10-Q

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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

BLUE RIDGE 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 area code:  828-454-0676

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer 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 (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of common shares outstanding at September 30, 2006 was 1,000.

BLUE RIDGE PAPER PRODUCTS INC.

AND SUBSIDIARIES

		INDEX
PART I.		FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets, September 30, 2006 (unaudited) and December 31, 2005 (derived from audited financial statements)
		Condensed Consolidated Statements of Operations, Three Months Ended September 30, 2006 and 2005 (unaudited), Nine Months Ended September 30, 2006 and 2005 (unaudited)
		Condensed Consolidated Statements of Cash Flows, Nine Months Ended September 30, 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 I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS

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BLUE RIDGE PAPER PRODUCTS INC.

Condensed Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(Dollars in thousands)
(unaudited)

	September 30,			December 31,
	2006			2005
Assets
Current assets:
Cash	$	3,752		$	2,110
Accounts receivable, net of allowance for doubtful accounts and discounts of $1,276 and $2,298 in 2006 and 2005, respectively	56,854			56,002
Inventories	51,431			53,988
Prepaid expenses	2,132			1,029
Insurance proceeds receivable	—			291
Income tax receivable	—			50
Deferred tax asset	4,373			4,448
Total current assets	118,542			117,918
Property, plant and equipment, net of accumulated depreciation of $116,340 and $105,253 in 2006 and 2005, respectively	188,406			190,463
Deferred financing costs, net	3,966			5,108
Other assets	57			193
Total assets	$	310,971		$	313,682
Liabilities and Stockholder’s Deficit
Current liabilities:
Current portion of senior debt	$	43		$	41
Current portion of capital lease obligation	402			595
Accounts payable	43,286			48,917
Accrued expenses and other current liabilities	31,086			33,987
Interest payable	5,698			1,875
Total current liabilities	80,515			85,415
Senior debt, net of current portion	161,555			159,749
Parent Pay-In-Kind (PIK) Senior Subordinated Note	46,424			44,425
Capital lease obligations	707			979
Pension and postretirement benefits	24,341			22,678
Deferred tax liability	4,373			4,448
Other liabilities	1,168			730
Total liabilities	319,083			318,424
Obligation to redeem ESOP shares	28,455			27,716
Obligation to redeem restricted stock units of Parent	1,180			1,631
Commitments and contingencies (See notes)
Stockholders’ equity:
Common stock (par value $0.01, 1000 shares authorized and outstanding in 2006 and 2005, respectively)	—			—
Additional paid-in capital	65,459			64,121
Accumulated deficit	(89,713		)	(86,054		)
Unearned compensation	—			(25		)
Accumulated other comprehensive loss	(4,183		)	(4,183		)
	(28,437		)	(26,141		)
Receivable from Parent	(9,310		)	(7,948		)
Total stockholders’ deficit	(37,747		)	(34,089		)
Total liabilities and stockholders’ deficit	$	310,971		$	313,682

See accompanying notes to condensed consolidated financial statements.

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BLUE RIDGE PAPER PRODUCTS INC.

Condensed Consolidated Statements of Operations
Three- and Nine-Month Periods Ended September 30, 2006 and 2005
(Dollars in thousands)
(unaudited)

	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2006			2005			2006			2005
Net sales	$	145,242		$	129,781		$	430,205		$	383,534
Cost of goods sold:
Cost of goods sold, excluding depreciation and amortization, flood-related loss and repairs and insurance recoveries	130,815			117,632			387,316			344,722
Depreciation and amortization	3,760			3,749			10,998			11,486
Flood-related loss and repairs	—			634			—			1,960
Insurance recoveries	—			(257		)	—			(357		)
Gross profit	10,667			8,023			31,891			25,723
Selling, general and administrative expenses.	8,777			6,110			20,673			16,356
Loss on litigation	—			2,000			—			2,000
Depreciation and amortization	28			427			114			1,289
ESOP expense	—			1,630			1,627			4,892
Operating profit (loss)	1,862			(2,144		)	9,477			1,186
Other income (expense):
Interest expense, excluding amortization of deferred financing costs	(4,598		)	(4,333		)	(13,554		)	(12,988		)
Amortization of deferred financing costs	(391		)	(350		)	(1,142		)	(1,023		)
Government grant income	369			1,436			1,554			3,742
Gain (loss) on equity method investment	2			(1		)	6			(1		)
	(4,618		)	(3,248		)	(13,136		)	(10,270		)
Loss before income taxes	(2,756		)	(5,392		)	(3,659		)	(9,084		)
Income taxes	—			—			—			—
Net loss	$	(2,756	)	$	(5,392	)	$	(3,659	)	$	(9,084	)

See accompanying notes to condensed consolidated financial statements.

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BLUE RIDGE PAPER PRODUCTS INC.

Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005
(Dollars in thousands)
(unaudited)

	2006			2005
Cash flows from operating activities:	$	(3,659	)	$	(9,084	)
Net loss
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	11,112			12,775
Compensation expense for Parent restricted stock	25			222
Amortization of deferred financing costs	1,142			1,023
ESOP expense	1,627			4,892
Gain on sale of assets	(6		)	(44		)
Parent PIK Senior Subordinated Note for interest	3,089			2,828
Changes in operating assets and liabilities:
Accounts receivable, net	(852		)	(16,106		)
Inventories	2,557			(3,283		)
Prepaid expenses	(1,103		)	744
Insurance proceeds receivable	291			10,282
Income tax receivable	50			21
Other current assets	—			(36		)
Accounts payable	(3,916		)	1,889
Accrued expenses and other current liabilities	(2,901		)	(857		)
Interest payable	2,733			2,822
Pension and postretirement benefits	1,663			1,033
Other assets and liabilities	573			(628		)
Net cash provided by operating activities	12,425			8,493
Cash flows used in investing activities:
Additions to property, plant and equipment	(9,066		)	(12,739		)
Proceeds from sale of property, plant and equipment	17			45
Net cash used in investing activities	(9,049		)	(12,694		)
Cash flows from financing activities:
Repurchase of Parent common and preferred stock	(1,362		)	(1,254		)
Proceeds from borrowings under line of credit	115,515			124,800
Repayment of borrowings under line of credit	(113,677		)	(119,530		)
Repayments of long-term debt and capital lease obligations	(495		)	(477		)
Other financing activities	(1,715		)	—
Net cash provided by (used in) financing activities	(1,734		)	3,539
Net increase (decrease) in cash	1,642			(662		)
Cash, beginning of period	2,110			2,466
Cash, end of period	$	3,752		$	1,804
Supplemental disclosures of cash flow information:
Cash paid for interest, including capitalized interest of $730 and $305 in 2006 and 2005, respectively	$	7,766		$	7,375
Noncash investing and financing activities:
Conversion of accrued interest to note payable	1,999			1,831
Issuance of restricted stock units	—			333

See accompanying notes to condensed consolidated financial statements.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (unaudited)

(1)  Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with Regulation S-X related to interim period financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) that are necessary for the fair presentation of results for the interim periods.  Results for the nine months ended September 30, 2006 may not necessarily be indicative of full-year results.  It is suggested that these condensed consolidated interim financial statements be read in conjunction with the audited consolidated financial statements of Blue Ridge Paper Products Inc. (the “Company”) included in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

(2)  Liquidity

The Company’s working capital needs are satisfied through its $50,000 revolving credit facility, which expires December 15, 2008.  The credit agreement requires that the Company meet certain financial covenants, including a minimum borrowing availability threshold and a fixed charge coverage ratio.  At various times during 2004 and 2005, the credit agreement was amended to reduce the minimum borrowing availability threshold from $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 the minimum borrowing availability threshold from $7,500 to $5,000.  For further discussion, see the Company’s annual report on Form 10-K for the year ended December 31, 2005.  In addition, the Company must meet certain affirmative and negative operating covenants.  In the event of default or if the outstanding balance of the revolving credit 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 credit agreement provides for activation of controlled bank accounts to apply daily cash collections toward the outstanding revolving loan balance.  On June 9, 2006, the revolving credit facility was amended to reduce the interest and applicable margins by 50 to 75 basis points depending on the level of borrowing.  Management believes the existing credit facility is adequate for the Company’s current cash flow needs.  Continued compliance with debt covenants and sufficient liquidity is dependent upon business operations consistent with management’s plan for 2006.  However, uncertainties exist within the Company’s markets that include, but are not limited to, availability and pricing of raw materials and energy, unforeseen disruption in plant operations, labor disputes, significant competition, relationships with large customers, product demand, environmental compliance, litigation, loss of key managers and exposures to interest rate changes.

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The borrowing availability at September 30, 2006 and December 31, 2005 is as follows:

	September 30,			December 31,
	2006			2005
Borrowing base	$	56,375		$	53,629
Credit agreement restriction	(5,000		)	(7,500		)
Suppressed availability (1)	(1,375		)	—
Credit line availability	50,000			46,129
Revolver balance	(35,903		)	(34,065		)
Letters of credit	(5,691		)	(6,519		)
Maximum borrowing availability	$	8,406		$	5,545

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

(3)  Inventories

Components of inventory at September 30, 2006 and December 31, 2005 are as follows:

	September 30,		December 31,
	2006		2005
Raw materials	$	17,029	$	17,411
Work in progress	14,837		20,113
Finished goods:
Paper and paperboard	13,388		12,407
Cartons	6,177		4,057
Total	$	51,431	$	53,988

(4)  Debt

9.5% Senior Secured 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 a term of five years, are due on December 15, 2008 and bear interest at a stated rate of 9.5%, which is payable semiannually in arrears on June 15 and December 15.  The Notes are collateralized by a senior secured interest in substantially all of the Company’s tangible and intangible assets and have a subordinated secured interest in the outstanding trade accounts receivable and inventories.  The Company has the right to redeem the Notes at 104.75% and 100.00%, plus accrued interest on or after December 15, 2006 and December 15, 2007, respectively.  Terms of the indenture under which the Notes have been issued contain certain covenants, including limitations on certain restricted payments and the incurrence of additional indebtedness.

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Revolving Credit Facility

On December 17, 2003, the Company entered into a revolving credit facility with a financial institution, which provided for maximum borrowings of $45,000, subject to a borrowing base calculated using eligible accounts receivable and inventories.  On September 15, 2004, the credit agreement was amended to increase the maximum borrowings to $50,000 on a permanent basis.  On August 5, 2005, the credit agreement was amended to include specified foreign account debtors as eligible accounts in determining borrowing base availability.  On June 9, 2006, the credit agreement was further amended to reduce the interest and applicable margins by 50 to 75 basis points depending on the level of borrowing.  The revolving credit facility is collateralized by a senior secured interest in the Company’s outstanding trade accounts receivable and inventories and by a subordinated secured interest in substantially all of the Company’s tangible and intangible assets.  The revolving credit facility matures on December 15, 2008, and requires the Company to pay an annual fee of 0.375% on the unused facility amount.  The Company had an outstanding balance of $35,903 and $34,065 at September 30, 2006 and December 31, 2005, respectively, and letters of credit outstanding as of September 30, 2006 and December 31, 2005 were $5,691 and $6,519, respectively.  The maximum borrowing availability at September 30, 2006 was $8,406, adjusting for the availability restriction described in Note 2 above.  The interest rate on the revolving credit facility at September 30, 2006 and December 31, 2005 was 7.69% and 7.71%, respectively.  This is a blended rate of LIBOR contracts plus margin.

Parent PIK Senior Subordinated Note

Blue Ridge Holding Corp. (the “Parent”) partially financed the acquisition of the Canton System from International Paper Company (formerly Champion International Corporation) with a PIK Senior Subordinated Note payable to International Paper in the principal amount of $30,000, wherein interest would accrue on the unpaid 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 extend the 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 interest payment date (March 31 and September 30), the Parent records interest on this note by issuing “Secondary Notes,” which bear substantially the same terms as the original Parent PIK Senior Subordinated Note.  Payments of principal and interest under the Parent PIK Senior Subordinated Note are legal obligations of the Parent and have not been guaranteed in any way by the Company.  However, the Parent will be dependent upon the Company to settle these obligations in their entirety.  In addition, under certain circumstances, primarily future Parent equity transactions transferring at least 50% of the common stock to a third party, payment by the Parent of the Parent PIK Senior Subordinated Note would be triggered prior to its maturity.  The entire amount is due on May 14, 2009.

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(5)  Retirement Plans

Pension Plan

The components of net periodic benefit costs relating to the Company’s pension plan are as follows for the three-month periods and nine-month periods ended September 30, 2006 and 2005:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Service cost	$	414		$	370		$	1,231		$	1,110
Interest cost	283			224			785			672
Expected return on assets	(264		)	(225		)	(792		)	(675		)
Amortization of prior service cost	(16		)	(13		)	(48		)	(39		)
Amortization of actuarial loss	172			132			408			396
Total net periodic benefits costs	$	589		$	488		$	1,584		$	1,464

Management is primarily responsible for determining the cost of pension benefits for this plan.  Management considered a number of factors, including consulting with an actuarial firm, when determining this cost.  The Company estimates its benefits payments in fiscal year 2006 will be approximately $326.  Benefits payments in fiscal year 2005 were $355.

Postretirement Medical Plan

The components of net periodic benefit costs relating to the Company’s postretirement medical plan are as follows for the three-month periods and nine-month periods ended September 30, 2006 and 2005:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006			2005		2006			2005
Service cost	$	118		$	163	$	354		$	489
Interest cost	227			277		681			831
Amortization of prior service cost	(100		)	45		(300		)	135
Total net periodic benefits costs	$	245		$	485	$	735		$	1,455

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

(6)  Recent Accounting Developments

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based Payment,” which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense

9

in the Company’s consolidated statements of income.  The Company adopted the provisions of SFAS 123R using the prospective method effective January 1, 2006.  As such, there was no accounting effect on any outstanding awards.  Upon adoption of SFAS 123R, the Company has only one share-based payment arrangement as described in the following paragraph.

Certain management employees have received restricted stock awards entitling them to receive the Parent’s restricted common stock units.  These units vest over varying periods from one to five years unless the Parent’s majority stockholder sells or otherwise disposes of 80% of its shares or there is a change in control, at which time the restricted stock units vest immediately.  Restricted stock units issued under these arrangements typically contain provisions granting the holder the right, upon the occurrence of certain events or conditions or for the 90-day period commencing at least six months after becoming fully vested and share certificates being issued and not repurchased, to require the Parent to repurchase such fully vested shares of the Parent’s stock underlying the respective restricted stock awards at the then-determined fair value, which is based on an appraisal of the Parent’s common stock performed by an independent valuation specialist.  On June 30, 2006, restricted stock units totaling 230,300 became due to the employees.  These units have a put option during a 90-day period beginning January 1, 2007 if the employee has held their respective share certificate for at least six months.  The Company repurchased 76,483 of the fully vested shares in July 2006 to cover the tax withholding of the employees as allowed by the agreements.  As of September 30, 2006, the Parent had issued and not repurchased a total of 190,355 restricted stock units, net of units canceled, of which all were fully vested.  The obligation to redeem restricted stock units of the Parent was $1,180 at September 30, 2006, which is recorded in temporary equity on the condensed consolidated balance sheet.  The Company records the fair value of the units issued as unearned compensation as a separate component of stockholder’s equity and amortizes them to expense over the vesting periods of the respective units.

In November 2004, the FASB issued SFAS 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4,” which clarifies the types of costs that should be expensed rather than capitalized as inventory.  This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory production should be capitalized.  The Company adopted this standard effective January 1, 2006.  The adoption of SFAS 151 did not have a material effect on the Company’s financial position or results of operations.

In June 2006, the FASB issued FAS Interpretation No. 48 (FIN 48) “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes.”  The accounting provisions of FIN 48 prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This interpretation establishes a consistent threshold for recognizing current and deferred taxes.  The Company will adopt the provisions of FIN 48 effective January 1, 2007.  The adoption of FIN 48 will not have a material effect on the Company’s financial statements or results of operations.

On September 29, 2006, the FASB issued FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132R.”  This new standard requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s over funded status or a liability for a plan’s under funded status: (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur.  Those changes will be reported in comprehensive income.  The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after June 15, 2007, for entities with non-publicly traded equity securities as defined by Statement No. 158.  The Company will adopt the provisions of Statement No. 158 in December 2007.

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In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on how uncorrected errors in previous years should be considered when quantifying errors in current-year financial statements. SAB 108 requires registrants to consider the effect of all carry over and reversing effects of prior-year misstatements when quantifying errors in current-year financial statements. SAB 108 allows registrants to record the effects of adapting the guidance as a cumulative-effect adjustment to retained earnings. The guidance in SAB 108 is effective for the Company in the fourth quarter of 2006. The Company does not anticipate that the adoption of SAB 108 will have a material effect on its consolidated financial statements.

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

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“Statement 157”), “Fair Value Measurements.” Statement 157 establishes a framework for measuring fair value in generally accepted accounting principles and enhances disclosures about fair value measurements. Statement 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. Statement 157 applies to interim reporting and will be effective for the Company in the first quarter of fiscal year 2008. The Company is currently evaluating the effects of Statement 157 but does not anticipate that it will have a material effect on its consolidated financial statements.

(7) Commitments and Contingencies

(a) Purchase Commitments

The Company has an agreement with International Paper for supply of wood chips through May 2009. The agreement requires minimum volume purchases and deliveries of 815,000 tons of wood chips during each contract year. These chips are supplied by two International Paper facilities in South Carolina and Tennessee and account for approximately 44% of the total Canton mill requirements. As of September 30, 2006, the Company had commitments to purchase wood chips of approximately $72,419 over the remaining term of the agreement. In May 2006, the agreement was amended to discontinue the invoicing of in-transit chips. The agreement states that title will transfer upon delivery at the Canton mill but risk of loss in the event of casualty while in-transit will be the responsibility of the Company.

(b) Labor Agreements

On July 7, 2006, a new labor agreement was ratified between the United Steelworkers International Union (USW) and the Company. The new contract provides for annual increases of 4%, 3% and 3% over the next three years, retroactive to May 14, 2006. In addition, the Company will increase its contribution to the bargaining unit pension plan to maintain benefits at current levels. Modifications to the employees’ healthcare plan were also made, which included eliminating the highest cost and least utilized healthcare plan, and increasing employee contributions toward healthcare.

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(c) Litigation, Claims and Assessments

On April 15, 2003, a class action lawsuit was filed against the Company for the time period June 1, 1999 until the date of the verdict on behalf of certain owners of property along the Pigeon River in Cocke County, Tennessee. The demand for damages by the class participants totaled approximately $22,500. On August 17, 2005, a jury in the Circuit Court of Cocke County, Tennessee ruled in favor of the Plaintiffs awarding $2,000 for nuisance damages with no punitive damages being awarded. A liability of $2,000 was recorded in 2005. The Company has appealed the decision to the Tennessee Court of Appeals Eastern Section in Knoxville, Tennessee.

On October 11, 2005, the Company was sued by the same 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 Cocke County, 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 September 19, 2006, the case was remanded back to Tennessee State Court.

On June 6, 2006, the Parent received notices of tax assessment for corporate and franchise tax for tax years 1999 through 2004. The aggregate amount assessed is $806, consisting of $443 in taxes, $97 in interest and $266 in penalties for the full six-year period. The Parent formally protested the tax assessment on July 5, 2006. The Company had not recorded a liability for any amount related to this assessment as of September 30, 2006 because the ultimate loss, if any, associated with the assessment is not probable or estimable.

The Company is subject to litigation that may arise in the normal course of business. In the opinion of management, the Company’s liability, if any, under any pending litigation will not materially impact its financial condition or operations.

(d) Environmental Liabilities

As part of its environmental management program, the Company recognizes obligations for closure of landfills in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations.” The Company had accrued $1,168 and $730 for the closure of landfills at September 30, 2006 and December 31, 2005, respectively. An engineering study received in March 2006 revealed that the estimated cost to close the landfill had increased by $317. Additionally, the estimated remaining months to fill decreased by 27 months because of increased usage in the landfill due to increased production rates at the Canton mill. The Company has recorded expenses of $92 and $191 in the three-month period and nine-month period ended September 30, 2006, and $26 and $77 in the three-month period and nine-month period ended September 30, 2005 respectively, related to the closure of this landfill.

(8) Other Matters

Flood Losses and Government Grants

In 2004, the Company experienced significant losses related to floods caused by Hurricanes Frances and Ivan. Property damage losses and related repairs and maintenance from these two floods through December 31, 2005 were $25,124. No additional expenses were recorded during the nine-month period ended September 30, 2006 and all recorded insurance recoveries had been collected.

In the wake of these events, the Company was awarded three grants for repairs and maintenance of the wastewater treatment facility located within the Canton mill that is also used by the Town of Canton. The first grant was awarded by FEMA for repairs incurred from the two floods. This grant was in the amount of $1,479, all of which

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was received in the first two quarters of 2005. The second grant was awarded by the State of North Carolina in the amount of $4,500 to be paid on a reimbursement basis. This grant provides for flood control repairs and improvements to the wastewater treatment facilities. The third grant for $485 was awarded under the U.S. Environmental Protection Agency that also provided for flood control repairs and improvements to the wastewater treatment facilities to be paid on a reimbursement basis. The Company has recognized these grants to the extent they have incurred costs from repairs and improvements resulting in the recognition of government grant income of $369 and $1,554 in the three-month period and nine-month period ended September 30, 2006, respectively. The Company recorded $4,910 as government grant income in the year ended December 31, 2005. Through September 30, 2006, the Company has recognized as income all of the government grants awarded.

Due Diligence Costs

The Company incurred certain due diligence costs including external legal and accounting fees associated with a potential transaction. During the three-month period ended September 30, 2006, the Company changed its estimate regarding the potential outcome of this transaction; therefore, costs and fees in the amount of $2,096 were recorded in selling, general and administrative expenses.

(9) Segment Information

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

Blue Ridge Paper Products Inc.

Three Months Ended September 30, 2006 and 2005

(Dollars in Thousands)

		Paper		Packaging		Corporate		Total
Net sales	2006	$	60,299	$	84,943	—		$	145,242
	2005	54,299		75,482		—		129,781
Operating profit (loss)	2006	5,483		5,185		(8,806	)	1,862
	2005	5,347		2,676		(10,167	)	(2,144		)
Depreciation and amortization	2006	2,900		860		28		3,788
	2005	2,906		843		427		4,176
Total assets	2006	202,833		91,044		17,094		310,971
	2005	201,984		95,653		15,006		312,643
Capital expenditures	2006	2,925		888		—		3,813
	2005	6,917		1,088		126		8,131

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Blue Ridge Paper Products Inc.

Nine Months Ended September 30, 2006 and 2005

(Dollars in Thousands)

		Paper		Packaging		Corporate		Total
Net sales	2006	$	177,033	$	253,172	—		$	430,205
	2005	158,091		225,443		—		383,534
Operating profit (loss)	2006	16,342		15,549		(22,414	)	9,477
	2005	14,793		10,930		(24,537	)	1,186
Depreciation and amortization	2006	8,429		2,569		114		11,112
	2005	8,997		2,489		1,289		12,775
Total assets	2006	202,833		91,044		17,094		310,971
	2005	201,984		95,653		15,006		312,643
Capital expenditures	2006	6,973		2,053		40		9,066
	2005	10,200		2,413		126		12,739

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This filing includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement 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-looking statements are not guarantees of future performance. Forward-looking statements are based on management’s expectations that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, that may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements. Given these risks and uncertainties, actual future results may be materially different from what we plan or expect. We will not update these forward-looking statements even if our situation changes in the future.

QUARTERLY OVERVIEW; COMPARISON TO IMMEDIATELY PRECEDING QUARTER

We reported a net loss of $2.8 million for the third quarter ended September 30, 2006. This compared to a net income of $2.0 million for the second quarter ended June 30, 2006 and a net loss of $5.4 million for the third quarter ended September 30, 2005. Total net sales for the third quarter ended September 30, 2006 were $145.2 million compared to $144.9 million and $129.8 million in the second quarter ended June 30, 2006 and third quarter ended September 30, 2005, respectively.

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Our net loss was attributable to an extended scheduled mill maintenance outage and $2.1 million in charges related to an acquisition opportunity that did not materialize. We continued to see significantly improved year-over-year financial performance resulting from strong productivity and improving market conditions.

Uncoated paper shipments totaled 70,829 tons in the third quarter ended September 30, 2006 compared to 70,220 tons in the second quarter ended June 30, 2006. Average pricing in the third quarter ended September 30, 2006 increased 2.2% compared to the second quarter ended June 30, 2006 and 16.0% when compared to the third quarter ended September 30, 2005. Price increases announced in the first quarter ended March 31, 2006 have been substantially implemented.

Packaging segment shipments for the quarter ended September 30, 2006 decreased 3.4% when compared to the second quarter ended June 30, 2006. Shipments decreased compared to the second quarter ended June 30, 2006 due primarily to the seasonality impact from school milk demand. Pricing for the packaging segment for the third quarter ended September 30, 2006 increased 3.0% over the second quarter ended June 30, 2006. During the third quarter ended September 30, 2006, the Company signed a multi-year contract to supply gable-top cartons to a new major premium juice customer.

Raw material costs increased in the third quarter ended September 30, 2006 compared to the second quarter ended June 30, 2006 by approximately $0.7 million. This increase was primarily due to increases in the costs of purchased pulp, wood chips and polyethylene. Recent decreases in energy prices have resulted in lower raw material and transportation costs going into the fourth quarter.

The Canton mill conducted its annual planned hardwood pulp mill maintenance outage in the third quarter ended September 30, 2006. A corresponding planned annual outage was conducted in the pine pulp mill in the second quarter ended June 30, 2006. The cost of the third quarter outage was approximately $3.7 million greater than the second quarter outage due primarily to additional planned work in the recovery boiler area and a planned maintenance outage of 3.5 days on the paperboard machine, both of which did not occur during the second quarter outage.

Through September 30, 2006, we incurred due diligence and legal fees associated with a potential growth opportunity totaling $2.1 million. The transaction was not consummated; therefore, these costs were expensed in the third quarter ended September 30, 2006.

Results of Operations

The following table sets forth certain sales and operating data for our business segments for the periods indicated:

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(Dollars in millions, except per ton amounts)

	Three-Month Period						Nine-Month Period
	Ended September 30,						Ended September 30,
	2006			2005			2006			2005
Net sales:
Packaging	$	84.9		$	75.5		$	253.2		$	225.4
Paper	60.3			54.3			177.0			158.1
Total	$	145.2		$	129.8		$	430.2		$	383.5
Segments’ operating profit:
Packaging	$	5.2		$	2.7		$	15.6		$	10.9
Paper	5.5			5.3			16.3			14.8
Total segments’ operating profit, excluding corporate expenses	$	10.7		$	8.0		$	31.9		$	25.7
Corporate expenses:	8.8			10.1			22.4			24.5
Total operating profit (loss)	$	1.9		$	(2.1	)	$	9.5		$	1.2
Percentage of net sales:
Packaging	58.5		%	58.2		%	58.9		%	58.8%
Paper	41.5		%	41.8		%	41.1		%	41.2		%
Total	100.0		%	100.0		%	100.0		%	100.0		%
Segments’ operating margin:
Packaging segment	6.1		%	3.6		%	6.2		%	4.8		%
Paper segment	9.1		%	9.8		%	9.2		%	9.4		%
Average margin	7.4		%	6.2		%	7.4		%	6.7		%
Shipments (tons):
Packaging segment	69,681			64,404			210,414			194,538
Paper segment	73,737			77,455			226,471			223,636
Total	143,418			141,859			436,885			418,174
Average price ($ per ton):
Packaging segment	$	1,218		$	1,172		$	1,203		$	1,159
Paper segment	818			701			782			707
Average price	$	1,012		$	915		$	985		$	917

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005

Net Sales.   Net sales for the three-month period ended September 30, 2006, or the 2006 three-month period, increased $15.4 million or 11.9% to $145.2 million compared to $129.8 million for the three-month period ended September 30, 2005, or the 2005 three-month period.

Net sales for our packaging segment for the 2006 three-month period increased $9.4 million or 12.5% to $84.9 million compared to $75.5 million for the 2005 three-month period.  For the 2006 three-month period, our packaging segment sold 69,681 tons of coated and converted paperboard products at an average price of $1,218 per ton, compared to 64,404 tons sold for the 2005 three-month period at an average price of $1,172 per ton.  The increase in packaging segment sales is attributable to an 8.2% increase in volume shipped and a 3.9% increase in average revenue per ton shipped.

Net sales for our paper segment for the 2006 three-month period increased $6.0 million or 11.0% to $60.3 million compared to $54.3 million in the 2005 three-month period.  Net sales volume in our paper segment declined 3,718 tons to 73,737 tons shipped in the 2006 three-month period as compared to 77,455 tons shipped

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in the 2005 three-month period.  Most of the net sales volume decline was related to reduced sales of non-converted bleached board, which resulted from increased transfers to our packaging division for further converting into value-added products.  All of the increase in revenue for our paper segment in the 2006 three-month period reflects improved pricing for our products.  Average pricing in our paper segment improved to $818 per ton shipped in the 2006 three-month period as compared to $701 per ton shipped in the 2005 three-month period.

Operating Profit.  Total segments’ operating profit increased $2.7 million to $10.7 million in the 2006 three-month period compared to an operating profit of $8.0 million for the 2005 three-month period. As a percentage of sales, total segments’ operating profit increased to 7.4% in the 2006 three-month period from 6.2% in the 2005 three-month period.

The following table sets forth significant items that increased (decreased) total segments’ operating profit:

	Three-Month Period Ended September 30, 2006	Three-Month Period Ended September 30, 2005	Change
Segments’ Operating Profit	$10.7	$8.0	$2.7

Product pricing improvement	$	14.9
Productivity improvements	1.9
Outbound transportation costs	(0.5		)
Sales of excess NOx credits in 2005	(1.3		)
Increased energy costs	(1.3		)
Plastic resin costs used at Waynesville coating facility	(2.2		)
Increased chemical and other raw material costs	(2.8		)
Increased wage and benefit costs	(3.0		)
Additional costs to execute semi-annual pulp mill maintenance outage	(2.7		)
Other miscellaneous and offsetting items	(0.3		)
Total	$	2.7

Operating profit for our packaging segment increased $2.5 million or 92.6% in the 2006 three-month period to $5.2 million or 6.1% of packaging segment sales, compared to $2.7 million or 3.6% of packaging segment sales for the 2005 three-month period.  The increase in operating profit for our packaging segment was due primarily to: (i) increased pricing on coated board sales of $1.7 million and on converted carton sales of $5.0 million; (ii) improved productivity of approximately $0.7 million; and (iii) other miscellaneous and offsetting variances totaling $0.3 million.  The increase in packaging segment operating profit in the 2006 three-month period was partially offset by: (i) a $2.2 million increase in purchase costs of plastic/resin, our primary raw material used at our Waynesville converting facility; (ii) a $1.5 million increase in costs of internally produced board received

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from the Canton mill and passed on to the packaging division through interdivisional transfer costs; (iii) an increase of $0.2 million in energy costs; (iv) an increase of $0.8 million in costs incurred for wages and benefits; and (v) increased costs for packing materials and outbound transportation costs of $0.5 million.

Operating profit for our paper segment increased $0.2 million in the 2006 three-month period to $5.5 million or 9.1% of paper segment sales, compared to an operating profit of $5.3 million or 9.8% of paper segment sales for the 2005 three-month period.  The increase in operating profit for our paper segment was due primarily to: (i) increased pricing on uncoated paper sales of $8.0 million and on uncoated board sales of $0.2 million; (ii) improved productivity of approximately $1.2 million; and (iii) increased transfer revenue for the rawstock sent to our Waynesville facility of $1.5 million.  The increase in paper segment operating profit in the 2006 three-month period was partially offset by: (i) a $1.1 million increase in purchase costs of fuels and electricity consumed at our Canton, North Carolina mill; (ii) a $2.5 million increase in the cost of wood chips, chemicals and other primary raw material used at our Canton, North Carolina mill; (iii) the sale of excess NOx credits of approximately $1.3 million in the 2005 three-month period; (iv) a $2.2 million increase in costs incurred for wages and benefits; (v) a $0.3 million increase in outbound transportation costs due primarily to higher fuel costs; (vi) increased costs of $2.7 million to execute our fall pulp mill maintenance outage due to additional scope of work as compared to the semi-annual outage we completed in the 2005 three-month period; and (vii) other miscellaneous and offsetting variances totaling $0.6 million.

Selling, General and Administrative Expenses.  Total selling, general and administrative expenses increased $2.7 million or 44.3% to $8.8 million in the 2006 three-month period compared to $6.1 million for the 2005 three-month period.  The increase in selling, general and administrative expenses for the 2006 three-month period was attributable to increased salary payroll costs of approximately $0.6 million and the incurrence of $2.1 million in due diligence expense in the 2006 three-month period.  Through September 30, 2006, the Company incurred due diligence and legal fees associated with a potential growth opportunity totaling $2.1 million.  The transaction was not consummated; therefore, these costs were expensed in the quarter ended September 30, 2006.

Loss on Litigation.  There was no expense recognized for loss on litigation in the 2006 three-month period; however, we did establish a $2.0 million liability in the 2005 three-month period to recognize the potential liability from a class action lawsuit that was filed against us on behalf of certain owners of property along the Pigeon River in Cocke County, Tennessee.  The demand for damages by the class participants totaled approximately $22.5 million.  On August 17, 2005, a jury in the Circuit Court of Cocke County, Tennessee ruled in favor of the Plaintiffs awarding $2.0 million for nuisance damages with no punitive damages being awarded.  We have appealed this verdict to the Tennessee appellate court.

Depreciation and Amortization Expense (non-operations).  Depreciation and amortization expenses unrelated to manufacturing decreased $0.4 million or 100% to $0.0 million in the 2006 three-month compared to $0.4 million in the 2005 three-month period.  The drop in depreciation expense relates primarily to the completion of depreciation on system-related assets purchased in prior years.

ESOP Expense.  ESOP expense decreased $1.6 million or 100.0% to $0.0 million in 2006 three-month period compared to $1.6 million in the 2005 three-month period.  The ESOP expense is a non-cash expense, which results from the annual transfer of shares into the ESOP.  The amount of the ESOP expense varies with the value of the shares of our parent’s common stock, which is determined by an independent valuation specialist at the end of each year.  The decrease in the 2006 three-month period reflects the decline in annual valuation of the shares of our Parent’s common stock to $6.20 per share in fiscal year 2006 compared to $9.06 in fiscal year 2005 as well as the completion of the seven-year share distribution into the ESOP, which began in May 1999

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and ended in May 2006.  Going forward, one more valuation adjustment will be recorded in the fourth quarter of 2006.  Following that adjustment, we should no longer incur ESOP expense.

Interest and Amortization Expenses.   Interest and amortization expenses increased $0.3 million to $5.0 million for the 2006 three-month period compared to $4.7 million for 2005 three-month period.  This increase is due primarily to an increased borrowing level and increased interest rate on our revolving line of credit as well as increased amounts outstanding on our Parent PIK Senior Subordinated Note.

Government Grant Income.  Flood prevention activities continue at our Canton, North Carolina mill following the flood damage incurred at the mill in 2004.  In the 2006 three-month period, we recognized government grant income of $0.4 million as compared to $1.4 million in the 2005 period.  The grant is being used to repair and more permanently protect our wastewater facility, which also serves the Town of Canton, North Carolina.  As of the end of the 2006 three-month period, we have recorded income for all grants awarded to date.

Income Tax Expense.  There was no income tax expense recorded in either the 2006 three-month period or 2005 three-month period.  This was due to our year-to-date net losses as of September 30, 2006 and 2005.

NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005

Net Sales.  Net sales for the nine months ended September 30, 2006, or the 2006 nine-month period, increased to $430.2 million or 12.2% compared to $383.5 million for the nine months ended September 30, 2005, or the 2005 nine-month period.  This increase in total revenue is attributable to an increase in the average weighted revenue per ton shipped to $985 per ton in the 2006 nine-month period from $917 per ton in the 2005 nine-month period as well as an increase in the total volume of products shipped.  The increase in average revenue per ton sold resulted primarily from continued improvement pricing in all four of our major grade lines: paper, uncoated board, coated board and cartons.  The increase in average weighted revenue per unit sold resulted in an approximate $29.7 million increase in total revenue in the 2006 nine-month period as compared to the 2005 nine-month period.  Total sales volume increased by 18,711 tons or 4.5% to 436,885 tons in the 2006 nine-month period compared to 418,174 tons for the 2005 nine-month period.

Net sales for our packaging segment for the 2006 nine-month period increased $27.8 million or 12.3% to $253.2 million compared to $225.4 million for the 2005 nine-month period.  The increase in net sales is attributable to: (i) an average net sales price per ton increase of 9.4% for cartons and 5.9% for non-converted coated paperboard in the 2006 nine-month period compared to the 2005 nine-month period; and (ii) a 24.9% increase in volume of our non-converted coated paperboard shipments in the 2006 nine-month period as compared to the 2005 nine-month period.  The increase in net sales was partially offset by a decrease in shipment volume for our converted cartons of 7.0% in the 2006 nine-month period as compared to the 2005 nine-month period.

Sales for our paper segment for the 2006 nine-month period have increased by $18.9 million or 12.0% to $177.0 million compared to $158.1 million for the 2005 nine-month period.  This increase was attributable to an improvement in our average net sales price per ton for our products sold as well as increased shipment volume.  Our average net sales price per ton increased 10.7% for our paper grades and 6.6% for uncoated paperboard in the 2006 nine-month period as compared to the 2005 nine-month period.  Total segment outside shipment volume increased 2,835 tons or 1.3% to 226,471 tons in the 2006 nine-month period as compared to 223,636 tons in the 2005 nine-month period.  The increase in the paper segment shipment volume reflects improved productivity at our Canton, North Carolina manufacturing facility.  This improved productivity also enabled us to increase transfers of uncoated board to our packaging division for further value-added converting.

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Operating Profit.  Total segments’ operating profit increased $6.2 million to $31.9 million in the 2006 nine-month period compared to an operating profit of $25.7 million for the 2005 nine-month period. As a percentage of sales, total segments’ operating profit increased to 7.4% in the 2006 nine-month period from 6.7% in the 2005 nine-month period.

The following table sets forth significant items that increased (decreased) total segments’ operating profit:

	Nine-Month Period Ended September 30, 2006	Nine-Month Period Ended September 30, 2005	Change
Segments’ Operating Profit	$31.9	$25.7	$6.2

Product pricing improvement	$	35.4
Net flood impact in 2005	2.0
Productivity improvements	4.5
Increased wage and benefit costs	(6.9		)
Outbound transportation costs	(1.5		)
Increased wood and purchased fiber costs	(5.1		)
Major raw material costs (plastic resin, chemicals and packing materials)	(10.2		)
Additional costs to execute semi-annual pulp mill outages	(2.3		)
Change in inventory valuation	(1.3		)
Increased energy costs	(4.6		)
Sales of excess NOx credits in 2005	(2.2		)
Other miscellaneous and offsetting items	(1.6		)
Total	$	6.2

Operating profit for our packaging segment in the 2006 nine-month period increased $4.7 million to $15.6 million compared to $10.9 million for the 2005 nine-month period.  The increase was primarily due to increases in the average net selling prices for coated paperboard and carton products of 9.4% and 5.9%, respectively, compared to the 2005 nine-month period, adding $18.7 million to revenues and operating profit for the 2006 nine-month period as compared to the 2005 nine-month period.  In addition, other miscellaneous and offsetting items totaling $0.3 million added to operating profit for the 2006 nine-month period.  The increase in packaging segment operating profit in the 2006 nine-month period was partially offset by: (i) a $3.7 million increase in purchase costs of plastic/resin, our primary raw material used at our Waynesville converting facility; (ii) reduced productivity for the segment of approximately $0.2 million and centered in our carton manufacturing volume, reflecting lower converted carton demand; (iii) a $3.7 million increase in our wage and benefits costs; (iv) increased transfer cost of rawstock paperboard of $4.3 million; (v) increased energy costs of $0.6 million;

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(vi) impact of change in inventory valuation in the 2005 nine-month period of $0.9 million; (vii) a $0.1 million increase in outbound transportation costs due primarily to higher fuel costs; and (viii) increased costs for miscellaneous raw materials of $0.8 million.

Operating profit for our paper segment increased $1.5 million in the 2006 nine-month period to $16.3 million as compared to $14.8 million for the 2005 nine-month period.  The increase in operating profit for our paper segment was due primarily to: (i) increased pricing on paper sales of $16.2 million and on uncoated board sales of $0.5 million; (ii) an approximate $4.7 million from improved productivity; (iii) increased transfer cost for the rawstock sent to our Waynesville facility of $4.3 million; and (iv) flood losses, net of insurance proceeds, of $2.0 million incurred in the 2005 nine-month period.  The increase in paper segment operating profit in the 2006 nine-month period was partially offset by: (i) a $4.0 million increase in purchase costs of fuels and electricity consumed at our Canton, North Carolina mill; (ii) a $1.4 million increase in outbound transportation costs due primarily to higher fuel costs; (iii) a $4.3 million increase in the cost of wood chips, our primary raw material at our Canton, North Carolina mill; (iv) an approximate $6.5 million increase in cost of chemicals and packing materials utilized in our manufacturing process; (v) increased wage and benefits costs of $3.2 million; (vi) the sale of excess NOx credits of approximately $2.2 million in the 2005 nine-month period; (vii) impact of change in inventory valuation in the 2005 nine-month period of $0.4 million; (viii) increased costs of $2.3 million to execute our two semi-annual pulp mill maintenance outages in the 2006 nine-month period due to additional scope of work as compared to the outages conducted in the 2005 nine-month period;  and (ix) other miscellaneous and offsetting variances totaling $1.9 million.

Selling, General and Administrative Expenses.   Total selling, general and administrative expenses increased $4.3 million or 26.2% to $20.7 million in the 2006 nine-month period compared to $16.4 million for the 2005 nine-month period.  The increase in selling, general and administrative expenses for the 2006 nine-month period was primarily attributable to: (i) reduction of a $0.5 million environmental reserve in the 2005 nine-month period; (ii) increased salary payroll costs of approximately $0.8 million primarily related to merit adjustments and management incentive payments;  (iii) a $0.7 million reversal in the 2005 nine-month period of severance reserves related to the completed closure of our Fort Worth, Texas DairyPak facility and other miscellaneous severance transactions; (iv) the incurrence of $2.1 million in due diligence expenses in 2006; and (v) other miscellaneous and offsetting variance totaling $0.2 million.

Loss on Litigation.  There was no expense recognized for loss on litigation in the 2006 nine-month period; however, we did establish a $2.0 million liability in the 2005 nine-month period to recognize the potential liability from a class action lawsuit that was filed against us on behalf of certain owners of property along the Pigeon River in Cocke County, Tennessee.  The demand for damages by the class participants totaled approximately $22.5 million.  On August 17, 2005, a jury in the Circuit Court of Cocke County, Tennessee ruled in favor of the Plaintiffs awarding $2.0 million for nuisance damages with no punitive damages being awarded.  We have appealed this verdict to the Tennessee appellate court.

Depreciation and Amortization Expense (non-operations).  Depreciation and amortization expenses unrelated to manufacturing decreased $1.2 million to $0.1 million in the 2006 nine-month compared to $1.3 million in the 2005 nine-month period.  The drop in depreciation expense relates primarily to the completion of depreciation on system-related assets purchased in prior years.

ESOP Expense.  ESOP expense decreased $3.3 million or 67.3% to $1.6 million in 2006 nine-month period compared to $4.9 million in the 2005 nine-month period.  The ESOP expense is a non-cash expense, which results from the annual transfer of shares into the ESOP.  The amount of the ESOP expense varies with the value of the shares of our Parent’s common stock, which is determined by an independent valuation specialist at the end of each year.  The decrease in the 2006 nine-month period reflects the decline in annual valuation of the

21

shares of our Parent’s common stock to $6.20 per share in fiscal year 2006 compared to $9.06 in fiscal year 2005 as well as the completion of the seven-year share distribution into the ESOP, which began in May 1999 and ended in May 2006.  Going forward, one more valuation adjustment will be recorded in the fourth quarter of 2006.  Following that adjustment, we should no longer incur ESOP expense.

Interest and Amortization Expenses.   Interest and amortization expenses increased $0.7 million to $14.7 million for the 2006 nine-month period compared to $14.0 million for the 2005 nine-month period.  This increase is due primarily to an increased borrowing level and increased interest rate on our revolving line of credit as well as increased amounts outstanding on our Parent PIK Senior Subordinated Note.

Government Grant Income.  Flood prevention activities continue at our Canton, North Carolina mill following the flood damage incurred at the mill in the 2004.  In the 2006 nine-month period, we recognized government grant income totaling approximately $1.6 million compared to $3.7 million in the 2005 nine-month period.  The grants are being used to repair and more permanently protect our wastewater treatment facility, which also serves the Town of Canton, North Carolina.  As of the end of the 2006 nine-month period, we have recorded income for all grants awarded to date.

Income Tax Expense.  There was no income tax expense recorded in either the 2006 nine-month period or 2005 nine-month period since we had a year-to-date net loss in both of the periods.

LIQUIDITY AND CAPITAL RESOURCES

Our principal liquidity requirements are to service our debt and fund our operations and capital expenditure needs.  Our total senior debt, defined as total debt less the Parent PIK Senior Subordinated Note, at September 30, 2006 was $162.7 million.  Subject to our performance, which if adversely affected could affect the availability of funds, we expect to be able to meet our liquidity requirements for the remainder of fiscal year 2006 through cash provided by operations and through borrowings available under our working capital facility.  We cannot assure you, however, that this will be the case.  In December 2003, we issued $125.0 million of the Notes in a private offering.  Proceeds from issuance of the Notes were used to repay our Term Loans A and B and our then existing revolving credit facility under the 1999 credit agreement.  In addition, we paid $7.0 million on the Parent PIK Subordinated Note.  We entered into a $45.0 million revolving credit facility in December 2003.  On September 15, 2004, the credit agreement was amended to increase the facility from $45.0 million to $50.0 million on a permanent basis.  On August 5, 2005, the credit agreement was amended to include specified foreign account debtors as eligible accounts in determining borrowing base availability.  On March 15, 2006, the revolving credit agreement was amended on a permanent basis to change the minimum borrowing availability threshold from $7.5 million to $5.0 million.  On June 9, 2006, the credit agreement was further amended to reduce the interest and applicable margins by 50 to 75 basis points depending on level of borrowing.  The maximum borrowing availability at September 30, 2006 and December 31, 2005 was $8.4 million and $5.5 million, respectively.  Adding the maximum borrowing availability to the cash on hand increases our total liquidity to $12.2 million and $7.7 million at September 30, 2006 and December 31, 2005, respectively.  The revolving credit facility contains covenant restrictions, which require covenant availability to exceed $5.0 million (as amended March 15, 2006).  If the covenant availability does not meet the required minimum availability, a fixed charge coverage ratio covenant of 1.1 to 1.0 will be triggered.  As of September 30, 2006, we had a covenant availability of $14.8 million, which is $9.8 million in excess of the required minimum of $5.0 million.  This availability includes $1.4 million of suppressed availability.  Covenant availability is defined as borrowing base less outstanding revolver and letters of credit.

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Summary of Cash Flow ($ in millions):

	Nine Months Ended September 30,
	2006			2005
Net cash provided by operating activities	$	12.4		$	8.5
Net cash used in investing activities	(9.1		)	(12.7		)
Net cash provided by (used in) financing activities	(1.7		)	3.5
Net increase (decrease) in cash	$	1.6		$	(0.7	)
Cash balance	$	3.8		$	1.8

The cash provided by operations was $12.4 million for the 2006 nine-month period.  The improvement in cash provided by operations when compared to the 2005 nine-month period was attributable to the decreased loss discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as changes in working capital as reflected in the condensed consolidated statements of cash flows included elsewhere in this quarterly report on Form 10-Q.

The cash used in investing activities for the 2006 nine-month period was $9.1 million.  Capital spending for the 2006 nine-month period was $9.1 million of which $1.6 million was reimbursed by government grants.  For the fiscal year ending December 31, 2006, we currently estimate that our capital spending will be approximately $12.2 million of which $1.6 million will be offset by government grants.

Net cash used in financing activities was $1.7 million for the 2006 nine-month period, which is primarily attributable to net borrowings on our revolving line of credit.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks, including interest rate risk.  Risk exposure relating to this market risk is summarized below.  This information should be read in connection with the condensed consolidated financial statements and the related notes thereto included elsewhere in this quarterly report on Form 10-Q.

We manage interest cost using a combination of fixed and variable rate debt.  As of September 30, 2006, we have $125.0 million of Notes outstanding at a 9.5% fixed rate of interest and a $50.0 million working capital credit facility at variable rates of interest.  As of September 30, 2006, approximately $35.9 million was outstanding under our working capital credit facility consisting of short-term interest rates of 0.25% over Applicable Revolver Index Margin and 2.00% over Applicable Revolver Libor Margin, as defined in the Credit Agreement dated as of December 17, 2003.  Our working capital facility offers two options for interest rates:  Applicable Revolver Libor Margin ranging from 2.25% - 2.75% or Applicable Revolver Index Margin ranging from 0.50% - 1.00%.  These rates were amended June 9, 2006 to reduce interest of Applicable Revolver Libor Margin to 1.50% - 2.00% and Applicable Revolver Index Margin to 0.00% - 0.25%.  The rate is based on revolver availability.  At the end of September 2006, we were at the high point of the interest rate grid for Libor and Index Margins.  In addition, as of September 30, 2006, we have a $0.7 million mortgage note with a maximum interest rate of 5.5% and a remaining duration of four years.

ITEM 4. CONTROLS AND PROCEDURES

(A) Evaluation of Disclosure Controls and Procedures

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Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report.  Our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective in ensuring that all material information required to be disclosed by the Company in this quarterly report on Form 10-Q was recorded, processed, summarized, reported and properly disclosed in the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information was accumulated and communicated to our management (including our Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company is in compliance with Rule 13a-15(e) of the Exchange Act.

(B) Changes in Internal Controls Over Financial Reporting

There have been no significant changes in our internal controls over financial reporting during the three months ended September 30, 2006 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1A.  RISK FACTORS

The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 have not materially changed other than as disclosed in our quarterly report on Form 10-Q ended June 30, 2006.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

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

10.1 United Steelworkers International Union Labor Agreement with 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 the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BLUE RIDGE PAPER PRODUCTS INC.

Date:  November 9, 2006

/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 PRODUCTS INC.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. Section 232.102(d))

The following exhibits are filed as part of this report:

10.1United Steelworkers International Union Labor Agreement with Blue Ridge Paper Products Inc.

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

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

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EX-10.1

Exhibit 10.1

LABOR AGREEMENT

BETWEEN

BLUE RIDGE PAPER PRODUCTS INCORPORATED

AND

UNITED STEEL, PAPER AND FORESTRY, RUBBER,
MANUFACTURING, ENERGY, ALLIED INDUSTRIAL AND SERVICE
WORKERS INTERNATIONAL UNION

PREAMBLE

THIS AGREEMENT is made and entered into this 14th day of May 2006, by and between Blue Ridge Paper Products Incorporated (the “Company”), for its plants or mills located at Canton, North Carolina; Waynesville, North Carolina; Athens, Georgia; Clinton, Iowa, and Olmsted Falls, Ohio, hereinafter referred to as the “Company”, and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW) AFL-CIO, CLC, on behalf of Local 2-0507; Local 3-0794; Local 7-0761; and Local 5-0673, both hereafter referred to as the “Union.”

ARTICLE I
RECOGNITION

The Company recognizes the Union as the sole and exclusive bargaining representative for the purposes of collective bargaining with respect to rates of pay, wages, hours of employment, and other conditions of employment for all production and maintenance employees of the Company’s facilities as described in the Preamble, but excluding all clerical employees, professional employees, guards and supervisors as defined under the National Labor Relations Act as amended.

ARTICLE II
GENERAL PURPOSE

A.The general purpose of this Agreement is in the mutual interest of the Company, its staff employees and the employees represented by the Union, to provide for the uninterrupted operation of the plant under methods which will further to the fullest extent possible the safety, welfare, and health of the employees, economy of operation, quality and quantity of output, cleanliness and maintenance of the plant, and the protection of the property.  The Union recognizes its

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responsibilities as the exclusive bargaining agent of the employees covered by the Agreement, and realizes that in order to provide maximum opportunities for continuing employment, good working conditions, and fair and equitable wages, the Company must be in a strong competitive position.

B.Therefore, it shall be the duty of the Company, its staff employees, and the employees represented by the Union, to cooperate fully, individually and collectively, in this regard.  Further insure this ESOP be accepted as a part of this Agreement by reference.  This clause shall not be used to discriminate against any employee’s rights under this Agreement.

ARTICLE III
EQUAL EMPLOYMENT OPPORTUNITY

A.The Company and the Union agree that all employees shall have equal employment opportunities regardless of race, color, religion, sex, national origin, and within the framework of federal and state laws regarding age discrimination.

B.The Company and the Union shall observe the rights of the handicapped as provided in the Rehabilitation Act of 1973 and the rights of disabled veterans and veterans of the Vietnam era as provided in the Vietnam Era Veterans’ Readjustment Assistance Act.

C.Wherever used in this Agreement, the masculine personal pronoun and/or the feminine personal pronoun shall have equal application to the other.

ARTICLE IV
LENGTH OF AGREEMENT

THIS AGREEMENT shall remain in full force and effect from May 14, 2006 through May 13, 2009, and from year to year thereafter, unless terminated in accordance with the provisions outlined below. The terms of this Agreement will not be altered, varied, or amended except by mutual agreement in writing and signed by the parties hereto.

ARTICLE V
CHANGES OR MODIFICATION

In the event that either party desires to change any provisions of this Agreement, it shall give written notice of such desire by certified mail to the other party not more than ninety (90) days nor less than sixty (60) days in advance of the anniversary date or May 14, 2009.  The giving of notice, as provided above, shall constitute an obligation upon both parties to negotiate in good faith all questions at issue with the intent of reaching a written agreement prior to the anniversary date.

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ARTICLE VI
TERMINATION OF AGREEMENT

A.At any time after May 14, 2009, or any anniversary date thereafter, if no agreement on the questions at issue has been reached, either party may give written notice to the other party of intent to terminate the Agreement in not less then ten (10) days.

All provisions of the Agreement shall remain in full force and effect until the specified time has elapsed.  During this period, attempts to reach agreement shall be continued.

B.If the parties have failed to resolve their differences before the specified time has elapsed, all obligations under this Agreement are automatically cancelled.

ARTICLE VII
NO INTERRUPTION OF PRODUCTION

There shall be no lockouts by the Company, or strikes, slowdowns or work stoppage of any kind by the Union, its representatives, agents or members during the duration of this Agreement.

ARTICLE VIII
SENIORITY

The principles of seniority shall govern in promotions, layoff, demotions, and filling of vacancies, transfers and recalls as hereinafter provided.

A.An employee shall be considered probationary for the first sixty- (60) calendar days, after which he shall be considered a regular employee and his seniority shall date from the most recent date of hire.  During the probationary period, the Company shall have the right to transfer or discharge such employee and any such action shall not be subject to the grievance and arbitration procedure.

B.For the purpose of this Agreement, employees shall have four (4) types of seniority:  Plant Seniority; Department Seniority; Group Seniority and Job Seniority.  The type of seniority used at each location and the method of application shall be governed by each Local supplement that is a part of this agreement.  Such supplement shall apply to each location named in each supplement.   Should a question of Local supplement application occur and it cannot be resolved by the location, then this Master Agreement shall apply.  Seniority as it pertains to employees within the bargaining unit shall retain the same application as is accrued with Champion International Corporation

C.Seniority shall be broken and employment terminated for the following reasons:

1.Voluntary quit.

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2.Discharge for just cause.

3.Failure to return from a leave of absence as of the first scheduled workday following the termination date of the leave.

4.Absent from work for three (3) consecutive scheduled workdays without proper notification to the Company.  Excluded in the computation of “days” in this sentence are Saturdays, Sundays, and Holidays.

5.Employment on another job while on a leave of absence except as provided in Article XX, Section B & C.

6.Failure to notify the Company of intent to return to work within seven (7) days following receipt of certified letter sent to the employee’s address as carried on the Company’s records and failure to return to work from layoff within ten (10) days following receipt of such letter.

7.Exceptions may be made to 3, 4 and 6, if a justifiable reason is given.

D.PROMOTIONS IN LINES OF PROGRESSION

When promotions are to be made at any location, the language as applied in each Local Supplement shall be the controlling language.

E.JOB BIDDING

Job bidding shall be applied by using the employee’s seniority as developed in each Local Supplement.

F.TEMPORARY VACANCIES

Temporary vacancies shall be filled in accordance with the method of application developed in each Local Supplement.

G.DEMOTIONS AND LAYOFFS

Demotions and layoffs shall follow the reverse order of promotions.  The method of administering this seniority provision for demotions and layoffs shall be developed in each Local Supplement.  However, in any location probationary employees shall be laid off first.  Layoffs from the plant shall be by plant seniority.  Any employee’s job classification affected by a layoff shall be given an opportunity to receive at least thirty (30) days training prior to being reduced from their line of progression, job, group, department or the plant.

H.RECALL

Recall of laid off employees shall be in the reverse order of layoff seniority.  Employees laid off shall retain their plant seniority.

I.TRANSFERS

Transfers between lines of progression or departments shall be governed by the use of seniority application determined at each Local facility.  When a vacancy occurs, prior to hiring a new employee, incumbent employees shall be given an opportunity for transfers between locations.  The transferring employee(s) shall retain their seniority for earned vacation and pensions.  Their seniority date in the new location shall be in accordance with Section B above.  This transfer policy is attached as Appendix B.

4

ARTICLE IX
GRIEVANCES AND ARBITRATION

A.  GRIEVANCES

An earnest effort shall be made to promptly settle complaints in the following order and manner:

Step 1:  The employee and the steward shall discuss his complaint with his immediate supervisor within seven (7) days following the date the incident occurred that gave rise to the complaint; however, if the incident occurred while the employee was on an excused absence and he had no knowledge of it until his return to work, the seven (7) day period shall begin on his first scheduled work day following the return from the absence.  The employee, his shop steward, and his supervisor are encouraged to make every possible effort to settle the grievance at this stage.  The supervisor shall reply to the employee within three (3) days of the date the complaint was brought to his attention.

When the Company immediately agrees to resolve the issue, the Company will provide written documentation to the personnel department and Union in lieu of the formal grievance procedure.

Step 2:  A complaint, which is not resolved between the employee and his supervisor, must be reduced to writing and submitted to the department manager within seven (7) days of the supervisor’s reply.  The department manager and/or his designated representative and foreman involved shall meet with the employee, a local union officer and the steward within seven (7) days of the date the written grievance was received.  He shall give his written answer within three (3) days of the date of the meeting.

Step 3:  An appeal of the department manager’s answer must be made in writing to the Plant Manager or his designated representative within seven (7) days after receipt of the department manager’s answer by the local Union.  As a result of a meeting attended by the Plant Manager or his designated representative, together with the International Representative or his designated representative, a committee representing the Local Union, plus the aggrieved employee, a discussion of the appealed grievance shall take place within nine (9) days of the date the appeal notice was received.  The Plant Manager shall give his answer within ten (10) days of the date of the meeting.

A grievance not appealed from one step to the next within the specified time limits shall be considered settled on the basis of the last answer, unless such time limits are extended in writing by mutual agreement.  Failure on the part of the Company to answer within the specified time limits shall cause the grievance to be settled in favor of the grievant.

“Days” in the Grievance and Arbitration Articles shall mean calendar days, excluding Saturdays, Sundays, and Holidays.

5

B. ARBITRATION

1. An appeal of the Plant Manager’s answer must be made in writing to the Company within thirty (30) days.  An extension of this time limit will be granted up to a maximum of thirty (30) days if requested by the Union.  If written notice is given, the Company within three (3) days will ask the Federal Mediation and Conciliation Service to furnish the parties with a panel of seven (7) qualified arbitrators.  Within fourteen (14) days after receipt of the list of arbitrators, the Union and the Company shall alternately strike a name from the list.  The Union and the Company shall alternate on each case in being the first party to strike a name from the list, with the Union striking first on the first case under this new Agreement.  The person whose name remains shall be the arbitrator.  Either party has the right to reject one panel of arbitrators and another panel will be requested.

The decision of the arbitrator on all matters properly submitted, shall be final and binding on both parties to this Agreement.  Arbitrator selection shall be accomplished in accordance with the procedure in each Local Supplement if different from above.

2. The arbitrator shall have jurisdiction and authority only to interpret, apply, or determine compliance with the provisions of this Agreement, insofar as shall be necessary to the determination of grievances appealed to him.  He shall have no authority to add to, detract from, or alter in any way, the provisions of the Agreement, nor to establish or change any wage rate.  The same arbitrator shall not arbitrate multiple issues.

3. The Company and the Union shall share the expenses of the arbitrator equally.  The expenses of the witnesses shall be paid by the party requesting the witness to testify.

4. The arbitrator shall render his award within thirty (30) days after the receipt of post-hearing briefs.  If the parties do not file briefs, the arbitrator shall render his award within thirty (30) days after the close of the hearing.

ARTICLE X
VACATIONS

A. ELIGIBILITY

All hourly paid employees who have at least one (1) year seniority in the plant shall be granted a vacation with pay each calendar year.  Below are the numbers of years of continuous employment in the Company’s service that must be completed to be eligible for the number of weeks vacation indicated:

1 week vacation after           The actual number of weeks of

2 weeks vacation after         eligibility shall be those years

3 weeks vacation after         referred to in the Local Supplement

4 weeks vacation after         at each location.

5 weeks vacation after

6 weeks vacation after

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B. An employee who works less than 1,040 hours because of an illness or injury shall receive credit for forty (40) hours per week for all full weeks lost because of such illness or injury.  The accumulation of these credits will be limited to the first calendar year of each continuous period of loss of hours due to such illness or injury.

C. VACATION PAY

1. The amount of vacation pay for an eligible employee shall be calculated at the rate of pay as set forth in each Local Supplement.

2. An employee who leaves the employ of the Company and has not taken the vacation to which he is entitled, shall receive vacation pay at the time of leaving the employment of the Company.  The amount of such additional vacation pay shall be prorated according to the number of months worked.

3. An employee who enters the armed services, retires, or dies, and who has completed one (1) year or more of continuous employment in the company’s service on the last previous anniversary date of such continuous employment, shall upon termination of employment receive in addition to vacation pay as provided above, vacation pay for time worked during the calendar year in which his employment is terminated.  The amount of such additional vacation pay shall be prorated according to the number of months worked.

B. VACATION PERIODS

1. Vacations shall be taken in periods of not less than one week, except as provided by other provisions of this Agreement that applies to Incremental Vacation.

2. Vacations are not accumulative from year to year.

3. Holidays falling in a vacation period shall not extend the vacation period.

4. Vacations will be taken to coincide with the established workweek.

5. The administration of the vacation scheduling for employees shall be the process that is established by the supplemental agreements at each Local facility.

ARTICLE XI
HOLIDAYS

Each employee shall receive eight (8) hours straight time pay at his hourly rate (including any additional pay provided in each Local Supplement) for the following holidays:  Memorial Day (Federal); Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving Day, December 24, Christmas Day, December 26, a floating holiday, Good Friday, Easter Monday, New Years Day and Presidents’ Day.  These are identified maximum numbers of holidays only for purposes of this Agreement.  Each Local facility may contain a different number of holidays, but in no event will the number

7

of holidays exceed the number listed in this Article.  In addition to the number deviation of holidays contained in each Local Supplement, each Local Supplement shall determine annually which of those holidays that the location wishes to recognize as holidays for the forthcoming year.  Such identification meeting shall occur in December of the prior year.  The method of calculating the proper classified rate may vary in each Local supplement.

A. ELIGIBILITY

1. The employee must have completed his probationary period prior to such paid holiday.

2. The employee must work his last scheduled workday before the holiday and his first scheduled workday after the holiday unless absence on either or both of these days is due to a layoff, absence with employer’s permission, bona fide illness of the employee, or illness of a member of the employee’s immediate family requiring his presence.

3. If a holiday occurs during a period when an employee who otherwise is eligible for holiday pay is laid off he will receive pay for such holiday when he returns to work, provided the entire duration of his layoff has not exceeded one hundred eighty (180) days.

4. An employee who is absent because of illness or industrial injury and is otherwise eligible for holiday pay will receive holiday pay in the regular pay period covering the holiday which occurs within one hundred eighty (180) days of his last day worked.

B.An employee who is required to work on a holiday shall be paid time and one-half for all hours worked on the holiday; and in addition, if he qualifies as provided above, he shall be paid holiday pay.

C.When any specified paid holiday is celebrated within an eligible employee’s approved vacation period and he is absent from work because of such vacation, he shall be paid for such holiday in accordance with the provisions set out herein.

D.Hours not worked but paid for on a holiday shall be counted as time worked for the purpose of computing weekly overtime.

ARTICLE XII
HOURS OF WORK AND OVERTIME

A.The established workweek begins at 7:00 a.m. on Monday and shall continue for seven (7) consecutive twenty-four (24) hour periods.  The workweek shall end at 6:59 a.m. the following Monday.  The starting of the workweek for the DairyPak plants may begin at 11:00 p.m. on Sunday and shall continue for seven (7) consecutive twenty-four (24) hour periods.  The workweek shall end at 10:59 p.m. the following Sunday.

8

B.The normal schedule for shift workers, which includes a paid lunch period, is as follows:

First Shift - 6:30 a.m. to 2:30 p.m.

Second Shift - 2:30 p.m. to 10:30 p.m.

Third Shift - 10:30 p.m. to 6:30 a.m.

This shift starting and quitting time may vary between each Local Supplement.  However, in no event shall a shift begin any later then 7:00 a.m., 3:00 p.m. or 11:00 p.m. or end any later than 3:00 p.m., 11:00 p.m., or 7:00 a.m.

C.Work performed prior to or following the work shift will be paid at the appropriate overtime rate.

D.For the purpose of computing overtime, the workweek will be forty (40) hours and the workday will be eight (8) hours.

E.All time worked by an employee in excess of eight (8) hours in any twenty-four (24) work period or over forty (40) hours in any work week shall be paid at one and one-half (1 ½) times the base rate.  It is further provided that hours not worked on any of the twelve (12) holidays designated in Article XI, Section A, of this Agreement shall be considered as hours worked in computing hours in excess of forty (40) per week.

F.The normal schedule of day workers is 7:00 a.m. to 12:00 noon and 12:30 p.m. to 3:30 p.m., Monday through Friday.  The Company will arrange the schedule of day workers for five (5) consecutive days of eight (8) consecutive hours, lunch period of thirty (30) minutes excepted.  An employee on day work requested to work through meal time will continue to work until 3:30 p.m. unless the emergency work is completed and the employee requests to be released at 3:00 p.m.  Emergency work making it necessary to work through mealtime will be held to a minimum and will not be performed unless directed by the department manager.

G.The Company will post changes in work schedules for the following week not later than 12:00 noon on Thursday.

H.There shall be no duplication of overtime pay for the same hours, and payment of overtime for any hour or part of an hour on one basis shall exclude that time from consideration for payment of overtime on any other basis.

ARTICLE XIII
SHIFT DIFFERENTIAL

Employees working on the second and third shift shall be paid in accordance with the Local Supplements.  This amount may vary between each facility.

9

ARTICLE XIV
WAGES

Wage rates shall be paid in accordance with the Appendix attached as a part of the Local Supplement at each location.  The necessary increase of wages because of working in a higher classification or the lowering of wages because of working in a lower classification shall be in accordance with the methods provided in each Local Supplement.

A.Rates on existing jobs shall not be subject to adjustment throughout the life of this Agreement, except as provided in “B” below.

B.When new jobs are created, or when substantial charges are made in the duties and/or workload of existing jobs, the Company and the Union will meet within thirty (30) days from the date request is received, unless mutually agreed to extend the time limit, to negotiate the rate of the new job or the rate of the existing job that has been substantially changed.  If no agreement can be reached, the Company will set the job rate.  Such rate may be subject to negotiations at the next general contract negotiations, and any change agreed upon at that time will be made retroactive to persons then on the payroll of the Company to such time as the Company and the Union shall agree.

C.The matter of wages is not to be a subject of arbitration.

D.REPORTING TIME

1.Should an employee report for work at his regularly scheduled time, and due to unavoidable circumstances his services are not required for that workday, payment will be made for four (4) hours straight time at his regular rate of pay.  Reporting time hours paid for, but not actually worked, will be counted toward computation.

2.Reporting time pay shall not be paid if the failure to provide work is caused by storm, flood, fire, accidental breakdown, power failure, or other causes beyond the control of the Company.

ARTICLE XV
JURY DUTY

A.When a regular employee is called upon to serve on a jury, he shall receive the difference between the amount received for such jury duty and the “total rate” he would have received on his regularly scheduled job at straight time, provided the employee notifies his supervisor so necessary arrangements can be made.

B.If an employee is scheduled to work the third shift on the night before he reports for jury duty, he will be excused from work that night.  His pay will be computed as outlined above.

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C.Employees seeking reimbursement under this Article must present proof of hours served on jury duty and compensation received from the court in connection therewith.  In the event that an employee is required to appear in court as a witness or defendant, the Company will try to grant the employee time off without pay.

ARTICLE XVI
CALL-IN TIME

A.An employee who is called in to work at a time other than his regularly scheduled shift shall be guaranteed a minimum of four (4) hours at his regular straight time rate or time and one-half for hours worked, whichever is greater.  An employee so called will be allowed to leave after the work for which he was called has been completed.  However, such employee may be required to do work of an urgent nature that has developed after the Company has called him.

B.Call-in is not applicable when work is planned in advance and scheduled to commence at any specific time, if the employee is scheduled to work and is notified before leaving the mill on prior shift, or sixteen (16) hours in advance of starting time of such work.

ARTICLE XVII
DISCIPLINE AND DISCHARGE

A.If an employee is called in for a disciplinary interview he/she shall be advised he/she has the right to union representation and the employee and union representative have the right to examine the materials in their personnel files if used in the disciplinary interview.  When a statement against an employee is to be entered into the personnel record of the employee, the Company will furnish the employee and the Union with a copy.

B.An employee discharged shall have the right to request in writing the reason for such discharge.  A copy of the reason for such discharge shall be sent to the Local Union President.

C.All disciplinary action will be taken within five (5) working days (excluding Saturdays, Sundays, and holidays) from the date the Company becomes aware of the infraction.

ARTICLE XVIII
FUNERAL LEAVE

A.In the event of a death (except for the employee’s spouse, children, mother and/pr father) in the immediate family of an employee who has been in the employ of the Company for sixty (60) days or more, the employee will be compensated at a regular straight time rate of pay for his scheduled days of work

11

lost up to a maximum of three (3) consecutive calendar days.  For the computation of the three (3) days maximum pay, the two (2) days preceding the funeral, the day of the funeral, and the day after the funeral are the only days to be considered.  In the event a Location has a greater number of days then those specified, the Local Supplement for the Location will apply. The Company may require proof of death and relationship before making such payments.

B.The immediate family of the employee shall be limited to those listed in the Local Supplement at each location.

C.Time spent while on funeral leave will be counted as hours worked for computing overtime.

D.Funeral leave pay will not be payable if any of the days lost fall within an employee’s approved vacation period or leave of absence.  No allowance will be granted in the case where, because of distance or other cause, the employee does not attend the funeral of the deceased.

ARTICLE XIX
MILITARY LEAVE

A.The Company shall comply with the applicable federal and state statues pertaining to the re-employment rights of returning servicemen/women.

B.Any regular employee who is a member of a National or State Guard Unit, or any United States Armed Forces Reserve component, who is required to participate in training for thirty (30) days or less, or temporary guard duty, will be granted a leave of absence for such purpose and may receive pay from the Company as follows:

The difference between the base pay received from the government and the straight time earnings of his scheduled work hours at the mill during the period of absence, up to a maximum of ninety-six (96) hours in any one calendar year.

ARTICLE XX
LEAVE OF ABSENCE

A. GENERAL

1. Upon application by an employee and written permission from the Company, a leave of absence without pay may be granted at the discretion of the Company for a period of not more than thirty (30) calendar days without prejudice to seniority rights.

2. Extension may be granted at the discretion of the Company and seniority shall accrue during an approved extension.

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3. Upon termination of an absence from work for five (5) or more scheduled workdays because of illness, or fifteen (15) or more calendar days for any reason other than vacation, the employee will report to the Medical Center.

4. An employee granted a leave of absence would notify his department manager at least twenty-four (24) hours in advance of the scheduled starting time of his job he will be ready to resume his work.

5. Copies of all approved leaves of absence and extensions thereof shall be furnished the Union.

6. A leave of absence is not required when absence is due to occupational injury or disease.

B. ELECTED OFFICE LEAVE

1. Employees who are duly elected to a full-time elected public governmental office at the Federal, State or Local level will be granted a leave of absence up to a maximum of four (4) years  (six (6) years if elected to the United States Senate).

2. In the case of an employee elected to the State or Federal House of Representatives or Senate, a leave of absence will be granted and seniority shall accrue for the length of time the body is in full session.

3. Seniority shall not accrue during an elected office leave except as provided above.  The Company shall be notified at least two (2) weeks prior to the end of the leave of the employee’s intent to return.

C. UNION LEAVE

1. Employees may be granted a leave to work for the International Union and employees to work for the Local Union, provided the request is made in writing by the Union and approved by the Company. Such leave shall have a maximum of two (2) years.  Extensions may be granted at the discretion of the Company.

2. Seniority shall accrue during a Union leave.  When a promotion becomes available for which an employee who is on Union leave is eligible, that promotion shall be offered to him upon his return from leave.  The company shall be notified at least two (2) weeks prior to the end of the leave of the employee’s intent to return.

D. FAMILY MEDICAL LEAVE

In accordance with the provisions of the Family Medical Leave Act, the Parties agree a request for Family Medical Leave will be granted when applied for by an employee.  This Family Medical Leave will be granted without sacrifice of any other negotiated benefits.  (See MOA referenced in Appendix D)

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ARTICLE XXI
MISCELLANEOUS

A.Supervisors will not perform work normally done by hourly rated employees, nor will the Company condone such work, except in cases of emergencies or unforeseen circumstances where failure to act promptly might result in harm or damage to personnel, plant, or equipment.

B.When it becomes necessary to change methods of operation or kinds of products, which may result in elimination of jobs or combining of jobs, the Company will advise and negotiate the matter with the Local Union.

C.With respect to the subject of contracting out, it is understood production employees will normally perform production work and maintenance employees will normally perform maintenance work.  It is understood there may be times the Company must employ the service of outside contractors.  The Company will notify, meet and discuss the need, manner and necessity to use such outside services with the Union prior to letting of the contract.  If the work can be accomplished by the use of mill forces then bargaining employees will perform the work.

Excluding from these provisions are new construction and major replacement of equipment that requires special tools or equipment.  The use of outside contractors shall be unionized contractors as long as cost and service levels are competitive.

D.Each employee is expected to respect his supervisors and each supervisor is expected to respect the employee.  Both parties to this Agreement realize the importance of getting along in the plant.  Harassment, profanity, or any other act of disrespect in the plant will not be tolerated.

E.Items pertaining to any particular location at the time of development of this Master Agreement will continue to be handled by the Supplement at each Location.

F.The Company will compensate those Union Officers, Stewards, or members, as designated by the Union at their respective hourly rates for the time lost from work due to keeping their appointments with Management, or investigating incidents that may become grievances.

G.Future medical/dental plan cost increases and decreases, starting 1/1/07, will be shared 50/50 until employee contribution reaches 20% of premium, starting with current dollar contributions.  This change will replace all current cost sharing language in the Master and Local Supplements.

H.Attached as Appendix D, is a listing of Memorandum Of Agreement’s (MOA’s) and Side Letter Agreements incorporated into this Agreement by reference.

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ARTICLE XXII
COMPANY RULES

Company rules include those listed in each Local supplement and are included in this Master Agreement by reference.  Changes or additions to these rules may be made from time to time and the parties shall agree on the rules prior to the notification to all employees.  By the publishing of these rules and notification of changes and additions, it shall be considered that employees will have complete knowledge of the rules.  The employees shall abide by the Company’s rules and practices.

ARTICLE XXIII
NON-COERCION

The Company agrees not to interfere in any way with the exercise by employees of their legitimate rights to join and be active in the Union.  The Union agrees not to intimidate or coerce employees to join the Union.

ARTICLE XXIV
CONTRAVENTION OF LAW

If any provision or section of this Agreement is found to be in violation of laws or regulations of the United States, or the State in which the mill covered by this Agreement is located, such provisions shall be superseded by the appropriate provisions of such law or regulations, so long as same is in force and effect.  All other provisions of this Agreement shall continue in full force and effect.  The parties will discuss any change to a federal or state law, which may be related to this Agreement, and if it is found to affect a provision of this Agreement, the parties shall meet and negotiate the change or changes to the Agreement to conform to the law.  Should Section 14B of the National Labor Relations Act be amended or repealed, by either the State or Federal Government, the Company will notify the bargaining unit members they have thirty (30) days to become members of the Union.

ARTICLE XXV
DEDUCTION OF UNION DUES

A.Subject to the provisions of State and Federal laws, the Company agrees to make a payroll deduction of current Union dues of employees who are members of the Union.  This deduction will commence with the next full bi-weekly pay period following receipt of an authorization signed by the employee in the following form:

The form shall be the standard form for Union dues deduction provided by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW).

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B.It shall be the sole obligation of the Company to remit the sums deducted to the designated Financial Officer of the Local Union.  The Union shall keep the Company harmless against all claims, demands or other forms of liability that may arise out of the Company’s compliance with this Article.

C.The Company agrees that it will deduct voluntary contributions to the USW Political Action Fund each pay period from the earnings of those employees who voluntarily authorize such contributions on forms provided for that purpose by the USW/PAC.  The signing of USW/PAC checkoff forms and the making of such voluntary contributions are not conditions of membership in the Union or of employment with the Company.  The USW/PAC checkoff program shall remain in compliance with any applicable state or federal statute.

The Company shall remit monthly to the Treasurer of the USW/PAC, the total amount of voluntary contributions and a list of the employees who made said voluntary contributions.  The remission of monthly USW/PAC checkoff will be made to the USW Political Action Fund at Five Gateway Center, Pittsburgh, PA 15222 within fifteen days following the end of each month.

The Union shall indemnify and save the Company harmless against any and all claims, demands, suits or other forms of liability that shall arise out of or by reason of action taken or not taken by the Company for the purpose of complying with any of the provisions of this understanding.

ARTICLE XXVI
SAFETY AND HEALTH COMMITTEE

1. The Company agrees to provide and maintain a safe and healthy workplace for its employees.  The Company will maintain all reasonable and necessary precautions for safeguarding the safety and health of employees and employees are expected to cooperate in the implementation of this safe work environment.

2. In addition to “for cause” drug and alcohol testing, “post accident” drug and alcohol testing will be used by the Company in the event of on the job injuries.  It is understood that such testing will be conducted only when an injured employee is treated by a licensed physician.  This provision becomes effective 1/1/07.  The method of administering this provision shall be set forth in each Local supplement of this Agreement.

ARTICLE XXVII
ATTENDANCE POLICY

The need for all employees to attend work whenever scheduled is an inherent portion of this work process.  Therefore, each location shall establish and maintain an attendance

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policy that fits the circumstances at each of their locations.  Such attendance policy shall be included as part of this Agreement by reference.

ARTICLE XXVIII
CONTINUOUS WORK

In consideration of the Union’s execution of this Agreement, the Employer promises its operations covered by this Agreement shall not be sold, conveyed, or otherwise transferred or assigned to any successor without first securing the agreement of the successor to assume the Employer’s obligations under this Agreement.

ARTICLE XXIX
PROFIT SHARING

A.The intention of Blue Ridge Paper Products Inc. is to establish a profit sharing program to bind Blue Ridge Paper and its Union employees together in a team to improve Company profits.  Increased profits in one fiscal year may be used in part to increase wages of its employees in the next fiscal year.

B.The Company will pay to its hourly employees the contracted amount of operating profits before taxes earned in the fiscal year January 1 to December 31 of any given year.  The total payments due will be divided equally between employees on an annual basis.

C.Blue Ridge Paper Products Inc. will absorb the administrative costs of the plan.

D.The full contents of the Profit Sharing plan are attached hereto as Appendix A. It shall describe this Profit Sharing plan in detail.

ARTICLE XXX
WORK PLACE CULTURE DEVELOPMENT

The parties signatory to the Labor Agreement between the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW) and its affiliated Local Unions and Blue Ridge Paper Products Inc. (an ESOP Company) at each of its locations do jointly enter into the following agreement:

There is a mutual recognition on the part of both the Union and the Company in order to maintain economic viability, gain a competitive advantage in the marketplace, and maintain job security, it is necessary for Blue Ridge Paper Products Inc. to upgrade

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profitability through increased efficiency, team effort, mutual cooperation and the elimination of barriers to improved productivity.

It is agreed between the parties, as part of Work Place Cultural Development, during the life of the Agreement the Company and the Union will work together to explore either new or improved work processes or concepts.  It is understood that any subsequent changes that may be required in any provisions of the Agreement are subject to negotiations and agreement between the parties.

The method of development of this Work Place Culture shall be determined by each location.  Its necessary and use shall be incorporated as part of this agreement by reference.

Each Location shall have a Work Place Culture Steering Committee.  The provisions set forth in each Local supplement shall determine the creation and maintenance of this Committee.

ARTICLE XXXI
ESOP RECOGNITION AND ELECTION

The Bargaining Unit members recognize with the ratification of this Labor Agreement they are accepting the Employee Stock Ownership Plan (ESOP) as a part of this Agreement.  The ESOP, along with its supporting documents is incorporated herein by reference. (See Appendix C)

A. Board of Directors

1. The Company and the Union acknowledge that every member of the Company’s Board of Directors (Board, members of such Board, Directors) has a fiduciary duty to the Company and all of its stockholders.

2. The Company agrees that the Union shall have the right, subject to the procedure; the Directors’ discharge of their fiduciary duties; and as described below, to designate three (3) individuals to serve on the Board.

a. The International President shall provide the Board’s Chairman with the names and resumes of the individuals whom s/he wishes to have serve on the Board.

b. Provided that the individuals are acceptable to the Chairman, (it being understood that in all respects each individual will be dealt with separately) such acceptance not to be unreasonably withheld, the Chairman shall promptly recommend such individual(s) to the Board’s Nominating Committee, who absent compelling reasons to the contrary, shall promptly recommend such individual(s) to the full Board for election at its next meeting.

c. Once elected, the individual(s) shall be recommended by the Board for election by the shareholders to serve a regular term at the Company’s next Annual Meeting of Shareholders.

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3. If after election, the individual(s) becomes unwilling or unable to serve, or the Union wishes to replace one or all of them, the International President shall provide the Board’s Chairman with the name of a new individual(s) whom s/he wishes to have serve on the Board and the process outlined above shall thereafter be followed.  In such case the individual(s) previously named by the International President may be removed from or not nominated for re-election to the Board.

4. At the time that any person is nominated by the Union as provided in this Section A, said nominee shall acknowledge in whatever fashion such acknowledgement is given by all of the Company’s other Directors, that such nominee, if elected to the Board, would have a fiduciary duty to the Company and its stockholders.

B.Benefit Pool

There shall be a pool of funds established from unused funds that result from the contribution from Blue Ridge Paper Products to employee benefits.  At the conclusion of the Labor Agreement or the sale of Blue Ridge Paper Products, any funds that remain in this pool, including any earned interest, shall be distributed to bargaining unit employees.  This distribution shall be in some type of monetary compensation.

ARTICLE XXXII
ESOP DISPUTE RESOLUTION

Any ESOP Plan or Board of Directors disputed issues or fiduciary responsibility issues shall be handled in the following manner:

1.The ESOP Plan Administration Committee shall appoint a Mediator to explore resolution of the dispute.

2.Failing to achieve resolution of the dispute by a Mediator, the complainant and the ESOP shall mutually agree on an arbitrator to hear the disputed issue.  At the conclusion of the hearing the arbitrator shall be required to provide the Parties with an immediate decision.  The arbitrator’s decision shall be final and binding on all parties.

ARTICLE XXXIII
ESOP PLAN ADMINISTRATION COMMITTEE

There shall be an ESOP Plan Administration Committee created and maintained for the ESOP.  This Committee shall have two (2) Union members nominated and elected to this position.  These members shall be from the Canton and Waynesville, North Carolina locations.

There shall as well be an ESOP Plan Administration Sub-Committee created and maintained for the ESOP.  This Sub-Committee shall have two (2) Union members

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nominated and elected to this position from each DairyPak location.  All committee positions shall be for terms of two (2) years.

ARTICLE XXXIV
ESOP TRUST COMMITTEE

There shall be an ESOP Trust Committee created and maintained.  This committee shall have two (2) Union members nominated and elected to this committee.

There shall be an ESOP Trust Sub-Committee created and maintained.  This Sub-Committee shall have two (2) Union members nominated and elected to this Committee from each DairyPak location.  All committee positions shall be for terms of two (2) years.

ARTICLE XXXV
COMMITTEE COMPENSATION

All Board of Director and Committee positions shall be reimbursed for any hours lost from work at their regular rate of pay.  The Company shall pay this reimbursement.

ARTICLE XXXVI
SEVERANCE PAY

In the event a plant must sustain a permanent curtailment or shut down, an employee with one (1) or more year’s plant seniority will be eligible for severance pay.

A laid off employee entitled to severance pay will be paid one (1) week of pay for each year of continuous service at his classified rate of pay.

The employee’s continuous service shall be calculated from his most recent date of hire without further interruption in service.

If an employee is recalled after having received all the severance pay due, he or she, will begin again as of the date of his or her return accumulating a period of time which will be credited toward any future lay-off.

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This Master Agreement, including any appendix or exhibits hereto, and the Local Supplemental Agreements, embodies the entire agreement and understanding of the parties in all respects.  This Master Agreement and the Local Supplemental Agreements supersede all prior agreements and understandings between the parties.

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IN WITNESS WHEREOF, the parties hereto, have caused their names to be subscribed below by their duly authorized officers and representatives as of this               day of                         , 2006.

United Steelworkers, AFL-CIO/CLC		Blue Ridge Paper Products Inc.
		41 Main Street
		Canton, NC, 28716
By:		By:	/S/ Darrell E. Douglas
	Leo G. Gerard		Darrell E. Douglas
	International President		VP-Human Resources
			/S/ Terry Huskey
	James D. English		Terry Huskey
	International Secretary-Treasurer		VP-Gen. Mgr. Paper Division
			/S/ Robert M. Shanahan
	Thomas Conway		Robert M. Shanahan
	International Vice President		VP-Mfg., Mill Mgmt.-Canton, NC
	Administration
			/S/ David M. Lewallen
	Fred Redmond		David M. Lewallen
	International Vice President		VP-Operations, DairyPak
	Human Affairs
			/S/ Alan W. Denney
	C.L. “Connie” Entrekin		Alan W. Denney
	Director, District 9		VP & Gen. Mgr. Extrusion—
			Waynesville
	Stan Johnson		/S/ James E. Froehlich
	Assistant to the Director, District 9		James E. Froehlich
			Director Human Resources-Canton
	Local Union Negotiating Committee:
			/S/ Chuck Grotsky
			Chuck Grotsky
	/S/ Howard Taylor		Manager HROD-Olmsted Falls, OH
	President Local No. 507
			/S/ Larry Foster
	/S/ Robert Riggs		Larry Foster
	President Local No. 673		Plant Manager-Clinton, IA
	/S/ Mark Howard		/S/ Jeff Hykin
	President Local No. 761		Jeff Hykin
			Plant Manager-Olmsted Falls, OH
	/S/ Pat Kitchens
	President Local No. 794		/S/ Victor G. Orr
			Victor G. Orr
			Plant Manager-Athens, GA

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Appendix A

AGREEMENT ON PROFIT SHARING

On this 14th day of May 1999, Blue Ridge Paper Products Inc. hereinafter referred to as the Company, and the USW and its Locals, hereby agree to the establishment of this Profit Sharing Plan for the purpose of providing profit sharing contributions by the Company to eligible employees:

1.Eligibility

Eligible employees are all active employees of Blue Ridge Paper Products Inc., including those who retire, die, go on military, pregnancy, union or sick leave, or are laid off during a Plan Year, who have completed the probationary period (as set forth under the Collective Bargaining Agreement between the parties) as of the last day of such Plan Year, and have completed 1,000 or more hours.  Plan Years end on December 31.

2.Contribution Formula

The total Profit Sharing Contribution each Plan Year shall be an amount equal to 10% of Profit, as defined in Section 3.

3.Definition of Profit

Profit means the Company’s reported profit, before income taxes, and before deductions.

4.Allocation of Benefits

The total Profit Sharing Contribution shall be divided equally among eligible employees, as determined under the Eligibility clause.  Eligible employees or their beneficiaries who retire, die, go on military, pregnancy, union or sick leave, or are laid off during a Plan Year will receive their applicable profit sharing check for the Plan Year the event occurs.

5.Distribution of Benefits

The Company shall pay all Profit Sharing Benefits by separate check within 90 days following the close of the Plan Year.

6.Audits and Reports

Future changes in the Company’s accounting procedures should not significantly affect payments under this Plan.  The parties shall meet prior to the determination of the annual Profit Sharing Contribution to discuss the adjustments, if any, needed to offset such changes.

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All computations and adjustments required under this Plan shall be reviewed by an Auditor, who shall be from an independent Certified Public Accounting firm that is mutually acceptable to the Company and the Union.  As soon as practicable after the close of each Plan Year, the Auditor shall provide the Union with a report on the operation of the Plan.  Such report shall include information on the adjustments, if any, that are necessary to determine Profits in Section 3, and other relevant information reflecting Plan experience.  In addition, the Company shall respond as soon as practicable to requests from the Union for information supporting the Profit Sharing Contribution calculations.  The Union shall have access to all financial records for the purpose of verifying the profit sharing calculations.

If the Union should question a conclusion or decision of the Auditor, the Auditor shall review its methods and procedures with the Union and will take into account any new information, which may be developed by such review.

7.Other Understandings

A.In the event an otherwise eligible employee dies during a Plan Year, his/her Profit Sharing Benefit shall be paid to the person designated as his/her Beneficiary under the Company’s group life insurance plan.

B.The parties agree to refer any disagreement over the interpretation of the terms of this Agreement to a mutually acceptable impartial person or persons for resolution.

8.Effective Dates and Duration

The Plan will become effective May 14, 1999.  This Agreement and the Plan will continue in effect until May 13, 2006, and will continue from Plan Year to Plan Year thereafter unless either party, upon written notice to the other, requests a modification, change or termination of the Agreement at the end of such yearly period; provided further, the party requesting such modifications shall, at least sixty (60) days prior to December 31st, or prior to the completion of any such subsequent yearly period, as the case may be, serve notice in writing upon the other party setting forth such changes or modifications so desired, together with a request that a meeting be held to discuss such proposals, and both parties shall thereupon arrange such meetings as may be required for the purpose of negotiating on such proposals.

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Appendix B

HOURLY RELOCATION GUIDELINES

At the time a Blue Ridge manufacturing location makes a decision to fill an hourly job position(s) from outside the facility (new hire), the following guidelines will apply per Article VIII (Seniority), Section I (Transfers), of the new master Labor Agreement.  Note:  These guidelines are effective for all current Blue Ridge Paper Products Inc. manufacturing facilities.

1.When a vacancy occurs, prior to hiring a new employee, incumbent Blue Ridge employees shall be given an opportunity for transfers between locations.  It will be the responsibility of the location Human Resources representatives to notify other Blue Ridge manufacturing facilities of vacancies utilizing the attached form (A).  This form will be transmitted after all internal bidding procedures have been utilized at a facility and a decision has been made to fill the vacancy externally.

2.“Incumbent Blue Ridge employees,” as used above, includes current active employees as well as laid off employees so long as they continue to maintain recall rights under the terms of their location labor agreement.

3.Although current Blue Ridge incumbent employees shall be considered prior to hiring from the outside, interested employees are still subject to the selection criteria (i.e., interview, testing, drug screening, etc.) in effect at the receiving location.  Whenever possible the selection process will be coordinated with the interested employee’s current location to minimize travel (i.e., telephone interview, local testing and/or drug screening, etc.).  It must also be understood that the receiving location controls the timing of their vacancies and to be considered the employee must be able and willing to make themselves available based upon the time constraints of the receiving location.

4.If an incumbent employee satisfies the hiring criteria and accepts an offer of employment at another Blue Ridge facility, they will establish a new plant seniority date consistent with the date they report for work at their new location.  Transferring employees will not be subject to the new hire probationary period at the receiving location.

5.Transferring employees shall only retain their prior location seniority for earned vacation and pension.  Their selection of specific vacation weeks will be in accordance with their new seniority and vacation scheduling procedures at their new location.

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6.Any existing waiting periods for employee benefits will be waived for a transferring employee and the employee will be immediately eligible for those benefits in effect at the new location.

7.A transferring employee will maintain membership in the international union and will be a member of the local union on the date of transfer.

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Appendix C

EMPLOYEE STOCK OWNERSHIP PLAN

Refer to Blue Ridge Paper Products Inc. Employee Stock Ownership Plan incorporated herein by reference. Copies of the Plan are available from

The Blue Ridge ESOP

41 Main St.

Canton, NC 28716

Attn:  ESOP Coordinator

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Appendix D

Listing of Side Letter Agreements and MOA’s incorporated in the Master Agreement by reference.

1. MOA regarding Health Care Program for 2003 and future years, dated November 2. 2002.

2. MOA regarding “Clarification of Article XX “Leave of Absence, Section D., “Family Medical Leave”, effective April, 28, 2004.

3. MOA interpreting Article V of the Master Labor Agreement, dated January 20, 2005.

4. Side Letter Agreement dated July 10, 2006 regarding a potential future Acquisition of or by Blue Ridge Paper Products Inc.

5. Side Letter Agreement dated July 10, 2006 regarding the “Right to Terminate” the Labor Agreement by the Union upon the occurrence of certain circumstances.

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Richard A. Lozyniak, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Blue Ridge Paper Products Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 9, 2006

/S/  RICHARD A. LOZYNIAK
Richard A. Lozyniak
President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I. John B. Wadsworth, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Blue Ridge Paper Products Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal  control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 9, 2006

/S/  JOHN B. WADSWORTH
John B. Wadsworth
Chief Financial Officer
(Principal Financial Officer)