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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the transition period from          to

Commission File Number: 001-32240

NEENAH PAPER, INC.

(Exact name of registrant as specified in its charter)

(678) 566-6500

(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   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):

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

As of July 31, 2009, there were approximately 14,655,000 shares of the Company’s common stock outstanding.

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Part I—FINANCIAL INFORMATION

Item 1.  Financial Statements

NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share and per share data)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 See Notes to Condensed Consolidated Financial Statements

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NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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NEENAH PAPER, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions, except as noted)

Note 1.  Background and Basis of Presentation

Background

Neenah Paper, Inc. (“Neenah” or the “Company”), is a Delaware corporation incorporated in April 2004. The Company has two primary operations: its fine paper business and its technical products business.

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

In May 2009, the Company permanently closed its fine paper mill located in Ripon, California (the “Ripon Mill”).  The Ripon Mill had one paper machine with an annual capacity of approximately 35,000 tons.  The Company expects its other premium fine paper mills to absorb production previously made at the Ripon Mill. The decision to close the Ripon Mill reflects the Company’s strategy to drive consolidation in the premium fine paper category through leading brands and a cost efficient manufacturing platform. See Note 4, “Closure of the Ripon Mill.”

In February 2008, the Company committed to a plan to sell its pulp mill in Pictou, Nova Scotia (the “Pictou Mill”) and approximately 500,000 acres of woodland assets in Nova Scotia (the “Woodlands”).  In June 2008, the Company’s wholly owned subsidiary, Neenah Paper Company of Canada (“Neenah Canada”) completed the sale of the Pictou Mill to Northern Pulp Nova Scotia Corporation (“Northern Pulp”), a new operating company jointly owned by Atlas Holdings LLC and Blue Wolf Capital Management LLC (collectively, “Atlas”).

The Company believes it is probable that the sale of the Woodlands will be completed within twelve months.  As of June 30, 2009, the assets of the Woodlands are reported as assets held for sale—discontinued operations.  For the three and six months ended June 30, 2009, the results of operations of the Woodlands are reported as discontinued operations in the condensed consolidated statements of operations. The consolidated results of operations for all prior periods have been restated to reflect the results of operations of the Pictou Mill and the Woodlands and the loss on disposal of the Pictou Mill as discontinued operations.  See Note 5, “Discontinued Operations.”

Basis of Consolidation and Presentation

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Management believes that the disclosures made are adequate for a fair presentation of the Company’s results of operations, financial position and cash flows. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations, financial position and cash flows for the interim periods presented herein.  The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make extensive use of estimates and assumptions that affect the reported amounts and disclosures.  Actual results may vary from these estimates.

These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.  The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

The condensed consolidated interim financial statements of Neenah and its subsidiaries included herein are unaudited, except for the December 31, 2008 condensed consolidated balance sheet, which was derived from audited financial statements.  The condensed consolidated financial statements include the financial statements of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements.

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Earnings (Loss) per Share (“EPS”)

Basic earnings (loss) per share (“EPS”) was computed in accordance with Emerging Issues Task Force (“EITF”) Issue No. 03-6 Participating Securities and the Two-Class Method under FASB Statement No. 128, or EITF Issue No. 03-6, and FASB Staff Position (“FSP”) EITF 03-6-1 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, or FSP EITF 03-6-1.  In accordance with FSP EITF 03-6-1, share-based awards with non-forfeitable dividends are classified as participating securities. In calculating basic earnings per share, this method requires net income to be reduced by the amount of dividends declared in the current period for each participating security and by the contractual amount of dividends or other participation payments that are paid or accumulated for the current period. Undistributed earnings for the period are allocated to participating securities based on the contractual participation rights of the security to share in those current earnings assuming all earnings for the period are distributed. Recipients of our restricted stock awards have contractual participation rights that are equivalent to those of common stockholders. Therefore, we allocate undistributed earnings to restricted stock and common stockholders based on their respective ownership percentage, as of the end of the period.

EITF Issue No. 03-6 also requires companies with participating securities to calculate diluted earnings per share using the two class method in accordance with the provisions of SFAS No. 128 Earnings Per Share, (“SFAS No. 128”). The two-class method requires the denominator to include the weighted average participating securities along with the additional share equivalents from the assumed conversion of stock options calculated using the “Treasury Stock” method, subject to the anti-dilution provisions of SFAS No. 128.  EITF Issue No. 03-6 has been retroactively applied for all periods presented

Diluted EPS was calculated to give effect to all potentially dilutive common shares using the “Treasury Stock” method. Outstanding stock options, stock appreciation rights (“SARS”) and restricted stock units with performance conditions represent the only potentially dilutive non-participating security effects on the Company’s weighted-average shares.  For the three and six months ended June 30, 2009 approximately 1,940,000 and 1,865,000 potentially dilutive stock-based compensation awards, respectively, were excluded from the computation of dilutive common shares.  For the three and six months ended June 30, 2008, approximately 1,550,000 and 1,420,000 potentially dilutive stock-based compensation awards, respectively, were excluded from the computation of dilutive common shares.  In addition, as a result of the loss from continuing operations for the three and six months ended June 30, 2009, approximately 70,000 and 60,000 incremental shares, respectively, resulting from the assumed vesting of restricted stock units with performance conditions were excluded from the diluted earnings per share calculation, as the effect would have been anti-dilutive.

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The following table presents the computation of basic and diluted EPS (dollars in millions except per share amounts, shares in thousands):

(a)   In accordance with EITF Issue No. 03-6, for the three and six months ended June 30, 2009 undistributed losses have been entirely allocated to the common stockholders due to the fact that the holders of participating securities are not contractually obligated to share in the losses of the Company. For the three and six months ended June 30, 2009, distributed income from continuing operations allocated to participating securities was $4 thousand and $8 thousand, respectively. For the three and six months ended June 30, 2008, net distributed and undistributed income from continuing operations allocated to participating securities was $47 thousand and $0.1 million, respectively.

Note 2.  Accounting Standard Changes

On June 30, 2009, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS No. 165 sets forth:

In accordance with the provisions of SFAS No. 165, the Company has evaluated subsequent events for their impact on its financial statements through August 10, 2009 which is the date that such financial statements were issued and determined there were no subsequent events that would affect the financial statements or require disclosure.

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On June 30, 2009, the Company adopted FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), which requires, among other things, the disclosure in interim and annual periods of:

·      the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period, and

·      quantitative disclosures about the fair value measurements separately for each major category of assets and liabilities measured at fair value on a recurring basis.

The Company’s adoption of FSP FAS 157-4 did not have an impact on its financial position, results of operation, or cash flows.

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued SFAS No.166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (“SFAS No. 166”). SFAS No. 166 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”) to:

a.     Clarify that the objective of paragraph 9 of SFAS No. 140 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets; and

b.     Define the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. If the transfer does not meet those conditions, a transferor should account for the transfer as a sale only if it transfers an entire financial asset or a group of entire financial assets and surrenders control over the entire transferred asset(s).

Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes.

SFAS No. 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt SFAS No. 166 as of January 1, 2010 and does not expect such adoption to have a material effect on its financial position, results of operation or cash flows.

In June 2009, the FASB issued SFAS No.167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167 amends FASB Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:

a.     The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance.

b.     The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. SFAS No. 167 also amends FASB Interpretation 46(R) to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance.

SFAS No. 167 is effective as of the beginning of a reporting entity’s first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt SFAS No. 167 as of January 1, 2010 and does not expect such adoption to have a material effect on its financial position, results of operation or cash flows because it does not have any variable interest entities.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (“SFAS No. 168”).  SFAS No. 168 will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (the “SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. When effective, SFAS No. 168 will supersede all then-existing non-SEC accounting and reporting standards and all non grandfathered, non-SEC accounting literature not included in the SFAS No. 168 will become non authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt SFAS No. 168 as of September 30, 2009 and does not expect such adoption to have a material effect on its financial position, results of operation or cash flows.

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Note 3.  Comprehensive Income (Loss)

Comprehensive income (loss) includes, in addition to net income (loss), gains and losses recorded directly into stockholders’ equity on the condensed consolidated balance sheet. These gains and losses are referred to as other comprehensive income items. Accumulated other comprehensive income (loss) consists of foreign currency translation gains and (losses), deferred gains and (losses) on cash flow hedges and adjustments related to pensions and other postretirement benefits. Income taxes are not provided for foreign currency translation adjustments because they relate to indefinite investments in Neenah Germany. The Company also does not provide income taxes for foreign currency translation adjustments for its Canadian operations.  For the three and six months ended June 30, 2009, the Company did not record deferred taxes related to future funds expected to be repatriated upon the sale of the Woodlands because there are no expected tax consequences considering the anticipated proceeds from the disposal of the Woodlands.  As of June 30, 2009 and December 31, 2008, accumulated other comprehensive income was $93.5 million and $91.7 million, respectively.

The following table presents the components of comprehensive income (loss):

Note 4.  Closure of the Ripon Mill

In May 2009, the Company permanently closed the Ripon Mill.  The closure resulted in a pre-tax charge to earnings of $18 million for the three months ended June 30, 2009.  The charge was comprised of approximately $6.7 million in non-cash charges primarily for losses related to the carrying value of property, plant and equipment and a $0.8 million curtailment loss related to postretirement benefit plans (see Note 10) in which employees of the Ripon Mill participated and approximately $10.5 million related to cash payments for contract terminations, severances and other employee costs.  The Company expects approximately $7 million of this amount to be paid in 2009, with the remaining payments in 2010 and beyond.

As of June 30, 2009, the remaining long-lived assets of the Ripon Mill, primarily composed of land and buildings, are classified as Assets held for sale on the condensed consolidated balance sheet.  The Company believes that the sale of such assets will be completed within 12 months. Assets held for sale are valued at the lower of cost or fair value less cost to sell. The assets of the Ripon Mill are reported on the condensed consolidated balance sheet at their aggregate cost of $6.2 million.

The Company accounted for the costs associated with the closure of the Ripon Mill in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”).  As of June 30, 2009, approximately $1.2 million in severance benefits had been paid to 78 former employees of the Ripon Mill and severance benefits due to 19 former employees of the Ripon Mill remained unpaid.  The Company expects the payment of all severance benefits to be substantially completed by September 30, 2009. The following table presents the status of such closure costs as of and for the three months ended June 30, 2009:

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Note 5.  Discontinued Operations

In June 2008, Neenah Canada sold the Pictou Mill to Northern Pulp, a new operating company formed by Atlas.  In connection with the transfer of the Pictou Mill, Neenah Canada made payments of approximately $10.3 million to Northern Pulp. In addition, the Company incurred transaction costs of approximately $3.3 million. Pursuant to the terms of the transaction, Northern Pulp assumed all of the assets and liabilities associated with the Pictou Mill, as well as existing customer contracts, supply agreements (including a pulp supply agreement with Kimberly-Clark Corporation (“Kimberly-Clark”)), labor agreements and pension obligations.

In conjunction with the sale of the Pictou Mill, Northern Pulp assumed responsibility for all pension and other post-employment benefit obligations for active and retired employees of the mill.  The Company accounted for the transfer of these liabilities as a settlement of post-employment benefit obligations pursuant to SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (“SFAS No. 88”).  For the three and six months ended June 30, 2008, the Company recognized a non-cash, pre-tax settlement loss of $53.7 million due to the reclassification of deferred adjustments related to pensions and other post-employment benefits from accumulated other comprehensive income to loss from discontinued operations in the condensed consolidated statement of operations.

During the first quarter of 2008, the Company determined that the estimated value it would receive from a sale of the Pictou Mill indicated that it would not recover the carrying value of the mill’s long-lived assets. For the three and six months ended June 30, 2008, the Company recognized non-cash, pre-tax impairment charges of $0.7 million and $91.2 million, respectively, to write-off the carrying value of the Pictou Mill’s long-lived assets.  In addition, for the three and six months ended June 30, 2008, the Company recorded pre-tax income (expense) of $9.8 million and ($29.7) million, respectively, to recognize the loss on disposal of the Pictou Mill. At June 30, 2009, the Woodlands are reported as Assets held for sale on the condensed consolidated balance sheet at their historic book value net of accumulated depletion of $3.5 million.  The Company believes it is probable that the sale of the Woodlands will be completed within twelve months.

In conjunction with the sale of the Pictou Mill, the Company entered into a stumpage agreement (the “Stumpage Agreement”) which allows Northern Pulp to harvest an average of approximately 400,000 metric tons of softwood timber annually from the Woodlands. The Stumpage Agreement is for a term of ten years and Northern Pulp has the option to extend the agreement for an additional three years.  For calendar year 2008, Northern Pulp paid a nominal amount for approximately 236,000 metric tons of softwood timber harvested under the Stumpage Agreement.  As a result, the Company recorded $2.8 million in deferred revenue for the estimated fair value of the timber to be harvested by Northern Pulp in calendar 2008.  For the year ended December 31, 2008, the Company recognized all of such deferred revenue. For timber purchases during calendar year 2009, Northern Pulp has agreed to pay the stumpage rate charged by the Nova Scotia provincial government for harvesting on government licensed lands. The price paid for timber purchases during the remainder of the Stumpage Agreement will be based on an agreed upon formula for estimating market prices. The Company believes the Stumpage Agreement prices for calendar year 2009 and beyond represent market rates.  Northern Pulp has agreed to pay substantially all costs associated with maintaining the Woodlands and harvesting the timber.  An agreement to sell the Woodlands will require the buyer to assume the Stumpage Agreement.

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The results of operations of the Pictou Mill and the Woodlands and the estimated loss on sale of the Pictou Mill are reported as discontinued operations in the condensed consolidated statements of operations for each period presented. The following table summarizes the results of discontinued operations:

(a)   Represent net sales of the Pictou Mill and the Woodlands only.

(b)   For the three and six months ended June 30, 2008, the loss from operations includes non-cash, pre-tax impairment charges of $0.7 million and $91.2 million, respectively, to write-off the carrying value of the Pictou Mill’s long-lived assets.

(c)   The gain on disposal for the three months ended June 30, 2008 represents an adjustment of the previously estimated loss on sale of the Pictou Mill to the actual loss recognized upon closing the transaction.  The adjustment to the estimated loss was primarily due to the recognition of costs associated with scheduled maintenance downtime which occurred prior to closing.

Note 6. Other Income - Net

In August 2006, Neenah Canada transferred the Terrace Bay, Ontario pulp mill and related woodlands operations (“Terrace Bay”) to certain affiliates of Buchanan Forest Products, Ltd. (“Buchanan”).  Buchanan assumed responsibility for substantially all liabilities related to the future operation of Terrace Bay.  At closing, Neenah Canada retained pension and long-term disability obligations for current and former mill employees and postretirement medical and life insurance obligations for current retirees. During the first quarter of 2008, Neenah Canada paid approximately $5.0 million to settle litigation related to the reduction and/or elimination of certain retiree benefits following Neenah Canada’s transfer of Terrace Bay to Buchanan.  In conjunction with the settlement, Neenah Canada agreed to continue certain retiree life insurance benefits at a reduced rate in the future.  As a result of the settlement, for the six months ended June 30, 2008, Neenah Canada recorded a curtailment gain of approximately $4.3 million which is recorded in Other income-net on the condensed consolidated statement of operations.

For the three and six months ended June 30, 2008, the Company recognized gains of approximately $2.9 million from the sale of certain assets acquired in the Fox River acquisition.

The Company recognized (gains) losses of $0.1 million and $(0.1) million, respectively, from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) for the three and six months ended June 30, 2009.  For the three and six months ended June 30, 2008, the Company recognized foreign currency transactions (gains) losses of $0.2 million and $(26) thousand, respectively.  For the three and six months ended June 30, 2008, (gains) losses from foreign currency transactions related to the operations of the Pictou Mill were approximately $0.2 million and $(0.8) million, respectively, and are recorded in loss from discontinued operations on the condensed consolidated statements of operations.  For the six months ended June 30, 2008, the Company realized (gains) on foreign currency forward exchange contracts of approximately $(0.5) million.  All such foreign currency forward exchange contracts gains related to the operations of the Pictou Mill and are recorded in loss from discontinued operations on the condensed consolidated statements of operations.

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The following table presents the components of “Other income — net” on the condensed consolidated statement of operations:

Note 7. Income Taxes

On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109.  The following is a tabular reconciliation of the total amounts of uncertain tax positions as of and for the six months ended June 30, 2009:

If the Company’s liability for uncertain tax positions at June 30, 2009 is not realized, the Company’s effective tax rate in future periods would be favorably affected by approximately $0.5 million. The Company does not anticipate that the expiration of the statute of limitations or the settlement of audits in the next 12 months will result in liabilities for uncertain income tax positions that are materially different than the amounts accrued as of June 30, 2009.

In accordance with Accounting Principles Board Opinion No. 28, Interim Period Reporting, the Company excluded the tax effects of the costs associated with closing the Ripon Mill as an infrequent and/or unusual item in estimating its full year effective tax rate.  See Note 4, “Closure of the Ripon Mill.” The tax effects of closing the Ripon Mill were treated as a discrete item in determining the tax benefit for the three and six months ended June 30, 2009.  Therefore, the effective tax rate for the six months ended June 30, 2009 is not necessarily indicative of the tax rate the Company expects to record for the remainder of 2009.

Note 8. Supplemental Balance Sheet Data

The following presents inventories by major class:

The FIFO values of total inventories valued on the LIFO method were $56.1 million and $66.5 million at June 30, 2009 and December 31, 2008, respectively.  For the three and six months ended June 30, 2009, the Company recognized approximately $0.3 million and $0.4 million, respectively, of expense due to the liquidation of LIFO inventories.

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The following table presents the components of Assets held for sale on the condensed consolidated balance sheet.

Note 9. Debt

Long-term debt consisted of the following:

Senior Unsecured Notes

In November 2004, the Company completed an underwritten offering of ten-year senior unsecured notes (the “Senior Notes”) at an aggregate face amount of $225 million. The Senior Notes bear interest at a rate of 7.375 percent, payable May 15 and November 15 of each year and mature on November 15, 2014. The Senior Notes are fully and unconditionally guaranteed by all of the Company’s subsidiaries, with the exception of Neenah Germany.

Secured Revolving Credit Facility

On November 30, 2004, the Company entered into a Credit Agreement by and among the Company, certain of its subsidiaries, the lenders listed in the Credit Agreement and JP Morgan Chase Bank, N.A. as agent for the lenders (the “Initial Credit Agreement”). Under the Initial Credit Agreement, the Company had a secured revolving credit facility that provided for borrowings of up to $150 million.

In May 2008, the Company entered into the Sixth Amendment to the Initial Credit Agreement (the “Sixth Amendment”). In the Sixth Amendment, the Lenders consented to consummation of the sale of the Pictou Mill. As of June 30, 2009, the Initial Credit Agreement (as amended, the “Amended Credit Agreement”) provides for a secured revolving credit facility (the “Revolver”) to provide for borrowings of up to $210 million. The Company’s ability to borrow under the Revolver is limited to the lowest of (a) $210 million, (b) the Company’s borrowing base (as determined in accordance with the Amended Credit Agreement) and (c) the applicable cap on the amount of “credit facilities” under the indenture for the Senior Notes. The Amended Credit Agreement is currently scheduled to terminate on November 30, 2010.

The weighted-average interest rate on outstanding Revolver borrowings as of June 30, 2009 and December 31, 2008 was 2.1 percent per annum and 3.6 percent per annum, respectively. Borrowing availability under the Revolver is reduced by outstanding letters of credit and reserves for certain other items as defined in the Amended Credit Agreement. Availability under the Amended Credit Agreement will fluctuate over time depending on the value of the Company’s inventory, receivables and various capital assets. As of June 30, 2009, the Company had approximately $1.1 million of letters of credit outstanding and $51.8 million of borrowing availability under the Revolver. As of June 30, 2009, the Company had approximately $84.3 million in outstanding Revolver borrowings. Approximately $18.3 million of such Revolver borrowings are due within the next 12 months.  The Company has the ability and intent to refinance such borrowings and therefore has excluded these amounts from current liabilities.

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The Amended Credit Agreement contains events of default customary for financings of this type, including failure to pay principal or interest, materially false representations or warranties, failure to observe covenants and other terms of the Amended Credit Agreement, cross-defaults to other indebtedness, bankruptcy, insolvency, various ERISA violations, the incurrence of material judgments and changes in control. As of June 30, 2009, no events of default had occurred.

Term Loan

In March 2007, the Company entered into an agreement by and among the Company, certain of its subsidiaries and JP Morgan Chase Bank, N.A. (the “Term Loan Agreement”) to borrow up to $25 million (the “Term Loan”). The weighted-average interest rate on outstanding Term Loan borrowings as of June 30, 2009 and December 31, 2008, was 2.1 percent per annum and 3.6 percent per annum, respectively. Borrowings under the Term Loan are being repaid in equal quarterly installments which began in November 2007.  As of June 30, 2009, required Term Loan amortization payments are $1.25 million per quarter.  All amounts outstanding under the Term Loan are scheduled to be repaid by August 2010.

Other Financing

In December 2006, Neenah Germany entered into agreements with HypoVereinsbank and IKB Deutsche Industriebank AG to provide a total of €10.0 million of project financing for the construction of a saturator (the “German Loan Agreement”). The German Loan Agreement bears interest at a rate of 3.8 percent per annum and matures in December 2016.  As of June 30, 2009, €9.4 million ($13.2 million, based on exchange rates at June 30, 2009) was outstanding under this agreement.

Neenah Germany has an unsecured revolving line of credit (the “German Line of Credit”) with HypoVereinsbank that provides for borrowings of up to €15 million for general corporate purposes.  The Line of Credit matures on November 30, 2009.  The weighted-average interest rate on outstanding Line of Credit borrowings as of June 30, 2009 and December 31, 2008 was 2.7 percent and 5.7 percent per annum, respectively.  As of June 30, 2009, the Company had €7.9 million ($11.1 million, based on exchange rates at June 30, 2009) outstanding under the Line of Credit and €7.1 million ($9.9 million, based on exchanges rates at June 30, 2009) of available credit.

Note 10.  Pension and Other Postretirement Benefits

Pension Plans

Substantially all active employees of the Company’s U.S. paper operations participate in defined benefit pension plans and/or defined contribution retirement plans. Neenah Germany has defined benefit plans designed to provide a monthly pension upon retirement for all its employees in Germany. There is no legal or governmental obligation to fund Neenah Germany’s benefit plans and as such the plans are currently unfunded.

The closure of the Ripon Mill (See Note 4, “Closure of the Ripon Mill”) resulted in the elimination of expected years of future service for mill employees eligible to participate in the Company’s defined benefit pension plans and postretirement medical plan.  In accordance with SFAS No. 88, the Company measured the assets and liabilities of the affected postretirement plans as of May 31, 2009 and recognized an aggregate curtailment loss of approximately $0.8 million for the three and six months ended June 30, 2009.

In conjunction with the sale of the Pictou Mill, Northern Pulp assumed responsibility for all pension and other postretirement benefit obligations for active and retired employees of the mill.  The Company accounted for the transfer of these liabilities as a settlement of postretirement benefit obligations pursuant to SFAS No. 88.

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The following table presents the components of net periodic benefit cost:

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

(b)               For the three and six months ended June 30, 2008, pension and other postretirement benefit costs for the Pictou Mill and the Woodlands are reported as results of discontinued operations on the condensed consolidated statements of operations

The Company expects to make pension contributions of approximately $9 million in 2009. For the six months ended June 30, 2009, the Company made pension contributions of approximately $3.6 million.  In addition, Neenah Germany expects to pay approximately $1.6 million (based on exchange rates at June 30, 2009) for pension benefits in 2009. Neenah Germany made approximately $0.7 million of such pension benefit payments during the six months ended June 30, 2009.

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Note 11.  Stock Compensation Plan

The Company established the 2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”) in December 2004. The Company reserved 3,500,000 shares of $0.01 par value common stock (“Common Stock”) for issuance under the Omnibus Plan. Pursuant to the terms of the Omnibus Plan, the compensation committee of the Company’s Board of Directors may grant various types of equity-based compensation awards, including incentive and nonqualified stock options, stock appreciation rights, restricted stock, RSUs, restricted stock units with performance conditions (“Performance Shares”) and performance units, in addition to certain cash-based awards. All grants under the Omnibus Plan will be made at fair market value and no grant may be repriced. In general, the options expire ten years from the date of grant and vest over a three-year service period. As of June 30, 2009, approximately 2,305,000 shares of Common Stock (based on the closing market price for Common Stock at June 30, 2009) were reserved for future issuance under the Omnibus Plan.  The Company accounts for stock-based compensation pursuant to the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment.

Valuation and Expense Information

Substantially all stock-based compensation expense is recorded in selling, general and administrative expenses on the condensed consolidated statements of operations.  The following table summarizes stock-based compensation expense and related income tax benefits for the three months ended June 30, 2009 and 2008.

The following table summarizes total compensation costs related to the Company’s equity awards and amounts recognized in the three and six months ended June 30, 2009.

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Stock Options

During the six months ended June 30, 2009, the Company awarded nonqualified stock options to Long-Term Incentive Plan (the “LTIP”) participants to purchase 350,600 shares of common stock (subject to forfeiture due to termination of employment and other conditions).  In addition, the Company awarded to non-employee members of the board of directors nonqualified stock options to purchase 32,000 shares of Common Stock. For the six months ended June 30, 2009, the weighted-average exercise price of such nonqualified stock option awards was $7.46 per share. The exercise price of the options was equal to the market price of the Company’s common stock on the date of grant.  In general, the options expire in ten years and one-third vest on each of the first three anniversaries of the date of grant.  For options awarded to non-employee members of the board of directors, options expire in ten years and vest on the first anniversary of the date of grant. The weighted-average grant date fair value for stock options granted during the six months ended June 30, 2009 was $2.11 per share and was estimated using the Black-Scholes option valuation model with the following assumptions:

The expected term was estimated based upon historical data for Kimberly-Clark stock option awards. The expected volatility was based on the Company’s historical stock price performance.  The risk-free interest rate was based on the yield on U.S. Treasury bonds with a remaining term approximately equivalent to the expected term of the stock option award.  Forfeitures were estimated at the date of grant.

No stock options were exercised during the six months ended June 30, 2009 and 2008. The aggregate intrinsic value of approximately 1,240,000 stock options that were exercisable at June 30, 2009 was approximately $0.5 million. The aggregate intrinsic value of approximately 1,207,000 stock options that were exercisable at December 31, 2008 was zero.

The aggregate grant date fair value of approximately 105,000 stock options and SARs that vested during the six months ended June 30, 2009, was $1.0 million. As of June 30, 2009, certain participants met age and service requirements that allowed their options to qualify for accelerated vesting upon retirement. As of June 30, 2009, LTIP participants held options to purchase 210,000 shares of common stock that would have been exercisable if they had retired as of such date. The aggregate grant date fair value of options subject to accelerated vesting was $1.1 million. Stock options subject to accelerated vesting for expense recognition become exercisable according to the contract terms of the stock option grant.

As of June 30, 2009, the aggregate intrinsic value of 1,915,000 stock options or SARs that were vested or expected to vest was $0.5 million.  The weighted-average grant date fair value of such stock options was $9.32 per share. As of December 31, 2008, the weighted-average grant date fair value and aggregate intrinsic value of 1,619,000 stock options that were vested or expected to vest was $11.10 per share and zero, respectively.

As of June 30, 2009, the Company has approximately 475,000 unvested stock options with a weighted-average grant date fair value of $4.84 per share. As of December 31, 2008, approximately 415,000 unvested stock options were outstanding with a weighted-average grant date fair value of $6.98 per share.

Performance Shares

During the six months ended June 30, 2009, the Company made a target award of 216,400 Performance Shares to LTIP participants. The measurement period for the Performance Shares is January 1, 2009 through December 31, 2011. Common stock equal to between 30 percent and 250 percent of the performance share target will be awarded based on the Company’s growth in earnings before interest, taxes, depreciation and amortization (“EBITDA”) minus a capital charge and total return to shareholders relative to a peer group of companies and the Russell 2000® Value small cap index. The weighted-average grant date fair value for the Performance Shares was $4.07 per share (which represents the grant date market price of the Company’s common stock of $7.41 per share multiplied by the probability weighted expected payout of approximately 0.55 shares of common stock for each Performance Share) and was estimated using a “Monte Carlo” simulation technique. Compensation cost is recognized pro rata over the vesting period.

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Note 12.  Goodwill and Other Intangible Assets

The following table presents changes in the carrying amount of goodwill for the three months ended June 30, 2009.  All of such goodwill is reported in the Technical Products segment.

The following table presents the gross carrying amount of intangible assets and the related accumulated amortization for intangible assets subject to amortization.