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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:
|- | -------------------------------------------------------------------------------------



For the fiscal year ended January 3, 2004



OR



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



Commission File No. 333-82084



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APPLETON PAPERS INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 36-2556469                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|825 East Wisconsin Avenue Appleton, Wisconsin                  |  | 54911                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



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Securities registered pursuant to Section 12(b) of the Act:



None



Securities registered pursuant to Section 12(g) of the Act:



None



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See Table of Additional Registrants Below



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ̈No x*



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x



Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ̈No x



*This report is being filed pursuant to covenants contained in the indenture
governing the Registrants senior subordinated notes. The Registrants reporting obligations have been automatically suspended under Section 15(d) of the Securities Exchange Act of 1934, as amended.



As of February 29, 2004, 100 shares of Appleton Papers Inc. common stock,
$100.00 par value, were outstanding. There is no trading market for the common stock of Appleton Papers Inc. As of February 29, 2004, each of the additional registrants had the number of shares outstanding which is shown in the table below. There is
no trading market for the common stock of the additional registrants. No shares of the Registrant or the additional registrants were held by non-affiliates.



Appleton Papers Inc. and WTA Inc. meet the conditions set forth in General Instruction I (1)(a) and (b) of Form 10-K and are therefore filing this form
with the reduced disclosure format.



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ADDITIONAL REGISTRANTS



|                                                     |  |                                                          |  |                                                  |  |                                    |  |                                                                                                                   |  |                 
|---------------------------------------------------- |  | -------------------------------------------------------- |  | ------------------------------------------------ |  | ---------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----------------
|                                                    
|Exact name of Registrant as specified in its charter |  | State or otherjurisdiction ofincorporationororganization |  | Number ofSharesOutstanding asof February 29,2004 |  | I.R.S.EmployerIdentificationNumber |  | Address, including zip code, and telephone number, including area code, of Registrantsprincipal executive office |  | Registration No.
|                                                    
|Paperweight Development Corp.                        |  | Wisconsin                                                |  | 12,124,778                                       |  | 39-2014992                         |  | 825 EastWisconsinAvenue,Appleton,Wisconsin54911(920) 734-9841                                                     |  | 333-82084-01    
|                                                    
|WTA Inc.                                             |  | Delaware                                                 |  | 1                                                |  | 51-0329653                         |  | Suite1300,1105 MarketStreetWilmington,Delaware 19899(302) 651-8339                                                |  | 333-82084-02    
|                                                    



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TABLE OF CONTENTS



|           |  |                                                                                                |  |           
|---------- |  | ---------------------------------------------------------------------------------------------- |  | ----------
|           |  |                                                                                                |  | PageNumber
|PART I     |  |                                                                                                |  |           
|           |  |                                                                                               
|Item 1     |  | Business                                                                                       |  | 1         
|           |  |                                                                                               
|Item 2     |  | Properties                                                                                     |  | 17        
|           |  |                                                                                               
|Item 3     |  | Legal Proceedings                                                                              |  | 18        
|           |  |                                                                                               
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                            |  | 18        
|           |  |                                                                                               
|PART II    |  |                                                                                                |  |           
|           |  |                                                                                               
|Item 5     |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 18        
|           |  |                                                                                               
|Item 6     |  | Selected Financial Data                                                                        |  | 20        
|           |  |                                                                                               
|Item 7     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 21        
|           |  |                                                                                               
|Item 7A    |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 38        
|           |  |                                                                                               
|Item 8     |  | Financial Statements and Supplementary Data                                                    |  | 47        
|           |  |                                                                                               
|Item 9     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 108       
|           |  |                                                                                               
|PART III   |  |                                                                                                |  |           
|           |  |                                                                                               
|Item 10    |  | Directors and Executive Officers of the Registrant                                             |  | 109       
|           |  |                                                                                               
|Item 11    |  | Executive Compensation                                                                         |  | 113       
|           |  |                                                                                               
|Item 12    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 119       
|           |  |                                                                                               
|Item 13    |  | Certain Relationships and Related Transactions                                                 |  | 119       
|           |  |                                                                                               
|Item 14    |  | Controls and Procedures                                                                        |  | 119       
|           |  |                                                                                               
|PART IV    |  |                                                                                                |  |           
|           |  |                                                                                               
|Item 15    |  | Principal Accounting Fees and Services                                                         |  | 120       
|           |  |                                                                                               
|Item 16    |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 120       
|           | 
|SIGNATURES |  | 125                                                                                           
|           | 
|EXHIBITS   |  |                                                                                               





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PART I



Unless stated to the contrary or the context requires otherwise, all references to Appleton, we, us, company, or
our refer to Appleton Papers Inc. and our subsidiaries and predecessors.



|Item 1. | Business
|------- | --------



Overview



Appleton Papers Inc. creates product solutions for customers and end users through its development and use of coating formulations and applications as well as encapsulation, security, printing and packaging technologies. We operate in four
business segments: coated solutions, thermal and advanced technical products, security products and performance packaging.



Coated Solutions



Our carbonless business is the largest component of our coated solutions segment. We produce the NCR PAPER* brand of carbonless paper and we believe we
are the worlds largest producer of carbonless paper. Carbonless paper is used to make multipart business forms such as invoices and credit card receipts. As part of our coated solutions business, we produce coated products for inkjet printing,
point-of-sale displays and other design and print applications. We also offer customers custom coating solutions and the potential for strategic partnerships through our engineered manufacturing solutions, or toll coating, program. This program
focuses on our ability to apply barrier and/or printable coatings to substrates.



Thermal and Advanced Technical Products



The
thermal and advanced technical products segment consists of our thermal business as well as the development of non-thermal products and related substrates for the transaction and item identification markets. We believe we are the largest
manufacturer of direct thermal products in North America. Our products are routinely used for point-of-sale receipts and coupons; event and transportation tickets; lottery and gaming tickets; tags for airline baggage and retail applications; and
label products for grocery, shipping, medical and retail applications.



Security Products



Our security business
produces products with basic security features that make them resistant to forgery and counterfeiting. From that foundation we are building a comprehensive business that incorporates security technologies including watermarks, taggants, embedded
threads and fibers, and machine-readable technologies. We focus our security business on checks, business and government documents, and the emerging brand protection market. In December 2003, we acquired BemroseBooth, which is located in the United
Kingdom, to gain greater access to international security product markets. BemroseBooth is a leading provider of mission critical secure and specialized print services. BemroseBooths products include security printed vouchers and
payment cards, mass transit and car parking tickets, variable data labeling, high-integrity mailing and printed promotional products such as calendars.



Performance Packaging



In April 2003, we purchased C&H Packaging (Merrill, Wis.) and American Plastics (Rhinelander, Wis.) to enter the performance packaging market and
leverage our expertise in coating applications and microencapsulation. C&H Packaging prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial product industries. American Plastics
produces high-quality, custom multilayered films and commercial packaging.



We narrowed the focus of our new business development team to performance packaging for both consumer and commercial markets. In October 2003, we changed the name of our new business development team to the
performance packaging team to reflect its focus, progress and direction, as well as to communicate specific capabilities to prospective customers.

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|* | NCR PAPER is a registered trademark licensed to Appleton.
|- | ---------------------------------------------------------



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Company Background



Company History



Appleton Coated Paper Company, or ACPC, began operations in 1907 in Appleton, Wisconsin. In 1953, ACPC began working with National Cash Register Company,
which later changed its name to NCR Corporation, on the development and production of carbonless paper. In 1954, NCR began marketing its NCR PAPER* brand of carbonless paper, which ACPC manufactured.



In 1969, NCR acquired Combined Paper Mills, Inc., which then consisted of
pulp and paper mills in Combined Locks, Wisconsin, and Roaring Spring, Pennsylvania. In 1970, NCR acquired ACPC. In 1971, the Appleton Papers division of NCR was formed through the merger of ACPC with Combined Paper Mills, Inc.



In 1978, Appleton Papers Inc., as a subsidiary of B.A.T Industries Limited,
acquired the assets of the Appleton Papers division from NCR. In 1990, Appleton, together with The Wiggins Teape Group Ltd., was separated from B.A.T Industries to form Wiggins Teape Appleton p.l.c., a public company listed on the London Stock
Exchange. Later that year, Wiggins Teape Appleton merged with Arjomari Prioux SA, a public French paper manufacturer and merchant. Shortly after the merger, the group changed its name to Arjo Wiggins Appleton p.l.c. Appleton operated as an indirect,
wholly-owned subsidiary of Arjo Wiggins Appleton p.l.c. until 2001.



On November 9, 2001, as discussed in more detail below, the Appleton Papers employees acquired the Company from Arjo Wiggins Appleton p.l.c. through the use of an employee stock ownership plan. Effective February 3, 2003, we changed our
trade name to Appleton. We now use the tagline, What Ideas Can Do®, with a new
logo as part of our new identity. We have retained Appleton Papers Inc. as our legal name.



Formation of the ESOP



Our 401(k) plan, which was called the Appleton Papers Retirement Savings Plan, was amended and restated effective as of January 1, 2001, in the form of the Appleton Papers Retirement Savings and Employee Stock Ownership Plan, which we refer
to as the KSOP or the plan. The KSOP includes a separate employee stock ownership plan component, which we refer to as the ESOP or the Company Stock Fund. The KSOP is a tax-qualified retirement plan that is available to our U.S. employees. The ESOP
component of the KSOP is a tax-qualified employee stock ownership plan that has invested and will invest in Paperweight Development common stock.



We offered eligible participants, as named fiduciaries under the Employee Retirement Income Security Act of 1974, as amended,
which we refer to as ERISA, a one-time irrevocable election to direct State Street Global Advisors, the ESOP trustee, to accept the transfer of all or any part of their existing balances in the KSOP and the 401(a) plan to the Company Stock Fund. The
total proceeds transferred by eligible participants to the Company Stock Fund were approximately $107 million, representing an average election by each eligible participant to direct the transfer of approximately 73% of his or her account balance to
the Company Stock Fund. On November 9, 2001, the ESOP trustee purchased 100% of the common stock of Paperweight Development Corp. Paperweight Development simultaneously used all the proceeds from the sale of those shares of common stock to finance a
portion of the purchase price of the acquisition described below.



Our
Acquisition from AWA



On November 9, 2001, Paperweight
Development and its then wholly-owned subsidiary, New Appleton LLC, acquired Appleton Papers from Arjo Wiggins Appleton p.l.c., which is now known as Arjo Wiggins, a European manufacturer of paper products, and two of its subsidiary holding
companies, which we sometimes refer to as the sellers or as affiliates of Arjo Wiggins. We refer to this transaction as the acquisition. The purchase price was $810 million, plus proceeds of $7.4 million from the sale of our Harrisburg
facility. We are now a wholly-owned subsidiary of Paperweight Development and the ESOP owns 100% of the shares of common stock of Paperweight Development. Paperweight Development has elected to be treated as a subchapter S corporation for federal
and, where recognized, state income tax purposes and elected that its eligible subsidiaries be treated as qualified subchapter S subsidiaries for federal and, where recognized, state income tax purposes. This tax treatment, together with 100%
ownership of Paperweight Developments common stock by the tax-exempt ESOP, has resulted in substantial corporate tax savings and enhanced cash flow. Paperweight Development does not conduct any business apart from undertaking matters
incidental to its ownership of stock of its subsidiaries and matters relating to the ESOP and taking actions required to be taken under ancillary acquisition agreements.



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Recent Acquisitions



On April 30, 2003, we acquired two privately-held, Wisconsin-based companies, C&H Packaging Company, Inc. and American Plastics Company, Inc. C&H
Packaging, located in Merrill, Wis., prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial product industries. American Plastics, located in Rhinelander, Wis., produces high-quality,
custom multilayered films and commercial packaging.



In
December 2003, we acquired Bemrose Group Limited, a privately-held company headquartered in Derby, England. The groups operating unit, BemroseBooth, produces security printed vouchers and payment cards, mass transit and car parking tickets,
variable data labeling, high-integrity mailing and printed promotional products such as calendars.



Our strategy for growth includes strengthening and expanding our presence in certain market segments and broadening our product offerings through
acquisitions. We entered the performance packaging segment through our acquisition of C&H Packaging and American Plastics. We added an international presence to our security products segment through the acquisition of BemroseBooth. We have
evaluated and will continue to evaluate opportunities to acquire other companies that will help us achieve our business strategies. As a result, we may engage in discussions or, in some cases, negotiations with prospective targets and may make
future acquisitions. Any such acquisitions will be subject to limitations contained in our debt instruments. Generally, we will not comment on such discussions or possible acquisitions until a definitive agreement has been executed.



Business Segments



For financial information regarding our business segments, refer to Note 24 of Notes to
Consolidated Financial Statements contained below in Item 8. Financial Statements and Supplementary Data.



Coated Solutions



The coated solutions segment combines the operations of our carbonless business, which accounted for more than 70% of our total net sales in fiscal 2003,
with our specialty business, our inkjet products business and our business of engineered manufacturing solutions, or toll coating services.



Carbonless products are sold in rolls, which account for approximately 80% of sales, and in precut sheets, which account for approximately 20% of sales.
Based on our assessment of the U.S. carbonless market, we believe that in 2003 the U.S. carbonless market totaled more than 515,000 tons.



We sell our carbonless roll and sheet products under the NCR PAPER* brand. We offer over 500 grades of carbonless roll and sheet products with nearly
4,000 stock keeping units differentiated by grade, width, length, color and basis weight. We believe we have the broadest carbonless product line in the industry.



We sell about half of our carbonless roll products directly to converters and business forms printers who print carbonless
forms. We sell about half of our carbonless roll products and most of our carbonless sheet products to paper merchants who stock and sell carbonless paper to printers.



Our specialty papers business, which consists of our coated inkjet papers, specialty coated printing papers and our
engineered manufacturing solutions or toll coating services, had net sales of approximately $14 million in 2003.



Carbonless Product Description



NCR PAPER* brand carbonless paper is similar in composition to high-quality bond paper. The major component in both is cellulose. The remainder is filler
and sizing materials added to give the desired surface appearance and characteristics. What makes carbonless paper different from bond paper are the coatings used to manufacture it. Those coatings are composed of adhesives, inert fillers,
microencapsulated dyes, coreactants and other materials used to ensure a smooth, uniform printing surface. These coatings enable a copy to be made without using carbon paper or other copying materials.



In a typical three-part business form, three kinds of carbonless paper work
together as a system to transfer images cleanly and clearly from one sheet to the next. The top sheet is a CB (coated back) sheet, the back of which is covered with a coating made of millions of microscopic capsules containing colorless dyes. The
last sheet is a CF (coated front) sheet, coated on its front side with a



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coreactant or receiver material. The middle sheet is a CFB (coated front and back) sheet, front-coated with receiver materials and back-coated with dye
capsules. As pressure from a pen or printer is applied to the top sheet, the dye capsules on the CB surface break and interact with the CF receiver coating to develop a black or blue image on each copy.



Carbonless paper is used in a diverse group of end markets, including
government, retail, financial, insurance and manufacturing, with no one segment dominating demand. Use in many of these markets is tied to economic growth, which impacts the number of transactions completed in a given year. As such, periods of
economic growth or contraction can impact demand. Sales of carbonless products historically have not been significantly impacted by seasonality.



The carbonless market experienced rapid growth during the 1980s as carbonless paper replaced carbon tissue-based multipart forms, economic growth fueled
increased business activity and forms usage, and businesses began to make greater use of computers, which also increased overall forms demand. Based on our assessment, the U.S. carbonless market peaked in 1994 at approximately 890,000 tons. Since
1994, the U.S. carbonless market has been in decline. The decline is the result of increased use by businesses of competing technologies that do not use impact printing to create images. Examples of such technologies include digital laser, inkjet,
and thermal printers, as well as electronic communications.



Based on our assessment, we believe the annual rates of decline in the U.S. carbonless market from 1994 to 1999 were between 1% and 7%, with a compound annual rate of approximately 4% during this period. On the same basis, we estimate that
the U.S. carbonless paper market declined by approximately 10% in 2000 and by approximately 8% percent annually from 2001 through 2003, and will decline at a compound annual rate of approximately 9% between 2004 and 2008. We attribute these varying
rates of decline to fluctuations in the number of commercial transactions in which carbonless products are used, as well as changes in technological substitution rates. We expect the decline rate for carbonless sheets in the United States to
continue to be lower than the decline rate for rolls.



Carbonless
Competitors



The U.S. carbonless market is served
primarily by three domestic manufacturersAppleton, MeadWestvaco Corporation and Imation Corp. In the carbonless market, Appleton competes primarily on the basis of product quality, service and price. The U.S. market is also served by a number
of foreign competitors. The foreign competitors, who use an aggressive, low-price strategy to sell into the U.S. carbonless market, served approximately 6% percent of the U.S. market. In 2003, we estimate we had over 50% of the U.S. carbonless
market.



Thermal and Advanced Technical Products



The thermal and advanced technical products segment consists of our thermal
business as well as the development of non-thermal products and related substrates for the transaction and item identification markets.



Currently this business segment consists primarily of direct thermal products. The most popular direct thermal imaging chemistry used today is based on
the leuco dye system invented by NCR Corporation and commercially introduced by Appleton in the late 1960s. Thermal paper is used in four principal market segments. The point-of-sale products are used for retail receipts and coupons. Our label
products are used for grocery, shipping, medical and retail applications. Our tag and ticket products are used for airline and baggage applications, event and transportation tickets, and lottery and gaming applications. The printer/calculator/chart
products are used for medical diagnostic charts and other specialty applications. The point-of-sale and label segments combined account for nearly 80% of the U.S. and Canadian thermal market.



We estimate that in 2003 the growing U.S. and Canadian thermal market was
more than 175,000 tons and that total thermal consumption outside the United States and Canada was more than double that amount. Market demand for thermal paper continues to grow as new applications are developed that utilize the benefits of thermal
technology.



We sell our point-of-sale products to printers and
converters who in turn sell to end-user customers or to resellers such as office supply stores, office superstores, warehouse clubs, mail order catalogs, equipment dealers, merchants and original equipment manufacturers.



Thermal label products are sold to companies who apply pressure sensitive
adhesive coatings and release liners and then sell these products to label printers. Thermal tag, ticket and chart grades are sold to specialty printing companies who convert them to finished products such as entertainment, lottery and gaming
tickets, tags, coupons and medical charts.



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Thermal Product Description



Direct thermal paper is produced by coating a base material, such as paper, with a mixture of colorless dye, coreactant,
sensitizer, stabilizer, adhesives, clays and binders. Until heat is applied to the paper, the dye and the coreactant are separated on the papers surface within a mixture of sensitizer and stabilizer. Heat causes the sensitizer to melt and form
the medium that allows the dye and the coreactant to combine, react and form an image on the paper. Once the reaction occurs, the coatings stabilizer keeps the image from fading by preventing the reaction from reversing itself. A top coat may
be added to enhance resistance to environmental elements, while adding a back coat controls curl and static.



The type and amount of dye, coreactant and sensitizer used to produce direct thermal paper affects the temperature at which the image-forming reaction
occurs on the paper. Thermal printers provide the heat energy that helps to form an image on the thermal paper.



The U.S. and Canadian thermal market experienced strong growth during the 1990s and is expected to continue growing as the advantages of thermal printing
systems become more widely recognized. These advantages include their competitive cost, quiet operation, cleanliness, speed, high print quality, reliability, portability and their use of a single consumable (thermal paper) versus other printing
systems that require paper and ink or toner cartridges.



Based
on our assessment, we estimate that the annual rates of growth in the U.S. and Canadian thermal market from 1995 to 2003 were between 1% and 13% and averaged 7% for the period. Based on our assessment, we believe this market will continue to grow at
a compound annual rate of more than 3% between 2004 and 2008. Sales of thermal products have not been significantly impacted by seasonality.



Thermal Competitors



We believe we had nearly 40% of the combined U.S. and Canadian thermal market in 2003. In 2003, other significant thermal producers included Koehler AG,
Kanzaki Specialty Papers, Ricoh Company, Ltd. and Mitsubishi Paper Mills Company Ltd. Kanzaki and Ricoh are domestic producers, while Koehler and Mitsubishi are based abroad.



There are a number of other foreign competitors who have a presence in the United States and Canada. Appleton competes
primarily on the basis of service, product quality, breadth of product offering and price.



Security Products



Our
security business produces products with basic security features that make them resistant to forgery and counterfeiting. From that foundation we are building a more comprehensive business that incorporates security technologies including watermarks,
taggants, embedded threads and fibers, and machine-readable technologies to address the sophisticated fraud and security problems that more and more companies face. We focus our security business on checks, business and government documents, and the
emerging brand protection market. In December 2003, we expanded the scope of our security products business by acquiring BemroseBooth, a provider of secure and specialized print services headquartered in Derby, England.



Security Product Description



In 1994, Appleton introduced DocuCheckSecurity Papers to provide reliable protection focused on the check market. We then introduced DocuMarkCustom Watermark products, which provide a proprietary method for increasing the security of a range
of documents. DocuMarkSignature Watermarks are designed for applications such as vital
records, titles, certificates and other official/high-value documents. Those three security products utilize watermarks and visible threads or fluorescent fibers embedded in the substrate that enable authentication of original documents and deter
counterfeiting. Our TechMarkIntelligent Solutions products use digital coding features
to provide authentication and identification. AssurMarkSecurity Label Substrate uses a
tamper-evident feature and covert authentication to deter remarking and counterfeiting fraud. Sales of our security products have not been significantly impacted by seasonality.



BemroseBooth products include security printed vouchers and payment cards, mass transit and car parking tickets, variable
data labeling, high-integrity mailing and printed calendars. Sales of some of BemroseBooths printed products are affected by seasonality. Demand for their printed calendars and diaries peaks in the fourth quarter while sales of gift vouchers
and similar products aimed at the retail segments typically increase at the same time.



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Security Competitors



Our security competitors include Boise Cascade Corporation, MeadWestvaco Corporation, JB Rolland Papers Ltd., Portals Bathford, Arjo Wiggins, Communisis
p.l.c., De La Rue International and Magnadata International Ltd. We believe we have a 5% share of the worldwide market for check paper and a smaller share in the secure document market. We believe no single producer has a significant share of the
emerging brand protection market.



Performance Packaging Products



We entered the performance packaging business in 2003
with the acquisition of C&H Packaging Company, Inc. and American Plastics Company, Inc. C&H Packaging prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial products
industries. American Plastics produces high-quality, custom multilayered films and commercial packaging. In addition, we are using our coating and converting capabilities to develop and produce coated and composite structure substrates for the
packaging industry.



Performance Packaging Description



C&H Packaging prints multilayered, plastic barrier films. The
companys flexible packaging converting operation produces pouches, semi-rigid packaging, lidding films, films for dry condensed dairy products, forming and nonforming films, cheese and snack food films, and custom packaging.



American Plastics manufactures multilayered, coextruded barrier films and
also produces vacuum bags and pouches from those films.



Examples of our organic growth in performance packaging include our introduction of MoistureBloc for Folding Cartons. This product is a barrier packaging substrate engineered to protect consumer dry goods like detergents, powdered milk, rice, potato flakes and baby cereal. Moisture
Bloc for Ream Wrap is a recyclable,
moisture-resistant, barrier wrap designed to protect reams of paper and other substrates.



Performance Packaging Competitors



The Flexible Packaging Association estimates that the U.S. flexible packaging market (which includes performance packaging) generates $20 billion in annual sales and employs approximately 90,000 people. Flexible and
performance packaging operations range from small manufacturing companies with single facilities to large integrated corporations with up to 30 individual plant locations. The largest market for performance packaging is food, accounting for over 50
percent of shipments.



We have many performance packaging
competitors including Winpak, Printpak Inc., Pliant Corporation, Kendall Packaging Corporation, Cadillac Products Packaging Company, American Packaging, Clear Lam Packaging Inc., Progressive Packaging Ltd. and others. Large producers such as Curwood
and Pechiney Plastic Packaging may also be competitors in some market situations. We believe that, collectively, Appleton, C&H Packaging and American Plastics do not have a significant share of the performance packaging market. Sales of our
performance packaging products are positively affected by the fourth quarter holiday season. Sales then tend to be slowest in the first quarter of the year.



Geographical Financial Information



Our revenues from customers attributed to the U.S. were $721.7 million in fiscal 2003, $768.3 million in fiscal 2002, $94.8 million in the 2001 successor
period and $726.6 million in the 2001 predecessor period. Our revenues from customers attributed to foreign countries were $139.8 million in fiscal 2003, $129.7 million in fiscal 2002, $18.2 million in the 2001 successor period and $116.3 million in
the 2001 predecessor period. As a result of the BemroseBooth acquisition in December 2003, we held approximately $71 million in long-lived assets in foreign countries as of January 3, 2004 and approximately $617 million in the U.S. as of January 3,
2004. For fiscal years 2002 and 2001, we did not hold a material amount of long-lived assets in foreign countries.



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Research and Development and New Business Development



Research and development plays a vital role in our position as a leader in
our chosen markets. Ongoing investment in research and development has enabled us to develop core competencies in the encapsulation process, specialty coating chemistry, coating application systems and security technologies.



Our R&D professionals are aligned with our business units (coated
solutions, thermal and advanced technical products, security products and performance packaging). They work on cost reduction, product line extensions, new product development and technology transfer and development.



Our technology development team works to leverage and expand our expertise in
coating applications, coating formulations, microencapsulation, security and other technologies.



We incurred $18.0 million in research and development costs in fiscal 2003 related to the development of new products and significant improvements to
existing products. We expect to incur a similar amount in 2004.



Sales, Marketing and Distribution



We promote
and sell our products through our own sales and marketing organization. Our sales personnel operate from field locations. Our marketing employees work to obtain and analyze market data, work with research and development personnel to develop new
products and value-added services and provide support for our products. Our technical service representatives assist customers with product applications and improvements and complaint resolution by telephone and in person at customer locations. Our
customer service representatives receive customer orders, establish delivery dates and answer inquiries about stock availability and order status.



We operate a network of eight distribution centers to store our products and distribute them to customers. Distribution centers are located in Appleton,
Wisconsin; Harrisburg, Pennsylvania; Independence, Kentucky; Kansas City, Kansas; Portland, Oregon; Los Angeles, California; Atlanta, Georgia; and Peterborough, Ontario, Canada.



Customers



We currently have 32 merchant customers that stock and redistribute our carbonless sheet products on a national or regional basis through over 400
locations. Some of those merchants also stock and redistribute our performance packaging products. We sell our carbonless rolls directly to 80 printer and converter customers. We also sell our carbonless rolls to over 400 forms printers through
merchants on a drop-shipment basis. In those cases, we deliver our products from our distribution centers and provide customer support directly to the printer while the merchant bears the credit risk of nonpayment. We believe that during 2003 we
were essentially the sole provider to over 80% of our carbonless customers.



We primarily sell our thermal products directly to converters who cut and rewind large rolls into smaller rolls, print and otherwise further process the paper based on end-user needs. In addition, we believe we were
essentially the sole provider to two of our ten largest thermal customers and that we sold product to more than 80% of all potential thermal customers in the North American market in 2003.



We sell our security products to check and other security printers who print
checks, titles, certificates and other secure documents. Customers for BemroseBooth products include many of the United Kingdoms biggest brand names in retail, telecommunications, financial services and transportation.



We sell performance packaging products produced by C&H Packaging and
American Plastics to the food processing, household and industrial products industries as well as to packaging producers and film converters.



Sales to Unisource Worldwide, Inc. accounted for approximately 13% of our 2003 net sales and sales to xpedx accounted for approximately 10% of our 2003
net sales.



Customer Focused Quality



Customer Focused Quality (CFQ) means meeting or exceeding customer
expectations in all aspects of every transaction with our company. This approach to serving customers has become the core of our company culture, the hallmark of our competitive reputation and a point of differentiation from our competitors.



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CFQ is a dynamic process designed to engage all our employees. The process requires employees to identify
their internal and external customers, define customer expectations, establish performance measures for meeting those expectations, and create a plan for continuous improvement. We believe that our employees ongoing commitment to CFQ
significantly contributes to our ability to meet our business objectives.



Working Capital Practices



We maintain finished goods inventories at levels that enable us to provide approximately 99% availability of stock items and next day delivery to approximately 85% of our coated solutions and thermal and advanced technical products
customers. We also maintain raw material inventories at levels consistent with demand for both stock and custom orders. The custom order lead times currently range from 10 to 21 days for carbonless products and approximately 21 days or less for
thermal and advanced technical products. Our accounts receivable management practices, including terms of sale, are designed to accommodate the competitive differences of each business segment.



American Plastics maintains finished goods inventory for a limited stocking
program to ensure 48-hour availability on those stock items while custom order lead times are generally in the range of 3 to 6 weeks. Raw material inventories reflect expected customer demand, supplier lead times and economic order quantities.
Accounts receivable are managed in a manner consistent with industry practice.



A significant share of C&H Packagings volume is custom order business and raw materials are purchased as orders are received from customers. Most of these orders are on a make-and-ship basis. Order lead
times are typically 4 to 5 weeks for rollstock and 5 to 6 weeks for pouches. Accounts receivable management practices reflect the competitive requirements of the business.



BemroseBooth has a mix of stock and custom orders. Raw material and finished goods inventories for stock items are
consistent with historic order patterns and estimated demand. Raw materials for custom orders are purchased against those specific orders and the finished product is shipped immediately upon completion. Accounts receivable management practices are
consistent with the industry.



Order Backlogs



In our coated solutions business, over 75% of orders call for stocking
grades and a majority of sales of those stock products are delivered one day following the order. Less than 25% of our sales of coated solutions products derive from custom orders. The mix of orders in our thermal and advanced technical products
business is approximately 70-75% stock and 25-30% custom. For competitive reasons we strive to maintain custom order lead times in a range of 10 to 21 days for coated solutions products and 21 days or less for thermal and advanced technical
products. As of each year-end 2001, 2002 and 2003, products ordered not shipped totaled approximately 2% of our total annual shipment volumes of coated solutions and thermal and advanced technical products.



American Plastics order backlog consists primarily of custom orders
scheduled so as to make the most efficient utilization of machine time. Backlogs typically cover 4 to 8 weeks of customer orders and include some advance or blanket orders placed by customers covering their requirements for the next several months.



C&H Packaging, because of the predominantly custom order
nature of the business, generally reports backlogs in the range of 6 to 8 weeks, with some of these orders representing customers requirements for a number of months, perhaps for the entire year. At year-end 2003, the value of products
ordered not shipped approximated 15% of annual shipments.



A significant share of BemroseBooths business derives from custom orders and is managed in terms of contractually agreed delivery dates. Typically, in excess of 95% of these orders are delivered on time. In the promotional products
segment of their business, many of these products (e.g., calendars and gift vouchers) are shipped well in advance of the calendar year-end and there is, effectively, no order backlog.



Manufacturing



To produce carbonless paper, we coat the microcapsules onto paper either on a
paper machine, where the paper is first manufactured and then, in a continuous process, coated with the microcapsules, or on an off-machine coater where previously manufactured paper is coated in a separate operation.



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Coating the microcapsules on the paper machine is a technically challenging but efficient process because
it saves the costs of winding, transporting and unwinding the paper before sending it through an off-machine coater. We believe we are the only U.S. carbonless producer that uses on-machine coating to apply microcapsules.



We manufacture all our thermal paper on off-machine coaters at the Appleton
plant. We mix the specialized dyes, coreactants and stabilizers required for the thermal image reaction and apply those and other needed coatings to base stock, often in a continuous process in which the paper is coated and dried up to three times
in a single pass through a coating machine. Significant technical challenges in coating thermal paper include both applying expensive coating materials in an efficient manner and drying the coated paper at low heat to prevent image reaction.



Paper machines and off-machine coaters are large, complex
machines that operate most efficiently when operated continuously. Paper machine production and yield decline when a machine is stopped for grade changes in coatings, basis weight, color or width. Therefore, we organize our manufacturing processes
so that all our paper machines and most of our coaters run almost continuously throughout the year. We schedule our higher volume, longer runs of carbonless products at our pulp and paper mills located in West Carrollton and Roaring Spring. Shorter
runs of carbonless products as well as thermal and specialty coated products are produced on coaters at the Appleton plant.



The Appleton plant also produces all of our carbonless sheet products. As the demand for carbonless paper continues to decline, which we expect to occur,
we will move carbonless production to our mills. We intend to utilize the open capacity at the Appleton plant for the production of technical products and new products developed through our new product development efforts.



The Roaring Spring mill is a fully integrated pulp and paper mill. Two of the
mills three paper machines produce carbonless products while a third machine produces our security products. We are investing $8 million to upgrade and expand the production capabilities of two of the mills paper machines to increase the
range and scope of their abilities to manufacture security products.



The West Carrollton mill is the focus of our recycling operations. The mill features extensive waste paper processing and deinking operations. West Carrolltons three paper machines produce carbonless and thermal
base stock and finished carbonless paper products.



C&H
Packaging is an integrated pre-press, printing, laminating and converting operation. C&H Packaging prints multilayered, plastic films on high-speed, multicolor, flexographic printing presses using waterborne ink systems. The flexible packaging
converting operation produces pouches, semi-rigid packaging, lidding films, films for dry condensed dairy products, forming and nonforming films, cheese and snack food films, and custom packaging.



American Plastics manufactures multilayered, coextruded barrier films and
also produces vacuum pouches from those films.



BemroseBooth
produces its secure mail, promotional, security and information products at its manufacturing site in Derby, England. The company manufactures its transit and parking products at Hull. The high-integrity mailing operations are focused in Teesside.



Raw Materials



Our principal raw materials consist of base stock, chemicals, pulp,
wastepaper and packaging. In fiscal 2003, those materials made up approximately 50% of the annual cost of goods sold. Our largest raw material component is base stock, which was approximately 20% of our cost of goods sold in fiscal 2003. Most of our
externally purchased base stock, which are rolls of uncoated paper used in the production of coated paper products, is acquired from four sources with whom we have pricing and volume target purchase agreements. These agreements protect us to some
extent from the significant pricing cycles for pulp and commodity paper products.



Approximately 10% of our cost of goods sold in fiscal 2003 was for pulp, wood and wastepaper used in the Roaring Spring and West Carrollton paper mills. While wastepaper and pulp prices are subject to swings in the
supply and demand cycle for pulp and commodity papers, we seek to reduce the impact of those swings in the pulp and commodity paper cycle by negotiating price and volume agreements for pulp and by purchasing wastepaper through a national broker.



The technical challenges of manufacturing our products require
Appleton to use many specialty raw materials, designed and manufactured to work with our products and manufacturing processes. We make purchasing decisions based upon quality, service, value and long-term strategic importance. We have long-term
agreements with key suppliers designed to ensure stable and consistent supply, to promote joint development and engineering of new raw materials and products, to enhance total value to our customers and to protect mutual strategic interests.



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We are a party to two significant chemical supply agreements, one of which is with Nisseki Chemical Texas
Inc. and commenced January 1, 2002. Under this agreement we purchase primary solvents, which are a key component in our carbonless paper manufacturing process. The cost of those purchases was approximately 5% of our total 2003 chemical purchases.
Pursuant to this agreement, we are obligated to purchase a significant portion of primary solvents through December 31, 2007. The agreement continues year to year after 2007 until either party terminates the contract.



We are also a party to a chemical supply agreement with ESCO Company Limited
Partnership, Mitsui Toatsu Chemicals, Inc. and Yamamoto Chemicals, Inc., which commenced July 1, 1997. Under this agreement, we purchase black color formers, which are chemicals that interact with other chemicals to form a black marking. The cost of
those purchases was approximately 14% of our 2003 chemical purchases. Pursuant to this agreement, we are obligated to purchase a significant portion of our black color former needs through June 30, 2007.



We are also party to a significant base stock supply agreement with Appleton
Coated LLC, which commenced December 30, 2001. The cost of those purchases was approximately 64% of our total 2003 base stock purchases. Pursuant to this agreement, which was amended effective as of December 28, 2003, we are obligated to purchase
75,000 tons of base stock during 2004 and 40,000 tons of base stock in 2005. The term of this agreement, as amended, expires on January 1, 2006.



Principal raw materials used at C&H Packaging are mono and multilayered plastic films, inks and adhesives. The primary raw material used at American
Plastics is resin pellets made from polyethylene, ethylene vinyl alcohol copolymer (EVOH) or nylon. At BemroseBooth raw material purchases mainly comprise paper, self-adhesive laminates, inks and hologram foil.



Information Technology



We have completed the first two waves of our enterprise resource planning
conversion project known as Project Venture. This conversion of our computer system software is intended to optimize our business operations and expand our capabilities to accommodate business growth. The first wave involved the financial and
nonstock procurement processes. The second wave focused on the order-to-cash cycle (order entry, pricing, distribution, inventory planning, invoicing and accounts receivable). The third and final wave involves our manufacturing and stock procurement
processes and is expected to begin in the second quarter of 2004 and be completed during the second half of 2004. The third wave of Project Venture will be implemented at each manufacturing site beginning with West Carrollton in May 2004. Prior to
implementing the third wave of Project Venture, we will upgrade our computer hardware to accommodate the additional transaction volume. We anticipate that our total expenditures for Project Venture will be approximately $23 million.



Employees



As of February 29, 2004, we employed 3,348 persons, of whom 1,969 were covered by union contracts. Of our 2,558 U.S.
employees, 2,353 currently have an investment in the Company Stock Fund of our KSOP, including 1,446 of our 1,514 U.S. union employees.



Manufacturing employees at our major manufacturing facilities in Appleton, Roaring Spring and West Carrollton are represented by the Paper,
Allied-Industrial, Chemical and Energy Workers International Union, or PACE. We entered into long-term labor contracts for all three of these facilities early in 2001. The labor contracts at our Appleton and West Carrollton facilities will expire in
2006 and the Roaring Spring labor contract will expire in 2007. As of February 29, 2004, 1,514 employees were covered by the labor contracts at these three facilities.



PACE also represents employees at the Appleton, Harrisburg and Edwardsville distribution centers. Employees at the
Peterborough, Ontario, Canada facility are represented by Independent Paperworkers of Canada. Employees at the Portage, Wisconsin plant and our other distribution centers in Georgia, Kentucky, California and Oregon, as well as C&H Packaging and
American Plastics, have chosen not to be represented by a union. Office employees have also chosen not to be represented.



Manufacturing employees at our Derby and Hull manufacturing facilities in the United Kingdom are represented by Graphical, Paper and Media Union. These
employees are covered by a national labor agreement that is reviewed annually in April by the Graphical, Paper and Media Union and the British Printing Industries Federation. As of February 29, 2004, 455 United Kingdom employees were represented by
the union. Employees at the Teesside, England facility have chosen not to be represented by a union.



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We have enjoyed good labor-management relations over an extended period of time. There have been no work
stoppages over the last 30 years. We believe this long-term relationship has been critical in developing efficient manufacturing sites and a workforce that is highly committed to Customer Focused Quality and the success of our company.



Intellectual Property



Our wholly-owned subsidiary, WTA Inc., owns approximately 70 unexpired U.S.
patents, through assignment from Appleton, covering carbonless and thermal paper products and manufacturing technologies, with foreign counterparts in Canada, Europe and Japan. We have also licensed technology from other paper manufacturers mainly
involving non-critical manufacturing processes or materials used in such processes. Together with NCR, we have licensed technology to Kanzaki Specialty Papers, Nippon Paper Industries Co., Ltd., formerly Jujo Paper Company, Ltd. and Yamamoto
Chemicals Inc.



As part of the acquisition of our business from
NCR in 1978, we obtained a 100-year license to use forms of the NCR PAPER* trademark that are used as our brand for carbonless products.



We do not believe that any single patent or patent application is material to our business or operations. We believe that the duration of our existing
patents is consistent with our business needs.



Environmental
Matters



General



Our operations are subject to comprehensive and frequently changing federal,
state and local environmental laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of wastewater and stormwater, storage, treatment and disposal of materials and waste, remediation of soil, surface
water and groundwater contamination, and liability for damages to natural resources.



We are subject to the following material environmental laws and regulations:



| |  | the Comprehensive Environmental Response Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act, which governs the identification, reporting
and cleanup of hazardous substances that have been released into the environment;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act and Hazardous and Solid Waste Amendment, which governs the disposal of solid waste and the
identification, treatment and disposal of hazardous waste;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the Toxic Substances Control Act, which governs the regulation of hazardous chemical substances, such as asbestos, polychlorinated biphenyls, radon and lead;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the Federal Water Pollution Control Act, as amended by the Clean Water Act, which governs the regulation of the discharge of pollutants into navigable waters;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the Clean Air Act, which governs the regulation of the emission of contaminants into the atmosphere;
| | - | ----------------------------------------------------------------------------------------------------



| |  | the Emergency Planning and Community Right-to-Know Act, which governs the reporting and emergency notification of hazardous and toxic chemicals used in or released from a facility;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | similar state statutes and regulations; and
| | - | -------------------------------------------



| |  | United Kingdom Environmental Protection Act 1990 and Health and Safety At Work Act 1974 including various regulations under these statutes.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



Compliance with these laws and regulations is an increasingly important
factor in our business. We expect to incur capital expenditures of approximately $2 million in 2004 and $17 million from 2005 through 2008 and to continue to incur expenditures after 2008 in order to maintain compliance with applicable federal,
state and local environmental laws and regulations and to meet new regulatory requirements. Compliance with these regulatory requirements is likely to increase our expenses, reduce our earnings and adversely affect the operating flexibility of our
manufacturing operations, which could harm our competitive position, especially relative to foreign competitors who may not be subject to the same restrictions and attendant compliance costs.



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We are subject to strict, and under some circumstances, joint and several, liability for the
investigation and remediation of environmental contamination, including contamination caused by other parties, at properties that we own or operate and at properties where we or our predecessors have arranged for the disposal of regulated materials.
As a result, we are involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. We could be involved in additional proceedings in the future and the total amount of these future costs and
other environmental liabilities may be material. To our knowledge, we have only been named a potentially responsible party, or PRP, at one site for which our liability may be significant, the Lower Fox River site, which is described below, although
it is possible that we could be named as a PRP for additional sites in the future.



Portage Plant



The Portage plant operates
under various state and federal permits for discharges and emissions to air and water. There are no known material liabilities with respect to environmental compliance issues at the Portage plant.



Roaring Spring Mill



The Roaring Spring mill operates under various state and federal permits for discharges and emissions to air and water. We
have submitted to the State of Pennsylvania, and received state approval for, a landfill closure plan for a non-hazardous clay-lined landfill that is present at the Roaring Spring mill. We received State approval for and closed our clay-lined
landfill in 2003. We estimate our long-term groundwater monitoring costs to be up to $725,000 in aggregate over the next 30 years.



Appleton Plant



The Appleton plant operates under various state and federal permits for discharges and emissions to air and water. Except for the Fox River matter,
described below, there are no known material liabilities with respect to environmental compliance issues at the Appleton plant.



West Carrollton Mill



The West Carrollton 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, we believe that it could be necessary to undertake remedial action in the future, although we are currently under no obligation to do so. We have 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. Remedial action to address PCB contamination in the area of the wastewater
impoundments is expected to involve construction of a cap to prevent exposure to PCBs. In addition, remedial action could involve long-term monitoring of groundwater or the construction and operation of a groundwater pump-and-treat system to prevent
migration of PCB contamination in groundwater, and the removal and disposal of PCB-contaminated sediment in the Great Miami River. The cost for remedial actionincluding installation of a cap, long-term pumping, treating and/or monitoring of
groundwater, and removal of sediment in the Great Miami Riveris estimated 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. In conjunction with the acquisition of Appleton by the ESOP in
2001, AWA agreed to indemnify us for 50% of all environmental liabilities up to $5.0 million and 100% of all such environmental costs exceeding $5.0 million. In addition, the former owner and operator of the West Carrollton mill may be liable for
all or part of the cost of remediation of historic PCB contamination. Other than the PCB contamination in the area of the wastewater impoundments, there are no other known material liabilities with respect to environmental issues at the West
Carrollton mill.



Merrill and Rhinelander Plants



Our C&H Packaging and American Plastics plants in Merrill, Wisconsin and
Rhinelander, Wisconsin, respectively, operate under various state and federal permits for discharges and emissions to air and water. There are no known material liabilities with respect to environmental compliance issues at these plants.



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United Kingdom Manufacturing Facilities



Our three BemroseBooth manufacturing facilities in Derby, Hull and Teesside operate under various permits for discharges and
emissions. There are no known material liabilities with respect to environmental compliance issues at these facilities.



Lower Fox River



Introduction.Various state and federal government agencies and Native American tribes have asserted claims against us and other parties 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. Wastewater from the Appleton plant, the Combined Locks paper mill now owned by Appleton Coated LLC (which
is still owned by AWAs ultimate parent) and from other local industrial facilities carried PCBs into the Lower Fox River during this time period. As a result, there are allegedly eleven million cubic yards of PCB-contaminated sediment spread
over 39 miles of the Lower Fox River. Low levels of PCBs have also been washed by the Lower Fox River into Green Bay, which is part of Lake Michigan.



In June 1997, the EPA published notice 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, which we refer to as CERCLA, or Superfund. The EPA identified seven potentially responsible parties, or PRPs, for PCB contamination in the Lower Fox River, including NCR
and our company as the former and current owners and operators of the Appleton plant, and the owners of five paper reprocessing mills located on the Fox River, including Georgia-Pacific, P.H. Glatfelter Company, WTM I Co., owned by Chesapeake
Corporation, Riverside Paper Corporation and U.S. Paper Mills Corp., which is now owned by Sonoco Products Company.



Remedial Action.On January 7, 2003, the DNR issued a Record of Decision (the ROD), with which the EPA concurred, on the first two
segments of the river, which are largely upstream of the Appleton plant. The ROD provides for dredging in the first segment and monitored natural recovery in the second segment. However, the ROD also provides that up to 25% of the remedy in the
first segment may consist of capping if dredging proves not to be cost-effective and certain conditions are met. It is our position that neither Appleton nor NCR has any responsibility or liability for PCB contamination in the first segment of the
Lower Fox River. On July 28, 2003, the DNR and EPA issued a ROD covering the third, fourth and fifth segments of the Lower Fox River (which includes Green Bay) which also provides for substantial dredging in that portion of the river.



In the two RODs, the DNR estimates total costs for the Lower Fox River
remedial action plan of approximately $400 million, an increase of $67 million over prior estimates, over a 7 to 18 year time period. Most of the estimated costs pertain to the removal of large quantities of sediment from the Lower Fox River by
dredging, dewatering of the dredged materials, treatment of the dredge water and off-site disposal of the remaining solids. Based on cost estimates of large-scale dredging response actions at other sites and many subjective assumptions regarding the
work to be done, engineers engaged by several of the PRPs have estimated that the cost of remediation work in the Lower Fox River could be between $740 million and $1.6 billion. The DNR strongly disputes this analysis and continues to believe that
its cost estimates are accurate.



We do not believe that the
remedial action proposed by the DNR in the two RODs is appropriate or cost-effective. We, along with the other PRPs, have developed a substantial body of evidence that we believe demonstrates that selection of alternatives involving active,
river-wide remediation, particularly massive dredging, would be inappropriate and unnecessary. There is ongoing, vigorous debate within the scientific, regulatory, legal, public policy and legislative communities over how to properly manage
contaminated sediments. Although we believe that the remedy adopted in the RODs is inappropriate and may be substantially modified and improved over time through further design and experience, the issuance of the RODs greatly reduces the uncertainty
about the remedy that will be selected by the EPA and DNR for the remaining three segments of the Lower Fox River.



Natural Resource Damages (NRD).In October 2000, the FWS released a proposed restoration and compensation determination plan presenting
the federal and tribal natural resource trustees planned approach for restoring natural resources injured by PCBs and calculating the potential natural resource damages under different remedial action scenarios. The final NRD valuation will
depend on the extent of PCB cleanup; however, the proposed plan estimates that natural resource damages will fall in the range of $176 million to $333 million for all PRPs in the aggregate. The total costs estimated by the DNR, EPA and FWS for the
proposed remediation and NRD discussed above range from $576 million to $733 million. Over the past several years and at various natural resource damage sites, the FWS and other government agencies have settled NRD claims for amounts substantially
less than original estimates or claims. In June 2002, the state and federal trustees announced a proposed settlement of their NRD claims against Fort James Operating Company, a subsidiary of Georgia-Pacific Corporation (Fort James), the
owner of one of the reprocessing mills. Under the settlement, Fort James would pay for or conduct restoration projects with a total cost of approximately $12 million. The



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proposed settlement has been challenged by an environmental group in a case pending before the U.S. District Court in Milwaukee. We anticipate the actual
costs for the PRPs to settle NRD claims related to the Lower Fox River will be significantly less than the initial range of $176 million to $333 million.



Our Share of Liability.We purchased the Appleton plant from NCR in 1978, after the use of PCBs in the manufacturing process was discontinued.
Nevertheless, pursuant to CERCLA, we and NCR are viewed by the EPA as PRPs. Accordingly, we and NCR asserted indemnity claims against each other pursuant to the terms of the agreement for the purchase of the assets of the business in 1978. In order
to resolve our indemnification obligations to each other, we entered into an interim settlement agreement with NCR in 1998 under which the parties agreed to share both defense and liability costs arising from the Lower Fox River.



In addition to our interim settlement agreement with NCR, five of the seven
PRPs, excluding U.S. Paper Mills and Riverside Paper, have entered into a non-binding agreement to share both defense costs and costs for scientific studies relating to PCBs discharged into the Lower Fox River.



A study performed by the FWS in 2000 provided a preliminary estimate of the
amount of PCBs discharged into the Lower Fox River by each PRP and concluded that the discharges from the Appleton plant and the Combined Locks paper mill (which we formerly owned and which is now owned by an affiliate of AWA) represented a
percentage in the range of 36% to 52% of the total PCBs discharged. These preliminary estimates have not yet been finalized by the FWS and may be revised. However, the FWS analysis, when completed, will not be binding on the PRPs. The final
allocation of liability among the PRPs will be determined by negotiation, litigation or other dispute resolution processes. Based on historical and technical analyses performed by environmental engineers we have engaged, we believe that the
percentage of PCBs discharged from the Appleton and Combined Locks facilities is less than 20% of the total discharged by all the PRPs. A portion of our 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 their respective share(s) of the potential liability, we could be responsible for a portion of their share(s). Based on a review of publicly available financial information about the
other PRPs, we believe that the other PRPs will be required, and have adequate financial resources, to pay their share of the remediation and natural resource damage claims for the Lower Fox River.



Interim Restoration and Remediation Consent Decree.We entered into a
consent decree on December 10, 2001 with NCR, the DNR, the Wisconsin Department of Justice, the EPA, the FWS, the U.S. Department of Justice, the National Oceanic and Atmospheric Administration, and the Oneida and Menomonee Indian Tribes, which are
collectively referred to as the intergovernmental partners, or IGP. Pursuant to the consent decree, we and NCR agreed to provide up to $41.5 million over a period of four years, up to a maximum of $10.4 million per year, for interim restoration and
remediation efforts directed by the IGP. We and NCR will each pay approximately half of the amounts paid under the consent decree. Through the end of 2003, we have paid approximately $8.2 million under the consent decree. Under the consent decree,
the IGP agree not to sue or take administrative action against us and NCR during the four-year period including pursuant to any claims that could be made as a result of the issuance of the ROD. The consent decree does not constitute a final
settlement with the IGP or provide protection against future claims against us and NCR; however, under the decree, we and NCR will receive full credit against remediation costs and NRD claims for all monies expended for restoration and remediation
of the Lower Fox River during the interim period including pursuant to any claims that could be made as a result of the issuance of the RODs.



Estimates of Liability. A precise estimate of our ultimate share of remediation and natural resource damage liability cannot be made at this time
due to uncertainties with respect to:



| |  | the scope and cost of implementing the final remediation plan;
| | - | --------------------------------------------------------------



| |  | the scope of restoration and final valuation of federal and state NRD assessments;
| | - | ----------------------------------------------------------------------------------



| |  | the evolving nature of remediation and restoration technologies and governmental policies; and
| | - | ----------------------------------------------------------------------------------------------



| |  | our share of remediation and NRD costs relative to the other PRPs.
| | - | ------------------------------------------------------------------



However, the issuance of the RODs greatly reduces the uncertainty about the remedy that will be implemented for the Lower Fox River and provides us the ability to
reasonably estimate our potential liability. Accordingly, we have created a reserve for this environmental liability. During 2003 the total reserve was accreted by $5.9 million while payments against the reserve totaled $6.9 million. This resulted
in a remaining reserve of $109.1 million as of January 3, 2004, of which $9.8 million is recorded in other accrued liabilities and $99.3 million is recorded as an environmental liability.



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As discussed below, AWA has agreed to indemnify us for certain liabilities related to the Lower Fox
River. At January 3, 2004, the total indemnification receivable from AWA is $86.8 million, of which, $9.8 million is recorded in other current assets and $77.0 million is recorded as an environmental indemnification receivable. The $22.3 million
difference between the reserve and the indemnification receivable represents the discounted share of Lower Fox River costs for which we are responsible. A $21.0 million charge was recorded within earnings in 2002 and has accreted to $22.3 million
during 2003. This discounted share was calculated using a discount rate of 6.0%, which represents our estimate of the fair market interest rate at which this liability could be settled in an arms length transaction. This $21.0 million amount
will accrete to $25.0 million by the end of 2005.



We used the
estimates described below, including the most recent government agency estimates, in evaluating our total Lower Fox River environmental liability:



| |  | total costs for remediation of $480 million, based on the DNRs estimate of $400 million in total costs for remediation, plus a 20% contingency;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 our estimate (we assume that Appleton and NCR are primarily responsible for only the discharges from our plant and our former mill and not for other discharges);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | costs to settle NRD claims against Appleton and NCR, estimated at $20 million or less, based on the IGPs $12 million settlement of NRD claims against Fort James;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our responsibility for approximately half of the claims asserted against Appleton and NCR, based on our interim settlement agreement with NCR, the terms of which are confidential;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $20 million in fees and expenses.
| | - | ---------------------------------



Because of the numerous uncertainties underlying these estimates, it is possible that our share of costs will be higher.



AWA Indemnification.In conjunction with the acquisition of Appleton
in 2001, we entered into two indemnification agreements under which AWA agreed to indemnify Paperweight Development and Paperweight Development agreed to indemnify us for, and pay, all governmental and third party liabilities and all costs and
expenses incurred by us in defending ourselves against governmental and third party claims, which we refer to as the Fox River Liabilities. The Fox River Liabilities also include fees and expenses of our environmental counsel, advisers, engineers
and scientific experts, and the costs incurred in obtaining studies and other analyses concerning various remedial alternatives for the Lower Fox River.



The indemnification agreements mirror one another and result in our receiving the indemnification payments directly or indirectly from AWA. This summary
assumes that AWA is satisfying the Fox River Liabilities by paying us directly or making payments on our behalf to third parties, even though the indemnification agreements provide that Paperweight Development is indemnified by AWA and Paperweight
Development indemnifies us.



Under the indemnification
agreements, we will be indemnified for the first $75 million of Fox River Liabilities and for those in excess of $100 million. We are responsible for the $25 million of liabilities between $75 million and $100 million. The indemnification agreements
provide that it is the intent of the parties that at no time will we or Paperweight Development be required to fund any costs and expenses relating to the Fox River Liabilities for which we or Paperweight Development will be indemnified. Pursuant to
these agreements, AWA paid $20.9 million in connection with the Fox River Liabilities through 2003.



In connection with the indemnification agreements and in order to assure us, the ESOP Trustee and our lenders that AWA would be able to meet its
indemnification obligations under these agreements, AWA purchased and fully paid for indemnity claim insurance from an affiliate of American International Group, Inc., or AIG.



15



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##### Table of Contents

The AIG insurance policy is a $250 million policy that is designed to provide coverage, with the
exception described below, for an increasing amount of potential Fox River Liabilities for each of the 12-month periods beginning November 9th of the years specified below:



|                    |  |                                   
|------------------- |  | ----------------------------------
|Year                |  | Maximum Coverage                  
|2001                |  | $ 75 million                      
|2002                |  | $100 million                      
|2003                |  | $125 million                      
|2004                |  | $150 million                      
|2005                |  | $175 million                      
|2006                |  | $200 million                      
|2007 and thereafter |  | $250 million                      
|                    |  | (unless reducedas described below)



The amounts available
under the AIG insurance policy were determined as a result of negotiations with AWA and are not based on any particular cost estimates. We believe that the $250 million available under the AIG insurance policy will be in excess of our ultimate
liability for remediation of the Lower Fox River even if (a) the costs of remediation were to be twice the government agencies estimate of $400 million, (b) our NRD settlement were to be twice the $12 million obtained by Georgia-Pacific, and
(c) our combined share with NCR of all of these liabilities were to be substantially more than any estimate of our share of PCB discharge.



The AIG insurance policy was designed to provide a funding source to satisfy the Fox River Liabilities and other liabilities. As such, the policyholder
(described below) has designated a third party administrator to manage the various environmental issues that arise with respect to the Lower Fox River. This administrator works with our employees as negotiations and discussions occur with
governmental authorities and third parties. As we incur costs and expenses that constitute Fox River Liabilities, we submit invoices to the administrator, which are in turn submitted to AIG and then paid under the AIG insurance policy. As noted
above, the indemnification agreements negotiated with AWA and the AIG insurance policy are designed to ensure that we will not be required to fund any costs and expenses for the Fox River Liabilities and to assure us, the ESOP Trustee and our
lenders and investors that we will not have to rely on AWA itself to make these payments. This arrangement is working as designed.



The AIG insurance policy will not terminate sooner than the stated maturity of our senior subordinated notes unless we experience certain types of changes
of control and provided we comply with the provisions of the senior credit facility and senior subordinated notes, including provisions that could require us to repay or offer to repay that indebtedness. The AIG insurance policy will be extended
beyond the stated maturity of the senior subordinated notes, which we refer to as an extension period, (1) for up to three years if a designated arbiter is not able to determine that we will have sufficient internal cash to repay the senior
subordinated notes at stated maturity, or if the designated arbiter determines we will have sufficient cash but we do not actually repay the senior subordinated notes or irrevocably deposit funds sufficient to repay them or (2) for up to five years
if AWA shall have committed a payment default under its indemnification obligations in excess of $1 million that is not cured within 60 days of written notice. The amount of coverage required under the AIG insurance policy during an extension period
will be the lesser of (1) two times the excess of the required remaining indemnification payments during the extension period over funds available from the net worth protection described below and the amounts otherwise available under the policy
after December 15, 2008 from the stream of payments we refer to as the annuity as determined by a designated arbiter or (2) the amount of coverage available under the AIG insurance policy remaining on the first day of the extension period.



The AIG insurance policy is owned by a Bermuda corporation
which we refer to as the policyholder. Under the indemnification agreements, the policyholder has the right to elect to reduce the maximum coverage amount from $250 million to $167 million at any time after the notes are paid in full and certain
other conditions are met or upon a change of control. At such time, AIG will make available to the policyholder a stream of payments that continues until 2027, which we refer to as the annuity.



In order to establish and administer the AIG insurance policy, AWA and
Paperweight Development each formed direct or indirect special purpose subsidiaries that jointly own the policyholder. The policyholder owns and is the direct beneficiary of the AIG insurance policy. At the closing of the acquisition, AWA assigned,
and the policyholder assumed, AWAs share of the Fox River Liabilities under AWAs indemnification agreement in exchange for a capital contribution by AWA to the policyholder in the amount of the premium due under and to fully purchase the
AIG insurance policy. AWA has not been released from its primary responsibility for performance under its indemnification agreement. This structure is intended to protect the policyholder and the AIG insurance policy from claims made by the
creditors of AWA, Paperweight Development and/or their respective affiliates, including the special purpose subsidiaries that own the policyholder, in a bankruptcy or other liquidation proceeding involving any of these companies.



16



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##### Table of Contents

At the closing of the acquisition, AWA, Paperweight Development, 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 Paperweight Development from taking any actions that would result in any change to this structure including,
without limitation, (1) amendments to the charter documents of any of the special purpose subsidiaries or the policyholder, (2) issuances, redemptions or transfers of any of the equity securities of the special purpose subsidiaries or the
policyholder and (3) transfers or assignments of the AIG insurance policy. In addition, AWA and Paperweight Development agreed, with respect to the special purpose subsidiaries, and the special purpose subsidiaries agreed, with respect to the
policyholder, that they will not make any assignment for the benefit of creditors, consent to the appointment of a receiver for their assets, or file any petition or application under any bankruptcy, reorganization or similar liquidation law or
regulation.



The indemnification agreements provide that AWA
can elect to control and manage the Fox River Liabilities with the cooperation and assistance of our personnel. We have agreed to make certain of our employees available to AWA at its cost to assist with discussions and negotiations with the EPA,
the DNR, the FWS and other governmental agencies. AWA is controlling and managing the Fox River Liabilities with our assistance.



In addition to the AIG insurance policy, AWA agreed to deposit up to $75 million, minus all previous indemnification payments made for Fox River
Liabilities, into an escrow account, which we refer to as the net worth protection, if the maximum coverage limits under the AIG insurance policy are no longer in force, if AWA has not yet paid its first $75 million of Fox River Liabilities and if
AWAs consolidated tangible net worth is less than £500 million (1) for two consecutive fiscal quarters, or (2) in whole or in part as a result of a sale of assets outside the ordinary course of business, a sale of stock or other
ownership interests of any direct or indirect operating subsidiary or a transaction out of the ordinary course of business.



The AIG insurance policy and the net worth protection are collectively referred to as the financial assurance. Under the indemnification agreements, AWA
is able to reduce some of the financial assurance to avoid duplication of the components of the financial assurance.



The indemnification agreements provide for a dispute resolution process involving arbitration in accordance with the Center for Public
ResourcesRules for Non-Administered Arbitration.



AWAs indemnification obligation to us is also discussed in Notes 3 and 19 of Notes to Consolidated Financial Statements.



17



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##### Table of Contents

|Item 2. | Properties
|------- | ----------



We own or lease the facilities reflected in the table below. We believe that our plants and facilities have been well maintained, are in good condition,
are suitable for their respective operations and provide sufficient capacity to meet production requirements.



|                                             |  |                                                 |  |                           |  |                       
|-------------------------------------------- |  | ----------------------------------------------- |  | ------------------------- |  | ----------------------
|Location                                     |  | Description                                     |  | ApproximateSquare Footage |  | Status                
|Appleton, Wisconsin (Wisconsin Ave.)         |  | Headquarters Office and Manufacturing
Plant     |  | 885,000                   |  | Owned                 
|Portage, Wisconsin                           |  | Capsule Manufacturing Plant                     |  | 44,000                    |  | Owned                 
|Roaring Spring, Pennsylvania                 |  | Pulp and Paper Mill                             |  | 634,000                   |  | Owned                 
|West Carrollton, Ohio                        |  | Pulp and Paper Mill                             |  | 750,000                   |  | Owned                 
|Merrill, Wisconsin                           |  | Flexible Plastics Printing and Converting Plant |  | 128,000                   |  | Owned                 
|Rhinelander, Wisconsin                       |  | Film and Commercial Packaging
Plant             |  | 60,000                    |  | Owned                 
|Derby, England                               |  | Headquarters Office and Manufacturing Plant     |  | 224,000                   |  | Owned                 
|Derby, England                               |  | Manufacturing Plant                             |  | 28,000                    |  | Lease expires 3/25/06 
|Hull, England                                |  | Manufacturing Plant                             |  | 81,000                    |  | Owned                 
|Teesside, England                            |  | Manufacturing Plant                             |  | 23,000                    |  | Lease expires 2/21/10 
|Wednesbury, England                          |  | Warehouse (Vacant)                              |  | 28,000                    |  | Lease expires 3/25/13 
|Appleton, Wisconsin (East Warehouse Road)(1) |  | Warehouse                                       |  | 430,000                   |  | Lease expires 11/30/05
|Appleton, Wisconsin(Kensington Drive)(1)     |  | Distribution Center                             |  | 360,000                   |  | Lease expires 12/31/04
|Independence, Kentucky                       |  | Distribution Center                             |  | 350,000                   |  | Lease expires 3/31/06 
|Harrisburg, Pennsylvania                     |  | Distribution Center                             |  | 300,000                   |  | Lease expires 8/16/06 
|Ontario, California                          |  | Distribution Center                             |  | 260,000                   |  | Lease expires 5/31/05 
|Edwardsville, Kansas                         |  | Distribution Center                             |  | 240,000                   |  | Lease expires 12/28/05
|McDonough, Georgia                           |  | Distribution Center                             |  | 210,000                   |  | Lease expires 3/31/07 
|Portland, Oregon                             |  | Distribution Center                             |  | 50,000                    |  | Lease expires 1/31/07 
|Peterborough, Ontario, Canada                |  | Distribution Center                             |  | 60,000                    |  | Lease expires 12/31/04

---

|(1) | The East Warehouse Road and Kensington Drive facilities are operated as a single distribution
center.
|--- | -----------------------------------------------------------------------------------------------------



Our performance packaging business is
primarily operated at the Merrill and Rhinelander, Wisconsin locations. A significant portion of our security business is operated at the Derby, Hull and Teesside, England locations.



Between fiscal 1999 and fiscal 2003, we invested approximately $238 million in capital improvements, approximately $186
million of which was spent at our manufacturing facilities. The primary goal of this capital spending was to improve manufacturing efficiencies, product quality and cycle time. Of the $186 million spent at our manufacturing facilities, approximately
$20 million was spent to comply with applicable environmental regulations. Through fiscal 2003, we spent approximately $20 million on our enterprise resource planning conversion project known as Project Venture. This project is expected to be
completed in 2004.



We also maintain 9 field sales offices in
the U.S., all of which are in leased premises under short-term leases.



|Item 3. | Legal Proceedings
|------- | -----------------



From time to time we may be subject to various legal proceedings and other claims arising in the ordinary course of our business. Other than the Ellis,
Cinquanti, McLaughlin and Marks v. Appleton Papers Inc. case described below and the Lower Fox River matter described above, we do not believe that any pending or threatened legal proceedings or other claims will have, individually or in the
aggregate, a material adverse effect on our financial position, results of operations or cash flows.



18



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##### Table of Contents

In Ellis, Cinquanti, McLaughlin and Marks v. Appleton Papers Inc., a case pending in U.S. District
Court in Syracuse, New York, the plaintiffs generally allege that exposure to carbonless paper has caused allergic reactions which are totally disabling and that they are, therefore, entitled to substantial damages. The plaintiffs are seeking
monetary damages in an aggregate amount of $12 million, plus punitive damages. We have defended a number of such cases over the past 20 years, settling some for amounts which are not material to our business and obtaining dismissals in others based
on various arguments including, in one case, that the plaintiffs alleged proof that carbonless paper causes injury was based on junk science. While we are vigorously defending ourselves and expect to prevail in this case and in any
similar cases that may be brought against us in the future, there can be no assurance that we will be successful in our defense.



For a discussion of environmental matters see Item 1. BusinessEnvironmental Matters and Note 19 of Notes to Consolidated Financial
Statements.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



None.



PART II



|Item 5. | Market for Registrants Common Equity and Related Stockholder Matters
|------- | ---------------------------------------------------------------------



There is no established trading market for the common stock of Paperweight Development, Appleton or WTA Inc. All of the
outstanding shares of Paperweight Development are owned of record by the KSOP, in which there are approximately 2,581 participants who have invested in the Company Stock Fund. All of the outstanding shares of Appleton are owned of record by
Paperweight Development and all of the outstanding shares of WTA Inc. are owned of record by Appleton.



Effective July 1, 2003, Paperweight Development sold 231,689 shares of its common stock to the Company Stock Fund of the KSOP. The Company Stock Fund
acquired the shares with payroll deductions deferred to the Company Stock Fund during the period from January 1, 2003 to June 30, 2003 by employees of Appleton who are participants in the KSOP. The aggregate offering price was approximately $5.3
million.



Effective December 31, 2003, Paperweight Development
sold 180,908 shares of its common stock to the Company Stock Fund of the KSOP. The Company Stock Fund acquired the shares with payroll deductions deferred to the Company Stock Fund during the period from July 1, 2003 to December 31, 2003 by
employees of Appleton who are participants in the KSOP. The aggregate offering price was approximately $4.1 million.



There were no underwriters used and no underwriting discounts or commissions were paid. The offer and sale of the shares were made pursuant to Rule 701
under the Securities Act, as amended, and a no-action letter issued by the Securities and Exchange Commission to Paperweight Development and Appleton dated July 3, 2001.



In order to finance the acquisition of the Company from AWA, Appleton entered into various loan agreements and then loaned
the proceeds to Paperweight Development so it could close the transaction. In November 2002, Appleton declared and paid to Paperweight Development a dividend of $596.9 million. Paperweight Development used the dividend proceeds to repay this
intercompany loan, plus accrued interest, owed to Appleton. Also in 2002, WTA Inc. declared and paid to Appleton a dividend of $6.2 million. WTA Inc. had received payment of accrued interest and royalties from Appleton, which it then returned to
Appleton as a dividend.



In 2001, immediately prior to the
acquisition of Appleton from AWA, Appleton declared and paid to our parent corporation at the time, Appleton Investments LLC, a dividend of approximately $51,000 in conjunction with the settlement of remaining intercompany debt balances.



Other than the intercompany settlement transactions described immediately
above, no dividends have been declared on the common stock of Paperweight Development, Appleton and WTA Inc. in the last two fiscal years and none of these entities currently anticipates paying dividends in the foreseeable future. Each of these
entities is restricted from declaring dividends and repurchasing common stock pursuant to provisions contained in our senior credit facility and trust indenture. Refer to Notes 12, 22 and 25 of the Notes to Consolidated Financial Statements.



19



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##### Table of Contents

|Item 6. | Selected Financial Data
|------- | -----------------------



Selected Financial Data



The following tables set forth selected historical consolidated financial data for Paperweight Development and Appleton as of and for each of the five fiscal years in the five-year period ended January 3, 2004. The
historical consolidated financial data for the fiscal years ended January 3, 2004 and December 28, 2002 and the periods ended December 29, 2001 and November 9, 2001 were derived from our consolidated financial statements included elsewhere in this
report, which have been audited by PricewaterhouseCoopers LLP, our independent public auditors, as indicated in its report included in Item 8. Financial Statements and Supplementary Data. The remaining historical financial data presented
below were derived from our audited consolidated financial statements not included in this report. The historical consolidated financial data presented in this report are not necessarily indicative of our financial position or the results of
operations for any future period. The financial and other operating data set forth below should be read in conjunction with Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and our
historical consolidated financial statements and related notes included elsewhere in this report.



|                                                            |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|----------------------------------------------------------- |  | ----------------- | --------- | - | ------------------- | - | ------- | ------------------------------------------------- |  | - | --------------------------------------------------- | - |  | ---- | ------- | - | ---- | - | --------- | - |  | - | --------- | -
|                                                            |  | (Successor Basis) |           |   | (Predecessor Basis) |  
|                                                            |  | 2003              |           |   | 2002                |   |         | For the PeriodNovember 10,2001 toDecember 29,2001 |  |   | For the Period December 31, 2000 to November 9,2001 |   |  | 2000 |         |   | 1999 |  
|                                                            |  | (in thousands)    |           |   | (in thousands)      |  
|Statement of Operations Data:                               |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Net sales                                                   |  | $                 | 861,453   |   |                     | $ | 897,973 |                                                   |  | $ | 112,950                                             |   |  | $    | 842,868 |   |      | $ | 1,080,013 |   |  | $ | 1,123,833 |  
|Cost of sales                                               |  |                   | 634,323   |   |                     |   | 630,712 |                                                   |  |   | 76,345                                              |   |  |      | 591,741 |   |      |   | 752,616   |   |  |   | 789,194   |  
|                                                            |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Gross profit                                                |  |                   | 227,130   |   |                     |   | 267,261 |                                                   |  |   | 36,605                                              |   |  |      | 251,127 |   |      |   | 327,397   |   |  |   | 334,639   |  
|Selling, general and administrative                         |  |                   | 159,103   |   |                     |   | 156,577 |                                                   |  |   | 18,693                                              |   |  |      | 135,126 |   |      |   | 166,238   |   |  |   | 162,324   |  
|Restructuring and other charges(1)                          |  |                   | 2,629     |   |                     |   |        |                                                   |  |   |                                                    |   |  |      | 6,385   |   |      |   | 7,816     |   |  |   | 44,542    |  
|Special charges(2)                                          |  |                   |          |   |                     |   | 21,017  |                                                   |  |   |                                                    |   |  |      | 24,301  |   |      |   | 18,488    |   |  |   | 25,409    |  
|                                                            |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Operating income                                            |  |                   | 65,398    |   |                     |   | 89,667  |                                                   |  |   | 17,912                                              |   |  |      | 85,315  |   |      |   | 134,855   |   |  |   | 102,364   |  
|Interest expense                                            |  |                   | 54,160    |   |                     |   | 68,354  |                                                   |  |   | 10,638                                              |   |  |      | 25,441  |   |      |   | 43,244    |   |  |   | 42,926    |  
|Debt extinguishment expenses                                |  |                   | 1,396     |   |                     |   | 11,754  |                                                   |  |   |                                                    |   |  |      | 10,392  |   |      |   | 7,502     |   |  |   |          |  
|Interest income                                             |  |                   | (315      | ) |                     |   | (990    | )                                                 |  |   | (406                                                | ) |  |      | (8,818  | ) |      |   | (13,750   | ) |  |   | (11,273   | )
|Other (income) expense                                      |  |                   | (1,085    | ) |                     |   | (46     | )                                                 |  |   | (53                                                 | ) |  |      | 492     |   |      |   | (1,176    | ) |  |   | 3,103     |  
|                                                            |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Income before income taxes from continuing operations       |  |                   | 11,242    |   |                     |   | 10,595  |                                                   |  |   | 7,733                                               |   |  |      | 57,808  |   |      |   | 99,035    |   |  |   | 67,608    |  
|Provision for income taxes                                  |  |                   | 83        |   |                     |   | 503     |                                                   |  |   | 117                                                 |   |  |      | 20,625  |   |      |   | 32,874    |   |  |   | 17,715    |  
|                                                            |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Income from continuing operations                           |  |                   | 11,159    |   |                     |   | 10,092  |                                                   |  |   | 7,616                                               |   |  |      | 37,183  |   |      |   | 66,161    |   |  |   | 49,893    |  
|Loss from discontinued operations, net of tax(3)            |  |                   |          |   |                     |   |        |                                                   |  |   |                                                    |   |  |      | (4,462  | ) |      |   | (13,063   | ) |  |   | (55,691   | )
|                                                            |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Income (loss) before cumulative effect of accounting change |  |                   | 11,159    |   |                     |   | 10,092  |                                                   |  |   | 7,616                                               |   |  |      | 32,721  |   |      |   | 53,098    |   |  |   | (5,798    | )
|Cumulative effect of accounting change, net of tax(4)       |  |                   |          |   |                     |   |        |                                                   |  |   |                                                    |   |  |      |        |   |      |   |          |   |  |   | (6,835    | )
|                                                            |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Net income (loss)                                           |  | $                 | 11,159    |   |                     | $ | 10,092  |                                                   |  | $ | 7,616                                               |   |  | $    | 32,721  |   |      | $ | 53,098    |   |  | $ | (12,633   | )
|                                                            |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Other Financial Data:                                       |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Depreciation and amortization                               |  | $                 | 71,218    |   |                     | $ | 67,977  |                                                   |  | $ | 6,005                                               |   |  | $    | 36,659  |   |      | $ | 42,897    |   |  | $ | 46,515    |  
|Capital expenditures                                        |  |                   | 29,903    |   |                     |   | 32,444  |                                                   |  |   | 6,741                                               |   |  |      | 49,804  |   |      |   | 81,072    |   |  |   | 37,685    |  
|Ratio of earnings to fixed charges(5)                       |  |                   | 1.2       |   |                     |   | 1.1     |                                                   |  |   | 1.7                                                 |   |  |      | 3.1     |   |      |   | 3.1       |   |  |   | 2.6       |  
|Balance Sheet Data (at end of period):                      |  |                   |           |   |                     |   |         |                                                   |  |   |                                                     |   |  |      |         |   |      |   |           |   |  |   |           |  
|Working capital (deficit)(6)                                |  | $                 | 121,874   |   |                     | $ | 89,706  |                                                   |  | $ | 145,043                                             |   |  | $    | 181,187 |   |      |   | ($171,503 | ) |  | $ | 108,892   |  
|Total assets                                                |  |                   | 1,069,853 |   |                     |   | 960,162 |                                                   |  |   | 1,002,298                                           |   |  |      | 788,719 |   |      |   | 774,504   |   |  |   | 948,708   |  
|Total debt                                                  |  |                   | 562,024   |   |                     |   | 520,673 |                                                   |  |   | 670,225                                             |   |  |      | 13,279  |   |      |   | 499,944   |   |  |   | 569,604   |  
|Redeemable common stock                                     |  |                   | 158,279   |   |                     |   | 133,581 |                                                   |  |   | 104,663                                             |   |  |      |        |   |      |   |          |   |  |   |          |  
|(Accumulated deficit) retained earnings                     |  |                   | (3,587    | ) |                     |   | (541    | )                                                 |  |   | 7,616                                               |   |  |      |        |   |      |   |          |   |  |   |          |  
|Shareholders equity (deficit)                              |  |                   |          |   |                     |   |        |                                                   |  |   |                                                    |   |  |      | 510,773 |   |      |   | (519      | ) |  |   | 66,091    |  



|(1) | Due to the continued decline in the Companys carbonless business, salaried employment
was reduced in 2003. During the third quarter of fiscal 1999, we announced plans to close our Harrisburg plant, which was sold on August 17, 2001. See Note 6 of Notes to Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Special charges consist of the following items:
|--- | -----------------------------------------------



|                                 |  |                   |   |                     |   |                                                   |  |                                                   |   |      |   |        |  |   |        |  |   |       
|-------------------------------- |  | ----------------- | - | ------------------- | - | ------------------------------------------------- |  | ------------------------------------------------- | - | ---- | - | ------ |  | - | ------ |  | - | ------
|                                 |  | (Successor Basis) |   | (Predecessor Basis)
|                                 |  | 2003              |   | 2002                |   | For the PeriodNovember 10,2001 toDecember 29,2001 |  | For the PeriodDecember 31, 2000 toNovember 9,2001 |   | 2000 |   | 1999  
|Environmental expense(a)         |  | $                 |  |                     | $ | 21,017                                            |  | $                                                 |  |      | $ | 23,389 |  | $ | 3,148  |  | $ | 3,590 
|Litigation settlements(b)        |  |                   |  |                     |   |                                                  |  |                                                   |  |      |   | 449    |  |   | 3,625  |  |   | 21,819
|Equipment relocation expenses(c) |  |                   |  |                     |   |                                                  |  |                                                   |  |      |   | 463    |  |   | 5,215  |  |   |      
|Loss on investment(d)            |  |                   |  |                     |   |                                                  |  |                                                   |  |      |   |       |  |   | 6,500  |  |   |      
|                                 |  |                   |   |                     |   |                                                   |  |                                                   |   |      |   |        |  |   |        |  |   |       
|Total                            |  | $                 |  |                     | $ | 21,017                                            |  | $                                                 |  |      | $ | 24,301 |  | $ | 18,488 |  | $ | 25,409



|(a) | Represents costs related to the Lower Fox River. See Item 1.
BusinessEnvironmental Matters. In connection with the acquisition, AWA has agreed to indemnify us for certain of these costs. See Item 1. BusinessEnvironmental MattersLower Fox RiverAWA Indemnification.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Represents settlement amounts and legal fees, primarily for two litigation matters.
|--- | -----------------------------------------------------------------------------------



|(c) | Represents costs to dismantle and transport equipment from the Harrisburg plant to the
Appleton plant and Roaring Spring mill as part of the Harrisburg plant closure.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | Represents write-off of the notes receivable and equity investment in Paperhub.com, a
proposed internet paper and supplies purchasing business. Paperhub.com has ceased its operations and, subject to limitations, AWA and affiliates of AWA have agreed to indemnify us for any further liabilities in connection with this investment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Effective November 26, 2000, we completed the transfer of two wholly-owned subsidiaries,
Appleton Coated and Appleton Leasing, to Appleton Coated Papers Holdings Inc. These two subsidiaries consisted entirely of our coated free sheet, fine paper products and leasing divisions. We classified these subsidiaries as discontinued operations
in our consolidated statements of operations for all periods presented. The Newton Falls, New York mill, which was part of the business operated by Appleton Coated and therefore included in discontinued operations for the periods presented, was not
included within the November 26, 2000 transfer described above because the Newton Falls mill was sold to a third party in the third quarter of 2001. After the mill was sold, Newton Falls, Inc. was transferred to an affiliate of AWA. See Note 5 of
Notes to Consolidated Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents the write-off of deferred start-up costs.
|--- | ----------------------------------------------------



|(5) | For the purpose of calculating these ratios, we define earnings as pre-tax income from continuing operations plus fixed charges. We define fixed charges as interest
expense plus amortized expenses related to indebtedness.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Beginning in fiscal 1998, includes parent company debt which has been classified as a current liability. See Note 7 of Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



Introduction



This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of Paperweight
Development Corp. and Appleton Papers Inc. for the three-year period ended January 3, 2004. This discussion should be read in conjunction with our accompanying consolidated financial statements and related notes.



21



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Appleton Papers Inc. creates product solutions for customers and end users through its development and
use of coating formulations and applications as well as encapsulation, security, printing and packaging technologies. We operate in four business segments: coated solutions, thermal and advanced technical products, security products and performance
packaging.



Our carbonless business is the largest component of
our coated solutions segment. The U.S. carbonless market has been in decline since 1994. Based on our assessment, we believe the annual rates of decline in the U.S. carbonless market from 1994 to 1999 were between 1% and 7%, with a compound annual
rate of approximately 4% during this period. On the same basis, we estimate that the U.S. carbonless paper market declined by approximately 10% in 2000 and by approximately 8% annually from 2001 through 2003, and will decline at a compound rate of
approximately 9% between 2004 and 2008. Our coated solutions segment accounted for approximately 72% of our total net sales in fiscal 2003.



In addition to the declining U.S. carbonless market, our carbonless business is subject to the impact of increasingly competitive pricing. Other domestic
carbonless producers, wanting to maintain or increase their market share, have increased their competitive pricing actions. In addition, foreign competitors, who serve approximately 6% of the U.S. carbonless market, used an aggressive, low-price
strategy to sell into the U.S. carbonless market, which also led to a reduction in net selling prices. In response to this increased pricing competition, we have experienced a reduction in our U.S. carbonless selling prices.



The U.S. and Canadian thermal market experienced strong growth during the
1990s and is expected to continue growing as the advantages of thermal printing systems become more widely recognized. These advantages include their competitive cost, quiet operation, cleanliness, speed, high print quality, reliability, portability
and their use of a single consumable (thermal paper) versus other printing systems, which require paper and ink or toner cartridges. Based on our assessment, we estimate that the annual rates of growth in the U.S. and Canadian thermal market from
1995 to 2003 were between 1% and 13% and averaged 7% for the period. Based on our assessment, we believe the U.S. and Canadian thermal market will continue to grow at a compound annual rate of more than 3% between 2004 and 2008.



We have also continued to experience the impact of competitive pricing in
most segments of our thermal and advanced technical products business from both foreign and domestic producers. However, during the second half of 2003, we were able to successfully implement two price increases for our high volume, low margin
point-of-sale products.



Over the past few years, our
management team has developed growth strategies to offset the declining nature of the U.S. carbonless market and its resulting impact on our revenue and operating income. Our strategies for growth include strengthening and expanding our presence in
certain growing market segments and broadening our product offerings through acquisitions. In April 2003, we entered the performance packaging segment through our acquisition of C&H Packaging and American Plastics. In December 2003, we added an
international presence to our security products segment through the acquisition of BemroseBooth. We have evaluated, and will continue to evaluate, opportunities to acquire other companies that will help us achieve our business strategies.



General



Acquisition of Appleton Papers. At the close of business on November 9, 2001, Paperweight Development acquired Arjo
Wiggins Delaware General Partnership, or AWDGP, and its wholly-owned subsidiary, Appleton Papers Inc., from Arjo Wiggins Appleton p.l.c. (AWA) for $810 million. Paperweight Development had no operating activity prior to the acquisition
of AWDGP.



We and Paperweight Development financed the
acquisition, refinanced most of our current debt and paid related fees and expenses with the following:



| |  | $79 million of our available cash;
| | - | ----------------------------------



| |  | $340 million of a senior credit facility, of which $265 million in term loans was borrowed at the closing of the acquisition;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | $250 million in aggregate principal amount of a senior subordinated note due 2008 issued by us to AWA, which was repaid with the proceeds of the offering of the $250 million
aggregate principal amount of 12.5% Series A Senior Subordinated Notes due 2008 and other available cash;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a deferred payment obligation with a present value of $140 million at the closing of the acquisition to be paid to one of AWAs affiliates; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | $107 million in proceeds from the sale of Paperweight Development redeemable common stock to the ESOP.
| | - | ------------------------------------------------------------------------------------------------------



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##### Table of Contents

The acquisition was accounted for using the purchase method and the financial statements of Appleton
Papers were adjusted on November 10, 2001 to reflect its assets and liabilities at fair value. We refer to the period November 10, 2001 to December 29, 2001 as the 2001 successor period. The successor period includes the accounts of Paperweight
Development and its wholly-owned subsidiaries, which we refer to as the successor company. We refer to the period December 31, 2000 to November 9, 2001 as the 2001 predecessor period. The predecessor period includes the accounts of Appleton Papers,
its wholly-owned subsidiaries, as well as Appleton Papers direct parent companies, AWDGP and Appleton Investments LLC, which we collectively refer to as the predecessor company. The accounts for AWDGP and Appleton Investments consisted of debt
used to fund the operations of Appleton Papers and corresponding interest expense and tax benefits.



Project Venture. In January 2002, our board of directors formally approved Project Venture, a $23 million capital project to install a new
enterprise resource planning system with the goal of optimizing our current business operations as well as expanding our capabilities to transform to a new products company. We selected J.D. Edwards to provide the software system solution. Project
Venture affects nearly every business function at Appleton including finance, information services, product development, manufacturing, logistics, purchasing, human resources, marketing, sales and customer service. Project Venture addresses Appleton
and its core businesses and will be extended to other subsidiaries as appropriate. During 2001, an 18-member employee project team began working to identify, define and redesign our work processes in preparation for the new software installation. In
addition to our own internal dedicated resources, we have also selected industry-respected implementation partners to assist in the design and installation of the J.D. Edwards software.



In order to minimize the risks associated with an implementation of this size and complexity, we have chosen to implement
Project Venture in three waves. The first wave, which was successfully implemented in December 2002, involved our financial reporting and nonstock procurement processes. The second wave, which was successfully implemented in January 2004, involved
our order-to-cash cycle (order entry, pricing, distribution, inventory planning, customer invoicing and accounts receivable). The final wave of implementation, which involves our manufacturing and stock procurement processes, is expected to begin in
the second quarter of 2004 and be completed during the second half of 2004.



Recent Acquisitions.On April 30, 2003, we acquired two privately-held, Wisconsin-based companies, C&H Packaging Company, Inc. and American Plastics Company, Inc. The purchase price for these acquisitions
approximated $50.6 million, net of cash acquired. C&H Packaging, located in Merrill, Wisconsin, prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial product industries. American
Plastics, located in Rhinelander, Wisconsin, produces high-quality, custom multilayered films and commercial packaging.



In December 2003, we acquired Bemrose Group Limited, a privately-held company headquartered in Derby, England. The purchase price for this acquisition
approximated $61.7 million, net of cash acquired. The groups operating unit, BemroseBooth, produces security printed vouchers and payment cards, mass transit and car parking tickets, variable data labeling, high-integrity mailing and printed
promotional products such as calendars.



Restructuring and Other Charges. Due to the continued decline in our carbonless business, management reviewed salaried staffing requirements in fiscal 2003. As a result of these management reviews, a salaried workforce
reduction program was implemented in fiscal 2003. The cost of this program, which included severance costs and outplacement services, was $2.6 million for fiscal 2003.



During the third quarter of fiscal 1999, we announced plans to close our Harrisburg plant in fiscal 2001 to improve
operational efficiencies by reducing excess production capacity. As a result, we recorded restructuring charges of $44.5 million in fiscal 1999, $7.8 million in fiscal 2000, and $6.4 million in fiscal 2001 related to the Harrisburg plant closure.
The charge recorded in fiscal 1999 was primarily due to the Harrisburg asset impairment totaling $26.4 million, costs for employment terminations of $11.3 million and distribution center exit costs of $6.0 million. As part of the Harrisburg plant
closure, we also recorded special charges, described below, of $5.2 million in fiscal 2000 and $0.5 million in fiscal 2001. For a more detailed review of these activities, please read our consolidated financial statements and related notes included
elsewhere in this report.



Discontinued Operations.On
November 26, 2000, we completed the transfer of two wholly-owned subsidiaries, Appleton Coated LLC and Appleton Leasing LLC, to Appleton Coated Papers Holdings Inc., an affiliate of AWA. These two subsidiaries, which had been operated with a
separate management team since the first quarter of fiscal 1999, consisted entirely of our coated free sheet, fine paper products and leasing divisions. The Newton Falls, New York mill, which was part of the business operated by Appleton Coated, was
not included within the November 26, 2000 transfer. The Newton Falls mill was sold to a third party in the third quarter of 2001. On October 28, 2001, we completed the transfer of Newton Falls, Inc. to Newton Falls LLC, an affiliated company of



23



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##### Table of Contents

AWA. These subsidiaries, including the Newton Falls mill, have been classified as discontinued operations for purposes of our financial statements and the
following discussion and analysis.



On February 26, 2004, we
issued our earnings release and reported net income for fiscal 2003 of $11.7 million. Subsequent to this release, we recorded an additional expense of $0.7 million, $0.5 million net of tax, related to purchase accounting adjustments for the
BemroseBooth acquisition, which resulted in net income for fiscal 2003 to be reduced to $11.2 million.



Comparison of Fiscal 2003 and Fiscal 2002



Net Sales.



Net Sales per
Quarter

(dollars in thousands)

|            |  |           |         |           |   |           |  |           |         |           |   |         |  |   |        
|----------- |  | --------- | ------- | --------- | - | --------- |  | --------- | ------- | --------- | - | ------- |  | - | -------
|            |  | Quarter 1 |         | Quarter 2 |   | Quarter 3 |  | Quarter 4 |         | Full Year
|Fiscal 2003 |  | $         | 204,238 |           | $ | 210,649   |  | $         | 217,783 |           | $ | 228,783 |  | $ | 861,453
|Fiscal 2002 |  | $         | 224,576 |           | $ | 228,698   |  | $         | 229,030 |           | $ | 215,669 |  | $ | 897,973



Net sales for fiscal
2003 decreased $36.5 million, or 4.1%, to $861.5 million, compared to $898.0 million for fiscal 2002. Net sales for each quarter of fiscal 2003 increased over the previous 2003 quarter. The improvement in net sales for the second quarter of fiscal
2003 compared to the first quarter of fiscal 2003 was largely a result of the addition of net sales from the two packaging companies we acquired in April 2003 and increased thermal and advanced technical products growth. The improvement in net sales
for the third quarter of fiscal 2003 compared to the second quarter of fiscal 2003 was largely a result of continued thermal and advanced technical products growth as well as reporting a full quarter of net sales for the two packaging companies we
acquired in April 2003. The improvement in net sales for the fourth quarter of fiscal 2003 compared to the third quarter of fiscal 2003 was largely a result of the addition of net sales from the acquisition of BemroseBooth in December 2003 and
continued thermal and advanced technical products growth.



Coated solutions net sales for fiscal 2003 were $622.6 million, a decrease of $85.4 million, or 12.1%, compared to fiscal 2002. Carbonless volume declined by 9% for the year, which was in line with company expectations. The decline in
carbonless net sales was greater than the volume decline as a result of increased competitive pricing pressures from both domestic and foreign producers. Average selling prices in our domestic market, which accounted for more than 75% of our total
carbonless shipments in fiscal 2003, decreased in the 3-4% range for fiscal 2003 as compared to fiscal 2002. The percentage of carbonless shipments to international customers increased by 2% in fiscal 2003, which also negatively impacted net sales
due to the lower selling price points in the international markets that we service. During fiscal 2002, we recorded $5.3 million in revenue from one-time toll coating services, which were not repeated in fiscal 2003.



Thermal and advanced technical products net sales for fiscal 2003 were
$182.1 million, an increase of $5.3 million, or 3.0%, compared to fiscal 2002. Thermal and advanced technical products volume increased 11% for fiscal 2003 as compared to fiscal 2002. A majority of our volume increase for fiscal 2003 was experienced
in our high volume, low margin point-of-sale products. Throughout the first seven months of fiscal 2003, we continued to experience pricing erosion on these products due to continued pricing pressures from both domestic and foreign producers of
similar products. In August 2003, we implemented a price increase on our highest volume point-of-sale grade, which was followed by an additional price increase on this same grade in late November 2003. These price increases were the first increases
experienced for this grade in over three years of continuing price deterioration. Average selling prices for our high volume, low margin point-of-sale products decreased in the 4-5% range for fiscal 2003 as compared to fiscal 2002. Our other
segments within thermal and advanced technical products, such as label and tag/ticket applications, also experienced competitive pricing pressures throughout 2003.



Other businesses net sales:



|                       |  |                       |      |      |   |     
|---------------------- |  | --------------------- | ---- | ---- | - | ----
|                       |  | (dollars in millions)
|                       |  | 2003                  |      | 2002
|Security               |  | $                     | 26.5 |      | $ | 13.2
|Performance packaging  |  |                       | 30.3 |      |   |    
|                       |  |                       |      |      |   |     
|Total other businesses |  | $                     | 56.8 |      | $ | 13.2



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Our other businesses net sales for fiscal 2003, which include our security and performance
packaging businesses, were $56.8 million, an increase of $43.6 million compared to fiscal 2002. Our acquisition of BemroseBooth in December 2003 contributed $10.9 million to our security net sales increase for fiscal 2003. Net sales from our
existing security business were $15.5 million for fiscal 2003, an increase of $2.3 million, or 17.6% compared to fiscal 2002. Our two new performance packaging companies, C&H Packaging and American Plastics, which were acquired in April 2003,
contributed $30.2 million of the increased revenue for fiscal 2003.



Gross Profit. Gross profit was $227.1 million for fiscal 2003, a decrease of $40.1 million, or 15.0%, compared to fiscal 2002. Gross profit margin was 26.4% for fiscal 2003 as compared to 29.8% for fiscal 2002. The decline in gross
profit dollars for fiscal 2003 as compared to fiscal 2002 was due to the following factors:



| |  | The combined effect of carbonless volume decline, competitive carbonless pricing pressures and higher carbonless international mix negatively impacted gross profit for fiscal 2003
by approximately $40 million.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The combined negative impact of continued competitive thermal pricing pressures and a higher proportion of low margin point-of-sale products in the mix of thermal sales more than
offset the favorable impact of increased thermal volume in fiscal 2003 and resulted in approximately $7 million in reduced gross profit.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fiber costs increased by approximately $7 million for purchased pulp, wastepaper and wood.
| | - | ------------------------------------------------------------------------------------------



These factors were partially offset by the following:



| |  | Gross profit from our 2003 acquisitions contributed approximately $8 million in gross profit, which included the $3 million impact of unfavorable purchase accounting adjustments
related to valuing inventory at fair market value for the three companies we acquired in fiscal 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Manufacturing efficiency gains, along with cost reductions in base stock, chemical and packaging purchases net of manufacturing cost increases in the areas of salaries and labor
costs, utilities and employee benefits, contributed approximately $6 million in gross profit for fiscal 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Selling, General and Administrative. Selling, general and administrative expenses for fiscal 2003 were $159.1 million, an increase of $2.5 million,
or 1.6%, compared to fiscal 2002. The companies we acquired in 2003 had $6.3 million in selling, general and administrative expenses related to the period of time we owned these companies in fiscal 2003, for which there were no corresponding
expenses in our fiscal 2002 results. The areas where we experienced a reduction in expense in fiscal 2003 as compared to fiscal 2002 include: long-term management incentive plans, the costs of which were driven by the performance of Appleton and
changes in the value of Paperweight Development redeemable common stock; lower distribution costs due to the reduction in carbonless shipments; fixed asset disposals; and bad debt expense.



Restructuring and Other Charges. Due to the continued decline in our
carbonless business, management reviewed salaried staffing requirements in fiscal 2003. As a result of these management reviews, a salaried workforce reduction program was implemented in fiscal 2003. The cost of this program, which included
severance costs and outplacement services, was $2.6 million for fiscal 2003. In the future, we will continue to evaluate our organization and our ability to achieve our business strategies. As we continue to make those evaluations, we may be
required to further reduce our workforce and incur additional charges.



Special Charges. During the fourth quarter of 2002, we recorded an environmental expense of $21 million in response to the January 2003 issuance of the Wisconsin Department of Natural Resources Record of Decision for the Lower Fox
River PCB cleanup. AWA has agreed to indemnify us for the first $75 million and for all amounts over $100 million in liabilities relating to the Lower Fox River. This $21 million fourth quarter charge represents the discounted share of the portion
of Lower Fox River costs for which Appleton may be responsible. This discounted share will accrete (i.e., increase) to $25 million by the end of 2005 to coincide with the expiration of the interim restoration and remediation agreement entered into
between Appleton and various government agencies in 2001 (see Note 19 of Notes to Consolidated Financial Statements). We anticipate that we will begin funding our $25 million share of the Lower Fox River liability sometime after 2008.



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##### Table of Contents

Operating Income.



|                                                             |  |                        |         |   |             |   |        |  
|------------------------------------------------------------ |  | ---------------------- | ------- | - | ----------- | - | ------ | -
|                                                             |  | (dollars in thousands) |        
|                                                             |  | Fiscal 2003            |         |   | Fiscal 2002 |  
|Coated Solutions                                             |  | $                      | 73,681  |   |             | $ | 88,602 |  
|Thermal and Advanced Technical Products                      |  |                        | 6,174   |   |             |   | 9,394  |  
|Other                                                        |  |                        | (2,633  | ) |             |   | (768   | )
|Unallocated corporate charges and business development costs |  |                        | (11,824 | ) |             |   | (7,561 | )
|                                                             |  |                        |         |   |             |   |        |  
|Total Operating Income                                       |  | $                      | 65,398  |   |             | $ | 89,667 |  



Operating income for
fiscal 2003 was $65.4 million, a decrease of $24.3 million, or 27.1%, compared to fiscal 2002. Operating income for fiscal 2002 included the $21.0 million special charge described above. Operating income as a percentage of net sales for fiscal 2003
was 7.6% as compared to 10.0% of net sales for fiscal 2002.



Coated solutions operating income for fiscal 2003 was $73.7 million, a decrease of $14.9 million compared to fiscal 2002. This decrease was primarily due to the expected decline in carbonless volume, increased competitive pricing
pressures and a higher percentage of carbonless international shipments compared to fiscal 2002. Coated solutions operating income for fiscal 2002 included the $21.0 million charge related to the discounted share of the Lower Fox River costs
for which we may be responsible.



Thermal and advanced
technical products operating income for fiscal 2003 was $6.2 million, a decrease of $3.2 million, or 34.3%, compared to fiscal 2002. Volume increases experienced in 2003 were more than offset by continued competitive pricing pressures in most
major product segments. Continued cost reduction efforts to improve manufacturing efficiencies were maintained throughout the year, which helped to offset a portion of the impact of the competitive pricing pressures.



Our other businesses, which include our security and performance packaging
businesses, experienced an operating loss for fiscal 2003 of $2.6 million, an increase of $1.9 million compared to fiscal 2002. The increase in operating loss for fiscal 2003 was due to increased sales and marketing efforts directed toward growing
our domestic security business, increased product development costs and unfavorable purchase accounting adjustments of approximately $3 million related to valuing inventory at fair market for the three companies we acquired in fiscal 2003. These
costs exceeded the operating income generated from operations for our newly acquired packaging and security businesses.



Our unallocated corporate charges and business development costs relate to expenditures associated with our technology development team, which works to
leverage and expand our expertise in coating applications, coating formulations, microencapsulation, security and other technologies. We also incurred expenditures related to our marketing and research and development efforts, which are focused on
growing our performance packaging business for both consumer and commercial markets. In addition, costs associated with our acquisition teams activities (salaries, travel, consulting fees and legal expenses) are also included as part of
business development costs in 2003. Our business development costs for fiscal 2003 were $11.8 million, an increase of $4.3 million compared to fiscal 2002.



Interest Expense.



|                                               |  |                       |      |             |   |     
|---------------------------------------------- |  | --------------------- | ---- | ----------- | - | ----
|                                               |  | (dollars in millions)
|                                               |  | Fiscal 2003           |      | Fiscal 2002
|Interest expense  term loans                  |  | $                     | 7.0  |             | $ | 12.1
|Interest expense  senior subordinated notes   |  |                       | 25.4 |             |   | 31.3
|Interest expense  deferred debt expense       |  |                       | 3.4  |             |   | 9.6 
|Interest expense  deferred payment obligation |  |                       | 16.3 |             |   | 14.5
|Interest expense  Fox River accretion         |  |                       | 1.3  |             |   |    
|Interest expense  other                       |  |                       | 0.8  |             |   | 0.9 
|                                               |  |                       |      |             |   |     
|Total interest expense                         |  | $                     | 54.2 |             | $ | 68.4



Interest expense for
fiscal 2003 was $54.2 million, a decrease of $14.2 million, or 20.8%, compared to fiscal 2002. The reduction in interest expense for fiscal 2003 as compared to fiscal 2002 was a result of the significant debt reduction we accomplished in fiscal
2002, our debt restructuring activities in fiscal 2002 and fiscal 2003, as well as lower interest rates we experienced in fiscal 2003 on our senior bank debt. During fiscal 2002, we used cash generated from operations to repay $113.7 million of our
senior bank debt. In addition, we purchased and retired $50.0 million of our Series B notes during fiscal 2002. Non-cash deferred debt amortization expenses were $3.4 million in fiscal 2003 compared to $9.6 million in fiscal 2002. As a result of the
significant repayment of senior bank debt in fiscal 2002, our deferred debt amortization expense was significantly higher in fiscal 2002. Non-cash interest on the deferred payment obligation (see Note 12 of Notes to Consolidated Financial
Statements) was $16.3 million in fiscal 2003 compared to $14.5 million in fiscal 2002. In fiscal 2003, our discounted share of the Lower Fox River costs for which we are responsible was accreted by $1.3 million. This $21.0 million amount will
accrete to $25.0 million by the end of 2005.



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##### Table of Contents

Debt Extinguishment Expenses. During December 2003, a portion of our long-term debt obligations
was refinanced with new debt carrying a reduced interest rate. As a result, we were required to write-off $1.4 million of deferred debt issuance costs associated with the original debt. During June 2002, a portion of our long-term debt obligations
was refinanced with new debt carrying a reduced interest rate. As a result, we were required to write-off $11.8 million of deferred debt issuance costs associated with the original debt. Refer to Liquidity and Capital Resources below for
additional discussion of these refinancing activities.



Interest Income. Interest income for fiscal 2003 was $0.3 million, a decrease of $0.7 million compared to $1.0 million for fiscal 2002. The decrease was due to lower interest rates earned on short-term investments and, on average,
lower short-term investment balances maintained during fiscal 2003 as compared to fiscal 2002.



Provision for Income Taxes. In connection with the acquisition of Appleton Papers, Paperweight Development elected to be treated as a subchapter S corporation and for its eligible subsidiaries to be treated as
qualified subchapter S subsidiaries for U.S. federal and, where recognized, state income tax purposes. As a result of these elections, we expect to incur no future U.S. income tax liability and minimal state income tax liabilities. The American
Plastics and C&H Packaging subsidiaries acquired in 2003 are eligible for such treatment while BemroseBooth, a company registered in the U.K. and subject to U.K. Inland Revenue tax laws, is not eligible for treatment as a qualified subchapter S
subsidiary and as a result we will incur a foreign tax liability. As a subchapter S corporation, Paperweight Development is subject to a corporate-level tax under Section 1374 of the Internal Revenue Code known as the built-in gain tax. The built-in
gain tax is a tax imposed on the gain inherent in assets as of the effective date of the S election if the gain is recognized within ten years after the effective date of the S election. If we sell a material portion of our assets in the future, we
could be subject to a significant tax liability.



For fiscal
2003, we recorded a tax provision of $0.1 million which included a $0.3 million tax benefit recorded by BemroseBooth. Deferred tax liabilities associated with BemroseBooth are $1.8 million at January 3, 2004.



Net Income. Net income for fiscal 2003 was $11.2 million, an increase
of $1.1 million or 10.6% compared to fiscal 2002.



Comparison of
Fiscal 2002 and Combined Fiscal 2001



For purposes of the
discussion of yearly operating results, the financial information for the 2001 predecessor period has been combined with the financial information for the 2001 successor period and referred to as fiscal 2001.



Net Sales.



Net Sales per Quarter

(dollars in thousands)



|            |  |           |         |           |   |           |  |           |         |           |   |         |  |   |        
|----------- |  | --------- | ------- | --------- | - | --------- |  | --------- | ------- | --------- | - | ------- |  | - | -------
|            |  | Quarter 1 |         | Quarter 2 |   | Quarter 3 |  | Quarter 4 |         | Full Year
|Fiscal 2002 |  | $         | 224,576 |           | $ | 228,698   |  | $         | 229,030 |           | $ | 215,669 |  | $ | 897,973
|Fiscal 2001 |  | $         | 240,310 |           | $ | 239,188   |  | $         | 249,112 |           | $ | 227,208 |  | $ | 955,818



Net sales for fiscal
2002 decreased $57.8 million, or 6.1%, to $898.0 million, compared to $955.8 million for fiscal 2001. For both fiscal 2002 and fiscal 2001 we experienced the trend where net sales for the first three quarters of the year remained relatively stable
followed by a drop in net sales in the fourth quarter. The decline during each of the fourth quarters of fiscal 2002 and fiscal 2001 was largely attributable to our carbonless business.



Coated solutions net sales for fiscal 2002 were $707.9 million, a decrease of $64.9 million, or 8.4%, compared to
fiscal 2001. Carbonless volume declined by 8% for the year, which was in line with company expectations. Average selling prices in our domestic market, which accounted for more than 80% of our total carbonless shipments in fiscal 2002, decreased in
the 1-2% range for fiscal 2002 as compared to fiscal 2001. During fiscal 2002, we recorded $5.3 million in revenue from one-time toll coating services.



Thermal and advanced technical products net sales for fiscal 2002 were $176.8 million, an increase of $4.6 million, or 2.7%, compared to fiscal
2001. Thermal and advanced technical products volume increased 8% for fiscal 2002 as compared to fiscal 2001. Net selling prices for our high volume, low margin point-of-sale products were stable throughout 2002 after experiencing a 4.2% decline
from the fourth quarter 2001 price levels due to competitive market conditions.



Our other businesses net sales for fiscal 2002, which related to our security business, were $13.2 million, an increase of $2.5 million compared to fiscal 2001.



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Gross Profit. Gross profit was $267.3 million for fiscal 2002, a decrease of $20.5 million, or
7.1%, compared to fiscal 2001. Gross profit margin was 29.8% for fiscal 2002 as compared to 30.1% for fiscal 2001. The benefit of lower raw material costs for pulp and chemicals, and the full year benefits achieved from the restructuring plan
completed in fiscal 2001, were offset by the carbonless volume decline and an increase of $17.7 million in manufacturing depreciation expense, when compared to fiscal 2001. The acquisition of Appleton Papers by Paperweight Development was recorded
using the purchase method of accounting and the financial statements of Appleton Papers were adjusted on November 10, 2001 to reflect property, plant and equipment at fair value, which resulted in higher depreciation expense.



Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2002 were $156.6 million, an increase of $2.8 million, or 1.8%, compared to fiscal 2001. Amortization expense related to intangible assets increased $7.7 million for fiscal 2002 as compared to fiscal 2001 due to
the value assigned to intangible assets in the purchase price allocation related to the acquisition of Appleton Papers. Information systems expenses increased by $3.1 million due to additional costs associated with the implementation of Project
Venture. Expenses related to awards under our long-term management incentive plans, which are based on the performance of Appleton Papers and increases in the value of Paperweight Development redeemable common stock, resulted in an increase in
non-cash compensation expense of $3.5 million in fiscal 2002. Bad debt expense in fiscal 2002 was $0.8 million higher than in fiscal 2001 primarily due to potential credit exposures from Argentinean customers. In fiscal 2001, we received fees of
$1.8 million from Appleton Coated for information technology services we provided and recorded as an offset to our information technology department expenses. Appleton Coated did not utilize our information technology services in fiscal 2002.
Distribution costs for fiscal 2002 decreased by $7.0 million, or 10.7%, compared to fiscal 2001 due to reduced carbonless volumes, lower freight costs and reduced warehousing expenses. Selling, general and administrative expenses for fiscal 2001
also included a charge of $6.9 million in management bonuses, incurred in the 2001 predecessor period, related to the acquisition of Appleton Papers.



Restructuring and Other Charges. During the third quarter of fiscal 1999, we announced plans to close our Harrisburg plant in fiscal 2001.
Restructuring and other charges associated with this plant closure, which was completed in fiscal 2001, approximated $6.4 million in fiscal 2001, and related to asset impairments of $3.8 million, employee severance benefits of $1.1 million and $1.5
million of various costs relating to the final closure of the plant. We did not incur any restructuring or other charges in fiscal 2002.



Special Charges. Special charges for fiscal 2002 consisted of environmental costs of $21.0 million. Special charges for fiscal 2001 consisted of
(1) environmental costs of $23.4 million, (2) a legal settlement during fiscal 2001 resulting in charges of $0.4 million and (3) costs to dismantle and transport equipment from the Harrisburg plant to the Appleton plant and Roaring Spring mill of
$0.5 million.



During the fourth quarter of 2002, we recorded
an environmental expense of $21 million in response to the January 2003 issuance of the Wisconsin Department of Natural Resources Record of Decision for the Lower Fox River PCB cleanup. AWA has agreed to indemnify us for the first $75 million and
for all amounts over $100 million in liabilities relating to the Lower Fox River. This $21 million fourth quarter charge represents the discounted share of the portion of Lower Fox River costs for which Appleton may be responsible. This discounted
share will accrete (i.e., increase) to $25 million by the end of 2005 to coincide with the expiration of the interim restoration and remediation agreement entered into between Appleton and various government agencies in 2001 (see Note 19 of Notes to
Consolidated Financial Statements). We anticipate that we will begin funding our $25 million share of the Lower Fox River costs sometime after 2008.



Operating Income.



|                                                             |  |                        |        |   |             |   |         |  
|------------------------------------------------------------ |  | ---------------------- | ------ | - | ----------- | - | ------- | -
|                                                             |  | (dollars in thousands) |       
|                                                             |  | Fiscal 2002            |        |   | Fiscal 2001 |  
|Coated Solutions                                             |  | $                      | 88,602 |   |             | $ | 107,105 |  
|Thermal and Advanced Technical Products                      |  |                        | 9,394  |   |             |   | 10,435  |  
|Other                                                        |  |                        | (768   | ) |             |   | (324    | )
|Unallocated corporate charges and business development costs |  |                        | (7,561 | ) |             |   | (13,989 | )
|                                                             |  |                        |        |   |             |   |         |  
|Total Operating Income                                       |  | $                      | 89,667 |   |             | $ | 103,227 |  



Operating income for
fiscal 2002 was $89.7 million, a decrease of $13.6 million, or 13.1%, compared to fiscal 2001. Operating income as a percentage of net sales for fiscal 2002 was 10.0% as compared to 10.8% of net sales for fiscal 2001.



Coated solutions operating income for fiscal 2002 decreased $18.5
million, or 17.3%, compared to fiscal 2001 primarily due to the decline in carbonless roll volume in fiscal 2002 as compared to fiscal 2001.



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Thermal and advanced technical products operating income for fiscal 2002 decreased $1.0 million
compared to fiscal 2001 due to an increase in depreciation and amortization expenses resulting from the purchase price allocation related to the acquisition of Appleton Papers, offset in part by volume increases experienced in 2002.



Our unallocated corporate charges and business development costs for fiscal
2002 decreased $6.4 million, or 46.0%, compared to fiscal 2001. The decrease in fiscal 2002 was due to a charge of $6.9 million in management bonuses, incurred in the 2001 predecessor period, related to the acquisition of Appleton Papers.



Interest Expense.



|                                                  |  |                       |      |                    |   |                        |  |   |     
|------------------------------------------------- |  | --------------------- | ---- | ------------------ | - | ---------------------- |  | - | ----
|                                                  |  | (dollars in millions)
|                                                  |  | Fiscal2002            |      | SuccessorBasis2001 |   | Predecessor Basis 2001
|Interest expense  term loans                     |  | $                     | 12.1 |                    | $ | 2.4                    |  | $ |    
|Interest expense  senior subordinated notes      |  |                       | 31.3 |                    |   | 1.3                    |  |   |    
|Interest expense  senior subordinated note (AWA) |  |                       |     |                    |   | 2.8                    |  |   |    
|Interest expense  private placement              |  |                       |     |                    |   |                       |  |   | 7.6 
|Interest expense  deferred debt expense          |  |                       | 9.6  |                    |   | 1.8                    |  |   | 0.1 
|Interest expense  deferred payment obligation    |  |                       | 14.5 |                    |   | 1.9                    |  |   |    
|Interest expense  Fox River IGP accretion        |  |                       |     |                    |   | 0.2                    |  |   | 0.6 
|Interest expense  other                          |  |                       | 0.9  |                    |   | 0.2                    |  |   | 17.2
|                                                  |  |                       |      |                    |   |                        |  |   |     
|Total interest expense                            |  | $                     | 68.4 |                    | $ | 10.6                   |  | $ | 25.5



Interest expense for
fiscal 2002 was $68.4 million, an increase of $32.3 million compared to $36.1 million for fiscal 2001 due to the issuance of long-term debt obligations associated with the acquisition of Appleton Papers on November 9, 2001. As a result of our
voluntary debt prepayments in 2002, we also amortized a larger share of the deferred debt issuance expenses as compared to the scheduled loan terms. Non-cash deferred debt amortization expenses in fiscal 2002 amounted to $9.6 million.



Debt Extinguishment Expenses. During June 2002, a portion of our
long-term debt obligations was refinanced with new debt carrying a reduced interest rate. As a result, we were required to write off $11.8 million of deferred debt issuance costs associated with the original debt. Refer to Liquidity and
Capital Resources below for additional discussion of this refinancing. During the 2001 predecessor period, we recorded debt extinguishment expenses of $10.4 million as a result of the early redemption of our 6.26% and 6.61% senior unsecured
notes. The debt extinguishment expenses consisted primarily of a prepayment penalty and the write-off of non-cash deferred debt issuance costs.



Interest Income. Interest income for fiscal 2002 was $1.0 million, a decrease of $8.2 million compared to $9.2 million for fiscal 2001. The
decrease was due to the October 1, 2001 sale of a $125 million interest-bearing shareholder note we held from Arjo Wiggins SA, a French company ultimately owned by AWA.



Provision for Income Taxes. In connection with the acquisition of Appleton Papers, Paperweight Development elected to
be treated as a subchapter S corporation and for its eligible subsidiaries to be treated as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state income tax purposes. As a result of these elections, we expect to incur no
future U.S. income tax liability and minimal state income tax liabilities. As a subchapter S corporation, Paperweight Development is subject to a corporate-level tax under Section 1374 of the Internal Revenue Code known as the built-in gain tax. The
built-in gain tax is a tax imposed on the gain inherent in assets as of the effective date of the S election if the gain is recognized within ten years after the effective date of the S election. If we sell a material portion of our assets in the
future, we could be subject to a significant tax liability.



Loss from Discontinued Operations. In October 2001, we completed the transfer of one of our wholly-owned subsidiaries, Newton Falls, Inc., to an affiliated company of AWA. This entity was classified as a discontinued operation for
fiscal 2001. Loss from discontinued operations, net of taxes, was $4.5 million for fiscal 2001 and primarily consisted of asset impairments and closing costs associated with the permanent closure of the Newton Falls mill.



Net Income. Net income for fiscal 2002 was $10.1 million compared to
$40.3 million for fiscal 2001, a decrease of $30.2 million resulting primarily from an increase in interest expense and a reduction in operating income.



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Liquidity and Capital Resources



Predecessor Period



Prior to the acquisition of Appleton Papers by Paperweight Development, we operated as an indirect, wholly-owned subsidiary of AWA. This resulted in
numerous intercompany transactions related to our investing and financing activities. Therefore, the following discussion regarding our historical cash flows from operating, investing and financing activities is not representative of our cash flow
and activities as a separate entity following the acquisition.



We historically financed our short-term liquidity needs with internally generated funds, working capital lines of credit and loans from an affiliate of AWA.



Successor Period



As a result of the acquisition of Appleton Papers on November 9, 2001, we incurred significant debt requiring periodic interest and principal repayments.
Requirements for working capital, capital expenditures, pension fund contributions, periodic interest and debt principal payments, employee redemptions of redeemable common stock and acquisitions, if any, in fiscal 2004 will continue to be funded
with cash flows from operations supplemented with borrowings under the revolving credit portion of our senior credit facility. We believe our capital resources and liquidity position at January 3, 2004 are adequate to meet projected needs.



In connection with the acquisition of Appleton Papers,
Paperweight Development elected to be treated as a subchapter S corporation and for its eligible subsidiaries to be treated as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state income tax purposes. As a result of
these elections, we expect to incur no future U.S. income tax liability and minimal state income tax liability. This should also have a positive impact on our future liquidity and cash flows. The American Plastics and C&H Packaging subsidiaries
acquired in 2003 are eligible for such treatment while BemroseBooth, a company registered in the U.K. and subject to U.K. Inland Revenue tax laws, is not eligible for treatment as a qualified subchapter S subsidiary and as a result we will incur a
foreign tax liability.



Our strategy for growth includes
strengthening and expanding our presence in certain market segments and broadening our product offerings through acquisitions and new product development. We have evaluated and will continue to evaluate opportunities to acquire other companies that
will help us achieve our business strategies. As a result, we may engage in discussions, or, in some cases, negotiations with prospective targets and may make future acquisitions. Any such acquisitions would be subject to the limitations contained
in our debt instruments. Generally, we will not comment on such discussions or possible acquisitions until a definitive agreement has been executed.



Cash Flows from Operating Activities. Net cash provided by operating activities of continuing operations for fiscal 2003 was $126.3 million. We
incurred $8.1 million in non-cash employer matching contributions to the KSOP for fiscal 2003. A decrease in working capital for fiscal 2003 increased operating cash flows by $12.8 million largely driven by decreases in receivables of $12.7 million
and inventories of $4.9 million, which were partially offset by a $5.0 million decrease in accounts payable and other accrued liabilities. Accounts receivable decreased due to the timing of our January 3, 2003 year end, which allowed for collection
of receivables with month end terms.



Net cash provided by
operating activities of continuing operations for fiscal 2002 was $176.9 million. As required by the rules for purchase accounting, fixed assets and intangible assets acquired in connection with the acquisition of Appleton Papers were recorded at
fair value as of the date of the acquisition resulting in an increase in non-cash depreciation and amortization expense of $25.3 million for fiscal 2002. We also incurred $7.3 million in non-cash employer matching contributions to the KSOP during
fiscal 2002. A decrease in working capital for fiscal 2002 increased operating cash flows by $20.5 million. Decreases in inventories of $16.5 million and receivables of $12.0 million were partially offset by a decrease in accounts payable and other
accrued liabilities of $6.3 million. Inventories, which were strategically built in 2001 in advance of the Harrisburg shutdown and movement of production equipment to the Appleton plant and Roaring Spring mill facilities, were reduced throughout
2002. Accounts receivable decreased due to lower sales and a reduction in past due account balances. Accrued income tax liability increased by $18.0 million, largely attributable to income tax refunds received during fiscal 2002, which relate to
periods prior to the November 9, 2001 acquisition date. These refunds will be used to satisfy any additional tax liabilities arising from audits of prior periods.



Net cash provided by operating activities of continuing operations for fiscal 2001 was $130.7 million. A decrease in working
capital for fiscal 2001 increased operating cash flows by $29.3 million. Accounts receivable decreased $34.7 million, largely due to a reduction in past due account balances. Inventories decreased $20.5 million, primarily as a result of a next-day
basestock inventory program initiated during the first quarter of fiscal 2001 and a partial reduction in safety stock that was in place while the Harrisburg closure and transfer of equipment to Appleton plant and Roaring Spring mill was being
completed during the first half of fiscal 2001. Accounts payable, other accrued liabilities and restructuring reserves decreased $25.8 million, partially due to final severance payments and a reduction in accounts payable for capital expenditures
upon the completion of the equipment transfer and reinstallation projects related to the Harrisburg plant closure during fiscal 2001.



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Cash Flows from Investing Activities.During fiscal 2003, fiscal 2002 and fiscal 2001, capital
expenditures were $29.9 million, $32.4 million and $56.5 million, respectively. During fiscal 2000 and fiscal 2001, we invested heavily in our facilities, including restructuring our manufacturing base and re-installing the equipment originally
located at our Harrisburg plant.



On December 23, 2003 an
amendment to the senior credit facility was approved by a majority of the lenders, which amended the related financial covenants to provide additional flexibility. One component of the financial covenants that was amended related to our permitted
capital expenditures per year. The amendment increased the permitted capital expenditures for 2004 and each fiscal year thereafter from $45.0 million to $50.0 million. The amended senior credit facility does not permit us to make capital
expenditures during any fiscal year in excess of the amount indicated:



|                                     |  |        |           
|------------------------------------ |  | ------ | ----------
|Fiscal Year                          |  | Amount
|2002                                 |  | $      | 60,000,000
|2003                                 |  | $      | 50,000,000
|2004 and each fiscal year thereafter |  | $      | 50,000,000



The indenture under
which we issued the notes does not permit us to make capital expenditures during any fiscal year in excess of the amount indicated:



|                                     |  |        |           
|------------------------------------ |  | ------ | ----------
|Fiscal Year                          |  | Amount
|2002                                 |  | $      | 70,000,000
|2003                                 |  | $      | 60,000,000
|2004 and each fiscal year thereafter |  | $      | 55,000,000



Under the senior
credit facility and the indenture, we may carry forward up to 50% of any unexpended amounts for capital expenditures to the next succeeding fiscal year. We may also make capital expenditures with the proceeds from sales of our assets. Actual capital
expenditures in fiscal 2003 were $29.9 million, which resulted in a capital carryforward of $10.1 million into fiscal 2004. Allowable capital expenditures in fiscal 2004, including the carryforward, amount to $60.1 million under the senior credit
facility and $70.1 million under the indenture. We project that our capital expenditures will be approximately $50.0 million in 2004. We believe that the limitations described above will permit us to carry out our planned capital expenditures during
2004 and each fiscal year thereafter.



Net cash used by
investing activities was $142.2 million for fiscal 2003. Of this amount, $112.3 million was used to acquire C&H Packaging, American Plastics and BemroseBooth. The remaining $29.9 million was related to capital expenditures for fiscal 2003. Of
this amount, $14.0 million was expended on capital projects approved prior to the end of fiscal 2002. The remaining $15.9 million was expended on capital projects approved in 2003. Significant capital expenditures in fiscal 2003 included $7.3
million spent on Project Venture.



Net cash used by investing
activities was $32.4 million for fiscal 2002. Of this amount, $11.3 million was expended on capital projects approved prior to the end of fiscal 2001. The remaining $21.1 million was expended on capital projects approved in 2002. Significant capital
expenditures in fiscal 2002 included $12.6 million spent on Project Venture and $4.2 million spent on a paper machine rebuild at West Carrollton mill.



Net cash used by investing activities of continuing operations was $321.5 million for the 2001 successor period. Of this amount, $6.7 million related to
various machinery and equipment capital expenditures. At the close of business on November 9, 2001, Paperweight Development Corp. completed the acquisition of Appleton Papers Inc. for a total cash purchase price of $314.8 million.



Net cash used by investing activities of continuing operations was $40.8
million for the 2001 predecessor period. Of this amount, $49.8 million related to various machinery and equipment capital expenditures, which was partially offset by $9.0 million of proceeds from the sale of the Harrisburg facility.



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Cash Flows from Financing Activities. On November 9, 2001, we entered into a $340 million senior
credit facility. The Senior Credit Facility comprised the following: a four-year credit facility of up to $75 million for revolving loans, including letters of credit; a four-year term loan of $115 million; and a five-year term loan of $150 million.
The Senior Credit Facility is unconditionally and jointly and severally guaranteed by Paperweight Development and WTA Inc., C&H Packaging Company Inc., American Plastics Company, Inc., American Real Estate Corporation, Rose Holdings Limited,
Bemrose Group Limited, The Henry Booth Group Limited, BemroseBooth Limited, HBGI Holdings Limited, Bemrose Security & Promotional Printing Limited and BemroseBooth USA Inc., each of which is a wholly-owned subsidiary of Appleton Papers.



From November 18, 2002 through April 1, 2003, our defined
leverage ratio was calculated at less than 2.00 to 1.00 but greater than or equal to 1.50 to 1.00 and, as a result, the interest rate on the $115 million senior secured note and the revolving credit facility was reduced to LIBOR plus 2.5% per annum.
From April 2, 2003 through May 15, 2003, our defined leverage ratio was calculated at less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 and, as a result, the interest rate was increased to LIBOR plus 3.0% per annum. From May 16, 2003
through August 19, 2003, our defined leverage ratio was calculated at less than 2.00 to 1.00 but greater than or equal to 1.50 to 1.00 and, as a result, the interest rate was decreased to LIBOR plus 2.5% per annum. On August 20, 2003, our defined
leverage ratio was calculated at less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 and, as a result, the interest rate was increased to LIBOR plus 3.0% per annum.



On April 18, 2003, an amendment to the senior credit facility was approved by a majority of the lenders that allowed us to
make acquisitions of $150 million in total over the life of the term loans, with no single acquisition totaling more than $60 million. In addition, the amendment allows for an increase in the revolving line of credit from $75 million to $100 million
should we need access to additional funds. It also allows us to repurchase and retire an additional $50 million of aggregate principal amount of our 12.5% Series B Senior Subordinated Notes due 2008.



On December 23, 2003, an amendment to the senior credit facility was approved
by a majority of the lenders which amends the related financial covenants to provide additional flexibility, allows for the establishment of a UK subsidiary, allows for Euro and British Sterling borrowings, classifies the acquisitions of American
Plastics, C&H Packaging and BemroseBooth as permitted investments, thereby preserving the $150 million limit for future acquisitions as permitted under the April 18, 2003 amendment, and increases the single acquisition limit from $60 million to
$75 million. In addition, the amendment also allowed for the refinancing discussed below.



Through June 5, 2002, the interest rate on borrowings under the $150 million term loan was LIBOR plus 4.25% per annum, subject to a minimum LIBOR rate of 2.5% per annum. On June 6, 2002, we refinanced the $112.4
million remaining principal amount and replaced it with similar debt carrying a reduced interest rate of LIBOR plus 3.25% per annum, not subject to a minimum LIBOR rate. As a result of this refinancing, $11.8 million of deferred debt issuance costs
were written off in a non-cash transaction as debt extinguishment expenses. The terms of this refinanced debt also allowed us to repurchase and retire up to $50.0 million of aggregate principal amount of our 12.5% Series B Senior Subordinated Notes
due 2008. In aggregate, actual principal of $50.0 million was purchased and retired during fiscal 2002. In December 2003, we refinanced the remaining $83.3 million of this debt and borrowed an additional $56.7 million with which to make the Bemrose
acquisition. This debt, which is similar to the previous debt, carries an interest rate of LIBOR plus 2.5%. As a result of this refinancing, $1.4 million of deferred debt issuance costs were written off in fiscal 2003 as debt extinguishment
expenses.



On December 14, 2001, we issued $250 million
aggregate principal amount of 12.5% Series A Senior Subordinated Notes due 2008, which were used to redeem in full, at par, the senior subordinated note due 2008 held by AWA as described in Note 12 of our fiscal 2003 Notes to Consolidated Financial
Statements. On June 12, 2002, we filed a Registration Statement on Form S-4 to register an offer with the Securities and Exchange Commission to exchange up to $250 million of our registered 12.5% Series B Senior Subordinated Notes due 2008 for any
and all of our outstanding 12.5% Series A Senior Subordinated Notes due 2008. The exchange offer closed on July 12, 2002. The entire outstanding principal balance of Series A notes was exchanged for Series B notes. During 2002, we paid a premium of
$1.8 million to purchase and retire $50.0 million in aggregate principal amount of our Series B notes.



The Series B notes are unsecured obligations of Appleton Papers, ranking subordinate in right of payment to all of our senior debt, and are
unconditionally and jointly and severally guaranteed by Paperweight Development and WTA Inc., C&H Packaging Company Inc., American Plastics Company Inc., American Real Estate Corporation, Rose Holdings Limited, Bemrose Group Limited, The Henry
Booth Group Limited, BemroseBooth Limited, HBGI Holdings Limited, Bemrose Security & Promotional Printing Limited and BemroseBooth USA Inc. Interest on the notes is payable semi-annually in June and December of each year. Prior to December 15,
2004, and after 100% application toward repayment of the senior credit facility, we may use proceeds of certain sales of our equity to redeem up to 35% of the original principal amount of the notes at a redemption price of 112.5% of their principal
amount, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date.



Except as described in the preceding paragraphs, the notes will not be redeemable at our option prior to December 15, 2005. On or after December 15, 2005,
we may redeem during the twelve-month period beginning on December 15 of the applicable year all or



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part of the notes at the redemption price of 106.25% in 2005, 103.125% in 2006, and 100% in 2007 and thereafter, plus accrued and unpaid interest and
liquidated damages, if any.



Both the Senior Credit Facility
and the notes contain affirmative and negative covenants. In general, the covenants contained in the Senior Credit Facility are more restrictive than those of the notes. Among other restrictions, the covenants contained in the Senior Credit Facility
require us to meet specified financial tests, including various debt and cash flow ratios, which become more restrictive over the term of the debt.



The Senior Credit Facility and notes also contain covenants, which, among other things, restrict our ability and the ability of our other guarantors of
the Senior Credit Facility and notes to incur liens; engage in transactions with affiliates; incur additional indebtedness; declare dividends or redeem or repurchase capital stock; make loans and investments; engage in mergers, acquisitions,
consolidations and asset sales; acquire assets, stock or debt securities of any person; make capital expenditures; terminate the S corporation status of Paperweight Development or the qualified subchapter S subsidiary status of its subsidiaries
eligible to elect such status; amend our debt instruments; and amend other agreements related to the acquisition.



Net cash provided by financing activities of continuing operations was $21.1 million in fiscal 2003. We used cash generated by operations to repay $41.3
million of term loans, all of which were mandatory principal repayments. In December 2003, we refinanced the remaining $83.3 million under the $150 million term loan and borrowed an additional $56.7 million with which to make the Bemrose
acquisition. During fiscal 2003, we borrowed $84.0 million on the revolving credit facility, of which $45.0 million was used to fund the April 30, 2003, acquisition of C&H Packaging and American Plastics. The remaining $39.0 million was used for
seasonal working capital needs. During fiscal 2003, $74.0 million was repaid on the revolving credit facility, leaving an outstanding balance of $10.0 million as of January 3, 2004.



During fiscal 2003, we received net proceeds of $13.4 million from the sales of Paperweight Development redeemable common
stock. Of this amount, the ESOP trustee purchased $4.0 million of stock at $18.58 per share with pre-tax deferrals made by employees from July 1, 2002 through December 28, 2002, $5.3 million of stock at $21.92 per share with pre-tax deferrals made
by employees from December 29, 2002 through June 29, 2003 and $4.1 million of stock at $22.42 per share with pre-tax deferrals made by employees from June 30, 2003 through January 3, 2004. During fiscal 2003, payments of $14.4 million were made to
redeem shares of Paperweight redeemable common stock related to employee requests for diversification, retirement or termination.



Net cash used by financing activities of continuing operations was $155.8 million in fiscal 2002. We used cash generated by operations to repay $113.7
million of term loans. Of this amount, $18.0 million was for mandatory principal repayments, while the remaining $95.7 million represented voluntary principal repayments, which we made in order to reduce future interest expense. In addition, we
purchased and retired $50.0 million of our Series B notes during fiscal 2002.



During fiscal 2002, we received net proceeds of $5.9 million from the sale of redeemable common stock. The ESOP trustee purchased these shares with pre-tax payroll deferrals made by employees from November 10, 2001
through June 30, 2002. Employees eligible to begin diversification redeemed approximately $0.3 million of Paperweight Development redeemable common stock.



Net cash provided by financing activities of continuing operations was $327.2 million for the 2001 successor period. Of this amount, $484.5 million
represented the net proceeds from the issuance of long-term debt, which was used to finance the acquisition of Appleton Papers and for the repayment of the $250 million senior subordinated note due 2008 held by AWA. Proceeds from the issuance of
Paperweight Development redeemable common stock of $106.8 million, or $104.7 million net of stock issuance costs, were also used to finance the acquisition of Appleton Papers. Finally, $7.4 million was paid to AWA related to the net proceeds from
the sale of the Harrisburg plant. Net cash used by financing activities of continuing operations was $21.5 million for the 2001 predecessor period. During this period, we used cash generated by operations and loan proceeds of $159.1 million from an
AWA affiliate to repay $150.0 million of external debt and $45.7 million of loans from affiliated companies.



Disclosure About Critical Accounting Policies



We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). This requires us to make estimates and assumptions
that affect reported amounts and related disclosures. Actual results could differ from those estimates. Our accounting policies are disclosed in our fiscal 2003 Notes to Consolidated Financial Statements. The following policies are considered by us
to be the most critical in understanding the judgments that are involved in the preparation of the consolidated financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows. Management
has discussed the development, selection and disclosure of these estimates and assumptions with the audit committee and board of directors.



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Environmental. Accruals for losses associated with environmental obligations are recorded when it
is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing legislation, regulatory action and remediation technologies. Accruals are discounted to reflect the time value of money if
the aggregate amount of the liability and the amount and timing of cash payments are fixed or reliably determinable. The process of estimating environmental cleanup liabilities is complex and dependent primarily on the nature and extent of
historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required, the outcome of discussions with regulatory agencies and, at multi-party sites,
other PRPs. In future periods, new laws or regulations, advances in cleanup technologies and additional information about the ultimate cleanup remedy that is used could significantly change our estimates. Accordingly, we cannot give any assurances
that our eventual environmental cleanup costs and liabilities will not exceed the amount of our current reserve.



Redeemable Common Stock. Redeemable equity securities are required to be accreted (i.e., increased) so the amount on the balance sheet reflects the
estimated amount redeemable at the earliest redemption date based upon the redemption value at each period end. We accreted the redeemable common stock by $14.2 million for the year ended January 3, 2004. Redeemable common stock is being accreted up
to the earliest redemption date based upon our estimated fair market value of the redeemable common stock as of January 3, 2004. We estimate that the earliest redemption date occurs when the participant reaches 55 years of age and has 10 years of
participation in the KSOP. At that point, the participant has the right to make diversification elections for a period of six years. The fair value of redeemable common stock is determined by an independent, third party appraiser selected by the
ESOP Trustee as required by law and the ESOP. Based upon the estimated fair value of the redeemable common stock currently outstanding, an ultimate redemption amount of approximately $283 million has been determined. The accretion is being charged
to retained earnings because redeemable common stock is the only class of shares outstanding.



Restructuring. Charges related to involuntary employee termination benefits are recognized in the period managements plan of termination meets all of the following criteria and has been communicated to
employees: (1) management, having the authority to approve the action, commits to a plan of termination; (2) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected
completion date; (3) the plan establishes the terms of the benefit arrangement, including the benefits employees will receive upon termination; and (4) actions required to complete the plan indicate that it is unlikely that significant changes to
the plan will be made or that the plan will be withdrawn.



The
timing of recognition and related measurement of a liability for one-time termination benefits depends on whether employees are required to render service until they are terminated in order to receive the termination benefits and, if so, whether
employees will be retained to render service beyond a minimum retention period. If employees are not required to render service until they are terminated in order to receive the termination benefits or if employees will not be retained to render
service beyond the minimum retention period, a liability for the termination benefits is recognized and measured at its fair value at the communication date. If employees are required to render service until they are terminated in order to receive
the termination benefits and will be retained to render service beyond the minimum retention period, a liability for the termination benefits shall be measured initially at the communication date based on the fair value of the liability as of the
termination date. The liability is recognized ratably over the future service period.



A liability for costs to terminate a contract before the end of its term is recognized and measured at its fair value when we terminate the contract in accordance with the contract terms. A liability for costs that
will continue to be incurred under a contract for its remaining term without economic benefit to us is recognized and measured at its fair value when we cease using the right conveyed by the contract. A liability for other costs associated with an
exit or disposal activity is recognized and measured at its fair value in the period in which the liability is incurred. The ultimate costs associated with these termination and exit activities may differ from original estimates.



Income Taxes. In conjunction with the acquisition of Appleton Papers,
Paperweight Development elected to be treated as a subchapter S corporation and elected to treat its eligible subsidiaries, including Appleton Papers, as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state income tax
purposes. As a result of these elections, we do not expect to incur any future U.S. income tax liability and we expect to incur minimal state income tax liabilities. The American Plastics and C&H Packaging subsidiaries acquired in 2003 are
eligible for such treatment while BemroseBooth, a company registered in the U.K. and subject to U.K. Inland Revenue tax laws, is not eligible for treatment as a qualified subchapter S subsidiary and as a result we will incur a foreign tax liability.
Our current income tax liability consists of non-indemnified liabilities for LIFO recapture taxes, our 50% share for adverse tax audits for amounts between $5 million and $10 million related to various C corporation tax years prior to the closing of
the acquisition and our current year tax provision for BemroseBooth. Currently, all U.S. federal C corporation tax years are closed, while various Canadian and state C corporation tax years remain open. All other amounts related to tax exposures for
C corporation tax years are fully indemnified by AWA; however, any adverse tax audits that have been indemnified by AWA must first be funded with tax refunds we have received.



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Inventories. We value product inventories primarily at the lower of cost or market. Cost is
determined using the last-in, first-out, or LIFO, method for substantially all finished goods, work in process and raw materials. Stores and spare parts inventory is valued at average cost and other inventory is valued using the first-in, first-out,
or FIFO, method. Valuing inventories at the lower of cost or market requires the use of estimates and judgment relating to excess and obsolete inventory. Any actions taken by our customers that could impact the value of our inventory are considered
when determining the lower of cost or market valuations.



Accounts Receivable. We value accounts receivable net of an allowance for uncollectible accounts. This allowance is based on our estimate of the portion of the receivables that will not be collected in the future. However, the
ultimate collectibility of a receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without advance warning.



Goodwill and Other Intangible Assets.Effective December 30, 2001, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill is no longer amortized; however it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We performed impairment
reviews for our Security and Performance Packaging business units using a fair value method based on managements judgments and assumptions. The fair value represents the amount at which a business unit could be bought or sold in a current
transaction between willing parties on an arms length basis. In estimating the fair value, we use multiples of earnings based on the average of historical published multiples of earnings of comparable entities with similar operations and economic
characteristics. The estimated fair value is then compared with the carrying amount of the business units, including recorded goodwill. The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated
fair value. The impairment testing performed by us at January 3, 2004, indicated that the estimated fair value of our Security and Performance Packaging business units exceeded their corresponding carrying amounts, including recorded goodwill, and
as such, no impairment existed at that time.



Other intangible
assets with definite lives continue to be amortized over their estimated useful lives and are tested for impairment when events or changes in circumstances indicate that the asset might be impaired. Indefinite lived intangible assets, which are not
amortized, are also subject to annual impairment testing. The impairment testing performed by us at January 3, 2004, indicated that the estimated fair value of our indefinite lived intangible assets exceeded their corresponding carrying amounts, and
as such, no impairment existed at that time.



A considerable
amount of management judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of each business unit and the respective indefinite lived intangible assets. While we believe our judgments and
assumptions were reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required.



Revenue Recognition.Revenue is recognized when all of the following criteria are met: persuasive evidence of a selling arrangement exists; the
sales price to the customer is fixed; collectibility is reasonably assured; and title has transferred to the customer. Generally, these criteria are met at the time of shipment. Estimated costs for sales incentives, discounts and sales returns and
allowances are recorded as sales reductions in the period in which the related revenue is recognized. Shipping and handling fees are reflected in net sales and shipping and handling costs are reflected in cost of sales.



Employee Benefit Plans. We provide a range of benefits to our
employees and retired employees, including pensions and postretirement healthcare. The determination of our obligation and expense for pension and other postretirement benefits, such as retiree healthcare and life insurance, is dependent on our
selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others and where applicable, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation
and healthcare costs. The expected long-term rate of return for pension assets is based on historical returns for the different asset classes held by our plan and our asset allocation. The discount rate is based on market rates for long-term,
high-quality corporate bonds. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally
affect our recognized expense and recorded obligation in such future periods. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. Based on information
provided by our independent actuaries and other relevant sources, we believe that the assumptions used are reasonable. Significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and
other postretirement obligations and our future expense. To develop the expected long-term rate of return on assets assumptions, a building block approach was utilized starting with an inflation expectation and adding an expected real return to
arrive at a long-term nominal expected return for each asset class. Long-term expected real returns are derived in the context of the advisors future expectations for the U.S. Treasury real yield curve. Based on the assumptions and methodology
described above, we have selected 9.0% for 2003 and anticipate using 8.25% for 2004 as our long-term rate of return on assets assumptions.



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Additional disclosures concerning liquidity and capital resources, including off-balance sheet
arrangements.



Liquidity Disclosures.As disclosed
above, we entered into a $340 million senior credit facility and issued $250 million in aggregate principal amount of senior subordinated notes in conjunction with the acquisition of Appleton Papers. The senior credit facility and the indenture
require us to comply with affirmative and negative covenants. In general, the covenants contained in the senior credit facility are more restrictive than those of the indenture. Among other restrictions, the covenants contained within the senior
credit facility require us to meet specified financial tests, including various debt and cash flow ratios, which become more restrictive over the term of the loans. If we default on any of these provisions, it could require the repayment of the
amounts outstanding, which were approximately $385.4 million as of January 3, 2004. Based on managements expectations for 2004, we anticipate that we will be able to comply with all covenants and other requirements set forth in the senior
credit facility and the indenture.



We are not aware of
circumstances that could reasonably be expected to impair our ability to continue to engage in our operations in the future.



We believe that the following factors could reasonably be given significant weight in the determination of our credit rating or could otherwise adversely
affect our ability to raise short-term and long-term financing:



| |  | our highly leveraged balance sheet;
| | - | -----------------------------------



| |  | the declining market for our carbonless paper;
| | - | ----------------------------------------------



| |  | an actual rate of decline in the market for our carbonless paper that may be greater than the rate projected by us;
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | our customer concentration; and
| | - | -------------------------------



| |  | our reliance on a small number of suppliers for a significant portion of our raw materials.
| | - | -------------------------------------------------------------------------------------------



Guarantees of Debt or Other Commitments to Third Parties.We do not have any significant guarantees of third party
debt or other commitments to third parties.



Written Options
on Non-Financial Assets (for example, real estate puts). We do not have any written options on non-financial assets.



Off-Balance Sheet Arrangements.We had no arrangements or other relationships with unconsolidated entities or other persons that are reasonably
likely to materially affect liquidity or the availability of, or requirements for, capital resources at January 3, 2004.



Disclosures about Contractual Obligations and Commercial Commitments. A summary of our significant contractual obligations and other commercial
commitments as of January 3, 2004 is as follows:



|                                      |  |                       |         |                 |   |           |  |           |         |              |   |         |  |   |        
|------------------------------------- |  | --------------------- | ------- | --------------- | - | --------- |  | --------- | ------- | ------------ | - | ------- |  | - | -------
|                                      |  | Payment Due by Period
|Contractual Obligations               |  | Total                 |         | LessThan 1 Year |   | 1-3 Years |  | 4-5 Years |         | After 5Years
|                                      |  | (in thousands)       
|Long-Term Debt                        |  | $                     | 558,102 |                 | $ | 31,350    |  | $         | 145,402 |              | $ | 199,958 |  | $ | 181,392
|Capital Lease Obligations             |  |                       | 3,922   |                 |   | 418       |  |           | 994     |              |   | 1,199   |  |   | 1,311  
|Operating Leases                      |  |                       | 22,450  |                 |   | 8,094     |  |           | 10,784  |              |   | 2,582   |  |   | 990    
|Unconditional Purchase Obligations(1) |  |                       | 46,400  |                 |   | 17,400    |  |           | 21,200  |              |   | 7,200   |  |   | 600    
|Other Long-Term Obligations(2)        |  |                       | 132,896 |                 |   | 8,683     |  |           | 10,513  |              |   | 33,551  |  |   | 80,149 
|                                      |  |                       |         |                 |   |           |  |           |         |              |   |         |  |   |        
|Total Contractual Cash Obligations    |  | $                     | 763,770 |                 | $ | 65,945    |  | $         | 188,893 |              | $ | 244,490 |  | $ | 264,442
|                                      |  |                       |         |                 |   |           |  |           |         |              |   |         |  |   |        



|(1) | Represents contractual arrangements for the purchase of raw materials with various suppliers.
|--- | ---------------------------------------------------------------------------------------------



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|(2) | Represents obligations for pension, postretirement health benefits, deferred compensation payments and our $25 million share of the Lower Fox River costs.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



In addition to the contractual obligations
listed above, it will also be necessary for us to use cash to satisfy our repurchase obligations related to the ESOP. The following table outlines the potential repurchase liability for the next five years based on managements assumptions,
developed in conjunction with the ESOP administrator, related to participant death, retirement, diversification requests, employment termination and changes in share valuation.



|                                     |  |                                             |        |                 |   |           |  |           |        |  |   |       
|------------------------------------ |  | ------------------------------------------- | ------ | --------------- | - | --------- |  | --------- | ------ |  | - | ------
|                                     |  | Estimate of Potential Commitment per Period
|Other Commitments                    |  | Total                                       |        | LessThan 1 Year |   | 1-3 Years |  | 4-5 Years
|                                     |  | (in thousands)                             
|Estimated Share Repurchase Liability |  | $                                           | 99,478 |                 | $ | 26,507    |  | $         | 36,793 |  | $ | 36,178



We expect that a
portion of this share repurchase liability will be funded from new deferrals from employees into the Company Stock Fund. Employees may defer, on a pre-tax basis, a percentage of their pay in an amount equal to between 2 percent and 50 percent of
their annual compensation. Participants have the option of directing their deferrals to the Vanguard Fund, the Company Stock Fund, or a combination of both. We believe that new deferrals from employees into the Company Stock Fund for the five-year
period presented above will aggregate approximately $45 million, which would reduce and defer the repurchase liability set forth in the table above.



Deferrals directed to the Company Stock Fund accumulate in a short-term interest bearing account within the ESOP trust until the next valuation date, June
30th or December 31st. At that time, these deferrals, and the interest earned on these amounts, are used to purchase shares based upon the price of a share of Paperweight Development common stock on the valuation date preceding or following the date
on which the participant made the deferrals, whichever is lower.



Disclosures About Certain Trading Activities that Include Non-Exchange Traded Contracts Accounted for at Fair Value. We do not engage in any trading activities that include non-exchange traded contracts accounted for at fair value.



Disclosures About Effects of Transactions with Related and
Certain Other Parties. We disclose the effects of transactions with related parties in Notes 5 and 7 of the Notes to Consolidated Financial Statements. There were no other significant transactions with related and certain other parties.



New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143, which was effective for fiscal years beginning after June 15, 2002, requires entities to record the fair value of a legal liability for an asset retirement
obligation in the period in which it is incurred. When the liability is recorded, the entity capitalizes the cost of the liability by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present
value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. SFAS No. 143 was
effective for us in the first quarter of fiscal 2003 and did not have any effect on our financial position, results of operations or cash flows.



In April 2002, SFAS No. 145, Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections was
issued, which mainly addresses the accounting and disclosure related to early extinguishment of debt transactions as well as other technical corrections. The provisions of this statement were effective for us for all transactions consummated after
May 15, 2002. Pursuant to this pronouncement, we recorded debt extinguishment expenses of $1.4 million and $11.8 million within income from continuing operations, as a result of refinancing a portion of the senior credit facility during the fourth
quarter of 2003 and the second quarter of 2002, respectively. The adoption of SFAS No. 145 also resulted in us reclassifying our fiscal 2001 Predecessor Period debt extinguishment expenses of $10.4 million from an extraordinary item to a component
of earnings from continuing operations.



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In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS
No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance
that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 was effective for exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not had a material impact on our financial position, results of operations or cash flows.



In January 2003, the FASB issued FASB interpretation No.
(FIN) 46, Consolidation of Variable Interest Entities. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable
interest entities. FIN 46 explains the concept of a variable interest entity and requires consolidation by the primary beneficiary where there is a controlling financial interest in a variable interest entity or where the variable interest entity
does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB released a revised version of FIN 46 (hereafter referred to as FIN 46R) clarifying
certain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. FIN 46R applies immediately to variable interest entities created by us after December 31, 2003, and applies for the first reporting period
beginning after December 15, 2004 to variable interest entities in which we hold a variable interest that was acquired before January 1, 2004. We are currently evaluating the impact of this statement.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics
of both liabilities and equity. In accordance with the standard, a financial instrument that embodies an obligation for the issuer is required to be classified as a liability (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position (FSP) No.
150-4 Issuers Accounting for Employee Stock Ownership Plans under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which concluded that ESOP shares or
freestanding agreements to repurchase those shares are not within the scope of SFAS No. 150.



During December 2003, the FASB revised SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits, to require additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. These disclosure requirements are effective immediately for us, except for estimated future benefit payments, which will be effective in
fiscal 2004. This statement also requires interim period disclosure of the components of net periodic benefit cost, and if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund
pension plans and other postretirement benefit plans. These interim disclosures will be effective in the first quarter of 2004.



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------



We are exposed to market risk from changes in interest rates, foreign currency exchange rate fluctuations and commodity prices. To reduce these risks, we
selectively use financial instruments and other proactive risk management techniques.



Interest Rate Risk. We are exposed to interest rate volatility with regard to our existing senior credit facility. Primary exposure includes movements in the U.S. prime rate and London Interbank Offer Rate, or
LIBOR. Borrowings under the senior credit facility bear interest at LIBOR plus a spread.



In February 2002, we entered into an interest rate protection cap under which LIBOR was capped at 6% plus the spread, for a cost of $0.2 million. The rate protection was for two years and covered, as of January 3,
2004, over 35% of our borrowings under the senior credit facility. The interest rate protection cap expired on February 9, 2004. We are no longer required, under the terms of the senior credit facility, to provide interest rate protection for
periods subsequent to February 2004. We believe any reasonably likely near-term shift in interest rates will not have a material effect on our consolidated financial position, statement of operations or cash flows. A one-percent change in LIBOR
would have an impact of $1.3 million on fiscal 2004 financial results for the borrowings under the senior credit facility.



Currency Risk. We have manufacturing, sales and distribution facilities in the United Kingdom and a sales organization and distribution facility in
Canada and thus make investments and enter into transactions denominated in foreign currencies. Although the vast majority of our international sales arise from the sales efforts of our United States subsidiaries and are denominated in U.S.



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dollars, with the acquisition of BemroseBooth in December 2003, we will be more exposed to transactional and translational foreign exchange risk in the
coming years.



Regarding transactional foreign exchange risk,
we enter into limited foreign exchange contracts to reduce the variability of the earnings and cash flow impacts of nonfunctional currency denominated receivables between our Canadian distribution center and its customers located outside the United
States. Gains and losses resulting from hedging instruments offset the foreign exchange gains or losses on the underlying assets being hedged. The maturities of these forward exchange contracts generally coincide with the settlement dates of the
related transactions. These forward exchange contracts are designated as cash flow hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. At January 3, 2004 we had outstanding $13.3 million
of foreign exchange contracts hedging underlying accounts receivable. A 10% appreciation or depreciation in the Canadian dollar at January 3, 2004 would not have a significant impact on our consolidated balance sheet, consolidated statement of
operations or our consolidated statement of cash flows. This is because any gains or losses under foreign exchange contracts hedging accounts receivable balances would be offset by equal gains or losses on the underlying receivables.



Our primary translation exchange risk exposure at January 3, 2004, was with
the British pound. Amounts invested in non-U.S. based subsidiaries are translated into U.S. dollars at the exchange rate in effect at year-end. The resulting translation adjustments are recorded in accumulated other comprehensive loss as cumulative
translation adjustments. The cumulative translation adjustment component of accumulated other comprehensive loss at January 3, 2004, is $1.2 million. Using year-end exchange rates, the total amount invested in foreign operations at January 3, 2004
was approximately $62.7 million for which no hedges have been established.



Commodity Prices. We are subject to the effects of changing raw material costs caused by movements in underlying commodity prices. We are exposed to fluctuating market prices for commodities, including pulp,
chemicals and basestock. We have established programs to manage our exposure to commodity prices through effective negotiations with suppliers. As listed within our contractual obligations, we enter into contracts with our vendors to lock in
commodity prices at various times and for various periods to limit our near-term exposure to fluctuations in raw material prices.



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



This report contains forward-looking statements. The words will, believes, anticipates, intends,
estimates, expects, projects, plans 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 our strategy, future operations, future financial position, estimated revenues, projected costs, prospects, plans and objectives of management and events or developments that we expect or anticipate 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 our 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 Risk Factors below. We disclaim any obligation to
update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.



RISK FACTORS



We are subject to substantial costs and potential liabilities relating to environmental regulation and litigation.



We are subject to substantial regulation by various federal, state and local
authorities concerned with the impact of the environment on human health, the limitation and control of emissions and discharges into the air, ground and waters, the quality of ambient air and bodies of water and the handling, use and disposal of
specified substances. Financial responsibility for the cleanup or other remediation of contaminated property or for natural resource damages can extend to previously owned or used properties, waterways and properties owned by unrelated companies or
individuals, as well as properties currently owned and used by us, regardless of whether the contamination is attributable entirely to prior owners. As described in the following risk factor, we have been identified as a potentially responsible
party for remediation and alleged natural resource damages related to the Lower Fox River and Green Bay system, which we refer to as the Lower Fox River. In addition, we make capital expenditures and incur operating expenses for cleanup obligations
and other environmental matters arising from our daily operations.



Including the Lower Fox River, we have approximately $109.1 million of accrued liabilities as of January 3, 2004 for estimated or anticipated liabilities and legal and consulting costs relating to environmental matters arising from past
operations. We also have



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approximately $86.8 million of indemnification receivables from our former parent company, AWA, as of January 3, 2004. While the accrued liabilities reflect
our current estimate of the cost of these environmental matters, the amount that we have accrued may be inadequate. In addition, we may be named as a potentially responsible party at other sites in the future and the costs associated with such
future sites may be material. We expect environmental laws and regulations and the interpretation and enforcement of those laws and regulations to become increasingly stringent and to further limit emission and discharge levels and to increase the
likelihood and cost of environmental cleanups and related activities. All of these factors are likely to increase our operating expenses, require continuing capital expenditures and adversely affect the operating flexibility of our manufacturing
operations and may require indeterminable and significant additional expenditures in connection with such compliance.



We have been named as a potentially responsible party related to the Lower Fox River.



We have been named by the United States Environmental Protection Agency, or EPA, as a potentially responsible
party, or PRP, under the Comprehensive Environmental Response Compensation and Liability Act. We have been named a PRP because of discharges of polychlorinated biphenyls, or PCBs, into the Lower Fox River from our Appleton Plant in the 1950s,
1960s and 1970s and because of discharges from the Appleton Coated paper mill in Combined Locks, Wisconsin, which we owned from 1978 to 2000. We could be liable for a significant portion of the costs of remediating the PCBs that remain in the Lower
Fox River. These costs could be very large. In October 2001, the DNR and EPA released a report in which they estimated total remediation costs, which we would share with other PRPs, to be $308 million. In a December 2002 update to its estimates, the
DNR estimated the total remediation costs to be $333 million over a 7 to 18 year period. In 2003, the DNR and EPA issued two Record of Decisions (RODs) covering all five segments of the Lower Fox River, which includes Green Bay. The RODs provide for
a combination of dredging and monitored natural recovery and contain revised estimates of total costs for remediation of $400 million over a 7 to 18 year time period. In addition to remediation, various government agencies are also asserting that we
and the other PRPs are liable for natural resource damages caused by the PCBs. In October 2000, the U.S. Fish & Wildlife Service estimated that total natural resource damages would be in a range between $176 million to $333 million. At this
time, we cannot precisely estimate our total liability for the Lower Fox River because we do not know how much the remedial actions and natural resource damages may cost or how large our share of those costs will be. Our liability could be
substantial. Because the issuance of the two RODs greatly reduces the uncertainty about the remedy that will be implemented, we recorded an $80.8 million environmental liability for the Lower Fox River in fiscal 2002 and an additional $15.6 million
environmental liability for the Lower Fox River in fiscal 2003, before indemnification by our former parent. Although we believe our recorded environmental liability reflects a reasonable estimate of our liabilities associated with the Lower Fox
River based on the RODs, the actual amount of liabilities associated with the Lower Fox River could prove to be significantly larger than our recorded environmental liability. The liabilities associated with the Lower Fox River are discussed in
greater detail under the heading Item 1. BusinessEnvironmental MattersLower Fox River.



Our former parent, AWA, may fail to comply with its indemnification obligations related to the acquisition of our company.



Pursuant to the purchase agreement relating to the acquisition of our company, AWA and two of its affiliates have agreed to
indemnify us for certain losses resulting from:



| |  | inaccuracies in the representations and warranties made by AWA and its affiliates;
| | - | ----------------------------------------------------------------------------------



| |  | the breach or nonperformance of AWAs or its affiliates covenants and other agreements;
| | - | ----------------------------------------------------------------------------------------



| |  | liabilities related to the businesses of Newton Falls, Inc., Appleton Coated LLC, Appleton Recycled Fibers, Inc., Appleton Capital Inc., Appleton Leasing LLC, Arjo Wiggins
Investments Inc., Paperhub.com, Inc. and several other of our former subsidiaries;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | ownership of the real property on which the Harrisburg plant and distribution center are located and environmental matters at this location prior to our sale of the Harrisburg plant
to a third party; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | other designated liabilities.
| | - | -----------------------------



AWA has also, subject to certain limitations, agreed to indemnify us for specified environmental liabilities relating to the contamination of the Lower Fox River. In
addition, AWA has agreed to indemnify us against certain taxes, including taxes we may be required to pay in respect of periods prior to the closing of the acquisition. AWAs indemnification obligations are discussed in greater detail under the
heading Item 1. BusinessEnvironmental MattersLower Fox RiverAWA Indemnification.



If the potential matters for which we are entitled to receive indemnification from AWA and its affiliates result in significant liabilities for us, and
for any reason AWA and/or its affiliates are unable or unwilling to honor these indemnification obligations, we



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could be required to pay for these liabilities ourselves, which could have a material adverse effect on our cash flow, our ability to fund or expand our
operations and our ability to repay our existing and future indebtedness.



We incurred a significant amount of debt to complete the acquisition and, as a result, we are operating as a highly leveraged company.



To complete our acquisition of our company, it was necessary for us to incur a substantial amount of indebtedness. Our consolidated operating company
debt and deferred payment obligation was approximately $562 million at January 3, 2004.



This large amount of indebtedness could:



| |  | make it more difficult for us to satisfy our obligations with respect to the senior credit facility and the Series B senior subordinated notes;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working
capital, capital expenditures, acquisitions, research and development efforts and other general corporate activities;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate activities;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | make it more difficult for us to satisfy our obligations to our creditors and, if we fail to comply with the requirements of our indebtedness, could result in an event of default
under the agreements related to our indebtedness;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limit our ability to successfully withstand a downturn in our business or the economy generally; and
| | - | ----------------------------------------------------------------------------------------------------



| |  | place us at a competitive disadvantage against other less leveraged competitors.
| | - | --------------------------------------------------------------------------------



Furthermore, although our ability, Paperweight Developments ability and the ability of substantially all of our subsidiaries to borrow
money is restricted by the terms of the senior credit facility, the indenture and the deferred payment obligation to one of AWAs affiliates, it may be possible for us and our guarantors to incur even more debt and, if we and our guarantors
were to do so, these risks could intensify.



Our ability to service our
debt is dependent on our future operating results and we cannot be sure that we will be able to meet our debt obligations as they come due.



Our ability to meet our payment obligations and to comply with the financial covenants contained in the agreements relating to our indebtedness is subject
to a variety of factors, including changes in:



| |  | demand for and selling prices of our products;
| | - | ----------------------------------------------



| |  | competition;
| | - | ------------



| |  | costs of raw materials and operating costs;
| | - | -------------------------------------------



| |  | the decline rate in sales of carbonless paper products;
| | - | -------------------------------------------------------



| |  | interest rate levels;
| | - | ---------------------



| |  | our status as a qualified subchapter S subsidiary;
| | - | --------------------------------------------------



| |  | environmental regulations; and
| | - | ------------------------------



| |  | general economic conditions.
| | - | ----------------------------



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We may not be able to generate sufficient cash flows to meet our payment obligations under the agreements relating to our
indebtedness. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make the required payments on our indebtedness, then we may be required to refinance our indebtedness. We may not be able to refinance our
indebtedness on terms that are acceptable to us or at all. In the absence of a refinancing, our lenders would be able to accelerate the maturity of our indebtedness, which could cause us to default under our other indebtedness, dispose of assets or
declare bankruptcy.



Compliance with the covenants relating to our
indebtedness may limit our operating flexibility.



The
agreements relating to our indebtedness, among other things, prohibit or restrict our ability to:



| |  | pay dividends on or purchase stock;
| | - | -----------------------------------



| |  | repay subordinated indebtedness;
| | - | --------------------------------



| |  | make investments;
| | - | -----------------



| |  | acquire other companies;
| | - | ------------------------



| |  | borrow additional money;
| | - | ------------------------



| |  | use assets as security in other transactions;
| | - | ---------------------------------------------



| |  | sell assets or merge with or into other companies;
| | - | --------------------------------------------------



| |  | make capital expenditures;
| | - | --------------------------



| |  | enter into sale and leaseback transactions;
| | - | -------------------------------------------



| |  | sell equity interests in our subsidiaries;
| | - | ------------------------------------------



| |  | amend particular agreements relating to our transaction with AWA and the ESOP;
| | - | ------------------------------------------------------------------------------



| |  | engage in new lines of business; and
| | - | ------------------------------------



| |  | take, or fail to take, any actions that would cause us to lose our S corporation status.
| | - | ----------------------------------------------------------------------------------------



These limitations, together with our highly leveraged position, could limit our ability to finance our operations with debt
or equity in the future. In addition, these restrictions and our leveraged position may restrict our ability to respond to competitive market conditions, to make capital expenditures beyond those permitted in the agreements relating to the
indebtedness or to take advantage of other business opportunities, including making acquisitions. This loss of operating flexibility may have a material adverse affect on our ability to achieve our financial objectives or our ability to sustain our
current levels of revenue, earnings and cash flow.



Terrorism, acts of
war or international conflicts could negatively affect our business and financial condition.



Acts or threats of war or terrorism, international conflicts, including ongoing military operations in Iraq and Afghanistan, and the actions taken by the
U.S. and other governments in response to such events could negatively impact general business and economic conditions in the U.S. and abroad. If terrorist activity, acts of war or other international hostilities cause an overall economic decline,
our financial condition and operating results could be materially adversely affected. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security and other
actual or potential conflicts or acts of war, including conflict in the Middle East, have created many economic and political uncertainties that could adversely impact our business and results of operations in ways that cannot presently be
predicted.



The market for the primary product in our coated
solutions business, carbonless paper, may decline more rapidly than we anticipate.



Our coated solutions business, of which the primary product is carbonless paper, currently represents our primary business and accounted for 81% of our net sales in fiscal 2001, 79% of our net sales in fiscal 2002 and
72% of our net sales in fiscal 2003. Our total sales volume of carbonless paper products declined 12.9% from fiscal 2000 to fiscal 2001, 7.9% from fiscal 2001 to fiscal 2002



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and 9.0% from fiscal 2002 to fiscal 2003. We believe the U.S. carbonless market is declining as users switch to alternative modes of communication and
technologies that do not use multipart business forms. We assume that the decline in our sales volume of carbonless paper products will continue at approximately 8% compounded annually for the next five years. If the decline in our sales of
carbonless paper products accelerates, then our operating efficiency, profitability and cash flow may be materially adversely affected.



We may be unable to develop and introduce new and enhanced products.



Our success will depend in large part on our ability to use our existing technical and manufacturing capabilities and
knowledge in the development and introduction of new value-added products targeted at new markets and customers. If we are unable to utilize our capabilities, or properly identify and address the evolving needs of targeted customers and markets, our
ability to capture and develop new business opportunities will be limited. In addition, if the revenue and profits generated by new products are not sufficient to replace the anticipated decline in revenue and profits generated by carbonless
products, then our business would suffer.



The development of
new products can be very difficult and requires high levels of innovation. The development process can also be lengthy and costly. To date, our new products have yet to generate significant revenues or profits. The success of our new product
offerings will depend on several factors, including our ability to:



| |  | accurately anticipate and properly identify our customers needs and industry trends;
| | - | -------------------------------------------------------------------------------------



| |  | price our products competitively;
| | - | ---------------------------------



| |  | manufacture our products at a competitive cost;
| | - | -----------------------------------------------



| |  | innovate, develop and commercialize new products and applications in a timely manner;
| | - | -------------------------------------------------------------------------------------



| |  | differentiate our products from our competitors products;
| | - | ----------------------------------------------------------



| |  | hire and retain personnel specializing in new product development; and
| | - | ----------------------------------------------------------------------



| |  | use our research and development budget efficiently.
| | - | ----------------------------------------------------



The risks associated with acquisitions could have a material adverse effect on us.



Our strategy for growth includes strengthening and expanding our presence in certain market segments and broadening our
product offerings through acquisitions, as evidenced by the two acquisitions we completed in fiscal 2003. Acquisitions are subject to potential problems and inherent risks, including:



| |  | difficulties in identifying, financing and completing viable acquisitions, especially in light of the restrictions on acquisitions imposed by our debt covenants and our inability to
use our common stock as consideration;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | difficulties in integrating the acquired company, retaining the acquired companys customers and achieving the expected benefits of the acquisition, such as expected revenue
increases, cost savings and increases in geographic or product presence, in the desired time frames, if at all;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the diversion of managements attention away from current operations;
| | - | ---------------------------------------------------------------------



| |  | the loss of key employees of the acquired company;
| | - | --------------------------------------------------



| |  | the assumption of undisclosed liabilities or known liabilities not fixed as to their ultimate amount; and
| | - | ---------------------------------------------------------------------------------------------------------



| |  | in the event of a foreign-based acquisition, exposure to new market dynamics, a different regulatory environment and various cultural differences.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



Financing acquisitions could require us to use substantial cash or other
liquid assets or to incur additional debt. In such cases, we could become more susceptible to default under our outstanding debt obligations, an economic downturn and competitive pressures. If we are unable to overcome the potential problems and
inherent risks related to our acquisition strategy, then our business, operating results, financial condition and future growth prospects could suffer.



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We currently rely on a relatively small number of customers to produce a significant amount of our net sales from
coated solutions and thermal and advanced technical products.



Our five largest customers for coated solutions products accounted for approximately 52% of coated solutions net sales in fiscal 2001, approximately 51% of coated solutions net sales in fiscal 2002 and approximately 50% of coated solutions
net sales in fiscal 2003. Our five largest customers for thermal and advanced technical products accounted for approximately 57% of thermal and advanced technical products net sales in fiscal 2001, approximately 52% of thermal and advanced technical
products net sales in fiscal 2002 and approximately 51% of thermal and advanced technical products net sales in fiscal 2003. Many of our customers are under no obligation, contractual or otherwise, to purchase our products in the future.
Furthermore, some of our customers have become insolvent or financially distressed in recent years. If we lose one or more of our significant customers (e.g., to a competitor or as a result of their being acquired by a customer of a competitor) or
any of our significant customers experiences financial difficulty, then our operating efficiency, earnings and cash flow could be materially adversely affected.



We currently rely on a small number of third parties to supply several of the key raw materials we use to produce our products.



Our business depends upon the availability of key raw materials, including
basestock and certain chemicals. In fiscal 2003, we purchased from external suppliers approximately $127 million of basestock. We relied on four external suppliers for approximately 98% of the basestock we purchased in fiscal 2003 to produce our
coated solutions products. We relied on a single external supplier for approximately 75% of the basestock we purchased in fiscal 2003 to produce our thermal and advanced technical products. For some of the key chemicals we use in our products we
rely on one or two suppliers. If there is a disruption in the supply of our raw materials, including the chemicals that we need to produce our coated solutions and thermal and advanced technical products, then we may be required to purchase these
raw materials from alternative sources, which may result in a significant increase in our operating costs. Included in these increased costs would be development costs associated with qualifying new raw materials and suppliers. We may not be able to
procure carbonless basestock, thermal basestock or our other raw materials from alternative suppliers in the future in amounts sufficient to meet our needs or at prices consistent with historical prices. The unavailability of alternative suppliers
could subject us to significant cost increases and manufacturing delays and could have a material adverse effect on our operations, earnings and cash flow.



We have competitors in our various markets and we may not be able to maintain prices and margins for our products.



We face strong competition from companies in all four of our business
segments. Our competitors vary in size and the breadth of their product offerings and some of our competitors have significantly greater financial, technical and marketing resources than we do. In addition, the non-compete agreement we have with our
former parent company, AWA, expires on November 9, 2004, three years from the original purchase date. Given its knowledge of the U.S. market for carbonless and thermal products, its practical knowledge of, and prior experience with, the requirements
of producing such products, and the fact it has U.S.-based production facilities, it is possible that AWA may decide to re-enter the U.S. marketplace and become a new competitor with which we would have to contend.



Regardless of the continuing quality of our primary products, we may be
unable to maintain our prices or margins due to:



| |  | declining overall carbonless market size;
| | - | -----------------------------------------



| |  | accelerating decline in the carbonless sheet market;
| | - | ----------------------------------------------------



| |  | increasing manufacturing costs;
| | - | -------------------------------



| |  | increasing international competition; or
| | - | ----------------------------------------



| |  | declining general economic conditions.
| | - | --------------------------------------



Our inability to compete effectively or to maintain our prices and margins could have a material adverse effect on our earnings and cash flow.



We depend on our key personnel to manage our business effectively and they may be
difficult to replace.



Our success depends, to a
significant degree, on the efforts and abilities of our current senior and middle management teams. Their skills, experience and industry contacts significantly benefit us. The loss of key employees could have a negative effect on our



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operating results and financial condition. We do not maintain key-man life insurance on any members of our senior management team, other than our chief
executive officer, and no members of our senior management team are subject to employment agreements except for the chief executive officer of our newly acquired U.K.-based security printing business.



Paperweight Development, its eligible subsidiaries and the ESOP may not continue to be
exempt from U.S. federal or state income tax.



Paperweight Development has made an election to be taxed as a subchapter S corporation for U.S. federal and, where recognized, state income tax purposes and an election to treat its eligible subsidiaries as qualified subchapter S
subsidiaries for U.S. federal and, where recognized, state income tax purposes. The American Plastics and C&H Packaging subsidiaries acquired in 2003 are eligible for such treatment while BemroseBooth, a company registered in the U.K. and
subject to U.K. Inland Revenue tax laws, is not eligible for treatment as a qualified subchapter S subsidiary and as a result we will incur a foreign tax liability.



Section 1362 of the Internal Revenue Code of 1986 provides that a corporation that meets certain requirements may elect to
be taxed as a subchapter S corporation. These requirements include, but are not limited to: (1) the corporation having only certain types of shareholders, including ESOPs, (2) the corporation having 75 shareholders or less and (3) the corporation
having only one class of stock.



The continuing status of
Paperweight Development as a subchapter S corporation for U.S. federal and state income tax purposes will depend upon it continuing to meet the S corporation requirements. Neither we nor Paperweight Development have obtained a ruling from the
Internal Revenue Service or any state tax agency confirming that Paperweight Development will be treated as a subchapter S corporation or that we will be treated as a qualified subchapter S subsidiary. In addition, neither we nor Paperweight
Development have obtained an opinion upon which any investor may rely stating that Paperweight Development qualifies as a subchapter S corporation and its eligible subsidiaries qualify as qualified subchapter S subsidiaries for U.S. federal and
state income tax purposes. It is possible that the Internal Revenue Service could take the position on audit that certain debt or obligations of Paperweight Development or its subsidiaries constitute a second class of stock and terminate Paperweight
Developments subchapter S election. The applicable law and regulations may change in a way which results in the taxation of Paperweight Development as a corporation other than as a subchapter S corporation. Furthermore, the current law that
exempts the ESOP trust from taxation on its allocable share of a subchapter S corporations income may change.



Paperweight Development realized a benefit during fiscal 2002 and fiscal 2003 as a result of the elimination of its and its eligible subsidiaries
U.S. federal income tax liability and a substantial portion of its and its eligible subsidiaries state income tax liabilities. These two years constitute the only years currently open for federal income tax audit purposes. While Paperweight
Development was audited by the IRS for the 2001 tax year and received a no change letter (meaning the subchapter S corporation election was held to be valid for that year), if, for any reason, Paperweight Development loses its subchapter
S corporation status, or any of its qualified subchapter S subsidiaries loses its qualified subchapter S subsidiary status, Paperweight Development and its subsidiaries would be required to pay U.S. federal and state income tax, thereby reducing the
amount of cash available to repay debt or reinvest in our operations, which would have a material adverse effect on our earnings and cash flow. Similarly, if the ESOP trust becomes subject to tax on its share of the subchapter S corporations
income, Paperweight Development would have to distribute cash to the ESOP trust to allow it to pay the tax, again reducing the amount of cash available to repay debt or to be reinvested in our operations. The termination of Paperweight
Developments subchapter S corporation status or the termination of Paperweight Developments subsidiaries qualified subchapter S subsidiary status would violate covenants under the senior credit facility and the indenture governing
the notes and would lead to a default under the senior credit facility and/or the indenture governing the notes. Loss of subchapter S corporation or comparable status would also require Paperweight Development and its subsidiaries to pay state
income taxes in many states.



As a subchapter S corporation,
Paperweight Development is subject to a corporate-level tax under Section 1374 of the Code known as the built-in gain tax. The built-in gain tax is a tax imposed on the gain inherent in assets as of the effective date of the subchapter S election if
the gain is recognized within ten years after the effective date of the subchapter S election. If we sell a material portion of our assets in the future, we could be subject to a significant tax liability.



Future legislation or regulations intended to reform pension and other employee benefit
plans could adversely affect our ability to repay our debt, reinvest in our operations, or grow our business through new product development or through acquisitions.



Since the bankruptcy filings of Enron Corp. and others in 2001, legislators and agencies of the executive branch have
formulated or suggested various proposals to amend, restrict or eliminate various features of employee benefit plans. For example, legislation has been proposed in Congress to restrict the amount of company stock that may be held by a 401(k) plan
and to allow plan participants to freely sell company stock held in their plan accounts. If legislation is adopted or new regulations are adopted that require us to lift restrictions on sales of stock held in participants KSOP accounts, that
expand the diversification rights of participants



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in the KSOP, or that limit the amount of Paperweight Development common stock that may be held by the KSOP, then we may be required to fund the repurchase of
substantial amounts of Paperweight Development common stock or take some other action restrictive to our finances. These repurchases or other restrictive actions could reduce the amount of cash available to repay debt, reinvest in our operations, or
grow our business through new product development or through acquisitions. In addition, these repurchases could violate covenants under our senior credit facility and the indenture governing our senior subordinated notes, which could lead to a
default under those documents.



Paperweight Developments legal
obligations to repurchase common stock from employees terminating their participation in the ESOP may lead to a default under the agreements relating to our indebtedness.



It may be necessary for us to make significant distributions to Paperweight Development in order for it to satisfy its share
repurchase obligations to the ESOP under ERISA and the terms of the KSOP. The ESOP incurs obligations to its participants when they retire, otherwise terminate employment or make diversification elections. However, the agreements relating to our
indebtedness contain limitations on our ability to make this type of distribution. The amount of Paperweight Developments repurchase obligations may at any time exceed these limitations and we may elect to or be forced to help Paperweight
Development meet its obligations. Further, Paperweight Development may also be limited to some extent from making payments to the ESOP or its beneficiaries by the terms of its and our indebtedness. As a result of Paperweight Developments
legally imposed repurchase obligation, we and/or Paperweight Development may be forced to violate the distribution and/or payment limitations contained in the agreements relating to its and our indebtedness, which may ultimately result in a default
under these agreements. Defaults on any of our indebtedness could result in acceleration of our indebtedness and cause us to dispose of our assets or declare bankruptcy.



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|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



1. Reports of Independent Auditors



To the Shareholder and Board of Directors of Paperweight Development Corp. and Subsidiaries:



In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, redeemable common stock,
(accumulated deficit) retained earnings, accumulated other comprehensive loss and comprehensive income and cash flows present fairly, in all material respects, the financial position of Paperweight Development Corp. and its subsidiaries at January
3, 2004 and December 28, 2002, and the results of its operations and its cash flows for each of the two years in the period ended January 3, 2004 and for the period from November 10, 2001 to December 29, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



As discussed in Note 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective December 30, 2001.



As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
relating to the classification of gains and losses from extinguishment of debt effective December 30, 2001.



As discussed in Note 3 to the consolidated financial statements, the Predecessor Company had a change in ownership as of November 9, 2001 which resulted in a new basis of accounting.



/s/    PricewaterhouseCoopers
LLP

Milwaukee, Wisconsin

March 24, 2004



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To the Board of Directors of Appleton Papers Inc. and Subsidiaries:



In our opinion, the consolidated statements of operations, shareholders equity and cash
flows for the period December 31, 2000 to November 9, 2001 present fairly, in all material respects, the results of operations and cash flows of Appleton Papers Inc. and its subsidiaries for the period December 31, 2000 to November 9, 2001, in
conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



/s/    PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

March 4, 2002



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2. Financial Statements.





PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

JANUARY 3, 2004 and DECEMBER 28, 2002

(dollars in thousands, except share data)



|                                                                                                                                               |  |      |           |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | ------- | -
|                                                                                                                                               |  | 2003 |           |   | 2002 |  
|ASSETS                                                                                                                                         |  |      |           |   |      |   |         |  
|Current assets                                                                                                                                 |  |      |           |   |      |   |         |  
|Cash and cash equivalents                                                                                                                      |  | $    | 29,682    |   |      | $ | 24,390  |  
|Accounts receivable, less allowance for doubtful accountsof $3,245 and $1,428, respectively                                                    |  |      | 117,129   |   |      |   | 93,377  |  
|Inventories                                                                                                                                    |  |      | 129,611   |   |      |   | 118,098 |  
|Other current assets                                                                                                                           |  |      | 18,450    |   |      |   | 12,933  |  
|                                                                                                                                               |  |      |           |   |      |   |         |  
|Total current assets                                                                                                                           |  |      | 294,872   |   |      |   | 248,798 |  
|Property, plant and equipment, net                                                                                                             |  |      | 511,560   |   |      |   | 504,088 |  
|Goodwill                                                                                                                                       |  |      | 47,971    |   |      |   |        |  
|Intangible assets, net                                                                                                                         |  |      | 128,450   |   |      |   | 127,016 |  
|Environmental indemnification receivable                                                                                                       |  |      | 77,030    |   |      |   | 67,356  |  
|Other assets                                                                                                                                   |  |      | 9,970     |   |      |   | 12,904  |  
|                                                                                                                                               |  |      |           |   |      |   |         |  
|Total assets                                                                                                                                   |  | $    | 1,069,853 |   |      | $ | 960,162 |  
|                                                                                                                                               |  |      |           |   |      |   |         |  
|LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE
LOSS                                             |  |      |           |   |      |   |         |  
|Current liabilities                                                                                                                            |  |      |           |   |      |   |         |  
|Current portion of long-term debt                                                                                                              |  | $    | 31,350    |   |      | $ | 42,419  |  
|Accounts payable                                                                                                                               |  |      | 56,870    |   |      |   | 45,419  |  
|Accrued interest expense                                                                                                                       |  |      | 1,839     |   |      |   | 1,758   |  
|Restructuring reserve                                                                                                                          |  |      | 5,757     |   |      |   | 4,753   |  
|Other accrued liabilities                                                                                                                      |  |      | 77,182    |   |      |   | 64,743  |  
|                                                                                                                                               |  |      |           |   |      |   |         |  
|Total current liabilities                                                                                                                      |  |      | 172,998   |   |      |   | 159,092 |  
|Senior secured notes payable                                                                                                                   |  |      | 135,402   |   |      |   | 108,923 |  
|Revolving line of credit                                                                                                                       |  |      | 10,000    |   |      |   |        |  
|Variable rate industrial development bonds                                                                                                     |  |      | 8,650     |   |      |   | 8,650   |  
|Capital lease obligation                                                                                                                       |  |      | 3,504     |   |      |   | 3,923   |  
|Postretirement benefits other than pension                                                                                                     |  |      | 59,469    |   |      |   | 58,262  |  
|Accrued pension                                                                                                                                |  |      | 39,696    |   |      |   | 10,959  |  
|Accrued income taxes                                                                                                                           |  |      | 15,432    |   |      |   | 24,548  |  
|Environmental liability                                                                                                                        |  |      | 99,329    |   |      |   | 88,373  |  
|Other long-term liabilities                                                                                                                    |  |      | 8,419     |   |      |   | 9,548   |  
|Senior subordinated notes payable                                                                                                              |  |      | 199,958   |   |      |   | 199,958 |  
|Deferred payment obligation                                                                                                                    |  |      | 172,742   |   |      |   | 156,409 |  
|Commitments and contingencies (Note 19)                                                                                                        |  |      |          |   |      |   |        |  
|Redeemable common stock, $0.01 par value, shares authorized:30,000,000, shares issued and outstanding: 12,124,778 and 11,587,204,
respectively |  |      | 158,279   |   |      |   | 133,581 |  
|Accumulated deficit                                                                                                                            |  |      | (3,587    | ) |      |   | (541    | )
|Accumulated other comprehensive loss                                                                                                           |  |      | (10,438   | ) |      |   | (1,523  | )
|                                                                                                                                               |  |      |           |   |      |   |         |  
|Total liabilities, redeemable common stock, accumulated deficit andaccumulated other comprehensive loss                                        |  | $    | 1,069,853 |   |      | $ | 960,162 |  
|                                                                                                                                               |  |      |           |   |      |   |         |  



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



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)



|                                                      |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|----------------------------------------------------- |  | --------------------------------- | ------- | - | ----------------------------------- | - | ------- | -------------------------------------------------- |  | - | ------------------------------------------------- | - |  | - | ------- | -
|                                                      |  | (Successor Basis)                 |         |   | (PredecessorBasis)                  |  
|                                                      |  | For the Year Ended January 3,2004 |         |   | For the Year Ended December 28,2002 |   |         | For the Period November 10,2001 toDecember 29,2001 |  |   | For the Period December 31,2000 toNovember 9,2001 |  
|Net sales                                             |  | $                                 | 861,453 |   |                                     | $ | 897,973 |                                                    |  | $ | 112,950                                           |   |  | $ | 842,868 |  
|Cost of sales                                         |  |                                   | 634,323 |   |                                     |   | 630,712 |                                                    |  |   | 76,345                                            |   |  |   | 591,741 |  
|                                                      |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|Gross profit                                          |  |                                   | 227,130 |   |                                     |   | 267,261 |                                                    |  |   | 36,605                                            |   |  |   | 251,127 |  
|Selling, general and administrative expenses          |  |                                   | 159,103 |   |                                     |   | 156,577 |                                                    |  |   | 18,693                                            |   |  |   | 135,126 |  
|Restructuring and other charges                       |  |                                   | 2,629   |   |                                     |   |        |                                                    |  |   |                                                  |   |  |   | 6,385   |  
|Environmental expense                                 |  |                                   |        |   |                                     |   | 21,017  |                                                    |  |   |                                                  |   |  |   | 23,389  |  
|Litigation settlements                                |  |                                   |        |   |                                     |   |        |                                                    |  |   |                                                  |   |  |   | 449     |  
|Equipment relocation expenses                         |  |                                   |        |   |                                     |   |        |                                                    |  |   |                                                  |   |  |   | 463     |  
|                                                      |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|Operating income                                      |  |                                   | 65,398  |   |                                     |   | 89,667  |                                                    |  |   | 17,912                                            |   |  |   | 85,315  |  
|Other expense (income)                                |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|Interest expense                                      |  |                                   | 54,160  |   |                                     |   | 68,354  |                                                    |  |   | 10,638                                            |   |  |   | 25,441  |  
|Debt extinguishment expenses                          |  |                                   | 1,396   |   |                                     |   | 11,754  |                                                    |  |   |                                                  |   |  |   | 10,392  |  
|Interest income                                       |  |                                   | (315    | ) |                                     |   | (990    | )                                                  |  |   | (406                                              | ) |  |   | (8,818  | )
|Foreign exchange (gain) loss                          |  |                                   | (1,085  | ) |                                     |   | (46     | )                                                  |  |   | (53                                               | ) |  |   | 492     |  
|                                                      |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|Income before income taxes from continuing operations |  |                                   | 11,242  |   |                                     |   | 10,595  |                                                    |  |   | 7,733                                             |   |  |   | 57,808  |  
|Provision for income taxes                            |  |                                   | 83      |   |                                     |   | 503     |                                                    |  |   | 117                                               |   |  |   | 20,625  |  
|                                                      |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|Income from continuing operations                     |  |                                   | 11,159  |   |                                     |   | 10,092  |                                                    |  |   | 7,616                                             |   |  |   | 37,183  |  
|                                                      |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|Discontinued operations, net of tax:                  |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|Loss from discontinued operations                     |  |                                   |        |   |                                     |   |        |                                                    |  |   |                                                  |   |  |   | (4,462  | )
|                                                      |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  
|Net income                                            |  | $                                 | 11,159  |   |                                     | $ | 10,092  |                                                    |  | $ | 7,616                                             |   |  | $ | 32,721  |  
|                                                      |  |                                   |         |   |                                     |   |         |                                                    |  |   |                                                   |   |  |   |         |  



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



50



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)



|                                                                                                                                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---------------------------------- | - | -------- | -------------------------------------------------- |  | - | ------------------------------------------------- | - |  | - | -------- | -
|                                                                                                                                  |  | (Successor Basis)                |          |   | (Predecessor Basis)                |  
|                                                                                                                                  |  | For the YearEndedJanuary 3, 2004 |          |   | For the YearEndedDecember 28, 2002 |   |          | For the PeriodNovember 10, 2001toDecember 29, 2001 |  |   | For the PeriodDecember 31, 2000toNovember 9, 2001 |  
|Cash flows from operating activities:                                                                                             |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Income from continuing operations                                                                                                 |  | $                                | 11,159   |   |                                    | $ | 10,092   |                                                    |  | $ | 7,616                                             |   |  | $ | 37,183   |  
|Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing
operations: |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Depreciation                                                                                                                      |  |                                  | 61,548   |   |                                    |   | 58,514   |                                                    |  |   | 4,716                                             |   |  |   | 36,201   |  
|Amortization of intangible assets                                                                                                 |  |                                  | 9,670    |   |                                    |   | 9,463    |                                                    |  |   | 1,289                                             |   |  |   | 458      |  
|Amortization of financing fees                                                                                                    |  |                                  | 3,418    |   |                                    |   | 9,585    |                                                    |  |   | 1,770                                             |   |  |   | 59       |  
|Employer 401(k) noncash matching contributions                                                                                    |  |                                  | 8,093    |   |                                    |   | 7,339    |                                                    |  |   | 1,154                                             |   |  |   |         |  
|Foreign exchange (gain) loss                                                                                                      |  |                                  | (1,085   | ) |                                    |   | (46      | )                                                  |  |   | (53                                               | ) |  |   | 492      |  
|Loss on disposals of equipment                                                                                                    |  |                                  | 887      |   |                                    |   | 1,563    |                                                    |  |   |                                                  |   |  |   | 1,252    |  
|Debt extinguishment expenses                                                                                                      |  |                                  | 540      |   |                                    |   | 11,754   |                                                    |  |   |                                                  |   |  |   | 209      |  
|Accretion of deferred payment and capital lease obligations                                                                       |  |                                  | 16,612   |   |                                    |   | 14,818   |                                                    |  |   | 1,890                                             |   |  |   | 324      |  
|Deferred income taxes                                                                                                             |  |                                  |         |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   | (11,840  | )
|Asset impairment charges                                                                                                          |  |                                  |         |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   | 3,827    |  
|(Increase)/decrease in assets and increase/(decrease) in liabilities excluding effects of business acquisitions:                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Accounts receivable                                                                                                               |  |                                  | 12,667   |   |                                    |   | 12,017   |                                                    |  |   | 17,524                                            |   |  |   | 17,215   |  
|Inventories                                                                                                                       |  |                                  | 4,863    |   |                                    |   | 16,500   |                                                    |  |   | (4,767                                            | ) |  |   | 25,308   |  
|Other current assets                                                                                                              |  |                                  | (694     | ) |                                    |   | (923     | )                                                  |  |   | 54                                                |   |  |   | (226     | )
|Accounts payable and other accrued liabilities                                                                                    |  |                                  | (5,046   | ) |                                    |   | (6,335   | )                                                  |  |   | (1,426                                            | ) |  |   | (14,480  | )
|Restructuring reserve                                                                                                             |  |                                  | 1,004    |   |                                    |   | (711     | )                                                  |  |   | (19                                               | ) |  |   | (9,913   | )
|Accrued income taxes                                                                                                              |  |                                  | 437      |   |                                    |   | 17,970   |                                                    |  |   | 289                                               |   |  |   | (4,656   | )
|Accrued pension                                                                                                                   |  |                                  | 1,803    |   |                                    |   | (7,097   | )                                                  |  |   | 205                                               |   |  |   |         |  
|Environmental liability/receivable, net                                                                                           |  |                                  |         |   |                                    |   | 21,017   |                                                    |  |   |                                                  |   |  |   | 20,012   |  
|Other, net                                                                                                                        |  |                                  | 468      |   |                                    |   | 1,368    |                                                    |  |   | (187                                              | ) |  |   | (828     | )
|                                                                                                                                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Net cash provided by operating activities of continuing operations                                                                |  |                                  | 126,344  |   |                                    |   | 176,888  |                                                    |  |   | 30,055                                            |   |  |   | 100,597  |  
|Net cash provided by operating activities of discontinued operations                                                              |  |                                  |         |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   | 11,897   |  
|                                                                                                                                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Net cash provided by operating activities                                                                                         |  |                                  | 126,344  |   |                                    |   | 176,888  |                                                    |  |   | 30,055                                            |   |  |   | 112,494  |  
|Cash flows from investing activities:                                                                                             |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Proceeds from sale of equipment                                                                                                   |  |                                  | 3        |   |                                    |   | 56       |                                                    |  |   | 19                                                |   |  |   | 9,016    |  
|Additions to property, plant and equipment                                                                                        |  |                                  | (29,903  | ) |                                    |   | (32,444  | )                                                  |  |   | (6,741                                            | ) |  |   | (49,804  | )
|Acquisition of businesses, net of cash acquired                                                                                   |  |                                  | (112,266 | ) |                                    |   |         |                                                    |  |   | (314,826                                          | ) |  |   |         |  
|                                                                                                                                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Net cash (used by) investing activities                                                                                           |  |                                  | (142,166 | ) |                                    |   | (32,388  | )                                                  |  |   | (321,548                                          | ) |  |   | (40,788  | )
|Cash flows from financing activities:                                                                                             |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Payments of senior secured notes payable                                                                                          |  |                                  | (124,590 | ) |                                    |   | (113,658 | )                                                  |  |   |                                                  |   |  |   |         |  
|Proceeds from refinancing senior secured notes payable                                                                            |  |                                  | 140,000  |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   |         |  
|Repurchase of senior subordinated notes payable                                                                                   |  |                                  |         |   |                                    |   | (50,042  | )                                                  |  |   |                                                  |   |  |   |         |  
|Payments relating to capital lease obligation                                                                                     |  |                                  | (670     | ) |                                    |   | (671     | )                                                  |  |   | (56                                               | ) |  |   | (268     | )
|Proceeds from revolving line of credit                                                                                            |  |                                  | 84,000   |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   |         |  
|Payments of revolving line of credit                                                                                              |  |                                  | (74,000  | ) |                                    |   |         |                                                    |  |   |                                                  |   |  |   |         |  
|Proceeds from issuance of redeemable common stock                                                                                 |  |                                  | 13,360   |   |                                    |   | 5,909    |                                                    |  |   | 104,663                                           |   |  |   |         |  
|Payments to redeem common stock                                                                                                   |  |                                  | (14,387  | ) |                                    |   | (304     | )                                                  |  |   |                                                  |   |  |   |         |  
|(Decrease)/increase in cash overdraft                                                                                             |  |                                  | (2,599   | ) |                                    |   | 2,954    |                                                    |  |   | (4,570                                            | ) |  |   | 8,920    |  
|Payments of loans from former parent and affiliated companies                                                                     |  |                                  |         |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   | (45,745  | )
|Loans from former parent and affiliated companies                                                                                 |  |                                  |         |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   | 159,140  |  
|Due to former parent and affiliated companies, net                                                                                |  |                                  |         |   |                                    |   |         |                                                    |  |   | (7,388                                            | ) |  |   | 6,412    |  
|Payments for debt extinguishment                                                                                                  |  |                                  |         |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   | (150,000 | )
|Payment of senior subordinated seller note                                                                                        |  |                                  |         |   |                                    |   |         |                                                    |  |   | (250,000                                          | ) |  |   |         |  
|Proceeds from issuance of long-term debt, net of issuance costs                                                                   |  |                                  |         |   |                                    |   |         |                                                    |  |   | 484,546                                           |   |  |   |         |  
|                                                                                                                                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Net cash provided by (used by) financing activities of continuing operations                                                      |  |                                  | 21,114   |   |                                    |   | (155,812 | )                                                  |  |   | 327,195                                           |   |  |   | (21,541  | )
|Net cash (used by) financing activities of discontinued operations                                                                |  |                                  |         |   |                                    |   |         |                                                    |  |   |                                                  |   |  |   | (11,528  | )
|                                                                                                                                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Net cash provided by (used by) financing activities                                                                               |  |                                  | 21,114   |   |                                    |   | (155,812 | )                                                  |  |   | 327,195                                           |   |  |   | (33,069  | )
|Change in cash and cash equivalents                                                                                               |  |                                  | 5,292    |   |                                    |   | (11,312  | )                                                  |  |   | 35,702                                            |   |  |   | 38,637   |  
|Cash and cash equivalents at beginning of period                                                                                  |  |                                  | 24,390   |   |                                    |   | 35,702   |                                                    |  |   |                                                  |   |  |   | 39,871   |  
|                                                                                                                                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  
|Cash and cash equivalents at end of period                                                                                        |  | $                                | 29,682   |   |                                    | $ | 24,390   |                                                    |  | $ | 35,702                                            |   |  | $ | 78,508   |  
|                                                                                                                                  |  |                                  |          |   |                                    |   |          |                                                    |  |   |                                                   |   |  |   |          |  



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



51



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY

(dollars in thousands, except share data)



|                                                          |  |                   |  |        |        |                |   |          |                  |  |   |                 |                    |  |                  |          |   |  |   |         |  
|--------------------------------------------------------- |  | ----------------- |  | ------ | ------ | -------------- | - | -------- | ---------------- |  | - | --------------- | ------------------ |  | ---------------- | -------- | - |  | - | ------- | -
|                                                          |  | Common Stock      |  |        |        |                |   |          |                  |  |   |                 | TotalShareholder's | 
|                                                          |  | SharesOutstanding |  | Amount |        | Paid-InCapital |   |          | RetainedEarnings |  |   | ShareholderNote |                    |  | (Deficit) Equity |         
|Balance, December 30, 2000 (Predecessor Basis)            |  | 100               |  | $      | 10,500 |                | $ | (224,282 | )                |  | $ | 338,263         |                    |  | $                | (125,000 | ) |  | $ | (519    | )
|Net income                                                |  |                  |  |        |       |                |   |         |                  |  |   | 32,721          |                    |  |                  |         |   |  |   | 32,721  |  
|Conversion of shareholder note                            |  |                  |  |        |       |                |   |         |                  |  |   |                |                    |  |                  | 125,000  |   |  |   | 125,000 |  
|Dividend distribution                                     |  |                  |  |        |       |                |   |         |                  |  |   | (7,388          | )                  |  |                  |         |   |  |   | (7,388  | )
|Capital contribution from parent and affiliated companies |  |                  |  |        |       |                |   | 352,973  |                  |  |   |                |                    |  |                  |         |   |  |   | 352,973 |  
|Transfer of liability to affiliated company               |  |                  |  |        |       |                |   | 2,782    |                  |  |   |                |                    |  |                  |         |   |  |   | 2,782   |  
|Recovery of withholding tax                               |  |                  |  |        |       |                |   |         |                  |  |   | 5,204           |                    |  |                  |         |   |  |   | 5,204   |  
|                                                          |  |                   |  |        |        |                |   |          |                  |  |   |                 |                    |  |                  |          |   |  |   |         |  
|Balance, November 9, 2001 (Predecessor Basis)             |  | 100               |  | $      | 10,500 |                | $ | 131,473  |                  |  | $ | 368,800         |                    |  | $                |         |   |  | $ | 510,773 |  
|                                                          |  |                   |  |        |        |                |   |          |                  |  |   |                 |                    |  |                  |          |   |  |   |         |  

|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - |  | ------ | ------- | - | ------------------------------------ | - | ------- | --------------------------------- |  | - | ------------------- | - |  | - | ------ | -
|CONSOLIDATED STATEMENTS OF
REDEEMABLE COMMON STOCK, (ACCUMULATED DEFICIT) RETAINED EARNINGS, ACCUMULATED OTHER COMPREHENSIVE LOSS AND COMPREHENSIVE
INCOME (dollars in thousands, except share data) | 
|
|
|                                                                                                                                                                                                     |  | Redeemable CommonStock |   |  |        |         |   |                                      |   |         |                                   | 
|                                                                                                                                                                                                     |  | SharesOutstanding      |   |  | Amount |         |   | (AccumulatedDeficit)RetainedEarnings |   |         | AccumulatedOtherComprehensiveLoss |  |   | ComprehensiveIncome |  
|Issuance of redeemable common stock, net of issuance costs                                                                                                                                           |  | 10,684,373             |   |  | $      | 104,663 |   |                                      | $ |        |                                   |  | $ |                    |   |  |   |        |  
|Comprehensive income:                                                                                                                                                                                |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Net income                                                                                                                                                                                           |  |                       |   |  |        |        |   |                                      |   | 7,616   |                                   |  |   |                    |   |  | $ | 7,616  |  
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Total comprehensive income                                                                                                                                                                           |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  | $ | 7,616  |  
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Balance, December 29, 2001                                                                                                                                                                           |  | 10,684,373             |   |  |        | 104,663 |   |                                      |   | 7,616   |                                   |  |   |                    |   |  |   |        |  
|Comprehensive income:                                                                                                                                                                                |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Net income                                                                                                                                                                                           |  |                       |   |  |        |        |   |                                      |   | 10,092  |                                   |  |   |                    |   |  | $ | 10,092 |  
|Minimum pension liability adjustment                                                                                                                                                                 |  |                       |   |  |        |        |   |                                      |   |        |                                   |  |   | (1,523              | ) |  |   | (1,523 | )
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Total comprehensive income                                                                                                                                                                           |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  | $ | 8,569  |  
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Issuance of redeemable common stock                                                                                                                                                                  |  | 919,539                |   |  |        | 10,973  |   |                                      |   |        |                                   |  |   |                    |   |  |   |        |  
|Redemption of redeemable common stock                                                                                                                                                                |  | (16,708                | ) |  |        | (304    | ) |                                      |   |        |                                   |  |   |                    |   |  |   |        |  
|Accretion of redeemable common stock                                                                                                                                                                 |  |                       |   |  |        | 18,249  |   |                                      |   | (18,249 | )                                 |  |   |                    |   |  |   |        |  
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Balance, December 28, 2002                                                                                                                                                                           |  | 11,587,204             |   |  |        | 133,581 |   |                                      |   | (541    | )                                 |  |   | (1,523              | ) |  |   |        |  
|Comprehensive income:                                                                                                                                                                                |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Net income                                                                                                                                                                                           |  |                       |   |  |        |        |   |                                      |   | 11,159  |                                   |  |   |                    |   |  | $ | 11,159 |  
|Minimum pension liability adjustment                                                                                                                                                                 |  |                       |   |  |        |        |   |                                      |   |        |                                   |  |   | (9,609              | ) |  |   | (9,609 | )
|Foreign currency translation adjustment                                                                                                                                                              |  |                       |   |  |        |        |   |                                      |   |        |                                   |  |   | 1,226               |   |  |   | 1,226  |  
|Realized and unrealized losses on derivatives                                                                                                                                                        |  |                       |   |  |        |        |   |                                      |   |        |                                   |  |   | (532                | ) |  |   | (532   | )
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Total comprehensive income                                                                                                                                                                           |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  | $ | 2,244  |  
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Issuance of redeemable common stock                                                                                                                                                                  |  | 1,184,408              |   |  |        | 24,880  |   |                                      |   |        |                                   |  |   |                    |   |  |   |        |  
|Redemption of redeemable common stock                                                                                                                                                                |  | (646,834               | ) |  |        | (14,387 | ) |                                      |   |        |                                   |  |   |                    |   |  |   |        |  
|Accretion of redeemable common stock                                                                                                                                                                 |  |                       |   |  |        | 14,205  |   |                                      |   | (14,205 | )                                 |  |   |                    |   |  |   |        |  
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  
|Balance, January 3, 2004                                                                                                                                                                             |  | 12,124,778             |   |  | $      | 158,279 |   |                                      | $ | (3,587  | )                                 |  | $ | (10,438             | ) |  |   |        |  
|                                                                                                                                                                                                     |  |                        |   |  |        |         |   |                                      |   |         |                                   |  |   |                     |   |  |   |        |  



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



52



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##### Table of Contents

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS



Paperweight Development Corp. (PDC) and New Appleton LLC were
formed on December 28, 2000 by an executive management group of Appleton Papers Inc. (API) for the purpose of purchasing all of the partnership interests of Arjo Wiggins Delaware General Partnership (AWDGP). The partnership
interests in AWDGP were held by Arjo Wiggins US Holdings Limited (87.5%) and Arjo Wiggins North America Investments Limited (12.5%). API was a wholly-owned subsidiary of Appleton Investments LLC (AI) and AI was a wholly-owned subsidiary
of AWDGP. Prior to the acquisition of AWDGP, PDC had no operating activity.



The Appleton Papers Retirement Savings Plan (the 401(k) plan) was amended and restated effective January 1, 2001 in the form of the Appleton Papers Retirement Savings and Employee Stock Ownership Plan (the
KSOP). The KSOP includes a separate employee stock ownership plan component (the ESOP or the Company Stock Fund). Eligible employees of API, as named fiduciaries under the Employee Retirement Income Security Act
of 1974 (ERISA), as amended, were offered a one-time irrevocable election to direct State Street Global Advisors, the ESOP trustee, to accept the transfer of all or any part of their existing balances in the 401(k) plan and the 401(a)
plan to the Company Stock Fund. At the close of the election period, the proceeds from this offering were approximately $106.8 million and were used to purchase 100% of the outstanding common stock of PDC (see Note 22 Employee Stock Ownership
Plan). PDC and New Appleton LLC acquired AWDGP on November 9, 2001.



In December 2001, AI was liquidated and merged into AWDGP. Subsequently, AWDGP was liquidated and merged into API and New Appleton LLC was liquidated and merged into PDC.



The accompanying consolidated financial statements, after the elimination of
intercompany accounts and transactions, include the accounts of PDC and its wholly-owned subsidiaries (collectively the Company) for the years ended January 3, 2004 and December 28, 2002 and the period November 10, 2001 to December 29,
2001 (Successor Period). The accounts prior to the acquisition of AWDGP (Predecessor Period) relate to API, its wholly-owned subsidiaries, as well as AWDGP and AI. The accounts of AWDGP and AI consisted of debt used to fund
the operations of API and the corresponding interest expense and tax benefits. The consolidated statements of operations and cash flows for the Successor Period have been segregated from the Predecessor Period to reflect the change in the reporting
entity. Subsequent to the November 9, 2001 acquisition, API became a wholly-owned subsidiary of PDC (see Note 3 Acquisition of Businesses).



Prior to the November 9, 2001 acquisition, APIs ultimate parent was Worms et Cie. Worms et Cie. is incorporated in France.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



NATURE OF OPERATIONS



API is the primary operating subsidiary of PDC and was the primary operating
subsidiary of AWDGP. API creates product solutions for customers and end users through its development and use of coating formulations and applications as well as encapsulation technology, security, printing and packaging technologies. The Company
operates in four business segments: coated solutions, thermal and advanced technical products, security products and performance packaging. The carbonless business is the largest component of the coated solutions segment. Carbonless paper is used to
make multipart business forms such as invoices and credit card receipts. As part of its coated solutions business, the Company produces coated products for inkjet printing, point-of-sale displays and other design and print applications. Also
included in the coated solutions segment for fiscal 2003 and all periods presented, are the Companys carbonless products which contain security features. Sales within the coated solutions segment accounted for approximately 72% of consolidated
net sales in 2003, 79% of consolidated net sales in 2002, 80% in the fiscal 2001 Successor Period and 81% in the fiscal 2001 Predecessor Period.



The thermal and advanced technical products segment consists of the thermal business as well as the development of non-thermal products and related
substrates for the transaction and item identification markets. These products are routinely used for point-of-sale receipts and coupons; event and transportation tickets; lottery and gaming tickets; tags for airline baggage and retail applications;
and label products for grocery, shipping, medical and retail applications. Sales within thermal and advanced technical products accounted for approximately 21% of consolidated net sales in 2003, 20% of consolidated net sales in 2002, 18% in the
fiscal 2001 Successor Period and 18% in the fiscal 2001 Predecessor Period.



The security business produces products with basic security features that make them resistant to forgery and counterfeiting. From that foundation API is building a comprehensive business that incorporates security
technologies including watermarks, taggants, embedded threads and fibers and machine-readable technologies. The focus of the security business is on checks, business and government documents and the emerging brand protection market. In December
2003, the Company acquired Bemrose Group Limited, whose operating unit, BemroseBooth, is a leading provider of mission critical secure and specialized print services.



The Company entered the performance packaging market in 2003 by acquiring C&H Packaging Company, Inc. (C&H
Packaging) and American Plastics Company, Inc. (American Plastics). These two companies produce high-quality, custom multilayered films and commercial packaging and print and convert flexible plastic packaging materials.



The Companys customers include printers, merchants and
converters primarily located in North America, who buy its carbonless, thermal, security or specialty coated products. The Companys performance packaging business unit sells packaging products to food processing, household and industrial
products companies located in the United States. Customers of BemroseBooth, the Companys United Kingdom subsidiary, include many of the United Kingdoms biggest brand names in retail, telecommunications, financial services and
transportation.



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



FISCAL YEAR



The Companys fiscal year is the 52-week or 53-week period ending the
Saturday nearest December 31. Fiscal year 2003 was a 53-week period ending on January 3, 2004. Fiscal year 2002 was a 52-week period ending on December 28, 2002. Fiscal 2001 was a 52-week year, for which the Predecessor Period and the Successor
Period ended November 9, 2001 and December 29, 2001, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



USE OF ESTIMATES



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. The more critical estimates made by management relate to environmental contingencies, pension and postretirement assumptions, accrued discounts,
restructuring charges and accruals, accrued income taxes, intangible asset impairment, fair market value of redeemable common stock and receivable and inventory reserves. Actual results could differ from those estimates.



RECLASSIFICATIONS



Certain prior year financial statement amounts have been reclassified to conform to their current year presentation. These
reclassifications had no effect on net income.



REVENUE RECOGNITION



Revenue is recognized by the Company when all of the following
criteria are met: persuasive evidence of a selling arrangement exists; the Companys price to the customer is fixed; collectibility is reasonably assured; and title has transferred to the customer. Generally, these criteria are met at the time
of shipment. Estimated costs for sales incentives, discounts and sales returns and allowances are recorded as sales reductions in the period in which the related revenue is recognized. Shipping and handling fees are reflected in net sales and
shipping and handling costs are reflected in cost of sales.



DERIVATIVE
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES



The Company
has written policies and procedures that place all financial instruments under the direction of the corporate treasury department and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for
trading purposes is strictly prohibited. The Company uses financial instruments to manage the market risk from changes in foreign currency exchange rates.



The Company follows the guidance of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137, No. 138 and No. 149. The fair values of all derivatives are recorded in the consolidated balance sheets. 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 anticipated transactions that are subject to foreign exchange exposure using foreign currency
exchange contracts. These instruments are designated as cash flow hedges in accordance with SFAS No. 133 and are recorded on the consolidated balance sheets at fair value. The effective portion of the contracts gains or losses due to changes
in fair value are initially recorded as a component of accumulated other comprehensive loss and are subsequently reclassified into earnings when the hedge transactions occur and affect earnings. These contracts are highly effective in hedging the
variability in future cash flows attributable to changes in currency exchange rates.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



For the years ended January 3, 2004 and December 28, 2002,
the fiscal 2001 Successor Period and the fiscal 2001 Predecessor Period, no amount was recognized in earnings due to ineffectiveness of a hedge transaction. The $0.5 million amount reported as realized and unrealized losses on derivatives in
accumulated other comprehensive loss as of January 3, 2004 represents the net loss on derivatives designated as cash flow hedges.



CASH EQUIVALENTS



Cash equivalents consist of funds invested in institutional money market funds with daily liquidity. At January 3, 2004 and December 28, 2002, there were
cash overdrafts of approximately $7.2 million and $9.8 million, respectively, which are included in accounts payable within the accompanying consolidated balance sheets.



INVENTORIES



Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for substantially all
finished goods, work in process and raw materials. Stores and spare parts inventories are valued at average cost and certain other inventories are valued using the first-in, first-out (FIFO) method. Finished goods and work-in process
inventories include the cost of materials, labor and manufacturing overhead.



PROPERTY, PLANT AND EQUIPMENT



Property, plant
and equipment are stated at cost, including interest incurred during construction, and depreciated over their estimated useful lives using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The
general range of useful lives for financial reporting is 10 to 40 years for buildings and improvements and 2 to 20 years for machinery and equipment. Maintenance and repair costs that do not significantly improve the related asset or extend its
useful life are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts with resulting gains or losses reflected in earnings.



INTERNAL USE SOFTWARE



Costs incurred related to the development of internal use software are accounted for in accordance with Statement of
Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining
software for internal use once certain criteria are met. Capitalized software costs are amortized over the lesser of 8 years or the useful life of the software using the straight-line method.



INTANGIBLE ASSETS



Certain intangible assets (including a portion of registered trademarks) have been determined to have indefinite useful
lives and will not be amortized until their useful lives are determined to be no longer indefinite. Other intangible assets (patents, customer relationships, non-compete agreements, applications software and the remaining registered trademarks) are
amortized over their estimated useful lives of 3 to 25 years.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



IMPAIRMENT OF LONG-LIVED 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 the asset might be impaired. This impairment analysis consists of a comparison of the fair value of an intangible asset with its carrying amount. If
the carrying amount of an intangible asset with an indefinite life exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess.



The carrying value of intangible assets with definite lives and long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment would be determined based upon a comparison of the undiscounted future net cash flows anticipated to be generated during the remaining life of
the intangible assets with a definite life or long-lived assets to their respective carrying values. Measurement of any impairment loss would be based upon discounted operating cash flows.



INCOME TAXES



In conjunction with the acquisition of API, PDC elected to be treated as a subchapter S corporation and elected that its
eligible subsidiaries be treated as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state income tax purposes and, therefore, the Company anticipates that it will not incur any future U.S. federal income tax liability and
minimal state income tax liabilities.



Non eligible
subsidiaries, and the Predecessor Company which was included within the consolidated tax return of AWDGP, account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the
financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.



FAIR VALUE OF FINANCIAL INSTRUMENTS



Cash and cash equivalents, accounts receivable and accounts payable recorded in the balance sheets approximate fair value based on the short maturity of
these instruments. Fair values of long-term debt and deferred payment and lease obligations are estimated based on market conditions and interest rates available to the Company for similar financial instruments.



COMPREHENSIVE INCOME



SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of
comprehensive income and its components in financial statements. At January 3, 2004 comprehensive income for the Company consisted of net income and accumulated other comprehensive loss relating to minimum pension liability adjustments, foreign
currency translation adjustments and unrealized losses on derivatives totaling $2.2 million. At December 28, 2002 comprehensive income for the Company consisted of net income and accumulated other comprehensive loss relating to minimum pension
liability adjustments totaling $8.6 million.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



RESEARCH AND DEVELOPMENT



Research and development costs are charged to expense as incurred. Such costs
incurred in the development of new products or significant improvements to existing products amounted to $18.0 million in 2003, $14.7 million in 2002, $1.7 million during the 2001 Successor Period and $12.5 million for the fiscal 2001 Predecessor
Period.



ACCOUNTING PRONOUNCEMENTS



In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143, which was effective for fiscal years beginning after June 15, 2002, requires entities to record the fair value of a legal liability for an asset retirement
obligation in the period in which it is incurred. When the liability is recorded, the entity capitalizes the cost of the liability by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present
value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. SFAS No. 143 was
effective for the Companys first quarter of fiscal 2003 and did not have any effect on its financial position, results of operations or cash flows.



In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections was
issued, which mainly addresses the accounting and disclosure related to early extinguishment of debt transactions as well as other technical corrections. The provisions of this statement were effective for the Company for all transactions
consummated after May 15, 2002. Pursuant to this pronouncement, API recorded debt extinguishment expenses of $1.4 million and $11.8 million within income from continuing operations as a result of refinancing a portion of the Senior Credit Facility
during the fourth quarter of 2003 and the second quarter of 2002, respectively. The adoption of SFAS No. 145 also resulted in the Company reclassifying its fiscal 2001 Predecessor Period debt extinguishment expenses of $10.4 million from an
extraordinary item to a component of earnings from continuing operations.



In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 was effective for exit or disposal activities initiated after December 31, 2002. The
adoption of this statement did not have a material impact on the Companys financial position, results of operations or cash flows.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



In January 2003, the FASB issued FASB Interpretation No.
(FIN) 46, Consolidation of Variable Interest Entities. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable
interest entities. FIN 46 explains the concept of a variable interest entity and requires consolidation by the primary beneficiary where there is a controlling financial interest in a variable interest entity or where the variable interest entity
does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB released a revised version of FIN 46 (hereafter referred to as FIN 46R) clarifying
certain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. FIN 46R applies immediately for the Company to variable interest entities created after December 31, 2003, and applies for the first reporting
period beginning after December 15, 2004 to variable interest entities in which an enterprise holds a variable interest that was acquired before January 1, 2004. The Company is currently evaluating the impact of this statement.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics
of both liabilities and equity. In accordance with the standard, a financial instrument that embodies an obligation for the issuer is required to be classified as a liability (or an asset in some circumstances). SFAS No. 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position (FSP) No.
150-4 Issuers Accounting for Employee Stock Ownership Plans under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which concluded that ESOP shares or
freestanding agreements to repurchase those shares are not within the scope of SFAS No. 150.



In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits, to require additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. These disclosure requirements are effective immediately for the Company, except for estimated future benefit payments, which will be effective in
fiscal 2004. This statement also requires interim period disclosure of the components of net periodic benefit cost, and if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund
pension plans and other postretirement benefit plans. These interim disclosures will be effective in the first quarter of 2004.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



3. ACQUISITION OF BUSINESSES



In December 2003, the Company acquired Bemrose Group Limited, a
privately-held company headquartered in Derby, England. The groups operating unit, BemroseBooth, produces security printed vouchers and payment cards, mass transit and car parking tickets, variable data labeling, high-integrity mailing and
printed promotional products such as calendars. The purchase price for this acquisition, net of cash acquired, approximated $61.7 million and was financed with cash from operations and proceeds received from a senior secured variable rate note. The
Company is obtaining independent appraisals to allocate the purchase price to the acquired net assets. Pending completion of the appraisals, the excess of the purchase price over the estimated fair value of the acquired net assets has been allocated
to goodwill. The Company expects that such appraisals, and the allocation of the purchase price, will be completed by the end of the second quarter of fiscal 2004. Goodwill of approximately $23.8 million has been assigned to the Companys
security business unit. Bemrose Group Limited has been included in the Companys consolidated financial statements since the date of acquisition.



The acquisition was accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. The following table
summarizes the estimated fair values of the assets acquired and liabilities assumed excluding cash acquired (dollars in thousands):



|                              |  |   |        
|----------------------------- |  | - | -------
|Current assets                |  | $ | 38,714 
|Property, plant and equipment |  |   | 37,912 
|Intangible assets             |  |   | 7,659  
|Goodwill                      |  |   | 23,757 
|Other assets                  |  |   | 669    
|                              |  |   |        
|Total assets acquired         |  | $ | 108,711
|                              |  |   |        
|Current liabilities           |  | $ | 25,234 
|Other long-term liabilities   |  |   | 21,802 
|                              |  |   |        
|Total liabilities assumed     |  | $ | 47,036 
|                              |  |   |        
|Net assets acquired           |  | $ | 61,675 
|                              |  |   |        



On April 30, 2003, the
Company acquired all of the outstanding common shares of two privately-held Wisconsin-based companies, C&H Packaging Company, Inc. and American Plastics Company, Inc., which includes American Real Estate Corporation (a real estate holding
company for the real estate assets of American Plastics). C&H Packaging and American Plastics have been included in the Companys consolidated financial statements from the date of acquisition. C&H Packaging prints and converts flexible
plastic packaging materials for companies in the food processing, household and industrial product industries. American Plastics produces high-quality, custom multilayered films and commercial packaging. The purchase price for these acquisitions
approximated $50.6 million and was financed with cash from operations and borrowings under the revolving credit portion of the Companys Senior Credit Facility. The Company obtained independent appraisals to allocate the purchase price to the
acquired net assets. As a result of this acquisition, goodwill of approximately $23.7 million has been assigned to the Companys Performance Packaging business unit.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The following table summarizes the estimated fair values
of the assets acquired and liabilities assumed (dollars in thousands):



|                              |  |   |       
|----------------------------- |  | - | ------
|Current assets                |  | $ | 13,219
|Property, plant and equipment |  |   | 12,300
|Intangible assets             |  |   | 6,132 
|Goodwill                      |  |   | 23,739
|Other assets                  |  |   | 110   
|                              |  |   |       
|Total assets acquired         |  | $ | 55,500
|                              |  |   |       
|Current liabilities           |  | $ | 4,909 
|                              |  |   |       
|Total liabilities assumed     |  | $ | 4,909 
|                              |  |   |       
|Net assets acquired           |  | $ | 50,591
|                              |  |   |       



The following
unaudited proforma data summarizes the results of operations for the years indicated as if the acquisitions of C&H Packaging, American Plastics and BemroseBooth had been completed on December 29, 2002 and December 30, 2001, respectively. The
proforma data gives effect to actual operating results prior to the acquisition and adjustments to cost of sales, selling general and administrative, interest expense, amortization, depreciation and income taxes. These unaudited proforma amounts do
not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred on December 29, 2002 and December 30, 2001 or that may be obtained in the future (dollars in thousands):



|           |  |                                   |         |                                     |   |          
|---------- |  | --------------------------------- | ------- | ----------------------------------- | - | ---------
|           |  | For the Year EndedJanuary 3, 2004 |         | For the Year EndedDecember 28, 2002
|Net sales  |  | $                                 | 968,459 |                                     | $ | 1,031,733
|Net income |  | $                                 | 13,642  |                                     | $ | 14,472   



At the close of
business on November 9, 2001, PDC and New Appleton LLC completed the purchase of all the partnership interests of AWDGP (the Acquisition). The total cash purchase price consisted of the following (dollars in thousands):



|                                              |  |   |          |  
|--------------------------------------------- |  | - | -------- | -
|Agreed upon purchase price                    |  | $ | 810,000  |  
|Transaction fees                              |  |   | 6,203    |  
|Cash acquired by buyer                        |  |   | (78,508  | )
|Settlement of intercompany note receivable    |  |   | (32,869  | )
|                                              |  |   |          |  
|Net assets acquired                           |  |   | 704,826  |  
|Senior subordinated seller note               |  |   | (250,000 | )
|Deferred payment obligation                   |  |   | (140,000 | )
|                                              |  |   |          |  
|Acquisition of business, net of cash acquired |  | $ | 314,826  |  
|                                              |  |   |          |  



The transaction was
financed with $106.8 million of proceeds received from the ESOP ($104.7 million, net of stock issuance costs), $265.0 million of senior secured notes payable borrowed at the closing (see Note 12 Long-Term Obligations), $250.0 million in
aggregate principal amount of a senior subordinated note due 2008 issued to Arjo Wiggins Appleton (AWA), which bore interest at the rate of 11.5% per annum in the Successor Period, and a deferred payment obligation with a present value
of $140 million at the closing of the Acquisition to be paid to AWA (see Note 12 Long-Term Obligations).



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The following table summarizes the estimated fair values
of the assets acquired and liabilities assumed, excluding cash acquired (dollars in thousands):



|                              |  |   |        
|----------------------------- |  | - | -------
|Current assets                |  | $ | 264,714
|Property, plant and equipment |  |   | 529,770
|Intangible assets             |  |   | 137,768
|Other assets                  |  |   | 17,210 
|                              |  |   |        
|Total assets acquired         |  | $ | 949,462
|                              |  |   |        
|Current liabilities           |  | $ | 137,028
|Long-term debt                |  |   | 8,650  
|Other long-term liabilities   |  |   | 98,958 
|                              |  |   |        
|Total liabilities assumed     |  | $ | 244,636
|                              |  |   |        
|Net assets acquired           |  | $ | 704,826
|                              |  |   |        



In conjunction with
the Acquisition, the Company entered into two indemnification agreements under which AWA agreed to indemnify PDC and PDC agreed to indemnify API for, and pay, all governmental and third party liabilities and all costs and expenses incurred by API in
defense against governmental and third party claims, referred to as the Fox River Liabilities. The Fox River Liabilities also include fees and expenses of APIs environmental counsel, advisers, engineers and scientific experts, and the costs
incurred in obtaining studies and other analyses concerning various remedial alternatives for the Lower Fox River. The indemnification agreements mirror one another and result in API receiving indemnification payments directly or indirectly from
AWA.



Under the indemnification agreements, AWA agreed to
indemnify the Company for the first $75 million of Fox River Liabilities and for those in excess of $100 million (see Note 19 Commitments and Contingencies). The Company is responsible for the $25 million of liabilities between $75
million and $100 million. The indemnification agreements provide that it is the intent of the parties that at no time will API or PDC be required to fund any costs and expenses relating to the Fox River Liabilities for which API or PDC will be
indemnified. AWA has paid $20.9 million under the indemnification agreements through 2003.



In connection with the indemnification agreements and in order to assure the Company, the ESOP Trustee and the Companys lenders that AWA would be able to meet its indemnification obligations under these
agreements, AWA purchased and fully paid for indemnity claim insurance from an affiliate of American International Group, Inc. (AIG).



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The AIG insurance policy is designed to provide coverage,
with the exception described below, for an increasing amount of potential Fox River Liabilities for each of the 12-month periods beginning November 9 of the years specified below:



|                    |  |                   
|------------------- |  | ------------------
|Year                |  | Maximum Coverage  
|2001                |  | $ 75 million      
|2002                |  | $100 million      
|2003                |  | $125 million      
|2004                |  | $150 million      
|2005                |  | $175 million      
|2006                |  | $200 million      
|2007 and thereafter |  | $250 million      
|                    |  | (unless reduced as
|                    |  | described below)  



The amounts available
under the AIG insurance policy were determined as a result of negotiations with AWA and are not based on any particular cost estimates. The Company believes that the $250 million available under the AIG insurance policy will be in excess of the
Companys ultimate liability for remediation of the Lower Fox River even if, as discussed in Note 19, Commitments and Contingencies, (a) the costs of remediation were to be twice the government agencies estimate of $400
million, (b) the Companys natural resource damages (NRD) settlement was to be twice the $12 million obtained by Georgia-Pacific and (c) the Companys combined share with NCR of all of these liabilities was to be substantially
more than any estimate of the Companys share of the PCB discharge.



The AIG insurance policy was designed to provide a funding source to satisfy the Fox River Liabilities and other liabilities. As such, the policyholder (described below) has designated a third party administrator to
manage the various environmental issues that arise with respect to the Lower Fox River. This administrator works with the Companys employees as negotiations and discussions occur with governmental authorities and third parties. As the Company
incurs costs and expenses that constitute Fox River Liabilities, it submits invoices to the administrator, which are in turn submitted to AIG and then paid under the AIG insurance policy. As noted above, the indemnity arrangements negotiated with
AWA and the AIG insurance policy are designed to ensure that the Company will not be required to fund any costs and expenses for the Fox River Liabilities and to assure the Company, the ESOP Trustee and the Companys lenders and investors that
it will not have to rely on AWA itself to make these payments.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The AIG insurance policy will not terminate sooner than
the stated maturity of the senior subordinated notes unless the Company experiences certain types of changes of control and provided it complies with the provisions of the Senior Credit Facility and Senior Subordinated Notes, including provisions
that could require it to repay or offer to repay that indebtedness. The AIG insurance policy will be extended beyond the stated maturity of the Senior Subordinated Notes, referred to as an extension period, (1) for up to three years if a designated
arbiter is not able to determine that the Company will have sufficient internal cash to repay the Senior Subordinated Notes at stated maturity, or if the designated arbiter determines the Company will have sufficient cash but does not actually repay
the Senior Subordinated Notes or irrevocably deposit funds sufficient to repay them or (2) for up to five years if AWA shall have committed a payment default under its indemnification obligations in excess of $1 million that is not cured within 60
days of written notice. The amount of coverage required under the AIG insurance policy during an extension period will be the lesser of (1) two times the excess of the required remaining indemnification payments during the extension period over
funds available from the net worth protection described below and the amounts otherwise available under the policy after December 15, 2008 from the stream of payments referred to as the annuity as determined by a designated arbiter or (2) the amount
of coverage available under the AIG insurance policy remaining on the first day of the extension period.



The AIG insurance policy is owned by a Bermuda corporation that is referred to as the policyholder. Under the indemnification agreements, the policyholder
has the right to elect to reduce the maximum coverage amount from $250 million to $167 million at any time after the notes are paid in full and certain other conditions are met or upon a change of control.



In order to establish and administer the AIG insurance policy, AWA and PDC
each formed direct or indirect special purpose subsidiaries that jointly own the policyholder. The policyholder owns and is the direct beneficiary of the AIG insurance policy. At the closing of the Acquisition, AWA assigned, and the policyholder
assumed, AWAs share of the Fox River Liabilities under AWAs indemnification agreement in exchange for a capital contribution by AWA to the policyholder in the amount of the premium required to fully purchase the AIG insurance policy. AWA
has not been released from its primary responsibility for performance under its indemnification agreement. This structure is intended to protect the policyholder and the AIG insurance policy from claims made by the creditors of AWA, PDC and/or their
respective affiliates, including the special purpose subsidiaries that own the policyholder, in a bankruptcy or other liquidation proceeding involving any of these companies.



The indemnification agreements provide that AWA can elect to control and manage the Fox River Liabilities with the
cooperation and assistance of the Companys personnel. API agreed to make certain of its employees available to AWA at its cost to assist with discussions and negotiations with the United States Environmental Protection Agency
(EPA), the Wisconsin Department of Natural Resources (DNR), the Fish & Wildlife Service (FWS) and other governmental agencies.



In addition to the AIG insurance policy, AWA agreed to deposit up to $75 million, minus all previous indemnification
payments made for Fox River Liabilities, into an escrow account, which is referred to as the net worth protection, if the maximum coverage limits under the AIG insurance policy are no longer in force, if AWA has not yet paid its first $75 million of
Fox River Liabilities and if AWAs consolidated tangible net worth is less than £500 million (1) for two consecutive fiscal quarters or (2) in whole or in part as a result of a sale of assets outside the ordinary course of business, a
sale of stock or other ownership interests of any direct or indirect operating subsidiary or a transaction out of the ordinary course of business.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The AIG insurance policy and the net worth protection are
collectively referred to as the financial assurance. Under the indemnification agreements, AWA is able to reduce some of the financial assurance to avoid duplication of the components of the financial assurance. The indemnification agreements
provide for a dispute resolution process involving arbitration in accordance with the Center for Public ResourcesRules for Non-Administered Arbitration.



AWA also agreed to indemnify the Company for liabilities related to the business and operations of Newton Falls, Inc., Appleton Coated LLC, Appleton
Capital Inc., Appleton Leasing LLC, Arjo Wiggins Investments Inc., Appleton Recycled Fibers, Inc., Paperhub.com, Inc. and several other of APIs former subsidiaries, the ownership of the real property on which the Harrisburg plant is located
and for pre-closing environmental contingencies at this location, and for certain other designated liabilities, which are referred to as other excluded liabilities, including pending litigation, and some known environmental conditions or issues,
other than those matters relating to the Lower Fox River, which are covered by the indemnification agreement described above. Under these provisions AWA is obligated to reimburse API for losses for, in the case of a breach of an environmental
representation or warranty or a loss arising from a known environmental condition or issue constituting other excluded liabilities, 50% of the first $5 million of losses and 100% of losses in excess of $5 million and, in all other cases, 100% of the
losses.



Also as part of the purchase agreement, AWA agreed to
indemnify the Company for 100% of net income tax liabilities after the November 9, 2001 acquisition, in respect of periods through September 30, 2001, excluding 50% of amounts in excess of $5.0 million in the aggregate up to and including $10.0
million in the aggregate, representing a maximum amount of $2.5 million for which the Company shall remain responsible. All tax refunds relating to periods through September 30, 2001 received by the Company must first be applied against the amount
of net income tax liabilities indemnified by AWA. The Company will be allowed to retain any excess net refunds over net income tax liabilities. In fiscal 2003, API received $0.5 million of state tax refunds that relate to periods prior to September
30, 2001, which may be used to satisfy any additional tax liabilities arising from audits for those periods. In fiscal 2002, API received $17.9 million of federal and state tax refunds that related to periods prior to September 30, 2001. Since the
Acquisition, certain contingent tax liabilities relating to the period prior to October 1, 2001, and reserved for within the November 10, 2001 opening balance sheet, have since been resolved or the corresponding years have been closed to audit. As
of January 3, 2004, accrued income taxes were reduced by $13.8 million. Correspondingly, property, plant and equipment and intangible assets were also decreased by $13.8 million.



4. GOODWILL AND OTHER INTANGIBLE ASSETS



Effective December 30, 2001, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and
intangible assets with an indefinite life will no longer be amortized, however, they must be tested for impairment annually. Amortization will continue to be recorded for other intangible assets with determinable lives. A summary of net income, as
if the Company had accounted for goodwill under SFAS No. 142 as of January 2, 2000 is as follows (dollars in thousands):



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                        |  |                                    |        |                                      |   |                                                       |  |                                                      |       |  |   |       
|----------------------- |  | ---------------------------------- | ------ | ------------------------------------ | - | ----------------------------------------------------- |  | ---------------------------------------------------- | ----- |  | - | ------
|                        |  | (Successor Basis)                  |        | (PredecessorBasis)                  
|                        |  | For the Year Ended January 3, 2004 |        | For the Year Ended December 28, 2002 |   | For the Period November 10, 2001 to December 29, 2001 |  | For the Period December 31, 2000 to November 9, 2001
|Adjusted net income     |  |                                    |        |                                      |   |                                                       |  |                                                      |       |  |   |       
|As reported, net of tax |  | $                                  | 11,159 |                                      | $ | 10,092                                                |  | $                                                    | 7,616 |  | $ | 32,721
|Goodwill amortization   |  |                                    |       |                                      |   |                                                      |  |                                                      |      |  |   | 458   
|                        |  |                                    |        |                                      |   |                                                       |  |                                                      |       |  |   |       
|                        |  | $                                  | 11,159 |                                      | $ | 10,092                                                |  | $                                                    | 7,616 |  | $ | 33,179
|                        |  |                                    |        |                                      |   |                                                       |  |                                                      |       |  |   |       



The changes in the
carrying amount of goodwill for the year ended January 3, 2004 are as follows (dollars in thousands):



|                                    |  |                  |   |                                       |   |          |  |                      |        |       |   |        |  |   |       
|----------------------------------- |  | ---------------- | - | ------------------------------------- | - | -------- |  | -------------------- | ------ | ----- | - | ------ |  | - | ------
|                                    |  | Coated Solutions |   | Thermal andAdvancedTechnical Products |   | Security |  | PerformancePackaging |        | Total
|Balance as of December 28, 2002     |  | $                |  |                                       | $ |         |  | $                    |       |       | $ |       |  | $ |      
|Goodwill from business acquisitions |  |                  |  |                                       |   |         |  |                      | 23,757 |       |   | 23,739 |  |   | 47,496
|Currency translation                |  |                  |  |                                       |   |         |  |                      | 475    |       |   |       |  |   | 475   
|                                    |  |                  |   |                                       |   |          |  |                      |        |       |   |        |  |   |       
|Balance as of January 3, 2004       |  | $                |  |                                       | $ |         |  | $                    | 24,232 |       | $ | 23,739 |  | $ | 47,971
|                                    |  |                  |   |                                       |   |          |  |                      |        |       |   |        |  |   |       



The goodwill value
presented above in the security business, which relates to the BemroseBooth acquisition, is preliminary pending the Companys final purchase price allocation, which is anticipated to be completed by the end of the second quarter of fiscal 2004.



The Companys other intangible assets consisted of the
following (dollars in thousands):



|                               |  |                       |         |                         |   |                     |  |                         |         |  |   |       
|------------------------------ |  | --------------------- | ------- | ----------------------- | - | ------------------- |  | ----------------------- | ------- |  | - | ------
|                               |  | As of January 3, 2004 |         | As of December 28, 2002
|                               |  | GrossCarryingAmount   |         | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets:   |  |                       |         |                         |   |                     |  |                         |         |  |   |       
|Trademarks                     |  | $                     | 63,082  |                         | $ | 6,457               |  | $                       | 60,000  |  | $ | 3,404 
|Patents                        |  |                       | 39,373  |                         |   | 13,141              |  |                         | 40,000  |  |   | 6,997 
|Customer relationships         |  |                       | 13,946  |                         |   | 776                 |  |                         | 7,050   |  |   | 351   
|Non-compete agreements         |  |                       | 1,908   |                         |   | 48                  |  |                         |        |  |   |      
|Applications software          |  |                       | 480     |                         |   |                    |  |                         |        |  |   |      
|                               |  |                       |         |                         |   |                     |  |                         |         |  |   |       
|Total                          |  | $                     | 118,789 |                         | $ | 20,422              |  | $                       | 107,050 |  | $ | 10,752
|                               |  |                       |         |                         |   |                     |  |                         |         |  |   |       
|Unamortized intangible assets: |  |                       |         |                         |   |                     |  |                         |         |  |   |       
|Trademarks                     |  | $                     | 30,083  |                         |   |                     |  | $                       | 30,718  |  |   |       
|                               |  |                       |         |                         |   |                     |  |                         |         |  |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Of the $148.9 million of acquired intangible assets, $93.2
million was assigned to registered trademarks. Trademarks totaling $58.8 million related to carbonless paper and $4.3 million related to the Companys 2003 acquisitions are being amortized over their useful life of 20 years, while the remaining
$30.1 million are considered to have an indefinite life and, as such, are not subject to amortization. The remaining acquired intangible assets are being amortized over their estimated useful lives ranging from 3 to 25 years for patents and customer
relationships, 5 years for non-compete agreements and 7 years for applications software.



Amortization expense for the year ended January 3, 2004 approximated $9.7 million. Amortization expense for the year ended December 28, 2002 and the period November 10, 2001 to December 29, 2001 approximated $9.5
million and $1.3 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates that annual amortization expense of intangible assets will approximate $11 million per year for 2004 through 2006, $10 million for 2007
and $6 million for 2008.



5. DISCONTINUED OPERATIONS



On October 28, 2001, API completed the transfer of one of its wholly-owned
subsidiaries, Newton Falls, Inc. (NFI), to Newton Falls LLC (NFLLC), an affiliated company of AWA. The Newton Falls mill, which represented the remainder of APIs coated free sheet and fine paper products division, was
permanently closed in the third quarter of 2001. APIs deficit investment in this subsidiary at the date of transfer was $2.8 million. This amount was credited to shareholders equity as API and NFLLC were commonly controlled entities.



API classified this subsidiary as discontinued operations in
its consolidated statements of operations and cash flows for the Predecessor Period presented. Operating losses were $6.9 million and net income approximated $4.5 million in the fiscal 2001 Predecessor Period.



6. RESTRUCTURING AND OTHER CHARGES



During 2003, in order to position itself for long-term growth, the Company
reduced salaried employment by 46. This included positions at corporate headquarters as well as the plant and mill sites. As a result, the Company took a charge in 2003 of $2.6 million for employment termination benefits.



During the third quarter of 1999, API announced plans to close the Newton
Falls mill in 2000 and the Harrisburg plant in 2001. API recorded restructuring charges of $12.7 million in the fiscal 2001 Predecessor Period related to these facility closings.



In the third quarter of 2000, API ceased operations at the Newton Falls mill and permanently closed the mill during the
third quarter of 2001. API sold its Harrisburg plant in August 2001. As part of this sale, API entered into a five-year agreement to lease the portion of the plant that served as a distribution center.



The table below summarizes the components of restructuring costs included in
the fiscal 2001 Predecessor Period in the consolidated statements of operations (dollars in thousands):



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                |  |                                                     |       |                                   |   |       |  
|------------------------------- |  | --------------------------------------------------- | ----- | --------------------------------- | - | ----- | -
|                                |  | (Predecessor Basis)                                 |      
|                                |  | For the Period December 31, 2000to November 9, 2001 |      
|                                |  | Restructuring and Other Charges                     |       | Loss from Discontinued Operations |  
|Asset impairments               |  | $                                                   | 3,827 |                                   | $ | 3,277 |  
|Employee termination benefits   |  |                                                     | 1,089 |                                   |   |      |  
|Newton Falls mill closing costs |  |                                                     |      |                                   |   | 2,667 |  
|Loss on contractual obligations |  |                                                     |      |                                   |   | (85   | )
|Other                           |  |                                                     | 1,469 |                                   |   | 415   |  
|                                |  |                                                     |       |                                   |   |       |  
|                                |  | $                                                   | 6,385 |                                   | $ | 6,274 |  
|                                |  |                                                     |       |                                   |   |       |  



In accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, API recorded impairment losses of $3.8 million and $3.3 million during the period December 31, 2000 to November 9, 2001 for the
sale of the Harrisburg plant and the closure of the Newton Falls mill, respectively.



Charges related to employee termination benefits of $1.1 million recorded in the period December 31, 2000 to November 9, 2001 were recorded for the 348 plant and distribution center employees whose employment was
terminated in 2001.



Newton Falls mill closing costs of $2.7
million in the fiscal 2001 Predecessor Period relate to additional costs caused by various delays in closing the facility that were not included within APIs original estimates.



Other charges of $1.9 million were recorded in the fiscal 2001 Predecessor Period. These charges primarily related to other
payments made for various closing costs incurred for the Harrisburg plant.



The table below summarizes the components of the restructuring reserve included on the consolidated balance sheets at January 3, 2004 and December 28, 2002 (dollars in thousands):



|                               |  |                          |       |                       |   |                        |  |   |                       |   |  |   |      
|------------------------------ |  | ------------------------ | ----- | --------------------- | - | ---------------------- |  | - | --------------------- | - |  | - | -----
|                               |  | December 28,2002 Reserve |       | 2003 ReserveAdditions |   | 2003 Chargesto Reserve |  |   | January 3,2004Reserve
|Distribution center exit costs |  | $                        | 4,753 |                       | $ |                       |  | $ | (617                  | ) |  | $ | 4,136
|Employee termination benefits  |  |                          |      |                       |   | 2,629                  |  |   | (1,008                | ) |  |   | 1,621
|                               |  |                          |       |                       |   |                        |  |   |                       |   |  |   |      
|                               |  | $                        | 4,753 |                       | $ | 2,629                  |  | $ | (1,625                | ) |  | $ | 5,757
|                               |  |                          |       |                       |   |                        |  |   |                       |   |  |   |      



The $0.6 million
reduction to the distribution center exit cost reserve represents 2003 lease payments, net of sublease income, for the New York distribution center. In 1999, the Company committed to exiting this distribution center in 2001 because it was no longer
needed as a result of the closure of the Newton Falls mill and thus recorded $6.0 million of related restructuring and other charges expected to be incurred until the long-term lease expires in 2007.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



7. TRANSACTIONS WITH AWA AND AWA AFFILIATED COMPANIES



On November 6, 2001, AWDGPs two partners made a capital
contribution of approximately $353.0 million to AWDGP. A portion of the receivables associated with this capital contribution were assigned to affiliated companies for full settlement of intercompany loan balances. Prior to the Acquisition, API made
a dividend distribution of approximately $7.4 million to an affiliated company.



Management fee expenses to AWA approximated $1.0 million in the fiscal 2001 Predecessor Period. Basestock and other paper purchases from Appleton Coated LLC for the fiscal 2001 Predecessor Period were $86.4 million.
Fees, associated with information technology and other services, received from affiliated companies approximated $2.7 million for the fiscal 2001 Predecessor Period.



During 2000 and through September of 2001, API held a $125 million shareholder note in Arjo Wiggins SA (the AWSA
Note). The AWSA Note could be redeemed at the option of AWSA on every tenth anniversary of the January 5, 1994 issue date. Interest at the annual rate of 6.46% was payable on June 15 and December 15 of each year. API recorded $6.4 million of
interest income in the fiscal 2001 Predecessor Period. Effective October 1, 2001 the note was sold to AWA for $125 million plus accrued interest. In consideration for the sale of the AWSA Note, AWA agreed to reduce intercompany debt owed by API to
AWA.



During 1990, API made a dividend distribution of $113.4
million to AWA, of which $5.2 million represented withholding tax. This $113.4 million dividend was charged directly to equity. Subsequent to remitting the withholding tax, API determined the distribution was not subject to withholding tax and filed
for a refund. API received the refund but, expecting the issue to be contested by the IRS, recorded the receipt of the refund as an accrued liability. During the third quarter of 2001 the issue was settled by the IRS in APIs favor and the $5.2
million accrued liability was reversed directly to retained earnings.



8.
INVENTORIES



Inventories consist of the following (dollars
in thousands):



|                                            |  |      |         |      |   |         |  
|------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                            |  | 2003 |         | 2002 |  
|Finished goods                              |  | $    | 66,108  |      | $ | 61,685  |  
|Raw materials, work in process and supplies |  |      | 63,333  |      |   | 56,898  |  
|                                            |  |      |         |      |   |         |  
|Total cost                                  |  |      | 129,441 |      |   | 118,583 |  
|Increased (excess) cost over LIFO cost      |  |      | 170     |      |   | (485    | )
|                                            |  |      |         |      |   |         |  
|                                            |  | $    | 129,611 |      | $ | 118,098 |  
|                                            |  |      |         |      |   |         |  



Stores and spare parts
inventory balances of $21.4 million in 2003 and $21.3 million in 2002 are valued at average cost. These balances are included above on the raw materials, work in process and supplies line. Inventories valued using the FIFO method approximate 11% of
the Companys total inventory balance.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



9. PROPERTY, PLANT AND EQUIPMENT



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



|                                      |  |      |          |   |      |   |         |  
|------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|                                      |  | 2003 |          |   | 2002 |  
|Land and improvements                 |  | $    | 9,118    |   |      | $ | 4,725   |  
|Buildings and improvements            |  |      | 93,909   |   |      |   | 77,259  |  
|Machinery and equipment               |  |      | 477,323  |   |      |   | 447,745 |  
|Software                              |  |      | 27,447   |   |      |   | 9,971   |  
|Capital lease                         |  |      | 4,764    |   |      |   | 4,764   |  
|Construction in progress              |  |      | 22,543   |   |      |   | 22,633  |  
|                                      |  |      |          |   |      |   |         |  
|                                      |  |      | 635,104  |   |      |   | 567,097 |  
|Accumulated depreciation/amortization |  |      | (123,544 | ) |      |   | (63,009 | )
|                                      |  |      |          |   |      |   |         |  
|                                      |  | $    | 511,560  |   |      | $ | 504,088 |  
|                                      |  |      |          |   |      |   |         |  



10. OTHER ASSETS



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



|                      |  |      |       |      |   |       
|--------------------- |  | ---- | ----- | ---- | - | ------
|                      |  | 2003 |       | 2002
|Deferred debt expense |  | $    | 6,044 |      | $ | 9,483 
|Other                 |  |      | 3,926 |      |   | 3,421 
|                      |  |      |       |      |   |       
|                      |  | $    | 9,970 |      | $ | 12,904
|                      |  |      |       |      |   |       



11. OTHER ACCRUED LIABILITIES



Other accrued liabilities consist of the following
(dollars in thousands):



|                      |  |      |        |      |   |       
|--------------------- |  | ---- | ------ | ---- | - | ------
|                      |  | 2003 |        | 2002
|Payroll               |  | $    | 10,819 |      | $ | 10,912
|Trade discounts       |  |      | 27,004 |      |   | 26,437
|Workers compensation |  |      | 4,604  |      |   | 5,129 
|Fox River Liabilities |  |      | 9,767  |      |   | 6,144 
|Other                 |  |      | 24,988 |      |   | 16,121
|                      |  |      |        |      |   |       
|                      |  | $    | 77,182 |      | $ | 64,743
|                      |  |      |        |      |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



12. LONG-TERM OBLIGATIONS



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



|                                                                                                                                                         |  |      |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                         |  | 2003 |         |   | 2002 |  
|Senior secured variable rate note payable, LIBOR plus 3.0%, $3,400 due March 31, 2004 and $2,757 due quarterly thereafter ending November 8,
2005        |  | $    | 26,752  |   |      | $ | 57,550  |  
|Senior secured variable rate note payable, LIBOR plus 3.25%, $227 due quarterly with $77,412 due November 8, 2006                                        |  |      |        |   |      |   | 93,792  |  
|Senior secured variable rate note payable, LIBOR plus 2.5%, $331 due March 31, 2004 and $321 due quarterly thereafter with $125,204 due
November 8, 2006 |  |      | 140,000 |   |      |   |        |  
|Revolving line of credit, LIBOR plus 3.0%                                                                                                                |  |      | 10,000  |   |      |   |        |  
|                                                                                                                                                         |  |      |         |   |      |   |         |  
|                                                                                                                                                         |  |      | 176,752 |   |      |   | 151,342 |  
|Less obligations due within one year (1)                                                                                                                 |  |      | (31,350 | ) |      |   | (42,419 | )
|                                                                                                                                                         |  |      |         |   |      |   |         |  
|                                                                                                                                                         |  |      | 145,402 |   |      |   | 108,923 |  
|Unsecured variable rate industrial development bonds, 1.3% average interest rate at January 3, 2004, $2,650 due in 2013 and $6,000 due in
2027           |  |      | 8,650   |   |      |   | 8,650   |  
|Senior subordinated notes payable, 12.5%, due December 15, 2008                                                                                          |  |      | 199,958 |   |      |   | 199,958 |  
|Deferred payment obligation, due May 8, 2010, 10% per annum compounded semi-annually to the date of repayment                                            |  |      | 172,742 |   |      |   | 156,409 |  



|(1) | In accordance with the terms of the senior secured variable rate notes payable, it is anticipated that an additional debt repayment of $18.4 million, based upon an excess cash flow
calculation, will be made during the first quarter of 2004. As such, this amount has been included in the balance representing obligations due within one year.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On November 9, 2001, API entered into a $340 million Senior Credit Facility. The Senior Credit Facility included the
following: a four-year credit facility of up to $75 million for revolving loans, including letters of credit; a four-year senior secured note of $115 million; and a five-year senior secured note of $150 million. The Senior Credit Facility is
unconditionally, jointly and severally guaranteed by PDC and WTA Inc., C&H Packaging, Inc., American Plastics Company, Inc., American Real Estate Corporation, Rose Holdings Limited, Bemrose Group Limited, The Henry Booth Group Limited,
BemroseBooth Limited, HBGI Holdings Limited, Bemrose Security & Promotional Printing Limited and BemroseBooth USA Inc., each of which is a direct or indirect wholly-owned subsidiary of API (see Note 25 Guarantor Financial
Information).



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



From November 18, 2002 through April 1, 2003 the
Companys defined leverage ratio was calculated at less than 2.00 to 1.00 but greater than or equal to 1.50 to 1.00 and, as a result, the interest rate on the $115 million senior secured note and the revolving credit facility was reduced to
LIBOR plus 2.5%. From April 2, 2003 through May 15, 2003, the Companys defined leverage ratio was calculated at less than 2.5 to 1.00 but greater than or equal to 2.00 to 1.00 and, as a result, the interest rate was increased to LIBOR plus
3.0%. From May 16, 2003 through August 19, 2003 the Companys defined leverage ratio was calculated at less than 2.00 to 1.00 but greater than or equal to 1.50 to 1.00 and, as a result, the interest rate was decreased to LIBOR plus 2.5%. On
August 20, 2003, the interest rate was increased to LIBOR plus 3.0% because the Companys defined leverage ratio was calculated at less than 2.5 to 1.00 but greater than or equal to 2.00 to 1.00.



On April 18, 2003 an amendment to the Senior Credit Facility was approved by
a majority of the lenders that allowed API to make acquisitions of $150 million in total over the life of the term loans, with no single acquisition totaling more than $60 million. In addition, the amendment allows for an increase in the revolving
line of credit from $75 million to $100 million should the Company need to access additional funds. It also allows API to repurchase and retire an additional $50 million of aggregate principal amount of its 12.5% Series B Senior Subordinated Notes
due 2008.



In December 2003 an amendment to the Senior Credit
Facility was approved by a majority of the lenders which amends the related financial covenants to provide additional flexibility, allows the establishment of a UK subsidiary, allows for Euro and British Sterling borrowings, classifies the
acquisition of American Plastics, C & H Packaging and BemroseBooth as permitted investments, thereby preserving the $150 million limit for futures acquisitions as permitted under the April 18, 2003 amendment and increases the single acquisition
limit from $60 million to $75 million. In addition, the amendment also allowed for the refinancing discussed below.



Through June 5, 2002, borrowings under the $150 million senior secured note bore interest at LIBOR plus 4.25% per annum, subject to a minimum LIBOR rate
of 2.5%. On June 6, 2002, the Company refinanced the $112.4 million remaining principal amount and replaced it with similar debt carrying a reduced interest rate of LIBOR plus 3.25%, not subject to a minimum LIBOR rate. The terms of this refinanced
debt also allowed the Company to repurchase up to $50.0 million in aggregate principal amount of its 12.5% Senior Subordinated Notes due 2008. As a result of this refinancing, $11.8 million of deferred debt issuance costs were written off during
fiscal 2002 as debt extinguishment expenses. In December 2003, the Company refinanced the remaining $83.3 million of this debt and borrowed an additional $56.7 million with which to make the Bemrose Group Limited acquisition. This debt, which is
similar to the previous debt, carries an interest rate of LIBOR plus 2.5%. As a result of this refinancing, $1.4 million of deferred debt issuance costs were written off in fiscal 2003 as debt extinguishment expenses.



The LIBOR rate at January 3, 2004 was 1.2%.



During 2003, the Company made mandatory debt repayments of $41.3 million,
plus interest, on its outstanding senior secured notes. During 2002, the Company made mandatory debt repayments of $18.0 million, plus interest, and voluntary debt prepayments totaling $95.7 million, plus interest, on its outstanding senior secured
notes.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



On December 14, 2001, API issued $250 million aggregate
principal amount of its 12.5% Series A Senior Subordinated Notes due 2008, which were used to redeem in full, at par, the senior subordinated note due 2008 held by AWA (see Note 3 Acquisition of Businesses). On June 12, 2002, the
Companys Registration Statement on Form S-4, relating to the offer to exchange up to $250 million of its registered 12.5% Series B Senior Subordinated Notes due 2008 for any and all of its outstanding 12.5% Series A Senior Subordinated Notes
due 2008, was declared effective by the Securities and Exchange Commission. The exchange offer closed on July 12, 2002. The entire outstanding principal balance of Series A notes was exchanged for Series B notes. During 2002, the Company purchased
and retired $50.0 million of its Series B notes. The Company paid a premium of $1.8 million on the purchase and retirement of the $50.0 million of its Series B notes.



The Series B notes and the Series A notes have substantially the same terms, conditions and covenants. The Series B notes
are unsecured obligations of API, ranking subordinate in right of payment to all senior debt of API, and are unconditionally, jointly and severally guaranteed by PDC and WTA Inc., C&H Packaging, Inc., American Plastics Company, Inc., American
Real Estate Corporation, Rose Holdings Limited, Bemrose Group Limited, The Henry Booth Group Limited, BemroseBooth Limited, HBGI Holdings Limited, Bemrose Security & Promotional Printing Limited and BemroseBooth USA Inc. (see Note 25
Guarantor Financial Information). Interest on the Senior Subordinated Notes is payable semi-annually in June and December of each year. Prior to December 15, 2004, and after 100% application toward the repayment of the Senior Credit
Facility, API may use the proceeds of certain sales of its equity to redeem up to 35% of the original principal amount of the Senior Subordinated Notes at a redemption price of 112.5% of their principal amount, plus accrued and unpaid interest and
liquidated damages, if any, to the redemption date.



Except
pursuant to the preceding paragraph, the Senior Subordinated Notes will not be redeemable at APIs option prior to December 15, 2005. On or after December 15, 2005, API may redeem during the 12-month period beginning on December 15 of the
applicable year all or a part of the Senior Subordinated Notes at the redemption prices of 106.25% in 2005, 103.125% in 2006 and 100% in 2007 and thereafter, plus accrued and unpaid interest and liquidated damages, if any.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Both the Senior Credit Facility and the Senior
Subordinated Notes contain customary affirmative and negative covenants. In general, the covenants contained in the Senior Credit Facility are more restrictive than those of the Senior Subordinated Notes. Among other restrictions, the covenants
contained within the Senior Credit Facility require the Company to meet specified financial tests, including various debt and cash flow ratios which become more restrictive over the term of the debt. These financial tests include the following: a
maximum defined leverage ratio of 2.75 to 1.00 at December 31, 2003 decreasing to 2.50 to 1.00 by March 31, 2006 and thereafter; a maximum defined senior leverage ratio of 1.50 to 1.00 at December 31, 2003 decreasing to 1.25 to 1.00 by March 31,
2006 and thereafter; a minimum defined interest coverage ratio of 3.50 to 1.00 for four consecutive fiscal quarters beginning December 31, 2003 increasing to 4.00 to 1.00 by March 31, 2006 and thereafter; a minimum consolidated fixed charge coverage
ratio of 1.10 to 1.00 for four consecutive quarters beginning December, 2003 and thereafter; and a minimum consolidated net worth of $107.0 million, plus fifty percent of cumulative consolidated net income for each fiscal quarter beginning with the
quarter ending on March 31, 2002 for which consolidated net income is positive, plus the excess of the aggregate amount of all ESOP stock issuances after November 9, 2001 over the aggregate amount of any ESOP related distributions after November 9,
2001.



The Senior Credit Facility and Senior Subordinated Notes
also contain covenants, which, among other things, restrict APIs ability and the ability of other guarantors of the Senior Credit Facility and Senior Subordinated Notes to incur liens, engage in transactions with affiliates, incur additional
indebtedness, declare dividends or redeem or repurchase capital stock, make loans and investments, engage in mergers, acquisitions, consolidations and asset sales, acquire assets, stock or debt securities of any person, make capital expenditures,
terminate the S corporation status of PDC or the qualified subchapter S subsidiary status of its subsidiaries eligible to elect such status, amend APIs other debt instruments and amend other agreements related to the Acquisition.



Both the Senior Credit Facility and Senior Subordinated Notes contain
customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, certain events of bankruptcy and insolvency, ERISA violations, judgment defaults, cross-defaults to certain
other indebtedness, agreements related to the Lower Fox River indemnification arrangements and purchase agreement and a change in control. If an event of default occurs, is continuing and arises from certain events of bankruptcy or insolvency, all
amounts owing under both the Senior Credit Facility and Senior Subordinated Notes become due and payable immediately. If any other event of default occurs under the Senior Credit Facility and is continuing, the Administrative Agent may, or if
requested by the Required Lenders (as defined in the Senior Credit Facility) shall, (i) terminate the revolving commitments and/or (ii) declare the loans and all other amounts owing under the agreement to be due and payable immediately. If any other
event of default occurs under the Senior Subordinated Note Indenture and is continuing, the trustee or Holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



In connection with the Acquisition (see Note 3
Acquisition of Businesses), PDC agreed to pay AWA approximately $321 million on May 8, 2010 (the Deferred Payment Obligation). The Deferred Payment Obligation is or will be contractually subordinated in right of payment to
the prior repayment in full of the Senior Credit Facility and the Senior Subordinated Notes and the fulfillment of all of PDCs obligations under its guarantees of the Senior Credit Facility and the Senior Subordinated Notes. PDC has the right
to set off the amount of any losses suffered by the Company for which AWA is obligated to provide indemnification under the purchase agreement against any payments due under the Deferred Payment Obligation.



In connection with the Deferred Payment Obligation, PDC agreed to the
following: (1) limit the distributions PDC is allowed to make to the ESOP other than (i) those distributions required to repurchase stock from employees whose employment is terminated or who exercise their diversification rights under the ESOP and
(ii) loans to the ESOP to permit the ESOP to make loans or to fund hardship distributions to participants in the ESOP; (2) not to incur debt other than certain permitted guarantees; the intercompany acquisition loan; loans payable to AWA pursuant to
the Fox River Indemnification Agreement; or other indebtedness not to exceed $5,000 at any time outstanding; nor to allow API or its subsidiaries to incur indebtedness except (i) to refinance the Senior Credit Facility; (ii) certain permitted
guarantees; (iii) loans payable to AWA pursuant to the Fox River Indemnification Agreement; (iv) an incurrence of indebtedness following which (a) the resulting indebtedness and Attributable Debt (excluding working capital facilities) of PDC and its
subsidiaries is $635 million or less and (b) the accumulated outstanding amount of any such indebtedness incurred under this provision and not used to reduce existing indebtedness and any indebtedness incurred to avoid a default (see (v) following)
does not exceed $100 million; or (v) if reasonably necessary to avoid a default under the terms of the Purchase Indebtedness or any refinancing thereof; (3) not to own assets other than APIs capital stock; (4) to allow the holder of the
Deferred Payment Obligation the right to transfer the obligation to a qualified institutional buyer and to other parties, except APIs competitors, with PDCs consent, which may not be unreasonably withheld; and (5) to provide AWA with all
information provided to the holders of the Senior Subordinated Notes.



If, at any time prior to the date that the Deferred Payment Obligation is paid in full, API defaults on the payment of any principal or interest owing under the Senior Credit Facility or the Senior Subordinated Notes and the default
continues for thirty days, the holder of the Deferred Payment Obligation will have the right to designate one member to the Companys board of directors. Notwithstanding the foregoing, if AWA transfers more than 50% of the Deferred Payment
Obligation to a third party, then such third party holder would be entitled to designate two directors to the Companys board of directors upon any payment default. PDC will be permitted to prepay the Deferred Payment Obligation, in whole at
any time, or in part from time to time, for an amount equal to $140 million increased by 10% per annum compounded semi-annually from the closing date of the Acquisition through the date of repayment, less the amount of any prior prepayments.
However, the agreements governing the Senior Credit Facility and the Senior Subordinated Notes prohibit or restrict prepayments, or repayment on the due date, of the Deferred Payment Obligation as long as the Senior Credit Facility and the Senior
Subordinated Notes remain outstanding.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



At January 3, 2004 there was approximately $44.8 million
of unused borrowing capacity under the $75 million revolving credit facility for working capital and other corporate purposes. In accordance with the terms of the April 18, 2003 amendment to the Senior Credit Facility, the Company has the ability to
access an additional $25 million under its revolving line of credit. Approximately $20.2 million of the revolving credit facility was used to support outstanding letters of credit. At December 28, 2002 there was approximately $57.5 million of unused
borrowing capacity under this same revolving credit facility. Approximately $17.5 million of the revolving credit facility was used to support outstanding letters of credit. A commitment fee of 0.5% per annum is assessed on its unused borrowing
capacity.



API recorded debt extinguishment expenses of $10.4
million during the 2001 Predecessor Period as a result of the early redemption of the 6.26% and 6.61% senior unsecured notes payable. On October 19, 2001, API paid $150.0 million in principal due on the notes and $3.3 million in related interest.
The debt extinguishment expenses consisted primarily of a prepayment penalty and the write-off of unamortized debt issuance costs. The redemption of the debt was financed with funds received from an affiliated company.



Scheduled repayment of principal on long-term obligations outstanding at
January 3, 2004 is as follows (dollars in thousands):



|           |  |   |        
|---------- |  | - | -------
|           | 
|2004       |  |   | $31,350
|2005       |  |   | 19,556 
|2006       |  |   | 125,846
|2007       |  |   |       
|2008       |  |   | 199,958
|Thereafter |  |   | 181,392
|           |  |   |        
|           |  | $ | 558,102
|           |  |   |        



13. INCOME TAXES



In conjunction with the acquisition of API, the Company elected to be
treated as a subchapter S corporation and to treat its eligible subsidiaries as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state income tax purposes. The components of the provision for income taxes from continuing
operations for the Predecessor Period are as follows (dollars in thousands):



|                  |  |                                                      |         |  
|----------------- |  | ---------------------------------------------------- | ------- | -
|                  |  | (Predecessor Basis)                                  |        
|                  |  | For the Period December 31, 2000 to November 9, 2001 |        
|Current           |  | $                                                    | 32,465  |  
|Deferred          |  |                                                      | (11,840 | )
|                  |  |                                                      |         |  
|Total tax expense |  | $                                                    | 20,625  |  
|                  |  |                                                      |         |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



An analysis of effective income tax rates for continuing
operations for the Predecessor Period is shown below (dollars in thousands):



|                                                                         |  |                                                      |        |  
|------------------------------------------------------------------------ |  | ---------------------------------------------------- | ------ | -
|                                                                         |  | (Predecessor Basis)                                  |       
|                                                                         |  | For the Period December 31, 2000 to November 9, 2001 |       
|Expected tax at statutory federal tax rates                              |  | $                                                    | 20,233 |  
|State and local income taxes net of federal tax benefit                  |  |                                                      | 2,046  |  
|Benefit from Extraterritorial Income Exclusion/Foreign Sales Corporation |  |                                                      | (1,085 | )
|Prior year taxes                                                         |  |                                                      | (1,453 | )
|Other, net                                                               |  |                                                      | 884    |  
|                                                                         |  |                                                      |        |  
|Total tax expense                                                        |  | $                                                    | 20,625 |  
|                                                                         |  |                                                      |        |  
|Effective income tax rate                                                |  |                                                      | 35.7   | %
|                                                                         |  |                                                      |        |  



No analysis of
effective income tax rates for the Successor Period is shown because, under U.S. tax law, PDC has elected subchapter S corporation status and thus its tax provision includes only minimal foreign and state income taxes. BemroseBooth, acquired by the
Company in December 2003, is a taxable entity. For fiscal 2003, the Company recorded a tax provision of $0.1 million which included a $0.3 million tax benefit recorded by BemroseBooth. Deferred tax liabilities associated with BemroseBooth are $1.8
million at January 3, 2004.



The effective income tax rate for
discontinued operations was 37.2% for the fiscal 2001 Predecessor Period.



14. LEASES



The Company leases buildings,
machinery and equipment and other facilities. Many of these leases obligate the Company to pay real estate taxes, insurance and maintenance costs and contain multiple renewal options, which cover periods ranging from one to ten years. Total rent
expense was $8.0 million for 2003, $8.8 million for 2002, $1.2 million for the 2001 Successor Period and $7.5 million for the fiscal 2001 Predecessor Period.



Assets recorded under a capital lease consist of the following (dollars in thousands):



|                              |  |      |        |   |      |   |       |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                              |  | 2003 |        |   | 2002 |  
|Building                      |  | $    | 4,764  |   |      | $ | 4,764 |  
|Less accumulated depreciation |  |      | (1,092 | ) |      |   | (568  | )
|                              |  |      |        |   |      |   |       |  
|                              |  | $    | 3,672  |   |      | $ | 4,196 |  
|                              |  |      |        |   |      |   |       |  



Future minimum lease
payments as of January 3, 2004 under leases that have initial or remaining non-cancelable terms in excess of one year are as follows (dollars in thousands):



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                                            |  |               |        |   |                  |   |       
|----------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------
|                                                            |  | Capital Lease |        |   | Operating Leases
|2004                                                        |  | $             | 670    |   |                  | $ | 8,094 
|2005                                                        |  |               | 675    |   |                  |   | 6,705 
|2006                                                        |  |               | 731    |   |                  |   | 4,079 
|2007                                                        |  |               | 731    |   |                  |   | 1,825 
|2008                                                        |  |               | 731    |   |                  |   | 757   
|Thereafter                                                  |  |               | 1,401  |   |                  |   | 990   
|                                                            |  |               |        |   |                  |   |       
|Total minimum lease payments                                |  |               | 4,939  |   |                  | $ | 22,450
|                                                            |  |               |        |   |                  |   |       
|Less amounts representing interest                          |  |               | (1,017 | ) |                  |   |       
|                                                            |  |               |        |   |                  |   |       
|Present value of minimum lease payments under capital lease |  |               | 3,922  |   |                  |   |       
|Less current principal portion                              |  |               | (418   | ) |                  |   |       
|                                                            |  |               |        |   |                  |   |       
|                                                            |  | $             | 3,504  |   |                  |   |       
|                                                            |  |               |        |   |                  |   |       



15. INTEREST EXPENSE (INCOME)



Interest expense (income) consists of the following
(dollars in thousands):



|                               |  |                                    |        |   |                                      |   |        |                                                       |  |   |                                                      |   |  |                         |        |   |  |   |    
|------------------------------ |  | ---------------------------------- | ------ | - | ------------------------------------ | - | ------ | ----------------------------------------------------- |  | - | ---------------------------------------------------- | - |  | ----------------------- | ------ | - |  | - | ---
|                               |  | (Successor Basis)                  |        |   | (Predecessor Basis)                 
|                               |  | For the Year Ended January 3, 2004 |        |   | For the Year Ended December 28, 2002 |   |        | For the Period November 10, 2001 to December 29, 2001 |  |   | For the Period December 31, 2000 to November 9, 2001
|                               |  | Continuing Operations              |        |   | Continuing Operations                |   |        | Continuing Operations                                 |  |   | Continuing Operations                                |   |  | Discontinued Operations
|Interest expense  affiliates  |  | $                                  |       |   |                                      | $ |       |                                                       |  | $ |                                                     |   |  | $                       | 16,293 |   |  | $ | 187
|Interest expense  external    |  |                                    | 54,160 |   |                                      |   | 68,366 |                                                       |  |   | 10,653                                               |   |  |                         | 9,471  |   |  |   |   
|Capitalized interest           |  |                                    |       |   |                                      |   | (12    | )                                                     |  |   | (15                                                  | ) |  |                         | (323   | ) |  |   |   
|                               |  |                                    |        |   |                                      |   |        |                                                       |  |   |                                                      |   |  |                         |        |   |  |   |    
|Total interest expense         |  | $                                  | 54,160 |   |                                      | $ | 68,354 |                                                       |  | $ | 10,638                                               |   |  | $                       | 25,441 |   |  | $ | 187
|                               |  |                                    |        |   |                                      |   |        |                                                       |  |   |                                                      |   |  |                         |        |   |  |   |    
|Interest (income)  affiliates |  | $                                  |       |   |                                      | $ |       |                                                       |  | $ |                                                     |   |  | $                       | (6,492 | ) |  | $ |   
|Interest (income)  external   |  |                                    | (315   | ) |                                      |   | (990   | )                                                     |  |   | (406                                                 | ) |  |                         | (2,326 | ) |  |   |   
|                               |  |                                    |        |   |                                      |   |        |                                                       |  |   |                                                      |   |  |                         |        |   |  |   |    
|Total interest (income)        |  | $                                  | (315   | ) |                                      | $ | (990   | )                                                     |  | $ | (406                                                 | ) |  | $                       | (8,818 | ) |  | $ |   
|                               |  |                                    |        |   |                                      |   |        |                                                       |  |   |                                                      |   |  |                         |        |   |  |   |    



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



16. FAIR VALUE OF FINANCIAL INSTRUMENTS



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



|                                  |  |                 |         |                   |   |                 |  |            |         |  |   |        
|--------------------------------- |  | --------------- | ------- | ----------------- | - | --------------- |  | ---------- | ------- |  | - | -------
|                                  |  | January 3, 2004 |         | December 28, 2002
|Financial Instruments             |  | Carrying Amount |         | Fair Value        |   | Carrying Amount |  | Fair Value
|Senior subordinated notes payable |  | $               | 199,958 |                   | $ | 228,000         |  | $          | 199,958 |  | $ | 209,507
|Senior credit facility            |  |                 | 176,752 |                   |   | 176,752         |  |            | 151,342 |  |   | 151,342
|Industrial development bonds      |  |                 | 8,650   |                   |   | 8,650           |  |            | 8,650   |  |   | 8,650  
|                                  |  |                 |         |                   |   |                 |  |            |         |  |   |        
|                                  |  | $               | 385,360 |                   | $ | 413,402         |  | $          | 359,950 |  | $ | 369,499
|Deferred payment obligation       |  |                 | 172,742 |                   |   | 160,881         |  |            | 156,409 |  |   | 144,031
|                                  |  |                 |         |                   |   |                 |  |            |         |  |   |        
|                                  |  | $               | 558,102 |                   | $ | 574,283         |  | $          | 516,359 |  | $ | 513,530
|Lease obligation                  |  | $               | 3,922   |                   | $ | 3,922           |  | $          | 4,314   |  | $ | 4,314  



The Senior
Subordinated Notes Payable are traded in public markets and therefore, the fair value was determined based on quoted market prices. The Senior Credit Facility and industrial development bonds have variable interest rates that reflect current market
terms and conditions. The fair values of the deferred payment and lease obligations were determined based on current rates available to the Company for financial instruments of the same remaining maturities and similar terms.



17. PENSION BENEFITS



The Company has various defined benefit pension plans and a defined contribution pension plan. The Company utilized a
November 30 measurement date for fiscal 2003 and fiscal 2002. The status of these plans, including a reconciliation of benefit obligations, a reconciliation of plan assets, the funded status of the plans as well as the key assumptions used in
accounting for the plans, is shown below (dollars in thousands):



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                          |  |                                  |         |   |                                    |   |         |  
|----------------------------------------- |  | -------------------------------- | ------- | - | ---------------------------------- | - | ------- | -
|Pension Benefits                          |  | For the YearEndedJanuary 3, 2004 |         |   | For the YearEndedDecember 28, 2002 |  
|Change in benefit obligation              |  |                                  |         |   |                                    |   |         |  
|Benefit obligation at beginning of period |  | $                                | 203,476 |   |                                    | $ | 189,278 |  
|Service cost                              |  |                                  | 6,058   |   |                                    |   | 5,835   |  
|Interest cost                             |  |                                  | 13,933  |   |                                    |   | 13,076  |  
|Acquisition of business                   |  |                                  | 68,114  |   |                                    |   |        |  
|Currency translation adjustments          |  |                                  | 1,363   |   |                                    |   |        |  
|Plan amendments                           |  |                                  |        |   |                                    |   | 119     |  
|Special benefits charge                   |  |                                  |        |   |                                    |   | 1,346   |  
|Actuarial loss                            |  |                                  | 25,005  |   |                                    |   | 3,012   |  
|Benefits and expenses paid                |  |                                  | (10,376 | ) |                                    |   | (9,190  | )
|                                          |  |                                  |         |   |                                    |   |         |  
|Benefit obligation at end of period       |  | $                                | 307,573 |   |                                    | $ | 203,476 |  
|                                          |  |                                  |         |   |                                    |   |         |  
|Change in plan assets                     |  |                                  |         |   |                                    |   |         |  
|Fair value at beginning of period         |  | $                                | 170,970 |   |                                    | $ | 173,544 |  
|Actual return on plan assets              |  |                                  | 29,667  |   |                                    |   | (3,384  | )
|Acquisition of business                   |  |                                  | 51,129  |   |                                    |   |        |  
|Currency translation adjustments          |  |                                  | 1,023   |   |                                    |   |        |  
|Employer contributions                    |  |                                  |        |   |                                    |   | 10,000  |  
|Benefits and expenses paid                |  |                                  | (10,376 | ) |                                    |   | (9,190  | )
|                                          |  |                                  |         |   |                                    |   |         |  
|Fair value at end of period               |  | $                                | 242,413 |   |                                    | $ | 170,970 |  
|                                          |  |                                  |         |   |                                    |   |         |  
|Funded status of plans                    |  |                                  |         |   |                                    |   |         |  
|Funded status at end of period            |  | $                                | (65,160 | ) |                                    | $ | (32,506 | )
|Unrecognized                              |  |                                  |         |   |                                    |   |         |  
|Net actuarial loss                        |  |                                  | 37,021  |   |                                    |   | 23,529  |  
|Prior service cost                        |  |                                  | 110     |   |                                    |   | 119     |  
|                                          |  |                                  |         |   |                                    |   |         |  
|Net liability                             |  | $                                | (28,029 | ) |                                    | $ | (8,858  | )
|                                          |  |                                  |         |   |                                    |   |         |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                                                 |  |                                   |         |   |                                     |   |         |  
|---------------------------------------------------------------- |  | --------------------------------- | ------- | - | ----------------------------------- | - | ------- | -
|Pension Benefits                                                 |  | For the Year EndedJanuary 3, 2004 |         |   | For the Year EndedDecember 28, 2002 |  
|Amounts recognized in the consolidated balance sheet consist of: |  |                                   |         |   |                                     |   |         |  
|Accrued benefit liability                                        |  | $                                 | (39,696 | ) |                                     | $ | (10,959 | )
|Intangible asset                                                 |  |                                   | 535     |   |                                     |   | 578     |  
|Accumulated other comprehensive loss                             |  |                                   | 11,132  |   |                                     |   | 1,523   |  
|                                                                 |  |                                   |         |   |                                     |   |         |  
|Net amount recognized                                            |  | $                                 | (28,029 | ) |                                     | $ | (8,858  | )
|                                                                 |  |                                   |         |   |                                     |   |         |  
|Key assumptions at end of period (%)                             |  |                                   |         |   |                                     |   |         |  
|Discount rate                                                    |  |                                   | 6.25    |   |                                     |   | 7.00    |  
|Rate of compensation increase                                    |  |                                   | 4.00    |   |                                     |   | 4.25    |  



Data presented in the
reconciliation of changes in benefit obligation and the changes in plan assets titled Acquisition of business, relate to the BemroseBooth acquisition in December 2003 and are based upon the Companys preliminary purchase price
allocation.



The components of net periodic pension cost
include the following (dollars in thousands):



|                               |  |                                    |         |   |                                      |   |         |                                                       |  |   |                                                      |   |  |   |         |  
|------------------------------ |  | ---------------------------------- | ------- | - | ------------------------------------ | - | ------- | ----------------------------------------------------- |  | - | ---------------------------------------------------- | - |  | - | ------- | -
|                               |  | (Successor Basis)                  |         |   | (Predecessor Basis)                  |  
|Pension Benefits               |  | For the Year Ended January 3, 2004 |         |   | For the Year Ended December 28, 2002 |   |         | For the Period November 10, 2001 to December 29, 2001 |  |   | For the Period December 31, 2000 to November 9, 2001 |  
|Net periodic benefit cost      |  |                                    |         |   |                                      |   |         |                                                       |  |   |                                                      |   |  |   |         |  
|Service cost                   |  | $                                  | 6,058   |   |                                      | $ | 5,835   |                                                       |  | $ | 808                                                  |   |  | $ | 3,996   |  
|Interest cost                  |  |                                    | 13,933  |   |                                      |   | 13,076  |                                                       |  |   | 1,780                                                |   |  |   | 10,225  |  
|Expected return on plan assets |  |                                    | (17,878 | ) |                                      |   | (17,114 | )                                                     |  |   | (2,344                                               | ) |  |   | (13,748 | )
|Amortization of                |  |                                    |         |   |                                      |   |         |                                                       |  |   |                                                      |   |  |   |         |  
|Transition obligation          |  |                                    |        |   |                                      |   |        |                                                       |  |   |                                                     |   |  |   | 70      |  
|Prior service cost             |  |                                    | 9       |   |                                      |   |        |                                                       |  |   |                                                     |   |  |   | 953     |  
|Actuarial gain                 |  |                                    |        |   |                                      |   |        |                                                       |  |   |                                                     |   |  |   | (757    | )
|Special benefits charge        |  |                                    |        |   |                                      |   | 1,346   |                                                       |  |   |                                                     |   |  |   |        |  
|                               |  |                                    |         |   |                                      |   |         |                                                       |  |   |                                                      |   |  |   |         |  
|Net periodic benefit cost      |  | $                                  | 2,122   |   |                                      | $ | 3,143   |                                                       |  | $ | 244                                                  |   |  | $ | 739     |  
|                               |  |                                    |         |   |                                      |   |         |                                                       |  |   |                                                      |   |  |   |         |  



The key assumptions
used in the measurement of the Companys net periodic benefit cost are shown in the following table:



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                               |  |                                   |   |  |                                     |   |  |                                                       |   |  |                                                      |  
|------------------------------ |  | --------------------------------- | - |  | ----------------------------------- | - |  | ----------------------------------------------------- | - |  | ---------------------------------------------------- | -
|                               |  | (Successor Basis)                 |   |  | (PredecessorBasis)                  |  
|                               |  | For the YearEnded January 3, 2004 |   |  | For the YearEnded December 28, 2002 |   |  | For the Period November 10, 2001 to December 29, 2001 |   |  | For the Period December 31, 2000 to November 9, 2001 |  
|Discount rate                  |  | 7.00                              | % |  | 7.00                                | % |  | 7.00                                                  | % |  | 7.75                                                 | %
|Expected return on plan assets |  | 9.00                              | % |  | 9.00                                | % |  | 9.00                                                  | % |  | 9.00                                                 | %
|Rate of compensation increase  |  | 4.25                              | % |  | 4.25                                | % |  | 4.25                                                  | % |  | 4.75                                                 | %



As of the
Companys 2003 and 2002 measurement date, the approximate asset allocations by asset category were as follows:



|                          |  |                  |   |  |                  |  
|------------------------- |  | ---------------- | - |  | ---------------- | -
|                          |  | November 30,2003 |   |  | November 30,2002 |  
|US Equity                 |  | 44               | % |  | 40               | %
|International Equity      |  | 11               |   |  | 10               |  
|Private Equity            |  | 3                |   |  | 3                |  
|Tactical Asset Allocation |  | 20               |   |  | 19               |  
|Fixed Income              |  | 15               |   |  | 17               |  
|Real Estate               |  | 7                |   |  | 9                |  
|Cash                      |  |                 |   |  | 2                |  
|                          |  |                  |   |  |                  |  
|Total                     |  | 100              | % |  | 100              | %
|                          |  |                  |   |  |                  |  



The Companys
Benefits Finance Committee (the Committee) is, among other things, charged with monitoring investment performance. The Committee regularly reviews fund performance and asset allocations, making changes as necessary to realign the asset
mix with the target allocations. The Committee has an investment policy for the pension plan assets that establishes long-term target asset allocations by asset class, as follows:



|                                                                         |  |    |  
|------------------------------------------------------------------------ |  | -- | -
|Total US Equity (including private equity and tactical asset allocation) |  | 55 | %
|Total International Equity (including tactical asset allocation)         |  | 13 | %
|Real Estate                                                              |  | 10 | %
|Bonds (including tactical asset allocation)                              |  | 22 | %



The Company contracts
with an investment advisor to assist it and the members the Committee in managing the fund investments and establishing asset allocations and long-term return expectations. The advisor develops and maintains long-term return, risk and correlation
expectations for a broad array of capital markets.



To develop
the expected long-term rate of return on assets assumptions, a building block approach was utilized starting with an inflation expectation and adding an expected real return to arrive at a long-term nominal expected return for each asset class.
Long-term expected real returns are derived in the context of the advisors future expectations for the U.S. Treasury real yield curve. Based on the assumptions and methodology described above, the Company has selected 9.0% for 2003 and
anticipates using 8.25% for 2004 as its long-term rate of return on assets assumptions.



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The Company expects to contribute $25 million to its
pension plan in calendar 2004 for plan year 2003. The defined benefit plan provides that hourly employees receive payments of stated amounts for each year of service. Payments under the defined benefit plan covering salaried employees are based on
years of service and the employees compensation during employment. At January 3, 2004, the accumulated benefit obligation and the fair value of plan assets for the defined benefit plan, exclusive of BemroseBooth, were approximately $211.9
million and $190.2 million, respectively.



In 2002, the Company
offered an early retirement option to certain Appleton plant hourly employees resulting in a special benefits charge of $1.3 million. API has an unfunded, non-qualified retirement plan for certain management employees. Benefits are based on final
average compensation and vest upon retirement from API.



Certain of APIs hourly employees participate in a multi-employer defined benefit plan. APIs cost for this plan amounted to $0.9 million in 2003, $0.8 million in 2002, $0.1 million in the 2001 Successor Period and $0.5 million in
the 2001 Predecessor Period. The Company has not recorded a liability for the unfunded amount related to this plan as the liability cannot be reasonably estimated.



In December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive Plan (the Plan), which
provides officers and key employees the opportunity to earn phantom stock units, the value of which is related to the appreciation of the value of the Companys common stock. The phantom stock units vest ratably over three years. Vested phantom
shares may not be exercised in whole or in part, until they are held for a minimum of three years. Compensation expense for the Plan was $0.5 million in 2003 and $1.8 million in 2002. Since the inception of the Plan, 484,520 shares have been granted
and 46,125 shares have been forfeited, leaving an outstanding balance of 438,395 shares.



As part of AWAs efforts to sell AWDGP, which began in mid-2000, AWA agreed to compensate certain executive officers for their efforts in selling
AWDGP to a third party through two AWA incentive programs. The first incentive program provided for a loyalty payment to named executive officers as of October 1, 2000 who remained officers through the closing of any sale of AWDGP and who agreed to
be available to be engaged at the request of any buyer of AWDGP. As part of the Acquisition, each of the recipients in this program agreed to defer a substantial portion of the payment into a deferred compensation plan and therefore the funds are
available to the Company until the officers employment is terminated. Due to a change in estimates, the Company recorded income of $0.2 million in fiscal 2003. Expenses under this program totaled $1.7 million in fiscal 2002 and $4.1 million in
the fiscal 2001 Predecessor Period. The second incentive program involved sales incentive payments made to the Companys chief executive officer and other employees who assisted with the successful completion of the Acquisition. Total payments
made under this program were $2.8 million in the fiscal 2001 Predecessor Period.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



18. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS



The Company has defined postretirement benefit plans that provide medical
and life insurance for certain retirees and eligible dependents. The Company utilized a November 30 measurement date for fiscal 2003 and fiscal 2002. The status of these plans, including a reconciliation of benefit obligations and the funded status
of the plans as well as the key assumptions used in accounting for the plans, is as follows (dollars in thousands):



|                                          |  |                    |         |   |                    |   |         |  
|----------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|                                          |  | For the Year Ended |         |   | For the Year Ended |  
|Other Postretirement Benefits             |  | January 3, 2004    |         |   | December 28, 2002  |  
|Change in benefit obligation              |  |                    |         |   |                    |   |         |  
|Benefit obligation at beginning of period |  | $                  | 65,332  |   |                    | $ | 60,612  |  
|Service cost                              |  |                    | 1,040   |   |                    |   | 963     |  
|Interest cost                             |  |                    | 4,424   |   |                    |   | 4,149   |  
|Actuarial loss                            |  |                    | 4,036   |   |                    |   | 3,000   |  
|Benefits and expenses paid                |  |                    | (4,648  | ) |                    |   | (3,392  | )
|                                          |  |                    |         |   |                    |   |         |  
|Benefit obligation at end of period       |  | $                  | 70,184  |   |                    | $ | 65,332  |  
|                                          |  |                    |         |   |                    |   |         |  
|Funded status of plans                    |  |                    |         |   |                    |   |         |  
|Funded status at end of period            |  | $                  | (70,184 | ) |                    | $ | (65,332 | )
|Unrecognized Net actuarial loss           |  |                    | 6,585   |   |                    |   | 2,831   |  
|                                          |  |                    |         |   |                    |   |         |  
|Accrued benefit cost                      |  | $                  | (63,599 | ) |                    | $ | (62,501 | )
|                                          |  |                    |         |   |                    |   |         |  
|Key assumptions at end of period (%)      |  |                    |         |   |                    |   |         |  
|Discount rate                             |  |                    | 6.25    |   |                    |   | 7.00    |  
|Pre-Medicare medical inflation            |  |                    | 10.00   |   |                    |   | 10.00   |  
|Post-Medicare medical inflation           |  |                    | 10.00   |   |                    |   | 10.00   |  
|Ultimate medical inflation                |  |                    | 5.00    |   |                    |   | 5.50    |  
|Year ultimate inflation reached           |  |                    | 2008    |   |                    |   | 2005    |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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



|                                                   |  |                                    |       |                                      |   |                                                       |  |                                                      |     |  |   |       |  
|-------------------------------------------------- |  | ---------------------------------- | ----- | ------------------------------------ | - | ----------------------------------------------------- |  | ---------------------------------------------------- | --- |  | - | ----- | -
|                                                   |  | (Successor Basis)                  |       | (Predecessor Basis)                  |  
|Other Postretirement Benefits                      |  | For the Year Ended January 3, 2004 |       | For the Year Ended December 28, 2002 |   | For the Period November 10, 2001 to December 29, 2001 |  | For the Period December 31, 2000 to November 9, 2001 |    
|Net periodic benefit cost                          |  |                                    |       |                                      |   |                                                       |  |                                                      |     |  |   |       |  
|Service cost                                       |  | $                                  | 1,040 |                                      | $ | 963                                                   |  | $                                                    | 129 |  | $ | 661   |  
|Interest cost                                      |  |                                    | 4,424 |                                      |   | 4,149                                                 |  |                                                      | 545 |  |   | 3,864 |  
|Amortization of Prior service cost                 |  |                                    |      |                                      |   |                                                      |  |                                                      |    |  |   | 469   |  
|Actuarial loss                                     |  |                                    |      |                                      |   |                                                      |  |                                                      |    |  |   | 124   |  
|                                                   |  |                                    |       |                                      |   |                                                       |  |                                                      |     |  |   |       |  
|Net periodic benefit cost                          |  | $                                  | 5,464 |                                      | $ | 5,112                                                 |  | $                                                    | 674 |  | $ | 5,118 |  
|Charges related to discontinued operations         |  |                                    |      |                                      |   |                                                      |  |                                                      |    |  |   | (506  | )
|                                                   |  |                                    |       |                                      |   |                                                       |  |                                                      |     |  |   |       |  
|Net periodic benefit cost of continuing operations |  | $                                  | 5,464 |                                      | $ | 5,112                                                 |  | $                                                    | 674 |  | $ | 4,612 |  
|                                                   |  |                                    |       |                                      |   |                                                       |  |                                                      |     |  |   |       |  



The key assumptions
used in the measurement of the Companys net periodic benefit cost are shown in the following table:



|                                |  |                                    |   |  |                                      |   |  |                                                       |   |  |                                                      |  
|------------------------------- |  | ---------------------------------- | - |  | ------------------------------------ | - |  | ----------------------------------------------------- | - |  | ---------------------------------------------------- | -
|                                |  | (Successor Basis)                  |   |  | (Predecessor Basis)                  |  
|                                |  | For the Year Ended January 3, 2004 |   |  | For the Year Ended December 28, 2002 |   |  | For the Period November 10, 2001 to December 29, 2001 |   |  | For the Period December 31, 2000 to November 9, 2001 |  
|Discount rate                   |  | 7.00                               | % |  | 7.00                                 | % |  | 7.00                                                  | % |  | 7.75                                                 | %
|Pre-Medicare medical inflation  |  | 10.00                              | % |  | 10.00                                | % |  | 10.00                                                 | % |  | 8.00                                                 | %
|Post-Medicare medical inflation |  | 10.00                              | % |  | 10.00                                | % |  | 10.00                                                 | % |  | 8.00                                                 | %
|Ultimate medical inflation      |  | 5.50                               | % |  | 5.50                                 | % |  | 5.50                                                  | % |  | 5.50                                                 | %
|Year ultimate inflation reached |  | 2005                               |   |  | 2005                                 |   |  | 2004                                                  |   |  | 2003                                                 |  



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The Companys postretirement benefit plans provide
for prescription drug benefits. On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D)
as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position FAS 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003, any measures of the Companys accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the consolidated
financial statements and accompanying notes do not reflect the effects of the Act on the plans. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change
previously reported information.



Impact of a one percent
change in medical trend rate (dollars in thousands):



|                                              |  |             |       |             |   |        |  
|--------------------------------------------- |  | ----------- | ----- | ----------- | - | ------ | -
|                                              |  | 1% Increase |       | 1% Decrease |  
|Aggregate impact on service and interest cost |  | $           | 445   |             | $ | (382   | )
|Effect on accumulated plan benefit obligation |  |             | 5,111 |             |   | (4,452 | )



19. COMMITMENTS AND CONTINGENCIES



COMMITMENTS



The Company has entered into certain contractual arrangements for the
purchase of raw materials with various suppliers. Obligations as of January 3, 2004, under these contractual agreements, are as follows (dollars in thousands):



|           |  |   |       
|---------- |  | - | ------
|2004       |  | $ | 17,400
|2005       |  |   | 10,900
|2006       |  |   | 10,300
|2007       |  |   | 5,700 
|2008       |  |   | 1,500 
|Thereafter |  |   | 600   
|           |  |   |       
|           |  | $ | 46,400
|           |  |   |       



Actual purchases under
these obligations approximated $26.8 million in 2003, $28.4 million in 2002, $6.0 million in the 2001 Successor Period and $47.6 million in the fiscal 2001 Predecessor Period.



Basestock is a key raw material in the Companys business. For fiscal 2003, the Company purchased approximately $127
million of basestock from external suppliers. Approximately $53 million of this basestock was purchased for the production of carbonless products with nearly 83% purchased from three external suppliers. The Company purchased approximately $67
million of basestock for the production of thermal and advanced technical products with over 76% purchased from a single external supplier. For fiscal 2002, the Company purchased approximately $149 million of basestock from external suppliers.
Approximately $79 million of this basestock was purchased for the production of carbonless products with nearly 90% purchased from three external suppliers. The Company purchased approximately $64 million of basestock for the production of thermal
and advanced technical products with over 70% purchased from a single external supplier.



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CONTINGENCIES



Lower Fox River



Various state and federal government agencies and Native American tribes have asserted claims against API and other
parties with respect to historic discharges of polychlorinated biphenyls (PCBs) into the Lower Fox River in Wisconsin.



Carbonless paper containing PCBs was manufactured at what is currently the Appleton plant from 1954 until 1971. Wastewater from the Appleton plant, the
Combined Locks paper mill now owned by Appleton Coated LLC (which is still owned by AWAs ultimate parent) and from other local industrial facilities carried PCBs into the Lower Fox River during this time period. As a result, there are
allegedly eleven million cubic yards of PCB-contaminated sediment spread over 39 miles of the Lower Fox River. Low levels of PCBs have also been washed by the Lower Fox River into Green Bay, which is part of Lake Michigan.



In June 1997, the EPA published notice 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) and API as the former and current owners and operators of the Appleton plant, and the owners of five paper reprocessing mills
located on the Fox River, including Georgia-Pacific, P.H. Glatfelter Company, WTM I Co., owned by Chesapeake Corporation, Riverside Paper Corporation and U.S. Paper Mills Corp., which is now owned by Sonoco Products Company.



On January 7, 2003, the Wisconsin Department of Natural Resources
(DNR) issued a Record of Decision (ROD), with which the United States Environmental Protection Agency (EPA) concurred, on the first two segments of the river, which are largely upstream of the Appleton plant. The
ROD provides for dredging in the first segment and monitored natural recovery in the second segment. However, the ROD also provides that up to 25% of the remedy in the first segment may consist of capping if dredging proves not to be cost-effective
and certain conditions are met. It is APIs position that neither API nor NCR has any responsibility or liability for PCB contamination in the first segment of the Lower Fox River. On July 28, 2003, the DNR and EPA issued a ROD covering the
third, fourth and fifth segments of the Lower Fox River (which includes Green Bay) which also provides for substantial dredging in that portion of the river.



In the two RODs, the DNR estimates total costs for the Lower Fox River remedial action plan of approximately $400 million, an increase of $67 million over
prior estimates, over a 7 to 18 year time period. Most of the estimated costs pertain to the removal of large quantities of sediment from the Lower Fox River by dredging, dewatering of the dredged materials, treatment of the dredge water and
off-site disposal of the remaining solids. Based on cost estimates of large-scale dredging response actions at other sites and many subjective assumptions regarding the work to be done, engineers engaged by several of the PRPs have estimated that
the cost of remediation work in the Lower Fox River could be between $740 million and $1.6 billion. The DNR strongly disputes this analysis and continues to believe that its cost estimates are accurate.



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The Company does not believe that the remedial action
proposed by the DNR in the two RODs is appropriate or cost-effective. API, along with the other PRPs, has developed a substantial body of evidence that API believes demonstrates that selection of alternatives involving active, river-wide
remediation, particularly massive dredging, would be inappropriate and unnecessary. There is ongoing, vigorous debate within the scientific, regulatory, legal, public policy and legislative communities over how to properly manage contaminated
sediments. Although API believes that the remedy adopted in the RODs is inappropriate and may be substantially modified and improved over time through further design and experience, the issuance of the RODs greatly reduces the uncertainty about the
remedy that will be selected by the EPA and DNR for the remaining three segments of the Lower Fox River.



In October 2000, the U.S. Fish and Wildlife Service (FWS) released a proposed restoration and compensation determination plan presenting the
federal and tribal natural resource trustees planned approach for restoring natural resources injured by PCBs and calculating the potential natural resource damages (NRDs) under different remedial action scenarios. The final NRD
valuation will depend on the extent of PCB cleanup; however, the proposed plan estimates that NRDs will fall in the range of $176 million to $333 million for all PRPs in the aggregate. The total costs estimated by the DNR, EPA and FWS for the
proposed remediation and NRD discussed above range from $576 million to $733 million. Over the past several years and at various natural resource damage sites, the FWS and other government agencies have settled NRD claims for amounts substantially
less than original estimates or claims. In June 2002, the state and federal trustees announced a proposed settlement of their NRD claims against Fort James Operating Company, a subsidiary of Georgia-Pacific Corporation (Fort James), the
owner of one of the reprocessing mills. Under the settlement, Fort James would pay for or conduct restoration projects with a total cost of approximately $12 million. The proposed settlement has been challenged by an environmental group in a case
pending before the U.S. District Court in Milwaukee. API anticipates the actual costs for the PRPs to settle NRD claims related to the Lower Fox River will be significantly less than the initial range of $176 million to $333 million.



The Company purchased the Appleton plant from NCR in 1978, after the use of
PCBs in the manufacturing process was discontinued. Nevertheless, pursuant to CERCLA, both API and NCR are viewed by the EPA as PRPs. Accordingly, API and NCR asserted indemnity claims against each other pursuant to the terms of the agreement for
the purchase of the assets of the business in 1978. In order to resolve indemnification obligations to each other, API entered into an interim settlement agreement with NCR in 1998 under which the parties agreed to share both defense and liability
costs arising from the Lower Fox River.



In addition to the
interim settlement agreement with NCR, five of the seven PRPs, excluding U.S. Paper Mills and Riverside Paper, have entered into a non-binding agreement to share both defense costs and costs for scientific studies relating to PCBs discharged into
the Lower Fox River.



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A study performed by the FWS in 2000 provided a
preliminary estimate of the amount of PCBs discharged into the Lower Fox River by each PRP and concluded that the discharges from the Appleton plant and the Combined Locks paper mill (which API formerly owned and which is now owned by an affiliate
of AWA) represented a percentage in the range of 36% to 52% of the total PCBs discharged. These preliminary estimates have not yet been finalized by the FWS and may be revised. The FWS analysis will not be binding on the PRPs. The final allocation
of liability among the PRPs will be determined by negotiation, litigation or other dispute resolution processes. Based on historical and technical analyses performed by environmental engineers API has engaged, the Company believes that the
percentage of PCBs discharged from the Appleton and Combined Locks facilities is less than 20% of the total discharged by all the PRPs. A portion of API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 their respective share(s) of the potential liability, API could be responsible for a portion of their share(s). Based on a review of publicly available financial information
about the other PRPs, API believes that the other PRPs will be required, and have adequate financial resources, to pay their share of the remediation and natural resource damage claims for the Lower Fox River.



API entered into a consent decree on December 10, 2001 with NCR, the DNR, the
Wisconsin Department of Justice, the EPA, the FWS, the U.S. Department of Justice, the National Oceanic and Atmospheric Administration, and the Oneida and Menomonee Indian Tribes which are collectively referred to as the intergovernmental partners,
or IGP. Pursuant to the consent decree, API and NCR agreed to provide up to $41.5 million over a period of four years, to a maximum of $10.4 million per year, for interim restoration and remediation efforts directed by the IGP. API and NCR will each
pay approximately half of the amounts paid under the consent decree. Through the end of 2003, the Company has paid approximately $8.2 million under the consent decree. Under the consent decree, the IGP agree not to sue or take administrative action
against API and NCR during the four-year period including pursuant to any claims that could be made as a result of the issuance of the ROD. The consent decree does not constitute a final settlement with the IGP or provide protection against future
claims against API and NCR; however, under the decree, API and NCR will receive full credit against remediation costs and NRD claims for all monies expended for restoration and remediation of the Lower Fox River during the interim period including
pursuant to any claims that could be made as a result of the issuance of the RODs. API recorded a charge of $19.2 million for its discounted share of the arrangement during the first quarter of 2001. At January 3, 2004 this liability approximated
$13.7 million.



A precise estimate of APIs ultimate share
of remediation and natural resource damage liability cannot be made at this time due to uncertainties with respect to: the scope and cost of implementing the final remediation plan; the scope of restoration and final valuation of federal and state
NRD assessments; the evolving nature of remediation and restoration technologies and governmental policies; and APIs share of remediation and NRD costs relative to the other PRPs. However, the issuance of the RODs greatly reduces the
uncertainty about the remedy that will be implemented for the remaining segments of the Lower Fox River and provides API the ability to reasonably estimate its potential liability. Accordingly, API has recorded a reserve for this environmental
liability. During fiscal 2003 the total reserve was accreted by $5.9 million while payments against the reserve totaled $6.9 million. This resulted in a remaining reserve of $109.1 million as of January 3, 2004, of which $9.8 million is recorded in
other accrued liabilities and $99.3 million is recorded as an environmental liability.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



As part of the Acquisition, AWA agreed to indemnify the
Company for the first $75 million and for all amounts over $100 million in liabilities relating to the Lower Fox River (see Note 3 Acquisition of Businesses). At January 3, 2004, the total indemnification receivable from AWA is $86.8
million, of which, $9.8 million is recorded in other current assets and $77.0 million is recorded as an environmental indemnification receivable. The $22.3 million difference between the reserve and the indemnification receivable represents the
discounted share of Lower Fox River costs for which the Company is responsible. A $21.0 million charge was recorded within earnings in 2002 and has accreted to $22.3 million during fiscal 2003. This discounted share was calculated using a discount
rate of 6.0%, which represents the Companys estimate of the fair market interest rate at which this liability could be settled in an arms length transaction. This $21.0 million amount will accrete to $25.0 million by the end of 2005.



A summary of the indemnification receivable/environmental
liability is below (dollars in thousands):



|                                                                                                                                                             |  |                                        |         |   |                        |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ------- | - | ---------------------- | - | -------- | -
|                                                                                                                                                             |  | EnvironmentalIndemnificationReceivable |         |   | EnvironmentalLiability |  
|                                                                                                                                                             |  |                                       
|Establishment of reserve for 2001 IGP consent decree                                                                                                         |  | $                                      |        |   |                        | $ | (19,209  | )
|                                                                                                                                                             |  |                                       
|Accretion of Lower Fox River environmental liability                                                                                                         |  |                                        |        |   |                        |   | (747     | )
|                                                                                                                                                             |  |                                       
|Fair market valuation of AWA indemnification receivable and Lower Fox River liability as of the November 9, 2001 acquisition
date                            |  |                                        | 20,380  |   |                        |   | (424     | )
|                                                                                                                                                             |  |                                        |         |   |                        |   |          |  
|                                                                                                                                                             |  |                                       
|Balance, December 29, 2001                                                                                                                                   |  | $                                      | 20,380  |   |                        | $ | (20,380  | )
|                                                                                                                                                             |  |                                       
|Establishment of additional indemnification receivable/environmental liability associated with the issuance of the first ROD on January 7,
2003              |  |                                        | 66,146  |   |                        |   | (66,146  | )
|                                                                                                                                                             |  |                                       
|Establishment of reserve for the Companys portion of the Lower Fox River environmental liability in accordance with the Fox River
Indemnification agreement |  |                                        |        |   |                        |   | (21,017  | )
|                                                                                                                                                             |  |                                       
|Payments made for indemnification receivable/environmental liability                                                                                         |  |                                        | (14,077 | ) |                        |   | 14,077   |  
|                                                                                                                                                             |  |                                       
|Accretion of Lower Fox River indemnification receivable/environmental liability                                                                              |  |                                        | 1,052   |   |                        |   | (1,052   | )
|                                                                                                                                                             |  |                                        |         |   |                        |   |          |  
|                                                                                                                                                             |  |                                       
|Balance, December 28, 2002                                                                                                                                   |  | $                                      | 73,501  |   |                        | $ | (94,518  | )
|                                                                                                                                                             |  |                                       
|Establishment of additional indemnification receivable/environmental liability associated with the issuance of the second ROD on July 28,
2003               |  |                                        | 15,581  |   |                        |   | (15,581  | )
|                                                                                                                                                             |  |                                       
|Payments made for indemnification receivable/environmental liability                                                                                         |  |                                        | (6,867  | ) |                        |   | 6,867    |  
|                                                                                                                                                             |  |                                       
|Accretion of Lower Fox River indemnification receivable/environmental liability                                                                              |  |                                        | 4,582   |   |                        |   | (5,864   | )
|                                                                                                                                                             |  |                                        |         |   |                        |   |          |  
|                                                                                                                                                             |  |                                       
|Balance, January 3, 2004                                                                                                                                     |  | $                                      | 86,797  |   |                        | $ | (109,096 | )
|                                                                                                                                                             |  |                                        |         |   |                        |   |          |  



API used the estimates
described below, including the most recent government agency estimates, in evaluating its Lower Fox River environmental liability: (1) total costs for remediation of $480 million, based on the DNRs estimate of $400 million in total costs for
remediation, plus a 20% contingency; (2) 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 the
Companys estimate (the Company assumes that API and NCR are primarily responsible for only the discharges from the Appleton and Combined Locks facilities and not for other discharges); (3) costs to settle NRD claims against API and NCR,
estimated at $20 million or less, based on the IGPs $12 million settlement of NRD claims against Fort James; (4) APIs responsibility for approximately half of the claims asserted against API and NCR, based on the interim settlement
agreement with NCR, the terms of which are confidential; and (5) $20 million in fees and expenses. Because of the numerous uncertainties underlying these estimates, it is possible that APIs share of costs will be higher.



West Carrollton Mill



The West Carrollton 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 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.



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Based on investigation and delineation of PCB
contamination in soil and groundwater in the area of the wastewater impoundments, API believes that it could be necessary to undertake remedial action in the future, although API is currently under no obligation to do so. API 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. Remedial action to address PCB contamination in the area of the wastewater
impoundments is expected to involve construction of a cap to prevent exposure to PCBs. In addition, remedial action could involve long-term monitoring of groundwater or the construction and operation of a groundwater pump-and-treat system to prevent
migration of PCB contamination in groundwater, and the removal and disposal of PCB-contaminated sediment in the Great Miami River. The cost for remedial action  including installation of a cap, long-term pumping, treating and/or monitoring of
groundwater and removal of sediment in the Great Miami River  is estimated 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, the Great Miami River
remediation and the Companys share of these remediation costs, if any, no provision has been recorded in the accompanying financial statements for estimated remediation costs. In conjunction with the Acquisition of the Company by the ESOP in
2001, AWA agreed to indemnify the Company for 50% of all environmental liabilities up to $5.0 million and 100% of all such environmental costs exceeding $5.0 million. In addition, the former owner and operator of the West Carrollton mill may be
liable for all or part of the cost of remediation of historic PCB contamination. Other than the PCB contamination in the area of the wastewater impoundments, there are no other known material liabilities with respect to environmental issues at the
West Carrollton mill.



Other



From time to time, the Company may be involved in product liability and
various other suits incident to the operation of its business. A comprehensive insurance program is maintained and estimated costs are recorded for claims and suits of this nature. It is managements opinion that none of these claims or suits
will have a materially adverse effect on the Companys financial position, results of operations or cash flows.



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20. CONSOLIDATED STATEMENTS OF CASH FLOWS



Supplemental cash flow disclosures (dollars in thousands):



|                                                                 |  |                                    |        |                                      |   |                                                       |  |                                                      |         |  |   |        
|---------------------------------------------------------------- |  | ---------------------------------- | ------ | ------------------------------------ | - | ----------------------------------------------------- |  | ---------------------------------------------------- | ------- |  | - | -------
|                                                                 |  | (Successor Basis)                  |        | (Predecessor Basis)                 
|                                                                 |  | For the Year Ended January 3, 2004 |        | For the Year Ended December 28, 2002 |   | For the Period November 10, 2001 to December 29, 2001 |  | For the Period December 31, 2000 to November 9, 2001
|Cash paid during the period for:                                 |  |                                    |        |                                      |   |                                                       |  |                                                      |         |  |   |        
|Interest (net of amount capitalized)                             |  | $                                  | 32,738 |                                      | $ | 44,506                                                |  | $                                                    | 4,312   |  | $ | 23,209 
|Income taxes                                                     |  | $                                  | 352    |                                      | $ | 403                                                   |  |                                                      |        |  | $ | 21,387 
|                                                                 |  |                                    |        |                                     
|Non-cash transactions during the period:                         |  |                                    |        |                                      |   |                                                       |  |                                                      |         |  |   |        
|Capital contribution from former parent and affiliated companies |  |                                    |       |                                      |   |                                                      |  |                                                      |        |  | $ | 352,973
|Conversion of shareholder note                                   |  |                                    |       |                                      |   |                                                      |  |                                                      |        |  | $ | 125,000
|Transfer of liability to affiliated company                      |  |                                    |       |                                      |   |                                                      |  |                                                      |        |  | $ | 2,782  
|Recovery of withholding tax                                      |  |                                    |       |                                      |   |                                                      |  |                                                      |        |  | $ | 5,204  
|Deferred payment obligation                                      |  |                                    |       |                                      |   |                                                      |  | $                                                    | 140,000 |  |   |       
|Senior subordinated seller note                                  |  |                                    |       |                                      |   |                                                      |  | $                                                    | 250,000 |  |   |       



21. CONCENTRATIONS OF CREDIT RISK



Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of temporary cash investments that exceed the maximum federally insured limits and trade receivables. The Company places its temporary cash investments with high quality financial funds
that by policy limit their exposure to any one financial security.



Concentrations of credit risk with respect to trade receivables are limited due to the number of customers comprising the Companys customer base. The Company does not believe it is dependent upon any single customer. Sales to the
Companys two largest customers each represented 13% and 10% of net sales in 2003, 14% and 11% of net sales in 2002 and 15% and 12% of net sales in 2001.



The five largest customers for coated solutions products accounted for approximately 50% of coated solutions net sales in fiscal 2003, approximately
51% of coated solutions net sales in fiscal 2002 and approximately 52% of coated solutions net sales in fiscal 2001. The five largest customers for thermal and advanced technical products accounted for approximately 51% of thermal and advanced
technical products net sales in fiscal 2003, approximately 52% of thermal and advanced technical products net sales in fiscal 2002 and approximately 57% of thermal and advanced technical products net sales in fiscal 2001.



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22. EMPLOYEE STOCK OWNERSHIP PLAN



The Appleton Papers Retirement Savings Plan, was amended and restated
effective as of January 1, 2001, in the form of the Appleton Papers Retirement Savings and Employee Stock Ownership Plan (the KSOP). The KSOP includes a separate employee stock ownership plan component. The KSOP is a tax-qualified
retirement plan that also contains a 401(k) feature, which provides participants with the ability to make pre-tax contributions to the KSOP by electing to defer a percentage of their compensation. The ESOP component of the KSOP is a tax-qualified
employee stock ownership plan that is designed to invest primarily in the common stock of PDC.



Eligible participants, as named fiduciaries under ERISA, were offered a one-time irrevocable election to acquire a beneficial interest in the common stock of PDC by electing to direct the transfer of all
or a portion of their existing account balances in the KSOP and the 401(a) plan (Appleton Papers Inc. Retirement Medical Savings Plan) to the Company Stock Fund. During the transfer election period, eligible participants were able to elect to
transfer all or any portion of the following accounts to the Company Stock Fund: (1) account balances held in the Vanguard Fund, regardless of whether they were vested, less any outstanding loan balances and (2) any account balances, regardless of
whether they were vested, in the 401(a) plan. The total proceeds transferred by eligible participants to the Company Stock Fund were approximately $106.8 million. All proceeds of the offering were used by the ESOP trustee to purchase 10,684,373
shares of PDC common stock. As a result of this purchase, the ESOP owns 100% of the common stock of PDC. The ESOP trustee is expected to purchase common stock from PDC with future pre-tax deferrals made by employees. The Company also intends to fund
a significant part of its matching contribution commitment with common stock of PDC. The Companys matching contributions charged to expense amounted to $7.8 million in 2003, $8.1 million in 2002 and $1.3 million for the 2001 Successor Period.
Compensation expense associated with the KSOP approximated $3.4 million for the fiscal 2001 Predecessor Period.



The value of each participants account balance will be paid to that participant, or that participants beneficiary, in the case of the
participants death, upon the participants retirement, death, disability, resignation, dismissal or permanent layoff. Requests for lump sum distributions from the Company Stock Fund will be granted in accordance with a uniform,
nondiscriminatory policy established by the ESOP committee. In general, all requests for lump sum distributions in any plan year will be granted to the extent that the aggregate amount requested does not exceed the amount of new deferrals to the
Company Stock Fund, less any distributions that must be made in accordance with statutory requirements and installment distributions the KSOP is obligated to make under prior year distribution elections. Covenants in the agreements providing for the
Senior Credit Facility and the Senior Subordinated Notes restrict APIs ability to pay dividends to PDC, which could limit PDCs ability to repurchase shares distributed to ESOP participants who have terminated employment or who are
entitled to diversification rights. PDC has obligations to make distributions to former participants in the ESOP under ERISA and these obligations may supersede the terms of the respective agreements. If lump sum distributions cannot be made,
distributions to former participants will be made in up to five equal annual installments.



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In fiscal 2003, the ESOP trustee purchased 634,495 shares
of PDC redeemable common stock for an aggregate price of $13.4 million from pre-tax deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. The Companys matching deferrals over this same period
resulted in an additional 549,913 shares of redeemable common stock being issued. As a result of hardship withdrawals, diversification elections and employee terminations, 646,834 shares of PDC redeemable common stock were repurchased during 2003 at
an aggregate price of $14.4 million.



In fiscal 2002, the ESOP
trustee purchased 498,769 shares of PDC redeemable common stock from pre-tax deferrals made by employees, rollovers from new employees and interest earned on these funds. The Companys matching deferrals over this same period resulted in an
additional 420,770 shares of redeemable common stock being issued. During 2002, employees redeemed approximately $0.3 million of PDC redeemable company stock related to account diversification and hardship withdrawals.



Based upon managements assumptions related to participant death,
retirement, diversification requests, employment termination and changes in share value, the Company estimates that the potential repurchase obligations over the next five years may approximate $99 million. The Company anticipates that a portion of
these estimated disbursements will be funded from payroll deferrals from employees who elect to purchase stock through the Company Stock Fund, which are estimated to approximate $45 million over the next five years. The estimated net repurchase
obligations of approximately $54 million is anticipated to be disbursed in annual payments increasing from $8 million to $18 million over the five-year period. Because of the numerous uncertainties underlying these assumptions used by management
related to potential repurchase obligations and potential employee payroll deferrals into company stock, it is possible that actual results may be materially different.



In accordance with EITF Topic D-98, redeemable equity securities are required to be accreted (i.e., increased) 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. Redeemable common stock is being accreted up to the earliest redemption date based upon the estimated
fair market value of the redeemable common stock as of January 3, 2004. The earliest redemption date occurs when the holder reaches 55 years of age and has 10 years of participation in the KSOP. At that point, the holder has the right to make
diversification elections for a period of six years. The Company accreted the redeemable common stock by $14.2 million for the year ended January 3, 2004. Based upon the estimated fair value of the redeemable common stock as determined by an
independent, third party appraiser, an ultimate redemption liability of approximately $283 million was determined. The redeemable common stock recorded book value as of January 3, 2004 was $158 million, which leaves a remaining unrecognized
liability to be accreted of approximately $125 million. The fair value of the redeemable common stock is determined by an independent, third party appraiser selected by the ESOP Trustee as required by law and the ESOP. Such valuations are made as of
June 30 and December 31. Until the independent valuation is received, the fair value of the stock is estimated by management. Because the calculations of the third party appraiser are not provided to management, these interim estimates may differ
from the values determined by the appraiser as of June 30 and December 31. Adjustments (if any) will be recorded when the independent valuation is received. The accretion is being charged to retained earnings as redeemable common stock is the only
class of shares outstanding.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



23. UNAUDITED QUARTERLY FINANCIAL DATA



Unaudited quarterly financial data for the fiscal year 2003 includes the
following (dollars in thousands):



|                  |  |                                          |         |                                          |   |                                              |  |                                           |         |  |                                   |         |   |  |   |        
|----------------- |  | ---------------------------------------- | ------- | ---------------------------------------- | - | -------------------------------------------- |  | ----------------------------------------- | ------- |  | --------------------------------- | ------- | - |  | - | -------
|                  |  | For the Three Months Ended March 30,2003 |         | For the Three Months Ended June 29, 2003 |   | For the Three Months Ended September 28,2003 |  | For the Three Months Ended January 3,2004 |         |  | For the Year Ended January 3,2004
|Net sales         |  | $                                        | 204,238 |                                          | $ | 210,649                                      |  | $                                         | 217,783 |  | $                                 | 228,783 |   |  | $ | 861,453
|Gross profit      |  |                                          | 59,458  |                                          |   | 53,380                                       |  |                                           | 60,061  |  |                                   | 54,231  |   |  |   | 227,130
|Operating income  |  |                                          | 21,108  |                                          |   | 13,957                                       |  |                                           | 22,286  |  |                                   | 8,047   |   |  |   | 65,398 
|Net income (loss) |  |                                          | 7,771   |                                          |   | 885                                          |  |                                           | 9,066   |  |                                   | (6,563  | ) |  |   | 11,159 



Unaudited quarterly
financial data for the fiscal year 2002 includes the following (dollars in thousands):



|                  |  |                                          |         |                                          |   |         |                                              |  |                                             |         |  |                                     |         |   |  |   |        
|----------------- |  | ---------------------------------------- | ------- | ---------------------------------------- | - | ------- | -------------------------------------------- |  | ------------------------------------------- | ------- |  | ----------------------------------- | ------- | - |  | - | -------
|                  |  | For the Three Months Ended March 31,2002 |         | For the Three Months Ended June 30, 2002 |   |         | For the Three Months Ended September 29,2002 |  | For the Three Months Ended December 28,2002 |         |  | For the Year Ended December 28,2002
|Net sales         |  | $                                        | 224,576 |                                          | $ | 228,698 |                                              |  | $                                           | 229,030 |  | $                                   | 215,669 |   |  | $ | 897,973
|Gross profit      |  |                                          | 69,339  |                                          |   | 64,543  |                                              |  |                                             | 70,716  |  |                                     | 62,663  |   |  |   | 267,261
|Operating income  |  |                                          | 29,486  |                                          |   | 24,213  |                                              |  |                                             | 33,017  |  |                                     | 2,951   |   |  |   | 89,667 
|Net income (loss) |  |                                          | 10,486  |                                          |   | (5,358  | )                                            |  |                                             | 16,978  |  |                                     | (12,014 | ) |  |   | 10,092 



During the three
months ended January 3, 2004, restructuring and other charges of $2.0 million were recorded related to a salaried employment reduction, purchase accounting adjustments of $1.7 million related to inventory valuation for the BemroseBooth acquisition
were recorded and debt extinguishment expenses of $1.4 million were recorded.



During the three months ended December 28, 2002, environmental expenses of $21.0 million were recorded related to the Lower Fox River (see Note 19 Commitments and Contingencies). In June 2002, the
Company refinanced a $112.4 million senior secured note (see Note 12 Long-Term Obligations). As a result of this refinancing, $11.8 million of deferred debt issuance costs were written off during the quarter as debt extinguishment
expenses.



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24. SEGMENT INFORMATION



The Company operates in four business segments: coated solutions, thermal
and advanced technical products, security products and performance packaging. Based upon quantitative thresholds, coated solutions and the thermal and advanced technical products segment constitute the Companys reportable segments. The
accounting policies applicable to all segments are the same as those described in the summary of significant accounting policies. Management evaluates the performance of the segments based primarily on operating income. Items excluded from the
determination of segment operating income are unallocated corporate charges, business development costs not associated with existing segments, interest income and expense, debt extinguishment expenses, minority interest expense and foreign currency
gains and losses.



The carbonless business is the largest
component of the coated solutions segment. Carbonless paper is used to make multipart business forms such as invoices and credit card receipts. As part of its coated solutions business, the Company produces coated products for inkjet printing,
point-of-sale displays and other design and print applications. The Company reorganized its business segments in 2003, for all periods presented, to include carbonless products with security features in the coated solutions segment. The Company also
offers customers custom coating solutions and the potential for strategic partnerships through its engineered manufacturing solutions, or toll coating, program. This program focuses on the Companys ability to apply barrier and/or printable
coatings to substrates. The Company supplies coated solutions products to merchants, printers and paper converters primarily in North America.



The thermal and advanced technical products segment consists of the thermal business as well as the development of non-thermal products and related
substrates for the transaction and item identification markets. These products are routinely used for point-of-sale receipts and coupons; event and transportation tickets; lottery and gaming tickets; tags for airline baggage and retail applications;
and label products for grocery, shipping, medical and retail applications. The Company supplies thermal and advanced technical products primarily to paper converters in North America.



The security business produces products with basic security features that make them resistant to forgery and counterfeiting.
From that foundation API is building a comprehensive business that incorporates security technologies including watermarks, taggants, embedded threads and fibers and machine-readable technologies. The focus of the security business is on checks,
business and government documents and the emerging brand protection market. In December 2003, the Company acquired BemroseBooth (Derby, England) to gain greater access to international security product markets.



The Company entered the performance packaging market in 2003 by acquiring two
companies that produce high-quality, custom multilayered films and commercial packaging and print and convert flexible plastic packaging materials for companies in the food processing, household and industrial product industries.



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



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|                                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------- | ------- | - | ------------------------------------ | - | ------- | ---------------------------------------------------- |  | - | --------------------------------------------------- | - |  | - | ------- | -
|                                                             |  | (Successor Basis)                  |         |   | (PredecessorBasis)                   |  
|                                                             |  | For the Year Ended January 3, 2004 |         |   | For the Year Ended December 28, 2002 |   |         | For the Period November 10 2001 to December 29, 2001 |  |   | For the Period December 31 2000 to November 9, 2001 |  
|Net sales                                                    |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|Coated solutions                                             |  | $                                  | 622,586 |   |                                      | $ | 707,939 |                                                      |  | $ | 90,548                                              |   |  | $ | 682,335 |  
|Thermal and advanced technical products                      |  |                                    | 182,085 |   |                                      |   | 176,823 |                                                      |  |   | 20,672                                              |   |  |   | 151,586 |  
|Other(1)                                                     |  |                                    | 56,782  |   |                                      |   | 13,211  |                                                      |  |   | 1,730                                               |   |  |   | 8,947   |  
|                                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|Total                                                        |  | $                                  | 861,453 |   |                                      | $ | 897,973 |                                                      |  | $ | 112,950                                             |   |  | $ | 842,868 |  
|                                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|Operating income                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|Coated solutions                                             |  | $                                  | 73,681  |   |                                      | $ | 88,602  |                                                      |  | $ | 18,350                                              |   |  | $ | 88,755  |  
|Thermal and advanced technical products                      |  |                                    | 6,174   |   |                                      |   | 9,394   |                                                      |  |   | 403                                                 |   |  |   | 10,032  |  
|Other(1)                                                     |  |                                    | (2,633  | ) |                                      |   | (768    | )                                                    |  |   | (25                                                 | ) |  |   | (299    | )
|Unallocated corporate charges and business development costs |  |                                    | (11,824 | ) |                                      |   | (7,561  | )                                                    |  |   | (816                                                | ) |  |   | (13,173 | )
|                                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|Total                                                        |  | $                                  | 65,398  |   |                                      | $ | 89,667  |                                                      |  | $ | 17,912                                              |   |  | $ | 85,315  |  
|                                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|                                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|Depreciation and amortization                                |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|Coated solutions                                             |  | $                                  | 54,739  |   |                                      | $ | 56,456  |                                                      |  | $ | 4,797                                               |   |  | $ | 30,350  |  
|Thermal and advanced technical products                      |  |                                    | 12,713  |   |                                      |   | 10,389  |                                                      |  |   | 1,119                                               |   |  |   | 5,886   |  
|Other(1)                                                     |  |                                    | 3,660   |   |                                      |   | 1,051   |                                                      |  |   | 81                                                  |   |  |   | 393     |  
|Business development costs                                   |  |                                    | 106     |   |                                      |   | 81      |                                                      |  |   | 8                                                   |   |  |   | 30      |  
|                                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  
|Total                                                        |  | $                                  | 71,218  |   |                                      | $ | 67,977  |                                                      |  | $ | 6,005                                               |   |  | $ | 36,659  |  
|                                                             |  |                                    |         |   |                                      |   |         |                                                      |  |   |                                                     |   |  |   |         |  

---

|(1) | Other consists of security products and performance packaging.
|--- | --------------------------------------------------------------



25. GUARANTOR FINANCIAL INFORMATION



API (the Issuer) has issued senior subordinated notes (the Notes) which have been guaranteed by PDC (the Parent
Guarantor) and WTA, Inc., C&H Packaging Company, Inc., American Plastics Company, Inc., American Real Estate Corporation, Rose Holdings Limited, Bemrose Group Limited, The Henry Booth Group Limited, BemroseBooth Limited, HBGI Holdings
Limited, Bemrose Security & Promotional Printing Limited and BemroseBooth USA Inc., each of which is a wholly-owned subsidiary of API, (the Subsidiary Guarantors). These guarantees are full, unconditional and joint and several.



Presented below is condensed consolidating financial
information for the Parent Guarantor, the Issuer, the Subsidiary Guarantors and its remaining wholly-owned subsidiary (the Non-Guarantor Subsidiary) as of January 3, 2004 and December 28, 2002 and for the years ended January 3, 2004,
December 28, 2002, the 2001 Successor Period and the 2001 Predecessor Period. This financial information should be read in conjunction with the consolidated financial statements and other notes related thereto.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The condensed consolidating financial information has been
presented to show the nature of the assets held, results of operations and cash flows of the Parent Guarantor, Issuer, Subsidiary Guarantors and Non-Guarantor Subsidiary assuming the guarantee structure of the Notes was in effect at the beginning of
the periods presented. Separate financial statements for the Parent and Subsidiary Guarantors are not presented based on managements determination that they would not provide additional information that is material to readers of these
financial statements.



The Senior Credit Facility, the Senior
Subordinated Notes and the Deferred Payment Obligation place restrictions on the subsidiaries of the Issuer that would limit dividend distributions by these subsidiaries.



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING BALANCE SHEET

January 3, 2004

(dollars in
thousands)



|                                                                                                                             |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------ | - | -------------------- |  | - | ----------------------- | - | ------------ | - | ------ | ------------ | - | -------- | - |  | - | ---------
|                                                                                                                             |  | ParentGuarantor |         | Issuer |   | SubsidiaryGuarantors |  |   | Non-GuarantorSubsidiary |   | Eliminations |   |        | Consolidated
|ASSETS                                                                                                                       |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|Current assets                                                                                                               |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|Cash and cash equivalents                                                                                                    |  | $               |        |        | $ | 21,020               |  | $ | 5,676                   |   |              | $ | 2,986  |              | $ |         |   |  | $ | 29,682   
|Accounts receivable, net                                                                                                     |  |                 |        |        |   | 77,627               |  |   | 32,275                  |   |              |   | 7,227  |              |   |         |   |  |   | 117,129  
|Inventories                                                                                                                  |  |                 |        |        |   | 115,803              |  |   | 11,202                  |   |              |   | 2,606  |              |   |         |   |  |   | 129,611  
|Other current assets                                                                                                         |  |                 | 9,767   |        |   | 6,949                |  |   | 1,553                   |   |              |   | 181    |              |   |         |   |  |   | 18,450   
|                                                                                                                             |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|Total current assets                                                                                                         |  |                 | 9,767   |        |   | 221,399              |  |   | 50,706                  |   |              |   | 13,000 |              |   |         |   |  |   | 294,872  
|Property, plant and equipment, net                                                                                           |  |                 |        |        |   | 458,545              |  |   | 52,950                  |   |              |   | 65     |              |   |         |   |  |   | 511,560  
|Investment in subsidiaries                                                                                                   |  |                 | 308,924 |        |   | 376,920              |  |   |                        |   |              |   |       |              |   | (685,844 | ) |  |   |         
|Other assets                                                                                                                 |  |                 | 77,042  |        |   | 97,934               |  |   | 88,406                  |   |              |   | 39     |              |   |         |   |  |   | 263,421  
|                                                                                                                             |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|Total assets                                                                                                                 |  | $               | 395,733 |        | $ | 1,154,798            |  | $ | 192,062                 |   |              | $ | 13,104 |              | $ | (685,844 | ) |  | $ | 1,069,853
|                                                                                                                             |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|LIABILITIES, REDEEMABLE COMMON STOCK, (ACCUMULATED DEFICIT) RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE LOSS       |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |             
|Current liabilities                                                                                                          |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|Current portion of long-term debt                                                                                            |  | $               |        |        | $ | 31,350               |  | $ |                        |   |              | $ |       |              | $ |         |   |  | $ | 31,350   
|Accounts payable                                                                                                             |  |                 |        |        |   | 39,132               |  |   | 17,716                  |   |              |   | 22     |              |   |         |   |  |   | 56,870   
|Due to (from) parent and affiliated companies                                                                                |  |                 | 78,737  |        |   | 147,528              |  |   | (228,964                | ) |              |   | 2,699  |              |   |         |   |  |   |         
|Other accrued liabilities                                                                                                    |  |                 |        |        |   | 69,774               |  |   | 12,581                  |   |              |   | 2,423  |              |   |         |   |  |   | 84,778   
|                                                                                                                             |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|Total current liabilities                                                                                                    |  |                 | 78,737  |        |   | 287,784              |  |   | (198,667                | ) |              |   | 5,144  |              |   |         |   |  |   | 172,998  
|Long-term debt                                                                                                               |  |                 |        |        |   | 354,010              |  |   |                        |   |              |   |       |              |   |         |   |  |   | 354,010  
|Capital lease obligation                                                                                                     |  |                 |        |        |   | 3,504                |  |   |                        |   |              |   |       |              |   |         |   |  |   | 3,504    
|Other long-term liabilities                                                                                                  |  |                 |        |        |   | 200,576              |  |   | 21,749                  |   |              |   | 20     |              |   |         |   |  |   | 222,345  
|Deferred payment obligation                                                                                                  |  |                 | 172,742 |        |   |                     |  |   |                        |   |              |   |       |              |   |         |   |  |   | 172,742  
|Redeemable common stock, (accumulated deficit) retained earnings and accumulated other comprehensive loss                    |  |                 | 144,254 |        |   | 308,924              |  |   | 368,980                 |   |              |   | 7,940  |              |   | (685,844 | ) |  |   | 144,254  
|                                                                                                                             |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          
|Total liabilities, redeemable common stock, (accumulated deficit) retained earnings and accumulated other comprehensive loss |  | $               | 395,733 |        | $ | 1,154,798            |  | $ | 192,062                 |   |              | $ | 13,104 |              | $ | (685,844 | ) |  | $ | 1,069,853
|                                                                                                                             |  |                 |         |        |   |                      |  |   |                         |   |              |   |        |              |   |          |   |  |   |          



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 28, 2002

(dollars in
thousands)



|                                                                                                                             |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------ | - | ------------------- |  | - | ----------------------- | - | ------------ | - | ----- | ------------ | - | -------- | - |  | - | -------
|                                                                                                                             |  | ParentGuarantor |         | Issuer |   | SubsidiaryGuarantor |  |   | Non-GuarantorSubsidiary |   | Eliminations |   |       | Consolidated
|ASSETS                                                                                                                       |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|Current assets                                                                                                               |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|Cash and cash equivalents                                                                                                    |  | $               |        |        | $ | 23,521              |  | $ | 23                      |   |              | $ | 846   |              | $ |         |   |  | $ | 24,390 
|Accounts receivable, net                                                                                                     |  |                 |        |        |   | 87,495              |  |   |                        |   |              |   | 5,882 |              |   |         |   |  |   | 93,377 
|Inventories                                                                                                                  |  |                 |        |        |   | 116,042             |  |   |                        |   |              |   | 2,056 |              |   |         |   |  |   | 118,098
|Other current assets                                                                                                         |  |                 | 6,144   |        |   | 6,632               |  |   |                        |   |              |   | 157   |              |   |         |   |  |   | 12,933 
|                                                                                                                             |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|Total current assets                                                                                                         |  |                 | 6,144   |        |   | 233,690             |  |   | 23                      |   |              |   | 8,941 |              |   |         |   |  |   | 248,798
|Property, plant and equipment, net                                                                                           |  |                 |        |        |   | 504,066             |  |   |                        |   |              |   | 22    |              |   |         |   |  |   | 504,088
|Investment in subsidiaries                                                                                                   |  |                 | 290,480 |        |   | 239,015             |  |   |                        |   |              |   |      |              |   | (529,495 | ) |  |   |       
|Other assets                                                                                                                 |  |                 | 67,369  |        |   | 106,872             |  |   | 33,003                  |   |              |   | 32    |              |   |         |   |  |   | 207,276
|                                                                                                                             |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|Total assets                                                                                                                 |  | $               | 363,993 |        | $ | 1,083,643           |  | $ | 33,026                  |   |              | $ | 8,995 |              | $ | (529,495 | ) |  | $ | 960,162
|                                                                                                                             |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|LIABILITIES, REDEEMABLE COMMON STOCK, (ACCUMULATED DEFICIT) RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE LOSS       |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |             
|Current liabilities                                                                                                          |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|Current portion of long-term debt                                                                                            |  | $               |        |        | $ | 42,419              |  | $ |                        |   |              | $ |      |              | $ |         |   |  | $ | 42,419 
|Accounts payable                                                                                                             |  |                 |        |        |   | 45,299              |  |   |                        |   |              |   | 120   |              |   |         |   |  |   | 45,419 
|Due to (from) parent and affiliated companies                                                                                |  |                 | 76,067  |        |   | 122,605             |  |   | (199,688                | ) |              |   | 1,016 |              |   |         |   |  |   |       
|Other accrued liabilities                                                                                                    |  |                 |        |        |   | 69,719              |  |   |                        |   |              |   | 1,535 |              |   |         |   |  |   | 71,254 
|                                                                                                                             |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|Total current liabilities                                                                                                    |  |                 | 76,067  |        |   | 280,042             |  |   | (199,688                | ) |              |   | 2,671 |              |   |         |   |  |   | 159,092
|Long-term debt                                                                                                               |  |                 |        |        |   | 317,531             |  |   |                        |   |              |   |      |              |   |         |   |  |   | 317,531
|Capital lease obligation                                                                                                     |  |                 |        |        |   | 3,923               |  |   |                        |   |              |   |      |              |   |         |   |  |   | 3,923  
|Other long-term liabilities                                                                                                  |  |                 |        |        |   | 191,667             |  |   |                        |   |              |   | 23    |              |   |         |   |  |   | 191,690
|Deferred payment obligation                                                                                                  |  |                 | 156,409 |        |   |                    |  |   |                        |   |              |   |      |              |   |         |   |  |   | 156,409
|Redeemable common stock, (accumulated deficit) retained earnings and accumulated other comprehensive loss                    |  |                 | 131,517 |        |   | 290,480             |  |   | 232,714                 |   |              |   | 6,301 |              |   | (529,495 | ) |  |   | 131,517
|                                                                                                                             |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        
|Total liabilities, redeemable common stock, (accumulated deficit) retained earnings and accumulated other comprehensive loss |  | $               | 363,993 |        | $ | 1,083,643           |  | $ | 33,026                  |   |              | $ | 8,995 |              | $ | (529,495 | ) |  | $ | 960,162
|                                                                                                                             |  |                 |         |        |   |                     |  |   |                         |   |              |   |       |              |   |          |   |  |   |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 3, 2004

(dollars in thousands)



|                                             |  |                   |         |   |        |   |         |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |         |  
|-------------------------------------------- |  | ----------------- | ------- | - | ------ | - | ------- | -------------------- |  | - | ----------------------- | - |  | ------------ | ------ | - | ------------ | - | ------- | - |  | - | ------- | -
|                                             |  | (Successor Basis) |        
|                                             |  | ParentGuarantor   |         |   | Issuer |   |         | SubsidiaryGuarantors |  |   | Non-GuarantorSubsidiary |   |  | Eliminations |        |   | Consolidated |  
|Net sales                                    |  | $                 |        |   |        | $ | 815,870 |                      |  | $ | 41,169                  |   |  | $            | 60,110 |   |              | $ | (55,696 | ) |  | $ | 861,453 |  
|Cost of sales                                |  |                   |        |   |        |   | 601,343 |                      |  |   | 33,318                  |   |  |              | 56,691 |   |              |   | (57,029 | ) |  |   | 634,323 |  
|                                             |  |                   |         |   |        |   |         |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |         |  
|Gross profit                                 |  |                   |        |   |        |   | 214,527 |                      |  |   | 7,851                   |   |  |              | 3,419  |   |              |   | 1,333   |   |  |   | 227,130 |  
|Selling, general and administrative expenses |  |                   | 5       |   |        |   | 142,160 |                      |  |   | 12,459                  |   |  |              | 3,000  |   |              |   | 1,479   |   |  |   | 159,103 |  
|Restructuring and other charges              |  |                   |        |   |        |   | 2,629   |                      |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 2,629   |  
|                                             |  |                   |         |   |        |   |         |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |         |  
|Operating (loss) income                      |  |                   | (5      | ) |        |   | 69,738  |                      |  |   | (4,608                  | ) |  |              | 419    |   |              |   | (146    | ) |  |   | 65,398  |  
|Interest expense                             |  |                   | 16,334  |   |        |   | 54,374  |                      |  |   | 3                       |   |  |              | 10     |   |              |   | (16,561 | ) |  |   | 54,160  |  
|Debt extinguishment expenses                 |  |                   |        |   |        |   | 1,396   |                      |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 1,396   |  
|Interest income                              |  |                   | (464    | ) |        |   | (282    | )                    |  |   | (16,097                 | ) |  |              | (33    | ) |              |   | 16,561  |   |  |   | (315    | )
|Intercompany royalty expense (income)        |  |                   |        |   |        |   | 11,644  |                      |  |   | (11,644                 | ) |  |              |       |   |              |   |        |   |  |   |        |  
|Income in equity investments                 |  |                   | (27,034 | ) |        |   | (24,571 | )                    |  |   |                        |   |  |              |       |   |              |   | 51,605  |   |  |   |        |  
|Other income                                 |  |                   |        |   |        |   |        |                      |  |   |                        |   |  |              | (1,484 | ) |              |   | 399     |   |  |   | (1,085  | )
|                                             |  |                   |         |   |        |   |         |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |         |  
|Income before income taxes                   |  |                   | 11,159  |   |        |   | 27,177  |                      |  |   | 23,130                  |   |  |              | 1,926  |   |              |   | (52,150 | ) |  |   | 11,242  |  
|Provision (benefit) for income taxes         |  |                   |        |   |        |   | 143     |                      |  |   | (347                    | ) |  |              | 287    |   |              |   |        |   |  |   | 83      |  
|                                             |  |                   |         |   |        |   |         |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net income                                   |  | $                 | 11,159  |   |        | $ | 27,034  |                      |  | $ | 23,477                  |   |  | $            | 1,639  |   |              | $ | (52,150 | ) |  | $ | 11,159  |  
|                                             |  |                   |         |   |        |   |         |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |         |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE PERIOD ENDED DECEMBER 28, 2002

(dollars in thousands)



|                                      |  |                   |          |   |        |   |         |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |         |  
|------------------------------------- |  | ----------------- | -------- | - | ------ | - | ------- | ------------------- |  | - | ----------------------- | - |  | ------------ | ------ | - | ------------ | - | -------- | - |  | - | ------- | -
|                                      |  | (Successor Basis) |         
|                                      |  | ParentGuarantor   |          |   | Issuer |   |         | SubsidiaryGuarantor |  |   | Non-GuarantorSubsidiary |   |  | Eliminations |        |   | Consolidated |  
|Net sales                             |  | $                 |         |   |        | $ | 893,059 |                     |  | $ |                        |   |  | $            | 54,730 |   |              | $ | (49,816  | ) |  | $ | 897,973 |  
|Cost of sales                         |  |                   |         |   |        |   | 630,814 |                     |  |   |                        |   |  |              | 51,602 |   |              |   | (51,704  | ) |  |   | 630,712 |  
|                                      |  |                   |          |   |        |   |         |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |         |  
|Gross profit                          |  |                   |         |   |        |   | 262,245 |                     |  |   |                        |   |  |              | 3,128  |   |              |   | 1,888    |   |  |   | 267,261 |  
|Selling, general and administrative   |  |                   | 13       |   |        |   | 145,992 |                     |  |   | 6,241                   |   |  |              | 2,537  |   |              |   | 1,794    |   |  |   | 156,577 |  
|Environmental expense                 |  |                   |         |   |        |   | 21,017  |                     |  |   |                        |   |  |              |       |   |              |   |         |   |  |   | 21,017  |  
|                                      |  |                   |          |   |        |   |         |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |         |  
|Operating (loss) income               |  |                   | (13      | ) |        |   | 95,236  |                     |  |   | (6,241                  | ) |  |              | 591    |   |              |   | 94       |   |  |   | 89,667  |  
|Interest expense                      |  |                   | 45,724   |   |        |   | 71,177  |                     |  |   |                        |   |  |              |       |   |              |   | (48,547  | ) |  |   | 68,354  |  
|Debt extinguishment expenses          |  |                   |         |   |        |   | 11,754  |                     |  |   |                        |   |  |              |       |   |              |   |         |   |  |   | 11,754  |  
|Interest income                       |  |                   |         |   |        |   | (32,095 | )                   |  |   | (17,394                 | ) |  |              | (48    | ) |              |   | 48,547   |   |  |   | (990    | )
|Intercompany royalty expense (income) |  |                   |         |   |        |   | 12,933  |                     |  |   | (12,933                 | ) |  |              |       |   |              |   |         |   |  |   |        |  
|Intercompany dividend income          |  |                   | (596,867 | ) |        |   | (6,230  | )                   |  |   |                        |   |  |              |       |   |              |   | 603,097  |   |  |   |        |  
|Income in equity investments          |  |                   | (55,829  | ) |        |   | (18,365 | )                   |  |   |                        |   |  |              |       |   |              |   | 74,194   |   |  |   |        |  
|Other expense (income)                |  |                   |         |   |        |   | 1       |                     |  |   |                        |   |  |              | (58    | ) |              |   | 11       |   |  |   | (46     | )
|                                      |  |                   |          |   |        |   |         |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |         |  
|Income before income taxes            |  |                   | 606,959  |   |        |   | 56,061  |                     |  |   | 24,086                  |   |  |              | 697    |   |              |   | (677,208 | ) |  |   | 10,595  |  
|Provision for income taxes            |  |                   |         |   |        |   | 232     |                     |  |   |                        |   |  |              | 271    |   |              |   |         |   |  |   | 503     |  
|                                      |  |                   |          |   |        |   |         |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |         |  
|Net income                            |  | $                 | 606,959  |   |        | $ | 55,829  |                     |  | $ | 24,086                  |   |  | $            | 426    |   |              | $ | (677,208 | ) |  | $ | 10,092  |  
|                                      |  |                   |          |   |        |   |         |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |         |  



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE PERIOD NOVEMBER 10, 2001 TO DECEMBER 29, 2001



(dollars in thousands)



|                                      |  |                   |         |   |        |   |         |                     |  |   |                         |   |  |              |       |   |              |   |         |   |  |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | ------ | - | ------- | ------------------- |  | - | ----------------------- | - |  | ------------ | ----- | - | ------------ | - | ------- | - |  | - | ------- | -
|                                      |  | (Successor Basis) |        
|                                      |  | ParentGuarantor   |         |   | Issuer |   |         | SubsidiaryGuarantor |  |   | Non-GuarantorSubsidiary |   |  | Eliminations |       |   | Consolidated |  
|Net sales                             |  | $                 |        |   |        | $ | 112,989 |                     |  | $ |                        |   |  | $            | 7,268 |   |              | $ | (7,307  | ) |  | $ | 112,950 |  
|Cost of sales                         |  |                   |        |   |        |   | 76,795  |                     |  |   |                        |   |  |              | 7,034 |   |              |   | (7,484  | ) |  |   | 76,345  |  
|                                      |  |                   |         |   |        |   |         |                     |  |   |                         |   |  |              |       |   |              |   |         |   |  |   |         |  
|Gross profit                          |  |                   |        |   |        |   | 36,194  |                     |  |   |                        |   |  |              | 234   |   |              |   | 177     |   |  |   | 36,605  |  
|Selling, general and administrative   |  |                   |        |   |        |   | 17,223  |                     |  |   | 843                     |   |  |              | 347   |   |              |   | 280     |   |  |   | 18,693  |  
|                                      |  |                   |         |   |        |   |         |                     |  |   |                         |   |  |              |       |   |              |   |         |   |  |   |         |  
|Operating income (loss)               |  |                   |        |   |        |   | 18,971  |                     |  |   | (843                    | ) |  |              | (113  | ) |              |   | (103    | ) |  |   | 17,912  |  
|Interest expense                      |  |                   | 8,036   |   |        |   | 6,952   |                     |  |   |                        |   |  |              |      |   |              |   | (4,350  | ) |  |   | 10,638  |  
|Interest income                       |  |                   |        |   |        |   | (3,696  | )                   |  |   | (1,056                  | ) |  |              | (4    | ) |              |   | 4,350   |   |  |   | (406    | )
|Intercompany royalty expense (income) |  |                   |        |   |        |   | 1,674   |                     |  |   | (1,674                  | ) |  |              |      |   |              |   |        |   |  |   |        |  
|Income in equity investments          |  |                   | (15,652 | ) |        |   | (1,764  | )                   |  |   |                        |   |  |              |      |   |              |   | 17,416  |   |  |   |        |  
|Other income                          |  |                   |        |   |        |   |        |                     |  |   |                        |   |  |              | (53   | ) |              |   |        |   |  |   | (53     | )
|                                      |  |                   |         |   |        |   |         |                     |  |   |                         |   |  |              |       |   |              |   |         |   |  |   |         |  
|Income (loss) before income taxes     |  |                   | 7,616   |   |        |   | 15,805  |                     |  |   | 1,887                   |   |  |              | (56   | ) |              |   | (17,519 | ) |  |   | 7,733   |  
|Provision (benefit) for income taxes  |  |                   |        |   |        |   | 153     |                     |  |   |                        |   |  |              | (36   | ) |              |   |        |   |  |   | 117     |  
|                                      |  |                   |         |   |        |   |         |                     |  |   |                         |   |  |              |       |   |              |   |         |   |  |   |         |  
|Net income (loss)                     |  | $                 | 7,616   |   |        | $ | 15,652  |                     |  | $ | 1,887                   |   |  | $            | (20   | ) |              | $ | (17,519 | ) |  | $ | 7,616   |  
|                                      |  |                   |         |   |        |   |         |                     |  |   |                         |   |  |              |       |   |              |   |         |   |  |   |         |  





CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE PERIOD DECEMBER 31,
2000 TO NOVEMBER 9, 2001

(dollars in thousands)



|                                         |  |                     |         |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |         |  
|---------------------------------------- |  | ------------------- | ------- | - | ------------------- | - | ------- | ----------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                         |  | (Predecessor Basis) |        
|                                         |  | Issuer              |         |   | SubsidiaryGuarantor |   |         | Non-GuarantorSubsidiary |  |   | Eliminations |   |  | Consolidated |        
|Net sales                                |  | $                   | 842,546 |   |                     | $ |        |                         |  | $ | 52,028       |   |  | $            | (51,706 | ) |  | $ | 842,868 |  
|Cost of sales                            |  |                     | 594,354 |   |                     |   |        |                         |  |   | 51,275       |   |  |              | (53,888 | ) |  |   | 591,741 |  
|                                         |  |                     |         |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                             |  |                     | 248,192 |   |                     |   |        |                         |  |   | 753          |   |  |              | 2,182   |   |  |   | 251,127 |  
|Selling, general and administrative      |  |                     | 130,829 |   |                     |   | 126     |                         |  |   | 2,246        |   |  |              | 1,925   |   |  |   | 135,126 |  
|Restructuring and other charges          |  |                     | 30,686  |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | 30,686  |  
|                                         |  |                     |         |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |         |  
|Operating income (loss)                  |  |                     | 86,677  |   |                     |   | (126    | )                       |  |   | (1,493       | ) |  |              | 257     |   |  |   | 85,315  |  
|Interest expense                         |  |                     | 32,905  |   |                     |   |        |                         |  |   |             |   |  |              | (7,464  | ) |  |   | 25,441  |  
|Debt extinguishment expenses             |  |                     | 10,392  |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | 10,392  |  
|Interest income                          |  |                     | (8,720  | ) |                     |   | (7,476  | )                       |  |   | (86          | ) |  |              | 7,464   |   |  |   | (8,818  | )
|Intercompany royalty expense (income)    |  |                     | 12,392  |   |                     |   | (12,392 | )                       |  |   |             |   |  |              |        |   |  |   |        |  
|Intercompany dividend income             |  |                     | (5,830  | ) |                     |   |        |                         |  |   |             |   |  |              | 5,830   |   |  |   |        |  
|Income in equity investments             |  |                     | (10,072 | ) |                     |   |        |                         |  |   |             |   |  |              | 10,072  |   |  |   |        |  
|Other expense                            |  |                     | 4       |   |                     |   |        |                         |  |   | 488          |   |  |              |        |   |  |   | 492     |  
|                                         |  |                     |         |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes        |  |                     | 55,606  |   |                     |   | 19,742  |                         |  |   | (1,895       | ) |  |              | (15,645 | ) |  |   | 57,808  |  
|Provision (benefit) for income taxes     |  |                     | 18,423  |   |                     |   | 2,771   |                         |  |   | (569         | ) |  |              |        |   |  |   | 20,625  |  
|                                         |  |                     |         |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations |  |                     | 37,183  |   |                     |   | 16,971  |                         |  |   | (1,326       | ) |  |              | (15,645 | ) |  |   | 37,183  |  
|Loss from discontinued operations        |  |                     | (4,462  | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (4,462  | )
|                                         |  |                     |         |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                        |  | $                   | 32,721  |   |                     | $ | 16,971  |                         |  | $ | (1,326       | ) |  | $            | (15,645 | ) |  | $ | 32,721  |  
|                                         |  |                     |         |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |         |  



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 3, 2004

(dollars in thousands)



|                                                                                            |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------ | - | -------- | -------------------- |  | - | ----------------------- | - |  | ------------ | ------ | - | ------------ | - | ------- | - |  | - | -------- | -
|                                                                                            |  | (Successor Basis) |        
|                                                                                            |  | ParentGuarantor   |         |   | Issuer |   |          | SubsidiaryGuarantors |  |   | Non-GuarantorSubsidiary |   |  | Eliminations |        |   | Consolidated |  
|Cash flows from operating activities:                                                       |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net income                                                                                  |  | $                 | 11,159  |   |        | $ | 27,034   |                      |  | $ | 23,477                  |   |  | $            | 1,639  |   |              | $ | (52,150 | ) |  | $ | 11,159   |  
|Adjustments to reconcile net income to net cash provided by (used by) operating activities: |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Depreciation and amortization                                                               |  |                   |        |   |        |   | 63,670   |                      |  |   | 7,530                   |   |  |              | 18     |   |              |   |        |   |  |   | 71,218   |  
|Other                                                                                       |  |                   | 16,333  |   |        |   | 13,217   |                      |  |   |                        |   |  |              | (1,484 | ) |              |   | 399     |   |  |   | 28,465   |  
|Change in assets and liabilities, net                                                       |  |                   | (29,135 | ) |        |   | (13,910  | )                    |  |   | 6,458                   |   |  |              | 338    |   |              |   | 51,751  |   |  |   | 15,502   |  
|                                                                                            |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash (used by) provided by operating activities                                         |  |                   | (1,643  | ) |        |   | 90,011   |                      |  |   | 37,465                  |   |  |              | 511    |   |              |   |        |   |  |   | 126,344  |  
|Cash flows from investing activities:                                                       |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Proceeds from sale of equipment                                                             |  |                   |        |   |        |   | 3        |                      |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 3        |  
|Additions to property, plant and equipment                                                  |  |                   |        |   |        |   | (26,690  | )                    |  |   | (3,159                  | ) |  |              | (54    | ) |              |   |        |   |  |   | (29,903  | )
|Acquisition of businesses, net of cash acquired                                             |  |                   |        |   |        |   | (112,889 | )                    |  |   | 623                     |   |  |              |       |   |              |   |        |   |  |   | (112,266 | )
|                                                                                            |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash (used by) investing activities                                                     |  |                   |        |   |        |   | (139,576 | )                    |  |   | (2,536                  | ) |  |              | (54    | ) |              |   |        |   |  |   | (142,166 | )
|Cash flows from financing activities:                                                       |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Payments of long-term debt                                                                  |  |                   |        |   |        |   | (124,590 | )                    |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (124,590 | )
|Proceeds from refinancing senior secured notes payable                                      |  |                   |        |   |        |   | 140,000  |                      |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 140,000  |  
|Payments relating to capital lease obligation                                               |  |                   |        |   |        |   | (670     | )                    |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (670     | )
|Proceeds from revolving line of credit                                                      |  |                   |        |   |        |   | 84,000   |                      |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 84,000   |  
|Payments of revolving line of credit                                                        |  |                   |        |   |        |   | (74,000  | )                    |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (74,000  | )
|Due to parent and affiliated companies, net                                                 |  |                   | 2,670   |   |        |   | 24,923   |                      |  |   | (29,276                 | ) |  |              | 1,683  |   |              |   |        |   |  |   |         |  
|Proceeds from issuance of redeemable common stock                                           |  |                   | 13,360  |   |        |   |         |                      |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 13,360   |  
|Payments to redeem common stock                                                             |  |                   | (14,387 | ) |        |   |         |                      |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (14,387  | )
|Decrease in cash overdraft                                                                  |  |                   |        |   |        |   | (2,599   | )                    |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (2,599   | )
|                                                                                            |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash provided by (used by) financing activities                                         |  |                   | 1,643   |   |        |   | 47,064   |                      |  |   | (29,276                 | ) |  |              | 1,683  |   |              |   |        |   |  |   | 21,114   |  
|Change in cash and cash equivalents                                                         |  |                   |        |   |        |   | (2,501   | )                    |  |   | 5,653                   |   |  |              | 2,140  |   |              |   |        |   |  |   | 5,292    |  
|Cash and cash equivalents at beginning of period                                            |  |                   |        |   |        |   | 23,521   |                      |  |   | 23                      |   |  |              | 846    |   |              |   |        |   |  |   | 24,390   |  
|                                                                                            |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Cash and cash equivalents at end of period                                                  |  | $                 |        |   |        | $ | 21,020   |                      |  | $ | 5,676                   |   |  | $            | 2,986  |   |              | $ |        |   |  | $ | 29,682   |  
|                                                                                            |  |                   |         |   |        |   |          |                      |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  



104



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 28, 2002

(dollars in thousands)



|                                                                                            |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------ | - | -------- | ------------------- |  | - | ----------------------- | - |  | ------------ | ------ | - | ------------ | - | -------- | - |  | - | -------- | -
|                                                                                            |  | (Successor Basis) |         
|                                                                                            |  | ParentGuarantor   |          |   | Issuer |   |          | SubsidiaryGuarantor |  |   | Non-GuarantorSubsidiary |   |  | Eliminations |        |   | Consolidated |  
|Cash flows from operating activities:                                                       |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|Net income                                                                                  |  | $                 | 606,959  |   |        | $ | 55,829   |                     |  | $ | 24,086                  |   |  | $            | 426    |   |              | $ | (677,208 | ) |  | $ | 10,092   |  
|Adjustments to reconcile net income to net cash provided by (used by) operating activities: |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|Depreciation and amortization                                                               |  |                   |         |   |        |   | 61,802   |                     |  |   | 6,154                   |   |  |              | 21     |   |              |   |         |   |  |   | 67,977   |  
|Other                                                                                       |  |                   | 14,513   |   |        |   | 30,546   |                     |  |   |                        |   |  |              | (57    | ) |              |   | 11       |   |  |   | 45,013   |  
|Change in assets and liabilities, net                                                       |  |                   | (43,648  | ) |        |   | 20,963   |                     |  |   |                        |   |  |              | 2,391  |   |              |   | 74,100   |   |  |   | 53,806   |  
|                                                                                            |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|Net cash provided by operating activities                                                   |  |                   | 577,824  |   |        |   | 169,140  |                     |  |   | 30,240                  |   |  |              | 2,781  |   |              |   | (603,097 | ) |  |   | 176,888  |  
|Cash flows from investing activities:                                                       |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|Proceeds from sale of equipment                                                             |  |                   |         |   |        |   | 56       |                     |  |   |                        |   |  |              |       |   |              |   |         |   |  |   | 56       |  
|Additions to property, plant and equipment                                                  |  |                   |         |   |        |   | (32,431  | )                   |  |   |                        |   |  |              | (13    | ) |              |   |         |   |  |   | (32,444  | )
|                                                                                            |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|Net cash (used by) investing activities                                                     |  |                   |         |   |        |   | (32,375  | )                   |  |   |                        |   |  |              | (13    | ) |              |   |         |   |  |   | (32,388  | )
|Cash flows from financing activities:                                                       |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|Payments of long-term debt                                                                  |  |                   |         |   |        |   | (163,700 | )                   |  |   |                        |   |  |              |       |   |              |   |         |   |  |   | (163,700 | )
|Payments relating to capital lease obligation                                               |  |                   |         |   |        |   | (671     | )                   |  |   |                        |   |  |              |       |   |              |   |         |   |  |   | (671     | )
|Due to parent and affiliated companies, net                                                 |  |                   | (583,429 | ) |        |   | 610,917  |                     |  |   | (24,023                 | ) |  |              | (3,465 | ) |              |   |         |   |  |   |         |  
|Proceeds from issuance of redeemable common stock                                           |  |                   | 5,909    |   |        |   |         |                     |  |   |                        |   |  |              |       |   |              |   |         |   |  |   | 5,909    |  
|Payments to redeem common stock                                                             |  |                   | (304     | ) |        |   |         |                     |  |   |                        |   |  |              |       |   |              |   |         |   |  |   | (304     | )
|Cash overdraft                                                                              |  |                   |         |   |        |   | 2,954    |                     |  |   |                        |   |  |              |       |   |              |   |         |   |  |   | 2,954    |  
|Intercompany dividend                                                                       |  |                   |         |   |        |   | (596,867 | )                   |  |   | (6,230                  | ) |  |              |       |   |              |   | 603,097  |   |  |   |         |  
|                                                                                            |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|Net cash (used by) financing activities                                                     |  |                   | (577,824 | ) |        |   | (147,367 | )                   |  |   | (30,253                 | ) |  |              | (3,465 | ) |              |   | 603,097  |   |  |   | (155,812 | )
|Change in cash and cash equivalents                                                         |  |                   |         |   |        |   | (10,602  | )                   |  |   | (13                     | ) |  |              | (697   | ) |              |   |         |   |  |   | (11,312  | )
|Cash and cash equivalents at beginning of period                                            |  |                   |         |   |        |   | 34,123   |                     |  |   | 36                      |   |  |              | 1,543  |   |              |   |         |   |  |   | 35,702   |  
|                                                                                            |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  
|Cash and cash equivalents at end of period                                                  |  | $                 |         |   |        | $ | 23,521   |                     |  | $ | 23                      |   |  | $            | 846    |   |              | $ |         |   |  | $ | 24,390   |  
|                                                                                            |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |          |   |  |   |          |  



105



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##### Table of Contents

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE PERIOD NOVEMBER 10, 2001 TO DECEMBER 29, 2001

(dollars in thousands)



|                                                                                                   |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------ | - | -------- | ------------------- |  | - | ----------------------- | - |  | ------------ | ------ | - | ------------ | - | ------- | - |  | - | -------- | -
|                                                                                                   |  | (Successor Basis) |         
|                                                                                                   |  | ParentGuarantor   |          |   | Issuer |   |          | SubsidiaryGuarantor |  |   | Non-GuarantorSubsidiary |   |  | Eliminations |        |   | Consolidated |  
|Cash flows from operating activities:                                                              |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net income (loss)                                                                                  |  | $                 | 7,616    |   |        | $ | 15,652   |                     |  | $ | 1,887                   |   |  | $            | (20    | ) |              | $ | (17,519 | ) |  | $ | 7,616    |  
|Adjustments to reconcile net income (loss) to net cash provided by (used by) operating activities: |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Depreciation and amortization                                                                      |  |                   |         |   |        |   | 5,159    |                     |  |   | 843                     |   |  |              | 3      |   |              |   |        |   |  |   | 6,005    |  
|Other                                                                                              |  |                   |         |   |        |   | 4,761    |                     |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 4,761    |  
|Change in assets and liabilities, net                                                              |  |                   | (29,532  | ) |        |   | 28,268   |                     |  |   | (3,234                  | ) |  |              | (1,348 | ) |              |   | 17,519  |   |  |   | 11,673   |  
|                                                                                                   |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash (used by) provided by operating activities                                                |  |                   | (21,916  | ) |        |   | 53,840   |                     |  |   | (504                    | ) |  |              | (1,365 | ) |              |   |        |   |  |   | 30,055   |  
|Cash flows from investing activities:                                                              |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Proceeds from sale of equipment                                                                    |  |                   |         |   |        |   | 19       |                     |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 19       |  
|Additions to property, plant and equipment                                                         |  |                   |         |   |        |   | (6,741   | )                   |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (6,741   | )
|Acquisition of business, net of cash acquired                                                      |  |                   | (314,826 | ) |        |   |         |                     |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (314,826 | )
|                                                                                                   |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash (used by) investing activities                                                            |  |                   | (314,826 | ) |        |   | (6,722   | )                   |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (321,548 | )
|Cash flows from financing activities:                                                              |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Payments relating to capital lease obligation                                                      |  |                   |         |   |        |   | (56      | )                   |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (56      | )
|Decrease in cash overdraft                                                                         |  |                   |         |   |        |   | (4,570   | )                   |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (4,570   | )
|Due to parent and affiliated companies, net                                                        |  |                   | 239,467  |   |        |   | (242,915 | )                   |  |   | 540                     |   |  |              | 2,908  |   |              |   |        |   |  |   |         |  
|Due to former parent and affiliated companies, net                                                 |  |                   | (7,388   | ) |        |   |         |                     |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (7,388   | )
|Payment of senior subordinated seller note                                                         |  |                   |         |   |        |   | (250,000 | )                   |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | (250,000 | )
|Proceeds from issuance of long-term debt, net of issuance costs                                    |  |                   |         |   |        |   | 484,546  |                     |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 484,546  |  
|Proceeds from issuance of redeemable common stock, net of issuance costs                           |  |                   | 104,663  |   |        |   |         |                     |  |   |                        |   |  |              |       |   |              |   |        |   |  |   | 104,663  |  
|                                                                                                   |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash provided by (used by) financing activities                                                |  |                   | 336,742  |   |        |   | (12,995  | )                   |  |   | 540                     |   |  |              | 2,908  |   |              |   |        |   |  |   | 327,195  |  
|Change in cash and cash equivalents                                                                |  |                   |         |   |        |   | 34,123   |                     |  |   | 36                      |   |  |              | 1,543  |   |              |   |        |   |  |   | 35,702   |  
|Cash and cash equivalents at beginning of period                                                   |  |                   |         |   |        |   |         |                     |  |   |                        |   |  |              |       |   |              |   |        |   |  |   |         |  
|                                                                                                   |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  
|Cash and cash equivalents at end of period                                                         |  | $                 |         |   |        | $ | 34,123   |                     |  | $ | 36                      |   |  | $            | 1,543  |   |              | $ |        |   |  | $ | 35,702   |  
|                                                                                                   |  |                   |          |   |        |   |          |                     |  |   |                         |   |  |              |        |   |              |   |         |   |  |   |          |  



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE PERIOD DECEMBER 31, 2000 TO NOVEMBER 9, 2001

(dollars in thousands)



|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | -------- | - | ------------------- | - | ------- | ----------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                                                                                                                   |  | (Predecessor Basis) |         
|                                                                                                                                                   |  | Issuer              |          |   | SubsidiaryGuarantor |   |         | Non-GuarantorSubsidiary |  |   | Eliminations |   |  | Consolidated |        
|Cash flows from operating activities:                                                                                                              |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Income (loss) from continuing operations                                                                                                           |  | $                   | 37,183   |   |                     | $ | 16,971  |                         |  | $ | (1,326       | ) |  | $            | (15,645 | ) |  | $ | 37,183   |  
|Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used by) operating activities of continuing
operations: |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Depreciation and amortization                                                                                                                      |  |                     | 36,637   |   |                     |   |        |                         |  |   | 22           |   |  |              |        |   |  |   | 36,659   |  
|Deferred income taxes                                                                                                                              |  |                     | (11,840  | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (11,840  | )
|Asset impairment charges                                                                                                                           |  |                     | 3,827    |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | 3,827    |  
|Other                                                                                                                                              |  |                     | 2,336    |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | 2,336    |  
|Change in assets and liabilities, net                                                                                                              |  |                     | 20,196   |   |                     |   | (689    | )                       |  |   | 3,110        |   |  |              | 9,815   |   |  |   | 32,432   |  
|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Net cash provided by operating activities of continuing operations                                                                                 |  |                     | 88,339   |   |                     |   | 16,282  |                         |  |   | 1,806        |   |  |              | (5,830  | ) |  |   | 100,597  |  
|Net cash provided by operating activities of discontinued operations                                                                               |  |                     | 11,897   |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | 11,897   |  
|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Net cash provided by operating activities                                                                                                          |  |                     | 100,236  |   |                     |   | 16,282  |                         |  |   | 1,806        |   |  |              | (5,830  | ) |  |   | 112,494  |  
|Cash flows from investing activities:                                                                                                              |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Proceeds from sale of equipment                                                                                                                    |  |                     | 9,016    |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | 9,016    |  
|Additions to property, plant and equipment                                                                                                         |  |                     | (49,804  | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (49,804  | )
|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Net cash (used by) investing activities of continuing operations                                                                                   |  |                     | (40,788  | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (40,788  | )
|Net cash (used by) investing activities of discontinued operations                                                                                 |  |                     |         |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   |         |  
|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Net cash (used by) investing activities                                                                                                            |  |                     | (40,788  | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (40,788  | )
|Cash flows from financing activities:                                                                                                              |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Payment for debt extinguishment                                                                                                                    |  |                     | (150,000 | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (150,000 | )
|Payments relating to capital lease obligation                                                                                                      |  |                     | (268     | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (268     | )
|Cash overdraft                                                                                                                                     |  |                     | 8,920    |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | 8,920    |  
|Payments of loans from former parent and affiliated companies                                                                                      |  |                     | (45,745  | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (45,745  | )
|Payments of cash dividends                                                                                                                         |  |                     | (5,830   | ) |                     |   |        |                         |  |   |             |   |  |              | 5,830   |   |  |   |         |  
|Loans from former parent and affiliated companies                                                                                                  |  |                     | 159,140  |   |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | 159,140  |  
|Due to former parent and affiliated companies, net                                                                                                 |  |                     | 19,834   |   |                     |   | (16,280 | )                       |  |   | 2,858        |   |  |              |        |   |  |   | 6,412    |  
|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Net cash (used by) provided by financing activities of continuing operations                                                                       |  |                     | (13,949  | ) |                     |   | (16,280 | )                       |  |   | 2,858        |   |  |              | 5,830   |   |  |   | (21,541  | )
|Net cash (used by) financing activities of discontinued operations                                                                                 |  |                     | (11,528  | ) |                     |   |        |                         |  |   |             |   |  |              |        |   |  |   | (11,528  | )
|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Net cash (used by) provided by financing activities                                                                                                |  |                     | (25,477  | ) |                     |   | (16,280 | )                       |  |   | 2,858        |   |  |              | 5,830   |   |  |   | (33,069  | )
|Change in cash and cash equivalents                                                                                                                |  |                     | 33,971   |   |                     |   | 2       |                         |  |   | 4,664        |   |  |              |        |   |  |   | 38,637   |  
|Cash and cash equivalents at beginning of period                                                                                                   |  |                     | 39,410   |   |                     |   | 34      |                         |  |   | 427          |   |  |              |        |   |  |   | 39,871   |  
|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  
|Cash and cash equivalents at end of period                                                                                                         |  | $                   | 73,381   |   |                     | $ | 36      |                         |  | $ | 5,091        |   |  | $            |        |   |  | $ | 78,508   |  
|                                                                                                                                                   |  |                     |          |   |                     |   |         |                         |  |   |              |   |  |              |         |   |  |   |          |  



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|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



Not applicable.



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PART III



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------



The following table presents information as of February 29, 2004 regarding our executive officers, whom we refer to as the CEO team, and our directors and
the executive officers and directors of Paperweight Development. Each director holds a one-year term of office.



|                  |  |     |  |                                                                                                                                                          
|----------------- |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Name              |  | Age |  | Position                                                                                                                                                 
|Douglas Buth      |  | 49  |  | Chairman, Chief Executive Officer and a Director, and Chairman, President, Chief Executive Officer and a Director of Paperweight Development             
|                  |  |    
|Paul Karch        |  | 47  |  | Vice President, Human Resources & Law, Secretary, General Counsel and a Director, and Vice President, Secretary and a Director of Paperweight Development
|                  |  |    
|Dale Parker       |  | 52  |  | Vice President, Finance, Chief Financial Officer and a Director, and Chief Financial Officer and a Director of Paperweight Development                   
|                  |  |    
|Nicholas Davis    |  | 65  |  | Director and a Director of Paperweight Development                                                                                                       
|                  |  |    
|Ronald A. Pace    |  | 56  |  | Director and a Director of Paperweight Development                                                                                                       
|                  |  |    
|Susan Scherbel    |  | 45  |  | Director and a Director of Paperweight Development                                                                                                       
|                  |  |    
|W. A. Sikora      |  | 67  |  | Director and a Director of Paperweight Development                                                                                                       
|                  |  |    
|John Depies       |  | 47  |  | Vice President and General Manager, Thermal and Advanced Technical Products                                                                              
|                  |  |    
|Rick Fantini      |  | 49  |  | Vice President, Operations and Project Venture                                                                                                           
|                  |  |    
|James McDermott   |  | 47  |  | Vice President, Coated Solutions Sales and Marketing                                                                                                     
|                  |  |    
|Stephen Sakai     |  | 50  |  | Vice President, Performance Packaging                                                                                                                    
|                  |  |    
|Ann Whalen        |  | 45  |  | Vice President, Market Transformation                                                                                                                    
|                  |  |    
|Ted Goodwin       |  | 47  |  | Vice President, Technology                                                                                                                               
|                  |  |    
|Graham Bennington |  | 53  |  | Chief Executive Officer of BemroseBooth Limited                                                                                                          
|                  |  |    
|Paul McCann       |  | 45  |  | Plant Manager, Appleton Plant                                                                                                                            
|                  |  |    
|Todd Downey       |  | 45  |  | Director of Manufacturing and Mill Manager, West Carrollton Mill                                                                                         
|                  |  |    
|Rene-Paul Forier |  | 56  |  | Mill Manager, Roaring Spring Mill                                                                                                                        



Douglas Buth.
Mr. Buth has been Chief Executive Officer of Appleton Papers since 1998 and President and Chief Executive Officer of Paperweight Development since July 2001 and a Director of Paperweight Development since December 2000. He previously served as
Executive Vice President and General Manager of Carbonless from 1997 to 1998, Vice President of Sales from 1993 to 1997 and Vice President of Marketing from 1991 to 1993. Mr. Buth joined Appleton Papers in 1988 as Director of Strategic Planning. Mr.
Buth qualified as a CPA with PriceWaterhouse in 1979 and thereafter held a number of financial positions with Saks Fifth Avenue and BATUS. Mr. Buth received his BBA (Accounting) from the University of Notre Dame in 1977.



Paul Karch. Mr. Karch has been Vice President, Human Resources &
Law, Secretary and General Counsel since January 2002 and Vice President and Secretary of Paperweight Development since July 2001 and a Director of Paperweight Development since August 2001. Previously he served as Vice President, Law & Public
Affairs, Secretary and General Counsel from September 2000 to January 2002, as Vice President, Secretary and General Counsel from 1997 to 2000, as Secretary and General Counsel from 1996 to 1997, and as Senior Legal Counsel from 1994 to 1996. Prior
to joining Appleton Papers, Mr. Karch was in private practice at Luce, Forward, Hamilton & Scripps, San Diego, California from 1983 to 1993. Mr. Karch received his AB (Economics) from Harvard College in 1978 and a JD from Harvard Law School in
1982.



Dale Parker. Mr.
Parker has been Vice President, Finance and Chief Financial Officer since 2000, Chief Financial Officer of Paperweight Development since July 2001 and a Director of Paperweight Development since August 2001. Prior to joining Appleton Papers, he held
various financial positions at Black Clawson Co., Inc., a global manufacturer of capital goods for the paper and plastics industries, including Vice President Finance from 1988 to 2000. Mr. Parker qualified as a CPA in 1977. Mr. Parker received his
BS (Business) from Miami University in 1973 and an MBA from Xavier University in 1977.



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Nicholas Davis. Mr. Davis has been a Director of Appleton Papers and a Director of Paperweight
Development since November 2001. Mr. Davis has been the President and Chief Investment Officer of Montana Investment Advisors Inc., an SEC-regulated asset management firm based in Bozeman, Montana, since 1992. Prior to joining Montana Investment
Advisors Inc., he held various management positions at PaineWebber, Colorado Growth Capital and White Weld. Mr. Davis qualified as a CFA in 1969. Mr. Davis graduated with honors with a BA (Geology) from Princeton University in 1961 and an MBA from
Stanford University in 1963.



Ronald Pace. Mr. Pace has
been a Director of Appleton Papers and a Director of Paperweight Development since January 2003. Mr. Pace has been Sector President Plumbing  Americas for Kohler Company since June 1999. From February 1995 to June 1999 Mr. Pace served in other
management positions at Kohler Company. Prior to joining Kohler Company, Mr. Pace held various management positions in several companies, including AMP Incorporated (1991-1995), Johnson Matthey, PLC (1988-1991), Dainippon Ink & Chemicals
(1986-1988) and British Petroleum (1977-1986). Mr. Pace received his BA (Economics/Chemistry) in 1969 and an MBA (Finance/Marketing) in 1972 from the University of Connecticut.



Susan Scherbel.Ms. Scherbel has been a Director of Appleton Papers and a Director of Paperweight Development since
January 2002. Ms. Scherbel is employed by Bellview Associates, an investment firm she co-founded in March 2001. From January 1989 to March 2001, Ms. Scherbel served as a Managing Director of Merrill Lynch Investment Banking, where she specialized in
employee benefit transactions. Prior to this, Ms. Scherbel served as tax counsel for Hughes, Hubbard & Reed and as an advisor to the Assistant Secretary of the Treasury for Tax Policy at the United States Department of Treasury. Ms. Scherbel
graduated with an AB (Government and Economics) from Harvard College in 1979, a JD from Georgetown University in 1982 and an LLM from Georgetown University in 1986.



W. A. Sikora. Mr. Sikora has been a Director of Appleton Papers and a Director of Paperweight Development since
November 2001. Mr. Sikora has been a self-employed business and financial advisor to public and private companies since 1982, except for the period 1996 to 1999 when he was Executive Vice President of TransMontaigne Inc. (AMEX: TMG). He was also a
partner in the accounting firms of Hein + Sikora, Touche Ross & Co. and Peat Marwick Mitchell & Co. Mr. Sikora received a BS (Accounting), with honors, from the University of Colorado in 1959 and his certificate as a Certified Public
Accountant in 1960.



John Depies. Mr. Depies has been
Vice President and General Manager, Thermal and Advanced Technical Products since May 2001. Mr. Depies previously served as Vice President Sales and Marketing, Roll Printers from 1999 to 2001 and as Executive Director for Carbonless Sales from 1997
to 1999. Mr. Depies joined Appleton Papers in 1983 and served in a number of managerial roles from 1983 to 1997. Mr. Depies received his BA (Marketing) in 1979 and an MBA (Finance) in 1983 from the University of Wisconsin-Oshkosh.



Rick Fantini. Mr. Fantini has been Vice President, Operations and
Project Venture since January 2004. Project Venture is our name for the installation of a new enterprise resource planning system, which is a computer software system used for invoicing, financial reporting, shipment planning and manufacturing
operations. He served as Vice President, Operations from January 2002 to January 2004. Previously, he served as Vice President, Human Resources and Procurement from 1998 to 2002, as Director of Procurement from 1997 to 1998, as manager of Business
Development from 1996 to 1997 and served in a number of labor relations and benefits jobs since joining Appleton Papers in 1980. Mr. Fantini received a BA (Social Science) from Michigan State University in 1977, a Masters (Labor and Industrial
Relations) from Michigan State University in 1980 and an MBA from Northwestern University (Kellogg) in 1996.



James McDermott. Mr. McDermott has been Vice President, Coated Solutions Sales and Marketing since January 2002. Prior to this, Mr. McDermott
rejoined Appleton as Vice President, Carbonless Sales from May 2001 to January 2002 after a brief departure in 1999. Mr. McDermott was Vice President of Sales & Marketing for Dunsirn Industries from 1999 to 2001. Mr. McDermott originally was
hired by Appleton Papers in 1986 and has held various sales positions. Mr. McDermott received a BS (Agricultural Economics) from the University of Wisconsin-Madison in 1979.



Stephen Sakai. Mr. Sakai has been Vice President, Performance Packaging since October 2003. Mr. Sakai was Vice
President, New Business Development from March 2001 to October 2003. He previously served as Vice President and General Manager, Thermal from 1999 to March 2001, as Executive Director of Sales and Marketing for the Coated Free Sheet Business from
1997 to 1999 and held other management positions with the Coated Free Sheet Business from February 1996 to October 1997. Prior to joining Appleton Papers he held a variety of positions in finance, sales and marketing with Scott Paper from 1976 to
1996. Mr. Sakai received a BA from the University of Washington in 1975 and he received an MBA from the University of Puget Sound Business School in 1982.



Ann Whalen. Ms. Whalen has been Vice President, Market Transformation since January 2004. Ms. Whalen served as Vice President, Project Venture and
Information Services from January 2003 to January 2004. She previously served as Vice President,



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Project Venture from January 2002 to December 2002, as Vice President, Logistics from 1999 to January 2002, as Vice President of Finance from 1997 to 1999
and as Controller from 1991 to 1997. Ms. Whalen joined Appleton Papers in 1981 and served in several accounting positions prior to 1991. Ms. Whalen received a BBA (Accounting) from the University of Wisconsin-Madison in 1981 and she received an MBA
from the University of Wisconsin-Oshkosh in 1990.



Ted
Goodwin.Mr. Goodwin has been Vice President, Technology since September 2001. Mr. Goodwin previously served as Executive Director of New Business Development from 1999 to 2001 and, prior to this, he was the Executive Director of Carbonless
Research and Development from 1997 to 1999, Director of Applied Research from 1994 to 1997 and Director of Thermal Research from 1991 to 1994. Mr. Goodwin joined Appleton Papers in 1979 and advanced through several positions within Research and
Development from 1979 to 1994. Mr. Goodwin received his BS (Chemistry) from the University of Detroit in 1979 and he received an MBA from the University of Wisconsin-Oshkosh in 1988.



Graham Bennington. Mr. Bennington has been the Chief Executive Officer
of Appletons subsidiary, BemroseBooth Limited since July 2000. Prior to that, Mr. Bennington was the Chief Executive of Bemrose European Operations since 1992. Mr. Bennington joined Bemrose Corporation plc. in 1977 and served in several
positions including Operations Director and Personnel Manager. Mr. Bennington received a BA from Reading University (Politics and Economics) in 1971 and a post-graduate diploma (HR) from Aston University in 1972.



Paul McCann. Mr. McCann has been the Plant Manager of our Appleton
plant since September 2003. Mr. McCann progressed through a series of manufacturing, purchasing and management positions since joining Appleton Papers in 1981. Mr. McCann received a BS (Mechanical Engineering) from the University of
Wisconsin-Madison in 1981.



Todd Downey. Mr. Downey has
been the Director of Manufacturing since September 2003 and Mill Manager at our West Carrollton mill since 2000. He previously served as Production Manager from 1996 to 2000 and Paper Machine Business Unit Manager at our West Carrollton mill from
1994 to 1996. Prior to joining Appleton Papers in 1994, Mr. Downey worked at Champion Internationals Hamilton, Ohio mill from 1982 to 1994. Mr. Downey received a BA (Paper Science and Engineering) from Miami University in 1982.



Rene-Paul Forier. Mr. Forier has been the Mill Manager at our
Roaring Spring mill since July 2003. Mr. Forier joined Appleton Papers in 1992 and served in several positions including Mill Manager prior to leaving the company in 2000. After the closure of our Newton Falls facility in 2000, Mr. Forier worked as
a consultant to the company. Mr. Forier then rejoined Appleton Papers as an employee in 2002 and was renamed Mill Manager in July 2003. Mr. Forier received a BS (Chemistry) and a Ph.D. (Chemistry) from the University of Mons in Belgium.



The board of directors of Paperweight Development consists of seven
members. Paperweight Development has entered into a security holders agreement with the ESOP Trust which sets forth the manner in which the ESOP Trust will vote its shares of Paperweight Development common stock in connection with the election of
directors. Under the agreement, the ESOP Trust has agreed to vote all of its shares of Paperweight Development common stock to give effect to the following composition of Paperweight Developments board of directors:



| |  | between January 1, 2003 and December 31, 2003, two individuals nominated by the ESOP Trust, three individuals nominated by Paperweight Developments chief executive officer and
two individuals jointly nominated by the ESOP Trust and the chief executive officer;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | between January 1, 2004 and December 31, 2004, one individual nominated by the ESOP Trust, three individuals nominated by Paperweight Developments chief executive officer and
three individuals jointly nominated by the ESOP Trust and the chief executive officer; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | on and after January 1, 2005, four individuals nominated by Paperweight Developments chief executive officer and three individuals jointly nominated by the ESOP Trust and the
chief executive officer.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The ESOP Trust has
agreed that any vote taken to remove a director or to fill vacancies on the board of directors is subject to the provisions described above. The agreement also provides that directors nominated by joint nomination may only be removed by mutual
agreement of the ESOP Trust and Paperweight Developments chief executive officer. In addition to the election of directors, the agreement prohibits Paperweight Development from issuing capital stock to any person other than the ESOP Trust or
making, or permitting any of its subsidiaries to make, any acquisition in a single transaction or series of related transactions with a fair market value in excess of $100 million, in each case without the prior written consent of the ESOP Trust.



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Paperweight Development has entered into a security holders agreement with us on terms substantially
similar to those described above to provide for the manner in which Paperweight Development will vote its shares of our common stock in connection with the election of directors. In addition to the election of directors, the agreement prohibits us
from issuing capital stock to any person other than Paperweight Development or making, or permitting any of our subsidiaries to make, any acquisition in a single transaction or series of related transactions with a fair market value in excess of
$100 million, in each case without the prior written consent of Paperweight Development.



Pursuant to the agreements above, Messrs. Buth, Karch and Parker were nominated by Mr. Buth, our chief executive officer, and elected to the boards of directors of Paperweight Development and Appleton Papers, Messrs.
Davis and Sikora were nominated by the ESOP Trust and elected to the boards of directors of Paperweight Development and Appleton Papers and Mr. Pace and Ms. Scherbel were jointly nominated by Mr. Buth and the ESOP Trust and elected to the boards of
directors of Paperweight Development and Appleton Papers.



Pursuant to the terms of the senior credit facility, the indenture and the deferred payment obligation, the security holders agreements described above may not be amended except under limited circumstances. In addition, the senior credit
facility, the indenture and the deferred payment obligation require our board of directors and the board of directors of Paperweight Development to include at least two independent directors.



The Board of Directors has an Audit Committee and a Compensation Committee.
The members of both the Audit Committee and the Compensation Committee are Ms. Scherbel and Messrs. Davis, Pace and Sikora. The charter of the Audit Committee provides, among other things, that the Audit Committee will provide assistance to the
Board of Directors in fulfilling its responsibility to the ESOP participants relating to financial accounting and reporting practices and the quality and integrity of Paperweight Development financial reports. The charter of the Compensation
Committee provides that the Committee is responsible for establishing the compensation of our chief executive officer, approving the compensation of the named executive officers and reviewing the compensation of other members of the CEO team. The
Compensation Committee also has authority for administration of our Long-Term Incentive Plan. See Item 11. Executive CompensationManagement Compensation and Long-Term Incentive Plan below.



The board of directors of Paperweight Development and Appleton Papers have
determined that W.A. Sikora, chairman of the audit committees of both boards of directors, is an audit committee financial expert. Mr. Sikora is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Securities Exchange Act of 1934.



We have adopted a Code of
Business Conduct and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller. We have filed the Code of Business Conduct and
Ethics as an exhibit to this Annual Report on Form 10-K and we will be posting the Code on our Internet web site at www.appletonideas.com. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K by posting such information on our
Internet web site.



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|Item 11. | Executive Compensation
|-------- | ----------------------



The following table sets forth the compensation for the last three years paid to our chief executive officer and our four other most highly compensated
executive officers, who we refer to as our named executive officers:



Summary Compensation Table



|                                                                                        |  |              |  |                     |                       |                              |   |                             |  |                                     |                    |                          |               |  |   |                      
|--------------------------------------------------------------------------------------- |  | ------------ |  | ------------------- | --------------------- | ---------------------------- | - | --------------------------- |  | ----------------------------------- | ------------------ | ------------------------ | ------------- |  | - | ---------------------
|                                                                                        |  |              |  | Annual Compensation |                       | Long TermCompensation Awards |   |                            
|Name and Principal Position                                                             |  | Year         |  | Salary($)           |                       | Bonus($)                     |   | Other AnnualCompensation($) |  | SecuritiesUnderlyingOptions/SARs(#) |                    | All OtherCompensation($)
|                                                                                        |  |              |  |                     |                       |                              |   | (1)                         |  |                                     |                    | (2)                     
|Douglas P. Buth Chairman, President and Chief Executive Officer                         |  | 200320022001 |  | $                   | 650,000644,692419,422 |                              | $ | 167,534502,724210,000       |  | $                                   | 14,44818,76227,189 |                          | 24,000027,600 |  | $ | 14,21413,7871,774,868
|Dale E. Parker Vice President, Finance and Chief Financial Officer                      |  | 200320022001 |  |                     | 236,412227,058216,796 |                              |   | 43,295112,156102,852        |  |                                     | 13,46013,15613,156 |                          | 8,00005,770   |  |   | 15,62416,577731,113  
|John Depies Vice President and General Manager, Thermal and Advanced Technical Products |  | 200320022001 |  |                     | 208,569196,723187,985 |                              |   | 35,17698,32689,667          |  |                                     | 12,59416,92829,918 |                          | 8,00005,770   |  |   | 13,03912,592260,615  
|Stephen P. Sakai Vice President, Performance Packaging                                  |  | 200320022001 |  |                     | 214,192207,077195,675 |                              |   | 38,89498,831108,367         |  |                                     | 17,24317,00419,709 |                          | 8,00005,770   |  |   | 18,38516,603497,955  
|Paul Karch Vice President, Human Resources & Law and General Counsel                    |  | 200320022001 |  |                     | 218,160202,717187,788 |                              |   | 38,324102,79391,177         |  |                                     | 14,63011,13211,132 |                          | 8,00005,770   |  |   | 17,95115,320868,706  

---

|(1) | Other annual compensation consists of perquisites and tax reimbursements related to the
perquisites.
|--- | ----------------------------------------------------------------------------------------------------



|(2) | All other compensation for 2003 consists of the following for each named executive officer:
Mr. Buth, company contributions to defined contribution plans ($12,573) and life insurance premiums ($1,641); Mr. Parker, company contributions to defined contribution plans ($12,954) and life insurance premiums ($2,670); Mr. Sakai, company
contributions to defined contribution plans ($12,714), company contribution to non-qualified deferred compensation plan ($4,500), and life insurance premiums ($1,171); Mr. Karch, company contributions to defined contribution plans ($12,592), company
contribution to non-qualified deferred compensation plan ($4,257), and life insurance premiums ($1,102); and Mr. Depies, company contributions to defined contribution plans ($12,554) and life insurance premiums ($485). The defined contribution plans
include the KSOP and the 401(a) plan. The 401(a) plan was discontinued on June 30, 2003 and the money in this plan was transferred to the KSOP plan on July 1, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Stock Appreciation Rights Plan



The following table summarizes certain information concerning stock appreciation rights (SAR) grants made under
the Appleton Papers Inc. Long-Term Incentive Plan to the named executive officers during fiscal 2003.



Option/SAR Grants in Fiscal 2003



|                 |  |                                                  |  |                                                         |  |                             |       |                                                                                                 |            |        |   |         |  |   |        
|---------------- |  | ------------------------------------------------ |  | ------------------------------------------------------- |  | --------------------------- | ----- | ----------------------------------------------------------------------------------------------- | ---------- | ------ | - | ------- |  | - | -------
|                 |  | Individual Grants                                |  |                                                         |  |                             |       | Potential RealizableValue at AssumedAnnual Rates of StockPrice Appreciation forOption Terms (1)
|                 |  | Number ofSecuritiesUnderlyingOptions/SARsGranted |  | % of TotalOptions/SARsGranted toEmployees inFiscal Year |  | Exercise orBasePrice ($/Sh) |       | ExpirationDate                                                                                  |            | 5% ($) |   | 10% ($)
|Douglas P. Buth  |  | 24,000                                           |  | 9.3                                                     |  | $                           | 21.92 |                                                                                                 | 12/31/2012 |        | $ | 330,849 |  | $ | 838,436
|Dale E. Parker   |  | 8,000                                            |  | 3.1                                                     |  |                             | 21.92 |                                                                                                 | 12/31/2012 |        |   | 110,283 |  |   | 279,479
|John R. Depies   |  | 8,000                                            |  | 3.1                                                     |  |                             | 21.92 |                                                                                                 | 12/31/2012 |        |   | 110,283 |  |   | 279,479
|Stephen P. Sakai |  | 8,000                                            |  | 3.1                                                     |  |                             | 21.92 |                                                                                                 | 12/31/2012 |        |   | 110,283 |  |   | 279,479
|Paul J. Karch    |  | 8,000                                            |  | 3.1                                                     |  |                             | 21.92 |                                                                                                 | 12/31/2012 |        |   | 110,283 |  |   | 279,479



|(1) | The dollar amounts under these columns are the result of calculations at assumed rates of stock price appreciation of 5% and 10% over the ten-year period of the
grant. These assumed rates of growth were selected by the Securities and Exchange Commission for illustration purposes only.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table summarizes for each of the named executive officers the number of shares of
Paperweight Development common stock with respect to which SARs were exercised during 2003, the dollar value realized upon exercise of SARs, the total number of shares of Paperweight Development common stock underlying unexercised SARs held at
December 31, 2003 (exercisable and unexercisable) and the aggregate dollar value of in-the-money, unexercised SARs held at December 31, 2003 (exercisable and unexercisable). Value realized upon exercise is the difference between the fair market
value of the underlying shares of Paperweight Development common stock on the exercise date and the base price of the SARs. The value of unexercised, in-the-money SARs at fiscal year-end is the difference between their base price and the fair market
value of the underlying Paperweight Development common stock as of December 31, 2003 which was $23.36 per share. These values, unlike any amounts that may be set forth in the column entitled Value Realized have not been, and may never
be, realized. The SARs have not been, and may never, be exercised. The actual gains, if any, on exercise will depend on the value of the Paperweight Development common stock on the exercise date. The values in the table below are shown as of
December 31, 2003, the date of the most recent valuation of Paperweight Development common stock.



Aggregated Option/SAR Exercises in Fiscal 2003

and FY-End Option/SAR Values



|                 |  |                                |             |                    |               |                                                                    |             |                                                             |               |   |   |  |   |        
|---------------- |  | ------------------------------ | ----------- | ------------------ | ------------- | ------------------------------------------------------------------ | ----------- | ----------------------------------------------------------- | ------------- | - | - |  | - | -------
|Name             |  | Shares Acquired on Exercise(#) |             | Value Realized ($) |               | Number of Securities Underlying Unexercised Options/SARs at FY-End |             | Value of Unexercised In-the-Money Options/SARs at FY-End($)
|                 |  |                                | Exercisable |                    | Unexercisable |                                                                    | Exercisable |                                                             | Unexercisable
|Douglas P. Buth  |  | 0                              |             |                   |               | 0                                                                  |             | 51,600                                                      |               | $ | 0 |  | $ | 403,296
|Dale E. Parker   |  | 0                              |             |                   |               | 0                                                                  |             | 13,770                                                      |               |   | 0 |  |   | 88,607 
|John Depies      |  | 0                              |             |                   |               | 0                                                                  |             | 13,770                                                      |               |   | 0 |  |   | 88,607 
|Stephen P. Sakai |  | 0                              |             |                   |               | 0                                                                  |             | 13,770                                                      |               |   | 0 |  |   | 88,607 
|Paul J. Karch    |  | 0                              |             |                   |               | 0                                                                  |             | 13,770                                                      |               |   | 0 |  |   | 88,607 



Pension and Related Plans



In addition to the KSOP, we maintain a broad-based
qualified, noncontributory defined benefit pension plan for eligible salaried employees, which we refer to as the pension plan. We have also established a Supplemental Executive Retirement Plan, the SERP, to provide retirement benefits for
management and other highly compensated employees whose benefits are reduced by qualified plan limitations in the pension plan. The table below shows the estimated monthly single-life annuity benefit under the pension plans (without qualified plan
limitations) at various salary levels and years of credited service, payable upon retirement at age 65 in the year 2003. (2003 Social Security Covered Compensation is used in the formula.) The benefit shown is not subject to any deduction for any
Social Security benefit.



|             |  |                  |       |    |   |        |  |    |        |    |   |        |  |   |       
|------------ |  | ---------------- | ----- | -- | - | ------ |  | -- | ------ | -- | - | ------ |  | - | ------
|             |  | Years of Service
|Remuneration |  | 15               |       | 20 |   | 25     |  | 30 |        | 35
|$125,000     |  | $                | 1,963 |    | $ | 2,617  |  | $  | 3,271  |    | $ | 3,925  |  | $ | 4,579 
|150,000      |  |                  | 2,400 |    |   | 3,200  |  |    | 4,000  |    |   | 4,800  |  |   | 5,600 
|175,000      |  |                  | 2,838 |    |   | 3,783  |  |    | 4,729  |    |   | 5,675  |  |   | 6,621 
|200,000      |  |                  | 3,275 |    |   | 4,367  |  |    | 5,458  |    |   | 6,550  |  |   | 7,642 
|225,000      |  |                  | 3,713 |    |   | 4,950  |  |    | 6,188  |    |   | 7,425  |  |   | 8,663 
|250,000      |  |                  | 4,150 |    |   | 5,533  |  |    | 6,917  |    |   | 8,300  |  |   | 9,683 
|300,000      |  |                  | 5,025 |    |   | 6,700  |  |    | 8,375  |    |   | 10,050 |  |   | 11,725
|400,000      |  |                  | 6,775 |    |   | 9,033  |  |    | 11,292 |    |   | 13,550 |  |   | 15,808
|450,000      |  |                  | 7,650 |    |   | 10,200 |  |    | 12,750 |    |   | 15,300 |  |   | 17,850
|500,000      |  |                  | 8,525 |    |   | 11,367 |  |    | 14,208 |    |   | 17,050 |  |   | 19,892



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The SERP benefit, when added to the pension plan benefit, provides a combined benefit equal to the
benefit under the pension plan as if certain qualified plan limitations did not apply. Under the pension plan and the SERP, a pension is payable upon retirement at age 65, or upon earlier termination if certain conditions are satisfied. The pension
benefits are based on years of credited service and the average annual compensation received during the highest five full consecutive calendar years of the last ten years prior to retirement. Compensation covered by the plans includes base salary,
bonus, deferred compensation and overtime pay as defined in the pension plan.



As of December 31, 2003, the estimated years of credited service for each of our executive officers is as follows: Douglas Buth, 16 years; Paul Karch, 10 years; Dale Parker, 4 years; John Depies, 21 years; Rick
Fantini, 23 years; James McDermott, 15 years; Stephen Sakai, 8 years; Ann Whalen, 23 years; Ted Goodwin, 25 years; Paul McCann, 23 years; Todd Downey, 10 years; and Rene-Paul Forier, 1 year. Mr. Bennington does not participate in any of the
above plans, but Mr. Bennington is covered by the Bemrose Group Pension Scheme. Mr. Bennington has 26 years of credited service in this plan. Based on these years of service, Mr. Bennington would be entitled to an annual benefit of approximately
£89,558.



We have two non-qualified deferred compensation
plans for senior executives. The first has been in place for some time and allowed participants to defer receipt of any percentage of his or her compensation by filing an appropriate election with us. Under the arrangements related to this plan, we
funded a rabbi trust on October 11, 2001 to provide funds for our current obligations, valued at approximately $2.1 million under this plan as of December 31, 2003. The funds in the rabbi trust remain subject to claims of our creditors in the event
of insolvency. There will be no further deferrals to this plan. We have also established the New Deferred Compensation Plan for senior executives, which will allow for future deferrals but for which no funds will be transferred to the rabbi trust.
In addition to deferrals similar to those allowed under the old plan, this new plan provided for the deferral of the loyalty payment related to the acquisition of Appleton Papers Inc. from AWA. Except for the amounts deferred from the loyalty
payments, which will increase or decrease based on changes in the value of Paperweight Development common stock, amounts deferred in both plans are increased at the then prevailing ten-year Treasury note rate. The current obligations under the New
Deferred Compensation Plan are valued at approximately $2.6 million as of December 31, 2003.



Termination Protection Agreements



We have entered into termination protection agreements with all members of our CEO team, including the named executive officers with the exception of Graham Bennington, who is covered by an employment services
agreement, described more fully below. The agreements provide that if, at any time other than within two years after a change of control, as defined below, we terminate the executive officers employment other than for misconduct,
or permanent disability, as defined below, or the executive officer terminates the executive officers employment for good reason, as defined below, then the executive officer will continue to receive payments in
accordance with our normal payroll practices for eighteen months following termination of employment at a rate equal to the executive officers base salary in effect on the date on which his or her employment terminates. The payments to the
executive officer would be reduced by amounts he or she earns through employment during the eighteen-month salary continuation period after twelve months from the date of termination. The payments would cease completely if the executive officer, at
any time, engaged in a competing business.



Conversely, if,
within two years of a change of control, we terminate the executive officers employment other than for misconduct, or permanent disability, or he or she terminates his or her employment for good reason, then he or she is entitled to a lump-sum
cash payment. This payment will be equal to two times his or her annual base salary, plus a multiple of two times his or her targeted bonus for the fiscal year in which his or her employment terminates, or if no such bonus has been established for
the fiscal year of termination, then the bonus for the fiscal year prior to termination is used. The executive officer will also be entitled to a lump-sum cash payment representing a partial bonus for the year of termination, based on the number of
days the executive officer worked in the year of termination.



Whether or not an executive officers employment terminates within two years of a change of control, the executive officer would also receive his or her salary through the date of termination and all other amounts owed to the executive
officer at the date of termination under our benefit plans. In addition, he or she would be entitled to reimbursement for outplacement services and continued health and dental coverage for the executive officer and the executive officers
family for 18 months after the date of termination not in connection with a change of control or 24 months after the date of termination in connection with a change of control.



Our severance agreements provide that if certain amounts to be paid in connection with a change of control constitute
parachute payments, as defined in Section 280(G) of the Internal Revenue Code, the severance benefits owed to the executive



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officer may be increased such that the net amount retained by the executive officer after deduction of any excise taxes and income taxes on the excise tax
and additional payments, shall be equal to the original severance benefits.



A change of control is defined in these agreements as:



| |  | the transfer of substantially all of our assets to an unrelated party;
| | - | ----------------------------------------------------------------------



| |  | our liquidation;
| | - | ----------------



| |  | our merger or consolidation into another company; or
| | - | ----------------------------------------------------



| |  | any other event whereby ownership and control is effectively transferred.
| | - | -------------------------------------------------------------------------



Permanent Disability is defined in these agreements as any time an executive officer is entitled to receive benefits under Title II of the
Social Security Act.



Good Reason is defined in
these agreements as, prior to a change in control, without the executive officers consent, a reduction of 25% or more of the executive officers base salary and after a change in control:



| |  | a decrease in the executive officers position or responsibilities without his or her consent;
| | - | ----------------------------------------------------------------------------------------------



| |  | failure to pay the executive officers salary or bonus in effect immediately prior to a change in control; or
| | - | -------------------------------------------------------------------------------------------------------------



| |  | the relocation of the executive officers principal place of employment without his or her consent.
| | - | ---------------------------------------------------------------------------------------------------



Our wholly-owned subsidiary, BemroseBooth Limited, has entered into a service agreement with Graham Bennington. Under this
agreement, Mr. Bennington is entitled to receive an annual base salary of £135,000, which is subject to review on an annual basis by the board of directors of BemroseBooth. Mr. Benningtons current base salary is £150,000. In the
discretion of the BemroseBooth board of directors, Mr. Bennington may also participate in the bonus plans maintained by BemroseBooth for its other executive officers on terms as the board may determine. Mr. Bennington currently participates in the
BemroseBooth Senior Executive Bonus Scheme  Financial Year July 2003 to June 2004 pursuant to which he may earn a bonus of up to 30% of his salary based on achievement of net operating cash flow and operating profit goals and specific personal
objectives. In addition, Mr. Bennington is entitled to participate in BemroseBooths pension, life insurance and health insurance plans. The agreement terminates on Mr. Benningtons 60thbirthday, but may be terminated earlier upon 12 months notice by either party or by BemroseBooth upon notice to Mr. Bennington under certain other
circumstances. Mr. Benningtons agreement also contains nondisclosure, nonsolicitation and noncompetition provisions.



Management Compensation and Long-Term Incentive Plan



Management compensation is determined by the Compensation Committee of our Board of Directors, which comprises the four independent directors. Our
management compensation policy provides that management salaries, cash bonuses and other compensation will be consistent with our strategic goals and the best interests of the participants in the ESOP and generally be within the middle of the range
for management compensation for similar companies.



In addition
to receiving salaries, annual performance bonuses and fringe benefits, such as health and life insurance, approximately 120 management employees participate in the Appleton Papers Inc. Long-Term Incentive Plan. The plan provides for future cash
bonuses based on the long-term performance of Appleton Papers and increases in the value of Paperweight Development common stock, as determined by the semi-annual appraisals of the Paperweight Development common stock performed by the independent,
third party appraiser selected by the ESOP trustee. Specific phantom stock units are awarded periodically to employees in aggregate quantities of up to approximately 2% of outstanding Paperweight Development stock, with up to an
additional 1% to select, newly-hired management employees. The units are awarded at the most recent Paperweight Development stock price as determined by the semi-annual ESOP appraisal. Employees holding phantom stock units are entitled to trigger
the cash bonus for any phantom stock unit only after holding the unit for at least three years, except in the event of the sale or recapitalization of Paperweight Development or Appleton Papers. The cash bonus for any unit is equal to the increase
in the value of Paperweight Development common stock from the date of issue until the trigger date. The initial grant of phantom stock units occurred on November 11, 2001 with annual awards planned for January 1, 2003 and each January 1 thereafter.
We believe the plan is within standard industry terms for management long-term incentive compensation and will benefit us by retaining management talent and providing management with appropriate incentives to increase Paperweight Developments
share price.



In addition to the Appleton Papers Inc. Long-Term
Incentive Plan, Mr. Bennington and approximately 11 other management employees are covered under the BemroseBooth Long-Term Incentive Plan. This plan will pay a cash bonus if the compounded



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annual growth rate of EBIT for BemroseBooth for the 3-year period from 2004-2006 is a minimum of 6% per year over the average EBIT for the prior 3-year
period from 2001-2003. If the minimum is exceeded, then 50% of the excess EBIT above this minimum threshold will be shared with the participating employees. Mr. Bennington will receive 20% of the total payment (10% of the above-minimum EBIT).



Director Compensation



Directors of Appleton Papers and Paperweight Development who are not
employees of Appleton Papers, Paperweight Development or any of their subsidiaries are currently entitled to an annual fee for service on both boards of $25,000. Directors are also entitled to an annual fee of $10,000 for serving as the chairman of
the Audit Committee or $3,000 for serving as the chairman of the Compensation Committee. In addition, each director receives a fee of $1,500 per day for in-person meetings, $500 per day for other meetings and reimbursement for travel expenses
incurred in connection with attending board meetings.



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|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------



The Appleton Papers Employee Stock Ownership Trust, whose address is c/o State Street Global Advisors, One Lincoln Street,
Boston, Massachusetts 02111, owns beneficially and of record 100% of the issued and outstanding shares of Paperweight Development Corp. Paperweight Development owns beneficially and of record 100% of the issued and outstanding shares of Appleton
Papers Inc., which in turn owns beneficially and of record 100% of the issued and outstanding shares of WTA Inc.



The following table sets forth as of December 31, 2003 the number of shares allocated to the accounts of our directors, our named executive officers and
our directors and executive officers as a group in the Company Stock Fund of the KSOP.



|                                                             |  |                                              |     |  |         |  
|------------------------------------------------------------ |  | -------------------------------------------- | --- |  | ------- | -
|Name of Beneficial Owner                                     |  | Amount and Nature of Beneficial Ownership(1) |     |  | Percent |  
|Douglas Buth                                                 |  | 61,473                                       |     |  | *       |  
|Paul Karch                                                   |  | 37,782                                       |     |  | *       |  
|Dale Parker                                                  |  | 15,792                                       |     |  | *       |  
|Nicholas Davis                                               |  |                                             | (2) |  | *       |  
|Ronald Pace                                                  |  |                                             | (2) |  | *       |  
|Susan Scherbel                                               |  |                                             | (2) |  | *       |  
|W. A. Sikora                                                 |  |                                             | (2) |  | *       |  
|John Depies                                                  |  | 45,423                                       |     |  | *       |  
|Stephen Sakai                                                |  | 20,510                                       |     |  | *       |  
|All directors and executive officers as a group (17 persons) |  | 406,951                                      |     |  | 3.4     | %

---

|* | Less than 1%.
|- | -------------



|(1) | Participants in the KSOP have the right to direct the ESOP trustee to vote shares of common
stock which have been allocated to that participants ESOP account either for or against specified corporate events relating to Paperweight Development. For all other shareholder votes, the ESOP trustee will vote all shares of common stock held
by the ESOP as directed by the ESOP committee, subject to the security holders agreements described above under Item 10. Directors and Executive Officers of the Registrant. Participants have statutory diversification rights beginning at
age 55, conditional diversification rights beginning on January 1, 2006 and the right to receive distributions from the participants KSOP account upon retirement, death, disability, resignation, dismissal or permanent layoff. Participants may
not sell, pledge or otherwise transfer the shares of common stock allocated to their KSOP accounts.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Non-employee directors are not eligible to participate in the KSOP.
|--- | -------------------------------------------------------------------



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



None.



|Item 14. | Controls and Procedures
|-------- | -----------------------



Appleton, Paperweight Development and WTA maintain a set of disclosure controls and procedures that are designed to ensure that information required to be
disclosed by the registrants in the reports filed by the registrants under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. The
registrants carried out an evaluation, under the supervision and with the participation of their management, including the principal executive officer and principal financial officer of each of the registrants, of the effectiveness of the design and
operation of their disclosure controls and procedures pursuant to Rule 15d-15 of the Exchange Act. Based on that evaluation, the principal executive officer and principal financial officer of each of the registrants concluded that their disclosure
controls and procedures are effective as of the end of the period covered by this report.



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There have been no changes in the registrants internal control over financial reporting or
identified in connection with the evaluation discussed above that occurred during the registrants last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrants internal control over
financial reporting.



PART IV



|Item 15. | Principal Accounting Fees and Services
|-------- | --------------------------------------



Audit Fees. The aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP for both the audit of our financial
statements as of and for the years ended January 3, 2004 and December 28, 2002 and the review of the financial statements included in our Quarterly Reports on Form 10-Q and assistance with and review of documents filed with the SEC during those
periods were $277,000 in fiscal 2003 and $387,600 in fiscal 2002.



Audit-Related Fees. The aggregate fees billed by PricewaterhouseCoopers LLP for audit-related services were $58,700 in fiscal 2003 and $0 in fiscal 2002. These services in fiscal 2003 consisted of due diligence related to mergers and
acquisitions; accounting consultations and audits in connection with acquisitions; internal control reviews; and attest services.



Tax Fees. The aggregate fees billed by PricewaterhouseCoopers LLP for tax services were $0 in fiscal 2003 and $0 in fiscal 2002.



All Other Fees. The aggregate fees billed by PricewaterhouseCoopers
LLP for all other services were $0 in fiscal 2003 and $0 in fiscal 2002.



The
services provided in fiscal 2003 and described above were preapproved by the Audit Committee or the chairman of the Audit Committee and subsequently reviewed by the Audit Committee.



|Item 16. | Exhibits, Financial Statement Schedules and Reports on Form 8-K
|-------- | ---------------------------------------------------------------



(a)(1) Financial Statements.



Reports of Independent Auditors



Consolidated Balance Sheets as of January 3, 2004 and December 28, 2002



Consolidated Statements of Operations for the year ended January 3, 2004, for the year ended December 28, 2002, and for the
periods November 10, 2001 to December 29, 2001 and December 31, 2000 to November 9, 2001



Consolidated Statements of Cash Flows for the year ended January 3, 2004, for the year ended December 28, 2002 and for the periods November 10, 2001 to December 29, 2001 and December 31, 2000 to November 9, 2001



Consolidated Statements of Redeemable Common Stock,
(Accumulated Deficit) Retained Earnings, Accumulated Other Comprehensive Loss and Comprehensive Income for the years ended January 3, 2004 and December 28, 2002 and for the period November 10, 2001 to December 29, 2001



Consolidated Statement of Shareholders Equity for the period December
31, 2000 to November 9, 2001



Notes to
Consolidated Financial Statements



(a)(2) Financial Statement
Schedule.



Report of Independent Auditors on Financial
Statement Schedule



SCHEDULE II  Valuation and
Qualifying Accounts



(a)(3) Exhibits.



See (c) below.



120



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(b) Reports on Form 8-K.



During the quarter ended January 3, 2004, the Company



| | i. | Furnished a Form 8-K on November 6, 2003, reporting the issuance of a press release dated November 6, 2003 announcing the Companys third quarter 2003 financial results,
pursuant to Items 7 and 12.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii. | Furnished a Form 8-K/A on November 7, 2003, correcting an error contained in a press release dated November 6, 2003 announcing the Companys third quarter 2003 financial
results, pursuant to Items 7 and 12.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | iii. | Filed a Form 8-K on December 23, 2003, reporting the issuance of a press release dated December 23, 2003 announcing the Companys acquisition of Bemrose Group Limited, pursuant
to Items 5 and 7.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(c) Exhibits.



|      |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|----- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |    
|3.1   | *   |  | Second Amended and Restated Certificate of Incorporation of Appleton Papers Inc.                                                                                                                                                                                                                                                                                                                                 
|      |    
|3.2   | *   |  | Amended and Restated By-laws of Appleton Papers Inc.                                                                                                                                                                                                                                                                                                                                                             
|      |    
|3.2.1 | *** |  | Amendment to Amended and Restated By-laws of Appleton Papers Inc.                                                                                                                                                                                                                                                                                                                                                
|      |    
|3.2.2 |     |  | Amendment to Amended and Restated By-laws of Appleton Papers Inc. incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 28,
2002.                                                                                                                                                                                                                                 
|      |    
|3.3   | *   |  | Amended and Restated Articles of Incorporation of Paperweight Development Corp.                                                                                                                                                                                                                                                                                                                                  
|      |    
|3.4   | *   |  | Amended and Restated By-laws of Paperweight Development Corp.                                                                                                                                                                                                                                                                                                                                                    
|      |    
|3.5   | *   |  | Certificate of Incorporation of WTA Inc.                                                                                                                                                                                                                                                                                                                                                                         
|      |    
|3.6   | *   |  | Certificate of Amendment of Certificate of Incorporation of WTA Inc.                                                                                                                                                                                                                                                                                                                                             
|      |    
|3.7   | *   |  | By-laws of WTA Inc.                                                                                                                                                                                                                                                                                                                                                                                              
|      |    
|4.1   | *   |  | Indenture, dated as of December 14, 2001, between Appleton Papers Inc. and each of the guarantors named therein and U.S. Bank National Association, as trustee (the
Indenture).                                                                                                                                                                                                                                
|      |    
|4.1.1 |     |  | Supplemental Indenture dated April 30, 2003 among C&H Packaging, Inc., American Plastics Company, Inc., American Real Estate Corporation, Appleton Papers Inc., the other Guarantors (as
defined in the Indenture) and U.S. Bank National Association, incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 29, 2003.                                          
|      |    
|4.1.2 |     |  | Supplemental Indenture dated December 23, 2003 among Rose Holdings Limited, Bemrose Group Limited, BemroseBooth Limited, The Henry Booth Group Limited, HBGI Holdings Limited, Bemrose Security
& Promotional Printing Limited, BemroseBooth USA Inc., Appleton Papers Inc., the other Guarantors (as defined in the Indenture) and U.S. Bank National Association, as trustee.                                  
|      |    
|4.2   | *   |  | Form of Registered Note (included as Exhibit A1 to the Indenture).                                                                                                                                                                                                                                                                                                                                               
|      |    
|4.3   | *   |  | A/B Exchange Registration Rights Agreement, dated as of December 14, 2001, by and among Appleton Papers Inc. and the parties listed as guarantors thereto and Bear, Stearns, & Co. Inc., TD
Securities (USA) Inc., ABN AMRO Incorporated and U.S. Bancorp Piper Jaffray Inc.                                                                                                                                     
|      |    
|10.1  | *   |  | Purchase Agreement, dated as of December 11, 2001, between Appleton Papers Inc. and the parties listed as guarantors on Exhibit A thereto and Bear, Stearns, & Co. Inc., TD Securities
(USA) Inc., ABN AMRO Incorporated and U.S. Bancorp Piper Jaffray Inc.                                                                                                                                                     
|      |    
|10.2  | *   |  | Credit Agreement, dated as of November 8, 2001, among Paperweight Development Corp., Appleton Papers Inc., as Borrower, the several lenders from time to time parties thereto, Bear Stearns
Corporate Lending Inc., as syndication agent, Firstar Bank N.A. and LaSalle National Bank Association, as documentation agents, and Toronto Dominion (Texas), Inc., as administrative agent (the Credit Agreement).
|      |    
|10.3  | *   |  | First Amendment, dated as of December 7, 2001, to the Credit Agreement.                                                                                                                                                                                                                                                                                                                                          



121



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|        |      |  |                                                                                                                                                                                                                                                                                                                         
|------- | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |     
|10.3.1  | **** |  | Second Amendment, dated as of June 6, 2002, to the Credit Agreement.                                                                                                                                                                                                                                                    
|        |     
|10.3.2  |      |  | Third Amendment, dated as of April 18, 2003, to the Credit Agreement incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter ended March 30,
2003.                                                                                                                                  
|        |     
|10.3.3  |      |  | Fourth Amendment, dated as of December 23, 2003, to the Credit Agreement                                                                                                                                                                                                                                                
|        |     
|10.4    | *    |  | Purchase Agreement by and among Arjo Wiggins Appleton p.l.c., Arjo Wiggins US Holdings Ltd., Arjo Wiggins North America Investments Ltd., Paperweight Development Corp. and New Appleton LLC,
dated as of July 5, 2001.                                                                                                 
|        |     
|10.5    | *    |  | Deferred Payment Obligation (included as Schedule 2.3 to Exhibit 10.4).                                                                                                                                                                                                                                                 
|        |     
|10.6    |      |  | 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, incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 28, 2003.
|        |     
|10.7    | **   |  | Fox River PDC Environmental Indemnity Agreement by and among Appleton Papers Inc., Paperweight Development Corp and New Appleton LLC, dated as of November 9, 2001.                                                                                                                                                     
|        |     
|10.8    | **   |  | Security Agreement by and among Appleton Papers Inc., Paperweight Development Corp., New Appleton LLC and Arjo Wiggins Appleton p.l.c., dated as November 9, 2001.                                                                                                                                                      
|        |     
|10.9    | **   |  | Agreement, dated as of November 9, 2001, by and among Arjo Wiggins Appleton p.l.c., Arjo Wiggins (Bermuda) Holdings Limited, Paperweight Development Corp., PDC Capital Corporation and Arjo
Wiggins Appleton (Bermuda) Limited.                                                                                        
|        |     
|10.10   | **   |  | Assignment and Assumption Deed, dated as of November 9, 2001, between Arjo Wiggins Appleton p.l.c. and Arjo Wiggins Appleton (Bermuda) Limited.                                                                                                                                                                         
|        |     
|10.11   | **   |  | Collateral Assignment, dated as of November 9, 2001, by Arjo Wiggins Appleton (Bermuda) Limited in favor of Appleton Papers Inc.                                                                                                                                                                                        
|        |     
|10.12   | *    |  | Appleton Papers Retirement Savings and Employee Stock Ownership Plan, restated effective January 1, 2001.                                                                                                                                                                                                               
|        |     
|10.13   | *    |  | Appleton Papers Inc. Employee Stock Ownership Trust, adopted July 19, 2001.                                                                                                                                                                                                                                             
|        |     
|10.14   | *    |  | Appleton Papers Inc. Deferred Compensation Plan, restated effective as of January 1, 2000.(2)                                                                                                                                                                                                                           
|        |     
|10.15   | *    |  | Appleton Papers Inc. New Deferred Compensation Plan, adopted May 20, 2001.(2)                                                                                                                                                                                                                                           
|        |     
|10.16   | *    |  | Letter Agreement between Arjo Wiggins Appleton p.l.c. and Douglas Buth dated February 12, 2001 regarding Transaction-Related Executive Compensation.(2)                                                                                                                                                                 
|        |     
|10.17   | *    |  | Appleton Papers Inc. Long-Term Incentive Plan adopted June 22, 2001.(2)                                                                                                                                                                                                                                                 
|        |     
|10.18   | *    |  | Appleton Papers Inc. Supplemental Executive Retirement Plan, as amended through December 4, 1998.(2)                                                                                                                                                                                                                    
|        |     
|10.19   | *    |  | Form of Termination Protection Agreement.(2)                                                                                                                                                                                                                                                                            
|        |     
|10.20   | *    |  | Amended and Restated Intellectual Property Agreement among Appleton Papers Inc., WTA Inc. and Appleton Coated LLC dated as of November 9, 2001.                                                                                                                                                                         
|        |     
|10.21   | *    |  | Trademark License Agreement between Appleton Papers Inc., f/k/a Lentheric, Inc., and NCR Corporation, dated effective June 30, 1978.                                                                                                                                                                                    
|        |     
|10.22   | **** |  | Basestock Supply Agreement between Appleton Papers Inc. and Appleton Coated LLC dated June 27, 2001.(1)                                                                                                                                                                                                                 
|        |     
|10.22.1 |      |  | Amendment to Basestock Supply Agreement between Appleton Papers Inc. and Appleton Coated LLC effective June 27, 2002, incorporated by reference to the Registrants Annual Report on Form
10-K for the year ended December 28, 2002.(1)                                                                                 
|        |     
|10.22.2 |      |  | Amendment to Basestock Supply Agreement between Appleton Papers Inc. and Appleton Coated LLC dated February 25, 2004.(1)                                                                                                                                                                                                
|        |     
|10.23   | **   |  | Supply Agreement by and among ESCO Company Limited Partnership, Mitsui Toatsu Chemicals, Inc., Yamamoto Chemicals, Inc. and Appleton Papers Inc. dated as of July 1, 1997.(1)                                                                                                                                           
|        |     
|10.24   | **   |  | Sales Agreement between Nisseki Chemical Texas Inc. and Appleton Papers Inc. effective January 1, 2002.(1)                                                                                                                                                                                                              
|        |     
|10.24.1 |      |  | Amendment of Sales Agreement between Nisseki Chemical Texas Inc. and Appleton Papers Inc. effective October 1, 2003, incorporated by reference to the Registrants Quarterly Report on Form
10-Q for the quarter ended September 28, 2003.(1)                                                                           



122



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|      |   |  |                                                                                                                                                                                                    
|----- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  
|10.25 | * |  | Security Holders Agreement by and between Appleton Papers Inc. and the Appleton Papers Inc. Employee Stock Ownership Trust dated as of November 9, 2001.                                           
|      |  
|10.26 | * |  | Security Holders Agreement by and between Paperweight Development Corp. and the Appleton Papers Inc. Employee Stock Ownership Trust dated as of November 9, 2001.                                  
|      |  
|10.27 |   |  | Service Agreement dated June 14, 2000 between INHOCO 2059 Limited and Graham Bennington.(2)                                                                                                        
|      |  
|12.1  |   |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                 
|      |  
|14.1  |   |  | Code of Business Conduct and Ethics.                                                                                                                                                               
|      |  
|21.1  |   |  | Subsidiaries of Paperweight Development Corp.                                                                                                                                                      
|      |  
|31.1  |   |  | Certification of Douglas P. Buth, 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 Dale E. Parker, Vice President and Chief Financial Officer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as
amended.                 
|      |  
|31.3  |   |  | Certification of Douglas P. Buth, 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 Dale E. Parker, Chief Financial Officer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.                           
|      |  
|31.5  |   |  | Certification of Dale E. Parker, President (Principal Executive Officer and Principal Financial Officer) of WTA Inc., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as
amended.
|      |  
|32.1  |   |  | Statement of Douglas P. Buth, Chairman, President and Chief Executive Officer of Appleton Papers Inc. pursuant to 18 U.S.C. Section 1350.                                                          
|      |  
|32.2  |   |  | Statement of Dale E. Parker, Vice President and Chief Financial Officer of Appleton Papers Inc. pursuant to 18 U.S.C. Section 1350.                                                                
|      |  
|32.3  |   |  | Statement of Douglas P. Buth, Chairman, President and Chief Executive Officer of Paperweight Development Corp. pursuant to 18 U.S.C. Section 1350.                                                 
|      |  
|32.4  |   |  | Statement of Dale E. Parker, Chief Financial Officer of Paperweight Development Corp. pursuant to 18 U.S.C. Section 1350.                                                                          
|      |  
|32.5  |   |  | Statement of Dale E. Parker, President (Principal Executive Officer and Principal Financial Officer) of WTA Inc. pursuant to 18 U.S.C. Section 1350.                                               



|* | Incorporated by reference to the Registrants Registration Statement on Form S-4 (Registration No. 333-82084) filed on February 4, 2002.
|- | ----------------------------------------------------------------------------------------------------------------------------------------



|** | Incorporated by reference to Amendment No. 1 to the Registrants Registration Statement on Form S-4 (Registration No. 333-82084) filed on April 17, 2002.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|*** | Incorporated by reference to Amendment No. 2 to the Registrants Registration Statement on Form S-4 (Registration No. 333-82084) filed on May 15, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



|**** | Incorporated by reference to Amendment No. 3 to the Registrants Registration Statement on Form S-4 (Registration No. 333-82084) filed on June 12, 2002.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------



|(1) | Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
|--- | --------------------------------------------------------------------------------------------



|(2) | Management contract or compensatory plan or arrangement.
|--- | --------------------------------------------------------



Certain exhibits and schedules to the agreements filed herewith have been omitted. Such exhibits and schedules are described in the agreements and are not
material. The Registrants hereby agree to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules.



123



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) 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.By:

/s/ DOUGLAS P. BUTHDouglas P. Buth President and Chief Executive OfficerDate:

March 31, 2004




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:



|                                           |  |                                                                                           |  |               
|------------------------------------------ |  | ----------------------------------------------------------------------------------------- |  | --------------
|Name                                       |  | Title                                                                                     |  | Date          
|                                           |  |                                                                                          
|/s/ DOUGLAS P. BUTHDouglas P. Buth         |  | Chairman, President, Chief Executive Officer and a Director (Principal Executive Officer) |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ DALE E. PARKERDale E. Parker           |  | Vice President, Chief Financial Officer and a Director (Principal Financial Officer)      |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ STEPHEN G. KULAStephen G. Kula         |  | Controller (Principal Accounting
Officer)                                                 |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ NICHOLAS H.C. DAVISNicholas H.C. Davis |  | Director                                                                                  |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ RONALD PACERonald Pace                 |  | Director                                                                                  |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ W. A. SIKORAW. A. Sikora               |  | Director                                                                                  |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ SUSAN SCHERBELSusan Scherbel           |  | Director                                                                                  |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ PAUL J. KARCHPaul J. Karch             |  | Director                                                                                  |  | March 31, 2004



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) 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.By:

/s/ DOUGLAS P. BUTHDouglas P. Buth President and Chief Executive OfficerDate:

March 31, 2004




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:



|                                           |  |                                                                                           |  |               
|------------------------------------------ |  | ----------------------------------------------------------------------------------------- |  | --------------
|Name                                       |  | Title                                                                                     |  | Date          
|                                           |  |                                                                                          
|/s/ DOUGLAS P. BUTHDouglas P. Buth         |  | Chairman, President, Chief Executive Officer and a Director (Principal Executive Officer) |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ DALE E. PARKERDale E. Parker           |  | Chief Financial Officer and a Director (Principal
Financial Officer)                      |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ STEPHEN G. KULAStephen G. Kula         |  | Controller (Principal Accounting
Officer)                                                 |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ NICHOLAS H.C. DAVISNicholas H.C. Davis |  | Director                                                                                  |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ RONALD PACERonald Pace                 |  | Director                                                                                  |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ W. A. SIKORAW. A. Sikora               |  | Director                                                                                  |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ SUSAN SCHERBELSusan Scherbel           |  | Director                                                                                  |  | March 31, 2004
|                                           |  |                                                                                          
|/s/ PAUL J. KARCHPaul J. Karch             |  | Director                                                                                  |  | March 31, 2004



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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.



WTA INC.By:

/s/ DALE E. PARKERDale E. Parker PresidentDate:

March 31, 2004




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:



|                                         |  |                                                                                                       |  |               
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | --------------
|Name                                     |  | Title                                                                                                 |  | Date          
|                                         |  |                                                                                                      
|/s/ DALE E. PARKERDale E. Parker         |  | President (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |  | March 31, 2004
|                                         |  |                                                                                                      
|/s/ JULIE A. KUEHLJulie A. Kuehl         |  | Director                                                                                              |  | March 31, 2004
|                                         |  |                                                                                                      
|/s/ MICHAEL I. POLLOCKMichael I. Pollock |  | Director                                                                                              |  | March 31, 2004
|                                         |  |                                                                                                      
|Donald R. McLamb                         |  | Director                                                                                              |  | March 31, 2004



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REPORT OF INDEPENDENT AUDITORS

ON FINANCIAL STATEMENT SCHEDULE



To the Board of Directors

of Paperweight Development Corp. and Appleton Papers Inc. and Subsidiaries:



Our audits of the consolidated financial statements referred to in our reports dated March
24, 2004 and March 4, 2002 appearing in the 2003 Annual Report on Form 10-K of Paperweight Development Corp. and Appleton Papers Inc. and subsidiaries also included an audit of the financial statement schedule listed in Item 16(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.



/s/    PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

March 24, 2004



127



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SCHEDULE IIValuation and Qualifying Accounts

(dollars in thousands)



|                                            |  |                              |       |                          |       |                             |     |                                  |        |   |                        |   |      
|------------------------------------------- |  | ---------------------------- | ----- | ------------------------ | ----- | --------------------------- | --- | -------------------------------- | ------ | - | ---------------------- | - | -----
|Allowance for Losses on Accounts Receivable |  | Balance atBeginningof Period |       | Acquisition ofBusinesses |       | Charged toCosts andExpenses |     | AmountsWrittenOff LessRecoveries |        |   | Balance atEnd ofPeriod
|November 9, 2001 (Predecessor Basis)        |  | $                            | 1,763 |                          |      |                             | 175 |                                  | (353   | ) |                        | $ | 1,585
|                                            |  |                              |       |                          |       |                             |     |                                  |        |   |                        |   |      
|December 29, 2001 (Successor Basis)         |  | $                            | 1,585 |                          |      |                             | 12  |                                  | (12    | ) |                        | $ | 1,585
|                                            |  |                              |       |                          |       |                             |     |                                  |        |   |                        |   |      
|December 28, 2002 (Successor Basis)         |  | $                            | 1,585 |                          |      |                             | 964 |                                  | (1,121 | ) |                        | $ | 1,428
|                                            |  |                              |       |                          |       |                             |     |                                  |        |   |                        |   |      
|January 3, 2004 (Successor Basis)           |  | $                            | 1,428 |                          | 1,198 |                             | 707 |                                  | (88    | ) |                        | $ | 3,245
|                                            |  |                              |       |                          |       |                             |     |                                  |        |   |                        |   |      



All other schedules
are omitted because the required information is not present or is not present in amounts sufficient to require submission of a schedule or because the information required is included in the consolidated financial statements of Appleton Papers Inc.
or the notes thereto or the schedules are not required or are inapplicable under the related instructions.



128