |

 

Operating profitfor our packaging segment increased $0.3 million or 7.3% in the 2006three-month period to $4.4 million or 5.3% of packaging segment sales, comparedto $4.1 million or 5.5% of packaging segment sales for the 2005 three-monthperiod. The increase in operating profit for our packaging segment was dueprimarily to a $5.8 million increase in average revenue of products sold.  The increase in packaging segment operatingprofit in the 2006 three-month period was partially offset by: (i) $2.4million increase in purchase costs of plastic/resin, our primary raw materialused at our Waynesville converting facility; (ii) a $0.4 million increasein other major raw material costs for the division; (iii) a $1.7 millionincrease in costs of internally produced board received from the Canton milland passed on to the packaging division through interdivisional transfer costs;(iv) an increase of $0.3 million in energy costs; and (v) othermiscellaneous and offsetting variances totaling a negative $0.7 million.

Operating profitfor our paper segment decreased $2.3 million in the 2006 three-month period to$4.3 million or 7.5% of paper segment sales, compared to an operating profit of$6.6 million or 12.2% of paper segment sales for the 2005 three-month period. Thedecrease in operating profit for our paper segment was due primarily to: (i) a$1.4 million increase in purchase costs of fuels and electricity consumed atour Canton, North Carolina mill; (ii) cost increases of approximately $5.3million on many of our primary raw materials including wood chips, purchased

15

----

 

pulp andchemicals; and (iii) a $0.5 million increase in outbound transportationcosts due primarily to higher fuel costs. The decrease in paper segmentoperating profit in the 2006 three-month period was partially offset by:  (i) increased pricing on uncoated papersales of $2.0 million and on uncoated board sales of $0.3 million; (ii) floodlosses, net of insurance proceeds, of $0.8 million incurred in the 2005three-month with no corresponding losses in the 2006 three-month period; (iii) a$1.7 million increase in costs of internally produced board and passed on tothe packaging division through interdivisional transfer costs; and (iv) othermiscellaneous and offsetting variances totaling a positive $0.1 million.

*Selling,General and Administrative Expenses.   *Totalselling, general and administrative expenses increased $0.7 million or 13.7% to$5.8 million in the 2006 three-month period compared to $5.1 million for the2005 three-month period.  The increase inselling, general and administrative expenses was primarily attributable to a$0.7 million increase in corporate wages and benefits cost in the 2006three-month period as compared to the 2005 three-month period. The increase inwages and benefits costs included a $0.3 million reserve adjustment in the 2005three-month period held to complete the closure of our Fort Worth, TexasDairyPak facility that was completed in 2004, as well as an additional $0.3million credit in the 2005 three month period to adjust the liability relatedto company stock held by former employees.

*Depreciation and Amortization Expense (non-operations).   *Depreciationand amortization expenses unrelated to operations decreased $0.3 million or 75%to $0.1 million in the 2006 three-month period compared to $0.4 million in the2005 three-month period. The drop in depreciation expense relates primarily tothe completion of amortization on system-related assets purchased in prioryears.

*ESOP Expense.   *ESOP expensedecreased $0.5 million or 31.3% to $1.1 million in 2006 compared to $1.6million in 2005. The ESOP expense is a non-cash expense, which results from theannual transfer of shares into the ESOP. The amount of the ESOP expense varieswith the value of the shares, which is determined by an independent valuationspecialist at the end of each year. The decrease in the 2006 three-month periodreflects the decline in annual valuation of our shares to $6.20 per share infiscal 2006 compared to $9.06 in fiscal 2005.

#### **LIQUIDITYAND CAPITAL RESOURCES**

Our principal liquidityrequirements are to service our debt and fund our operations and capital expenditureneeds. Our total senior debt, defined as total debt less the Parent PIK SeniorSubordinated Note, at March 31, 2006 was approximately $164.0 million. Subjectto our performance, which if adversely affected could affect the availabilityof funds, we expect to be able to meet our liquidity requirements for theremainder of fiscal 2006 through cash provided by operations and throughborrowings available under our working capital facility. We cannot assure you,however, that this will be the case. In December 2003, we issued $125.0million of the Notes in a private offering. Proceeds from issuance of the Noteswere used to repay our Term Loans A and B and our existing revolving creditfacility under the 1999 credit agreement. In addition, we paid $7.0 million onthe Parent PIK Subordinated Note. We entered into a $45.0 million revolvingcredit facility in December 2003. On September 15, 2004, the creditagreement was amended to increase the facility from $45.0 million to $50.0million 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 March 15, 2006, the revolvingcredit agreement was amended on a permanent basis to change the minimumborrowing availability threshold from $7.5 million to $5.0 million. The maximumborrowing availability at March 31, 2006 and December 31, 2005 was$6.6 million and $5.5 million, respectively. The revolving credit facilitycontains covenant restrictions, which require covenant availability to exceed$5.0 million (as amended March 15, 2006). If the covenant availabilitydoes not meet the required minimum availability, a fixed charge coverage ratiocovenant of 1.1 to 1.0 will be triggered. As of March 31, 2006, we had acovenant availability of $11.6 million, which is $6.6 million in excess of therequired minimum.

16

----

 

Summary of Cash Flow ($in millions):

 

|                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Net cash used in operating activities | ** ** | $                                                    | (2.4       | ) | $ | (10.8 | **)** |
| Net cash used in  investing activities                         |       | (2.1                                                 | )          | (2.0 | ) |
| Net cash  provided by financing activities                     |       | 3.8                                                  |       | 12.7 |   |
| Net decrease in  cash                                          |       | $                                                    | (0.7       | ) | $ | (0.1 | ) |
|                                                           |       |                                                 |       |   |   |
| Cash balance                                                   |       | $                                                    | 1.4        |   | $ | 2.3 |   |

 

The cash used in operationswas $2.4 million for the 2006 three-month period. The cash used in operationswas primarily attributable to a decrease in accrued expenses and otherliabilities and the net loss for the 2006 three-month period, partially offsetby depreciation and amortization expenses and an increase in interest payable.The decrease in accrued expenses and other liabilities is mainly due to adecrease in rebates payable resulting from an annual rebate being paid outduring the 2006 three-month period.

The cash used ininvesting activities for the 2006 three-month period was $2.1 million. Capitalspending for the 2006 three-month period was $2.1 million. For the fiscal yearending December 31, 2006, we currently estimate that our capital spendingwill be approximately $8.7 million.

Net cash provided byfinancing activities was $3.8 million for the 2006 three-month period, which isprimarily attributable to net borrowings on our revolving line of credit.

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

Weare exposed to certain market risks, including interest rate risk. Riskexposure relating to this market risk is summarized below. This informationshould be read in connection with the condensed consolidated financialstatements and the related notes thereto included elsewhere in this quarterlyreport on Form 10-Q.

We manage interest costusing a combination of fixed and variable rate debt. As of March 31, 2006,we have $125.0 million of Notes outstanding at a 9.5% fixed rate of interestand a $50.0 million working capital credit facility at variable rates ofinterest. As of March 31, 2006, approximately $36.8 million wasoutstanding under our working capital credit facility consisting of short-terminterest rates of 0.75% over Applicable Revolver Index Margin and 2.50% overApplicable Revolver Libor Margin, as defined. Our working capital facilityoffers two options for interest rates: Applicable Revolver Libor margin ranging from 2.25% - 2.75% orApplicable Revolver Index Margin ranging from 0.50% - 1.00%. The rate is basedon revolver availability. At the end of March 2006, we were approximatelyat the mid-point of the interest rate grid for Libor and Index Margins. Inaddition, as of March 31, 2006, we have a $0.7 million mortgage note witha maximum interest rate of 5.5% and a remaining duration of four years.

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

(A) Evaluation ofDisclosure Controls and Procedures

Our ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof our disclosure controls and procedures (as defined in Rule 13a-15(e) and15d-15(e)) under the Securities Exchange Act of 1934. Based on theirevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of March 31, 2006,

17

----

our disclosure controlsand procedures were effective in ensuring that material information wasproperly disclosed in its filings with the Securities and Exchange Commission.

(B) Changesin Internal Controls Over Financial Reporting

There have been nosignificant changes in our internal controls over financial reporting duringthe three months ended March 31, 2006 that have materially affected or arereasonably likely to materially affect our internal control over financialreporting.

**PART II. OTHER INFORMATION**

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

The risk factors includedin our Annual Report on Form 10-K for the fiscal year ended December 31,2005 have not materially changed other than as set forth below.

***Labor disputes or increased labor costs could materiallyadversely affect our operating results.***

The current laboragreement runs from May 14, 1999 through May 14, 2006. Discussionshave been held regarding plans to negotiate a multi-year extension to thisagreement with minimal modifications. Should the new agreement not be concludedprior to the expiration date, the current agreement will continue in full forceand effect until such time as either party gives the other a 10-daynotice of their intent to terminate the agreement. A 60-day temporaryextension to the agreement has been executed to accommodate the parties’scheduling of further discussions.

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

Senior Management hasestablished performance measures for the 2006 cycle under the Blue Ridge PaperProducts Inc. Annual Performance and Sales Incentive Plan, referred to as theIncentive Plan.  The 2006 cycle under theIncentive Plan began on January 1, 2006 and will end on December 31,2006. The Incentive Plan provides the opportunity for certain key employees toreceive cash awards based on achievement of significant goals and objectivesduring the relevant period that are aligned with overall corporate goals andobjectives. Incentive award opportunities are expressed as a percent of basesalary and may be earned by a participant provided the participant achieves theagreed-upon goals and objectives within the relevant time frame.

#### **ITEM6. EXHIBITS**

(a) Exhibitsrequired by Item 601 of Regulation S-K

10.1 Blue Ridge PaperProducts Inc. Annual Performance and Sales Incentive Plan

31.1 Certification of CEOpursuant to Section 302 of Sarbanes-Oxley Act of 2002

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

18

----

 

**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.

 
|                         | **BLUE  RIDGE PAPER PRODUCTS INC.**  |
|-------------------------|--------------------------------------|
|                    |                                 |
|                    |                                 |
| Date: May 11, 2006 |                                 |
| ** **              | **/S/  JOHN B. WADSWORTH**           |
|                    | John B.  Wadsworth                   |
|                    | Chief Financial  Officer             |
|                    |                                 |
|                    | (On behalf of  the Registrant and as |
|                    | Principal  Financial Officer)        |

 

19

----

###  

### EXHIBIT INDEX

TO

FORM 10-Q

OF

BLUE RIDGE PAPER PRODUCTSINC.

FOR THE QUARTERLY PERIODENDED MARCH 31, 2006

Pursuant to Section102(d) of Regulation S-T

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

 

The following exhibits are filed as part of thisreport:

 

                10.1         Blue Ridge Paper Products Inc. AnnualPerformance and Sales Incentive Plan

                31.1         Certification of CEO pursuant toSection 302 of Sarbanes-Oxley Act of 2002

                31.2         Certification of CFO pursuant to Section302 of Sarbanes-Oxley Act of 2002

 

20

----