Appvion 10-Q 2011 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: October 2, 2011

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  x   No  ¨

Indicate by check mark whether either of the registrants is a large accelerated filer, an accelerated filer, 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 November 1, 2011, 9,353,853 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 November 1, 2011, 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.

1

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 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	34
Item 3	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4	Controls and Procedures	40
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	41
Item 1A	Risk Factors	41
Item 6	Exhibits	43
Signatures		44

2

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)
	October 2, 2011				January 1, 2011
ASSETS
Current assets
Cash and cash equivalents	$	11,691			$	3,772
Accounts receivable, less allowance for doubtful accounts of $1,012 and $1,435, respectively		95,021				93,374
Inventories		110,908				110,032
Other current assets		25,466				41,992
Total current assets		243,086				249,170
Property, plant and equipment, net of accumulated depreciation of $502,587 and $470,676, respectively		331,457				354,601
Intangible assets, net		46,700				48,449
Other assets		17,060				24,779
Total assets	$	638,303			$	676,999
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	1,203			$	18,694
Accounts payable		54,008				48,651
Accrued interest		16,294				3,094
Other accrued liabilities		59,785		��		62,988
Total current liabilities		131,290				133,427
Long-term debt		510,644				540,131
Postretirement benefits other than pension		44,562				45,133
Accrued pension		71,396				88,583
Other long-term liabilities		6,773				5,716
Commitments and contingencies (Note 13)		-				-
Redeemable common stock, $0.01 par value,   shares authorized: 30,000,000,   shares issued and outstanding:  9,357,864 and   9,713,212, respectively		101,062				110,045
Accumulated deficit		(139,948	)			(153,765	)
Accumulated other comprehensive loss		(87,476	)			(92,271	)
Total liabilities, redeemable common stock, accumulated       deficit and accumulated other comprehensive loss	$	638,303			$	676,999

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 October 2, 2011		Three Months Ended October 3, 2010		Nine Months Ended October 2, 2011		Nine Months Ended October 3, 2010
Net sales	$	217,104	$	214,870	$	651,705	$	645,662
Cost of sales		173,161		167,111		518,485		520,761
Gross profit		43,943		47,759		133,220		124,901
Selling, general and administrative expenses		32,744		34,644		97,865		104,775
Environmental expense insurance recovery		-		-		-		(8,181)
Litigation settlement, net (Note 13)		-		-		3,122		-
Operating income		11,199		13,115		32,233		28,307
Other expense (income)
Interest expense		15,112		16,302		46,945		49,970
Debt extinguishment expense, net		-		-		-		5,532
Interest income		(47)		(30)		(121)		(75)
Recovery from litigation, net (Note 13)		(23,229)		-		(23,229)		-
Foreign exchange loss (gain)		1,352		(1,028)		278		332
Other income		(175)		-		(1,549)		-
Income (loss) before income taxes		18,186		(2,129)		9,909		(27,452)
Provision for income taxes		160		136		361		90
Income (loss) from continuing operations		18,026		(2,265)		9,548		(27,542)
Discontinued operations
Income from discontinued operations, net    of income taxes		-		814		-		3,668
Net income (loss)	$	18,026	$	(1,451)	$	9,548	$	(23,874)

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 NINE MONTHS ENDED
(unaudited)
(dollars in thousands)
	October 2, 2011			October 3, 2010
Cash flows from operating activities:
Net income (loss)	$	9,548		$	(23,874	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation		34,669			36,754
Amortization of intangible assets		1,749			2,325
Amortization of financing fees		2,755			3,023
Amortization of bond discount		713			523
Employer 401(k) non-cash matching contributions		2,013			2,422
Foreign exchange loss		291			314
Gain on sale of Films		-			(2,560	)
Net gain from involuntary conversion of equipment		(1,374	)		(638	)
Loss on disposals of equipment		205			229
Accretion of capital lease obligation		6			31
Loss on debt extinguishment		-			5,532
Environmental expense insurance recovery (including accretion)		(109	)		(8,248	)
(Increase)/decrease in assets and increase/(decrease) in liabilities:
Accounts receivable		(1,854	)		(19,762	)
Inventories		(835	)		(5,607	)
Other current assets		13,373			(5,662	)
Accounts payable and other accrued liabilities		22,989			7,907
Accrued pension		(13,482	)		(9,511	)
Other, net		(487	)		(5,770	)
Net cash provided (used) by operating activities		70,170			(22,572	)
Cash flows from investing activities:
Proceeds from sale of equipment		-			81
Proceeds from sale of Films		2,000			56,000
Insurance proceeds from involuntary conversion of equipment		1,374			1,029
Additions to property, plant and equipment		(10,591	)		(11,511	)
Net cash (used) provided by investing activities		(7,217	)		45,599
Cash flows from financing activities:
Payments of senior secured notes payable		-			(211,225	)
Payments of senior subordinated notes payable		(17,491	)		-
Proceeds from senior secured first lien notes payable		-			299,007
Debt acquisition costs		-			(10,803	)
Payments relating to capital lease obligations		(36	)		(588	)
Proceeds from old revolving line of credit		-			21,350
Payments of old revolving line of credit		-			(109,575	)
Proceeds from new revolving line of credit		179,350			229,193
Payments of new revolving line of credit		(208,650	)		(229,193	)
Payments of State of Ohio loan		(900	)		(857	)
Payments of secured financing		-			(2,173	)
Proceeds from issuance of redeemable common stock		1,382			1,924
Payments to redeem common stock		(7,388	)		(7,740	)
Decrease in cash overdraft		(1,288	)		(2,457	)
Net cash used by financing activities		(55,021	)		(23,137	)
Effect of foreign exchange rate changes on cash and cash equivalents		(13	)		18
Change in cash and cash equivalents		7,919			(92	)
Cash and cash equivalents at beginning of period		3,772			9,963
Cash and cash equivalents at end of period	$	11,691		$	9,871

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
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED
(unaudited)
(dollars in thousands, except share data)
	Redeemable Common Stock
	Shares Outstanding		Amount			Accumulated Deficit			Accumulated Other Comprehensive Loss			Comprehensive Income (Loss)
Balance, January 1, 2011	9,713,212		$	110,045		$	(153,765	)	$	(92,271	)
Comprehensive income:
Net income	-			-			9,548			-		$	9,548
Changes in retiree plans	-			-			-			2,106			2,106
Realized and unrealized gain on derivatives	-			-			-			2,689			2,689
Total comprehensive income												$	14,343
Issuance of redeemable common stock	208,340			2,674						-
Redemption of redeemable common stock	(563,688	)		(7,388	)		-			-
Accretion of redeemable common stock	-			(4,269	)		4,269			-
Balance, October 2, 2011	9,357,864		$	101,062		$	(139,948	)	$	(87,476	)
Balance, January 2, 2010	10,097,099		$	122,087		$	(129,093	)	$	(99,717	)
Comprehensive loss:
Net loss	-			-			(23,874	)		-		$	(23,874	)
Changes in retiree plans	-			-			-			894			894
Realized and unrealized loss on derivatives	-			-			-			(815	)		(815	)
Total comprehensive loss												$	(23,795	)
Issuance of redeemable common stock	292,094			3,514
Redemption of redeemable common stock	(604,768	)		(7,740	)		-			-
Accretion of redeemable common stock	-			(5,237	)		5,237			-
Balance, October 3, 2010	9,784,425		$	112,624		$	(147,730	)	$	(99,638	)

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 statement of the results of operations for the three and nine months ended October 2, 2011 and October 3, 2010, the cash flows for the nine months ended October 2, 2011 and October 3, 2010 and financial position at October 2, 2011 and January 1, 2011 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 100%-owned subsidiaries (collectively the “Company”) for each of the three years in the period ended January 1, 2011, which are included in the annual report on Form 10-K for the year ended January 1, 2011. The consolidated balance sheet data as of January 1, 2011, 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 100%-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. Certain prior year financial statement amounts have been reclassified to conform to their current year presentation.

2.       DISCONTINUED OPERATIONS

On July 2, 2010, Appleton entered into a stock purchase agreement with NEX Performance Films Inc. (“Films”), an entity affiliated with Mason Wells Buyout Fund II, Limited Partnership, whereby Appleton agreed to sell all of the outstanding capital stock of American Plastics Company, Inc. (“APC”) and New England Extrusion Inc. (“NEX”) for a cash purchase price of $58 million. This transaction closed on July 22, 2010, with Appleton receiving $56 million at the time of closing and $2 million held in escrow, on behalf of Appleton, for 12 months to satisfy potential claims under the stock purchase agreement with Films. No claims were made against the escrow and the $2 million was paid to Appleton on July 25, 2011. The cash proceeds of the sale were used to reduce debt and a $0.4 million net gain was recorded in income from discontinued operations for the year ended January 1, 2011. APC had been acquired in 2003 and is located in Rhinelander, Wisconsin. NEX was acquired in 2005 and has manufacturing operations in Turners Falls, Massachusetts and Milton, Wisconsin.

The operating results of APC and NEX have been reclassified and are reported as discontinued operations within the Condensed Consolidated Statement of Operations for the three and nine months ended October 3, 2010. During the three and nine months ended October 3, 2010, discontinued operations reported net sales of $4.3 million and $51.6, respectively, and operating income before income taxes of $0.8 million and $3.7 million respectively.

3.       BUSINESS INTERRUPTION AND PROPERTY LOSS

Manufacturing operations at the Company’s West Carrollton, Ohio paper mill were temporarily interrupted in July 2010 by the collapse of one of its coal silos. The incident caused no injuries. One boiler was extensively damaged as well as the supporting infrastructure for two other boilers. While most of the West Carrollton facility was undamaged, the collapse of the coal silo reduced the mill’s ability to produce the power and steam required to operate its manufacturing equipment. The thermal coater resumed production a few days later and the remainder of the mill resumed production in early August. Appleton managed customer orders and shifted paper production to other company-owned manufacturing facilities in order to minimize any impact to its customers. The boiler that was extensively damaged resumed operation just prior to the end of first quarter 2011.

Losses associated with property damage and business interruption were covered by insurance subject to a deductible of $1.0 million. During second quarter 2011, the corresponding insurance claim was agreed and settled in full with all proceeds received from the insurer. Appleton incurred approximately $24.1 million in property damage, cost to repair and business interruption. After netting the $1.0 million deductible, and $1.7 million of capital and $0.8 million of expense for safety and efficiency upgrades to the replacement property, the Company recovered $20.3 million from its insurer and is seeking $0.3 million in credits from a vendor.

7

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Expenses associated with property damage and business interruption, totaling $17.1 million, were reported in cost of sales within the Consolidated Statement of Operations for the year ended January 1, 2011. Expenses associated with property damage and business interruption, totaling $0.7 million, have been reported in cost of sales within the Condensed Consolidated Statement of Operations for the nine months ended October 2, 2011. According to the terms of the insurance policy, Appleton recorded a $17.1 million recovery, less a $0.9 million valuation reserve, as a reduction to cost of sales for the year ended January 1, 2011, and a $0.5 million recovery as a reduction to cost of sales for the nine months ended October 2, 2011. Business interruption coverage also included recovery from lost margins related to the accident and therefore, Appleton recorded a gain of $0.6 million in cost of sales within the Consolidated Statement of Operations for the year ended January 1, 2011, as this amount was agreed with the insurer. During the first nine months of 2011, Appleton recorded an additional $0.2 million gain in cost of sales related to lost margins. Appleton also recorded a $0.4 million involuntary conversion loss on fixed assets associated with the property loss in its Consolidated Statement of Operations for the year ended January 1, 2011.

Total capital spending of approximately $5.5 million was incurred for work associated with bringing the damaged boiler back online. At year-end 2010, $1.0 million, net of the $1.0 million deductible, was recorded as a gain on the other (income) loss line within the Consolidated Statement of Operations. For the nine months ended October 2, 2011, Appleton recorded an additional $1.4 million of gain on the other income line within the Condensed Consolidated Statement of Operations, all of which was recorded during the second quarter.

4.        OTHER INTANGIBLE ASSETS

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

	As of October 2, 2011				As of January 1, 2011
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible assets:
Trademarks	$	44,665	$	23,653	$	44,665	$	22,079
Patents		10,690		10,690		12,376		12,376
Customer relationships		5,365		2,542		5,365		2,367
Subtotal		60,720	$	36,885		62,406	$	36,822
Unamortizable intangible assets:
Trademarks		22,865				22,865
Total	$	83,585			$	85,271

Of the $83.6 million of acquired intangible assets, $67.5 million was assigned to registered trademarks. Trademarks of $44.6 million related to carbonless paper 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 are not subject to amortization. Customer relationships are being amortized over their estimated useful life of 25 years.

Amortization expense for the three and nine months ended October 2, 2011 was $0.6 million and $1.7 million, respectively. Amortization expense for the three and nine months ended October 3, 2010 was $0.6 million and $1.7 million, respectively.

8

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5.        INVENTORIES

Inventories consist of the following (dollars in thousands):

	October 2, 2011		January 1, 2011
Finished goods	$	42,550	$	44,239
Raw materials, work in process and supplies		68,358		65,793
	$	110,908	$	110,032

Stores and spare parts inventory balances of $24.4 million and $23.8 million at October 2, 2011 and January 1, 2011, respectively, are valued at average cost and are included in raw materials, work in process and supplies. All other inventories are valued using the first-in, first-out (“FIFO”) method.

6.        PROPERTY, PLANT AND EQUIPMENT

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

	October 2, 2011			January 1, 2011
Land and improvements	$	9,207		$	8,611
Buildings and improvements		132,465			131,512
Machinery and equipment		652,957			643,300
Software		33,154			32,575
Capital lease		165			165
Construction in progress		6,096			9,114
		834,044			825,277
Accumulated depreciation/amortization		(502,587	)		(470,676	)
	$	331,457		$	354,601

Depreciation expense for the three and nine months ended October 2, 2011 and October 3, 2010 consists of the following (dollars in thousands):

	For the Three		For the Three		For the Nine		For the Nine
	Months Ended		Months Ended		Months Ended		Months Ended
Depreciation Expense	October 2, 2011		October 3, 2010		October 2, 2011		October 3, 2010
Cost of sales	$	10,593	$	10,499	$	31,290	$	30,885
Selling, general and administrative expenses		1,126		1,579		3,379		4,742
	$	11,719	$	12,078	$	34,669	$	35,627

9

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

7.        OTHER CURRENT AND NONCURRENT ASSETS

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

	October 2, 2011		January 1, 2011
Environmental indemnification receivable	$	12,263	$	20,580
Environmental expense insurance recovery		2,924		5,008
Escrow from sale of Films		-		2,000
Insurance recovery from coal silo accident		-		8,183
Other		10,279		6,221
	$	25,466	$	41,992

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

	October 2, 2011		January 1, 2011
Deferred debt issuance costs	$	10,999	$	13,754
Environmental expense insurance recovery		-		4,045
Other		6,061		6,980
	$	17,060	$	24,779

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):

	October 2, 2011		January 1, 2011
Compensation	$	11,394	$	8,997
Trade discounts		14,309		16,035
Workers’ compensation		4,302		3,680
Accrued insurance		2,125		2,375
Other accrued taxes		1,706		1,428
Postretirement benefits other than pension		3,758		3,758
Fox River Liabilities		12,263		20,580
Litigation settlement		1,750		-
Other		8,178		6,135
	$	59,785	$	62,988

9.       NEW ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-09, "Compensation-Retirement Benefits-Multiemployer Plans." The revised standard is intended to address concerns from the users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. The standard requires employers to provide, on an annual basis, additional quantitative and qualitative disclosures. These disclosures will provide users with more detailed information about an employer’s involvement in multiemployer pension plans including: the significant multiemployer plans in which an employer participates, the level of an employer’s participation in the significant multiemployer plans, the financial health of the significant multiemployer plans and the nature of the employer commitments to the plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. Since the Company participates in a multiemployer pension plan, it will be including the expanded disclosures within its consolidated financial statements for the year ended December 31, 2011.

10

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income." It provides updated guidance related to the presentation of other comprehensive income, offering two alternatives for presentation, including (a) a single continuous statement of comprehensive income or (b) two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company expects that adoption will not have a significant impact on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," which amends ASC 820. This updated guidance relates to fair value measurements and disclosures, including (a) the application of the highest and best use valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity and (c) quantitative information required for fair value measurements categorized within Level 3. Additionally, disclosure requirements have been expanded to include additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the effects, if any, the adoption of this guidance will have on its consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures,” requiring new disclosures of significant transfers in and out of Levels 1 and 2 fair value measurements, the reasons for the transfers, and separate reporting of purchases, sales, issuances and settlements in the roll forward of Level 3 fair value measurement activity. The new ASU also clarifies that fair value measurement disclosures should be provided for each class of assets and liabilities and disclosures should also be provided about valuation techniques and inputs used to measure fair value for recurring and nonrecurring fair value measurements. The disclosures are required for either Level 2 or Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). During first quarter 2010, the Company adopted the portion of ASU No. 2010-06 relating to Level 2 fair value measurements. During first quarter 2011, the Company adopted the portion of ASU No. 2010-06 relating to Level 3 fair value measurements. The disclosures required by adoption are included in Note 15 of Notes to Condensed Consolidated Financial Statements. Current year adoption had no impact on its financial statements.

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. Effective January 1, 2008, the Company amended the Appleton Papers Inc. Retirement Plan (the “Plan”) to provide that any non-union individuals hired or re-hired on or after January 1, 2008, would not 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” known as the Retirement Contribution benefit under the Appleton Papers Inc. Retirement Savings and Employee Stock Ownership Plan (the “KSOP”), or January 1, 2015, in the case of any other Plan participants. In December 2010, it was announced that the effective date of the freeze would change from January 1, 2015 to March 1, 2011.

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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The components of net periodic pension cost associated with the defined benefit pension plans include the following (dollars in thousands):

Pension Benefits	For the Three Months Ended October 2, 2011			For the Three Months Ended October 3, 2010			For the Nine Months Ended October 2, 2011			For the Nine Months Ended October 3, 2010
Net periodic benefit cost
Service cost	$	1,027		$	1,516		$	3,080		$	4,549
Interest cost		4,954			4,900			14,863			14,701
Expected return on plan assets		(5,603	)		(5,318	)		(16,809	)		(15,954	)
Amortization of prior service cost		122			134			365			404
Amortization of actuarial loss		1,113			654			3,340			1,961
Net periodic benefit cost	$	1,613		$	1,886		$	4,839		$	5,661

The Company planned to contribute $18 million to its defined benefit pension plan in 2011. The Company contributed the entire $18.0 million to the plan during the first nine months of 2011.

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. In December 2010, certain changes to the postretirement benefit plan were announced. Upon retirement and after COBRA benefits expire, the Company will continue to provide a subsidy toward the premium paid for pre-Medicare retiree medical coverage for those full-time salaried employees hired prior to April 1, 2003, and who retire before July 1, 2011. Beginning in 2012, Appleton’s contribution will be capped at $200 per person per month until December 31, 2020, or until Medicare-eligible, whichever comes first. In addition, those Medicare-eligible salaried retirees, spouses and surviving spouses who currently receive benefits from Appleton, beginning in 2012, will receive $100 per month to be used toward individual insurance coverage or other medical-related expenses.

The components of other postretirement benefit cost include the following (dollars in thousands):

Other Postretirement Benefits	For the Three Months Ended October 2, 2011			For the Three Months Ended October 3, 2010			For the Nine Months Ended October 2, 2011			For the Nine Months Ended October 3, 2010
Net periodic benefit cost
Service cost	$	115		$	197		$	395		$	589
Interest cost		614			760			1,916			2,280
Amortization of prior service credit		(654	)		(538	)		(2,034	)		(1,614	)
Amortization of actuarial loss		62			48			376			144
Net periodic benefit cost	$	137		$	467		$	653		$	1,399

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 (“LTIP”). Effective January 3, 2010, the Company adopted a long-term restricted stock unit plan ("RSU"). These plans, in accordance with the specific terms of each plan, provide key management employees, who are in a position to make a significant contribution to the growth and profitability of Appleton, the opportunity to be rewarded for performance that aligns with long-term shareholder interests. Both plans utilize phantom units. The value of a unit in the LTIP 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”) between the grant date and the exercise date. All units granted under the LTIP may be exercised after three full years. Units expire ten years after the grant date. The value of a unit in the RSU is based on the value of PDC common stock, as determined by the ESOP trustee. All RSUs vest three years after the award date and are paid at vesting. The cash payment upon vesting is equal to the value of one share of PDC common stock at the most recent valuation date times the number of units granted. Beginning in 2009, recipients were required to enter into a non-compete and non-solicitation agreement in order to receive units which, if violated following the receipt of units, results in forfeiture of any and all rights to receive payment relating to the units.

The Compensation Committee of the board establishes the number of units granted each year under these plans in accordance with the Compensation Committee’s stated goals and policies. The Compensation Committee has the discretion to use either, or both, plan(s) as appropriate to attract, motivate and retain key management employees while managing the expense to the Company. In 2010, all units were granted under the RSU. Prior to 2010, and again in 2011, all units were granted under the LTIP. The units were valued at the most recent PDC stock price as determined by the semi-annual ESOP valuation. As of June 30, 2011, the fair market value of one share of PDC common stock was $14.10. The Compensation Committee approved an aggregate total for the 2010 year of up to 219,000 units to be granted, of which, 213,000 units were granted under the RSU. Due to terminations of employment, 10,500 and 7,500 unvested units were forfeited during 2011 and 2010, respectively. A balance of 195,000 RSU units remains as of October 2, 2011. Approximately $0.2 million and $0.7 million of expense, related to this plan, was recorded during the three- and nine-month periods ended October 2, 2011. Approximately $0.2 million and $0.6 million of expense, related to this plan, was recorded during the three- and nine-month periods ended October 3, 2010. During the first nine months of 2011, 770,500 additional units were granted under the LTIP plan. Approximately $0.2 million of expense was recorded during the nine-month period ended October 2, 2011 as a result of these grants, all of which was recorded during the first half of the year.

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 determined by the semi-annual ESOP valuation. This deferred compensation vests coincidentally 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 October 2, 2011 and October 3, 2010. Approximately $0.2 million and $0.1 million was recorded as expense, related to this plan, for the nine-month periods ended October 2, 2011 and October 3, 2010, respectively.

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 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.

13

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)

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 Corporation (“NCR”), Appleton, Georgia-Pacific, P.H. Glatfelter Company, WTMI Co., owned by Chesapeake Corporation, Riverside Paper Corporation, which is now CBC Coating, Inc., 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 to remediate operable units 2-5 between $594 million and $900 million.

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

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. In December 2009, the court granted the defendants’ motion for summary judgment, dismissing the claim. In 2011, the same court granted the defendants' motion for summary judgment determining that Appleton and NCR are responsible for costs associated with the remedial action and natural resource damages on the Fox River. Appleton and NCR intend to appeal these decisions.

In October 2010, the United States of America (“US”) and the State of Wisconsin (“SOW”) filed a lawsuit on behalf of the EPA and the DNR, respectively, against ten companies (including the seven PRPs identified in 1997) and two municipalities seeking recovery of unreimbursed response costs and natural resources damages as well as a declaratory judgment that the defendants are liable for future response costs related to the Lower Fox River (“Government Case”). At the same time, the US and SOW lodged a consent decree with Georgia-Pacific (“GP”). Under the consent decree, and in exchange for a covenant not to sue and statutory contribution protection for portions of the Lower Fox River, GP would stipulate liability for performance of the required cleanup of a designated portion of the Lower Fox River, waive any objections to the cleanup remedy selected by EPA and DNR and pay $7 million toward the government’s unreimbursed past costs and expected future costs. The court approved the consent decree in April 2011. In June 2011, the EPA and DNR filed a motion for Preliminary Injunction seeking to expand the scope of work on the Fox River for 2011. The court denied the motion for Preliminary Injunction on July 5, 2011 and indicated in the decision that it was unlikely that the US could show that Appleton is liable under CERCLA. Appleton filed a motion for summary judgment on July 28, 2011 requesting the court determine that Appleton is not liable under CERCLA and that all claims against Appleton in the Government Case be dismissed with prejudice.

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, Appleton 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.

14

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)

Appleton’s Liability. CERCLA imposes liability on parties responsible, in whole or in part, for the presence of hazardous substances at a site. Parties liable under CERCLA 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. Appleton has obtained its own historical and technical analyses which suggest the percentage of PCBs discharged from the Appleton and Combined Locks facilities is less than 20% of the total PCBs discharged, and more recent analyses suggest the percentage is only 8% to 10%. These estimates have not been finalized and are not binding on the PRPs.

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 legal analyses and ongoing reviews 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.

Appleton has filed a motion for summary judgment requesting the court determine that Appleton is not liable under CERCLA and that all claims against Appleton in the Government Case be dismissed with prejudice.

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 continuing remediation activities provide evidence to reasonably estimate a range of Appleton’s liability.

Accordingly, at January 1, 2011, the reserve for Appleton’s liability for the Lower Fox River was $20.6 million. Based on anticipated clean-up costs and other spending during 2011 and beyond, Appleton increased its reserve by $9.4 million during the first quarter of 2011 and by another $11.3 million during third quarter 2011. Also during the first nine months of 2011, $29.0 million of payments were made from the reserve. This resulted in a remaining reserve of $12.3 million as of October 2, 2011, all of which is recorded in other accrued liabilities.

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

            •  total remediation costs of $735 million for operable units 2-5, based on the most recent bids received with a range from $594 million to $900 million;

            •  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;

            •  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

            •  legal fees and other expenses.

Periodically, interim legal determinations may obligate Appleton to fund portions of clean-up costs to extents greater than Appleton’s ultimate share as finally determined, and in such instances, Appleton may reserve additional amounts (including appropriate reimbursement under its indemnification agreements as discussed below).

15

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)

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, Arjo Wiggins Appleton Ltd, now known as Windward Prospects Ltd (“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 to satisfy its portion of the Fox River Liabilities not covered by the indemnification agreement with AWA. Project-to-date through October 2, 2011, AWA has paid $254.4 million in connection with Fox River Liabilities. At October 2, 2011, the total indemnification receivable from AWA was $12.3 million, all of which is recorded in other current assets.

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 provided up to $250 million of coverage for Fox River Liabilities, subject to certain limitations defined in the policy. As of October 2, 2011, there was no remaining coverage on the policy.

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. 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 financial condition of AWA. 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.

The insurance policy discussed above is held by a special purpose entity in which the Company is a minority shareholder. An AWA affiliate is the only other shareholder in this entity. The Company adopted ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” as of January 3, 2010. The Company determined that this entity is not a VIE and there is no requirement to include this entity in its consolidated financial results for the period ended October 2, 2011.

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 appealed the final judgment. In June 2010, the Wisconsin Court of Appeals upheld the final judgment. Settlements have been negotiated between the insurers and Appleton. Under the terms of the indemnification agreement, recoveries from insurance are reimbursed to AWA to the extent of its indemnification obligation. During 2010, Appleton recorded an $8.9 million receivable, representing settlements to be received in excess of amounts reimbursable to AWA, in the Consolidated Balance Sheet as of January 1, 2011. During the first nine months of 2011, Appleton received $6.2 million of these funds. The remaining receivable is included in other current assets of the Condensed Consolidated Balance Sheet as of October 2, 2011. An $8.9 million environmental expense insurance recovery was also recorded as a separate line item within operating income on the Consolidated Statement of Operations for the year ended January 1, 2011.

16

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 the wastewater impoundments at the West Carrollton facility and low levels of PCBs have been detected in the 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 may 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 Settlements

During the first nine months of 2011, Appleton resolved litigation initiated by a supplier over contract terms and recorded a charge to income of $3.1 million, including legal fees. Prior to resolution, Appleton had assessed the potential for liability as less than reasonably possible. However, during a court-ordered pre-trial mediation, the parties were able to resolve the litigation to the satisfaction of both parties.

During third quarter 2011, Appleton received payment of $23.2 million of damages, including interest and net of related fees and litigation expenses. This was the result of a favorable jury trial verdict, received in 2009, related to litigation commenced by Appleton against Andritz BMB AG and Andritz, Inc. During the time that followed, the defendants' attempts to overturn the verdict were unsuccessful. In March 2011, the Wisconsin Court of Appeals issued a decision unanimously affirming the final judgment. On September 1, 2011, the Wisconsin Supreme Court denied the defendants' petition seeking further review of the matter. This income was recorded in the other expense (income) section of the Condensed Consolidated Statements of Operations for the three and nine months ended October 2, 2011.

17

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)

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. Appleton has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While Appleton will vigorously defend itself and expects to prevail in any similar cases that may be brought against it in the future, there can be no assurance that it will be successful.

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 business, financial condition and results of operations or cash flows.

14.      EMPLOYEE STOCK OWNERSHIP PLAN

Appleton’s matching contributions charged to expense were $0.5 million and $0.6 million for the three months ended October 2, 2011 and October 3, 2010, respectively. Appleton’s matching contributions charged to expense were $2.0 million and $2.4 million for the nine months ended October 2, 2011 and October 3, 2010, respectively. As a result of hardship withdrawals, required diversifications and employee terminations, 563,688 shares of PDC redeemable common stock were repurchased during the first nine months of 2011 at an aggregate price of approximately $7.4 million. During the same period, the ESOP trustee purchased 107,671 shares of PDC redeemable common stock for an aggregate price of $1.4 million using pre-tax deferrals, rollovers and loan payments made by employees, while Appleton’s matching contribution for this same period resulted in an additional 100,669 shares of redeemable common stock being issued. During the first nine months of 2010, as a result of hardship withdrawals, required diversifications and employee terminations, 604,768 shares of PDC redeemable common stock were repurchased at an aggregate price of approximately $7.7 million. During the same period, the ESOP trustee purchased 159,941 shares of PDC redeemable common stock for an aggregate price of $1.9 million using pre-tax deferrals, rollovers and loan payments made by employees, while Appleton’s matching contribution for this same period resulted in an additional 132,153 shares of redeemable common stock being issued.

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” redeemable equity securities are required to be accreted so the amount in the balance sheet reflects the estimated amount redeemable at the earliest redemption date based upon the redemption value at each period-end. All Company common stock is redeemable common stock. Redeemable common stock is being accreted to the earliest redemption date mandated by federal law based upon the estimated fair market value of the redeemable common stock as of October 2, 2011. Excluding the year-end 2010 and June 30, 2011 stock valuations which resulted in increases to the price of PDC common stock, recent stock valuations have been marked with decreases to the stock price. The impact of these reductions caused the Company to reduce redeemable common stock accretion by $4.3 million for the nine months ended October 2, 2011. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $132 million has been determined. The recorded book value of the redeemable common stock as of October 2, 2011, was $101 million.

Due to a reduction in the June 30, 2010 share price, redeemable common stock accretion was reduced by $5.2 million for the nine months ended October 3, 2010. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $118 million was determined. The recorded book value of the redeemable common stock as of October 3, 2010 was $113 million.

18

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)

15.      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company selectively uses financial instruments to manage some market risks from changes in interest rates, foreign currency exchange rates or commodity prices. The fair values of all derivatives are recorded in the Condensed Consolidated Balance Sheet. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive loss, 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. These instruments are designated as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward note, also deemed to be categorized as Level 2. The effective portion of the contracts’ gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive loss and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transaction will not occur. 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 $42.9 million as of October 2, 2011. These contracts have settlement dates extending through December 2012.

Appleton selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks associated with market fluctuations in energy prices. These contracts are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs based on the New York Mercantile Exchange as measured on the last trading day of the accounting period and compared to the strike price. The contracts’ gains or losses due to changes in fair value are recorded in current period earnings. At October 2, 2011, the hedged volumes of these contracts totaled 643,000 MMBTU (Million British Thermal Units) of natural gas. The contracts have settlement dates extending through December 2012.

Appleton selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks associated with market fluctuations in pulp prices. These contracts are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs based on pricing published by RISI, Inc. ("RISI") as measured on the last trading day of the accounting period and compared to the swap’s fixed price. Currently, there are two pulp swap contracts in place. As of October 2, 2011, the first swap contract had a remaining hedge volume of 5,000 tons of pulp with settlement dates extending through February 2012. It is not designated as a hedge, and therefore, gains or losses due to changes in fair value are recorded in current period earnings. During third quarter 2011, Appleton entered into a second swap contract. As of October 2, 2011, this swap contract hedges 24,000 tons of pulp with settlement dates January through December 2012. It is designated as a cash flow hedge of forecasted pulp purchases, and therefore, the change in the effective portion of the fair value of the hedge will be deferred in accumulated other comprehensive loss until the inventory containing the pulp is sold.

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. As a result of the February 2010 voluntary refinancing, Appleton paid $5.0 million, including interest, to settle this derivative.

The following table presents the location and fair values of derivative instruments included in the Company’s Condensed Consolidated Balance Sheets (dollars in thousands):

Designated as a Hedge	Balance Sheet Location	October 2, 2011			January 1, 2011
Foreign currency exchange derivatives	Other current assets	$	2,366		$	393
Foreign currency exchange derivatives	Other current liabilities		-			(67	)
Pulp fixed swap	Other current assets		973			-
Not Designated as a Hedge
Natural gas fixed swap	Other current liabilities		(273	)		(69	)
Pulp fixed swap	Other current liabilities		(335	)		-

19

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The following table presents the location and amount of (gains) losses on derivative instruments and related hedge items included in the Company’s Condensed Consolidated Statement of Operations for the three and nine months ended October 2, 2011 and October 3, 2010 and (gains) losses initially recognized in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheet at the period-ends presented (dollars in thousands):

Designated as a Hedge	Statement of Operations Location	For the Three Months Ended October 2, 2011			For the Three Months Ended October 3, 2010		For the Nine Months Ended October 2, 2011		For the Nine  Months Ended October 3, 2010
Foreign currency exchange derivatives	Net sales	$	(18)	$	(237)	$	814	$	(1,045)
(Gains) losses recognized in accumulated other comprehensive loss							(2,276)		569
Pulp fixed swap	Other income		(175)		-		(175)		-
Gains recognized in accumulated other comprehensive loss							(798)		-
Not Designated as a Hedge
Natural gas fixed swap	Cost of sales		280		-		402		-
Pulp fixed swap	Cost of sales		320		-		115		-
Interest rate swap contract	Interest expense		-		-		-		961

While preparing Note 14 – Derivative Instruments and Hedging Activities, included in the 2010 Form 10-K, it was discovered that the financial impact to net sales of foreign exchange hedging, as reported in each of the 2010 Forms 10-Q, was incorrect. Only the disclosure as presented was incorrect. There were no errors in accounting or financial statement classification. The following schedule shows the disclosure error and corrected information (dollars in thousands) as presented above.

		(As Reported) Impact of Hedging on Net Sales		Error Correction			(As Corrected) Impact of Hedging on Net Sales
For the three months ended October 3, 2010	$	65 loss	$		302 gain	$	237 gain
For the nine months ended October 3, 2010	$	32 gain	$		1,013 gain	$	1,045 gain

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

20

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):

	October 2, 2011			January 1, 2011
Revolving credit facility at approximately 5.75% at October 2, 2011	$	-		$	29,300
Secured variable rate industrial development bonds, 0.5% average interest rate at October 2, 2011,      $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		6,420			7,105
State of Ohio loan at 1% until July 2011, then 3% until May 2019, approximately $30 due monthly      and final payment due May 2019		2,352			2,567
Senior notes payable at 8.125%, due June 2011		-			17,491
Senior subordinated notes payable at 9.75%, due June 2014		32,195			32,195
Senior secured first lien notes payable at 10.5%, due June 2015		305,000			305,000
Unamortized discount on 10.5% senior secured first lien notes payable, due June 2015		(4,536	)		(5,249	)
Second lien notes payable at 11.25%, due December 2015		161,766			161,766
		511,847			558,825
Less obligations due within one year		(1,203	)		(18,694	)
	$	510,644		$	540,131

During the first nine months of 2011, Appleton made mandatory debt repayments of $0.9 million, plus interest, on its State of Ohio loans. During the first nine months of 2011, Appleton borrowed $179.4 million and repaid $208.7 million on its revolving credit facility, leaving no outstanding balance at quarter-end. Approximately $18.1 million of the revolving credit facility is used to support outstanding letters of credit. As of July 1, 2011, the revolving credit facility was amended to reduce all applicable interest rate spreads by 0.25%. The interest rate assessed on Eurodollar rate loans is now the Eurodollar rate plus an interest rate spread ranging from 3.25% to 3.75%, depending on defined levels of average excess availability of the credit facility. The interest rate assessed on base rate loans is now the base rate plus an interest rate spread ranging from 2.25% to 2.75%, also depending on defined levels of average excess availability.

During June 2011, in accordance with the terms of its 8.125% senior notes payable, Appleton repaid in full the remaining note balance of $17.5 million. A payment of $18.2 million represented full and complete payment of all unpaid principal and accrued and unpaid interest. These funds were sourced from a combination of cash from operations and borrowing on the revolving credit facility. Upon payment, the notes were terminated and Appleton was released from all obligations under the notes.

On February 8, 2010, Appleton completed a voluntary refinancing of its debt to extend debt maturities, increase liquidity, eliminate certain financial covenants and increase financial flexibility. The refinancing included a five-year, asset-backed $100 million revolving credit facility. The revolving credit facility, as amended, provides for up to $100 million of revolving loans including a letter of credit sub-facility of up to $25 million and a swing line sub-facility of up to $5 million. It also contains an uncommitted accordion feature that allows Appleton to increase the size of the revolving credit facility by up to $25 million if Appleton can obtain commitments for the incremental amount. Borrowings under the revolving credit facility, as amended, are limited to the sum of (a) 85% of the net amount of eligible accounts receivable and (b) the lesser of (i) 70% of the net amount of eligible raw materials and finished goods inventory or (ii) 85% of the net orderly liquidation value of such inventory. This asset-backed revolving credit facility, as amended, contains a debt covenant whereby if the Company's average availability ratio should fall below 20%, then the Company is subject to a fixed charge coverage ratio of not less than 1.10:1.00. The average availability ratio is calculated monthly and is a function of the Company's average outstanding revolver borrowing as compared to the borrowing base of eligible inventory and accounts receivable as discussed above.

21

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The revolving credit facility, as amended, is guaranteed by PDC, each of PDC’s existing and future 100%-owned domestic and Canadian subsidiaries and each other subsidiary of PDC that guarantees the 10.5% senior secured first lien notes due June 2015. Lenders hold a senior first-priority interest in (i) substantially all of the accounts, inventory, general intangibles, cash deposit accounts, business interruption insurance, investment property (including, without limitation, all issued and outstanding capital stock of the Company and each revolver guarantor (other than PDC) and all interests in any domestic or Canadian partnership, joint venture or similar arrangement), instruments (including all collateral security thereof), documents, chattel paper and records of the Company and each revolver guarantor now owned or hereafter acquired (except for certain general intangibles, instruments, documents, chattel paper and records of the Company or any revolver guarantor, to the extent arising directly in connection with or otherwise directly relating to equipment, fixtures or owned real property), (ii) all other assets and properties of the Company and each revolver guarantor now owned or hereafter acquired, and (iii) all proceeds of the foregoing. Lenders also hold a junior first-priority security interest in (i) substantially all equipment, fixtures and owned real property of the Company and each revolver guarantor now owned or hereafter acquired, (ii) in each case solely to the extent arising directly in connection with or otherwise directly related to any of the foregoing, certain general intangibles, instruments, documents, chattel paper and records of the Company and each revolver guarantor now owned or hereafter acquired, and (iii) all proceeds of the foregoing. The revolving credit facility, as amended, contains affirmative and negative covenants customary for similar credit facilities, which among other things, restrict the Company’s ability and the ability of the Company’s subsidiaries, subject to certain exceptions, to incur liens, incur or guarantee additional indebtedness, make restricted payments, engage in transactions with affiliates and make investments.

The 10.5% senior secured first lien notes due June 2015 rank senior in right of payment to all existing and future subordinated indebtedness of Appleton and equally in right of payment with all existing and future senior indebtedness of Appleton. The notes are secured by security interests in substantially all of the property and assets of Appleton and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all of Appleton’s restricted subsidiaries (other than excluded restricted subsidiaries) and the parent entity. Initially, in addition to Appleton, this includes PDC and Appleton Papers Canada Ltd.

The first lien notes and the second lien notes, as amended, contain covenants that restrict Appleton’s ability and the ability of Appleton’s other guarantors to sell assets or merge or consolidate with or into other companies; borrow money; incur liens; pay dividends or make other distributions; make other restricted payments and investments; place restrictions on the ability of certain subsidiaries to pay dividends or other payments to Appleton; enter into sale and leaseback transactions; amend particular agreements relating to the transaction with former parent AWA and the ESOP; and enter into transactions with certain affiliates. These covenants are subject to important exceptions and qualifications set forth in the indenture governing the 11.25% second lien notes due 2015, as amended.

The senior subordinated notes, as amended, are unconditionally guaranteed by PDC and Rose Holdings Limited, subject to certain limitations.

As of October 2, 2011, Appleton was in compliance with all debt covenants and is forecasted to remain compliant for the next twelve months. Appleton’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results. Appleton’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead Appleton to seek amendments to, or waivers of, the financial covenants. Appleton cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of non-compliance with debt covenants, if 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.

22

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS   (In Progress-hilited items still open)

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):

	October 2, 2011				January 1, 2011
	Carrying		Fair		Carrying		Fair
Financial Instruments	Amount		Value		Amount		Value
Senior subordinated notes payable	$	32,195	$	27,849	$	32,195	$	15,293
Senior notes payable		-		-		17,491		16,966
Senior secured first lien notes payable		300,464		289,948		299,751		299,751
Second lien notes payable		161,766		152,869		161,766		130,222
Revolving credit facility		-		-		29,300		29,300
State of Ohio loans		8,772		9,376		9,672		10,185
Industrial development bonds		8,650		8,650		8,650		8,650
	$	511,847	$	488,692	$	558,825	$	510,367

The senior subordinated notes payable, the senior secured first lien notes payable and the second lien notes payable are traded in public markets and therefore, the fair value was determined based on quoted market prices. The fair value of the State of Ohio loans 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.

23

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

18.      SEGMENT INFORMATION

The Company’s reportable segments are as follows: carbonless papers, thermal papers and Encapsys®. 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, interest income, interest expense, debt extinguishment expense, foreign exchange loss (gain), recovery from litigation and other income. The Company does not allocate total assets internally in assessing operating performance and does not track capital expenditures by segment. Net sales, operating income (loss) and depreciation and amortization, as determined by the Company for its reportable segments, are as follows (dollars in thousands):

		For the Three Months Ended October 2, 2011			For the Three Months Ended October 3, 2010		For the Nine Months Ended October 2, 2011			For the Nine Months Ended October 3, 2010
Net sales
Carbonless papers	$	110,369		$	117,090		$	346,357		$	369,715
Thermal papers		97,443			89,052			278,103			256,428
		207,812			206,142			624,460			626,143
Encapsys		14,444			14,163			43,938			37,518
Intersegment (A)		(5,152	)		(5,435	)		(16,693	)		(17,999	)
Total	$	217,104		$	214,870		$	651,705		$	645,662
Operating income (loss)
Carbonless papers	$	6,353		$	10,553		$	21,353		$	23,696
Thermal papers		4,072			1,447			11,264			(2,656	)
		10,425			12,000			32,617			21,040
Encapsys		3,588			2,986			10,738			6,133
Unallocated corporate charges		(2,037	)		(1,353	)		(8,615	)		3,879
Intersegment (A)		(777	)		(518	)		(2,507	)		(2,745	)
Total	$	11,199		$	13,115		$	32,233		$	28,307
Depreciation and amortization
Carbonless papers	$	6,505		$	6,879		$	19,514		$	20,618
Thermal papers		4,593			4,964			13,785			14,833
		11,098			11,843			33,299			35,451
Encapsys		1,163			751			3,000			1,760
Unallocated corporate charges		41			68			119			165
Total	$	12,302		$	12,662		$	36,418		$	37,376

(A) Intersegment represents the portion of the Encapsys segment financial results relating to encapsulated products provided internally for the production of carbonless papers.

During the nine months ended October 2, 2011, the Company recorded a $3.1 million litigation settlement within unallocated corporate charges. During the nine months ended October 3, 2010, the Company recorded an $8.2 million environmental expense insurance recovery within unallocated corporate charges.

24

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

19.      GUARANTOR FINANCIAL INFORMATION

Appleton (the “Issuer”) has issued senior subordinated notes, as amended, which have been guaranteed by PDC (the “Parent Guarantor”), American Plastics Company, Inc. (prior to its July 22, 2010 sale), Rose Holdings Limited and New England Extrusion Inc. (prior to its July 22, 2010 sale), each of which is a 100%-owned subsidiary of Appleton (the “Subsidiary Guarantors”).

Presented below is condensed consolidating financial information for the Parent Guarantor, the Issuer, the Subsidiary Guarantors and a 100%-owned non-guarantor subsidiary (the “Non-Guarantor Subsidiary”) as of October 2, 2011 and January 1, 2011, and for the three and nine months ended October 2, 2011 and October 3, 2010. This financial information should be read in conjunction with the condensed consolidated financial statements and other notes related thereto.

The first lien notes and the second lien notes, as amended, place restrictions on the subsidiaries of the Issuer that would limit dividend distributions by these subsidiaries.

25

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
October 2, 2011
(unaudited)
(dollars in thousands)
	Parent Guarantor		Issuer			Subsidiary Guarantors		Non-Guarantor  Subsidiary			Eliminations		Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	-	$	11,336		$	-	$	355		$	-	$	11,691
Accounts receivable, net		-		90,349			-		4,672			-		95,021
Inventories		-		109,273			-		1,635			-		110,908
Other current assets		12,263		13,179			-		24			-		25,466
Total current assets		12,263		224,137			-		6,686			-		243,086
Property, plant and equipment, net		-		331,442			-		15			-		331,457
Investment in subsidiaries		186,110		13,792			-		-			(199,902)		-
Other assets		12		63,624			-		124			-		63,760
Total assets	$	198,385	$	632,995		$	-	$	6,825		$	(199,902)	$	638,303
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	-	$	1,203		$	-	$	-		$	-	$	1,203
Accounts payable		-		53,758			-		250			-		54,008
Due to (from) parent and affiliated companies		324,747		(315,144	)		-		(9,603	)		-		-
Other accrued liabilities		-		73,793			-		2,286			-		76,079
Total current liabilities		324,747		(186,390	)		-		(7,067	)		-		131,290
Long-term debt		-		510,644			-		-			-		510,644
Other long-term liabilities		-		122,631			-		100			-		122,731
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss		(126,362)		186,110			-		13,792			(199,902)		(126,362)
Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss	$	198,385	$	632,995		$	-	$	6,825		$	(199,902)	$	638,303

26

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 1, 2011
(unaudited)
(dollars in thousands)
	Parent Guarantor		Issuer			Subsidiary Guarantors		Non-Guarantor Subsidiary			Eliminations		Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	-	$	3,399		$	-	$	373		$	-	$	3,772
Accounts receivable, net		-		85,988			101		7,285			-		93,374
Inventories		-		107,908			-		2,124			-		110,032
Other current assets		20,580		21,364			-		48			-		41,992
Total current assets		20,580		218,659			101		9,830			-		249,170
Property, plant and equipment, net		-		354,597			-		4			-		354,601
Investment in subsidiaries		161,559		13,462			-		-			(175,021)		-
Other assets		12		73,087			-		129			-		73,228
Total assets	$	182,151	$	659,805		$	101	$	9,963		$	(175,021)	$	676,999
LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	-	$	18,694		$	-	$	-		$	-	$	18,694
Accounts payable		-		48,608			-		43			-		48,651
Due to (from) parent and affiliated companies		318,142		(312,040	)		101		(6,203	)		-		-
Other accrued liabilities		-		63,524			-		2,558			-		66,082
Total current liabilities		318,142		(181,214	)		101		(3,602	)		-		133,427
Long-term debt		-		540,131			-		-			-		540,131
Other long-term liabilities		-		139,329			-		103			-		139,432
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss		(135,991)		161,559			-		13,462			(175,021)		(135,991)
Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss	$	182,151	$	659,805		$	101	$	9,963		$	(175,021)	$	676,999

27

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)																	��
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 2, 2011
(unaudited)
(dollars in thousands)
	Parent						Subsidiary		Non-Guarantor
	Guarantor			Issuer			Guarantors		Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	648,842		$	-	$	38,916		$	(36,053	)	$	651,705
Cost of sales		-			517,953			-		36,535			(36,003	)		518,485
Gross profit		-			130,889			-		2,381			(50	)		133,220
Selling, general and administrative expenses		-			96,234			-		1,631			-			97,865
Litigation settlement		-			3,122			-		-			-			3,122
Operating income		-			31,533			-		750			(50	)		32,233
Interest expense		10,207			47,198			-		-			(10,460	)		46,945
Interest income		-			(10,328	)		-		(253	)		10,460			(121	)
Income in equity investments		(19,755	)		(394	)		-		-			20,149			-
Other (income) loss		-			(24,910	)		-		524			(114	)		(24,500	)
Income before income taxes		9,548			19,967			-		479			(20,085	)		9,909
Provision for income taxes		-			212			-		149			-			361
Net income	$	9,548		$	19,755		$	-	$	330		$	(20,085	)	$	9,548

28

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 3, 2010
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	643,474		$	-		$	35,119		$	(32,931	)	$	645,662
Cost of sales		-			520,645			-			33,638			(33,522	)		520,761
Gross profit		-			122,829			-			1,481			591			124,901
Selling, general and administrative expenses		-			103,392			-			1,383			-			104,775
Environmental expense insurance recovery		-			(8,181	)		-			-			-			(8,181	)
Operating income		-			27,618			-			98			591			28,307
Interest expense		9,973			50,327			-			-			(10,330	)		49,970
Debt extinguishment expense, net		-			5,532			-			-			-			5,532
Interest income		-			(10,048	)		-			(357	)		10,330			(75	)
Loss in equity investments		13,901			24,611			-			-			(38,512	)		-
Other loss (income)		-			558			-			(281	)		55			332
(Loss) income from continuing operations before income taxes		(23,874	)		(43,362	)		-			736			39,048			(27,452	)
Provision for income taxes		-			4			-			86			-			90
(Loss) income from continuing operations		(23,874	)		(43,366	)		-			650			39,048			(27,542	)
Income (loss) from discontinued operations, net of income taxes		-			29,465			(25,797	)		-			-			3,668
Net (loss) income	$	(23,874	)	$	(13,901	)	$	(25,797	)	$	650		$	39,048		$	(23,874	)

29

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 2, 2011
(unaudited)
(dollars in thousands)
	Parent						Subsidiary		Non-Guarantor
	Guarantor			Issuer			Guarantors		Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	217,377		$	-	$	12,950		$	(13,223	)	$	217,104
Cost of sales		-			173,030			-		13,187			(13,056	)		173,161
Gross profit (loss)		-			44,347			-		(237	)		(167	)		43,943
Selling, general and administrative expenses		-			32,062			-		682			-			32,744
Operating income (loss)		-			12,285			-		(919	)		(167	)		11,199
Interest expense		3,410			15,203			-		-			(3,501	)		15,112
Interest income		-			(3,457	)		-		(91	)		3,501			(47	)
(Income) loss in equity investments		(21,436	)		2,072			-		-			19,364			-
Other (income) loss		-			(23,077	)		-		1,066			(41	)		(22,052	)
Income (loss) before income taxes		18,026			21,544			-		(1,894	)		(19,490	)		18,186
Provision for income taxes		-			108			-		52			-			160
Net income (loss)	$	18,026		$	21,436		$	-	$	(1,946	)	$	(19,490	)	$	18,026

30

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 3, 2010
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	213,786		$	-		$	11,628		$	(10,544	)	$	214,870
Cost of sales		-			167,260			-			10,681			(10,830	)		167,111
Gross profit		-			46,526			-			947			286			47,759
Selling, general and administrative expenses		-			34,180			-			464			-			34,644
Operating income		-			12,346			-			483			286			13,115
Interest expense		3,327			16,359			-			-			(3,384	)		16,302
Interest income		-			(3,357	)		-			(57	)		3,384			(30	)
(Income) loss in equity investments		(1,876	)		27,564			-			-			(25,688	)		-
Other income		-			(695	)		-			(374	)		41			(1,028	)
(Loss) income from continuing operations before income taxes		(1,451	)		(27,525	)		-			914			25,933			(2,129	)
(Benefit) provision for income taxes		-			(40	)		-			176			-			136
(Loss) income from continuing operations		(1,451	)		(27,485	)		-			738			25,933			(2,265	)
Income (loss) from discontinued operations, net of income taxes		-			29,361			(28,547	)		-			-			814
										��
Net (loss) income	$	(1,451	)	$	1,876		$	(28,547	)	$	738		$	25,933		$	(1,451	)

31

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 2, 2011
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	9,548		$	19,755		$	-		$	330		$	(20,085	)	$	9,548
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation and amortization		-			36,415			-			3			-			36,418
Other		-			3,976			-			524			-			4,500
Change in assets and liabilities, net		(10,147	)		7,126			101			2,539			20,085			19,704
Net cash (used) provided by operating activities		(599	)		67,272			101			3,396			-			70,170
Cash flows from investing activities:
Proceeds from sale of Films		-			2,000			-			-			-			2,000
Insurance proceeds from involuntary conversion of equipment		-			1,374			-			-			-			1,374
Additions to property, plant and equipment		-			(10,577	)		-			(14	)		-			(10,591	)
Net cash used by investing activities		-			(7,203	)		-			(14	)		-			(7,217	)
Cash flows from financing activities:
Payments of senior subordinated notes payable		-			(17,491	)		-			-			-			(17,491	)
Payments relating to capital lease obligations		-			(36	)		-			-			-			(36	)
Proceeds from new revolving line of credit		-			179,350			-			-			-			179,350
Payments of new revolving line of credit		-			(208,650	)		-			-			-			(208,650	)
Payments of State of Ohio loan		-			(900	)		-			-			-			(900	)
Due to parent and affiliated companies, net		6,605			(3,104	)		(101	)		(3,400	)		-			-
Proceeds from issuance of redeemable common stock		1,382			-			-			-			-			1,382
Payments to redeem common stock		(7,388	)		-			-			-			-			(7,388	)
Decrease in cash overdraft		-			(1,288	)		-			-			-			(1,288	)
Net cash provided (used) by financing activities		599			(52,119	)		(101	)		(3,400	)		-			(55,021	)
Effect of foreign exchange rate changes on cash and cash equivalents		-			(13	)		-			-			-			(13	)
Change in cash and cash equivalents		-			7,937			-			(18	)		-			7,919
Cash and cash equivalents at beginning of period		-			3,399			-			373			-			3,772
Cash and cash equivalents at end of period	$	-		$	11,336		$	-		$	355		$	-		$	11,691

32

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 3, 2010
(unaudited)
(dollars in thousands)
	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Cash flows from operating activities:
Net (loss) income	$	(23,874	)	$	(13,901	)	$	(25,797	)	$	650		$	39,048		$	(23,874	)
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities:
Depreciation and amortization		-			37,349			1,726			4			-			39,079
Other		-			909			-			(281	)		-			628
Change in assets and liabilities, net		61,711			(53,957	)		(7,265	)		154			(39,048	)		(38,405	)
Net cash provided (used) by operating activities		37,837			(29,600	)		(31,336	)		527			-			(22,572	)
Cash flows from investing activities:
Proceeds from sale of equipment		-			81			-			-			-			81
Proceeds from sale of Films		-			56,000			-			-			-			56,000
Insurance proceeds from involuntary conversion of equipment		-			1,029			-			-			-			1,029
Additions to property, plant and equipment		-			(10,921	)		(590	)		-			-			(11,511	)
Net cash provided (used) by investing activities		-			46,189			(590	)		-			-			45,599
Cash flows from financing activities:
Payments of senior secured notes payable		-			(211,225	)		-			-			-			(211,225	)
Proceeds from senior secured first lien notes payable		-			299,007			-			-			-			299,007
Debt acquisition costs		-			(10,803	)		-			-			-			(10,803	)
Payments relating to capital lease obligations		-			(588	)		-			-			-			(588	)
Proceeds from old revolving line of credit		-			21,350			-			-			-			21,350
Payments of old revolving line of credit		-			(109,575	)		-			-			-			(109,575	)
Proceeds from new revolving line of credit		-			229,193			-			-			-			229,193
Payments of new revolving line of credit		-			(229,193	)		-			-			-			(229,193	)
Payments of State of Ohio loans		-			(857	)		-			-			-			(857	)
Payments of secured financing		-			(2,173	)		-			-			-			(2,173	)
Due to parent and affiliated companies, net		(32,021	)		209			31,925			(113	)		-				-
Proceeds from issuance of redeemable common stock		1,924			-			-			-			-			1,924
Payments to redeem common stock		(7,740	)		-			-			-			-			(7,740	)
Decrease in cash overdraft		-			(2,457	)		-			-			-			(2,457	)
Net cash (used) provided by financing activities		(37,837	)		(17,112	)		31,925			(113	)		-			(23,137	)
Effect of foreign exchange rate changes on cash and cash equivalents		-			18			-			-			-			18
Change in cash and cash equivalents		-			(505	)		(1	)		414			-			(92	)
Cash and cash equivalents at beginning of period		-			9,161			1			801			-			9,963
Cash and cash equivalents at end of period	$	-		$	8,656		$	-		$	1,215		$	-		$	9,871

33

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 100%-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 October 2, 2011. 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 1, 2011, the consolidated financial statements and related notes included therein.

Weak economic conditions, as well as higher raw materials pricing, continue to impact Appleton's business and results of operations. As discussed below, raw material prices continue to negatively impact the business. In response to escalating raw material costs, Appleton has been able to initiate and sustain price increases in order to manage its margins. The Company continues to be proactive and disciplined as it implements manufacturing efficiencies and cost saving measures to help balance the negative impact of increasing input costs on the business. Appleton's business and financial results will continue to be challenged during the remainder of the year by the slower than expected economic recovery and higher raw material prices.

Financial Highlights

Third quarter 2011 net sales of $217.1 million increased 1.0% compared to net sales of $214.9 million in third quarter 2010. Within the paper business, favorable pricing and mix offset a 5% volume shortfall when compared to third quarter 2010. Third quarter 2011 Encapsys® net sales of $14.4 million were slightly higher than third quarter 2010 net sales of $14.2 million. Encapsys third quarter 2011 volumes were approximately 3% higher than third quarter 2010.

Income from continuing operations of $18.0 million was recorded during third quarter 2011 compared to a $2.2 million loss from continuing operations recorded in third quarter 2010. Current quarter income includes $23.2 million of damages, including interest and net of related fees and litigation expenses. This was the result of a favorable jury trial verdict, received in 2009, related to litigation commenced by Appleton against Andritz BMB AG and Andritz Inc. During the time that followed, the defendants' attempts to overturn the verdict were unsuccessful. In March 2011, the Wisconsin Court of Appeals issued a decision unanimously affirming the final judgment. On September 1, 2011, the Wisconsin Supreme Court denied the defendants' petition seeking further review of the matter. These proceeds were received in September 2011 and were used to pay down debt on the Company's revolving credit facility.

During the current quarter, the Company incurred $2.1 million of spending associated with its biennial maintenance shutdown at the West Carrollton, Ohio paper mill. Since this maintenance shutdown occurs every two years, there was no comparable spending during third quarter 2010. In addition, current year operating income continues to be negatively impacted by escalating raw material prices though offset by favorable product pricing and mix as well as cost reduction efforts throughout the organization.

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Comparison of Unaudited Results of Operations for the Quarters Ended October 2, 2011 and October 3, 2010

	For the Quarter Ended
	October 2,			October 3,			Increase
	2011			2010			(Decrease)
	(dollars in millions)
Net sales	$	217.1		$	214.9			1.0	%
Cost of sales		173.2			167.1			3.7	%
Gross profit		43.9			47.8			-8.2	%
Selling, general and administrative expenses		32.7			34.6			-5.5	%
Operating income		11.2			13.2			-15.2	%
Interest expense, net		15.1			16.3			-7.4	%
Recovery from litigation, net		(23.2	)		-		nm
Other non-operating expense (income), net		1.2			(1.0	)	220.0		%
Income (loss) from continuing operations before income taxes		18.1			(2.1	)	nm
Provision for income taxes		0.1			0.1			-
Income (loss) from continuing operations		18.0			(2.2	)	nm
Income from discontinued operations, net of income taxes		-			0.8		-100.0		%
Net income (loss)	$	18.0		$	(1.4	)	nm
Comparison as a percentage of net sales
Cost of sales		79.8	%		77.8	%		2.0	%
Gross margin		20.2	%		22.2	%		-2.0	%
Selling, general and administrative expenses		15.0	%		16.1	%		-1.1	%
Operating margin		5.2	%		6.1	%		-0.9	%
Income (loss) from continuing operations before income taxes		8.3	%		-1.0	%		9.3	%
Income (loss) from continuing operations		8.3	%		-1.0	%		9.3	%
Income from discontinued operations, net of income taxes		-			0.4	%		-0.4	%
Net income (loss)		8.3	%		-0.6	%		8.9	%

Net sales for third quarter 2011 were $217.1 million, an increase of $2.2 million, or 1.0%, compared to the prior year period. Compared to the prior year quarter, shipment volumes within the paper business were approximately 5% lower. This was offset by favorable product pricing and mix and an increase in Encapsys shipment volumes of approximately 3%.

Third quarter 2011 operating income of $11.2 million decreased $2.0 million from third quarter 2010 operating income of $13.2 million. Third quarter 2011 gross profit of $43.9 million was 8.2% lower than third quarter 2010 gross profit and third quarter 2011 gross margin declined by 2.0 percentage points from the prior year quarter. Appleton’s paper business was positively impacted by improved price and mix of $12.0 million. However, this was offset by the increased cost of raw materials and utilities of $8.3 million, increased manufacturing costs of $3.0 million and lower shipment volumes. Third quarter 2011 saw an increase in manufacturing costs because of the $2.1 million of expense associated with the biennial maintenance shutdown at West Carrollton. Encapsys third quarter 2011 operating income was $0.6 million higher than the prior year quarter. Third quarter 2011 selling, general and administrative expenses (“SG&A”) were $1.9 million lower than the same period of 2010 primarily the result of lower overall spending.

35

Third quarter 2011 income from continuing operations of $18.0 million compares to a loss from continuing operations of $2.2 million recorded in third quarter 2010. In addition to the items noted above and the $23.2 million litigation recovery, third quarter 2011 net interest expense was $1.2 million lower than the same quarter last year due to the June 2011 repayment of the 8.125% senior notes payable of $17.5 million as well as the fourth quarter 2010 repayment of the secured term note payable of $17.5 million at 14.25% annual interest. Also during third quarter 2011, the Company recorded a foreign currency exchange loss of $1.3 million compared to a $1.0 million foreign currency exchange gain recorded during third quarter 2010. The Company reported net income of $18.0 million for the third quarter of 2011 compared to a net loss of $1.4 million reported for third quarter 2010, which included income from discontinued operations of $0.8 million.

Comparison of Unaudited Results of Operations for the Nine Months Ended October 2, 2011 and October 3, 2010

	For the Nine Months Ended
	October 2,			October 3,			Increase
	2011			2010			(Decrease)
	(dollars in millions)
Net sales	$	651.7		$	645.7		0.9	%
Cost of sales		518.5			520.8		-0.4	%
Gross profit		133.2			124.9		6.6	%
Selling, general and administrative expenses		97.9			104.8		-6.6	%
Environmental expense insurance recovery		-			(8.2	)	-100.0%
Litigation settlement		3.1			-		nm
Operating income		32.2			28.3		13.8	%
Interest expense, net		46.8			49.9		-6.2	%
Debt extinguishment expense, net		-			5.5		-100.0	%
Recovery from litigation, net		(23.2	)		-		nm
Other non-operating (income) expense, net		(1.3	)		0.3		nm
Income (loss) from continuing operations before income taxes		9.9			(27.4	)	136.1	%
Provision for income taxes		0.4			0.1		300.0	%
Income (loss) from continuing operations		9.5			(27.5	)	134.5	%
Income from discontinued operations, net of income taxes		-			3.6		-100.0	%
Net income (loss)	$	9.5		$	(23.9	)	139.7	%
Comparison as a percentage of net sales
Cost of sales		79.6	%		80.7	%	-1.1	%
Gross margin		20.4	%		19.3	%	1.1	%
Selling, general and administrative expenses		15.0	%		16.2	%	-1.2	%
Operating margin		4.9	%		4.4	%	0.5	%
Income (loss) from continuing operations before income taxes		1.5	%		-4.2	%	5.7	%
Income (loss) from continuing operations		1.5	%		-4.3	%	5.8	%
Income from discontinued operations, net of income taxes		-			0.6	%	-0.6	%
Net income (loss)		1.5	%		-3.7	%	5.2	%

Net sales for the first nine months of 2011 were $651.7 million, an increase of $6.0 million, or 0.9%, compared to the first nine months of 2010. This was the result of increased net sales within the Encapsys business.

36

Operating income for the first nine months of 2011 increased $3.9 million, or 13.8%, to $32.2 million. Year-to-date 2011 operating income includes a $3.1 million charge for a litigation settlement while year-to-date 2010 operating income included environmental expense insurance recovery of $8.2 million. In comparison to last year, gross profit for the first nine months of this year of $133.2 million was 6.6% higher. To date, 2011 gross margin is 20.4% which is 1.1 percentage points higher than gross margin for the prior year period. Appleton’s paper business was positively impacted by improved price and mix of $39.7 million. This was partially offset by increased costs of raw materials and utilities of $22.0 million and lower shipment volumes. As noted above, 2011 manufacturing spending includes additional costs for the West Carrollton mill maintenance shutdown of $2.1. Year-on-year, Encapsys contributed a $4.6 million increase to operating income. Overall, current year-to-date SG&A spending was $6.9 million lower than during the same period of 2010 as a result of reduced distribution costs, lower compensation and employee benefits expense, lower consulting and professional fees and decreased depreciation expense.

The Company reported net income of $9.5 million for the first nine months of 2011 compared to a net loss of $23.9 million reported last year, which included income from discontinued operations of $3.6 million. Current year net income includes $23.2 million of net recovery from litigation as well as a litigation settlement charge of $3.1 million. Prior year net income included an environmental expense insurance recovery of $8.2 million.

Business Segment Discussion

Third quarter 2011 net sales of $207.8 million, within the Company’s paper business, were $1.7 million higher than third quarter 2010 net sales. Year-to-date 2011 net sales within the Company’s paper business were $624.5 million, or $1.7 million lower than the same period last year. Third quarter 2011 operating income of $10.4 million was $1.6 million lower than third quarter 2010 operating income. Year-to-date 2011 operating income of $32.6 million was $11.6 million higher than the same period last year. The year-on-year operating income variance was the result of the following (dollars in millions):

	For the Three			For the Nine
	Months Ended			Months Ended
	October 2, 2011 v.			October 2, 2011 v.
	the Three Months			the Nine Months
	Ended October 3, 2010			Ended October 3, 2010
Favorable price and mix	$	12.0		$	39.7
(Increased) decreased manufacturing costs		(3.0	)		0.8
Net inflation of raw material and utilities pricing		(8.3	)		(22.0	)
Lower shipment volumes		(2.3	)		(6.9	)
	$	(1.6	)	$	11.6

Carbonless Papers

• Third quarter 2011 carbonless papers net sales totaled $110.4 million, a decrease of $6.7 million, or 5.7%, from prior year. Shipment volumes during third quarter 2011 were approximately 10% lower than the same period last year. The negative impact of lower shipment volumes was partially offset by price increases initiated since 2010 in response to rapidly rising raw material costs. During the first nine months of 2011, carbonless net sales totaled $346.4 million, a decrease of $23.4 million, or 6.3%, from prior year levels. On a year-to-date basis, 2011 carbonless shipment volumes were approximately 11% lower than last year.

• Third quarter 2011 carbonless papers operating income of $6.3 million decreased $4.2 million compared to third quarter 2010. During the first nine months of 2011, operating income of $21.3 million decreased $2.3 million compared to the same 2010 period. Third quarter 2011 operating income includes $1.2 million of the $2.1 million of total expense associated with the biennial maintenance shutdown at the West Carrollton, Ohio paper mill. Improved pricing was more than offset by lower shipment volumes and increased raw materials inflation during the three and nine months ended October 2, 2011.

37

Thermal Papers

• Third quarter 2011 thermal papers net sales totaled $97.4 million, an increase of $8.4 million, or 9.4%, over the prior year period. Year-to-date 2011 thermal papers net sales totaled $278.1 million, an increase of $21.7 million, or 8.5%, compared to last year. In order to improve profitability, Appleton has been managing volumes and price of the point of sale receipt paper (“POS”) portion of the thermal business. Third quarter 2011 shipment volumes, as well as year-to-date 2011 shipment volumes of POS, were approximately 6% and 7% lower than the year before, respectively. Third quarter 2011 shipment volumes of tag, label and entertainment (“TLE”) were approximately 12% higher than the prior year quarter. On a year-to-date basis, TLE shipment volumes were 10% higher. The thermal papers segment also benefited from favorable pricing realized in response to escalating raw material costs.

• The thermal papers segment recorded operating income of $4.1 million for third quarter 2011. This compared to third quarter 2010 operating income of $1.5 million. The thermal papers segment recorded operating income of $11.3 million for the first nine months of 2011 compared to an operating loss of $2.6 million for the first nine months of 2010. Third quarter 2011 operating income includes $0.9 million of the $2.1 million of total expense associated with the biennial maintenance shutdown at the West Carrollton, Ohio paper mill. Improved pricing and mix more than offset increases in raw material costs during the three and nine months ended October 2, 2011.

Encapsys

• Encapsys third quarter 2011 net sales of $14.4 million were $0.2 million higher than third quarter 2010. Third quarter 2011 volumes were approximately 3% higher than the prior year quarter. During the first nine months of 2011, Encapsys net sales totaled $43.9 million which was $6.4 million, or 17.1%, higher than the same period of 2010. Current year volumes were approximately 20% higher than the same period last year.

• As a result of higher shipment volumes and lower SG&A expenses, Encapsys third quarter 2011 operating income was $3.6 million compared to $3.0 million during third quarter 2010. Year-to-date 2011 operating income was $10.7 million compared to $6.1 million for the first nine months of 2010.

Unallocated Corporate Charges

• Unallocated corporate charges increased $0.7 million in third quarter 2011 compared to third quarter 2010 largely due to recording expense associated with various state and local tax assessments received during the quarter. Year-to-date 2011 expense was $12.5 million higher than 2010 due to the recording of a $3.1 million litigation settlement during 2011 and an $8.2 million Fox River insurance recovery during 2010.

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 expects 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 October 2, 2011, Appleton had $11.7 million of cash and $75.6 million of unused borrowing capacity under its revolving credit facility. Net debt decreased to $500.2 million compared to $555.1 million at year-end 2010.

During third quarter 2011, Appleton received a $23.2 million net recovery from litigation initiated in September 2007 against Andritz BMB AG and Andritz, Inc. and used the proceeds to pay down debt on the Company’s revolving credit facility.

During June 2011, in accordance with the terms of its 8.125% senior notes payable, Appleton repaid in full the remaining note balance of $17.5 million. In addition, $27.4 million of semi-annual interest due on its outstanding bond indebtedness was paid. During the current quarter, Appleton made contributions to its pension plan totaling $6.4 million, for a total of $18.0 million during 2011.

38

Appleton was in compliance with all debt covenants and is forecasted to remain compliant for the next twelve months. Appleton’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results. Appleton’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead Appleton to seek amendments to, or waivers of, the financial covenants. Appleton cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of non-compliance with debt covenants, if 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.

Cash Flows from Operating Activities. Net cash of $70.1 million was provided by operating activities during the first nine months of 2011. This was a $92.7 million increase in operating cash compared to net cash used by operating activities during the first nine months of 2010. Net income of $9.5 million includes $23.2 million of recovery from litigation cash proceeds received during September. Net income adjusted for non-cash charges provided $50.5 million in operating cash for the period. Non-cash charges included $36.4 million of depreciation and amortization, $3.5 million of debt fees amortization, $2.0 million of non-cash employer matching contributions to the KSOP and $0.5 million of other non-cash charges. These non-cash charges were offset by a $1.4 million gain from involuntary conversion of equipment. Cash was also provided during the current nine-month period from a $33.7 million decrease in working capital. In addition, there was a $13.5 million reduction in the pension liability, which included $18.0 million of pension plan contributions, and $0.6 million of other cash used.

The primary components of the $33.7 million decrease in working capital were a $23.0 million increase in accounts payable and other accrued liabilities and a $13.4 million decrease in other current assets. During the current period, Appleton’s accounts payable increased by $6.6 million. Accrued interest increased $13.2 million as most interest due is paid each year in June and December. The decrease in other current assets was largely the result of receiving $10.3 million of cash proceeds to settle the West Carrollton silo collapse insurance claim. During this same time period, an additional $2.1 million of insurance receivable was recorded for this claim. Also during the first nine months of this year, the Company received $6.2 million related to the Fox River insurance recovery and the $2.0 million of escrow associated with the July 2010 sale of Films. Other working capital changes in accounts receivable and inventories were uses of cash of $1.9 million and $0.8 million, respectively.

Cash Flows from Investing Activities. During the first nine months of 2011, $7.2 million of cash was used for investing activities, of which, $10.6 million was used for the acquisition of property, plant and equipment. Of the $10.6 million spent in 2011, $2.3 million related to equipment replacement resulting from the July 2010 coal silo collapse at the West Carrollton, Ohio paper mill. Insurance proceeds of $1.4 million were received during 2011 to compensate the Company’s losses. As of June 2011, this insurance claim was settled and all insurance proceeds were received. In July 2011, Appleton received the remaining $2.0 million of cash proceeds from the July 2010 sale of American Plastics Company, Inc. and New England Extrusion Inc. which had been in escrow pending any potential buyer claims resulting from the sale.

During 2010, the Company used $11.5 million for the acquisition of property, plant and equipment. Similarly, $1.0 million of insurance proceeds were received in 2010 for equipment replaced as a result of the silo collapse. Also during 2010, Appleton received $56.0 million of cash proceeds from the sale of American Plastics Company, Inc. and New England Extrusion Inc.

Cash Flows from Financing Activities. Net cash used for financing activities in 2011 was $55.0 million compared to $23.1 million of cash used during the prior year. During June 2011, in accordance with the terms of its 8.125% senior notes payable, Appleton repaid in full the remaining note balance of $17.5 million. Appleton has also made mandatory debt repayments of $0.9 million, plus interest, on its State of Ohio loans. During the current year, the Company repaid a net $29.3 million on its revolving credit facility and, as of October 2, 2011, did not have an unpaid revolver balance. Approximately $18.1 million of the revolving credit facility is used to support outstanding letters of credit.

Current year proceeds from the issuance of PDC redeemable common stock totaled $1.4 million. The ESOP trustee purchased this stock using pre-tax deferrals, rollovers and loan payments made by employees during the first six months of 2011. Year-to-date, payments to redeem PDC common stock were $7.4 million.

Cash overdrafts decreased $1.3 million during the first nine months of 2011. Cash overdrafts represent short-term obligations, in excess of deposits on hand, which have 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.

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New Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-09, "Compensation-Retirement Benefits-Multiemployer Plans." The revised standard is intended to address concerns from the users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. The standard requires employers to provide, on an annual basis, additional quantitative and qualitative disclosures. These disclosures will provide users with more detailed information about an employer’s involvement in multiemployer pension plans including: the significant multiemployer plans in which an employer participates, the level of an employer’s participation in the significant multiemployer plans, the financial health of the significant multiemployer plans and the nature of the employer commitments to the plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. Since the Company participates in a multiemployer pension plan, it will be including the expanded disclosures within its consolidated financial statements for the year ended December 31, 2011.

In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income." It provides updated guidance related to the presentation of other comprehensive income, offering two alternatives for presentation, including (a) a single continuous statement of comprehensive income or (b) two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company expects that adoption will not have a significant impact on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," which amends ASC 820. This updated guidance relates to fair value measurements and disclosures, including (a) the application of the highest and best use valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity and (c) quantitative information required for fair value measurements categorized within Level 3. Additionally, disclosure requirements have been expanded to include additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the effects, if any, the adoption of this guidance will have on its consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures,” requiring new disclosures of significant transfers in and out of Levels 1 and 2 fair value measurements, the reasons for the transfers, and separate reporting of purchases, sales, issuances and settlements in the roll forward of Level 3 fair value measurement activity. The new ASU also clarifies that fair value measurement disclosures should be provided for each class of assets and liabilities and disclosures should also be provided about valuation techniques and inputs used to measure fair value for recurring and nonrecurring fair value measurements. The disclosures are required for either Level 2 or Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). During first quarter 2010, the Company adopted the portion of ASU No. 2010-06 relating to Level 2 fair value measurements. During first quarter 2011, the Company adopted the portion of ASU No. 2010-06 relating to Level 3 fair value measurements. The disclosures required by adoption are included in Note 15 of Notes to Condensed Consolidated Financial Statements. Current year adoption had no impact on its 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 1, 2011. 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 4—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 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 updated risk factor 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 1, 2011.

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 Appleton’s 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 and raw material 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.

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 September 2007, Appleton filed antidumping petitions against imports of certain lightweight thermal paper (“LWTP”) from China, Germany and Korea and a countervailing duty petition against such imports from China. On September 26, 2008, the U.S Department of Commerce (“Department”) issued its final determination, affirming that certain Chinese producers and exporters of LWTP sold the product in the U.S. at prices below fair value, imposing final duties of 19.77% to 115.29% on those imports. The Department also affirmed that German producers and exporters of LWTP sold the product in the U.S. at prices below fair value and imposed final duties on those imports of 6.5%. In addition, the Department announced its final determination concerning the imposition of countervailing duties on imports of LWTP from China to offset the subsidies that Chinese producers receive from the Chinese government. For all but one Chinese producer, the Department imposed duties of between 13.17% and 137.25%. Between the countervailing and anti-dumping duties, the Department imposed total duties of 19.77% to 252.54% on imports of LWTP from China. On October 30, 2008, the U.S. International Trade Commission (“ITC”) made a final determination that there is a reasonable indication that the U.S. industry producing certain LWTP is threatened with material injury due to unfairly traded imports from China and Germany. As a result, the final duties went into effect in November 2008. These duties do not have a direct impact on Appleton’s net income.

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A German manufacturer filed an appeal of the ITC determination to the U.S. Court of International Trade (“CIT”), and the appeal was decided in favor of Appleton in November 2009. In December 2009, the German manufacturer filed a further appeal of the matter to the U.S. Court of Appeals for the Federal Circuit (“CAFC”). In January 2011, a three-judge panel of the CAFC vacated the decision of the CIT and remanded the matter for further consideration by the ITC. In April 2011, the General Counsel’s office of the ITC filed a request for the full CAFC to review the panel decision, which was denied. On September 30, 2011, the ITC upheld its original determination that the domestic industry was threatened with material injury by reason of LWTP imports from Germany.

In addition, Appleton and the German manufacturer each filed a request for administrative review with the Department, seeking to modify the amount of the duties based on the market practices during the first 12-month period following implementation of the final duties, as well as the second 12-month period following implementation of the final duties. In April 2011, the Department issued a final determination in the administrative review of the first 12-month period following the final duties, resulting in a dumping margin of 3.77 percent for imports from the German manufacturer for the period from November 2008 to October 2009. The German manufacturer has appealed the determination to the CIT. Upon final resolution of the appeals or the second administrative review, certain of the duties could be reduced, increased or eliminated.

In March 2009, the Mexican government began imposing tariffs on 90 U.S. products sold into Mexico, including carbonless paper. The tariff on carbonless paper had been 10%. Beginning January 1, 2010, all U.S. sales of carbonless paper into Mexico were assessed a 5% tariff. In August 2010, the Mexican government announced a rotating list of 99 U.S. products to receive tariffs of 5% - 45%. Carbonless paper was eliminated from this list, and currently is not subject to any import tariffs. Though the tariff was paid by the customer, this automatically increased the price of carbonless paper by the amount of the tariff which could have opened 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.

Also during 2010, the Mexican government passed legislation requiring all businesses in Mexico to file their invoices electronically with the government when the transactional value of the invoice is greater than 2000 pesos. In January 2011, this legislation became effective. This legislation allows a phase-in period whereby companies can still use paper invoices for up to two years as long as they obtained prior approval from the government to continue to print sequentially numbered invoices during this phase-in period. The legislation also permitted companies to begin the transition to electronic invoicing prior to the effective date of the legislation. This legislation provides that once a company agrees to offer one of its customers the option of receiving electronic invoices then it needs to extend this option to all customers and thereby no longer issue paper invoices. Currently, it is difficult to estimate what impact this might have on sales of carbonless paper into Mexico for use in multipart documents such as invoices. Other multipart documents, including delivery notices, order acknowledgments and other administrative documents, were not addressed in the legislation.

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 1, 2011, as well as in the Quarterly Report on Form 10-Q for the current quarter ended October 2, 2011, 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

10.1	Fox River AWA Environmental Indemnity Agreement by and among Arjo Wiggins Appleton p.l.c., Appleton Papers Inc., Paperweight Development Corp. and New Appleton LLC, dated as of November 9, 2001.
10.2	Credit Agreement, dated as of February 8, 2010, among Appleton Papers Inc., as borrower, Paperweight Development Corp., as holdings, Fifth Third Bank, as administrative agent, swing line lender and an L/C issuer, the other lenders party thereto and Fifth Third Bank, as sole lead arranger and sole book manager.
10.2.1	Second Amendment to Credit Agreement dated as of February 8, 2010, dated as of July 1, 2011, among Appleton Papers Inc., as borrower, Paperweight Development Corp., as holdings, Fifth Third Bank, as administrative agent, swing line lender and an L/C issuer, the other lenders party thereto and Fifth Third Bank, as sole lead arranger and sole book manager.
10.3	Resolutions by the Benefit Finance Committee of Appleton Papers Inc. dated January 10, 2011 further amending Appleton Papers Inc. Retirement Plan as amended through December 8, 2010. (1)
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, Senior 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, Senior Vice President Finance, 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, Senior 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, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.
101.ins	XBRL Instance Document
101.sch	XBRL Taxonomy Extension Schema
101.cal	XBRL Taxonomy Extension Calculation Linkbase
101.def	XBRL Taxonomy Extension Definition Linkbase
101.lab	Taxonomy Extension Label Linkbase
101.pre	Taxonomy Extension Presentation Linkbase

(1)           Management contract or compensatory plan or arrangement.

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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: November 10, 2011	/s/ Thomas J. Ferree
	Thomas J. Ferree
	Senior 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: November 10, 2011	/s/ Thomas J. Ferree
	Thomas J. Ferree
	Senior Vice President Finance, Chief Financial Officer and Treasurer (Signing on behalf of the Registrant and as the Principal Financial Officer)

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