Appvion 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: July 5, 2009

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For The Transition Period From            To             ..

Commission file numbers: 333-82084-01

                                           333-82084

PAPERWEIGHT DEVELOPMENT CORP.	APPLETON PAPERS INC.
(Exact Name of Registrant as Specified in Its Charter)	(Exact Name of Registrant as Specified in Its Charter)
Wisconsin	Delaware
(State or Other Jurisdiction of Incorporation or Organization)	(State or Other Jurisdiction of Incorporation or Organization)
39-2014992	36-2556469
(I.R.S. Employer Identification No.)	(I.R.S. Employer Identification No.)
825 East Wisconsin Avenue, P.O. Box 359, Appleton, Wisconsin	54912-0359
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (920) 734-9841

Indicate by check mark whether each 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  ¨

Indicate by check mark whether each 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  ¨    No  ¨

Indicate by check mark whether either of the registrants is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large Accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

As of August 2, 2009, 10,244,292 shares of Paperweight Development Corp. common stock, $.01 par value, were outstanding. There is no trading market for the common stock of Paperweight Development Corp. As of May 1, 2009, 100 shares of Appleton Papers Inc.’s common stock, $100.00 par value, were outstanding. There is no trading market for the common stock of Appleton Papers Inc. No shares of Paperweight Development Corp. or Appleton Papers Inc. were held by non-affiliates.

Documents incorporated by reference: None.

Appleton Papers Inc. meets the conditions set forth in General Instruction -H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

INDEX

		Page Number
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)
	a) Condensed Consolidated Balance Sheets	3
	b) Condensed Consolidated Statements of Operations	4
	c) Condensed Consolidated Statements of Cash Flows	5
	d) Consolidated Statements of Redeemable Common Stock, Accumulated Deficit, Accumulated     Other Comprehensive (Loss) Income and Comprehensive Income (Loss)	6
	e) Notes to Condensed Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4T	Controls and Procedures	41
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	42
Item 1A	Risk Factors	42
Item 3	Defaults Upon Senior Securities	43
Item 6	Exhibits	44
Signatures

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements (unaudited)

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except share data)
	July 5, 2009			January 3, 2009
ASSETS
Current assets
Cash and cash equivalents	$	3,089		$	4,180
Accounts receivable, less allowance for doubtful accounts of $1,697 and $1,715, respectively		105,238			88,218
Inventories		116,417			124,856
Other current assets		60,296			45,920
Assets held for sale		9,049			9,327
Total current assets		294,089			272,501
Property, plant and equipment, net of accumulated depreciation of   $421,786 and $394,075, respectively		422,180			439,301
Goodwill		9,251			9,251
Intangible assets, net		69,567			71,404
Environmental indemnification receivable		50,032			114,300
Other assets		15,859			13,909
Assets held for sale		8,762			9,255
Total assets	$	869,740		$	929,921
LIABILITIES, REDEEMABLE COMMON STOCK,  ACCUMULATED DEFICIT AND  ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	5,866		$	5,455
Accounts payable		51,329			61,093
Accrued interest		4,958			3,628
Other accrued liabilities		77,419			83,502
Liabilities held for sale		1,862			2,085
Total current liabilities		141,434			155,763
Long-term debt		619,037			598,598
Postretirement benefits other than pension		45,644			45,364
Accrued pension		111,688			109,532
Environmental liability		50,032			114,300
Other long-term liabilities		9,284			13,309
Commitments and contingencies (Note 13)		-			-
Redeemable common stock, $0.01 par value, shares authorized: 30,000,000, shares issued and outstanding:          10,245,419 and 10,643,894, respectively		135,579			147,874
Accumulated deficit		(147,465	)		(159,650	)
Accumulated other comprehensive loss		(95,493	)		(95,169	)
Total liabilities, redeemable common stock, accumulated        deficit and accumulated other comprehensive loss	$	869,740		$	929,921

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
	Three Months Ended July 5, 2009			Three Months Ended June 29, 2008		Six Months Ended July 5, 2009			Six Months Ended June 29, 2008
Net sales	$	213,411		$	250,113	$	425,961		$	486,725
Cost of sales		163,191			199,159		334,000			380,849
Gross profit		50,220			50,954		91,961			105,876
Selling, general and administrative expenses		31,930			40,516		66,248			85,134
Operating income		18,290			10,438		25,713			20,742
Other expense (income)
Interest expense		12,830			10,212		24,222			21,286
Debt extinguishment income, net		-			-		(5,380	)		-
Interest income		(21	)		(56)		(37	)		(237)
Litigation settlement, net (Note 13)		-			(41)		-			(22,274)
Foreign exchange (gain) loss		(881	)		(6)		(602	)		226
Other income		(820	)		-		(820	)		-
Income from continuing operations before income taxes		7,182			329		8,330			21,741
(Benefit) provision for income taxes		(62	)		55		(77	)		92
Income from continuing operations		7,244			274		8,407			21,649
Discontinued operations
Loss from discontinued operations, net of income   taxes		-			(42,950)		-			(42,925)
Net income (loss)	$	7,244		$	(42,676)	$	8,407		$	(21,276)
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(unaudited)
(dollars in thousands)
	July 5, 2009			June 29, 2008
Cash flows from operating activities:
Net income (loss)		$	8,407		$	(21,276)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			28,987			27,100
Amortization of intangible assets			1,921			2,466
Impairment of discontinued operations goodwill and long-lived assets			-			40,134
Amortization of financing fees			1,315			1,160
Employer 401(k) noncash matching contributions			2,111			3,082
Foreign exchange (gain) loss			(602)			426
Loss on disposals of equipment			123			844
Accretion of capital lease obligation			40			61
Gain on debt extinguishment			(5,380)			-
(Increase)/decrease in assets and increase/(decrease) in liabilities:
Accounts receivable			(15,708)			2,875
Inventories			7,982			(21,676)
Other current assets			(14,404)			216
Accounts payable and other accrued liabilities			2,175			(18,000)
Restructuring reserve			(1,924)			(239)
Accrued pension			2,670			(2,654)
Other, net			(5,077)			(11,337)
Net cash provided by operating activities			12,636			3,182
Cash flows from investing activities:
Proceeds from sale of equipment			27			4
Additions to property, plant and equipment			(11,524)			(50,728)
Net cash used by investing activities			(11,497)			(50,724)
Cash flows from financing activities:
Payments of senior secured notes payable			(1,125)			(1,125)
Payments of senior subordinated notes payable			(1,687)			-
Debt acquisition costs			(3,124)			-
Payments relating to capital lease obligation			(366)			(366)
Proceeds from revolving credit facility			119,450			178,958
Payments of revolving credit facility			(91,450)			(137,771)
Proceeds from State of Ohio loan			3,000			-
Payments of State of Ohio loan			(400)			-
Payments of secured financing			(1,125)			-
Proceeds from issuance of redeemable common stock			2,075			3,721
Payments to redeem common stock			(12,550)			(17,429)
Decrease in cash overdraft			(14,928)			(6,819)
Net cash (used) provided by financing activities			(2,230)			19,169
Effect of foreign exchange rate changes on cash and cash equivalents			-			159
Change in cash and cash equivalents			(1,091)			(28,214)
Cash and cash equivalents at beginning of period			4,180			44,838
Cash and cash equivalents at end of period		$	3,089		$	16,624

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK,
ACCUMULATED DEFICIT, ACCUMULATED OTHER COMPREHENSIVE (LOSS)
INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED
(unaudited)
(dollars in thousands, except share data)
	Redeemable Common Stock
	Shares Outstanding			Amount			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Comprehensive Income (Loss)
Balance, January 3, 2009		10,643,894		$	147,874		$	(159,650	)	$	(95,169	)
Comprehensive income
Net income		-			-			8,407			-		$	8,407
Changes in retiree plans, net		-			-			-			(575	)		(575	)
Realized and unrealized gain on derivatives		-			-			-			251			251
Total comprehensive income													$	8,083
Issuance of redeemable common stock		213,730			4,033			-			-
Redemption of redeemable common stock		(612,205	)		(12,550	)		-			-
Accretion of redeemable common stock		-			(3,778	)		3,778			-
Balance, July 5, 2009		10,245,419		$	135,579		$	(147,465	)	$	(95,493	)
Balance, December 29, 2007		11,116,751		$	182,040		$	(80,086	)	$	3,679
Comprehensive loss
Net loss		-						(21,276	)		-		$	(21,276	)
Change in retiree plans, net		-			-			-			27			27
Foreign currency translation adjustment		-			-			-			(41	)		(41	)
Realized and unrealized gain on derivatives		-			-			-			2,731			2,731
Total comprehensive loss													$	(18,559	)
Issuance of redeemable common stock		253,936			6,813			-			-
Redemption of redeemable common stock		(575,239	)		(17,429	)		-			-
Accretion of redeemable common stock		-			(1,345	)		1,345			-
Balance, June 29, 2008		10,795,448		$	170,079		$	(100,017	)	$	6,396

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.         BASIS OF PRESENTATION

In the opinion of management, all adjustments necessary for the fair presentation of the results of operations for the three and six months ended July 5, 2009 and June 29, 2008, the cash flows for the six months ended July 5, 2009 and June 29, 2008 and financial position at July 5, 2009 have been made. All adjustments made were of a normal recurring nature.

These condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes of Paperweight Development Corp. (“PDC”) and its wholly-owned subsidiaries (collectively the “Company”) for each of the three years in the period ended January 3, 2009, which are included in the annual report on Form 10-K for the year ended January 3, 2009. The consolidated balance sheet data as of January 3, 2009, contained within these condensed financial statements, was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Appleton Papers Inc. (“Appleton”) is a wholly-owned subsidiary of PDC.

The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The Company has performed an evaluation of subsequent events through August 7, 2009, the date the financial statements were issued. Certain immaterial prior year financial statement amounts have been reclassified to conform to their current year presentation.

2.         DISPOSITIONS

During second quarter 2009, Appleton committed to a formal plan to sell C&H Packaging Company, Inc. (“C&H”). C&H, located in Merrill, Wisconsin, was acquired in 2003 and prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial products industries. The assets and liabilities of C&H are reported as held for sale for the periods ended July 5, 2009 and January 3, 2009. Prospectively, as of the end of second quarter 2009, depreciation and amortization expense will be suspended. The sale is expected to be completed prior to the end of 2009. C&H is included within the performance packaging business segment.

Net assets held for sale consist of the following (dollars in thousands):

	July 5, 2009			January 3, 2009
Accounts receivable	$	2,869		$	3,811
Inventories		5,824			5,197
Other current assets		356			319
Property, plant and equipment, net		5,961			6,370
Goodwill		1,350			1,350
Intangible assets, net		1,451			1,535
Accounts payable		(1,449	)		(1,445	)
Other accrued liabilities		(413	)		(640	)
Net assets held for sale	$	15,949		$	16,497

Late in 2007, Appleton committed to a formal plan to sell Bemrose Group Limited (“Bemrose”), its secure and specialized print services business based in Derby, England. After conducting a strategic review in the fourth quarter of 2007, Appleton decided to focus its attention and expand its leadership positions in its core businesses. The operating results of Bemrose for the three and six months ended June 29, 2008 are reported separately as discontinued operations. For the three and six months ended June 29, 2008, Bemrose recorded net sales of $24.4 million and $47.2 million, respectively, and a loss before income taxes of $42.9 million for each period.

7

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

On August 1, 2008, Appleton completed the sale of Bemrose receiving £2.0 million ($3.9 million) of cash and £3.2 million ($6.4 million) of notes receivable to be settled within 75 and 180 days after closing. The first tranche of notes receivable was paid in November 2008, however, due to continuing difficult business conditions in Bemrose markets, Appleton established a £1.0 million ($1.5 million) reserve against the £2.0 million ($3.0 million) remaining principal and interest due at year-end 2008. During second quarter 2009, Appleton and Bemrose negotiated an amendment to the original sales agreement related to the second tranche of the note receivable. Bemrose agreed to pay Appleton £1.5 million (or approximately $2.5 million). In return, Appleton agreed to release Bemrose from the remaining £0.5 million ($0.8 million). During July 2009, £1.0 million ($1.6 million) was received from Bemrose. Interest will accrue on the unpaid balance and will be paid in addition to the remaining principal in January 2012. These renegotiated terms resulted in a partial recovery of the reserve established at year-end 2008 and the recording of a £0.5 million ($0.8 million) gain in other income from continuing operations in the Condensed Consolidated Statement of Operations for the three and six months ended July 5, 2009. The note receivable has been recorded within other long-term assets.

3.        GOODWILL AND OTHER INTANGIBLE ASSETS

 The Company reviews the carrying value of goodwill and intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that an asset might be impaired. The carrying amount of goodwill as of July 5, 2009 and January 3, 2009 was $9.3 million and was assigned entirely to the performance packaging segment.

The Company’s other intangible assets consist of the following (dollars in thousands):

	As of July 5, 2009				As of January 3, 2009
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible assets:
Trademarks	$	47,835	$	19,718	$	47,835	$	18,590
Patents		30,778		30,670		30,778		30,570
Customer relationships		25,064		6,592		25,064		5,983
Non-compete agreements		691		686		691		686
Subtotal		104,368	$	57,666		104,368	$	55,829
Unamortizable intangible assets:
Trademarks		22,865				22,865
Total	$	127,233			$	127,233

Of the $127.2 million of acquired intangible assets, $70.7 million was assigned to registered trademarks. Trademarks of $44.6 million related to carbonless paper and $3.2 million related to the Company’s 2003 and 2005 acquisitions are being amortized over their estimated useful life of 20 years, while the remaining $22.9 million are considered to have an indefinite life and, as such, are not subject to amortization. The remaining acquired intangible assets are being amortized over their estimated useful lives ranging from 3 to 25 years for patents and customer relationships and 1 to 5 years for non-compete agreements.

Total amortization expense for the three and six months ended July 5, 2009 was $0.9 million and $1.9 million, respectively. Of these amounts, C&H reported amortization expense of $0.1 million for the six months ended July 5, 2009. Amortization expense for the three and six months ended June 29, 2008 was $1.1 million and $2.5 million, respectively. Of these amounts, C&H recorded amortization expense of $0.1 million for the six months ended June 29, 2008.

4.         RESTRUCTURING AND OTHER CHARGES

Due to the impact of the economic downturn on the business, salaried headcount was reduced by 72 during December 2008. In addition, due to a shift of production from the Appleton, Wisconsin plant to the West Carrollton, Ohio paper mill and the impact of the economic downturn on the business, production headcount was reduced by 127. As a result, the Company recorded $2.6 million of restructuring and other charges, for employee termination benefits, during 2008.

8

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The table below summarizes the restructuring reserve included in the consolidated balance sheets at July 5, 2009 and January 3, 2009 (dollars in thousands):

		January 3, 2009			2009 Additions		2009			July 5, 2009
		Reserve			to Reserve		Utilization			Reserve
	$			$			$			$
U.S. employee termination benefits			2,138			-		(1,924	)		214

5.         INVENTORIES

Inventories consist of the following (dollars in thousands):

	July 5, 2009			January 3, 2009
Finished goods	$	67,196		$	70,448
Raw materials, work in process and supplies		63,548			69,255
		130,744			139,703
Inventory reserve		(3,619	)		(4,330	)
		127,125			135,373
LIFO reserve		(10,708	)		(10,517	)
	$	116,417		$	124,856

Stores and spare parts inventory balances of $23.3 million and $23.1 million at July 5, 2009 and January 3, 2009, respectively, are valued at average cost and are included in raw materials, work in process and supplies. Inventories valued using the FIFO method approximate 9% of the Company’s total inventory balance at both July 5, 2009, and January 3, 2009.

6.         PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment balances consist of the following (dollars in thousands):

	July 5, 2009			January 3, 2009
Land and improvements	$	9,909		$	9,880
Buildings and improvements		132,441			132,110
Machinery and equipment		648,692			646,294
Software		32,654			32,112
Capital lease		4,764			4,764
Construction in progress		15,506			8,216
		843,966			833,376
Accumulated depreciation/amortization		(421,786	)		(394,075	)
	$	422,180		$	439,301

9

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Depreciation  expense for the three and six months ended July 5, 2009 and June 29, 2008, consists of the following (dollars in thousands):

	For the Three		For the Three		For the Six		For the Six
	Months Ended		Months Ended		Months Ended		Months Ended
Depreciation Expense	July5, 2009		June29, 2008		July5, 2009		June29, 2008
Cost of sales	$	12,890	$	11,752	$	25,651	$	23,304
Selling, general and administrative expenses		1,668		1,920		3,336		3,796
	$	14,558	$	13,672	$	28,987	$	27,100

 Included in the amounts above, C&H recorded depreciation of $0.2 million and $0.4 million for the three and six months ended July 5, 2009, respectively. Also included in the above table, C&H recorded depreciation of $0.2 million and $0.4 million for the three and six months ended June 29, 2008, respectively.

7.        OTHER CURRENT AND NONCURRENT ASSETS

Other current assets consist of the following (dollars in thousands):

	July 5, 2009		January 3, 2009
Environmental indemnification receivable	$	37,700	$	37,700
Alternative fuels tax credit receivable		7,962		-
Note receivable from Bemrose		1,639		1,449
Other		12,995		6,771
	$	60,296	$	45,920

Other noncurrent assets consist of the following (dollars in thousands):

	July 5, 2009		January 3, 2009
Deferred debt issuance costs	$	12,344	$	10,968
Other		3,515		2,941
	$	15,859	$	13,909

8.        OTHER ACCRUED LIABILITIES

Other accrued liabilities, as presented in the current liabilities section of the balance sheet, consist of the following (dollars in thousands):

	July 5, 2009		January 3, 2009
Payroll and bonus	$	5,377	$	4,776
Trade discounts		15,891		18,537
Workers’ compensation		3,989		4,489
Accrued insurance		1,673		1,744
Other accrued taxes		974		1,787
Postretirement benefits other than pension		3,329		3,329
Fox River Liabilities		37,700		37,700
Restructuring reserve		214		2,138
Other		8,272		9,002
	$	77,419	$	83,502

10

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

9.         NEW ACCOUNTING PRONOUNCEMENTS

 In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (“Codification”). The Codification will become the single source for all authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and the Company has determined that it will not have an impact on its consolidated results of operations, financial position and cash flows.

 In May 2009, the FASB issued SFAS 165, “Subsequent Events.”  This statement is applicable to the accounting for and disclosure of subsequent events not addressed in other GAAP. It provides a definition of subsequent events and guidance as to when subsequent events are recognized or not recognized. SFAS 165 requires the disclosure of the date through which subsequent events have been evaluated, as well as whether the date is the date the financial statements were issued or the date the financial statements were available to be issued. These provisions are effective for interim or annual financial periods ending after June 15, 2009, and should be applied prospectively. The provisions of SFAS 165 were adopted by the Company during its second quarter ended July 5, 2009 and had no material impact on its financial statements.

In April 2009, the FASB issued FASB Staff Position (“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.” Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with SFAS 157 “Fair Value Measurements.” The provisions of FSP FAS 157-4 were adopted by the Company during its second quarter ended July 5, 2009. There was no current period impact on its financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1 “Interim Disclosures about Fair Value of Financial Instruments.” The FSP amends SFAS 107 “Disclosures about Fair Value of Financial Instruments” to require an entity to provide disclosures about fair value of financial instruments in interim financial information. The provisions of FSP FAS 107-1 were adopted by the Company during its second quarter ended July 5, 2009. The current period impact is addressed in Note 17, Fair Value of Financial Instruments.

In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1, “Employer’s Disclosures about Postretirement Benefit Plan Assets,” which amends SFAS 132 (Revised 2003), “Employers’ Disclosures about Pension and Other Postretirement Benefits,” to provide guidance on an employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. This pronouncement is effective for fiscal years ending after December 15, 2009. Upon initial application, the provisions are not required to be adopted for earlier periods as presented for comparative purposes. Earlier application of the provisions is permitted. The Company does not believe adoption will have a material impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. These provisions are effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company adopted SFAS 161 during its first quarter 2009. The principal impact to the Company was to require the expansion of its disclosures regarding derivative instruments.

In December 2007, the FASB issued SFAS 141 (Revised 2007), “Business Combinations.” SFAS 141R requires that an acquiring entity recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R will change the accounting treatment for acquisition costs, non-controlling interests, contingent liabilities, in-process research and development, restructuring costs and income taxes. In addition, it also requires a substantial number of new disclosure requirements. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company adopted SFAS 141R during the first quarter of 2009. The adoption did not have a material impact on its consolidated financial statements.

11

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

10.      EMPLOYEE BENEFITS

The Company has various defined benefit pension plans and defined contribution pension plans. This includes a Supplemental Executive Retirement Plan (“SERP”) to provide retirement benefits for management and other highly compensated employees whose benefits are reduced by the tax-qualified plan limitations of the pension plan for eligible salaried employees. The components of net periodic pension cost include the following (dollars in thousands):

	For the			For the			For the			For the
	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
Pension Benefits	July 5, 2009			June 29, 2008			July 5, 2009			June 29, 2008
Net periodic benefit cost
Service cost	$	1,458		$	1,539		$	2,916		$	3,077
Interest cost		4,908			4,488			9,817			8,976
Expected return on plan assets		(5,199	)		(5,186	)		(10,399	)		(10,372	)
Amortization of
Prior service cost		135			48			270			96
Actuarial loss		123			-			245			-
Net periodic benefit cost	$	1,425		$	889		$	2,849		$	1,777

Effective January 1, 2008, the Company amended the Appleton Papers Inc. Retirement Plan (the “Plan”) to provide that no individuals hired or re-hired on or after January 1, 2008, shall be eligible to participate in the Plan. Also, plan benefits accrued under the Plan were frozen as of April 1, 2008, with respect to Plan participants who elected to participate effective April 1, 2008, in a “Mandatory Profit Sharing Contribution” under the Appleton Papers Inc. Retirement Savings and Employee Stock Ownership Plan (the “KSOP”) or will be frozen as of January 1, 2015, in the case of any other Plan participants.

The Company expects to contribute approximately $10 million to its pension plan in fiscal 2009 for plan year 2008. No contributions were made to the pension plan during the first half of 2009.

11.      POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS

The Company has defined postretirement benefit plans that provide medical, dental and life insurance for certain retirees and eligible dependents. The components of other postretirement benefit cost include the following (dollars in thousands):

	For the			For the			For the			For the
	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
Other Postretirement Benefits	July 5, 2009			June 29, 2008			July 5, 2009			June 29, 2008
Net periodic benefit cost
Service cost	$	185		$	233		$	370		$	465
Interest cost		767			770			1,534			1,540
Amortization of
Prior service cost		(545	)		(539	)		(1,090	)		(1,078	)
Actuarial loss		-			1			-			2
Net periodic benefit cost	$	407		$	465		$	814		$	929

12

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

12.      LONG-TERM INCENTIVE COMPENSATION

In December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive Plan. In July 2002, the Company adopted the Appleton Papers Canada Ltd. Share Appreciation Rights Plan. These plans provide officers and key employees the opportunity to be awarded phantom units, the value of which is based on the change in the fair market value of PDC’s common stock under the terms of the employee stock ownership plan (the “ESOP”) prior to the grant date or the exercise date, as applicable. During the first quarter of 2009, 463,000 new phantom units were issued under the Appleton Papers Inc. Long-Term Incentive Plan at a share price of $21.43 which was the fair market value of one share of PDC common stock as of January 3, 2009. There was no expense recorded for this plan during the three and six months ended July 5, 2009. As a result of a June 29, 2008 decline in share price, the Company recorded reductions to compensation expense of $2.8 million and $2.7 million within selling, general and administrative expenses for the three and six months ended June 29, 2008, respectively.

Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. Deferred compensation is in the form of phantom units and is earned over the course of six-month calendar periods of service beginning January 1 and July 1. The number of units to be earned is calculated using the established dollar value of the compensation divided by the fair market value of one share of PDC common stock as established under the terms of the ESOP as of the prior December 31 and June 30, respectively. This deferred compensation vests coincidental with the board member’s continued service on the board. Upon cessation of service as a director, the deferred compensation will be paid in five equal annual cash installments. There was no expense recorded for this plan during the three months ended July 5, 2009. Approximately $0.1 million was recorded as expense, related to this plan, for the first half of 2009. There was no expense recorded for this plan during the three and six months ended June 29, 2008.

13.      COMMITMENTS AND CONTINGENCIES

Lower Fox River

Introduction. Various federal and state government agencies and Native American tribes have asserted claims against Appleton and others with respect to historic discharges of polychlorinated biphenyls (“PCBs”) into the Lower Fox River in Wisconsin. Carbonless paper containing PCBs was manufactured at what is currently the Appleton plant from 1954 until 1971. During this period, wastewater containing PCBs was discharged into the Lower Fox River from a publicly-owned treatment works, from the Appleton Coated paper mill and from other local industrial facilities. Wastewater from the Appleton plant was processed through the publicly-owned treatment works. As a result, there are allegedly eleven million cubic yards of PCB contaminated sediment spread over 39 miles of the Lower Fox River and Green Bay, which is part of Lake Michigan.

The United States Environmental Protection Agency (“EPA”) published a notice in 1997 that it intended to list the Lower Fox River on the National Priorities List of Contaminated Sites pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act, (“CERCLA” or “Superfund”). The EPA identified seven potentially responsible parties (“PRPs”) for PCB contamination in the Lower Fox River, including NCR, Appleton, Georgia-Pacific, P.H. Glatfelter Company, WTMI Co., owned by Chesapeake Corporation, Riverside Paper Corporation and U.S. Paper Mills Corp., which is now owned by Sonoco Products Company. 

Remedial Action. The EPA and the Wisconsin Department of Natural Resources (“DNR”) issued two Records of Decision (“ROD”) in 2003, estimating the total costs for the Lower Fox River remedial action at approximately $400 million. Other estimates obtained by the PRPs range from a low of $450 million to as much as $1.6 billion. More recent estimates place the cost between $594 million and $900 million. In June 2007, the EPA and DNR issued an amended ROD which modified the remedial action plan for the Lower Fox River.

The EPA issued an administrative order in November 2007, directing the PRPs to implement the remedial action of the Fox River. The PRPs have initiated remediation work under a work plan and are negotiating to reach a funding arrangement to complete the work plan.

13

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Appleton and NCR filed a lawsuit in January 2008 in federal court against various defendants, including other PRPs and certain municipalities in an effort to require contribution to the cost of cleaning up PCB-contaminated sediment in the Fox River.

Natural Resource Damages. In 2000, the U.S. Fish & Wildlife Service (“FWS”) released a proposed plan for restoring natural resources injured by PCBs. The plan estimates that natural resource damages (“NRDs”) will fall in the range of $176 million to $333 million for all PRPs. However, based on settlements of NRD claims to date, which have been substantially less than original estimates, the Company anticipates the actual costs of NRD claims will be less than the original estimates provided by FWS.

Interim Restoration and Remediation Consent Decree. Appleton and NCR collectively paid $41.5 million for interim restoration and remediation efforts pursuant to a 2001 consent decree with various governmental agencies (the “Intergovernmental Parties” or “IGP”). In addition, Appleton and NCR collectively paid approximately $750,000 toward interim restoration efforts and the preparation of a progress report pursuant to a 2006 consent decree with the IGP. Appleton and NCR also paid $2.8 million in 2007 to fund a land acquisition in partial settlement of NRD claims. Neither of the consent decrees nor the land acquisition constitutes a final settlement or provides protection against future claims; however, Appleton and NCR will receive full credit against remediation costs and NRD claims for all monies expended.

Appleton’s Liability. CERCLA imposes liability on parties responsible for, in whole or in part, the presence of hazardous substances at a site. Superfund-liable parties can include both current and prior owners and operators of a facility. While any PRP may be held liable for the entire cleanup of a site, the final allocation of liability among PRPs generally is determined by negotiation, litigation or other dispute resolution processes.

Appleton purchased the Appleton plant and the Combined Locks paper mill from NCR in 1978, after the use of PCBs in the manufacturing process was discontinued. Nonetheless, the EPA named both Appleton and NCR as PRPs in connection with remediation of the Lower Fox River. Appleton’s and NCR’s obligations to share defense and liability costs are defined by a 2006 arbitration determination.

The 2000 FWS study offered a preliminary conclusion that the discharges from the Appleton plant and the Combined Locks paper mill were responsible for 36% to 52% of the total PCBs discharged. These estimates have not been finalized and are not binding on the PRPs. Appleton has obtained its own historical and technical analyses which suggest that the percentage of PCBs discharged from the Appleton and Combined Locks facilities is less than 20% of the total PCBs discharged.

 A portion of Appleton’s potential liability for the Lower Fox River may be joint and several. If, in the future, one or more of the other PRPs were to become insolvent or unable to pay its respective share(s) of the potential liability, Appleton could be responsible for a portion of its share(s). Based on a review of publicly available financial information, Appleton believes that other PRPs will be required, and have adequate financial resources, to pay their shares of the remediation and natural resource damage claims for the Lower Fox River.

Estimates of Liability. Appleton cannot precisely estimate its ultimate share of liability due to uncertainties regarding the scope and cost of implementing the final remediation plan, the scope of restoration and final valuation of NRD assessments, the evolving nature of remediation and restoration technologies and governmental policies, and Appleton’s share of liability relative to other PRPs. However, the issuance of the RODs, the receipt of bid proposals and the beginning of remediation activities provide evidence to reasonably estimate a range of Appleton’s potential liability.

Accordingly, Appleton has recorded a reserve for its potential liability for the Lower Fox River. At January 3, 2009, this reserve was $152.0 million. During the first six months of 2009, $64.3 million of payments were made from the reserve. This resulted in a remaining reserve of $87.7 million as of July 5, 2009, of which $37.7 million is recorded in other accrued liabilities and $50.0 million is recorded as a long-term environmental liability.

The following assumptions were used in evaluating Appleton’s potential Lower Fox River liability and establishing a remediation reserve:

• total remediation costs of $654 million, based on the most recent bids received with a range from $594 million to $900 million;

14

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

• the FWS preliminary estimate that discharges from the Appleton plant and the Combined Locks mill represent 36% to 52%  of the total PCBs discharged by the PRPs, which is substantially greater than Appleton’s estimate;

• costs to settle NRD claims against Appleton and NCR, estimated at $20 million or less, based on the IGP’s settlement of other NRD claims;

• Appleton’s responsibility for over half of the claims asserted against Appleton and NCR, based on the Company’s interim settlement agreement with NCR and the arbitration determination; and

• $25 million in fees and expenses.

Although Appleton believes its recorded environmental liability reflects a reasonable estimate of its liabilities associated with the Lower Fox River, the actual amount of liabilities associated with the Lower Fox River could prove to be significantly larger than the recorded environmental liability.

AWA Indemnification. Pursuant to two indemnification agreements entered in 2001, AWA agreed to indemnify PDC and PDC agreed to indemnify Appleton for costs, expenses and liabilities related to certain governmental and third-party environmental claims, which are defined in the agreements as the Fox River Liabilities.

Under the indemnification agreements, Appleton is indemnified for the first $75 million of Fox River Liabilities and for amounts in excess of $100 million. During 2008, Appleton paid $25 million in satisfaction of its unindemnified portion of the Fox River Liabilities. AWA has paid $151.9 million in connection with Fox River Liabilities through first half 2009. At July 5, 2009, the total indemnification receivable from AWA was $87.7 million, of which $37.7 million is recorded in other current assets and $50.0 million is recorded as an environmental indemnification receivable.

 In connection with the indemnification agreements, AWA purchased and fully paid for indemnity claim insurance from Commerce & Industry Insurance Company, an affiliate of American International Group, Inc. The insurance policy provides up to $250 million of coverage for Fox River Liabilities, subject to certain limitations defined in the policy. At July 5, 2009, the policy had $98.1 million of remaining coverage which is sufficient to cover Appleton’s currently estimated share of the Fox River Liabilities. AWA’s obligations to maintain indemnity claim insurance covering the Fox River Liabilities are defined in and limited by the terms of the Fox River AWA Environmental Indemnity Agreement, as amended.

The indemnification agreements negotiated with AWA and the Commerce & Industry Insurance policy are designed to ensure that Appleton will not be required to fund any of the indemnified costs and expenses in relation to the Fox River Liabilities and to assure the ESOP Trustee and Appleton’s lenders and investors that Appleton will not have to rely solely on AWA itself to make these payments. This arrangement is working as designed and is expected to continue to protect Appleton with respect to the indemnified costs and expenses, based on Appleton’s review of the insurance policy and the financial condition of AWA and Commerce & Industry Insurance Company. AWA, PDC, the special purpose subsidiaries and the policyholder entered into a Relationship Agreement, which, among other things and subject to certain limited exceptions, prohibits AWA and PDC from taking any actions that would result in any change to this design structure.

In March 2008, Appleton received favorable jury verdicts in a state court declaratory judgment relating to insurance coverage of its environmental claims involving the Fox River. A final judgment and order was entered in January 2009. The insurers have appealed the final judgment. Under the terms of the indemnification agreement, recoveries from insurance are reimbursed to AWA to the extent of its indemnification obligation.

15

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

West Carrollton Mill

The West Carrollton, Ohio mill operates pursuant to various state and federal permits for discharges and emissions to air and water. As a result of the de-inking of carbonless paper containing PCBs through the early 1970s, there have been releases of PCBs and volatile organic compounds into the soil in the area of thewastewater impoundments at the West Carrollton facility and low levels of PCBs have been detected in groundwater immediately under this area. In addition, PCB contamination is present in sediment in the adjacent Great Miami River, but it is believed that this contamination is from a source other than the West Carrollton mill.

Based on investigation and delineation of PCB contamination in soil and groundwater in the area of the wastewater impoundments, Appleton believes that it could be necessary to undertake remedial action in the future, although Appleton is currently under no obligation to do so. Appleton has not had any discussions or communications with any federal, state or local agencies or authorities regarding remedial action to address PCB contamination at the West Carrollton mill. The cost for remedial action, which could include installation of a cap, long-term pumping, treating and/or monitoring of groundwater and removal of sediment in the Great Miami River, was estimated in 2001 to range up to approximately $10.5 million, with approximately $3 million in short-term capital costs and the remainder to be incurred over a period of 30 years. However, costs could exceed this amount if additional contamination is discovered, if additional remedial action is necessary or if the remedial action costs are more than expected.

Because of the uncertainty surrounding the ultimate course of action for the West Carrollton mill property, the Great Miami River remediation and Appleton’s share of these remediation costs, if any, and since Appleton is currently under no obligation to undertake remedial action in the future, no provision has been recorded in its financial statements for estimated remediation costs. In conjunction with the acquisition of PDC by the ESOP in 2001, and as limited by the terms of the purchase agreement, AWA agreed to indemnify the Company for 50% of all environmental liabilities at the West Carrollton mill up to $5.0 million and 100% of all such environmental costs exceeding $5.0 million. In addition, the former owners and operators of the West Carrollton mill may be liable for all or part of the cost of remediation of historic PCB contamination.

Litigation Settlement

In 1996, after being named as a defendant in a lawsuit, Appleton notified its insurance carriers of a coverage claim under policies in effect at the time. The lawsuit ultimately was resolved and Appleton recovered expenses from three of four insurers. The fourth insurer disputed coverage for its share of previously incurred costs. As a result, Appleton filed a lawsuit against the insurer. In 2007, a Wisconsin state appellate court issued an order estopping the insurer from denying its obligation to cover Appleton. Pursuant to a judgment in favor of Appleton which was entered in March 2008, and subsequent settlement negotiations with the insurer, Appleton recorded $22.2 million of income, net of fees. These proceeds were received in April 2008.

Other Litigation

In September, 2007, Appleton commenced litigation against a former contractor. The claims asserted included breach of obligations under a February 2007 agreement to perform certain engineering services. This matter proceeded to trial and, on May 14, 2009, Appleton received a favorable jury verdict. The defendant filed post-trial motions in response to the verdict. A hearing on the motions is scheduled for August 11, 2009, and a final judgment will be entered thereafter. The Company anticipates that the defendants will appeal any final judgment decided in Appleton’s favor. Ultimate resolution of the litigation could have a material effect on Appleton's financial results.

Other

From time to time, Appleton may be subject to various demands, claims, suits or other legal proceedings arising in the ordinary course of business. A comprehensive insurance program is maintained to provide a measure of financial protection against such matters, though not all such exposures are, or can be, addressed by insurance. Estimated costs are recorded for such demands, claims, suits or proceedings of this nature when reasonably determinable. The Company has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While the Company vigorously defends itself and expects to prevail in any similar cases that may be brought against Appleton in the future, there can be no assurance that the Company will be successful in its defense.

16

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 Except as described above, and assuming the Company’s expectations regarding defending such demands, claims, suits or other legal or regulatory proceedings prove accurate, Appleton does not believe that any pending or threatened demands, claims, suits or other legal proceedings will have, individually or in the aggregate, a materially adverse effect on its financial position, results of operations or cash flows.

14.      EMPLOYEE STOCK OWNERSHIP PLAN

Appleton’s matching contributions charged to expense were $1.0 million and $1.2 million for the three months ended July 5, 2009 and June 29, 2008, respectively. Appleton’s matching contributions charged to expense were $2.1 million and $3.1 million for the six months ended July 5, 2009 and June 29, 2008, respectively. As a result of hardship withdrawals, required diversifications and employee terminations, 612,205 shares of PDC redeemable common stock were repurchased during the first six months of 2009 at an aggregate price of approximately $12.6 million. During the same period, the ESOP trustee purchased 109,964 shares of PDC redeemable common stock for an aggregate price of $2.1 million from pre-tax deferrals, rollovers and loan payments made by employees, while Appleton’s matching contribution for this same period resulted in an additional 103,766 shares of PDC redeemable common stock being issued. During the first six months of 2008, the ESOP trustee purchased PDC redeemable common stock for an aggregate price of $3.7 million, also from pre-tax deferrals, rollovers and loan payments made by employees.

Redeemable common stock is being accreted up to the earliest redemption date based upon the estimated fair market value of the redeemable common stock as of July 5, 2009. Due to a reduction in the July 5, 2009 share price, redeemable common stock accretion was reduced by $3.8 million for the six months ended July 5, 2009. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $193 million was determined. The redeemable common stock recorded book value as of July 5, 2009 was $136 million, which leaves a remaining unrecognized liability to be accreted of approximately $57 million.

15.      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.

The Company selectively uses financial instruments to manage some market risk from changes in interest rates or foreign currency exchange rates. The fair values of all derivatives are recorded in the consolidated balance sheet. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive loss (“AOCI”), depending on whether the derivative is designated and qualifies as part of a hedge transaction and, if so, the type of hedge transaction.

The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts to reduce its cash flow exposure to foreign currency fluctuations associated with its anticipated cash flows. These instruments are designated as cash flow hedges in accordance with SFAS 133 and are recorded in the consolidated balance sheet at fair value. The effective portion of the contracts’ gains or losses, due to changes in fair value, are initially recorded as a component of accumulated other comprehensive loss and are subsequently reclassified into earnings when the underlying transactions occur and affect earnings. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates. The notional amount of foreign exchange contracts used to hedge foreign currency transactions was $7.0 million as of July 5, 2009.

 In February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five-year interest rate swap contract. This interest rate swap was being accounted for as a cash flow hedge. As discussed in Note 16, Long-Term Obligations, the covenant violation at January 3, 2009 and subsequent waiver and amendment in March 2009, to the senior secured credit facilities, changed the basis of the forecasted transactions for the interest rate swap contract. As amended, the senior secured credit facilities contain interest payments based on LIBOR with a 2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. As a result, this derivative is no longer designated as a hedging instrument under SFAS 133.

17

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 The following table presents the location and fair values of derivative instruments included in the Company’s condensed consolidated balance sheet at July 5, 2009 (dollars in thousands):

	As of July 5, 2009
	Derivatives		Derivatives Not
	Designated as Hedging Instruments		Designated as Hedging Instruments
	under SFAS 133		under SFAS 133
Other current liabilities
Foreign currency exchange derivatives	$	112	$	-
Other long-term liabilities
Interest rate swap contract		-		3,835
Total liabilities	$	112	$	3,835

The following table presents the location and amount of losses and/or gains on derivative instruments and related hedge items included in the Company’s Condensed Consolidated Statement of Operations for the three and six months ended July 5, 2009 and losses initially recognized in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheet at July 5, 2009 (dollars in thousands):

	Effective Portion
				Amount of Loss Reclassified from
				AOCI into Income
Derivatives in SFAS 133 Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives As of July 5, 2009		Location of Loss Reclassified from AOCI into Income	For the three months ended July 5, 2009			For the six months ended July 5, 2009
Foreign currency exchange derivatives	$	54	Net sales	$	(172	)	$	(140	)
				Amount of Gain Recognized
				in Income on Derivative
Derivatives Not Designated  as Hedging Instruments under			Location of Gain Recognized in Income on	For the three months			For the six months
SFAS 133			Derivative	ended July 5, 2009			ended July 5, 2009
Interest rate swap contract			Interest expense	$	712		$	916

For a discussion of the fair value of financial instruments, see Note 17, Fair Value of Financial Instruments.

18

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

16.      LONG-TERM OBLIGATIONS

Long-term obligations, excluding the capital lease obligation, consist of the following (dollars in thousands):

	July 5, 2009			January 3, 2009
At July 5, 2009 the senior secured variable rate notes payable were at 6.5%, $563 due quarterly with $212,062 due June 2013. At January 3, 2009 the notes were at approximately 4.5%, $563 due quarterly with $209,812 due June 2014.	$	220,500			$	221,625
Secured term note payable at 14.25%, approximately $300 due monthly with $6,831 due December 2013. At January 3, 2009 the note was at 12.5%, approximately $200 due monthly with $6,943 due December 2013.	20,689			21,814
At July 5, 2009 the revolving credit facility was at approximately 6.6%. At January 3, 2009 the revolving credit facility was at approximately 4.0%.		111,734				83,734
	352,923			327,173
Less obligations due within one year	(4,738		)	(4,640			)
	348,185			322,533
Secured variable rate industrial development bonds, 0.7% average interest rate at July 5, 2009, $2,650 due in 2013 and $6,000 due in 2027	8,650			8,650
State of Ohio assistance loan at 6%, approximately $100 due monthly and final payment due May 2017	8,380			8,780
State of Ohio loan at 1% until July 2011, then 3% until May 2019, approximately $30 due monthly and final payment due May 2019	3,000			-
Less obligations due within one year	(1,128		)	(815			)
	10,252			7,965
Senior notes payable at 8.125%, due June 2011	109,450			109,450
Senior subordinated notes payable at 9.75%, due June 2014	142,500			150,000

During first quarter 2009, Appleton purchased $7.5 million, plus interest, of the 9.75% senior subordinated notes payable due June 2014. As these senior subordinated notes were purchased at a price less than face value, the Company recorded a $5.8 million gain on this purchase. Also as a result of this purchase, $0.3 million of deferred debt issuance costs were written off, resulting in a net gain of $5.5 million.

In the first half of 2009, Appleton made mandatory debt repayments of $2.7 million, plus interest, on its senior secured variable rate notes payable, secured term note payable and State of Ohio assistance loan. Also during the first half of 2009, Appleton borrowed $119.5 million and repaid $91.5 million against its revolving credit facility, leaving an outstanding balance of $111.7 million that the Company has the ability and intent to finance on a long-term basis. Approximately $15.4 million of the revolving credit facility was used to support outstanding letters of credit. At July 5, 2009, there was approximately $22.9 million of unused borrowing capacity under the $150 million revolving credit facility for working capital and other corporate purposes. A commitment fee of 0.5% per annum is assessed on the unused borrowing capacity.

During July 2007, Appleton entered into a new $12.1 million Loan and Security Agreement with the Director of Development of the State of Ohio, consisting of a $9.1 million State Assistance Loan and a $3.0 million State Loan (together “the Ohio Loans”). The Company received the proceeds of the $3.0 million State Loan during second quarter 2009. The proceeds of the $9.1 million State Assistance Loan were received in 2007. All proceeds of these Ohio Loans were used to fund a portion of the costs of acquiring and installing paper coating and production equipment at the Company’s paper mill in West Carrollton, Ohio.

19

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Appleton’s senior secured credit facilities and senior secured term note payable contain provisions that require Appleton to maintain specified financial ratios. Prior to the waivers and amendments discussed below, the most restrictive limitations were quarter-end debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of not more than a 4.50 to 1.00 ratio as such terms are defined in the debt agreements. As a result of the significant downturn in Appleton’s business markets and the resulting loss reported for the three months ended January 3, 2009, Appleton was not in compliance with the leverage ratio covenant at January 3, 2009, which constituted events of default under the debt agreements. In order to waive the events of default existing at January 3, 2009, under the senior secured credit facilities and the senior secured term note payable, and to amend other provisions of the agreements, Appleton and its lenders entered into the following agreements in March 2009.

•      First Amendment to the senior secured credit facilities

•      First Amendment to the senior secured term note payable

 Under the First Amendment to the senior secured credit facilities, Appleton will pay interest rates equal to LIBOR, but not less than 2 percent, plus 450 basis points for any amounts outstanding on the senior secured variable rate notes payable and, interest rates initially equal to LIBOR, but not less than 2 percent, plus 450 basis points for any amounts outstanding on the revolving credit facility. The First Amendment to the senior secured credit facilities provides a grid under which the interest rates payable, for amounts outstanding on the revolving credit facility, may be reduced, based on measures of Appleton’s total leverage as defined in the senior secured credit facilities. Under the First Amendment to the senior secured term note payable, Appleton will pay an interest rate of 14.25 percent on the senior secured term note payable. For accounting purposes, the amendments to the senior secured credit facilities and the senior secured term note payable were treated as debt modifications. The Company paid $2.8 million of fees to the creditors in conjunction with the amendment to the senior secured credit facilities. These debt issuance costs will be amortized over the term of the modified agreement along with pre-existing unamortized debt issuance costs as an adjustment to interest expense over the remaining term of the modified agreement. Unamortized debt issuance costs of $0.1 million, relating to the revolving credit facility, were written off. The unamortized debt issuance costs remaining after the writeoff will be deferred and amortized over the term of the modified revolving credit facility.

 Pursuant to the terms of the First Amendment to the senior secured credit facilities:

• The maturity date for the revolving credit facility will be June 5, 2012, and the maturity date for the senior secured variable rate notes payable will be June 5, 2013;

• Appleton will be permitted up to $35 million of capital expenditures in 2009 and up to $40 million of capital expenditures in 2010, with no limit in 2011or thereafter;

• Appleton may not make acquisitions until December 31, 2010;

• Other restrictions are imposed on liens, indebtedness, investments, restricted payments and note repurchases;

• Mandatory prepayments are increased from 50% to 75% of excess cash flow as defined in the senior secured credit facilities;

• Financial covenants are modified to increase the total leverage ratio, to eliminate the interest coverage ratio, to add a senior secured leverage ratio, and to add a fixed charge coverage ratio, all as defined in the senior secured credit facilities and the First Amendment to the senior secured credit facilities.

20

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

In February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five-year interest rate swap contract. Also during first quarter 2008, Appleton fixed the interest rate, at 5.4%, on an additional $75.0 million of its variable rate notes with a five-year interest rate swap contract. As discussed below, one of the swap contracts was terminated in February 2009. The covenant violation at January 3, 2009 and subsequent waiver and amendment, in March 2009, to the senior secured credit facilities, changed the basis of the forecasted transactions for the two interest rate swap contracts that were placed in 2008. As amended, the senior secured credit facilities contain interest payments based on LIBOR with a 2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. As a result, Appleton concluded it was remote that the original forecasted transactions would occur as originally documented and reclassified as a charge against 2008 earnings, within interest expense, $9.4 million of swap losses originally classified in other comprehensive loss. The events of default also triggered an event of default pursuant to a cross-default provision under one of the interest rate swap contracts. As a result of the cross-default, the counterparty elected to terminate the swap contract. In February 2009, Appleton and the counterparty resolved Appleton’s obligation under the swap contract with an agreement to pay $4.7 million over the nine-month period ending October 2009. During the first half of 2009, Appleton paid $2.9 million in accordance with the termination agreement thereby reducing its liability to $1.8 million as of July 5, 2009. The remaining swap contract is expected to remain in place and future fluctuations in market value will be reflected as adjustments to interest expense. As of July 5, 2009, the remaining swap contract was recorded as a long-term liability of $3.8 million based on a fair value measurement using Level 2 inputs as described in SFAS 157, "Fair Value Measurements." The fair value of the interest rate swap derivative is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine the discounted cash flows. In comparison to the fair value reported at fiscal year-end 2008, the current fair value of this long-term liability is $0.9 million lower, with this change recorded in interest expense on the Condensed Consolidated Statement of Operations for the six months ended July 5, 2009.

The senior secured credit facilities, as amended, senior secured term note payable, as amended, senior notes and senior subordinated notes contain affirmative and negative covenants. In general, the covenants contained in the senior credit facilities, as amended, are more restrictive than those of the senior notes and senior subordinated notes. Among other restrictions, the covenants contained in the senior credit facilities, as amended, and senior secured term note payable, as amended, require Appleton to meet specified financial tests, including leverage and fixed charge coverage ratios, which become more restrictive over the term of the debt.

The senior secured credit facilities, as amended, senior secured term note payable, as amended, senior notes and senior subordinated notes also contain covenants which, among other things, restrict Appleton’s ability and the ability of Appleton’s other guarantors of the senior secured credit facilities, as amended, senior secured term note payable, as amended, senior notes and senior subordinated notes to incur liens; engage in transactions with affiliates; incur or guarantee additional indebtedness; declare dividends or redeem or repurchase capital stock; make loans and investments; engage in mergers, acquisitions, consolidations and asset sales; acquire assets, stock or debt securities of any person; terminate the subchapter S corporation status of PDC or the qualified subchapter S subsidiary status of its subsidiaries eligible to elect such status; amend its debt instruments; amend or terminate the ESOP; amend other agreements related to the transaction with AWA; repay other indebtedness; use assets as security in other transactions; enter into sale and leaseback transactions; sell equity interests in the Company’s subsidiaries; and engage in new lines of business.

The senior secured credit facilities, as amended, contain a provision that defines an event of default to include defaults or events of default under other indebtedness as defined in the senior secured credit facilities. The senior secured term note payable, as amended, contains a provision which defines an event of default to include defaults or events of default under the senior secured credit facilities, as amended, the senior notes and the senior subordinated notes.

The senior secured credit facilities, as amended, are unconditionally guaranteed by PDC and by substantially all of Appleton’s subsidiaries, other than two small foreign subsidiaries. In addition, they are secured by liens on substantially all of Appleton’s, the subsidiary guarantors’ and certain of Appleton’s other subsidiaries’ assets and by a pledge of Appleton’s and its subsidiaries’ capital stock. The senior secured term note payable, as amended, is unconditionally guaranteed by PDC and by substantially all of Appleton’s subsidiaries, other than certain immaterial subsidiaries. In addition, it is secured by a lien on specified manufacturing equipment located in Appleton’s paper mill in West Carrollton, Ohio. The senior notes and senior subordinated notes are unconditionally guaranteed by PDC, C&H Packaging Company, Inc., American Plastics Company, Inc., Rose Holdings Limited, HBGI Holdings Limited and New England Extrusion Inc.

21

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

As of July 5, 2009, Appleton was in compliance with its various amended covenants as disclosed in the 2008 Form 10-K. Based on Appleton’s forecasted operating results and related debt reductions, Appleton has projected compliance with all covenants for the next twelve-month period. Appleton’s ability to comply with the financial covenants in the future depends on further debt reduction and achieving forecasted operating results, which have become more difficult to project in the current economic environment. Given the uncertain global economic conditions,  continued constraints in the credit markets and other market uncertainties, there are various scenarios, including a reduction from forecasted operating results, under which Appleton could violate its financial covenants during 2009 and 2010. Appleton’s failure to comply with such covenants or an assessment that it is likely to fail to comply with such covenants, could also lead Appleton to seek amendments to or waivers of the financial covenants contained in the senior secured credit facilities and senior secured term note payable. Appleton cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants contained in the senior secured credit facilities and senior secured term note payable. Any such amendment to or waiver of the covenants would likely involve upfront fees, higher annual interest costs and other terms less favorable to the Company than those currently in the senior secured credit facilities and senior secured term note payable. In the event the lenders will not amend or waive the covenants, the debt would be due and Appleton would need to seek alternative financing. Appleton cannot provide assurance that it would be able to obtain alternative financing. If Appleton were not able to secure alternative financing, this would have a material adverse impact on the Company.

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount (including current portions) and estimated fair value of certain of the Company’s recorded financial instruments are as follows (dollars in thousands):

	July 5, 2009				January 3, 2009
	Carrying		Fair		Carrying		Fair
Financial Instruments	Amount		Value		Amount		Value
Senior subordinated notes payable	$	142,500	$	48,450	$	150,000	$	80,250
Senior notes payable		109,450		74,289		109,450		75,521
Senior credit facility		220,500		155,453		221,625		162,894
Senior secured debt		20,689		20,689		21,814		21,814
Revolving credit facility		111,734		111,734		83,734		83,734
State of Ohio loans		11,380		10,349		8,780		7,978
Industrial development bonds		8,650		8,650		8,650		8,650
	$	624,903	$	429,614	$	604,053	$	440,841
Interest rate swap derivatives	$	3,835	$	3,835	$	9,446	$	9,446

The senior subordinated notes payable and the senior notes payable are traded in public markets and, therefore, the fair value was determined based on quoted market prices. The senior credit facility is traded in interbank markets and, therefore, the fair value was determined based on quoted market prices. The senior secured debt is not traded in public markets, but was recently repriced during an amendment negotiated during March 2009. At July 5, 2009, it was determiend that the proceeds represented current market conditions due to the currency of the recent amendment and based on discussions with market makers for similar debt instruments. The fair value of the State of Ohio assistance loan was determined based on current rates for similar financial instruments of the same remaining maturity and similar terms. The industrial development bonds have a variable interest rate that reflects current market terms and conditions. The fair value of interest rate swap derivatives is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine the discounted cash flows that result in a measurement that is classified as Level 2 under SFAS 157.

18.      SEGMENT INFORMATION

The Company’s four reportable segments are as follows: coated solutions, thermal papers, security papers and performance packaging. Management evaluates the performance of the segments based primarily on operating income. Items excluded from the determination of segment operating income are unallocated corporate charges, business development costs not associated with specific segments, interest income, interest expense, debt extinguishment income and expense, foreign currency gains and losses, the nonrecurring litigation settlement and other income.

22

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The Company does not allocate total assets internally in assessing operating performance and does not track capital expenditures by segment. Net sales, operating income and depreciation and amortization, as determined by the Company for its reportable segments, are as follows (dollars in thousands):

	For the Three			For the Three			For the Six			For the Six
	Months Ended			Months Ended			Months Ended			Months Ended
	July 5, 2009			June 29, 2008			July 5, 2009			June 29, 2008
Net sales
Technical Papers
Coated solutions	$	110,339		$	143,072		$	223,642		$	280,992
Thermal papers		70,455			70,756			135,485			133,784
Security papers		8,682			9,004			18,955			17,668
		189,476			222,832			378,082			432,444
Performance packaging		23,935			27,281			47,879			54,281
Total	$	213,411		$	250,113		$	425,961		$	486,725
Operating income (loss)
Technical Papers
Coated solutions	$	18,774		$	9,642		$	29,633		$	19,018
Thermal papers		(2,227	)		1,403			(5,743	)		3,732
Security papers		2,785			1,004			4,402			1,772
		19,332			12,049			28,292			24,522
Performance packaging		840			1,758			1,184			3,221
Unallocated corporate charges and business development costs		(1,882	)		(3,369	)		(3,763	)		(7,001	)
Total	$	18,290		$	10,438		$	25,713		$	20,742
Depreciation and amortization
Technical Papers
Coated solutions	$	8,027		$	9,227		$	16,126		$	18,342
Thermal papers		5,117			3,079			10,004			6,295
Security papers		695			761			1,390			1,522
		13,839			13,067			27,520			26,159
Performance packaging		1,574			1,687			3,176			3,374
Unallocated corporate charges		106			17			212			33
Total	$	15,519		$	14,771		$	30,908		$	29,566

No restructuring expense was recorded during the three- and six-month periods ended July 5, 2009 and June 29, 2008.

23

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

19.      ALTERNATIVE FUELS TAX CREDIT

The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. In February 2009, Appleton began mixing black liquor with diesel fuel and using the mixture at its mill in Roaring Spring, Pennsylvania. The Company applied to the Internal Revenue Service to be registered as an alternative fuel mixer and received its registration in May 2009. As of July 5, 2009, Appleton filed for excise tax refunds totaling $7.6 million and accrued $0.4 million for eligible alternative fuel usage through July 5, 2009 to be included in subsequent filings. This $8.0 million is recorded in other current assets in the accompanying Condensed Consolidated Balance Sheet. Accordingly, the Condensed Consolidated Statement of Operations for the three and six months ended July 5, 2009 includes the $8.0 million tax credit as a reduction to cost of sales. Expenses related to this excise tax refund total $0.1 million for the first six months of 2009. As of August 7, 2009, $7.1 million has been received in cash from the Internal Revenue Service.

20.      GUARANTOR FINANCIAL INFORMATION

Appleton (the “Issuer”) has issued senior notes and senior subordinated notes (the “Notes”) which have been guaranteed by PDC (the “Parent Guarantor”), C&H Packaging Company, Inc., American Plastics Company, Inc., Rose Holdings Limited, HBGI Holdings Limited and New England Extrusion Inc., each of which is a wholly-owned subsidiary of Appleton (the “Subsidiary Guarantors”). These guarantees are full, unconditional and joint and several. Bemrose Group Limited, The Henry Booth Group Limited, BemroseBooth Limited and Bemrose Security & Promotional Printing Limited were Subsidiary Guarantors that were classified as discontinued operations during 2008 and disposed of in third quarter 2008 as discussed in Note 2 to the Condensed Consolidated Financial Statements. As of July 5, 2009, C&H is classified as held for sale.

Presented below is condensed consolidating financial information for the Parent Guarantor, the Issuer, the Subsidiary Guarantors and a wholly-owned non-guarantor subsidiary (the “Non-Guarantor Subsidiary”) as of July 5, 2009 and January 3, 2009, and for the three and six months ended July 5, 2009 and June 29, 2008. This financial information should be read in conjunction with the condensed consolidated financial statements and other notes related thereto.

Separate financial statements for the Parent and Subsidiary Guarantors are not presented based on management’s determination that they would not provide additional information that is material to readers of these financial statements.

The senior secured credit facilities, as amended, the senior secured term note payable, as amended, the senior notes and the senior subordinated notes place restrictions on the subsidiaries of the Issuer that would limit dividend distributions by these subsidiaries.

24

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 5, 2009
(unaudited)
(dollars in thousands)
	Parent Guarantor			Issuer			Subsidiary Guarantors			Non-Guarantor  Subsidiary			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	-		$	1,571		$	1		$	1,517		$	-		$	3,089
Accounts receivable, net		-			91,023			9,053			5,162			-			105,238
Inventories		-			106,312			7.980			2,125			-			116,417
Other current assets		37,700			20,474			1,883			239			-			60,296
Assets held for sale		-			-			9,049			-			-			9,049
Total current assets		37,700			219,380			27,966			9,043			-			294,089
Property, plant and equipment, net		-			401,187			20,982			11			-			422,180
Investment in subsidiaries		160,841			126,123			-			-			(286,964	)		-
Other assets		50,044			66,909			27,713			43			-			144,709
Assets held for sale		-			-			8,762			-			-			8,762
Total assets	$	248,585		$	813,599		$	85,423		$	9,097		$	(286,964	)	$	869,740
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	-		$	5,866		$	-		$	-		$	-		$	5,866
Accounts payable		-			50,152			1,055			122			-			51,329
Due to (from) parent and affiliated companies		355,964			(319,097	)		(33,802	)		(3,065	)		-			-
Other accrued liabilities		-			80,152			995			1,230			-			82,377
Liabilities held for sale		-			-			1,862			-			-			1,862
Total current liabilities		355,964			(182,927	)		(29,890	)		(1,713	)		-			141,434
Long-term debt		-			619,037			-			-			-			619,037
Other long-term liabilities		-			216,648			-			-			-			216,648
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss		(107,379	)		160,841			115,313			10,810			(286,964	)		(107,379	)
Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss	$	248,585		$	813,599		$	85,423		$	9,097		$	(286,964	)	$	869,740

25

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 3, 2009
(dollars in thousands)
	Parent Guarantor			Issuer			Subsidiary Guarantors			Non-Guarantor  Subsidiary			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	-		$	2,111		$	65		$	2,004		$	-		$	4,180
Accounts receivable, net		-			73,738			9,057			5,423			-			88,218
Inventories		-			113,406			9,461			1,989			-			124,856
Other current assets		37,700			6,343			1,674			203			-			45,920
Assets held for sale		-			-			9,327			-			-			9,327
Total current assets		37,700			195,598			29,584			9,619			-			272,501
Property, plant and equipment, net		-			416,630			22,658			13			-			439,301
Investment in subsidiaries		146,562			124,971			-			-			(271,533	)		-
Other assets		114,312			66,964			27,547			41			-			208,864
Assets held for sale		-			-			9,255			-			-			9,255
Total assets	$	298,574		$	804,163		$	89,044		$	9,673		$	(271,533	)	$	929,921
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	-		$	5,455		$	-		$	-		$	-		$	5,455
Accounts payable		-			60,573			395			125			-			61,093
Due to (from) parent and affiliated companies		405,519			(373,446	)		(28,861	)		(3,212	)		-			-
Other accrued liabilities		-			83,916			1,221			1,993			-			87,130
Liabilities held for sale		-			-			2,085			-			-			2,085
Total current liabilities		405,519			(223,502	)		(25,160	)		(1,094	)		-			155,763
Long-term debt		-			598,598			-			-			-			598,598
Other long-term liabilities		-			282,505			-			-			-			282,505
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss		(106,945	)		146,562			114,204			10,767			(271,533	)		(106,945	)
Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss	$	298,574		$	804,163		$	89,044		$	9,673		$	(271,533	)	$	929,921

26

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 5, 2009
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	378,041		$	47,879		$	22,000		$	(21,959	)	$	425,961
Cost of sales		-			293,817			40,273			21,962			(22,052	)		334,000
Gross profit		-			84,224			7,606			38			93			91,961
Selling, general and administrative expenses		-			59,032			6,477			739			-			66,248
Operating income (loss)		-			25,192			1,129			(701	)		93			25,713
Interest expense		6,184			24,222			17			-			(6,201	)		24,222
Debt extinguishment income, net		-			(5,380	)		-			-			-			(5,380	)
Interest income		-			(6,220	)		(17	)		(1	)		6,201			(37	)
Income in equity investments		(14,591	)		(1,322	)		-			-			15,913			-
Other income		-			(859	)		-			(485	)		(78	)		(1,422	)
Income (loss) before income taxes		8,407			14,751			1,129			(215	)		(15,742	)		8,330
Provision (benefit) for income taxes		-			160			21			(258	)		-			(77	)
Net income	$	8,407		$	14,591		$	1,108		$	43		$	(15,742	)	$	8,407

27

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 29, 2008
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	434,070		$	54,229		$	29,850		$	(31,424	)	$	486,725
Cost of sales		-			339,473			43,748			29,437			(31,809	)		380,849
Gross profit		-			94,597			10,481			413			385			105,876
Selling, general and administrative expenses		-			76,636			7,477			1,021			-			85,134
Operating income (loss)		-			17,961			3,004			(608	)		385			20,742
Interest expense		5,829			21,286			-			-			(5,829	)		21,286
Interest income		-			(8,287	)		-			(33	)		8,083			(237	)
Loss in equity investments		15,447			41,660			-			-			(57,107	)		-
Litigation settlement, net		-			(22,274	)		-			-			-			(22,274	)
Other (income) expense		-			(133	)		-			289			70			226
(Loss) income from continuing operations before income taxes		(21,276	)		(14,291	)		3,004			(864	)		55,168			21,741
Provision for income taxes		-			63			29			-			-			92
(Loss) income from continuing operations		(21,276	)		(14,354	)		2,975			(864	)		55,168			21,649
Loss from discontinued operations, net of income taxes		-			(1,093	)		(44,086	)		-			2,254			(42,925	)
Net loss	$	(21,276	)	$	(15,447	)	$	(41,111	)	$	(864	)	$	57,422		$	(21,276	)

28

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 5, 2009
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	189,060		$	23,935		$	10,368		$	(9,952	)	$	213,411
Cost of sales		-			143,168			20,004			10,436			(10,417	)		163,191
Gross profit (loss)		-			45,892			3,931			(68	)		465			50,220
Selling, general and administrative expenses		-			28,405			3,150			375			-			31,930
Operating income (loss)		-			17,487			781			(443	)		465			18,290
Interest expense		3,085			12,830			17			-			(3,102	)		12,830
Interest income		-			(3,106	)		(17	)		-			3,102			(21	)
Income in equity investments		(10,329	)		(1,572	)		-			-			11,901			-
Other income		-			(1,087	)		-			(696	)		82			(1,701	)
Income before income taxes		7,244			10,422			781			253			(11,518	)		7,182
Provision (benefit) for income taxes		-			93			10			(165	)		-			(62	)
Net income	$	7,244		$	10,329		$	771		$	418		$	(11,518	)	$	7,244

29

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 29, 2008
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	223,432		$	27,224		$	14,819		$	(15,362	)	$	250,113
Cost of sales		-			178,670			21,868			13,912			(15,291	)		199,159
Gross profit		-			44,762			5,356			907			(71	)		50,954
Selling, general and administrative expenses		-			36,239			3,829			448			-			40,516
Operating income		-			8,523			1,527			459			(71	)		10,438
Interest expense		2,976			10,212			-			-			(2,976	)		10,212
Interest income		-			(4,142	)		-			(13	)		4,099			(56	)
Loss in equity investments		39,700			41,654			-			-			(81,354	)		-
Litigation settlement, net		-			(41	)		-			-			-			(41	)
Other expense (income)		-			120			-			(23	)		(103	)		(6	)
(Loss) income from continuing operations before income taxes		(42,676	)		(39,280	)		1,527			495			80,263			329
Provision for income taxes		-			43			12			-			-			55
(Loss) income from continuing operations		(42,676	)		(39,323	)		1,515			495			80,263			274
Loss from discontinued operations, net of income taxes		-			(377	)		(43,696	)		-			1,123			(42,950	)
Net (loss) income	$	(42,676	)	$	(39,700	)	$	(42,181	)	$	495		$	81,386		$	(42,676	)

30

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 5, 2009
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	8,407		$	14,591		$	1,108		$	43		$	(15,742	)	$	8,407
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		-			27,806			3,099			3			-			30,908
Other		-			(1,908	)		-			(485	)		-			(2,393	)
Change in assets and liabilities, net		51,623			(92,384	)		928			(195	)		15,742			(24,286	)
Net cash provided (used) by operating activities		60,030			(51,895	)		5,135			(634	)		-			12,636
Cash flows from investing activities:
Proceeds from sale of equipment		-			27			-			-			-			27
Additions to property, plant and equipment		-			(11,266	)		(258	)		-			-			(11,524	)
Net cash used by investing activities		-			(11,239	)		(258	)		-			-			(11,497	)
Cash flows from financing activities:
Payments of senior secured notes payable		-			(1,125	)		-			-			-			(1,125	)
Payments of senior notes payable		-			(1,687	)		-			-			-			(1,687	)
Debt acquisition costs		-			(3,124	)		-			-			-			(3,124	)
Payments relating to capital lease obligation		-			(366	)		-			-			-			(366	)
Proceeds from revolving line of credit		-			119,450			-			-			-			119,450
Payments of revolving line of credit		-			(91,450	)		-			-			-			(91,450	)
Proceeds from State of Ohio loan		-			3,000			-			-			-			3,000
Payments of State of Ohio loan		-			(400	)		-			-			-			(400	)
Payments of secured financing		-			(1,125	)		-			-			-			(1,125	)
Due to parent and affiliated companies, net		(49,555	)		54,349			(4,941	)		147			-			-
Proceeds from issuance of redeemable common stock		2,075			-			-			-						2,075
Payments to redeem common stock		(12,550	)		-			-			-			-			(12,550	)
Decrease in cash overdraft		-			(14,928	)		-			-			-			(14,928	)
														-
Net cash (used) provided by financing activities		(60,030	)		62,594			(4,941	)		147			-			(2,230	)
														-
Change in cash and cash equivalents		-			(540	)		(64	)		(487	)		-			(1,091	)
Cash and cash equivalents at beginning of period		-			2,111			65			2,004			-			4,180
Cash and cash equivalents at end of period	$	-		$	1,571		$	1		$	1,517		$	-		$	3,089

31

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 29, 2008
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Cash flows from operating activities:
Net loss	$	(21,276	)	$	(15,447	)	$	(41,111	)	$	(864	)	$	57,422		$	(21,276	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		-			26,533			3,027			6			-			29,566
Impairment		-			-			40,134			-			-			40,134
Other		-			5,020			264			289			-			5,573
Change in assets and liabilities, net		23,029			(15,584	)		(2,103	)		1,265			(57,422	)		(50,815	)
Net cash provided by operating activities		1,753			522			211			696			-			3,182
Cash flows from investing activities:
Proceeds from sale of equipment		-			4			-			-			-			4
Additions to property, plant and equipment		-			(49,720	)		(1,008	)		-			-			(50,728	)
Net cash used by investing activities		-			(49,716	)		(1,008	)		-			-			(50,724	)
Cash flows from financing activities:
Payments of senior secured notes payable		-			(1,125	)		-			-			-			(1,125	)
Payments relating to capital lease obligation		-			(366	)		-			-			-			(366	)
Proceeds from revolving line of credit		-			178,958			-			-			-			178,958
Payments of revolving line of credit		-			(137,771	)		-			-			-			(137,771	)
Due to parent and affiliated companies, net		11,955			(7,383	)		(3,568	)		(1,004	)		-			-
Proceeds from issuance of redeemable common stock		3,721			-			-			-			-			3,721
Payments to redeem common stock		(17,429	)		-			-			-			-			(17,429	)
Decrease in cash overdraft		-			(6,819	)		-			-			-			(6,819	)
Net cash (used) provided by financing activities		(1,753	)		25,494			(3,568	)		(1,004	)		-			19,169
Effect of foreign exchange rate changes on cash and cash equivalents		-			159			-			-			-			159
Change in cash and cash equivalents		-			(23,541	)		(4,365	)		(308	)		-			(28,214	)
Cash and cash equivalents at beginning of period		-			33,567			9,247			2,024			-			44,838
Cash and cash equivalents at end of period	$	-		$	10,026		$	4,882		$	1,716		$	-		$	16,624

32

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless stated to the contrary or the context requires otherwise, all references to “Paperweight Development,” “PDC” or “Company” refer to Paperweight Development Corp. and its subsidiaries and predecessors. Appleton Papers Inc. is a wholly-owned subsidiary of Paperweight Development, which is referred to as “Appleton” in this report.

Overview

This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of PDC and Appleton for the quarter ended July 5, 2009. This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related Notes.

Reference should also be made to the Annual Report on Form 10-K for the year ended January 3, 2009, the consolidated financial statements and related notes included therein.

Financial Highlights

Net sales for second quarter 2009 totaled $213.4 million, compared to $250.1 million for second quarter 2008. This 14.7% decrease in net sales was largely due to the continued economic slowdown which negatively impacted shipment volumes world-wide. Technical Papers second quarter 2009 net sales decreased by $33.4 million, or 15.0%, when compared to net sales during second quarter 2008. Second quarter 2009 net sales within the Packaging business were $3.3 million, or 12.3%, lower than net sales for the same quarter last year. This decrease in revenue was largely due to lower selling prices to the customer in response to lower resin prices. Net sales for the six months ended July 5, 2009 totaled $426.0 million, compared to $486.7 million for the six months ended June 29, 2008.

Income from continuing operations was $7.2 million for second quarter 2009 compared to income from continuing operations of $0.3 million in second quarter 2008. Despite lower shipment volumes and reduced mill operations to match customer demand, operating income in the current period was positively impacted by cost reductions related to manufacturing and distribution costs and reductions in selling, general and administrative expenses. Also during second quarter 2009, the Company recorded an $8.0 million alternative fuels tax credit as a reduction to cost of sales. During second quarter 2009 there was no discontinued operations loss compared to a second quarter 2008 loss from discontinued operations of $43.0 million. This $43.0 million loss was entirely related to Bemrose Group Limited, which was sold on August 1, 2008, and included an impairment charge of $41.2 million. For the six months ended July 5, 2009, the Company reported net income of $8.4 million compared to a net loss of $21.3 million for the six months ended June 29, 2008. First half 2008 results included an impairment charge within discontinued operations of $40.1 million and a $22.3 million net gain from a litigation settlement.

During these challenging economic times, the Company continues its efforts to reduce spending and waste. The Company continually evaluates production output and takes steps to reduce staffing at all levels and to reduce operations by temporary slowdowns and shutdowns of production equipment. Beginning in second quarter 2009, all non-union employees in the Company are required to take two weeks of unpaid leave, or furlough, before the end of third quarter 2009. In addition, beginning in second quarter 2009, Appleton suspended its company match of employee deferrals made into the 401(k) plan by non-union employees. This company match will be reinstated in October 2009 as will other previously-suspended employee benefits. The company match for deferrals into the company stock fund remained intact.

During second quarter 2009, Appleton committed to a formal plan to sell C&H Packaging Company, Inc. (“C&H”). C&H, located in Merrill, Wisconsin, was acquired in 2003 and prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial products industries. The assets and liabilities of C&H are reported as held for sale for the periods ended July 5, 2009 and January 3, 2009. Prospectively, as of the end of second quarter 2009, depreciation and amortization expense will be suspended. The sale is expected to be completed prior to the end of 2009. C&H is included within the performance packaging business segment.

33

Comparison of Results of Operations for the Quarters Ended July 5, 2009 and June 29, 2008

	For the Quarter Ended
	July 5,			June 29,			%
	2009			2008			Chg
	(dollars in millions)
Net sales	$	213.4		$	250.1			-14.7	%
Cost of sales		163.2			199.2			-18.1	%
Gross profit		50.2			50.9			-1.4	%
Selling, general and administrative expenses		31.9			40.5			-21.2	%
Operating income		18.3			10.4			76.0	%
Interest expense, net		12.8			10.2			25.5	%
Other non-operating income, net		(1.7)			(0.1)		nm
Income from continuing operations before income taxes		7.2			0.3		nm
Provision for income taxes		-			-			-
Income from continuing operations		7.2			0.3		nm
Loss from discontinued operations, net of income taxes		-			(43.0)			-100.0	%
Net income (loss)	$	7.2		$	(42.7)		nm
Comparison as a percentage of net sales
Cost of sales		76.5	%		79.6	%		-3.1	%
Gross margin		23.5	%		20.4	%		3.1	%
Selling, general and administrative expenses		14.9	%		16.2	%		-1.3	%
Operating margin		8.6	%		4.2	%		4.4	%
Income from continuing operations before income taxes		3.4	%		0.1	%		3.3	%
Income from continuing operations		3.4	%		0.1	%		3.3	%
Loss from discontinued operations, net of income taxes		-			-17.2	%		17.2	%
Net income (loss)		3.4	%		-17.1	%		20.5	%

Net sales for second quarter 2009 were $213.4 million, a decrease of $36.7 million, or 14.7%, compared to the prior year period. This reduction was largely due to volume shortfalls.

Operating income in second quarter 2009 increased 76.0% to $18.3 million. During second quarter 2009, the Company recorded an $8.0 million alternative fuels tax credit as a reduction to cost of sales. Though operating income was negatively impacted by volume shortfalls, this was partially offset by a 21.2% reduction in selling, general and administrative expenses. Within selling, general and administrative costs, distribution costs were 27.8% lower than the year earlier period. Salaries, and related expenses, were approximately $3.1 million lower than such expenses for the second quarter of 2008 as a result of the headcount reductions made during 2008, furloughs taken during the current quarter, reduced severance expense and curtailment of the company match on the 401(k). In comparison to second quarter 2008, other areas of significantly reduced spending included legal fees, consulting fees and travel and entertainment. The positive impact of this reduced spending was partially offset by higher group health and pension expenses. Second quarter 2008 also included a recovery of $2.3 million of incentive compensation expense largely the result of a reduction in the June 2008 share price. As a percent of net sales, selling, general and administrative expenses were 14.9% during second quarter 2009 compared to 16.2% during second quarter 2008.

Income from continuing operations of $7.2 million was recorded in second quarter 2009 compared to income from continuing operations of $0.3 million recorded in second quarter 2008.

The second quarter 2008 loss from discontinued operations of $43.0 million was entirely related to Bemrose Group Limited, which was sold on August 1, 2008, and included an impairment charge of $41.2 million.

34

Comparison of Results of Operations for the Six Months Ended July 5, 2009 and June 29, 2008

	For the Six Months Ended
	July 5,			June 29,			%
	2009			2008			Chg
	(dollars in millions)
Net sales	$	426.0		$	486.7			-12.5	%
Cost of sales		334.1			380.8			-12.3	%
Gross profit		91.9			105.9			-13.2	%
Selling, general and administrative expenses		66.2			85.2			-22.3	%
Operating income		25.7			20.7			24.2	%
Interest expense, net		24.2			21.0			15.2	%
Debt extinguishment income, net		(5.4)			-			100.0	%
Other non-operating income, net		(1.4)			(22.0)		nm
Income from continuing operations before income taxes		8.3			21.7		-61.8		%
(Benefit) provision for income taxes		(0.1)			0.1			-200.0	%
Income from continuing operations		8.4			21.6		-61.1		%
Loss from discontinued operations, net of income taxes		-			(42.9)			-100.0	%
Net income (loss)	$	8.4		$	(21.3)		139.4		%
Comparison as a percentage of net sales
Cost of sales		78.4	%		78.2	%		0.2	%
Gross margin		21.6	%		21.8	%		-0.2	%
Selling, general and administrative expenses		15.5	%		17.5	%		-2.0	%
Operating margin		6.1	%		4.3	%		1.8	%
Income from continuing operations before income taxes		1.9	%		4.5	%		-2.6	%
Income from continuing operations		2.0	%		4.4	%		-2.4	%
Loss from discontinued operations, net of income taxes		-			-8.8	%		8.8	%
Net income (loss)		2.0	%		-4.4	%		6.4	%

Net sales for the first six months of 2009 were $426.0 million, a decrease of $60.7 million, or 12.5%, compared to the prior year period. The decrease in net sales for the first six months of 2009 was largely due to the continued economic slowdown which negatively impacted shipment volumes world-wide.

Operating income in the first six months of 2009 increased $5.0 million, or 24.2%, to $25.7 million. During the first half of 2009, the Company recorded an $8.0 million alternative fuels tax credit as a reduction to cost of sales. Though operating income was negatively impacted by volume shortfalls, this was partially offset by a 22.3% reduction in selling, general and administrative expenses. Within selling, general and administrative costs, distribution costs were 24.6% lower than the year earlier period. Salaries and related expenses were approximately $5.8 million lower than such expenses for the first half of 2008 as a result of the headcount reductions made during 2008, furloughs taken during the current quarter, reduced severance expense and curtailment of the company match on the 401(k). Other areas of significantly reduced spending included legal fees, consulting fees and travel and entertainment. The positive impact of this reduced spending was partially offset by higher group health and pension expenses. First half 2008 also included a recovery of $0.5 million of incentive compensation expense largely the result of a reduction in the June 2008 share price. As a percent of net sales, selling, general and administrative expenses were 15.5% during the first six months of  2009 compared to 17.5% during the same period of 2008.

Continuing operations reported $8.4 million of income for the first six months of 2009 compared to income from continuing operations of $21.6 million recorded during first half 2008. First half 2008 income from continuing operations included a $22.3 million net litigation settlement gain as the result of prevailing in a lawsuit to recover previously incurred costs from an insurance carrier.

35

The $42.9 million loss from discontinued operations, recorded during the first six months of 2008, was entirely related to Bemrose Group Limited and included an impairment charge of $40.1 million.

Business Segment Discussion

Technical Papers

Second quarter Technical Papers net sales of $189.5 million were $33.4 million lower than second quarter 2008 net sales. First half 2009 Technical Papers net sales of $378.1 million were $54.4 million lower compared to the first half of 2008. Second quarter operating income of $19.3 million was $7.3 million higher than second quarter 2008 operating income. First half 2009 operating income of $28.3 million was $3.8 million higher than the first six months of 2008. The year-on-year operating income variances were the result of the following:

	For the Three Months Ended July 5, 2009 v. the Three Months Ended			For the Six Months Ended July 5, 2009 v. the Six Months Ended
	June 29, 2008			June 29, 2008
	(dollars in millions)
Lower shipment volumes	$	(9.3	)	$	(16.0	)
Mill curtailments to match customer demand		(3.2	)		(8.8	)
Planned start-up costs of the thermal coater at the West Carrollton, Ohio paper mill		(2.5	)		(5.4	)
Reduced manufacturing spending		6.6			9.4
Lower distribution costs		5.3			9.1
Favorable selling, general and administrative spending		2.4			7.5
Alternative fuels tax credit		8.0			8.0
	$	7.3		$	3.8

A segment analysis follows.

• Second quarter 2009 coated solutions net sales totaled $110.4 million, a decrease of $32.7 million, or 22.9%, from prior year levels. Second quarter 2009 carbonless shipment volumes were 24.9% lower than second quarter 2008. Volume shortfalls were recorded in all market channels with international declining more than domestic. During the first six months of 2009, coated solutions net sales totaled $223.6 million, a decrease of $57.4 million, or 20.4%, from prior year levels.

Second quarter 2009 coated solutions operating income of $18.8 million increased $9.1 million compared to second quarter 2008. During the first six months of 2009, operating income of $29.6 million increased $10.6 million compared to the same 2008 period. The adverse impact of lower shipment volumes on 2009 operating margins was more than offset by lower distribution costs and favorable selling, general and administrative spending as well as the alternative fuels tax credit recorded as a reduction to cost of sales. The alternative fuels tax credit of $8.0 million was allocated between the coated solutions and security papers segments with $6.5 million allocated to coated solutions.

• Second quarter 2009 thermal papers net sales of $70.4 million were flat when compared to second quarter 2008 thermal papers net sales though shipment volumes were 3.2% higher. During the first six months of 2009, thermal papers net sales totaled $135.5 million, an increase of $1.7 million, or 1.3%, when compared to the same prior year period. First half 2009 shipment volumes were 5.9% higher than first half 2008 shipment volumes. Throughout 2009, revenue has been negatively impacted by continued pressure within the market to lower prices.

36

During second quarter 2009, the thermal papers business reported an operating loss of $2.3 million which was a $3.6 million decrease in operating income as compared to second quarter 2008. A $5.7 million operating loss was recorded for this business during the first half of 2009 which was a decrease in operating income of $9.5 million as compared to the same 2008 period. Despite higher shipment volumes and lower manufacturing costs and selling, general and administrative expenses, unfavorable product mix, higher input costs and $5.4 million of planned start-up costs drove gross margins down when compared to 2008.

• Second quarter 2009 security papers segment net sales were $8.7 million, a slight decrease from second quarter 2008 net sales of $9.0 million. First half 2009 security papers net sales were $19.0 million, an increase of $1.3 million, or 7.3%, from first half 2008. The increase was due to increased shipment volumes of 6.7%.

Second quarter 2009 operating income of $2.8 million was $1.8 million higher than second quarter 2008 largely the result of reduced cost of sales due to the $1.5 million alternative fuels tax credit allocated to this business segment. Security papers operating income of $4.4 million for the first half of the year was an increase of $2.7 million when compared to first half 2008 due to increased shipment volumes, manufacturing gains, the alternative fuels tax credit and reduced selling, general and administrative spending.

Performance Packaging

•   Performance packaging segment net sales totaled $23.9 million in second quarter 2009, a decrease of $3.3 million, or 12.3%, from second quarter 2008. During the first six months of 2009, this segment recorded net sales of $47.9 million which was a decrease of $6.4 million, or 11.8%, from the first six months of 2008. The decrease in revenue was largely due to lower selling prices to the customer in response to lower resin prices.

Operating income recorded during second quarter 2009 of $0.8 million was $0.9 million lower than second quarter 2008. Operating income recorded during the first six months of 2009, of $1.2 million, was $2.0 million, or 63.2%, lower than the first six months of 2008. This was the result of margin compression arising from resin pricing fluctuations.

During second quarter 2009, Appleton committed to a formal plan to sell C&H Packaging Company, Inc. (“C&H”). C&H, located in Merrill, Wisconsin, was acquired in 2003 and prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial products industries. The assets and liabilities of C&H are reported as held for sale for the periods ended July 5, 2009 and January 3, 2009. Prospectively, as of the end of second quarter 2009, depreciation and amortization expense will be suspended. The sale is expected to be completed prior to the end of 2009. C&H is included within the performance packaging business segment.

Unallocated Corporate Charges and Business Development Costs

• Unallocated corporate charges and business development costs decreased $1.5 million and $3.2 million during the three and six months ended July 5, 2009, respectively, when compared to the same periods of 2008 due to reduced selling, general and administrative expenses.

Liquidity and Capital Resources

Overview. Appleton’s primary sources of liquidity and capital resources are cash provided by operations and available borrowings under its revolving credit facility. Appleton generally expects that cash on hand, internally generated cash flow and available credit from its revolving credit facility will provide the necessary funds for the reasonably foreseeable operating and recurring cash needs (e.g., working capital, debt service, other contractual obligations and capital expenditures). At July 5, 2009, Appleton had $3.1 million of cash and approximately $22.9 million of unused borrowing capacity under its revolving credit facility and was in compliance with all of its debt covenants.

Cash Flows from Operating Activities. Net cash provided by operating activities for the first six months of 2009, of $12.6 million, was a $9.5 million improvement when compared to net cash provided by operating activities for the first six months of 2008. Net income, adjusted for non-cash charges, provided $36.9 million in operating cash for the period. Non-cash charges included $30.9 million in depreciation and amortization, $2.1 million of non-cash employer matching contributions to the KSOP and $0.9 million of other non-cash charges. A $5.4 million net gain on debt extinguishment, which is discussed below in cash flows from financing activities, was also recorded during the first half of this year. Uses of cash included a $21.9 million change in working capital and a net $2.4 million of other uses.

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Major components of the $21.9 million increase in working capital were a $15.7 million increase in accounts receivable and a $14.4 million increase in other current assets. Quarter-end receivables were at a more normal level compared to year-end 2008 which was impacted by increased collections due to the January 3, 2009 year-end date. As of July 5, 2009, other current assets included an $8.0 million receivable for the alternative fuels tax credit. Payments of $1.9 million were also made out of the restructuring reserve. As a result of aggressive inventory management, inventories decreased by $8.0 million. Accounts payable and accrued liabilities increased $2.1 million.

Cash Flows from Investing Activities. Net cash used by investing activities during the first half of 2009 totaled $11.5 million versus $50.7 million during the first six months of 2008. During 2008, Appleton was investing in the expansion project at the West Carrollton, Ohio paper mill. This expansion project, which was funded through cash flows from operations, special financing provided by the State of Ohio and borrowings under Appleton’s revolving credit facility, accounted for $44.6 million of the capital spending during first half 2008. This expansion was put into operation during the second half of 2008.

Cash Flows from Financing Activities. Net cash used by financing activities was $2.2 million for the first six months of 2009, while $19.2 million of cash was provided in the comparable 2008 period. During the first half of 2009, Appleton borrowed a net $28.0 million on its revolving credit facility. First half 2009 proceeds from the issuance of PDC redeemable common stock totaled $2.1 million. The ESOP trustee purchased this stock with pre-tax deferrals, rollovers and loan payments made by employees during the first six months of 2009. Payments to redeem PDC common stock were $12.6 million during this same period of 2009. The net cash decrease realized from these proceeds and redemptions was $3.2 million less than in the comparable period of 2008. Also, during first quarter 2009, the Company made market purchases of $7.5 million face value of its senior subordinated notes for a cash outlay of $1.7 million. As these notes were purchased at a price significantly less than face value, the Company recorded a $5.5 million net gain on these purchases. Appleton also made $3.0 million of mandatory debt and capital lease payments.

During July 2007, Appleton entered into a new $12.1 million Loan and Security Agreement with the Director of Development of the State of Ohio, consisting of a $9.1 million State Assistance Loan and a $3.0 million State Loan (together “the Ohio Loans”). The Company received the proceeds of the $3.0 million State Loan during second quarter 2009. The proceeds of the $9.1 million State Assistance Loan were received in 2007. All proceeds of these Ohio Loans were used to fund a portion of the costs of acquiring and installing paper coating and production equipment at the Company’s paper mill in West Carrollton, Ohio.

Cash overdrafts decreased $14.9 million during the first half of 2009. Cash overdrafts represent checks issued (thereby eliminating the corresponding accounts payable) but not yet cleared through the banking system. Fluctuations in the balance are a function of quarter-end payment patterns and the speed with which the payees deposit the checks.

 Appleton’s senior secured credit facilities and senior secured term note payable contain provisions that require Appleton to maintain specified financial ratios. Prior to the waivers and amendments discussed below, the most restrictive limitations were quarter-end debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of not more than a 4.50 to 1.00 ratio as such terms are defined in the debt agreements. As a result of the significant downturn in Appleton’s business markets and the resulting loss reported for the three months ended January 3, 2009, Appleton was not in compliance with the leverage ratio covenant at January 3, 2009, which constituted events of default under the debt agreements. In order to waive the events of default existing at January 3, 2009, under the senior secured credit facilities and the senior secured term note payable, and to amend other provisions of the agreements, Appleton and its lenders entered into the following agreements in March 2009:

•      First Amendment to the senior secured credit facilities

•      First Amendment to the senior secured term note payable

 Under the First Amendment to the senior secured credit facilities, Appleton will pay interest rates equal to LIBOR, but not less than 2 percent, plus 450 basis points for any amounts outstanding on the senior secured variable rate notes payable and, interest rates initially equal to LIBOR, but not less than 2 percent, plus 450 basis points for any amounts outstanding on the revolving credit facility. The First Amendment to the senior secured credit facilities provides a grid under which the interest rates payable, for amounts outstanding on the revolving credit facility, may be reduced, based on measures of Appleton’s total leverage as defined in the senior secured credit facilities. Under the First Amendment to the senior secured term note payable, Appleton will pay an interest rate of 14.25 percent on the senior secured term note payable. For accounting purposes, the amendments to the senior secured credit facilities and the senior secured term note payable were treated as debt modifications. The Company paid $2.8 million of fees to the creditors in conjunction with the amendment to the senior secured credit facilities. These debt issuance costs will be amortized over the term of the modified agreement along with pre-existing unamortized debt issuance costs as an adjustment to interest expense over the remaining term of the modified agreement. Unamortized debt issuance costs of $0.1 million, relating to the revolving credit facility, were written off. The unamortized debt issuance costs remaining after the writeoff will be deferred and amortized over the term of the modified revolving credit facility.

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 Pursuant to the terms of the First Amendment to the senior secured credit facilities:

• The maturity date for the revolving credit facility will be June 5, 2012, and the maturity date for the senior secured variable rate notes payable will be June 5, 2013;

• Appleton will be permitted up to $35 million of capital expenditures in 2009 and up to $40 million of capital expenditures in 2010, with no limit in 2011or thereafter;

• Appleton may not make acquisitions until December 31, 2010;

• Other restrictions are imposed on liens, indebtedness, investments, restricted payments and note repurchases;

• Mandatory prepayments are increased from 50% to 75% of excess cash flow as defined in the senior secured credit facilities;

• Financial covenants are modified to increase the total leverage ratio, to eliminate the interest coverage ratio, to add a senior secured leverage ratio, and to add a fixed charge coverage ratio, all as defined in the senior secured credit facilities and the First Amendment to the senior secured credit facilities.

 In February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five-year interest rate swap contract. Also during first quarter 2008, Appleton fixed the interest rate, at 5.4%, on an additional $75.0 million of its variable rate notes with a five-year interest rate swap contract. As discussed below, one of the swap contracts was terminated in February 2009. The covenant violation at January 3, 2009 and subsequent waiver and amendment, in March 2009, to the senior secured credit facilities, changed the basis of the forecasted transactions for the two interest rate swap contracts that were placed in 2008. As amended, the senior secured credit facilities contain interest payments based on LIBOR with a 2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. As a result, Appleton concluded it was remote that the original forecasted transactions would occur as originally documented and reclassified as a charge against 2008 earnings, within interest expense, $9.4 million of swap losses originally classified in other comprehensive loss. The events of default also triggered an event of default pursuant to a cross-default provision under one of the interest rate swap contracts. As a result of the cross-default, the counterparty elected to terminate the swap contract. In February 2009, Appleton and the counterparty resolved Appleton’s obligation under the swap contract with an agreement to pay $4.7 million over the nine-month period ending October 2009. During the first half of 2009, Appleton paid $2.9 million in accordance with the termination agreement thereby reducing its liability to $1.8 million as of July 5, 2009. The remaining swap contract is expected to remain in place and future fluctuations in market value will be reflected as adjustments to interest expense. As of July 5, 2009, the remaining swap contract was recorded as a long-term liability of $3.8 million based on a fair value measurement using Level 2 inputs as described in SFAS 157, "Fair Value Measurements." The fair value of the interest rate swap derivative is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine the discounted cash flows. In comparison to the fair value reported at fiscal year-end 2008, the current fair value of this long-term liability is $0.9 million lower, with this change recorded in interest expense on the Condensed Consolidated Statement of Operations for the six months ended July 5, 2009.

The Company is subject to credit risk relative to the ability of counterparties to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. The recent unprecedented volatility in capital and credit markets may create additional risks to the Company, directly or indirectly, because of its potential to also impact major customers and suppliers in the upcoming months and possibly years. The adverse effect of a sustained U.S. or international economic downturn, including sustained periods of decreased consumer and business spending, high unemployment levels or declining consumer or business confidence, along with continued volatility and disruption in the credit and capital markets, has and may continue to result in reduced demand for Appleton’s products and, therefore, reduced sales and profitability.

The senior secured credit facilities, as amended, senior secured term note payable, as amended, senior notes and senior subordinated notes contain affirmative and negative covenants. In general, the covenants contained in the senior credit facilities, as amended, are more restrictive than those of the senior notes and senior subordinated notes. Among other restrictions, the covenants contained in the senior credit facilities, as amended, and senior secured term note payable, as amended, require Appleton to meet specified financial tests, including leverage and fixed charge coverage ratios, which become more restrictive over the term of the debt.

The senior secured credit facilities, as amended, senior secured term note payable, as amended, senior notes and senior subordinated notes also contain covenants which, among other things, restrict Appleton’s ability and the ability of Appleton’s other guarantors of the senior secured credit facilities, as amended, senior secured term note payable, as amended, senior notes and senior subordinated notes to incur liens; engage in transactions with affiliates; incur or guarantee additional indebtedness; declare dividends or redeem or repurchase capital stock; make loans and investments; engage in mergers, acquisitions, consolidations and asset sales; acquire assets, stock or debt securities of any person; terminate the subchapter S corporation status of PDC or the qualified subchapter S subsidiary status of its subsidiaries eligible to elect such status; amend its debt instruments; amend or terminate the ESOP; amend other agreements related to the transaction with AWA; repay other indebtedness; use assets as security in other transactions; enter into sale and leaseback transactions; sell equity interests in the Company’s subsidiaries; and engage in new lines of business.

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The senior secured credit facilities, as amended, contain a provision that defines an event of default to include defaults or events of default under other indebtedness as defined in the senior secured credit facilities. The senior secured term note payable, as amended, contains a provision which defines an event of default to include defaults or events of default under the senior secured credit facilities, as amended, the senior notes and the senior subordinated notes.

The senior secured credit facilities, as amended, are unconditionally guaranteed by PDC and by substantially all of Appleton’s subsidiaries, other than two small foreign subsidiaries. In addition, they are secured by liens on substantially all of Appleton’s, the subsidiary guarantors’ and certain of Appleton’s other subsidiaries’ assets and by a pledge of Appleton’s and its subsidiaries’ capital stock. The senior secured term note payable, as amended, is unconditionally guaranteed by PDC and by substantially all of Appleton’s subsidiaries, other than certain immaterial subsidiaries. In addition, it is secured by a lien on specified manufacturing equipment located in Appleton’s paper mill in West Carrollton, Ohio. The senior notes and senior subordinated notes are unconditionally guaranteed by PDC, C&H Packaging Company, Inc., American Plastics Company, Inc., Rose Holdings Limited, HBGI Holdings Limited and New England Extrusion Inc.

As of July 5, 2009, Appleton was in compliance with its various amended covenants as disclosed in the 2008 Form 10-K. Based on Appleton’s forecasted operating results and related debt reductions, Appleton has projected compliance with all covenants for the next twelve-month period. Appleton’s ability to comply with the financial covenants in the future depends on further debt reduction and achieving forecasted operating results, which have become more difficult to project in the current economic environment. Given the uncertain global economic conditions, continued constraints in the credit markets and other market uncertainties, there are various scenarios, including a reduction from forecasted operating results, under which Appleton could violate its financial covenants during 2009 and 2010. Appleton’s failure to comply with such covenants or an assessment that it is likely to fail to comply with such covenants, could also lead Appleton to seek amendments to or waivers of the financial covenants contained in the senior secured credit facilities and senior secured term note payable. Appleton cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants contained in the senior secured credit facilities and senior secured term note payable. Any such amendment to or waiver of the covenants would likely involve upfront fees, higher annual interest costs and other terms less favorable to the Company than those currently in the senior secured credit facilities and senior secured term note payable. In the event the lenders will not amend or waive the covenants, the debt would be due and Appleton would need to seek alternative financing. Appleton cannot provide assurance that it would be able to obtain alternative financing. If Appleton were not able to secure alternative financing, this would have a material adverse impact on the Company.

Prior Period Error Corrections

During the preparation of the first quarter 2009 Form 10-Q, the Company identified an error in classification of gain on debt extinguishment in its 2008 Consolidated Statement of Cash Flows which affected cash flows from operating activities and cash flows from financing activities. During fourth quarter 2008, Appleton purchased $40.6 million, plus interest, of its 8.125% senior notes payable due June 15, 2011. The actual cash outlay for these purchases totaled $28.0 million. As these senior notes were purchased at prices less than face value, the Company appropriately recorded a $12.6 million gain. In accordance with Statement of Financial Accounting Standards (“SFAS”) 95, “Statement of Cash Flows,” gains or losses on extinguishment of debt is a financing activity and should be adjusted from the net income of the business to arrive at cash flows from operations. Appleton did not remove the non-cash gain on the extinguishment of debt from cash flows from operating activities resulting in an overstatement of cash flows from operations and cash outflows from financing activities on the Company’s Consolidated Statement of Cash Flows for the Twelve Months Ended January 3, 2009. This error had no impact on the Consolidated Statement of Operations and Consolidated Balance Sheet for 2008. After considering both quantitative and qualitative factors in accordance with Staff Accounting Bulletin 99, "Materiality," the Company determined that the errors were not material and the cash flow presentations will be revised for these errors in the 2009 Form 10-K.

As a result of researching the appropriate classification of the gain associated with the Bemrose note receivable, as discussed in Note 2 to the Condensed Consolidated Financial Statements contained in this report, it was determined that the initial reserve of $1.5 million should have also been recorded within continuing operations at year-end 2008, at which time the reserve was initially recorded in (loss) income from discontinued operations in the 2008 Form 10-K. Management assessed the error in accordance with Staff Accounting Bulletin 99, “Materiality,” and concluded the error is immaterial to the consolidated financial statements as of January 3, 2009, taken as a whole. The Consolidated Statement of Operations will be revised for this error in the 2009 Form 10-K.

Collective Bargaining Unit

Appleton’s collective bargaining agreement with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (“USW”) for employees at the West Carrollton, Ohio paper mill was due to expire on April 1, 2009. On March 30, 2009, the mill’s union employees voted to ratify a new three-year labor agreement. The new agreement includes improvements to wages and pension contributions as well as a schedule of health care cost sharing provisions.

Alternative Fuels Tax Credit

The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. In February 2009, Appleton began mixing black liquor with diesel fuel and using the mixture at its mill in Roaring Spring, Pennsylvania. The Company applied to the Internal Revenue Service to be registered as an alternative fuel mixer and received its registration in May 2009. As of July 5, 2009, Appleton filed for excise tax refunds totaling $7.6 million and accrued $0.4 million for eligible alternative fuel usage through July 5, 2009 to be included in subsequent filings. This $8.0 million is recorded in other current assets in the accompanying Condensed Consolidated Balance Sheet. Accordingly, the Condensed Consolidated Statement of Operations for the three and six months ended July 5, 2009 includes the $8.0 million tax credit as a reduction to cost of sales. Expenses related to this excise tax refund total $0.1 million for the first six months of 2009. As of August 7, 2009, $7.1 million has been received in cash from the Internal Revenue Service.

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New Accounting Pronouncements

 In June 2009, the Financial Accounting Standards Board ("FASB") issued the FASB Accounting Standards Codification ("Codification"). The Codification will become the single source for all authoritative generally accepted accounting principles ("GAAP") recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and the Company has determined that it will not have an impact on its consolidated results of operations, financial position and cash flows.

In May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 165, “Subsequent Events.”  This statement is applicable to the accounting for and disclosure of subsequent events not addressed in other GAAP. It provides a definition of subsequent events and guidance as to when subsequent events are recognized or not recognized. SFAS 165 requires the disclosure of the date through which subsequent events have been evaluated, as well as whether the date is the date the financial statements were issued or the date the financial statements were available to be issued. These provisions are effective for interim or annual financial periods ending after June 15, 2009, and should be applied prospectively. The provisions of SFAS 165 were adopted by the Company during its second quarter ended July 5, 2009 and had no material impact on its financial statements.

In April 2009, the FASB issued FASB Staff Position (“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.” Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with SFAS 157 “Fair Value Measurements.” The provisions of FSP FAS 157-4 were adopted by the Company during its second quarter ended July 5, 2009. There was no current period impact on its financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1 “Interim Disclosures about Fair Value of Financial Instruments.” The FSP amends SFAS 107 “Disclosures about Fair Value of Financial Instruments” to require an entity to provide disclosures about fair value of financial instruments in interim financial information. The provisions of FSP FAS 107-1 were adopted by the Company during its second quarter ended July 5, 2009. The current period impact is addressed in Note 17 to the Condensed Consolidated Financial Statements contained in this report.

In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1, “Employer’s Disclosures about Postretirement Benefit Plan Assets,” which amends SFAS 132 (Revised 2003), “Employers’ Disclosures about Pension and Other Postretirement Benefits,” to provide guidance on an employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. This pronouncement is effective for fiscal years ending after December 15, 2009. Upon initial application, the provisions are not required to be adopted for earlier periods as presented for comparative purposes. Earlier application of the provisions is permitted. The Company does not believe adoption will have a material impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. These provisions are effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company adopted SFAS 161 during its first quarter 2009. The principal impact to the Company was to require the expansion of its disclosures regarding derivative instruments.

In December 2007, the FASB issued SFAS 141 (Revised 2007), “Business Combinations.” SFAS 141R requires that an acquiring entity recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R will change the accounting treatment for acquisition costs, non-controlling interests, contingent liabilities, in-process research and development, restructuring costs and income taxes. In addition, it also requires a substantial number of new disclosure requirements. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company adopted SFAS 141R during the first quarter of 2009. The adoption did not have a material impact on its consolidated financial statements.

Item 3—Quantitative and Qualitative Disclosures About Market Risk

For information regarding quantitative and qualitative disclosures about market risk, see the Annual Report on Form 10-K for the year ended January 3, 2009. There have been no other material changes in the quantitative or qualitative exposure to market risk from that described in the Form 10-K.

Item 4T—Controls and Procedures

Internal Controls Over Financial Reporting

There were no changes in the internal control over financial reporting of Appleton or PDC, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrants’ internal control over financial reporting.

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Disclosure Controls and Procedures

Appleton and PDC carried out an evaluation, under the supervision and with the participation of their management, including their respective principal executive officer and principal financial officer, of the effectiveness of the design and operation of their disclosure controls and procedures as such terms are defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Appleton and PDC maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by Appleton and PDC in the reports filed or submitted by them under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also designed to ensure that the information is accumulated and communicated to management, including their respective principal executive and principal financial officers, to allow timely decisions regarding required disclosures. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer of Appleton and PDC have concluded that their disclosure controls and procedures are effective as of the end of the period covered by this Form 10-Q.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information regarding legal proceedings is contained in Note 13 to the Condensed Consolidated Financial Statements contained in this report and is incorporated herein by reference.

Item 1A – Risk Factors

Other than with respect to the risk factors set forth below, there have been no material changes in the risk factors disclosed in the Annual Report on Form 10-K for the year ended January 3, 2009.

Changes in tax laws may have a material effect on Appleton’s future cash flows and results of operations.

Earnings in the three and six months ended July 5, 2009, included an alternative fuels tax credit of $8.0 million for alternative fuel mixtures produced for use as a fuel in the business. The credit is scheduled to expire December 31, 2009. Legislation has been proposed that would terminate the credit for fuel used in the production of paper or pulp prior to December 31, 2009. We cannot predict whether such legislation will be enacted, or what its effective date would be. If the excise tax credit were to be terminated or materially changed prior to December 31, 2009, this may have a material effect on Appleton’s future cash flows and results of operations.

Appleton has competitors in its various markets and it may not be able to maintain prices and margins for its products.

Appleton faces strong competition in all of its business segments. Its competitors vary in size and the breadth of their product offerings and some of its competitors have significantly greater financial, technical and marketing resources than Appleton does. Regardless of the continuing quality of our primary products, Appleton may be unable to maintain its prices or margins due to:

• declining overall carbonless market size;

• accelerating decline in carbonless sheet sales;

• variations in demand for, or pricing of, carbonless products;

• increasing manufacturing costs;

• increasing competition in international markets or from domestic or foreign producers; or

• declining general economic conditions.

Appleton’s inability to compete effectively or to maintain its prices and margins could have a material adverse effect on its earnings and cash flow.

The carbonless paper market is highly competitive. Appleton competes based on a number of factors, including price, product availability, quality and customer service. Additionally, Appleton competes with domestic production and imports from Europe and Asia. In March 2009, the Mexican government began imposing tariffs on 90 U.S. products sold into Mexico, including carbonless paper. All U.S. sales of carbonless paper into Mexico are assessed a 10% tariff. Though the tariff is paid by the customer, this automatically increases the price of carbonless paper by 10% which could open the door for non-U.S. competitors to enter the Mexican market with their carbonless products and take advantage of the ability to offer customers more favorable pricing. Appleton may need to adjust its carbonless pricing accordingly in reaction to competitive pressures from both customers seeking more favorable pricing and foreign producers of carbonless paper seeking market entry.

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Future greenhouse gas/carbon regulations or legislation could adversely affect Appleton’s costs of compliance with environmental laws.

            In 2009, the U.S. Environmental Protection Agency (“EPA”) released a finding that greenhouse gas (“GHG”) emissions endanger the public health and welfare.  Should the EPA finalize the findings, it may then begin developing rules to regulate GHG emissions under the federal Clean Air Act.  It is uncertain whether such GHG emissions regulations will be issued, when they might be issued or what form they may take.  Also in 2009, several bills were introduced in the U.S. Congress concerning climate change and the emission into the environment of carbon dioxide and other GHGs.  It is expected that eventual legislation will take the form of a cap-and-trade program where generators will be required to purchase allowances to emit carbon dioxide andother GHGs, although it is possible that legislation may take other forms, such as a carbon tax on each unit of carbon dioxide and other GHGs emitted in excess of mandated limits.  As a result, Appleton could be required, among other things, to purchase allowances or offsets to emit GHGs or other regulated pollutants or to pay taxes on such emissions.  At this time there is no basis for estimating the effect of such legislation on the costs Appleton will incur to comply with environmental laws, although the Company is investigating ways to reduce carbon emissions.

Item 3 – Defaults Upon Senior Securities

At January 3, 2009, Appleton was not in compliance with the leverage ratio covenant under the senior secured credit facilities and the senior secured term note payable, which constituted events of default under the debt agreements. Subsequent waiver of such events of default and amendments to the senior secured credit facilities and the senior secured term note payable, were entered into in March 2009. Information regarding such events is contained in Note 16 to the Condensed Consolidated Financial Statements contained in this report and is incorporated herein by reference, as well under Item 7 in the Annual Report on Form 10-K for the year ended January 3, 2009 and Note 10 to the Consolidated Financial Statements contained in such Annual Report.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. The words “will,” “may,” “should,” “believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,” “plans,” “seek” or similar expressions are intended to identify forward-looking statements. All statements in this report other than statements of historical fact, including statements which address Appleton’s strategy, future operations, future financial position, estimated revenues, projected costs, prospects, plans and objectives of management and events or developments that Appleton expects or anticipates will occur, are forward-looking statements. All forward-looking statements speak only as of the date on which they are made. They rely on a number of assumptions concerning future events and are subject to a number of risks and uncertainties, many of which are outside the Company’s control that could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to, the factors listed under “Item 1A – Risk Factors” in the Annual Report on Form 10-K for the year ended January 3, 2009, as well as in the Quarterly Report on Form 10-Q for the current quarter ended July 5, 2009, which factors are incorporated herein by reference and as updated above. Many of these factors are beyond Appleton’s ability to control or predict. Given these uncertainties, do not place undue reliance on the forward-looking statements. Appleton disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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Item 6—Exhibits

31.1	Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.
31.2	Certification of Thomas J. Ferree, Vice President Finance, Chief Financial Officer and Treasurer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.
31.3	Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.
31.4	Certification of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.
32.1	Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Appleton Papers Inc., pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Thomas J. Ferree, Vice President Finance, Chief Financial Officer and Treasurer of Appleton Papers Inc., pursuant to 18 U.S.C. Section 1350.
32.3	Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.
32.4	Certification of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.

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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.

	APPLETON PAPERS INC.             (Registrant)
Date: August 7, 2009	/s/ Thomas J. Ferree
	Thomas J. Ferree
	Vice President Finance, Chief Financial Officer and Treasurer (Signing on behalf of the Registrant and as the Principal Financial Officer)

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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.

	PAPERWEIGHT DEVELOPMENT CORP.                         (Registrant)
Date: August 7, 2009	/s/ Thomas J. Ferree
	Thomas J. Ferree
	Chief Financial Officer and Treasurer (Signing on behalf of the Registrant and as the Principal Financial Officer)

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