UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







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: December 29, 2007


OR




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




For
The Transition Period
From            To            
..




Commission
file numbers: 333-82084-01


333-82084





PAPERWEIGHT
      DEVELOPMENT CORP.
            APPLETON
      PAPERS INC.(Exact
      Name of Registrant as Specified in Its Charter)
            (Exact
      Name of Registrant as Specified in Its
Charter)


Wisconsin
            Delaware(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (State
      or Other Jurisdiction of
              Incorporation
      or Organization)





39-2014992
            36-2556469(I.R.S.
      Employer Identification No.)
            (I.R.S.
      Employer Identification No.)





825
      East Wisconsin Avenue, P.O. Box 359, Appleton, Wisconsin
            54912-0359(Address
      of Principal Executive Offices)
            (Zip
      Code)




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





Securities
registered pursuant to Section 12(b) of the Act: None


Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if either of the registrants is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes   ̈    No  x




Indicate
by check mark if either of the registrants is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
    Yes  x    No   ̈




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




Indicate
by check mark 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 either of the registrants is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.


Large
Accelerated filer   ̈    Accelerated
filer   ̈    Non-accelerated
filer  x




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




As of
February 19, 2008, 11,115,770 Paperweight Development Corp. common stock,
$.01 par value, were outstanding. There is no trading market for the common
stock of Paperweight Development Corp. As of February 19, 2008, 100 shares
of Appleton Papers Inc.’s common stock, $100.00 par value, were outstanding.
There is no trading market for the common stock of Appleton Papers Inc. No
shares of Paperweight Development Corp. or Appleton Papers Inc. were held by
non-affiliates.




Documents
incorporated by reference: None.




Appleton
Papers Inc. meets the conditions set forth in General Instruction I(1)(a) and
(b) and is therefore filing this form with the reduced disclosure
format.  1





TABLE OF CONTENTS




Page
              NumberPART
      IItem 1
            Business
            3Item 1A
            Risk Factors
            13Item 1B
            Unresolved Staff Comments
            20Item 2
            Properties
            21Item 3
            Legal Proceedings
            22Item 4
            Submission of Matters to a Vote of Security
      Holders
            22PART
      IIItem 5
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            23Item 6
            Selected Financial Data
            24Item 7
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            25Item 7A
            Quantitative and Qualitative Disclosures About Market
      Risk
            38Item 8
            Financial Statements and Supplementary
      Data
            39Item 9
            Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
            83Item 9A
            Controls and Procedures
            83Item 9B
            Other Information
            83PART IIIItem 10
            Directors and Executive Officers of the
      Registrant
            84Item 11
            Executive Compensation
            87Item 12
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            100Item 13
            Certain Relationships and Related Transactions and
      Director Independence
            101Item 14
            Principal Accountant Fees and
    Services
            101PART IVItem 15
            Exhibits and Financial Statement
      Schedules
            102SIGNATURES
            106EXHIBITS







2
 Table of Contents


PART
I




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




Item 1.
            Business




Overview




Appleton
manufactures and sells carbonless and thermal papers as well as other specialty
papers. We also manufacture and sell plastic films and flexible packaging
solutions.




Under
Generally Accepted Accounting Principles (GAAP), Appleton has four reportable
business segments: coated solutions, thermal papers, security papers and
performance packaging. The performance of these four segments is described in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and “Item 8. Financial Statements and Supplementary
Data.”




Late in
2007, Appleton committed to a formal plan to sell Bemrose Group Limited
(“Bemrose”), its secure and specialized print services business based in Derby,
England. Bemrose is a leading U.K. provider of mission critical security and
specialized print services. At the time of its acquisition in December 2003,
Bemrose was expected to provide Appleton with a new product entry in the U.K.
security print market, with opportunities to expand into the U.S. market. After
conducting a strategic review in the fourth quarter of 2007, Appleton has
decided to focus its attention on core businesses and expand its leadership
positions in those markets. The operating results of this business for the years
ended December 29, 2007, December 30, 2006 and December 31, 2005 have been
reclassified and are now reported separately as discontinued
operations.




Technical
Papers




Coated
Solutions




Carbonless
paper products comprise the largest component of the coated solutions segment.
We produce the Appleton and NCR PAPER* brands
of carbonless paper and believe Appleton is the world’s largest producer of
carbonless paper. Carbonless paper is used to make multipart business forms such
as invoices and credit card receipts. Within the coated solutions business,
we produce coated products for point-of-sale displays and other design and print
applications and offer custom coating solutions.




Thermal
Papers




The
thermal papers segment focuses on the development of substrates for the
transaction and item identification markets. We believe Appleton is the largest
manufacturer of direct thermal papers in North America. Thermal products are
widely used for point-of-sale receipts and coupons; entertainment and
transportation tickets; lottery and gaming tickets; engineering, medical and
industrial charts; tags for airline baggage and retail applications; and label
products for shipping, warehousing, medical and clean-room
applications.




Security
Papers




The
security papers segment produces products with security features that resist
forgery and counterfeiting. Appleton’s portfolio of products incorporates
security technologies including watermarks, taggants, embedded threads and
fibers and machine-readable technologies to serve global markets.




Performance
Packaging




The
performance packaging segment produces single and multilayer polyethylene films
for packaging applications. It also prints and converts flexible plastic
packaging materials for customers in the food processing, household and
industrial products industries.















*
            NCR
      PAPER is a registered trademark licensed to
  Appleton.


3
 Table of Contents




Company
Background




PDC was
incorporated in Wisconsin on December 28, 2000. Appleton was incorporated
in Delaware in July 1965 and is the primary operating subsidiary of
PDC.




Company
History




Appleton
Coated Paper Company, or ACPC, began operations in 1907 in Appleton, Wisconsin.
In 1953, ACPC began working with NCR Corporation (“NCR”) 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, then 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, Appleton 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 and adopted the
tagline, “What Ideas Can Do®.”




The
KSOP and the ESOP




The
Appleton Papers Retirement Savings and Employee Stock Ownership Plan (the “KSOP”
or the “plan”) includes a separate employee stock ownership plan component (the
“ ESOP” or the “Company Stock Fund”). The KSOP is a tax-qualified retirement
plan that is available to U.S. employees. The ESOP component of the KSOP is a
tax-qualified employee stock ownership plan that invests in PDC common
stock.




In late
2001, approximately 90% of Appleton’s employees invested approximately $107
million in the ESOP. On November 9, 2001, the ESOP purchased 100% of the
common stock of PDC. PDC 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.




Acquisition
from Arjo Wiggins




On
November 9, 2001, PDC and a wholly-owned subsidiary, acquired Appleton from
Arjo Wiggins Appleton p.l.c., which is now known as Arjo Wiggins Appleton
Limited (“AWA”), a European manufacturer of paper products, and two of its
subsidiary holding companies, (the “sellers” or “affiliates of AWA”). Appleton
is now a wholly-owned subsidiary of PDC and the ESOP owns 100% of the shares of
common stock of PDC. PDC does not conduct any business apart from undertaking
matters incidental to its ownership of the stock of its subsidiaries and matters
relating to the ESOP and taking actions required to be taken under ancillary
acquisition agreements.




Acquisitions and
Dispositions




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




In
December 2003, Appleton acquired Bemrose Group Limited, a privately-held company
headquartered in Derby, England. The group’s operating unit, BemroseBooth
Limited (“BemroseBooth”), produces security printed vouchers and payment cards,
mass transit and car parking tickets, variable data labeling, high-integrity
mailings and printed calendars. BemroseBooth also offers print management
services through a network of external suppliers.




In
January 2005, Appleton acquired New England Extrusion, Inc., located in Turners
Falls, Massachusetts, and Milton, Wisconsin, a company that produces single and
multilayer polyethylene films for packaging applications.


4
 Table of Contents




Late in
2007, Appleton committed to a formal plan to sell Bemrose, its secure and
specialized print services business based in Derby, England. At the time of its
acquisition in December 2003, Bemrose was expected to provide Appleton with a
new product entry in the U.K. security print market, with opportunities to
expand into the U.S. market. After conducting a strategic review in the
fourth quarter of 2007, Appleton has decided to focus its attention on core
businesses and expand its leadership positions in those markets. The operating
results of Bemrose for the years ended December 29, 2007, December 30, 2006 and
December 31, 2005 have been reclassified and are now reported separately as
discontinued operations. As such, the discussion that follows excludes
Bemrose.




For
financial information regarding our business segments, refer to Note 23 of Notes
to Consolidated Financial Statements contained below in “Item 8. Financial
Statements and Supplementary Data.”




Technical
Papers




Coated
Solutions




The
coated solutions segment produces carbonless paper, coated products and custom
coating solutions and accounted for approximately 59% of total company net sales
in 2007.




Appleton
sells carbonless roll and sheet products under the Appleton and NCR PAPER*
brands, offering nearly 450 grades of carbonless roll and sheet products with
approximately 3,900 stock keeping units differentiated by grade, width, length,
color and basis weight. We believe we have the broadest carbonless product line
in the industry.




Carbonless
products are sold directly to converters, business forms printers and merchant
distributors who stock and sell carbonless paper to printers.




Coatings
used to make carbonless paper include adhesives, inert fillers,
microencapsulated dyes, co-reactants 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.




Carbonless
paper is used in a variety of end markets, including government, retail,
financial, insurance and manufacturing, with no one end market dominating
demand. Demand for carbonless products in many of these markets is tied to
economic growth, which impacts the number of transactions completed in a given
year. Sales of carbonless products historically have not been significantly
impacted by seasonality.




Since
1994, the U.S. carbonless market has been in decline as a 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. Appleton believes that
the U.S. carbonless paper market declined by approximately 8% annually from 2001
through 2007, and will decline over the next five years at rates comparable to
historical levels. Appleton believes the worldwide carbonless market is also in
decline, with demand declining at approximately 2% to 3% per
year.




In
addition to Appleton, other significant carbonless paper producers include P.H.
Glatfelter Company, Arjo Wiggins Appleton Limited, Mitsubishi Paper Mills
Company Ltd., Asia Pulp and Paper Co. Ltd., Koehler AG, Nippon Industries Co.
Ltd., Oji Paper Co. Ltd., Zanders GmbH and Nekoosa Coated Products, LLC. In the
carbonless market, Appleton competes primarily on the basis of product quality,
service, breadth of product offering and price.




Thermal Papers




The
thermal papers segment primarily produces and sells direct thermal papers for
the transaction and item identification markets. The most popular direct thermal
imaging chemistry is based on the leuco dye system that was invented by NCR
Corporation and commercially introduced by Appleton in the late 1960s. Thermal
paper is used in four principal market segments; point-of-sale products for
retail receipts and coupons; label products for shipping, warehousing, medical
and clean-room applications; tag and ticket products for airline and baggage
applications, event and transportation tickets and lottery and gaming
applications; and printer/calculator/chart products for engineering, industrial
and medical diagnostic charts. We estimate the point-of-sale and label market
segments combined accounted for the majority of the U.S. and Canadian thermal
market by volume in 2007.




Point-of-sale
products are sold 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. Label products are sold to companies who apply pressure
sensitive adhesive coatings and release liners and then sell these products to
label printers. 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.


5
 Table of Contents




The
market for thermal paper has grown with new applications being developed to
benefit thermal technology. Based on our assessment, Appleton believes the
annual rates of growth in the U.S. and Canadian thermal markets from 2001 to
2007 were between 0% and 10% and averaged nearly 7% for the period. Based on our
assessment, Appleton believes the U.S. and Canadian thermal markets will
continue to grow and that global markets will also continue to expand. In
January we announced an investment of approximately $125 million to expand our
West Carrollton, Ohio, mill to satisfy projected future demand for thermal
products by domestic and international customers. The project includes
installation of a state-of-the-art coater to produce thermal papers and
enhancements to one of the mill’s paper machines. Sales of thermal papers have
not been significantly impacted by seasonality.




In
addition to Appleton, other significant thermal paper producers included Koehler
AG, Kanzaki Specialty Papers, Ricoh Company, Ltd. and Mitsubishi Paper Mills
Company Ltd. Appleton competes primarily on the basis of service, product
quality, price and breadth of product offering.




Security Papers




The
security papers segment produces products with security features that resist
forgery and counterfeiting. We are developing a portfolio of products that
incorporates security technologies, including watermarks, taggants, embedded
threads and fibers and machine-readable technologies, to serve global markets.
We focus on checks and business and government documents. Sales of our security
products have not been significantly impacted by seasonality.




Security
papers competitors include Boise Cascade Corporation, P.H. Glatfelter Company,
Cascades Resources, Portals Bathford, Arjo Wiggins Appleton Limited and De La
Rue International. Appleton competes primarily on the basis of service, breadth
of product offering, product quality and price.




Performance Packaging
Products




The
performance packaging segment produces single and multilayer polyethylene films
for packaging applications. It also prints and converts flexible plastic
packaging materials for customers in the food processing, household and
industrial products industries. Sales of performance packaging products are
positively affected by the fourth quarter holiday season followed by lower
volumes in the first quarter of the year.




The
Flexible Packaging Association estimates that the U.S. flexible packaging market
(which includes performance packaging) generates over $23.5 billion in annual
sales and employs approximately 80,000 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 nation’s largest market for performance packaging is food,
accounting for over 57% of shipments.




Performance
packaging competitors include Pliant Corporation, Winpak, Charter Films, Inc.,
Danafilms, Inc., ISO Poly Films, Inc., Polymer Packaging Inc. and others. Large
producers such as Bemis Company, Inc., Printpak Inc. and Alcan Inc. may also be
competitors in some market situations. Appleton competes primarily on the basis
of service, breadth of product offering and price.




Geographical
Financial Information




Revenues
from sales in the U.S. were $700.0 million in 2007, $746.6 million in 2006 and
$750.3 million in 2005. Revenues from sales to customers in foreign countries
were $263.2 million in 2007, $227.1 million in 2006 and $184.0 million in 2005.
Substantially all long-lived assets are located in the U.S. as of December 29,
2007, December 30, 2006 and December 31, 2005.




Research
and Development




Research
and development plays an important role in Appleton’s leadership position.
Ongoing investment in research and development has enabled Appleton to develop
core competencies in the encapsulation process, specialty coating chemistry,
coating application systems and security technologies. Research and development
efforts are focused on cost reduction, product line extensions, new product
development and technology transfer and development. Research and development
costs related to the development of new products and significant improvements to
existing products were $10.6 million in 2007, $10.8 million in 2006 and $16.1
million in 2005.




6
 Table of Contents




Sales,
Marketing and Distribution




Appleton
promotes and sells products through its sales and marketing organization and, in
the case of C&H Packaging, through manufacturers’ representatives. Sales
personnel operate from field locations. Marketing employees endeavor to acquire
market, end-user and competitor insight to uncover and deliver market-focused
solutions. Technical service representatives assist customers with product
applications and improvements and complaint resolution by telephone and in
person at customer locations. Customer service representatives receive customer
orders, establish delivery dates and answer inquiries about stock availability
and order status.




Appleton
uses eight distribution centers to store and distribute products to customers.
Distribution centers are located in Appleton, Wisconsin; Camp Hill,
Pennsylvania; Hebron, Kentucky; Edwardsville, Kansas; Portland, Oregon; Ontario,
California; McDonough, Georgia; and Peterborough, Ontario, Canada. Third-party
logistics services are contracted through distribution facilities at Birmingham,
England, and Utrecht, Netherlands.




Distributors
and Customers




Appleton
currently sells through merchant distributors that stock and redistribute
carbonless sheet products globally from over 400 locations. Some merchant
distributors also redistribute performance packaging products. Carbonless rolls
typically are sold directly to printer and converter customers worldwide.
However, some carbonless rolls are sold to forms printers through merchant
distributors on a drop-shipment basis. In those cases, Appleton ships products
from distribution centers and provides customer support while the merchant bears
the credit risk of nonpayment.




Appleton
sells thermal papers directly to converters who cut and rewind large rolls into
smaller rolls, print and otherwise further process the paper based on end-user
needs.




Appleton
sells security products through merchants and to other security printers who
print checks, titles, certificates and other secure documents.




Appleton
sells performance packaging products produced by C&H Packaging, American
Plastics and New England Extrusion to the food, personal care, medical,
household and industrial products industries as well as to packaging producers
and film converters who serve those markets.




Within
the technical papers business, the five largest customers in the coated
solutions segment accounted for approximately 38% of coated solutions net sales
in 2007, 41% of coated solutions net sales in 2006 and approximately 45% of
coated solutions segment net sales in 2005. The five largest customers in the
thermal papers segment accounted for approximately 39% of thermal papers segment
net sales in 2007, 39% of thermal papers segment net sales in 2006 and
approximately 42% of thermal papers segment net sales in 2005. Sales to the five
largest customers in the performance packaging segment accounted for
approximately 43% of total segment net sales for 2007, approximately 34% of
total segment net sales for 2006 and approximately 28% of total segment net
sales in 2005. Sales to Unisource Worldwide, Inc. accounted for approximately
10% of 2007 net sales, 11% of 2006 net sales and 12% of 2005 net
sales.




Working
Capital Practices




Appleton
maintains finished goods inventories sufficient to provide a high level of
available stock items and next day delivery to a majority of coated solutions
and thermal papers customers. Raw material inventories are maintained at levels
consistent with demand for both stock and custom orders. Custom order lead times
typically are less than 30 days. Accounts receivable management practices,
including terms of sale, are designed to accommodate the competitive differences
of each business segment and market channel.




Most
sales in the performance packaging segment are custom orders with up to eight
weeks of lead time, depending on the nature of the items and production
requirements. Given the custom order nature of much of the business, finished
goods inventory levels generally are low and primarily represent products being
held pending customer release dates. Finished goods inventories are maintained
for select items where prompt availability is a competitive requirement. Raw
material inventories reflect actual and expected customer demand, supplier lead
times and economic order quantities. Accounts receivable management practices
reflect the competitive requirements of the business.


7
 Table of Contents




Order
Backlogs




In the
coated solutions business, customers generally order from stock grades and most
orders are delivered the next day. Thermal paper customers also order primarily
stock grades. As of year-end 2007, the total of coated solutions and thermal
papers products ordered but not shipped was approximately 4% of our annual sales
volume. As of 2006 and 2005 year-ends, products ordered but not shipped totaled
approximately 3% and 2%, respectively, of total annual shipments of coated
solutions and thermal papers.




The
performance packaging segment typically maintains backlogs of up to six weeks.
Most sales are custom orders and many customers place advance or blanket orders
covering a number of months into the future, which tends to increase the average
backlog figures. Backlogs are managed so as to maximize the efficiency of
production scheduling and machine utilization.




Manufacturing




The
Appleton plant, located in Appleton, Wisconsin, produces carbonless and thermal
paper. In 2005, we completed a $16 million project designed to expand the range
of coating capabilities at the Appleton plant.




The
Portage, Wisconsin plant produces microcapsules used to manufacture carbonless
paper at the Appleton, Roaring Spring and West Carrollton
facilities.




The
Roaring Spring, Pennsylvania mill is a fully integrated pulp and paper mill with
three paper machines and produces carbonless and security products. In 2005, we
completed an $8 million investment 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, Ohio mill produces carbonless and thermal base stock and finished
carbonless paper products. The mill includes extensive recycling capabilities
featuring wastepaper processing and de-inking operations. In 2007, we commenced
an expansion program of approximately $125 million for the mill, including
installation of a state-of-the-art coater to produce thermal papers and
enhancements to one of the mill’s paper machines. The project is scheduled for
completion in mid-2008.




C&H
Packaging, based in Merrill, Wisconsin, is a printing, laminating and converting
operation that prints multilayered, plastic films on high-speed, multicolor,
flexographic printing presses using water-based ink systems. Converting
operations include slitting and pre-formed and custom pouch
production.




American
Plastics, located in Rhinelander, Wisconsin, manufactures multilayered,
co-extruded barrier films, which are primarily sold to flexible packaging
converters. In addition, American Plastics converts some of its films into
vacuum pouches which are then sold to packing operations.




New
England Extrusion, located in Turners Falls, Massachusetts and Milton,
Wisconsin,  produces single and multilayer polyethylene films for
packaging applications.




Raw
Materials




Raw
materials purchases primarily consist of base stock, chemicals, pulp, wastepaper
and resin. In 2007, those materials made up approximately 58% of the annual cost
of goods sold. The largest raw material component, chemicals, comprised 18% of
cost of goods sold in 2007.




The next
largest raw material component is base stock—rolls of uncoated paper used in the
production of coated paper products. Base stock is acquired from multiple
sources pursuant to purchase agreements which establish pricing and volume
targets. These agreements mitigate exposure to significant pricing cycles common
for pulp and commodity paper products. Total base stock purchases in 2007
amounted to 16% of cost of goods sold.




Appleton
is party to a significant base stock supply agreement, which commenced June 27,
2001. Purchases under this agreement were slightly less than half of total 2007
base stock purchases. We plan to purchase a majority of 2008 base stock needs in
accordance with this agreement. The term of this agreement, as amended, expires
on December 31, 2008.




Approximately
12% of cost of goods sold in 2007 was for pulp, wood and wastepaper used in the
Roaring Spring and West Carrollton paper mills. While pulp and wastepaper 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 by negotiating price and
volume agreements for pulp and by purchasing wastepaper through a national
broker.


8
 Table of Contents




The
technical challenges of manufacturing 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 customers and to protect mutual strategic interests.




Employees




As of
February 24, 2008, Appleton employed 3,001 persons, of whom, 1,743 were
covered by union contracts. Manufacturing employees at Appleton’s major
manufacturing facilities in Appleton, Roaring Spring and West Carrollton are
represented by the United Steel, Paper and Forestry, Rubber, Manufacturing,
Energy, Allied Industrial and Service Workers International Union (“USW”).
Long-term (three-year) labor contracts have been established for all three
facilities. The labor contract at the West Carrollton facility was renegotiated
in April 2006. The labor contract at the Appleton facility expires in
2008.




The
Roaring Spring labor contract expired in late 2007, and Appleton is in the
process of negotiating a new collective bargaining agreement with the USW and is
currently operating under a day-to-day extension of the expired contract. The
outcome of these collective bargaining negotiations cannot presently be
determined. If Appleton is unable to reach an agreement with the USW regarding
the terms of a collective bargaining agreement, the Roaring Spring facility may
be subject to work interruptions or stoppages that could materially impact
Appleton’s financial results.




USW also
represents employees at the Appleton, Camp Hill 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 other distribution centers in Georgia, Kentucky, California and Oregon, as
well as C&H Packaging, American Plastics and New England Extrusion are not
represented.




Manufacturing
employees at the Derby and Hull manufacturing facilities in England are
represented by UNITE. These employees are covered by a national labor agreement
that is reviewed annually in April by UNITE and the British Printing Industries
Federation. As of February 24, 2008, 337 British employees were represented
by the union. Employees at the Teesside, England facility have chosen not to be
represented by a union.




Appleton
has enjoyed good labor-management relations over an extended period of time.
There have been no work stoppages over the last 30 years. This long-term
relationship has been critical in developing efficient manufacturing sites and a
workforce that is highly committed to Appleton’s success.




Intellectual
Property




A
wholly-owned subsidiary, WTA Inc., owned certain 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. On December 19, 2005, WTA Inc. was merged into Appleton, combining
WTA’s intellectual property assets, including patents and licenses with
Appleton’s existing patent portfolio.




As part
of the acquisition of the business from NCR in 1978, Appleton obtained a
100-year license to use forms of the NCR PAPER* trademark in branding for
carbonless products.




Appleton
also licenses technology from other companies covering non-critical articles of
manufacture, manufacturing processes or materials used in such
processes.




We do not
believe that any single patent or patent application is material to Appleton’s
business or operations. We believe that patent duration is consistent with our
business needs.




Environmental




General




Appleton
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 storm water,
storage, treatment and disposal of materials and waste, remediation of soil,
surface water and groundwater contamination and liability for damages to natural
resources.




Compliance
with environmental laws and regulations is an important facet of our business.
Appleton expects to incur capital expenditures of approximately $1.2 million in
2008 and a total of approximately $19.4 million from 2009 through 2012 to
maintain compliance with applicable federal, state, local and foreign
environmental laws and regulations and to meet new regulatory requirements. We
expect to continue to incur expenditures after 2012 in order to maintain
compliance with applicable federal, state, local and foreign environmental laws
and regulations and to meet new regulatory requirements.


9
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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. 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.




Other
than the polychlorinated biphenyls (“PCBs”) contamination in the area of the
wastewater impoundments at the West Carrollton Mill, and the Fox River matter,
both of which are disclosed below, there are no known material liabilities with
respect to environmental compliance issues.




West
Carrollton Mill




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




Based on
investigation and delineation of PCB contamination in soil and groundwater in
the area of the wastewater impoundments, 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. The cost for remedial
action, which could include installation of a cap, long-term pumping, treating
and/or monitoring of groundwater and removal of sediment in the Great Miami
River, was estimated in 2001 to range up to approximately $10.5 million, with
approximately $3 million in short-term capital costs and the remainder to be
incurred over a period of 30 years. However, costs could exceed this amount if
additional contamination is discovered, if additional remedial action is
necessary or if the remedial action costs are more than expected.




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




Lower
Fox River




Introduction.Various federal and state government agencies and Native American tribes
have asserted claims against Appleton and others with respect to historic
discharges of PCBs into the Lower Fox River in Wisconsin. The claims generally
fall within three categories of potential liability - remedial action, natural
resource damages (“NRDs”) and interim restoration and remediation – which are
separately discussed below.




Carbonless
paper containing PCBs was manufactured at what is currently the Appleton plant
from 1954 until 1971. During this period wastewater containing PCBs was
discharged into the Lower Fox River from a publicly owned treatment works, from
the Appleton Coated paper mill and from other local industrial facilities.
Wastewater from the Appleton plant was processed through the publicly owned
treatment works. As a result, there are allegedly eleven million cubic yards of
PCB-contaminated sediment spread over 39 miles of the Lower Fox River and Green
Bay, which is part of Lake Michigan.




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


10
 Table of Contents




Remedial Action.The EPA and the Wisconsin Department of Natural Resources (“DNR”) issued
a Record of Decision (“ROD”) in 2003 covering the first two segments of the
river. P.H. Glatfelter and WTM I are managing remediation efforts in the first
segment and each contributed an initial $25.2 million to cover costs of the
required remedial action. Appleton denies any responsibility or liability for
PCB contamination in the first segment.




The EPA
and DNR issued a second ROD in 2003 covering the third, fourth and fifth
segments of the Lower Fox River. NCR and Sonoco agreed to fund a remedial
project in the fourth segment at an estimated cost of $30 million. The total
costs for the Lower Fox River remedial action plans, as outlined in the two RODs
issued during 2003, were estimated to total approximately $400 million over a 7
to 18-year time period. Other estimates obtained by the PRPs range from a low of
$450 million to as much as $1.6 billion. More recent estimates place the cost
between $594 million and $900 million.




In
February 2007 the EPA issued a General Notice letter seeking to have one or more
of the PRPs enter into an agreement to implement all remaining remedial action
for segments two, three, four and five of the river. The EPA asked the PRPs to
submit a written proposal to conduct the remedial action as well as to address
various governmental agencies’ (“Intergovernmental Partners” or “IGP”)
additional claims for unreimbursed costs and NRDs. In June 2007, the EPA and DNR
issued an amended ROD which modified the remedial action plan for the Lower Fox
River.




Following
several months of discussions with PRPs, the EPA issued an administrative order
in November 2007, directing the PRPs to implement the remedial action of the Fox
River. In response, in December 2007, the PRPs submitted a work plan for the
clean up of the Fox River to the EPA. After a review, the EPA requested
modifications be incorporated into the work plan. As of early 2008, the PRPs are
negotiating to reach a funding arrangement to enable the work plan to be
implemented.




Appleton
and NCR filed a lawsuit in January 2008 in federal court against P.H. Glatfelter
Company, Menasha Corporation and George A. Whiting Paper Company in an
effort to require other PRPs to contribute to the cost of cleaning up PCB
contamination sediment in the Fox River.




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




Interim
Restoration and Remediation Consent Decree.Appleton and NCR collectively
paid $41.5 million for interim restoration and remediation efforts pursuant to a
2001 consent decree with the IGP. This consent decree expired in 2005. In
addition, Appleton and NCR collectively paid approximately $750,000 toward
interim restoration efforts and the preparation of a report analyzing progress
toward the restoration goals related to the Lower Fox River pursuant to a 2006
consent decree with the IGP. The 2006 consent decree expired in 2006. Appleton
and NCR paid $2.8 million in 2007 to fund a land acquisition in partial
settlement of NRD claims. Neither consent decree or the land acquisition
constitutes a final settlement nor provides protection against future claims;
however, Appleton and NCR will receive full credit against remediation costs and
NRD claims for all monies expended pursuant to the consent decrees.




Appleton’s
Liability.CERCLA imposes liability
on parties responsible for, in whole or in part, the presence of hazardous
substances at a site. Superfund liable parties can include both current and
prior owners and operators of a facility involved with the disposal of hazardous
substances. A PRP is potentially liable for cleanup costs, damages to natural
resources, costs of certain health assessments and injunctive relief (i.e.,
performing a cleanup) where a site may present an imminent and substantial
endangerment. While any PRP may be held liable for the entire cleanup of a site,
the final allocation of liability among PRPs generally is determined by
negotiation, litigation or other dispute resolution processes.




Appleton
purchased the Appleton plant and the Combined Locks paper mill from NCR in 1978,
after the use of PCBs in the manufacturing process was discontinued.
Nonetheless, the EPA named both Appleton and NCR as PRPs in connection with
remediation of the Lower Fox River. In 1998, Appleton and NCR entered into an
interim settlement agreement under which the two companies agreed to share
defense and liability costs arising from the remediation. When the 1998 interim
settlement agreement expires, Appleton’s and NCR’s continuing indemnification
obligations will be defined by an arbitration determination that was obtained in
January 2006.




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


11
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As noted
above, a portion of Appleton’s potential liability for the Lower Fox River may
be joint and several. If, in the future, one or more of the other PRPs were to
become insolvent or unable to pay its respective share(s) of the potential
liability, Appleton could be responsible for a portion of its share(s). Based on
a review of publicly available financial information, Appleton believes that the
other PRPs will be required, and have adequate financial resources, to pay their
shares of the remediation and natural resource damage claims for the Lower Fox
River.




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




Accordingly,
Appleton has recorded a reserve for its potential liability for the Lower Fox
River. At December 30, 2006, this reserve approximated $101.2 million.
During fiscal 2007, $19.5 million of payments were made from the reserve. In
addition, as the result of an analysis of Appleton’s estimated remaining
potential liability that was completed during 2007, the remediation reserve was
increased by $112.3 million. This resulted in a remaining reserve of $194.0
million as of December 29, 2007, of which $20.6 million is recorded in
other accrued liabilities and $173.4 million is recorded as a long-term
environmental liability.




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




•
            total
      remediation costs of $600 million, based on the most recent bids received
      with a range from $594 million to $900
million;




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




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




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




•    $38
million in fees and expenses through 2010.




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




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




Under the
indemnification agreements, Appleton is indemnified for the first $75 million of
Fox River Liabilities and for amounts in excess of $100 million. Appleton is
responsible for the $25 million of liabilities between $75 million and $100
million. Pursuant to these agreements, AWA paid $71.2 million in connection with
Fox River Liabilities through 2007.




At
December 29, 2007, the total indemnification receivable from AWA was $169.0
million, of which $3.8 million is recorded in other current assets and $165.2
million is recorded as an environmental indemnification receivable.




In
connection with the indemnification agreements, AWA purchased and fully paid for
indemnity claim insurance from an affiliate of American International Group,
Inc., or AIG. The AIG insurance policy is designed to provide up to $250 million
of coverage for Fox River Liabilities, subject to certain limitations defined in
the policy. AWA’s obligations to maintain indemnity claim insurance covering the
Fox River Liabilities are defined in and limited by the terms of the Fox River
AWA Environmental Indemnity Agreement, as amended.




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


12
 Table of Contents




Item 1A.
            Risk Factors




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
report contains forward-looking statements. The words “will,” “may,” “should,”
“believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,”
“plans,” “seek” or similar expressions are intended to identify forward-looking
statements. All statements in this report other than statements of historical
fact, including statements which address 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 below. Many of these factors are beyond our
ability to control or predict. Given these uncertainties, you should not place
undue reliance on the forward-looking statements. We disclaim any obligation to
update or revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.




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




We are
subject to comprehensive and frequently changing laws and regulations enacted 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, or PRP, 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 environmental obligations and matters arising from our daily
operations.




Including
the Lower Fox River, we have approximately $194 million of accrued liabilities
as of December 29, 2007 for estimated or anticipated liabilities and legal
and consulting costs relating to environmental matters arising from past
operations. We also have approximately $169 million of indemnification
receivables from our former parent company, AWA, as of December 29, 2007.
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 PRP 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 EPA as a PRP under the Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”). 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
material to our financial position. In 2003, the DNR and EPA issued two RODs
covering all five segments of the Lower Fox River, which includes Green Bay. The
RODs provide for a combination of dredging and capping and monitored natural
recovery and contain revised estimates of total costs for remediation of $400
million over a 7 to 18-year 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 for all PRPs in the
aggregate.


13
 Table of Contents




In
February 2007, the EPA issued a General Notice letter seeking to have one or
more of the PRPs enter into an agreement to implement all remaining remedial
action for segments two, three, four and five of the river. The EPA asked the
PRPs to submit a written proposal to conduct the remedial action as well as to
address various governmental agencies’ additional claims for unreimbursed costs
and natural resource damages. In June 2007, the EPA and DNR issued an Amended
ROD which modified the remedial action plan for the Lower Fox River. Following
several months of discussions with PRPs, the EPA issued an administrative order
in November 2007, directing the PRPs to implement the remedial action of the Fox
River.




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




Accordingly,
Appleton has recorded a reserve for its potential liability for the Lower Fox
River. At December 30, 2006, this reserve approximated $101.2 million.
During 2007, $19.5 million of payments were made from the reserve. In addition,
as a result of an analysis of Appleton’s estimated remaining potential liability
that was completed during 2007, the remediation reserve was increased by $112.3
million. This resulted in a remaining reserve of $194.0 million as of December
29, 2007, of which $20.6 million is recorded in other accrued liabilities and
$173.4 million is recorded as a long-term environmental liability.




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




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




As
amended in, and as limited by the terms of the purchase agreement relating to
the acquisition of Appleton, AWA and two of its affiliates have agreed to
indemnify PDC and Appleton for certain losses resulting from: inaccuracies in
the environmental representations and warranties made by AWA and its affiliates;
certain known environmental matters that existed at the closing of the
acquisition; environmental matters related to the businesses of Newton Falls,
Inc., Appleton Coated LLC and several other of our former affiliates and
subsidiaries; and environmental matters relating to the real property on which
our former Camp Hill, Pennsylvania plant and our current distribution center are
located that existed prior to our sale of the Camp Hill plant to a third
party.




AWA has
also agreed, subject to certain limitations, to indemnify Appleton and PDC for
specified environmental liabilities relating to the contamination of the Lower
Fox River. AWA’s indemnification obligations with respect to the Lower Fox River
are discussed in greater detail under the heading “Item 1. Business –
Environmental—Lower Fox River—AWA Indemnification” and in Notes 1 and 18 of
Notes to Consolidated Financial Statements in Item 8, below.




If the
indemnified matters result in significant liabilities for Appleton and AWA
and/or its affiliates are unable or unwilling to honor these indemnification
obligations, Appleton could be required to pay for these liabilities, which
could have a material adverse effect on cash flow, Appleton’s ability to fund or
expand operations and Appleton’s ability to repay existing and future
indebtedness.


14
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We
have a substantial amount of indebtedness outstanding and, as a result, we are
operating as a highly leveraged company.




Our total
debt at December 29, 2007 was approximately $542.2 million. For a
description of the components of our debt see “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources” and Note 11 of Notes to Consolidated Financial Statements.
This large amount of indebtedness could:




•
            make
      it more difficult for us to satisfy our obligations with respect to the
      senior credit facility, the senior notes and senior subordinated
      notes;




•
            require
      us to dedicate a substantial portion of cash flow from operations to
      payments on indebtedness, thereby reducing the availability of 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;




Furthermore,
although our ability to borrow money is restricted by the terms of the senior
credit facility and the indentures governing the senior notes and senior
subordinated notes, it may be possible for us to incur even more debt and, if we
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, for example, 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;




•
            environmental
      regulations; and




•
            general
      economic conditions.




We may
not be able to generate sufficient cash flow 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.


15
 Table of Contents




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




The
agreements relating to our indebtedness, including the senior credit facility,
the senior notes and the senior subordinated notes, contain numerous covenants
that include certain financial tests, including various debt and cash flow
ratios. The covenants related to our indebtedness, among other things, prohibit
or restrict our ability, as well as the ability of PDC and our subsidiaries
to:




•
            pay
      dividends on or purchase or redeem capital
  stock;




•
            repay
      other indebtedness;




•
            make
      loans and investments;




•
            acquire
      assets, stock or debt securities of another
  person;




•
            incur
      or guarantee additional
indebtedness;




•
            use
      assets as security in other
transactions;




•
            sell
      assets or merge with or into other
companies;




•
            enter
      into sale and leaseback
transactions;




•
            enter
      into transactions with affiliates;




•
            create
      liens;




•
            sell
      equity interests in our
subsidiaries;




•
            amend
      or terminate 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 PDC to lose its subchapter S
      corporation status.




A breach
of any of these covenants or our inability to meet the required financial tests
could result in a default in respect of the related indebtedness. If a default
occurs, the relevant lenders could elect to declare the indebtedness, together
with accrued interest and other fees, to be immediately due and payable and
proceed against any collateral securing that indebtedness. In addition, although
Appleton maintains financial resources sufficient to satisfy the unindemnified
portion of its potenital liability for the Lower Fox River, the timing of cash
out flows may constrain Appleton's ability to meet certain of the financial
tests under its indebtedness agreements.




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, make capital expenditures beyond
those permitted in the agreements relating to the indebtedness or 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 or past
levels of revenue, earnings and cash flow.




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




Our
technical papers business includes the coated solutions, thermal papers and
security papers segments. Our coated solutions segment, of which the primary
product is carbonless paper, currently represents our primary business segment
and accounted for 63% of our total company net sales in 2005, 59% of our net
sales in 2006 and 59% of our net sales in 2007. Our total sales volume of
carbonless paper products declined 3.3% from 2005 to 2006 and 2.3% from 2006 to
2007. We believe the worldwide carbonless market is declining as users switch to
alternative modes of communication and technologies that do not use impact
printing to create images. We expect that our total sales volume of carbonless
paper products will continue to decline at rates that are generally similar to
those experienced most recently. If the decline in our sales of carbonless paper
products accelerates, or if we are unable to maintain the prices of our
carbonless paper products, 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 in developing new products 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.


16
 Table of Contents




Our
ability to compete effectively in the marketplace depends, in large part, on our
ability to continually improve productivity and reduce operating
costs.




We must
continually strive to improve the productivity and cost structure of our
manufacturing operations and the efficiency of our support services in order to
offer products that are priced competitively and deliver an attractive value
proposition to our customers. We set specific productivity and cost reduction
goals each year for each of our production facilities and key staff functions.
Accomplishing these goals is essential to our near-term competitiveness and
long-term financial viability. If we fail to reach these goals, we may
experience an erosion of our profit margins, a decline in net sales or both,
which could negatively impact our ability to service our debt and invest in the
future growth of our various business segments.




Certain of our
employees are covered by collective bargaining agreements and labor disputes may
disrupt our operations.




The
Company has collective bargaining agreements for its manufacturing facilities in
Appleton, Roaring Spring and West Carrollton. Our collective bargaining
agreement with the United Steel, Paper and Forestry, Rubber, Manufacturing,
Energy, Allied Industrial and Service Workers International Union, or USW, for
employees at the Roaring Spring facility covers approximately 368 employees and
expired in November 2007. We are in the process of negotiating a new collective
bargaining agreement with the USW and are currently operating under a day-to-day
extension of the expired contract. The outcome of these collective bargaining
negotiations cannot presently be determined. If we are unable to reach an
agreement with the USW regarding the terms of a collective bargaining agreement,
we may be subject to work interruptions or stoppages that could materially
impact our financial results.




We
may be unsuccessful in constructing, starting up and integrating
the expansion at our West Carrollton, Ohio paper mill.




Appleton
previously announced its intention to invest approximately $125 million to
expand thermal paper manufacturing capacity at its existing paper mill located
in West Carrollton, Ohio. Work on the expansion project commenced during first
quarter 2007 and will continue through the second half of 2008. Unforeseen
circumstances may interfere with the project such that we may be required to
spend more than the planned amounts to complete the expansion project, or the
completion may be delayed beyond the planned start up in the second half of
2008. Moreover, we may not be able to integrate operation of the expansion
equipment with existing paper mill equipment as expected or achieve anticipated
operational improvements. Additionally, although the thermal paper market in
recent years has been growing, market conditions may be different when the
project is completed such that we are not able to capture the intended benefits
from the expansion project. As a result, we may not achieve the revenue and
profits that supported the investment analysis. If any one or all or combination
of these risks materialize, then our operating efficiency, profitability and
cash flow may be materially adversely affected.




We
currently rely on a relatively small number of customers to generate a
significant amount of our net sales from each of our various
businesses.




Within
the technical papers business, our five largest customers in the coated
solutions segment accounted for approximately 38% of coated solutions segment
net sales in 2007, approximately 41% of coated solutions segment net sales in
2006 and approximately 45% of coated solutions segment net sales in 2005. Our
five largest customers in the thermal segment accounted for approximately 39% of
thermal segment net sales in 2007, approximately 39% of thermal segment net
sales in 2006 and approximately 42% of thermal segment net sales in 2005. Sales
to our five largest customers in the performance packaging segment accounted for
approximately 43% of total segment net sales in 2007, 34% of total segment net
sales in 2006 and approximately 28% of total segment net sales in
2005.




Many of
our customers are under no obligation 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, revenues, earnings and cash flow
could be materially adversely affected.


17
 Table of Contents




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 base
stock, certain chemicals and resins. In 2007, we purchased approximately $121
million of base stock from external suppliers. We relied on three external
suppliers for approximately 99% of the base stock we purchased in 2007 to
produce coated solutions products. We relied on a single external supplier for
approximately 65% of the base stock we purchased in 2007 to produce thermal
papers. 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
products or the resins we use in our performance packaging 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 base stock,
thermal base stock, key chemicals, resins 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 in all 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.
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 carbonless sheet sales;




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




•
            increasing
      manufacturing costs;




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




•
            declining
      general economic conditions.




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




PDC
and its eligible subsidiaries may fail to remain qualified to be taxed as
subchapter S corporations and the ESOP may not continue to be exempt from U.S.
federal or certain state and local income taxes.




PDC has
made an election to be treated as a subchapter S corporation for U.S. federal
and, where recognized, state and local income tax purposes and an election to
treat its eligible subsidiaries as qualified subchapter S subsidiaries for U.S.
federal and, where recognized, state and local income tax purposes. We believe
that, currently, PDC qualifies as a subchapter S corporation and that Appleton
and other eligible subsidiaries are qualified subchapter S subsidiaries. All of
the Bemrose companies are registered in the United Kingdom and subject to U.K.
Inland Revenue tax laws and are not eligible for treatment as qualified
subchapter S subsidiaries. Similarly, Appleton’s Canadian subsidiary is subject
to Canadian tax law and is not eligible for this treatment.




Section 1362
of the Internal Revenue Code of 1986, as amended, or the Code, provides that a
corporation that meets certain requirements may elect to be taxed as a
subchapter S corporation. Section 1361 of the Code provides that a
corporation that, among other requirements, has all of its stock owned by a
subchapter S corporation or a qualified subchapter S subsidiary may elect to be
classified as a qualified subchapter S subsidiary. A qualified subchapter S
subsidiary is disregarded as a separate entity for federal and most state and
local income tax purposes. With limited exceptions, a subchapter S corporation
does not pay any income tax. Rather, the income of an S corporation is allocated
to its shareholders. An ESOP is exempt from income tax pursuant to
Section 501 of the Code and is not taxed on its allocable share of a
subchapter S corporation’s income. However, a plan is not treated as an ESOP
unless it meets the requirements of Section 4975(e)(7) of the
Code.


18
 Table of Contents




Our
continuing status as a subchapter S corporation and our eligible subsidiaries as
qualified subchapter S subsidiaries for U.S. federal and state income tax
purposes will depend upon our, and their, ability to continue to meet the
eligibility requirements.




It is
possible that the Internal Revenue Service, or IRS, could take the position on
audit that we are not eligible to be taxed as a subchapter S corporation and, as
a consequence, terminate our subchapter S election. Additionally, the applicable
law and regulations may change in a way that results in our being taxed 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.




We
realize significant tax savings during profitable years due to the subchapter S
corporation status. However, if, for any reason, we were to lose our subchapter
S corporation status, or any of our qualified subchapter S subsidiaries loses
its qualified subchapter S subsidiary status, we would be required to pay U.S.
federal and certain state and local income taxes, thereby reducing the amount of
cash available to repay debt or reinvest in our operations, which could have a
material adverse effect on our earnings and cash flow. Similarly, if the plan
does not qualify as an ESOP and becomes subject to tax on its share of the
subchapter S corporation’s income, we would have to distribute cash to the ESOP
trust to enable it to pay the resulting taxes, again reducing the amount of cash
available to repay debt or to be reinvested in our operations. The termination
of PDC’s subchapter S corporation status or the termination of our subsidiaries’
qualified subchapter S subsidiary status would violate covenants under the
senior credit facility and the indentures governing the senior notes and senior
subordinated notes and would lead to a default under the senior credit facility
and/or the indentures governing the senior notes and senior subordinated
notes.




As a
subchapter S corporation, we are 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 or the date assets are acquired in a carryover basis
transaction from a C corporation if the gain is recognized within ten years
after the effective date of the subchapter S election or the date of the
acquisition. If we sell a material portion of our assets within that ten-year
period, 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.




From time
to time in recent years, legislators and agencies of the executive branch have
formulated or suggested various legislative proposals that would affect employee
benefit plans. If legislation is adopted that requires us to lift restrictions
on sales of PDC common stock held in participants’ KSOP accounts, or that limits
the amount of PDC common stock that may be held by the KSOP, then we may be
required to fund the repurchase of substantial amounts of PDC 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 indentures governing the senior notes
and senior subordinated notes, which could lead to a default under those
agreements.


19
 Table of Contents




PDC’s
legal obligations to repurchase common stock from employees and former employees
may lead to a default under the agreements governing our indebtedness or may
constrain Appleton's ability to make necessary reinvestments into its operations
or invest in new business opportunities.




It may be
necessary for Appleton to make significant distributions to PDC in order for us
to satisfy our share of repurchase obligations, under the Employee Retirement
Income Savings Act of 1974, or ERISA, and the terms of the KSOP, to current and
former employees who are participants in the ESOP. We incur obligations to ESOP
participants, when they retire or otherwise terminate employment, to repurchase
shares of PDC. The ESOP allows us to satisfy our share repurchase obligations by
installment payments and we currently satisfy our share repurchase obligations
to former participants by making five equal annual installment payments. The
ESOP also has obligations to permit certain participants to diversify the
investment of a portion of their ESOP account, which would otherwise be invested
in shares of PDC stock. However, the agreements governing our indebtedness,
including our indebtedness under the senior notes and senior subordinated notes,
contain limitations on our ability to satisfy our repurchase obligations. The
amount of PDC’s repurchase obligations may at any time exceed these limitations
and Appleton may elect to or be forced to help PDC meet its obligations.
Further, PDC, as a guarantor of Appleton’s indebtedness, may also be limited to
some extent from making payments to the ESOP or its beneficiaries by the terms
of its and our indebtedness, including our indebtedness under the senior notes
and senior subordinated notes.




As a
result of PDC’s legally imposed repurchase obligations, Appleton and/or PDC may
be forced to violate the distribution and/or payment limitations contained in
the agreements relating to its and our indebtedness, including our indebtedness
under our senior notes and senior subordinated notes, which may ultimately
result in a default under the agreements and the notes. Defaults on any of our
indebtedness could result in acceleration of our indebtedness and cause us to
dispose of our assets or declare bankruptcy and, as a result, we may not have
sufficient funds to satisfy our obligations under the senior notes and senior
subordinated notes.








Item 1B.
            Unresolved Staff
Comments




None.


20
 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
            Approximate
              Square Footage
            StatusAppleton,
      Wisconsin (Wisconsin Ave.)
            Headquarters
      Offices and Manufacturing Plant
            1,160,000
            OwnedPortage,
      Wisconsin
            Capsule
      Manufacturing Plant
            51,700
            OwnedRoaring
      Spring, Pennsylvania
            Pulp
      and Paper Mill
            634,000
            OwnedWest
      Carrollton, Ohio
            Pulp
      and Paper Mill
            750,000
            OwnedMerrill,
      Wisconsin
            Flexible
      Plastics Printing and Converting Plant
            128,000
            OwnedRhinelander,
      Wisconsin
            Film
      and Commercial Packaging Plant
            68,800
            OwnedTurners
      Falls, Massachusetts
            Film
      and Commercial Packaging Plant
            105,000
            OwnedMilton,
      Wisconsin
            Film
      and Commercial Packaging Plant
            47,300
            OwnedDerby,
      England
            Headquarters
      Office and Manufacturing Plant
            212,500
            OwnedHull,
      England
            Manufacturing
      Plant
            90,000
            OwnedTeesside,
      England
            Manufacturing
      Plant
            15,000
            Lease
      expires 2/20/10Wednesbury,
      England
            Warehouse
      (Sublet)
            30,156
            Lease
      expires 3/25/13Appleton,
      Wisconsin (East Warehouse Road)
            Warehouse
            352,000
            Lease
      expires 11/30/12Appleton,
      Wisconsin (Kensington Drive)
            Distribution
      Center
            357,000
            Lease
      expires 12/31/09Hebron,
      Kentucky
            Distribution
      Center
            194,400
            Lease expires 12/31/10Camp
      Hill, Pennsylvania
            Distribution
      Center
            242,000
            Lease
      expires 8/31/10Ontario,
      California
            Distribution
      Center
            102,040
            Lease
      expires 7/31/10Edwardsville,
      Kansas
            Distribution
      Center
            244,000
            Lease
      expires 12/28/10McDonough,
      Georgia
            Distribution
      Center
            135,600
            Lease
      expires 9/30/10Portland,
      Oregon
            Distribution
      Center
            53,000
            Lease
      expires 12/31/10Peterborough,
      Ontario, Canada
            Distribution
      Center
            50,000
            Lease
      expires 12/31/08Roaring
      Spring, Pennsylvania
            Warehouse
            92,200
            Lease
      expires 12/31/08







Our
technical papers business is primarily operated at the Appleton and Portage,
Wisconsin, West Carrollton, Ohio and Roaring Spring, Pennsylvania locations. Our
performance packaging business is primarily operated at the Merrill, Rhinelander
and Milton, Wisconsin and Turners Falls, Massachusetts locations. Our secure and
specialized print services business is operated at the Derby, Hull and Teesside,
England, locations.




Between
fiscal 2003 and fiscal 2007, we invested approximately $189 million in capital
improvements, approximately $162 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 $162
million spent at our manufacturing facilities, approximately $4.7 million was
spent to comply with applicable environmental regulations.




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




21
 Table of Contents


Item 3.
            Legal Proceedings




We are
involved from time to time in certain administrative and judicial proceedings
and inquiries related to environmental matters. For a discussion of these
environmental matters, see “Item 1. Business – Environmental” and Note 18 of
Notes to the Consolidated Financial Statements. Furthermore, from time to time
we may be subject to various demands, claims, suits or other legal proceedings
arising in the ordinary course of our business. We have successfully defended
such claims, settling some for amounts which are not material to our business
and obtaining dismissals in others. While we vigorously defend ourselves and
expect to prevail 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.




In 1996,
Appleton was named as a defendant in a lawsuit and subsequently notified its
insurance carriers of a coverage claim under policies in effect at the time. The
lawsuit ultimately was resolved with the plaintiff and Appleton recovering
expenses from three of four insurers. The fourth insurer disputed coverage and
obligation to reimburse Appleton for its share of the litigation costs. Appleton
sued the insurer and in 2007 received a Wisconsin state appellate court decision
directing a trial court judgment in its favor. The trial court issued a decision
on our pending motions on February 19, 2008 authorizing judgment in favor of
Appleton. This trial court decision is still subject to further appeal; however,
there is a reasonable likelihood that Appleton will collect the judgment and
that it will have a material effect on the Company’s consolidated financial
statements upon final resolution.




Other
than the Lower Fox River matter described in “Item 1. Business – Environmental,”
and assuming our expectations regarding defending such demands, claims, suits or
other legal or regulatory proceedings prove accurate, we do not believe that any
pending or threatened demands, claims, suits or other legal or regulatory
proceedings will have, individually or in the aggregate, a materially adverse
effect on our financial position, results of operations or cash
flows.




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




None.




22
 Table of Contents


PART
II




Item 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity
  Securities




There is
no established trading market for the common stock of PDC or Appleton. All of
the outstanding shares of PDC are owned of record by the KSOP, in which there
are approximately 2,126 participants who were invested in the Company Stock Fund
as of December 29, 2007. All of the outstanding shares of Appleton are
owned of record by PDC.




No
dividends have been declared on the common stock of PDC or Appleton in the last
two fiscal years and neither 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 indentures governing our senior
notes and senior subordinated notes. For further information, see Notes 11 and
24 of Notes to Consolidated Financial Statements.




During
the year ended December 29, 2007, PDC sold approximately 232,868 shares of
its common stock to the ESOP. The ESOP acquired the shares with payroll
deferrals, rollovers and employee loan payments made to the ESOP during the
period from December 31, 2006 to December 29, 2007, by employees of
Appleton who are participants in the KSOP. The aggregate offering price was $7.7
million. There were no underwriters used and no underwriting discounts or
commissions paid. The offer and sale of the shares was made pursuant to Rule 701
under the Securities Act of 1933, as amended.




23
 Table of Contents


Item 6.
            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 December 29, 2007. The consolidated financial
information shown below reflects Bemrose as a discontinued operation for all
periods presented. The historical consolidated financial data for the fiscal
years ended December 29, 2007, December 30, 2006 and December 31, 2005, were
derived from our consolidated financial statements included elsewhere in this
report, which have been audited by PricewaterhouseCoopers LLP, our independent
registered public accounting firm, 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.





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(in
      thousands)Statement
      of Operations Data:Net
      sales
            
            $
            963,240
            
            
            $
            973,655
            
            
            $
            934,266
            
            
            $
            879,447
            
            
            $
            850,506Cost
      of sales
            
            
            733,738
            
            
            
            732,603
            
            
            
            703,796
            
            
            
            655,178
            
            
            
            624,576Gross
      profit
            
            
            229,502
            
            
            
            241,052
            
            
            
            230,470
            
            
            
            224,269
            
            
            
            225,930Selling,
      general and administrative expenses
            
            
            177,275
            
            
            
            179,671
            
            
            
            177,220
            
            
            
            170,332
            
            
            
            156,748Restructuring
      and other charges (1)
            
            
            1,445
            
            
            
            2,161
            
            
            
            7,405
            
            
            
            2,989
            
            
            
            2,629Operating
      income
            
            
            50,782
            
            
            
            59,220
            
            
            
            45,845
            
            
            
            50,948
            
            
            
            66,553Interest
      expense
            
            
            48,943
            
            
            
            49,186
            
            
            
            49,590
            
            
            
            49,160
            
            
            
            54,160Debt
      extinguishment expenses
            
            
            1,185
            
            
            
            -
            
            
            
            -
            
            
            
            30,779
            
            
            
            1,396Interest
      income
            
            
            (2,681
            )
            
            
            (903
            )
            
            
            (892
            )
            
            
            (2,093
            )
            
            
            (315
            )Other
      (income) expense
            
            
            (1,112
            )
            
            
            (513
            )
            
            
            902
            
            
            
            304
            
            
            
            (1,085
            )Income
      (loss) from continuing operationsbefore
      income taxes
            
            
            4,447
            
            
            
            11,450
            
            
            
            (3,755
            )
            
            
            (27,202
            )
            
            
            12,397Provision
      for income taxes
            
            
            253
            
            
            
            633
            
            
            
            548
            
            
            
            422
            
            
            
            430Income
      (loss) from continuing operations
            
            
            4,194
            
            
            
            10,817
            
            
            
            (4,303
            )
            
            
            (27,624
            )
            
            
            11,967Discontinued
      operations(Loss)
      income from discontinued operations, net of income taxes
            
            
            (10,501
            )
            
            
            528
            
            
            
            1,289
            
            
            
            2,593
            
            
            
            (808
            )Net
      (loss) income
            
            $
            (6,307
            )
            
            $
            11,345
            
            
            $
            (3,014
            )
            
            $
            (25,031
            )
            
            $
            11,159Other
      Financial Data:Depreciation
      and amortization(2)
            
            $
            63,809
            
            
            $
            69,195
            
            
            $
            73,067
            
            
            $
            70,688
            
            
            $
            70,824Capital
      expenditures(2)
            
            
            53,627
            
            
            
            32,391
            
            
            
            27,199
            
            
            
            31,514
            
            
            
            29,217Balance
      Sheet Data (at end of period):Working
      capital
            
            $
            141,139
            
            
            $
            142,065
            
            
            $
            145,809
            
            
            $
            191,268
            
            
            $
            121,602Total
      assets
            
            
            1,103,408
            
            
            
            1,016,123
            
            
            
            1,024,934
            
            
            
            1,074,439
            
            
            
            1,069,771Total
      debt
            
            
            544,174
            
            
            
            531,293
            
            
            
            574,011
            
            
            
            602,904
            
            
            
            562,024Redeemable
      common stock
            
            
            182,040
            
            
            
            190,466
            
            
            
            185,292
            
            
            
            159,329
            
            
            
            158,279Accumulated
      deficit
            
            
            (80,086
            )
            
            
            (67,885
            )
            
            
            (61,982
            )
            
            
            (41,034
            )
            
            
            (3,587
            )





(1)   Due
to the continued decline in Appleton's carbonless business, a salaried workforce
reduction initiative was implemented in fiscal 2003. Appleton has continued to
assess its staffing requirements for its headquarters operations and for its
plants and mills. Further reductions occurred throughout fiscal years 2004 -
2007. See Note 6 of Notes to Consolidated Financial Statements.




(2)  Amounts
exclude information related to the discontinued operation.


24
 Table of Contents


Item 7.                      Management’s Discussion and Analysis of Financial Condition and Results
of Operations




Overview




This
discussion summarizes the significant factors affecting the consolidated
operating results, financial position and liquidity of Paperweight Development
Corp. and Appleton Papers Inc. for the three-year period ended December 29,
2007. This discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and related Notes.




Appleton
creates product solutions for customers and end users through development and
use of coating formulations and applications as well as encapsulation, security,
printing and packaging technologies. Appleton has four reportable business
segments: coated solutions, thermal papers, security papers and performance
packaging. Note 23 of Notes to Consolidated Financial Statements reports the
performance of those segments.




Late in
2007, Appleton committed to a formal plan to sell Bemrose, its secure and
specialized print services business based in Derby, England. Bemrose is a
leading U.K. provider of mission critical security and specialized print
services. At the time of its acquisition in December 2003, Bemrose was expected
to provide Appleton with a new product entry in the U.K. security print market,
with opportunities to expand into the U.S. market. After conducting a strategic
review in the fourth quarter of 2007, Appleton has decided to focus its
attention on core businesses and expand its leadership positions in those
markets. The operating results of this business for the years ended December 29,
2007, December 30, 2006 and December 31, 2005 have been reclassified and are now
reported separately as discontinued operations. The discussion below relates
only to the operating results of continuing operations.




Technical
Papers




The
coated solutions segment, which includes carbonless paper products, is the
largest component of the technical papers business. Appleton believes the
carbonless market is declining as users switch to alternative modes of
communication and technologies that do not use impact printing to create images.
Appleton believes that the U.S. carbonless paper market declined by
approximately 8% annually from 2001 through 2007, and will decline over the next
five years at rates comparable to historical levels. Appleton believes the
worldwide carbonless market is also in decline, with demand declining at
approximately 2% to 3% per year. Over the past few years, Appleton has
developed and implemented growth strategies to offset the declining U.S. and
foreign carbonless markets and the resulting impact on revenue and operating
income. The coated solutions segment accounted for approximately 59% of total
net sales in 2007.




In
addition to declining U.S. and foreign carbonless markets, the carbonless
business continues to experience competitive pricing from foreign and domestic
producers. Other domestic carbonless producers have continued their competitive
pricing strategies in efforts to maintain or gain share. In addition, foreign
competitors continue to sell into the U.S. carbonless market with low-price
strategies. As a result of this increased pricing competition, Appleton has
continued to experience pressure on selling prices for carbonless products.
Nevertheless, market conditions do permit us to implement price increases from
time to time.




Market
demand for thermal paper has grown and is expected to continue to grow as
the advantages of thermal printing systems become more widely recognized. These
advantages include competitive cost, quiet operation, cleanliness, speed, high
print quality, reliability, portability and use of a single consumable (thermal
paper) versus other printing systems, which require paper and ink or toner
cartridges. Based on our assessment of market conditions, Appleton believes the
annual rates of growth in the U.S. and Canadian thermal market from 2001 to 2007
were between 0% and 10% and averaged nearly 7% for the period.




Prices
for lightweight thermal papers have been adversely affected by increased imports
of low-priced products from China, Germany and Korea. In September 2007,
Appleton filed antidumping petitions against imports of certain lightweight
thermal paper from China, Germany and Korea and a countervailing duty petition
against such imports from China. The U.S. International Trade Commission (“ITC”)
ruled in November 2007, that there is a reasonable indication that the U.S.
industry producing lightweight thermal paper products is being materially
injured or threatened with material injury due to unfairly traded imports from
China and Germany. The ITC further ruled that imports from Korea are negligible
because they represent less than three percent of imports into the United
States. As a result of this ruling, the U.S. Department of Commerce is
investigating Appleton’s allegations that imports from China and Germany are
being dumped in the United States market and that the Chinese government
is subsidizing exports of lightweight thermal paper to the United
States. The U.S. Department of Commerce issued its preliminary
determination regarding the Chinese subsidy on March 10, 2008, finding
margins that range from 0.57percent to 59.5 percent. Duties will be imposed to
offset the levels of subsidization found in the amount of these margins. The
U.S. Department of Commerce is scheduled to make its preliminary determinations
in the Chinese and German antidumping investigations on May 6, 2008. Additional
duties may be imposed when these preliminary antidumping determinations are
issued by the Commerce Department. Final determinations in the subsidy and
dumping cases will be issued later in 2008.




Performance
Packaging




The
performance packaging segment produces single and multilayer polyethylene films
for packaging applications. It also prints and converts flexible plastic
packaging materials for customers in the food processing, household and
industrial products industries.


25
 Table of Contents




Financial
Highlights




Results
for 2007 include the following:




•
            Net
      sales totaled $963.2 million, a $10.5 million, or 1.1%, decrease from 2006
      net sales levels.




•
            Appleton
      completed a new $375 million senior secured credit facility which provides
      expanded credit capability, extended repayment terms and reduced financial
      covenants.




•
            Income
      from continuing operations was $4.2 million, a decrease of $6.6 million
      from the prior year result. The decrease was driven primarily by reduced
      volumes, unfavorable mix and higher raw material costs which offset lower
      selling general and administrative expenses, productivity improvements,
      lower restructuring charges and higher interest
  income.




•
            Appleton
      recorded a $10.5 million loss in discontinued operations. Based on the
      Company’s commitment to a formal plan to sell the business operations of
      Bemrose, this loss included an $8.0 million impairment charge and a tax
      valuation allowance, against the net deferred tax asset, resulting in a
      tax provision of $1.0 million. The financial results for 2006 and 2005
      have been reclassified to reflect income from discontinued operations of
      $0.5 million and $1.3 million,
respectively.




•
            Appleton’s
      net loss of $6.3 million represents a decrease of $17.7 million from the
      $11.3 million net income in 2006. The decrease is due to the
      aforementioned decline in income from continuing operations and the loss
      from discontinued operations.


26
 Table of Contents




Comparison
of 2007 and 2006


For
      the Year EndedDecember
      29,
              2007
            
            
            December
      30,
              2006
            
            
            %
      Chg(dollars in millions)Net
      sales
            
            $
            963.2
            
            
            $
            973.7
            
            
            
            -1.1
            %Cost
      of sales
            
            
            733.7
            
            
            
            732.6
            
            
            
            0.2
            %Gross
      profit
            
            
            229.5
            
            
            
            241.1
            
            
            
            -4.8
            %Selling,
      general and administrative expenses
            
            
            177.3
            
            
            
            179.7
            
            
            
            -1.3
            %Restructuring
      and other charges
            
            
            1.4
            
            
            
            2.2
            
            
            
            -36.4
            %Operating
      income
            
            
            50.8
            
            
            
            59.2
            
            
            
            -14.2
            %Interest
      expense
            
            
            48.9
            
            
            
            49.2
            
            
            
            -0.6
            %Other
      non-operating income, net
            
            
            (2.6
            )
            
            
            (1.4
            )
            
            
            85.7
            %Income
      from continuing operations before income taxes
            
            
            4.5
            
            
            
            11.4
            
            
            
            -60.5
            %Provision
      for income taxes
            
            
            0.3
            
            
            
            0.6
            
            
            
            -50.0
            %Income
      from continuing operations
            
            
            4.2
            
            
            
            10.8
            
            
            
            -61.1
            %(Loss)
      income from discontinued operations, net of income taxes
            
            
            (10.5
            )
            
            
            0.5
            
            
            NANet
      (loss) income
            
            $
            (6.3
            )
            
            $
            11.3
            
            
            
            -155.8
            %Comparisons
      as a % of net salesCost
      of sales
            
            
            76.2
            %
            
            
            75.2
            %
            
            
            1.0
            %Gross
      margin
            
            
            23.8
            %
            
            
            24.8
            %
            
            
            -1.0
            %Selling,
      general and administrative expenses
            
            
            18.4
            %
            
            
            18.5
            %
            
            
            -0.1
            %Operating
      margin
            
            
            5.3
            %
            
            
            6.1
            %
            
            
            -0.8
            %Income
      from continuing operations before income taxes
            
            
            0.5
            %
            
            
            1.2
            %
            
            
            -0.7
            %Income
      from continuing operations
            
            
            0.4
            %
            
            
            1.1
            %
            
            
            -0.7
            %(Loss)
      income from discontinued operations, net of income taxes
            
            
            -1.1
            %
            
            
            0.1
            %
            
            
            -1.2
            %Net
      (loss) income
            
            
            -0.7
            %
            
            
            1.2
            %
            
            
            -1.9
            %









Net sales
for 2007 reached $963.2 million, decreasing $10.5 million, or 1.1%, compared to
$973.7 million for 2006. As explained more fully below, technical papers net
sales decreased slightly from year-earlier levels while net sales in the
performance packaging segment decreased by $10.0 million from 2006.




Gross
margin in 2007 declined 1.0 percentage point to 23.8%. Lower volumes and
unfavorable mix contributed to lower overall margins. In addition, higher raw
material and distribution costs offset improved pricing and manufacturing
gains.




Selling,
general and administrative expenses decreased 1.3% or $2.4 million during 2007.
As a percentage of net sales SG&A decreased 0.1 percentage point. Within
selling, general and administrative expenses, consulting expenses increased $1.9
million associated with an income tax recovery received during 2007 while
incentive accruals were reduced due to lower operating
performance.


27
 Table of Contents




Restructuring
and other charges decreased $0.8 million to $1.4 million in 2007 due to lower
restructuring activity during the year. The costs associated with the
restructuring announced by Appleton in late 2005 amounted to $1.3 million in
2006. We also recognized $0.9 million of distribution center exit costs during
2006. See Note 6 of Notes to Consolidated Financial Statements for further
information on the effects of the restructuring.




Other
non-operating income in 2007 increased $1.2 million to $2.6 million for 2007 due
to increased foreign currency gains of $0.6 million, $1.8 million increased
interest income, primarily as the result of income tax recoveries and higher
cash balances maintained subsequent to the new financing with higher interest
rates, offset by $1.2 million of debt extinguishment expenses from terminating
its previous credit facility.




Appleton
recorded a provision for income taxes of $0.3 million in 2007, primarily for
U.S. state and local income taxes. Appleton has elected to be taxed 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 and local income tax purposes. As a result of these elections, Appleton
expects to incur no future U.S. income tax liability and minimal state and local
income tax liabilities. Appleton Papers Canada Ltd. is not eligible for
treatment as a qualified subchapter S subsidiary.




As a
result of the foregoing, 2007 income from continuing operations decreased $6.6
million to $4.2 million.




Appleton
recorded a loss from discontinued operations in 2007 of $10.5 million as a
result of reclassifying Bemrose which is held for sale. The loss from
discontinued operations consists of operating losses of $1.5 million, the
establishment of a tax valuation allowance resulting in a net tax provision of
$1.0 million, a $7.0 million impairment of goodwill and a $1.0 million
impairment of  intangible assets.




For 2007,
Appleton recorded a net loss of $6.3 million, a $17.6 million decrease from the
net income of $11.3 million recorded for 2006. The decrease is due to lower
income from continuing operations and the loss from discontinued operations in
2007.




Business
Segment Discussion – 2007




Technical
Papers




•
            Coated
      solutions segment net sales totaled $572.0 million for 2007, a decrease of
      $0.4 million, or 0.1% from prior year levels. Lower shipment volumes and
      unfavorable mix offset improved pricing during 2007. Appleton experienced
      lower shipments in domestic markets in 2007, but was able to increase
      shipments internationally in part due to a weakened dollar but also due to
      increased international sales effort. Coated solutions operating income
      increased $1.3 million or 2.5% to $52.1 million for 2007 as the impacts of
      lower volumes, higher raw material costs and higher costs from a planned
      bi-annual mill maintenance outage were offset by improved pricing,
      manufacturing gains and lower selling, general and administrative
      expenses.




•
            Thermal
      papers segment net sales totaled $257.1 million for 2007, a decrease of
      $3.0 million or 1.1% from 2006. Improved mix generally was offset by lower
      shipment volumes in 2007. International shipment volumes increased nearly
      30%. Thermal papers segment operating income declined $6.2 million or
      46.4% to $7.2 million in 2007. The operating income decline is
      attributable to lower volumes, competitive pricing, higher raw materials
      and mill maintenance outage costs which offset gains from improved mix and
      reduced manufacturing and selling, general and administrative
      costs.




•
            Prices for lightweight thermal papers have been adversely
      affected by increased imports of low-priced products from China, Germany
      and Korea. In September 2007, Appleton filed antidumping petitions against
      imports of certain lightweight thermal paper from China, Germany and Korea
      and a countervailing duty petition against such imports from China. The
      U.S. International Trade Commission (“ITC”) ruled in November 2007, that
      there is a reasonable indication that the U.S. industry producing
      lightweight thermal paper products is being materially injured or
      threatened with material injury due to unfairly traded imports from China
      and Germany. The ITC further ruled that imports from Korea are negligible
      because they represent less than three percent of imports into the United
      States. As a result of this ruling, the U.S. Department of
      Commerce is investigating Appleton’s allegations that imports from
      China and Germany are being dumped in the United States market and
      that the Chinese government is subsidizing exports
      of lightweight thermal paper to the United States. The U.S.
      Department of Commerce issued its preliminary
      determination regarding the Chinese subsidy on March 10, 2008,
      finding margins that range from 0.57percent to 59.5 percent. Duties will
      be imposed to offset the levels of subsidization found in the amount of
      these margins. The U.S. Department of Commerce is scheduled to make its
      preliminary determinations in the Chinese and German antidumping
      investigations on May 6, 2008. Additional duties may be imposed when these
      preliminary antidumping determinations are issued by the Commerce
      Department. Final determinations in the subsidy and dumping cases will be
      issued later in 2008.




•
            Security
      papers segment net sales totaled $32.3 million for 2007, an increase of
      $2.9 million or 9.8% over 2006, primarily due to improved pricing during
      2007. Security papers segment 2007 operating income increased $1.9 million
      to $3.5 million on the strength of improved pricing and manufacturing cost
      reductions.


28
 Table of Contents




Performance
Packaging




•
            Performance
      packaging segment net sales totaled $101.8 million for 2007, a decrease of
      $10.0 million or 8.9% from prior year levels. Net sales were adversely
      impacted by lower shipment volumes, lower pricing and unfavorable mix
      during 2007, all a reflection of generally soft market conditions for
      packaging. Performance packaging segment 2007 operating income decreased
      $3.6 million to $6.2 million. Results for 2007 reflect the impact of lower
      volumes as well as margin declines derived from resin price increases,
      which were partially offset by manufacturing gains and lower selling,
      general and administrative costs.




Unallocated Corporate
Charges and Business Development Costs




•
            Unallocated
      corporate charges and business development costs increased $1.8 million in
      2007 compared to 2006, including $1.9 million of consulting fee expenses
      incurred in connection with income tax refunds obtained for the 2000 and
      2001 tax periods.




Effects of
Inflation. Costs for certain raw materials, including base stock,
chemicals and pulp, as well as costs for natural gas, oil and electricity,
generally have been subject to price changes and can have material effects on
our business, financial condition and results of operations. Costs for certain
raw materials and energy increased during 2007 and are expected to continue to
increase. We historically have been able to use price increases to recoup a
portion of raw material cost increases, but we rely on cost-cutting measures and
productivity and efficiency gains to offset the remaining portion of cost
increases. While Appleton expects that any significant increase in raw materials
or energy costs will be offset by price increases and/or by cost containment,
productivity and efficiency initiatives, our profitability could be adversely
affected should we be unable to pass on or mitigate any future cost
increases.




Comparison
of 2006 and 2005


For
      the Year EndedDecember
      30,
              2006
            
            
            December
      31,
              2005
            
            
            %
      Chg(dollars in millions)Net
      sales
            
            $
            973.7
            
            
            $
            934.3
            
            
            
            4.2
            %Cost
      of sales
            
            
            732.6
            
            
            
            703.8
            
            
            
            4.1
            %Gross
      profit
            
            
            241.1
            
            
            
            230.5
            
            
            
            4.6
            %Selling,
      general and administrative expenses
            
            
            179.7
            
            
            
            177.3
            
            
            
            1.4
            %Restructuring
      and other charges
            
            
            2.2
            
            
            
            7.4
            
            
            
            -70.3
            %Operating
      income
            
            
            59.2
            
            
            
            45.8
            
            
            
            29.3
            %Interest
      expense
            
            
            49.2
            
            
            
            49.6
            
            
            
            -0.8
            %Other
      non-operating income, net
            
            
            (1.4
            )
            
            
            -
            
            
            NAIncome
      (loss) from continuing operations before income taxes
            
            
            11.4
            
            
            
            (3.8
            )
            
            
            400.0
            %Provision
      for income taxes
            
            
            0.6
            
            
            
            0.5
            
            
            
            20.0
            %Income
      (loss) from continuing operations
            
            
            10.8
            
            
            
            (4.3
            )
            
            
            351.2
            %Income
      from discontinued operations, net of income taxes
            
            
            0.5
            
            
            
            1.3
            
            
            
            -61.5
            %Net
      income (loss)
            
            $
            11.3
            
            
            $
            (3.0
            )
            
            
            476.7
            %Comparisons
      as a % of net salesCost
      of sales
            
            
            75.2
            %
            
            
            75.3
            %
            
            
            -0.1
            %Gross
      margin
            
            
            24.8
            %
            
            
            24.7
            %
            
            
            0.1
            %Selling,
      general and administrative expenses
            
            
            18.5
            %
            
            
            19.0
            %
            
            
            -0.5
            %Operating
      margin
            
            
            6.1
            %
            
            
            4.9
            %
            
            
            1.2
            %Income
      (loss) from continuing operations before income taxes
            
            
            1.2
            %
            
            
            -0.4
            %
            
            
            1.6
            %Income
      (loss) from continuing operations
            
            
            1.1
            %
            
            
            -0.5
            %
            
            
            1.6
            %Income
      from discontinued operations, net of income taxes
            
            
            0.1
            %
            
            
            0.1
            %
            
            
            -Net
      income (loss)
            
            
            1.2
            %
            
            
            -0.3
            %
            
            
            1.5
            %







29
 Table of Contents




Net sales
for 2006 reached $973.7 million, increasing $39.4 million, or 4.2%, compared to
$934.3 million for 2005. As explained more fully below, technical papers net
sales increased from year-earlier levels by $27.0 million while net sales in the
performance packaging segment increased by $12.3 million from 2005.




Gross
margin in 2006 increased 0.1 percentage point to 24.8%. Lower volumes,
unfavorable mix and higher raw material costs were offset by improved pricing
and manufacturing gains.




Selling,
general and administrative expenses increased 1.4% or $2.4 million during 2006.
As a percentage of net sales, SG&A declined 0.5 percentage point as spending
increases were less than revenue growth. Within selling, general and
administrative expenses, distribution expenses for our technical papers business
were higher than 2005 by $3.6 million due to higher shipment volumes and higher
freight rates, which were impacted by higher fuel costs. Administrative costs
decreased by $2.0 million due to cost reduction efforts and the effects of 2005
and 2006 restructuring activities. Amortization costs decreased by $0.7 million
in 2006 as a result of having fully amortized certain non-compete agreements and
reduced amortization associated with certain other intangible
assets.




Restructuring
costs in 2006 totaled $2.2 million. Costs associated with the restructuring
announced by Appleton late in 2005 amounted to $1.3 million in 2006. Appleton
also recognized $0.9 million of distribution center exit costs during 2006.
Restructuring costs in 2005 were $7.4 million, of which, $6.7 million was
related to the 2005 restructuring plan and $0.7 million was for distribution
center exit costs. See Note 6 of Notes to Consolidated Financial Statements for
further information on the effects of the restructuring.




Interest
expense for 2006 was $49.2 million, a decrease of $0.4 million, or 0.8%,
compared to 2005. The impact of generally higher interest rates was offset by
lower average borrowings in 2006. During 2006, Appleton reduced its term loan
obligations by $35.8 million and made payments of $4.4 million to retire a
portion of the senior notes. Also, in 2006 no accretion was recorded because
Appleton had fully accreted its $25.0 million share of the Lower Fox River costs
by the end of 2005. Deferred debt expense increased by $0.7 million due to the
increase in the amortization of deferred debt expenses, attributable to the 2006
bond consent process and the write-off of deferred debt costs associated with
voluntary debt repayments.




Other
non-operating income in 2006 increased $1.4 million due to foreign currency
gains of $0.5 million recorded in 2006 compared to foreign currency losses of
$0.9 million recorded in 2005.




Appleton
recorded a provision for income taxes of $0.6 million in 2006 and $0.5 million
in 2005 for income taxes related primarily to its Canadian subsidiary. Appleton
has elected to be taxed 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 and local income tax purposes. As a result
of these elections, Appleton expects to incur no future U.S. income tax
liability and minimal state and local income tax liabilities. Appleton Papers
Canada Ltd. is not eligible for treatment as a qualified subchapter S
subsidiary.




As a
result of the foregoing, 2006 income from continuing operations increased $15.1
million to $10.8 million.




Appleton
recorded income from discontinued operations in 2006 of $0.5 million versus $1.3
million in 2005 related to Bemrose which is held for sale.




For 2006,
Appleton recorded net income of $11.3 million, a $14.3 million increase from the
net loss of $3.0 million recorded for 2005. The increase is primarily due to
increased income from continuing operations as discussed above.




Business
Segment Discussion – 2006




Technical
Papers




•
            Coated
      solutions segment net sales totaled $572.4 million for 2006, a decrease of
      $18.2 million, or 3.1% from 2005. Overall shipment volumes  were
      lower in 2006 than in 2005, with declines in domestic markets offsetting
      gains in international markets. Additionally, unfavorable mix offset
      improved pricing during the year. Coated solutions operating income was
      $50.9 million for 2006, a decrease of $3.9 million or 7.1% compared to
      prior year results. The decrease was the result of lower overall shipment
      volumes, unfavorable mix and higher raw material and manufacturing costs
      during 2006.




•
            Thermal
      papers segment net sales totaled $260.0 million for 2006, an increase of
      $40.7 million or 18.6% from prior year. Net sales benefited in 2006 from
      increased shipment volumes which offset effects of unfavorable mix and
      improved pricing. Thermal papers segment operating income increased $8.8
      million or 194.6% to $13.4 million in 2006. The operating income
      improvement was derived from stronger shipment volumes and improved
      pricing which offset the impacts from unfavorable mix and higher costs for
      raw materials, manufacturing expenses and selling, general and
      administrative expenses.




•
            Security
      papers segment net sales totaled $29.4 million for 2006, an increase of
      $4.5 million or 18.1% over 2005, due to increased shipment volumes and
      improved pricing during 2006. Security papers segment 2006 operating
      income increased $2.5 million to $1.6 million on the strength of the
      volume increases and improved
pricing.


30
 Table of Contents




Performance
Packaging




•
            Performance
      packaging segment net sales totaled $111.8 million for 2006, an increase
      of $12.3 million or 12.4% over 2005. Net sales improved as a result of
      increased shipment volumes and improved pricing. Performance packaging
      segment operating income increased $3.9 million to $9.8 million in 2006.
      The operating income improvement was the result of increased volumes,
      manufacturing gains and lower selling, general and administrative
      expenses.




Unallocated Corporate
Charges and Business Development Costs




•
            Unallocated
      corporate charges and business development costs for 2006 were $16.4
      million, a decrease of $2.1 million compared to 2005, primarily reflecting
      cost reductions achieved from prior year restructuring activities.
      Unallocated corporate charges and business development costs include
      corporate charges not specific to a business segment, expenditures
      associated with technology development and marketing and research and
      development. Also included in unallocated corporate charges and business
      development costs are restructuring costs associated with selective
      workforce reductions in corporate support
  functions.




Liquidity
and Capital Resources




Overview.
Appleton’s primary sources of liquidity are cash provided by operations and
available borrowings under its credit facility. Appleton expects that cash on
hand, internally generated cash flow and available credit from its credit
facility will provide the necessary funds for reasonably foreseeable operating
and recurring cash needs(e.g., working capital, debt service, other contractual
obligations and capital expenditures). Subject to meeting covenants in its
credit facility, Appleton currently has approximately, $135.3 million of unused
borrowing capacity under its revolving credit facility. In July 2007, Appleton
entered into a new $12.1 million financing arrangement with the State of Ohio as
part of its funding plans for an expansion project at its West Carrollton, Ohio
facility, as described below.




Cash Flows from
Operating Activities. Net cash provided by
operating activities for 2007 was $91.7 million compared to $104.7 million net
cash provided by operating activities in 2006. The net loss, adjusted for
non-cash items, provided $84.3 million in operating cash while a decrease in
working capital provided another $16.3 million of operating cash flow for the
period. Non-cash charges included $62.7 million of depreciation, $15.6 million
of intangible asset amortization, $3.0 million of amortization of financing
fees, $6.7 million in employer matching contributions for purchases of PDC
common stock, $2.4 million of losses on equipment disposals and $1.2 million of
foreign exchange gains. Uses of cash included a $6.0 million reduction in
accrued pension and a $1.9 million reduction in restructuring
reserve.




The $16.3
million decrease in working capital was driven by a $6.4 million increase in
accounts payable and other accrued liabilities, a $4.3 million decrease in
inventories and a $7.1 million decrease in accounts receivable. These changes
offset a $1.5 million increase in other current assets.




Net cash
provided by operating activities for 2006 was $104.7 million, an increase of
$31.0 million over 2005. Net income, adjusted for non-cash items, provided $97.9
million in operating cash while a decrease in working capital provided another
$11.0 million of operating cash flow for the period. Non-cash charges included
$66.3 million of depreciation, $9.4 million of intangible asset amortization,
$2.8 million of amortization of financing fees, $6.8 million in employer
matching contributions for purchases of PDC common stock and $1.2 million of
losses on equipment disposals. Uses of cash included a $4.3 million reduction in
restructuring reserves and a $0.8 million reduction in accrued
pension.




The $11.0
million decrease in working capital was driven by a $23.6 million increase in
accounts payable and other accrued liabilities and a $5.3 million decrease in
inventories. These changes offset the $12.7 million increase in accounts
receivable and a $5.2 million increase in other current assets.




Net cash
provided by operating activities for 2005 was $73.7 million. The net loss,
adjusted for non-cash items, provided $90.9 million in operating cash while an
increase in working capital used $13.2 million of operating cash flow in 2005.
Non-cash charges included depreciation of $69.7 million, $10.2 million of
intangible asset amortization, $7.9 million in non-cash employer matching
contributions for the purchase of PDC common stock, $2.1 million of amortization
on financing fees, $1.6 million of losses on equipment disposals and $1.4
million of accretion toward Appleton’s share of the Lower Fox River
environmental liability. The increase in working capital was the result of a
$9.0 million increase in inventories and a $6.6 million increase in other
current assets (primarily an increase in the indemnification receivable from
AWA). Accounts payable and other accrued liabilities increased $1.7 million and
accounts receivable decreased $0.7 million.




Cash Flows from
Investing Activities.Net cash used by investing activities totaled $61.8
million for 2007. Appleton invested $54.4 million in the expansion project at
the West Carrollton, Ohio facility as well as in a number of individual capital
projects during the year. Appleton also maintained $7.4 million of restricted
cash for mill expansion associated with the expansion project. The restricted
cash is expected to be disbursed within the next twelve months as the expansion
project is completed.






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Net cash
used by investing activities totaled $35.7 million for 2006. Appleton invested
$36.5 million in a number of individual capital projects.




Net cash
used by investing activities in 2005 totaled $101.3 million. Appleton invested
$68.8 million in the acquisition of New England Extrusion in January 2005 and
invested an additional $32.5 million in capital projects during the year. Major
components of capital spending included the final $7.4 million of the $16
million project to expand coating capabilities at the Appleton plant and the
final $2.4 million of the $8 million invested in paper machine improvements at
the Roaring Spring, Pennsylvania mill.




Cash Flows from
Financing Activities. Net cash used by financing
activities in 2007 was $4.7 million. In June 2007, Appleton entered into a new
$375 million senior secured credit facility consisting of a seven-year, $225
million term loan bearing interest at a base rate, or at LIBOR, at Appleton’s
option, plus an applicable margin, which is initially set at 0.75% for base rate
loans and 1.75% for LIBOR loans. Mandatory principal payments of $0.6 million
are due quarterly with the remaining balance due June 5, 2014. It also provides
access to a six-year, $150 million revolving credit facility. The new senior
credit facility is unconditionally guaranteed by PDC and by substantially all of
Appleton’s subsidiaries, other than certain immaterial subsidiaries. In
addition, it is secured by liens on substantially all Appleton’s, the subsidiary
guarantors’ and certain of Appleton’s other subsidiaries’ assets and by a pledge
of Appleton’s and its subsidiaries’ capital stock. Funding proceeds from the new
facility were applied to repay outstanding balances on Appleton’s previous
senior secured notes payable and revolving lines of credit, which were
terminated contemporaneously with the consummation of the new senior secured
credit facility. These funds were used to repay the $190.7 million of previous
senior secured variable rate notes, plus interest of $1.9 million, as well as
the $7.5 million outstanding amount borrowed against the previous $125 million
line of credit, plus interest. As a result of this refinancing, $0.3 million of
deferred debt issuance costs related to the previous senior credit facility were
written off. Financing fees of $2.1 million were also incurred, of which, $0.9
million was recorded as expense in Appleton’s statement of operations and $1.2
million was capitalized as deferred debt issuance costs and will be amortized
over the term of the new senior credit facility. During 2007, Appleton made a
mandatory debt repayment of $0.6 million, plus interest, on this senior secured
credit facility.




During
2007, Appleton borrowed $74.0 million and repaid $74.2 million under its
revolving lines of credit. Appleton made market purchases of senior notes
totaling $17.6 million during the year. Appleton obtained $9.1 million in July
2007 from a financing arranged with the State of Ohio to fund a portion of the
West Carrollton, Ohio mill expansion project. Appleton also retired the
remaining $7.0 million of senior subordinated notes payable in December 2007.
Proceeds from the issuance of PDC redeemable common stock totaled $7.7 million
during 2007 while $28.6 million was used to redeem shares of the stock pursuant
to employee requests to diversify their holdings in the ESOP and for
distributions upon retirement or termination. Cash overdrafts increased $6.1
million in 2007.




Net cash
used by financing activities in 2006 was $67.7 million. Appleton made payments
against term loans totaling $35.8 million, of which, $7.8 million represented
mandatory prepayments (including a $5.6 million excess cash flow payment) and
$28.0 million represented voluntary prepayments. Additionally, $4.4 million of
senior notes were purchased during 2006. Appleton paid $8.0 million in fees
associated with the 2006 bond consent solicitation process. (Refer to
“Description of Outstanding Indebtedness,” below, for a discussion of the
consent solicitation process.) During the course of 2006, Appleton paid a net of
$1.8 million more on our revolving credit facility than was borrowed. Proceeds
from the issuance of PDC redeemable common stock totaled $8.2 million during
2006 while $27.1 million was expended during the period to redeem shares of the
stock pursuant to employee requests to diversify their holdings in the ESOP and
for distributions upon retirement or termination. Payments to redeem common
stock were approximately $17.7 million higher in 2006 than in 2005 based on the
number of redemption requests from plan participants.




Net cash
used by financing activities was $23.7 million for 2005. Appleton made mandatory
debt repayments on its outstanding term loans of $2.4 million in 2005. Appleton
also made payments of $73.0 million against its borrowings under the revolving
credit facility of $75.0 million, made additional voluntary payments of $15.0
million against the outstanding term loan and purchased $13.0 million of its
senior notes. The borrowings under the revolving credit facility were used to
fund the New England Extrusion acquisition and other short-term operating needs.
Payments to redeem shares of redeemable common stock related to employee
requests to diversify their holdings in the ESOP and for distributions upon
retirement or termination totaled $9.4 million during 2005. Appleton received
net proceeds of $13.9 million from the sale of PDC redeemable common stock in
2005.




Description of
Outstanding Indebtedness.As described below, following Appleton’s June
2004 refinancing, $7 million of the old 12.5% series B senior subordinated notes
remained outstanding. These old senior subordinated notes were unsecured
obligations of Appleton, ranking subordinate in right of payment to all senior
debt and were unconditionally and jointly and severally guaranteed by PDC and
substantially all of Appleton’s subsidiaries. Interest on the notes was payable
semi-annually in June and December of each year. With certain exceptions, the
old notes were not redeemable at Appleton’s option prior to December 15,
2005. On or after December 15, 2005, Appleton was permitted to redeem
during the twelve-month period beginning on December 15 of the applicable
year all or part of the notes at a specified redemption price, which dropped to
100% in 2007 and thereafter, plus accrued and unpaid interest and liquidated
damages, if any. In December 2007, Appleton redeemed the $7 million remaining
portion of the old senior subordinated notes.


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On
June 11, 2004 Appleton underwent a voluntary refinancing of its debt.
Principal components of the refinancing included a new senior credit facility, a
series of senior notes and a new series of senior subordinated notes. The senior
credit facility included a six-year, $250 million term loan bearing interest at
a base rate, or at LIBOR, at Appleton’s option, plus an applicable margin, which
was determined by reference to a pricing grid. Effective March 21, 2006,
Appleton fixed the interest rate, at 7.16%, on $100.0 million of this
outstanding term loan with a three-year interest rate swap contract. This
contract was liquidated as part of the June 2007 refinancing. Initially,
mandatory principal payments of $625,000 were due quarterly. The required
quarterly payment amount was adjusted as Appleton made additional voluntary
principal payments and any remaining balance was due in equal payments on
March 31, 2010 and June 11, 2010. The senior credit facility also
included a five-year, $125 million revolving credit facility. On June 5, 2007 as
described above, Appleton replaced this senior credit facility with a new senior
secured credit facility.




As part
of the 2004 refinancing, Appleton also issued $185 million aggregate principal
amount of 8.125% senior notes due 2011 and $150 million aggregate principal
amount of 9.75% senior subordinated notes due 2014. The proceeds of the senior
credit facility were used to repay the amounts outstanding under the old senior
credit facility, plus interest, consisting of two term loans of $14.0 million
and $130.7 million, respectively. The balance of the proceeds of the senior
credit facility, together with the proceeds of the offering of the senior notes
and the senior subordinated notes, were used to repurchase approximately $193
million, plus interest, of the approximately $200 million in aggregate principal
amount outstanding of the old 12.5% series B senior subordinated notes and the
deferred payment obligation. The deferred payment obligation, which was due
May 8, 2010, had accreted at 10% per annum to $180.3 million as of
June 11, 2004. AWA discounted this obligation by $13.2 million and accepted
$167.1 million as payment in full of the obligation.




Long-term
obligations, excluding the capital lease obligation, consist of the
following:




2007
            
            
            2006(dollars in millions)Senior
      secured variable rate notes payable at LIBOR plus 2.25%, settled in June
      2007
            
            $
            —
            
            
            $
            195.5Senior
      secured variable rate notes payable at LIBOR plus 1.75%, $0.6 million due
      quarterly with $209.8 million due June 5, 2014
            
            
            224.4
            
            
            
            —224.4
            
            
            
            195.5Less
      obligations due within one year
            
            
            (2.8
            )
            
            
            (6.4
            )221.6
            
            
            
            189.1Unsecured
      variable rate industrial development bonds, 3.9% average interest rate at
      December 29, 2007, $2.7 million due in 2013 and $6.0 million due in
      2027
            
            
            8.7
            
            
            
            8.7State
      of Ohio assistance loan at 6%, approximately $0.1 million due monthly and
      final payment due May 15, 2017
            
            
            9.1
            
            
            
            —Less
      obligations due within one year
            
            
            (0.3
            )
            
            
            —8.8
            
            
            
            —Senior
      notes payable at 8.125%, due June 15, 2011
            
            
            150.1
            
            
            
            167.6Senior
      subordinated notes payable at 9.75%, due June 15,
2014
            
            
            150.0
            
            
            
            150.0Senior
      subordinated notes payable at 12.5%, settled in December
    2007
            
            
            —
            
            
            
            7.0Total
      long-term obligations
            
            $
            539.2
            
            
            $
            522.4




The
senior credit facility, senior notes and 9.75% senior subordinated notes contain
affirmative and negative covenants. In general, the covenants contained in the
senior credit facility are more restrictive than those of the senior notes and
9.75% senior subordinated notes. Among other restrictions, the covenants
contained in the senior credit facility require Appleton to meet specified
financial tests, including leverage and interest coverage ratios, which become
more restrictive over the term of the debt. If Appleton defaults on any of these
provisions, it could require the repayment of the amounts outstanding, which
were approximately $525 million as of December 29, 2007. Based on
management’s expectations for 2008, Appleton anticipates that it will be able to
make the required principal and interest payments and comply with all covenants
and other requirements set forth in the senior credit facility and the
indentures governing the senior notes and 9.75% senior subordinated
notes.




The
senior credit facility, senior notes and 9.75% senior subordinated notes also
contain covenants, which, among other things, restrict Appleton’s ability and
the ability of Appleton’s other guarantors of the senior credit facility, senior
notes and 9.75% senior subordinated notes to incur liens; engage in transactions
with affiliates; incur or guarantee additional indebtedness; declare dividends
or redeem or repurchase capital stock; make loans and investments; engage in
mergers, acquisitions, consolidations and asset sales; acquire assets, stock or
debt securities of any person; terminate the subchapter S corporation status of
PDC or the qualified subchapter S subsidiary status of its subsidiaries eligible
to elect such status; amend its debt instruments; amend or terminate the ESOP;
amend other agreements related to the transaction with AWA; repay other
indebtedness; use assets as security in other transactions; enter into sale and
leaseback transactions; sell equity interests in our subsidiaries; and engage in
new lines of business.


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During
the second quarter of 2006, we successfully completed a consent solicitation to
amend certain provisions of the indentures governing our 8.125% senior notes due
2011 and 9.75% senior subordinated notes due 2014 to, among other things, modify
the restricted payments covenants of the indentures, allow changes to the
documentation for the ESOP that are not reasonably likely to result in a
material adverse change to Appleton and provide for additional interest on the
8.125% senior notes and 9.75% senior subordinated notes in certain circumstances
pertaining to ESOP-related payments. As a result, Appleton was able to make in
the second quarter of 2006 and expects to continue to make, required ESOP
distributions without violating the covenant limitations of the indentures
governing the 8.125% senior notes and the 9.75% senior subordinated notes. In
consideration for the consent, Appleton paid to the consenting noteholders a
consent fee of $25.00 for each $1,000 principal amount of 8.125% senior notes
and 9.75% senior subordinated notes, resulting in an $8.0 million payment. This
amount was capitalized as debt issuance costs and will be amortized over the
remaining life of the notes. An additional $1.3 million was incurred in bank and
legal fees and has been expensed in our consolidated statement of operations for
the year ending December 30, 2006.




The
senior credit facility is unconditionally guaranteed by PDC and by substantially
all of Appleton’s subsidiaries, other than certain immaterial subsidiaries. In
addition, it is secured by liens on substantially all of Appleton’s, the
subsidiary guarantors’ and certain of Appleton’s other subsidiaries’ assets and
by a pledge of Appleton’s and its subsidiaries’ capital stock. The senior notes
and senior subordinated notes are unconditionally guaranteed by Paperweight
Development Corp., C&H Packaging Company, Inc., American Plastics Company,
Inc., Rose Holdings Limited, Bemrose Group Limited, The Henry Booth Group
Limited, BemroseBooth Limited, HBGI Holdings Limited, Bemrose
Security & Promotional Printing Limited and New England Extrusion
Inc.




Off-Balance Sheet
Arrangements.Appleton 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 December 29, 2007.




Disclosures about
Contractual Obligations, Commercial Commitments and Contingencies. A
summary of Appleton’s significant contractual obligations, commercial
commitments and contingencies as of December 29, 2007 is as
follows:




Payment
      Due by PeriodContractual
      Obligations
            
            Total
            
            
            Less
      Than 1 Year
            
            
            1-3
      Years
            
            
            4-5
      Years
            
            
            After
      5 Years(dollars
      in thousands)Long-term
      debt
            
            $
            542,243
            
            
            $
            3,138
            
            
            $
            6,175
            
            
            $
            156,445
            
            
            $
            376,485Capital
      lease obligation
            
            
            1,931
            
            
            
            620
            
            
            
            1,311
            
            
            
            —
            
            
            
            —Operating
      leases
            
            
            16,527
            
            
            
            5,670
            
            
            
            8,832
            
            
            
            2,025
            
            
            
            —Other
      long-term obligations (1)
            
            
            97,979
            
            
            
            32,559
            
            
            
            21,426
            
            
            
            8,540
            
            
            
            35,454Total
      contractual cash obligations
            
            $
            658,680
            
            
            $
            41,987
            
            
            $
            37,744
            
            
            $
            167,010
            
            
            $
            411,939





(1)
            Represents
      obligations for pension, postretirement health benefits, deferred
      compensation payments, severance payments and Appleton’s $25 million share
      of the Lower Fox River costs.




In
addition to the contractual obligations listed above, it will also be necessary
for Appleton to use cash to satisfy its 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 PeriodOther
      Commitments
              
              Total
              
              
              Less
      Than 1 Year
              
              
              1-3
      Years
              
              
              4-5
      Years(dollars
      in thousands)Estimated
      share repurchase liability
              
              $
              187,000
              
              
              $
              30,000
              
              
              $
              77,000
              
              
              $
              80,000




Appleton
expects 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, subject to certain
IRS limitations, equal to between 2 percent and 50 percent of their annual
compensation. Participants have the option of directing their deferrals to the
401(k) Fund, the Company Stock Fund or a combination of both. Appleton believes
that new deferrals from employees into the Company Stock Fund for the five-year
period presented above will aggregate approximately $35 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 30 or
December 31. 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 PDC
common stock on the valuation date preceding or following the date on which the
participant made the deferrals, whichever is lower.


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Collective
Bargaining Agreements




Appleton’s
collective bargaining agreement with the United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service Workers
International Union (“USW”) for employees at the Roaring Spring facility covers
approximately 368 employees and expired in November 2007. Appleton is in the
process of negotiating a new collective bargaining agreement with the USW and is
currently operating under a day-to-day extension of the expired contract. The
outcome of these collective bargaining negotiations cannot presently be
determined. If Appleton is unable to reach an agreement with the USW regarding
the terms of a collective bargaining agreement, the Roaring Spring facility may
be subject to work interruptions or stoppages that could materially impact
Appleton’s financial results.




Disclosures About
Certain Trading Activities that Include Non-Exchange Traded Contracts Accounted
for at Fair Value.Appleton does 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. There were no significant
transactions with related and certain other parties.




Disclosures
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 management 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 the 2007 Notes to
Consolidated Financial Statements. The following policies are considered by
management 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 position
and cash flows. Management has discussed the development, selection and
disclosure of these estimates and assumptions with the audit committee and board
of directors.




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 or remedies being used could
significantly change those estimates. Accordingly, we cannot give any assurances
that our eventual environmental cleanup costs and liabilities will not exceed
the amount of the current reserve.




Redeemable Common
Stock. Redeemable equity securities are required to be accreted 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 $5.9 million for the year ended
December 29, 2007. Redeemable common stock is being accreted up to the
earliest redemption date, mandated by federal law, based upon our estimated fair
market value of the redeemable common stock as of December 29, 2007. We
estimate that the earliest redemption date, as mandated by federal law, 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 State Street Global Advisors, 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 $371
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 four specified criteria and
has been communicated to employees as appropriate. 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.




A
liability for costs to terminate a contract before the end of its term is
recognized and measured at its fair value when the contract is terminated 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 to use 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.


35
 Table of Contents




Income
Taxes. In conjunction with the acquisition of Appleton, we elected to be
treated as a subchapter S corporation and elected to treat our eligible
subsidiaries, including Appleton, as qualified subchapter S subsidiaries for
U.S. federal and, where recognized, state and local income tax purposes. As a
result of these elections, we expect to incur no future U.S. income tax
liability and expect minimal state and local income tax liabilities. The
American Plastics and C&H Packaging subsidiaries acquired in 2003, as well
as New England Extrusion, acquired in January 2005, are eligible for such
treatment. Appleton’s Canadian subsidiary, Appleton Papers Canada Ltd. is not
eligible for treatment as a qualified subchapter S subsidiary. As a result, we
will incur a foreign tax liability. Appleton’s income tax reserve at
December 29, 2007 covers various audit issues and provisions for certain
non-U.S. entities. All U.S. federal C corporation tax years are closed, except
to the extent that we have refund claims outstanding in those years. Various
Canadian tax years and various state and local C corporation tax years remain
open.




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 the
majority of 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.Goodwill and intangible assets with indefinite
lives must be 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 secure and specialized print services and performance
packaging reporting units using a fair value method based on management’s
judgments and assumptions. The fair value represents the amount at which a
reporting unit could be bought or sold in a current transaction between willing
parties on an arms length basis. In estimating the fair value, we consider
discounted cash flow projections, multiples of earnings of comparable entities
with similar operations and economic characteristics as well as the results of
the independent third-party valuations performed in conjunction with our ESOP
share price valuation. The estimated fair value is then compared with the
carrying amount of the reporting units, including recorded goodwill. We are
subject to financial statement risk to the extent that the carrying amount
exceeds the estimated fair value. The impairment testing performed at
December 29, 2007 indicated that the estimated fair value of the
performance packaging reporting 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 at December 29, 2007
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 reporting 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 in the future.




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; collectability 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. Appleton generally does not invoice its customers for
shipping and handling fees. Related costs are classified as selling, general and
administrative expenses.




Sales Returns and
Allowances. A
reserve is established for expected sales returns and allowances. The amount of
the reserve is based on historic sales and returns and allowances data, which is
analyzed by product line and market channel to determine average returns and
allowances as a percent of gross sales. This percentage is applied to recent
sales activity and is adjusted, as necessary, for any significant known claims
or trends.


36
 Table of Contents




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 the selection of certain assumptions used by our
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. In
accordance with accounting principles generally accepted in the United States of
America, actual results that differ from the 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. Significant differences in actual
experience or significant changes in assumptions may materially affect our
pension and other postretirement obligations and our future expense. As of
December 29, 2007 we adopted Statement of Financial Accounting Standards
(“SFAS”) 158, “Employers’ Accounting for Defined Benefit Pension and other
Postretirement Plans-an amendment of FASB Statements 87, 88, 106 and 132
(R).”




Environmental
and Legal Matters




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 storm water,
storage, treatment and disposal of materials and waste, remediation of soil,
surface water and groundwater contamination and liability for damages to natural
resources.




Compliance
with these laws and regulations is an important factor in our business. We
expect to incur capital expenditures of approximately $1.2 million in 2008 and a
total of approximately $19.4 million from 2009 through 2012, and to continue to
incur expenditures after 2012, in order to maintain compliance with applicable
federal, state, local and foreign environmental laws and regulations and to meet
new regulatory requirements. For example, several of our facilities are subject
to MACT regulations under the Clean Air Act for Industrial/Commercial Boilers
and Process Heaters, which regulations may require significant expenditures to
achieve compliance with new emissions limitations. The projected capital
expenditures required to achieve MACT compliance are included in the projected
capital expenditures set forth above.




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 PRP, at one site for which
our liability may be significant, the Lower Fox River site, which is described
elsewhere, although it is possible that we could be named as a PRP for
additional sites in the future.




We are
involved from time to time in certain administrative and judicial proceedings
and inquiries related to environmental matters. For a discussion of these
environmental matters, see “Item 1. Business – Environmental” and Note 18 to the
Consolidated Financial Statements. Furthermore, we may be subject to various
demands, claims, suits or other legal proceedings arising in the ordinary course
of our business. We have successfully defended such claims, settling some for
amounts which are not material to our business and obtaining dismissals in
others. While we vigorously defend ourselves and expect to prevail 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.




Other
than the Lower Fox River matter described in “Item 1. Business – Environmental,”
and assuming our expectations regarding defending such demands, claims, suits or
other legal or regulatory proceedings prove accurate, we do not believe that any
pending or threatened demands, claims, suits or other legal or regulatory
proceedings will have, individually or in the aggregate, a materially adverse
effect on our financial position, results of operations or cash
flows.




In 1996,
Appleton was named as a defendant in a lawsuit and subsequently notified its
insurance carriers of a coverage claim under policies in effect at the time. The
lawsuit ultimately was resolved with the plaintiff and Appleton recovering
expenses from three of four insurers. The fourth insurer disputed coverage and
obligation to reimburse Appleton for its share of the litigation costs. Appleton
sued the insurer and in 2007 received a Wisconsin state appellate court decision
directing a trial court judgment in its favor. The trial court issued a decision
on our pending motions on February 19, 2008 authorizing judgment in favor of
Appleton. This trial court decision is still subject to further appeal; however,
there is a reasonable likelihood that Appleton will collect the judgment and
that it will have a material effect on the Company’s consolidated financial
statements upon final resolution.




37
 Table of Contents




New Accounting
Pronouncements




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
157, “Fair Value Measurements.” SFAS 157 provides a single definition of fair
value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. SFAS
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Fair value refers to the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. The standard clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing the asset or
liability. In support of this principle, the standard establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for example, the reporting
entity’s own data. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy. These provisions
are effective for financial statements issued for years beginning after
November 15, 2007. We are currently evaluating the impact, if any, on our
financial statements.




In
September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements
87, 88, 106 and 132(R).” SFAS 158 requires the Company to recognize the
overfunded or underfunded status of its defined benefit and retiree medical
plans as an asset or liability on the 2007 year-end balance sheet with changes
in the funded status recognized through accumulated other comprehensive income
in the year in which they occur. These provisions of SFAS 158 were adopted by
the Company effective December 29, 2007. Additionally, SFAS 158 requires the
Company to measure the funded status of a plan as of the date of its year-end no
later than 2008.




Item 7A.
            Quantitative and Qualitative Disclosures About Market
      Risk




Appleton
is 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
senior credit facility. Primary exposure includes movements in the U.S. prime
rate and London Interbank Offered Rate, or LIBOR. Borrowings under the senior
credit facility bear interest at LIBOR plus a spread.




Currency Risk.Appleton maintains a sales organization and distribution facility in
Canada and makes investments and enters into transactions denominated in foreign
currencies. Although the majority of international sales are denominated in U.S.
dollars, an increasing portion of international sales are denominated in foreign
currencies with the effect that Appleton is increasingly exposed to
translational foreign exchange risk in coming years.




Appleton
has entered into limited foreign exchange contracts to reduce the variability of
the earnings and cash flow impacts of nonfunctional currency denominated
activities between its Canadian distribution center and customers located
outside the United States. Gains and losses resulting from hedging instruments
offset the foreign exchange gains or losses on the underlying items being
hedged. Maturities of forward exchange contracts generally coincide with
settlement dates of related transactions. Forward exchange contracts are
designated as cash flow hedges in accordance with SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities.” At December 29, 2007,
Appleton had outstanding $15.3 million of foreign exchange contracts hedging
underlying accounts receivable. A 10% appreciation or depreciation in the
Canadian dollar at December 29, 2007 would not have a significant impact on
Appleton’s consolidated balance sheet, consolidated statement of operations or
consolidated statement of cash flows.




Commodity Prices.Appleton is subject to the effects of changing raw material costs caused
by movements in underlying commodity prices. Appleton is exposed to fluctuating
market prices for commodities, including pulp, chemicals and base stock, and has
established programs to manage exposure to commodity prices through effective
negotiations with suppliers. As noted our contractual obligations, Appleton
enters into contracts with our vendors to lock in commodity prices at various
times and for various periods to limit near-term exposure to fluctuations in raw
material prices.


38
 Table of Contents




Item 8.
            Financial Statements and Supplementary
      Data




1. Report of Independent Registered Public Accounting
Firm




To the
Shareholder and Board of Directors of PDC Corp. and Subsidiaries:




In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of redeemable common
stock, accumulated deficit, accumulated other comprehensive (loss) income and
comprehensive (loss) income present fairly, in all material aspects, the
financial position of Paperweight Development Corp. and its subsidiaries at
December 29, 2007 and December 30, 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 29, 2007 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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 Notes 2, 15 and 16 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 158, “Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106 and 132(R),” effective December 29,
2007.




/s/
PricewaterhouseCoopers LLP




PricewaterhouseCoopers
LLP


Milwaukee,
Wisconsin


March 5,
2008




39
 Table of Contents


2.  Financial
      Statements





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDecember
      29, 2007 and December 30, 2006(dollars
      in thousands, except share data)2007
            
            
            2006ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            44,838
            
            
            $
            19,975Accounts
      receivable, less allowance for doubtful accounts of $1,480 and $2,047,
      respectively
            
            
            116,762
            
            
            
            113,671Inventories
            
            
            124,078
            
            
            
            126,864Other
      current assets
            
            
            12,210
            
            
            
            25,429Assets
      of discontinued operations
            
            
            36,731
            
            
            
            38,982Total
      current assets
            
            
            334,619
            
            
            
            324,921Property,
      plant and equipment, net of accumulated depreciation of $353,975 and
      $300,562, respectively
            
            
            393,742
            
            
            
            398,202Goodwill
            
            
            50,246
            
            
            
            50,246Intangible
      assets, net
            
            
            77,340
            
            
            
            89,803Environmental
      indemnification receivable
            
            
            165,198
            
            
            
            58,031Other
      assets
            
            
            24,617
            
            
            
            20,765Assets
      of discontinued operations
            
            
            57,646
            
            
            
            74,155Total
      assets
            
            $
            1,103,408
            
            
            $
            1,016,123LIABILITIES,
      REDEEMABLE COMMON STOCK,
              ACCUMULATED
      DEFICIT AND
              ACCUMULATED
      OTHER COMPREHENSIVE INCOME (LOSS)Current
      liabilitiesCurrent
      portion of long-term debt
            
            $
            3,138
            
            
            $
            6,384Accounts
      payable
            
            
            82,621
            
            
            
            62,976Accrued
      interest
            
            
            4,688
            
            
            
            2,610Restructuring
      reserve
            
            
            398
            
            
            
            1,914Other
      accrued liabilities
            
            
            80,950
            
            
            
            82,490Liabilities
      of discontinued operations
            
            
            21,685
            
            
            
            26,482Total
      current liabilities
            
            
            193,480
            
            
            
            182,856Senior
      secured notes payable
            
            
            221,625
            
            
            
            189,149Variable
      rate industrial development bonds
            
            
            8,650
            
            
            
            8,650State
      of Ohio assistance loan
            
            
            8,780
            
            
            
            -Capital
      lease obligation
            
            
            1,311
            
            
            
            1,931Postretirement
      benefits other than pension
            
            
            47,436
            
            
            
            57,180Accrued
      pension
            
            
            16,857
            
            
            
            29,880Environmental
      liability
            
            
            173,353
            
            
            
            83,031Other
      long-term liabilities
            
            
            5,483
            
            
            
            6,335Liabilities
      of discontinued operations
            
            
            20,750
            
            
            
            14,940Senior
      notes payable
            
            
            150,050
            
            
            
            167,600Senior
      subordinated notes payable
            
            
            150,000
            
            
            
            157,000Commitments
      and contingencies  (Note 18)
            
            
            -
            
            
            
            -Redeemable
      common stock, $0.01 par value, shares authorized: 30,000,000, shares
      issued and outstanding: 11,116,751 and 11,550,231,
      respectively
            
            
            182,040
            
            
            
            190,466Accumulated
      deficit
            
            
            (80,086
            )
            
            
            (67,885
            )Accumulated
      other comprehensive income (loss)
            
            
            3,679
            
            
            
            (5,010
            )Total
      liabilities, redeemable common stock, accumulated
              deficit
      and accumulated other comprehensive income (loss)
            
            $
            1,103,408
            
            
            $
            1,016,123





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


40
 Table of Contents





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
    OPERATIONS(dollars
      in thousands)For
      the
            
            
            For
      the
            
            
            For
      theYear
      Ended
            
            
            Year
      Ended
            
            
            Year
      EndedDecember
      29, 2007
            
            
            December
      30, 2006
            
            
            December
      31, 2005Net
      sales
            
            $
            963,240
            
            
            $
            973,655
            
            
            $
            934,266Cost
      of sales
            
            
            733,738
            
            
            
            732,603
            
            
            
            703,796Gross profit
            
            
            229,502
            
            
            
            241,052
            
            
            
            230,470Selling,
      general and administrative expenses
            
            
            177,275
            
            
            
            179,671
            
            
            
            177,220Restructuring
      and other charges
            
            
            1,445
            
            
            
            2,161
            
            
            
            7,405Operating
      income
            
            
            50,782
            
            
            
            59,220
            
            
            
            45,845Other
      expense (income)Interest expense
            
            
            48,943
            
            
            
            49,186
            
            
            
            49,590Debt extinguishment expenses
            
            
            1,185
            
            
            
            -
            
            
            
            -Interest income
            
            
            (2,681
            )
            
            
            (903
            )
            
            
            (892
            )Foreign exchange (gain) loss
            
            
            (1,112
            )
            
            
            (513
            )
            
            
            902Income
      (loss) from continuing operations before income taxes
            
            
            4,447
            
            
            
            11,450
            
            
            
            (3,755
            )Provision
      for income taxes
            
            
            253
            
            
            
            633
            
            
            
            548Income
      (loss) from continuing operations
            
            
            4,194
            
            
            
            10,817
            
            
            
            (4,303
            )Discontinued
      operations(Loss) income from discontinued operations, net of income
      taxes
            
            
            (10,501
            )
            
            
            528
            
            
            
            1,289Net
      (loss) income
            
            $
            (6,307
            )
            
            $
            11,345
            
            
            $
            (3,014
            )





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


41
 Table of Contents


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
  FLOWS


(dollars
      in thousands)





For
      the Year
              Ended
              December
      29, 2007
            
            
            For
      the Year
              Ended
              December
      30, 2006
            
            
            For
      the Year
              Ended
              December
      31, 2005Cash
      flows from operating activities:Net
      (loss) income
            
            $
            (6,307
            )
            
            $
            11,345
            
            
            $
            (3,014
            )Adjustments
      to reconcile net (loss) income to net cashprovided
      by operating activities:Depreciation
            
            
            62,679
            
            
            
            66,319
            
            
            
            69,666Amortization
      of intangible assets
            
            
            15,649
            
            
            
            9,436
            
            
            
            10,178Amortization
      of financing fees
            
            
            3,048
            
            
            
            2,800
            
            
            
            2,084Employer
      401(k) noncash matching contributions
            
            
            6,658
            
            
            
            6,798
            
            
            
            7,889Foreign
      exchange (gain) loss
            
            
            (1,204
            )
            
            
            (267
            )
            
            
            904Loss
      on disposals of equipment
            
            
            2,400
            
            
            
            1,232
            
            
            
            1,636Accretion
      of capital lease obligation
            
            
            152
            
            
            
            189
            
            
            
            223Accretion
      of environmental liability
            
            
            -
            
            
            
            -
            
            
            
            1,370Debt
      extinguishment expenses
            
            
            266
            
            
            
            -
            
            
            
            -Deferred
      income taxes
            
            
            959
            
            
            
            -
            
            
            
            -(Increase)/decrease
      in assets and increase/(decrease) in liabilitiesexcluding
      effects of business acquisitions:Accounts
      receivable
            
            
            7,107
            
            
            
            (12,679
            )
            
            
            677Inventories
            
            
            4,317
            
            
            
            5,329
            
            
            
            (9,036
            )Other
      current assets
            
            
            (1,504
            )
            
            
            (5,250
            )
            
            
            (6,564
            )Accounts
      payable and other accrued liabilities
            
            
            6,389
            
            
            
            23,610
            
            
            
            1,681Restructuring
      reserve
            
            
            (1,907
            )
            
            
            (4,292
            )
            
            
            1,119Accrued
      pension
            
            
            (5,999
            )
            
            
            (830
            )
            
            
            770Other,
      net
            
            
            (1,047
            )
            
            
            935
            
            
            
            (5,923
            )Net
      cash provided by operating activities
            
            
            91,656
            
            
            
            104,675
            
            
            
            73,660Cash
      flows from investing activities:Proceeds
      from sale of equipment
            
            
            44
            
            
            
            795
            
            
            
            40Acquisition
      of business, net of cash acquired
            
            
            -
            
            
            
            -
            
            
            
            (68,832
            )Restricted
      cash for mill expansion
            
            
            (7,369
            )
            
            
            -
            
            
            
            -Additions
      to property, plant and equipment
            
            
            (54,457
            )
            
            
            (36,462
            )
            
            
            (32,532
            )Net
      cash used by investing activities
            
            
            (61,782
            )
            
            
            (35,667
            )
            
            
            (101,324
            )Cash
      flows from financing activities:Payments
      of senior secured notes payable
            
            
            (196,095
            )
            
            
            (35,776
            )
            
            
            (17,441
            )Proceeds
      from senior secured notes payable
            
            
            225,000
            
            
            
            -
            
            
            
            -Payments
      of senior notes payable
            
            
            (17,550
            )
            
            
            (4,400
            )
            
            
            (13,000
            )Payments
      of senior subordinated notes payable
            
            
            (7,000
            )
            
            
            -
            
            
            
            -Proceeds
      from State of Ohio financing
            
            
            9,105
            
            
            
            -
            
            
            
            -Debt
      acquisition costs
            
            
            (2,321
            )
            
            
            -
            
            
            
            -Bond
      consent costs
            
            
            -
            
            
            
            (7,994
            )
            
            
            -Payments
      relating to capital lease obligation
            
            
            (731
            )
            
            
            (731
            )
            
            
            (675
            )Proceeds
      from revolving lines of credit
            
            
            73,996
            
            
            
            27,475
            
            
            
            75,000Payments
      of revolving lines of credit
            
            
            (74,182
            )
            
            
            (29,289
            )
            
            
            (73,000
            )Proceeds
      from issuance of redeemable common stock
            
            
            7,659
            
            
            
            8,238
            
            
            
            13,940Payments
      to redeem common stock
            
            
            (28,641
            )
            
            
            (27,118
            )
            
            
            (9,369
            )Increase
      in cash overdraft
            
            
            6,100
            
            
            
            1,870
            
            
            
            846Net
      cash used by financing activities
            
            
            (4,660
            )
            
            
            (67,725
            )
            
            
            (23,699
            )Effect
      of foreign exchange rate changes on cash and cash
    equivalents
            
            
            (351
            )
            
            
            270
            
            
            
            (153
            )Change
      in cash and cash equivalents
            
            
            24,863
            
            
            
            1,553
            
            
            
            (51,516
            )Cash
      and cash equivalents at beginning of period
            
            
            19,975
            
            
            
            18,422
            
            
            
            69,938Cash
      and cash equivalents at end of period
            
            $
            44,838
            
            
            $
            19,975
            
            
            $
            18,422





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


42
 Table of Contents


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF REDEEMABLE COMMON
      STOCK,ACCUMULATED
      DEFICIT, ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
              AND
      COMPREHENSIVE (LOSS) INCOME(dollars
      in thousands, except share data)Redeemable
      Common StockShares
              Outstanding
            
            
            Amount
            
            
            Accumulated
              Deficit
            
            
            Accumulated
              Other
              Comprehensive
              (Loss)
      Income
            
            
            Comprehensive
              (Loss)
      IncomeBalance,
      January 1, 2005
            
            
            11,647,005
            
            
            $
            159,329
            
            
            $
            (41,034
            )
            
            $
            (9,793
            )Comprehensive
      loss:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            (3,014
            )
            
            
            -
            
            
            $
            (3,014
            )Minimum
      pension liability adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (9,011
            )
            
            
            (9,011
            )Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,173
            )
            
            
            (7,173
            )Realized
      and unrealized gains on derivatives
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            123
            
            
            
            123Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (19,075
            )Issuance
      of redeemable common stock
            
            
            638,302
            
            
            
            17,398
            
            
            
            -
            
            
            
            -Redemption
      of redeemable common stock
            
            
            (347,247
            )
            
            
            (9,369
            )
            
            
            -
            
            
            
            -Accretion
      of redeemable common stock
            
            
            -
            
            
            
            17,934
            
            
            
            (17,934
            )
            
            
            -Balance,
      December 31, 2005
            
            
            11,938,060
            
            
            
            185,292
            
            
            
            (61,982
            )
            
            
            (25,854
            )Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            11,345
            
            
            
            -
            
            
            $
            11,345Minimum
      pension liability adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,082
            
            
            
            12,082Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,161
            
            
            
            8,161Realized
      and unrealized gains on derivatives
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            601
            
            
            
            601Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            32,189Issuance
      of redeemable common stock
            
            
            499,160
            
            
            
            15,044
            
            
            
            -
            
            
            
            -Redemption
      of redeemable common stock
            
            
            (886,989
            )
            
            
            (27,118
            )
            
            
            -
            
            
            
            -Accretion
      of redeemable common stock
            
            
            -
            
            
            
            17,248
            
            
            
            (17,248
            )
            
            
            -Balance,
      December 30, 2006
            
            
            11,550,231
            
            
            
            190,466
            
            
            
            (67,885
            )
            
            
            (5,010
            )Comprehensive
      income:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            (6,307
            )
            
            
            -
            
            
            $
            (6,307
            )Minimum
      pension liability adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,773
            
            
            
            12,773Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            884
            
            
            
            884Realized
      and unrealized losses onderivatives
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (523
            )
            
            
            (523
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            6,827Adjustment
      to initiallyadopt
      SFAS 158, net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,445
            )Issuance
      of redeemable common stock
            
            
            435,408
            
            
            
            14,321
            
            
            
            -
            
            
            
            -Redemption
      of redeemable common stock
            
            
            (868,888
            )
            
            
            (28,641
            )
            
            
            -
            
            
            
            -Accretion
      of redeemable common stock
            
            
            -
            
            
            
            5,894
            
            
            
            (5,894
            )
            
            
            -Balance,
      December 29, 2007
            
            
            11,116,751
            
            
            $
            182,040
            
            
            $
            (80,086
            )
            
            $
            3,679





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


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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








1.        BASIS
OF PRESENTATION AND NATURE OF OPERATIONS





The
accompanying consolidated financial statements, after the elimination of
intercompany accounts and transactions, include the accounts of Paperweight
Development Corp. (“PDC”) and its wholly-owned subsidiaries (collectively the
“Company”) for the years ended December 29, 2007, December 30, 2006 and December
31, 2005.





NATURE OF
OPERATIONS





Appleton
Papers Inc. (“Appleton”) is the primary operating subsidiary of PDC. Appleton
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. The Company has four reportable
segments:  coated solutions, thermal papers, security papers and
performance packaging (see Note 4 “Discontinued Operations”).





The
coated solutions segment includes carbonless paper which is used to make
multipart business forms such as invoices and credit card receipts. Appleton
also produces coated products for point-of-sale displays and other design and
print applications and offers customers custom coating solutions within this
segment. Appleton supplies coated solutions products to paper merchants,
business forms printers and paper converters. Sales within the coated solutions
segment accounted for approximately 59% of consolidated net sales in 2007, 59%
of consolidated net sales in 2006 and 63% of consolidated net sales in
2005.





The
thermal papers segment develops substrates for the transaction and item
identification markets. These products are widely used for point-of-sale
receipts and coupons; entertainment and transportation tickets; lottery and
gaming tickets; engineering, medical and industrial charts; tags for airline
baggage and retail applications; and label products for shipping, warehousing,
medical and clean-room applications. Appleton supplies thermal products to
printers and paper converters. Sales within the thermal papers segment accounted
for approximately 27% of consolidated net sales in 2007, 27% of consolidated net
sales in 2006 and 23% of consolidated net sales in 2005.





The
security papers segment produces products with security features that resist
forgery and counterfeiting. Appleton seeks to serve global markets with an
expanding portfolio of products incorporating security technologies such as
watermarks, taggants, embedded threads and fibers and machine-readable
technologies. The focus of the security papers segment is on checks and business
and government documents.





The
performance packaging segment produces single layer and multilayer polyethylene
films for packaging applications. It also prints and converts flexible plastic
packaging materials for customers in the food processing, household and
industrial products industries.





RELATIONSHIPS WITH FORMER
PARENT





At the
close of business on November 9, 2001, PDC and New Appleton LLC completed the
purchase of all the partnership interests of Arjo Wiggins Delaware General
Partnership (“AWDGP”) and its wholly-owned subsidiary, Appleton Papers
Inc.





In
conjunction with the acquisition, the Company entered into two indemnification
agreements under which Arjo Wiggins Appleton Limited (“AWA”), the former parent
of Appleton, agreed to indemnify PDC and PDC agreed to indemnify Appleton for,
and pay, the costs, expenses and liabilities related to certain governmental and
third-party environmental claims, referred to as the Fox River
Liabilities.





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 18 “Commitments and Contingencies”). The Company is responsible for
the $25 million of liabilities between $75 million and $100 million. AWA has
paid $71.2 million under the indemnification agreements through
2007.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





In
connection with the indemnification agreements, AWA purchased and fully paid for
indemnity claim insurance from an affiliate of American International Group,
Inc. ("AIG"). The AIG insurance policy is designed to provide up to $250 million
of coverage for Fox River Liabilities, subject to certain limitations defined in
the policy. AWA’s obligations to maintain indemnity claim insurance covering the
Fox River Liabilities are defined in and limited by the terms of the Fox River
AWA Environmental Indemnity Agreement, as amended. The Company believes the
financial resources of AWA in combination with the coverage available under the
AIG insurance policy will be sufficient to satisfy the Company’s ultimate
liability for remediation of the Lower Fox River.





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, in relation to the Fox River Liabilities, other than the $25 million
of liabilities between $75 million and $100 million. These arrangements assure
the ESOP Trustee and the Company’s lenders and investors that the Company will
not have to rely solely on AWA itself to make these payments. This arrangement
is working as designed.





Pursuant
to the purchase agreement relating to the acquisition of the Company, as amended
in, and as limited by the terms of, the purchase agreement, AWA and two of its
affiliates have agreed to indemnify the Company for certain losses resulting
from:  inaccuracies in the environmental representations and
warranties made by AWA and its affiliates; certain known environmental matters
that existed at the closing of the acquisition; environmental matters related to
the businesses of Newton Falls, Inc., Appleton Coated LLC and several other of
the Company's former affiliates and subsidiaries; and environmental matters
relating to the real property on which the Company's former Camp Hill,
Pennsylvania plant and current distribution center are located, which existed
prior to the Company's sale of the Camp Hill plant to a third
party.





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 years 2007, 2006 and 2005 were 52-week periods
ending on December 29, 2007, December 30, 2006 and December 31, 2005,
respectively.





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 analyses, 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 classifications have been revised to conform to
their current year presentation.





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. The Company generally does not invoice its customers for
shipping and handling fees, which are classified as selling, general and
administrative expenses and totaled approximately $54 million for fiscal 2007,
$55 million for fiscal 2006 and $50 million for fiscal 2005.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





DERIVATIVE FINANCIAL
INSTRUMENTS AND HEDGING ACTIVITIES





The
Company selectively uses financial instruments to manage some market risk from
changes in interest rates or foreign currency exchange rates.





The
Company follows the guidance of Statement of Financial Accounting Standards
(“SFAS”) 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended by SFAS 137, 138 and 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 income (loss), depending on whether the derivative is designated
and qualifies as part of a hedge transaction and, if so, the type of hedge
transaction.





The
Company selectively hedges forecasted transactions that are subject to foreign
exchange exposure using foreign currency exchange contracts. These instruments
are designated as cash flow hedges in accordance with SFAS 133 and are recorded
in 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 income (loss) and are
subsequently reclassified into earnings when the underlying transactions occur
and affect earnings. These contracts are highly effective in hedging the
variability in future cash flows attributable to changes in currency exchange
rates.





During
March 2006, Appleton entered into a three-year interest rate swap contract to
fix the interest rate at 7.16% on $100.0 million of its variable rate notes.
This instrument was designated as a cash flow hedge in accordance with SFAS 133
and was recorded on the consolidated balance sheet at fair value. Due to the
refinancing of these senior secured variable rate notes, this interest rate swap
was terminated and settled in May 2007, resulting in a gain of $0.1
million.





For the
years ended December 29, 2007, December 30, 2006 and December 31, 2005, the
amount recognized in earnings due to ineffectiveness of hedge transactions was
immaterial. The amount reported as realized and unrealized losses on derivatives
of $0.5 million for 2007, in accumulated other comprehensive income (loss),
represents the net loss on derivatives designated as cash flow hedges. The
amount reported as realized and unrealized gains on derivatives of $0.6 million
for 2006 and $0.1 million for 2005, in accumulated other comprehensive income
(loss), represents the net gain on derivatives designated as cash flow
hedges.





CASH
EQUIVALENTS





Cash
equivalents consist of funds invested in institutional money market funds with
daily liquidity. At December 29, 2007 and December 30, 2006, there were cash
overdrafts of approximately $19.6 million and $13.5 million, respectively, which
are included in accounts payable within the accompanying consolidated balance
sheets. At December 29, 2007, the Company had $7.4 million of restricted cash to
be used to fund a portion of the costs of acquiring and installing paper coating
and production equipment at the Company’s paper mill in West Carrollton, Ohio.
There was no restricted cash at the end of fiscal 2006.





INVENTORIES





Inventories
are stated at the lower of cost or market. Cost is determined using the last-in,
first-out (“LIFO”) method for the majority of 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 3 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 operating income.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





INTERNAL USE
SOFTWARE





Costs
incurred related to the development of internal use software are accounted for
in accordance with Statement of Position (“SOP”) 98-1, “Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use.”  SOP
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 no longer be indefinite. Other intangible assets
(patents, customer relationships, non-compete agreements and the remaining
registered trademarks) are amortized over their estimated useful lives of 1 to
25 years.





IMPAIRMENT OF GOODWILL AND
LONG-LIVED ASSETS





The
Company reviews the carrying value of goodwill for impairment annually or more
frequently if events or changes in circumstances indicate that the goodwill
might be impaired. This impairment analysis consists of a comparison of the fair
value of the related reporting unit with its carrying amount. If the carrying
amount of the reporting unit exceeds its fair value, a second step to test for
impairment will be performed.





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 the intangible asset with its carrying amount.
If the carrying amount of the asset exceeds its fair value, an impairment loss
would be recognized in an amount equal to that excess.





The
Company reviews the carrying value of intangible assets with definite lives and
other long-lived assets whenever events or changes in circumstances indicate
that the assets may be impaired. The fair value of the assets is based on an
analysis of the undiscounted future cash flows. If the carrying amount of the
asset exceeds the determined fair value, an impairment loss would be recognized
based upon anticipated discounted cash flows from the asset.





INCOME
TAXES





In
conjunction with the acquisition of Appleton, 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 and local income tax purposes and, therefore, the Company anticipates that
it will not incur any future U.S. federal income tax liability and minimal state
and local income tax liabilities.





Ineligible
subsidiaries account for income taxes in accordance with SFAS 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 years in which the differences are expected to
reverse. A valuation allowance is provided against deferred tax assets in those
circumstances where it is more likely than not that some or all of the deferred
tax asset may not be realized.





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 the capital lease obligation are
estimated based on market conditions and interest rates available to the Company
for similar financial instruments.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)





The
components of the non-owner changes in equity, or accumulated other
comprehensive income (loss), are as follows (dollars in thousands):





2007
            
            
            2006Minimum
      pension liability adjustment
            
            $
            --
            
            
            $
            (12,773
            )Adjustment
      to initially adopt SFAS 158, net of tax
            
            
            (4,445
            )
            
            
            --Foreign
      currency translation adjustment
            
            
            8,110
            
            
            
            7,226Realized
      and unrealized gains on derivatives
            
            
            14
            
            
            
            537$
            3,679
            
            
            $
            (5,010
            )





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 $10.6 million in 2007, $10.8 million in 2006 and $16.1 million in
2005.





ACCOUNTING
PRONOUNCEMENTS





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
157, “Fair Value Measurements.”  SFAS 157 provides a single definition
of fair value, together with a framework for measuring it, and requires
additional disclosure about the use of fair value to measure assets and
liabilities. SFAS 157 also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Fair value refers to the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants in the market in which the
reporting entity transacts. The standard clarifies the principle that fair value
should be based on the assumptions market participants would use when pricing
the asset or liability. In support of this principle, the standard establishes a
fair value hierarchy that prioritizes the information used to develop
assumptions. The fair value hierarchy gives the highest priority to quoted
prices in active markets and the lowest priority to unobservable data, for
example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. These provisions are effective for financial statements issued for
years beginning after November 15, 2007. PDC is currently evaluating the impact,
if any, on its financial statements.




In
September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements
87, 88, 106 and 132(R).” SFAS 158 requires the Company to recognize the
overfunded or underfunded status of its defined benefit and retiree medical
plans as an asset or liability on the 2007 year-end balance sheet with changes
in the funded status recognized through accumulated other comprehensive income
in the year in which they occur. These provisions of SFAS 158 were adopted by
the Company effective December 29, 2007. Additionally, SFAS 158 requires the
Company to measure the funded status of a plan as of the date of its year-end no
later than 2008.





3.        ACQUISITION
OF BUSINESS





On
January 11, 2005, the Company acquired New England Extrusion, a company that
produces single and multilayer polyethylene films for packaging applications.
Simultaneously with the acquisition, New England Extrusion became a guarantor
under the senior credit facility, the senior note indenture and senior
subordinated note indentures. The purchase price for this acquisition, net of
cash acquired, approximated $68.8 million including the assumption of certain
liabilities. It was financed with cash from operations supplemented with
borrowings under the revolving credit portion of the Company’s senior credit
facility. The Company obtained an independent appraisal to allocate the purchase
price to the acquired net assets. The excess of the purchase price over the
estimated fair value of the acquired net assets was allocated to goodwill.
Goodwill of approximately $26.7 million was assigned to the Company’s
performance packaging segment. New England Extrusion has been included in the
Company’s consolidated financial statements since the date of the
acquisition.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





The
acquisition was accounted for using the purchase method in accordance with SFAS
141, “Business Combinations.” The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed, excluding cash acquired
(dollars in thousands):





As
      of Acquisition DateCurrent
      assets
            
            $
            8,756Property,
      plant and equipment
            
            
            14,075Intangible
      assets
            
            
            21,250Goodwill
            
            
            26,717Total
      assets acquired
            
            $
            70,798Current
      liabilities
            
            $
            1,966Total
      liabilities assumed
            
            $
            1,966Net
      assets acquired
            
            $
            68,832








4.        DISCONTINUED
OPERATIONS





Late in
2007, Appleton committed to a formal plan to sell Bemrose Group Limited
(“Bemrose”), its secure and specialized print services business based in Derby,
England. Bemrose is a leading U.K. provider of mission critical security and
specialized print services. At the time of its acquisition in December 2003,
Bemrose was expected to provide Appleton with a new product entry in the U.K.
security print market, with opportunities to expand into the U.S. market. After
conducting a strategic review in the fourth quarter of 2007, Appleton has
decided to focus its attention on core businesses and expand its leadership
positions in those markets. The operating results of this business for the years
ended December 29, 2007, December 30, 2006 and December 31, 2005 have been
reclassified and are now reported separately as discontinued
operations.







The following table presents the net
sales and (loss) income before income taxes of Bemrose (dollars in
thousands):





For
      the Year Ended
              December
      29, 2007
            
            
            For
      the Year Ended
              December
      30, 2006
            
            
            For
      the Year Ended
              December
      31, 2005Net
      sales
            
            $
            113,343
            
            
            $
            113,726
            
            
            $
            111,990(Loss) income
      before income taxes
            
            
            (9,542
            )
            
            
            (309
            )
            
            
            384





During
the fourth quarter of 2007, Appleton determined it was more likely than not that
the deferred tax asset recorded at Bemrose would not be recoverable due to
recent operating losses at Bemrose and management’s forecast for this business.
As a result, Appleton established a valuation allowance against the net deferred
tax asset as of December 29, 2007, resulting in a tax provision of $1.0
million.





At
December 29, 2007, Appleton adopted SFAS 158. With respect to Bemrose, an $8.0
million charge to accumulated other comprehensive income (loss) was recorded in
order to fully recognize the underfunded status of the defined benefit plan of
this business.





In
accordance with SFAS 142, “Goodwill and Other Intangible Assets,” Appleton
performed its annual goodwill assessment during the fourth quarter of 2007 and
determined a goodwill impairment of $7.0 million existed at Bemrose.
Additionally, as a result of the planned sale of Bemrose, the Company performed
an impairment review of other long-lived assets in accordance with SFAS 144 and
determined an impairment of $1.0 million existed. These impairment charges are
recorded in discontinued operations.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





In
addition, Appleton reclassified the assets and liabilities of Bemrose as
discontinued operations in the accompanying consolidated balance sheets, the
major classes of which are detailed in the following table (dollars in
thousands):





2007
            
            
            2006Current
      assets
            
            $
            36,731
            
            
            $
            38,982Property,
      plant and equipment, net
            
            
            28,921
            
            
            
            34,507Other
      long-term assets
            
            
            28,725
            
            
            
            39,648Current
      liabilities
            
            
            (21,685
            )
            
            
            (26,482
            )Other
      long-term liabilities
            
            
            (20,750
            )
            
            
            (14,940
            )Net
      assets of discontinued operations
            
            $
            51,942
            
            
            $
            71,715





Bemrose
was previously reported as a separate reportable segment.





5.        GOODWILL
AND OTHER INTANGIBLE ASSETS





The
Company reviews the carrying value of goodwill and intangible assets with
indefinite lives for impairment annually or more frequently if events or changes
in circumstances indicate that an asset might be impaired. At December 29, 2007,
Appleton recorded a $7.0 million charge associated with goodwill impairment at
Bemrose (see Note 4 “Discontinued Operations”). Amortization is recorded for
intangible assets with determinable lives. The carrying amount of goodwill for
each of the years ended December 29, 2007 and December 30, 2006 was $50.2
million and was assigned entirely to the performance packaging
segment.





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





As
      of December 29, 2007
            
            
            As
      of December 30, 2006Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Gross
      Carrying Amount
            
            
            Accumulated
      AmortizationAmortizable
      intangible assets:Trademarks
            
            $
            49,255
            
            
            $
            16,652
            
            
            $
            51,733
            
            
            $
            14,277Patents
            
            
            30,979
            
            
            
            29,920
            
            
            
            32,630
            
            
            
            26,903Customer
      relationships
            
            
            26,024
            
            
            
            5,261
            
            
            
            26,296
            
            
            
            3,956Non-compete
      agreements
            
            
            932
            
            
            
            882
            
            
            
            932
            
            
            
            786Subtotal
            
            
            107,190
            
            
            $
            52,715
            
            
            
            111,591
            
            
            $
            45,922Unamortizable
      intangible assets:Trademarks
            
            
            22,865
            
            
            
            
            
            
            
            24,134Total
            
            $
            130,055
            
            
            
            
            
            
            $
            135,725





Of the
$130.1 million of acquired intangible assets, $72.1 million was assigned to
registered trademarks. Trademarks of $44.6 million related to carbonless paper
and $4.6 million related to the Company’s 2003 and 2005 acquisitions are being
amortized over their estimated useful life of 20 years, while the remaining
$22.9 million are considered to have an indefinite life and, as such, are not
subject to amortization. The remaining acquired intangible assets are being
amortized over their estimated useful lives ranging from 3 to 25 years for
patents and customer relationships and 1 to 5 years for non-compete
agreements.





Amortization
expense for the year ended December 29, 2007 approximated $6.8 million.
Amortization expense for the years ended December 30, 2006 and December 31,
2005, approximated $8.2 million and $9.0 million, respectively. Excluding the
impact of any future acquisitions, the Company anticipates that annual
amortization of intangible assets will approximate $4.4 million for 2008, $3.8
million for 2009, $3.6 million for 2010, $3.6 million for 2011 and $3.6 million
for 2012.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





During
first quarter 2007, Appleton received formal notice from the Internal Revenue
Service that it agreed to settle Appleton’s refund claims filed for tax years
1999 and 2000. The total amount of the refund was $6.3 million, of which, $5.2
million was a refund of income tax paid and $1.1 million was interest. As this
refund related to tax periods prior to the November 9, 2001 acquisition date,
the $5.2 million was recorded as a reduction in purchase price via a decrease to
long-lived intangible assets. Of the $1.1 million of interest, approximately
$1.0 million pertained to the accrual of interest subsequent to the acquisition
date, and as such, was included in first quarter 2007 interest income. The
remaining $0.1 million of interest earned was related to tax periods prior to
the acquisition date and was also recorded as a reduction in purchase price via
a decrease to long-lived intangible assets. This refund was received by Appleton
in early April. During second quarter 2007, Appleton filed claims for the
corresponding state income tax refunds. The total amount of these refund claims
is $0.4 million, of which, $0.3 million is a refund of state income tax paid and
$0.1 million is interest. As this refund also related to tax periods prior to
the acquisition date, $0.3 million of tax and interest has been recorded as a
reduction in purchase price via a decrease to long-lived intangible assets. The
remaining $0.1 million of interest pertained to the accrual of interest
subsequent to the acquisition date and is included in second quarter 2007
interest income.





6.        RESTRUCTURING
AND OTHER CHARGES





In order
to position itself for long-term growth, the Company reduced salaried employment
in the U.S. by 94 employees during fiscal 2005, 21 employees during fiscal 2006
and 13 employees during fiscal 2007. These reductions included positions at the
corporate headquarters as well as the plant, mill and acquisition sites. As a
result, the Company recorded a charge of $1.1 million in 2007, $1.3 million in
2006 and $6.7 million in 2005 for employment termination benefits. During 2007,
the Company paid $1.6 million related to these employment termination benefits,
liabilities for which were incurred in years 2007 and prior. During 2006, the
Company paid $3.5 million related to these employment termination benefits,
liabilities for which were incurred in years 2006 and prior. See Note 23 for
allocation of restructuring charges by segment.





In 1999,
the Company committed to exiting its New York 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 expired in July 2007. During
2007, $0.3 million of additional restructuring expense was recorded for repairs
to be made to the facility in accordance with the expiration terms of the lease
agreement. This was in addition to the additional reserve of $0.9 million
recorded during fiscal 2006. The $1.3 million and $1.9 million usage against the
distribution center exit cost reserve during 2007 and 2006, respectively,
represents lease payments and repairs. As of December 29, 2007, $0.2 million
remained in this reserve for future costs of additional repairs the landlord may
require Appleton to make.





The
tables below summarize the components of the restructuring reserve included in
the consolidated balance sheets for the years ended December 29, 2007 and
December 30, 2006 (dollars in thousands):





December
      30,
            
            
            2007
      Additions
            
            
            2007
            
            
            December
      29,2006
      Reserve
            
            
            to
      Reserve
            
            
            Utilization
            
            
            2007
      ReserveDistribution
      center exit costs
            
            $
            1,194
            
            
            $
            351
            
            
            $
            (1,345
            )
            
            $
            200U.S.
      employee termination benefits
            
            
            720
            
            
            
            1,094
            
            
            
            (1,616
            )
            
            
            198$
            1,914
            
            
            $
            1,445
            
            
            $
            (2,961
            )
            
            $
            398








December
      31,
            
            
            2006
      Additions
            
            
            2006
            
            
            December
      30,2005
      Reserve
            
            
            to
      Reserve
            
            
            Utilization
            
            
            2006
      ReserveDistribution
      center exit costs
            
            $
            2,181
            
            
            $
            885
            
            
            $
            (1,872
            )
            
            $
            1,194U.S.
      employee termination benefits
            
            
            2,957
            
            
            
            1,276
            
            
            
            (3,513
            )
            
            
            720$
            5,138
            
            
            $
            2,161
            
            
            $
            (5,385
            )
            
            $
            1,914





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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





7.        INVENTORIES





Inventories
consist of the following (dollars in thousands):





2007
            
            
            2006Finished
      goods
            
            $
            67,596
            
            
            $
            68,941Raw
      materials, work in process and supplies
            
            
            66,575
            
            
            
            67,196134,171
            
            
            
            136,137Inventory
      reserve
            
            
            (3,736
            )
            
            
            (5,592
            )130,435
            
            
            
            130,545LIFO
      reserve
            
            
            (6,357
            )
            
            
            (3,681
            )$
            124,078
            
            
            $
            126,864





Stores
and spare parts inventory balances of $22.0 million in 2007 and $22.4 million in
2006 are valued at average cost and are included in raw materials, work in
process and supplies. Inventories valued using the FIFO method approximate 12%
of the Company’s total inventory balance at December 29, 2007 and 13% at
December 30, 2006.





8.        PROPERTY,
PLANT AND EQUIPMENT





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





2007
            
            
            2006Land
      and improvements
            
            $
            9,603
            
            
            $
            9,545Buildings
      and improvements
            
            
            95,421
            
            
            
            91,819Machinery
      and equipment
            
            
            560,323
            
            
            
            533,067Software
            
            
            33,779
            
            
            
            32,502Capital
      lease
            
            
            4,764
            
            
            
            4,764Construction
      in progress
            
            
            43,827
            
            
            
            27,067747,717
            
            
            
            698,764Accumulated
      depreciation/amortization
            
            
            (353,975
            )
            
            
            (300,562
            )$
            393,742
            
            
            $
            398,202





9.        OTHER
ASSETS





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





2007
            
            
            2006Deferred
      debt issuance costs
            
            $
            13,900
            
            
            $
            15,811Restricted
      cash for mill expansion
            
            
            7,369
            
            
            
            --Other
            
            
            3,348
            
            
            
            4,954$
            24,617
            
            
            $
            20,765





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





10.        OTHER
ACCRUED LIABILITIES





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





2007
            
            
            2006Payroll
      and bonus
            
            $
            19,596
            
            
            $
            21,865Trade
      discounts
            
            
            22,044
            
            
            
            25,672Workers’
      compensation
            
            
            4,306
            
            
            
            3,165Accrued
      insurance
            
            
            2,087
            
            
            
            912Other
      accrued taxes
            
            
            2,299
            
            
            
            2,734Postretirement
      benefits other than pension
            
            
            3,283
            
            
            
            2,863Fox
      River Liabilities
            
            
            20,645
            
            
            
            18,200Other
            
            
            6,690
            
            
            
            7,079$
            80,950
            
            
            $
            82,490








11.        LONG-TERM
OBLIGATIONS





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





2007
            
            
            2006Senior
      secured variable rate notes payable at LIBOR plus 2.25%, settled in June
      2007
            
            $
            --
            
            
            $
            195,533Senior
      secured variable rate notes payable at LIBOR plus 1.75%, $563 duequarterly
      with $209,812 due June 5, 2014
            
            
            224,438
            
            
            
            --224,438
            
            
            
            195,533Less
      obligations due within one year
            
            
            (2,813
            )
            
            
            (6,384
            )221,625
            
            
            
            189,149Unsecured
      variable rate industrial development bonds, 3.9% average
      interestrate
      at December 29, 2007, $2,650 due in 2013 and $6,000 due in
      2027
            
            
            8,650
            
            
            
            8,650State
      of Ohio assistance loan at 6%, approximately $100 due monthly
      andfinal
      payment due May 15, 2017
            
            
            9,105
            
            
            
            --Less
      obligations due within one year
            
            
            (325
            )
            
            
            --8,780
            
            
            
            --Senior
      notes payable at 8.125%, due June 15, 2011
            
            
            150,050
            
            
            
            167,600Senior
      subordinated notes payable at 9.75%, due June 15, 2014
            
            
            150,000
            
            
            
            150,000Senior
      subordinated notes payable at 12.5%, settled in December
    2007
            
            
            --
            
            
            
            7,000





In
December 2007, Appleton redeemed the remaining $7.0 million of its 12.5% senior
subordinated notes due December 15, 2008, paying par, plus accrued
interest.





During
fourth quarter 2007, Appleton purchased $12.1 million, plus interest, of the
8.125% senior notes payable due June 15, 2011. This purchase was made in three
separate blocks of $7.1 million, $3.0 million and $2.0 million with Appleton
purchasing at discounts of 1.5%, 1.75% and 1.75%, respectively. During the third
quarter of 2007, Appleton purchased $5.5 million, plus interest, of the 8.125%
senior notes payable due June 15, 2011. This purchase was made in four separate
blocks of $0.3 million, $0.2 million, $3.0 million and $2.0 million with
Appleton purchasing at discounts of 0.75%, 0.75%, 0.25% and par,
respectively.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





In July
2007, Appleton entered into a new $12.1 million Loan and Security Agreement with
the Director of Development of the State of Ohio, consisting of a $9.1 million
State Assistance Loan and a $3.0 million State Loan (together “the Ohio Loans”).
Proceeds of the Ohio Loans will be used to fund a portion of the costs of
acquiring and installing paper coating and production equipment at the Company’s
paper mill in West Carrollton, Ohio. As of the end of 2007, Appleton had only
received the proceeds of the $9.1 million State Assistance Loan. To date, the
Company has spent $1.7 million of these proceeds with the remaining $7.4 million
recorded as restricted cash within long-term other assets as its use is
restricted to funding capital additions. The Ohio State Assistance Loan provides
for monthly principal payments and interest at 6% and, upon receipt of the
funds, the State Loan provides for monthly principal payments and interest of 1%
for the first two years and 3% thereafter.





In June
2007, Appleton entered into a new $375 million senior secured credit facility
consisting of a seven-year, $225 million term loan bearing interest at a base
rate, or at LIBOR, at Appleton’s option, plus an applicable margin, which is
initially set at 0.75% for base rate loans and 1.75% for LIBOR loans.
Mandatory principal payments of $0.6 million are due quarterly with the
remaining balance due June 5, 2014. It also provides access to a six-year, $150
million revolving credit facility. The new senior credit facility is
unconditionally guaranteed by PDC and by substantially all of Appleton’s
subsidiaries, other than certain immaterial subsidiaries. In addition, it is
secured by liens on substantially all Appleton’s, the subsidiary guarantors’ and
certain of Appleton’s other subsidiaries’ assets and by a pledge of Appleton’s
and its subsidiaries’ capital stock. These funds were used to repay the $190.7
million of previous senior secured variable rate notes, plus interest of $1.9
million, as well as the $7.5 million outstanding amount borrowed against the
previous $125 million line of credit, plus interest. As a result of this
refinancing, $0.3 million of deferred debt issuance costs related to the
previous senior credit facility were written off. Financing fees of $2.1 million
were also incurred, of which, $0.9 million was recorded as expense in Appleton’s
statement of operations and $1.2 million was capitalized as deferred debt
issuance costs and will be amortized over the term of the new senior credit
facility. During 2007, Appleton made a mandatory debt repayment of $0.6 million,
plus interest, on this senior secured credit facility.





Prior to
the refinancing discussed above, Appleton made a $4.4 million excess cash flow
payment, plus interest, and a $0.5 million mandatory debt repayment, plus
interest, on its previous senior credit facility. During first quarter 2007,
Appleton borrowed $23.0 million against its revolving line of credit. By the end
of the quarter, this $23.0 million was repaid. During the second quarter of
2007, Appleton borrowed $44.5 million against its revolving line of credit. This
was repaid prior to the refinancing.





During
2006, Appleton made mandatory debt repayments totaling $2.2 million, plus
interest, voluntary debt repayments totaling $28.0 million, plus interest, and a
$5.6 million excess cash flow payment, plus interest, on its previous senior
secured credit facility.





During
the third quarter of 2006, Appleton purchased $0.1 million, plus interest, of
the 8.125% senior notes payable due June 15, 2011. These notes were purchased at
a 0.25% discount. During the fourth quarter of 2006, Appleton purchased another
$4.3 million, plus interest, of these 8.125% senior notes payable. This purchase
was made in three separate blocks of $0.5 million, $3.0 million and $0.8 million
with the Company paying par, a premium of 0.5% and a premium of 0.25%,
respectively.





During
the second quarter of 2006, Appleton successfully completed a consent
solicitation to amend certain provisions of the indentures governing its 8.125%
senior notes due 2011 and 9.75% senior subordinated notes due 2014 to, among
other things, modify the restricted payments covenants of the indentures, allow
changes to the documentation for the ESOP that are not reasonably likely to
result in a material adverse change to Appleton, and provide for additional
interest on the 8.125% senior notes and 9.75% senior subordinated notes in
certain circumstances pertaining to ESOP-related payments. As a result, Appleton
was able to make in the second quarter of 2006, and expects to continue to make,
required ESOP stock distributions without violating the covenant limitations of
the indentures governing the 8.125% senior notes and the 9.75% senior
subordinated notes. In consideration for the consent, Appleton paid to the
consenting noteholders a consent fee of $25.00 for each $1,000 principal amount
of 8.125% senior notes and 9.75% senior subordinated notes, resulting in an $8.0
million payment. This amount was capitalized as debt issuance costs and will be
amortized over the remaining life of the notes. An additional $1.3 million was
incurred in bank and legal fees and has been expensed in the Company’s
consolidated statement of operations for the year ending December 30,
2006.





During
March 2006, Appleton fixed the interest rate, at 7.16%, on $100.0 million of the
previous term loan principal with a three-year interest rate swap contract. Due
to the refinancing of the previous senior secured variable rate notes, this
interest rate swap was terminated and settled in May 2007 resulting in a gain of
$0.1 million.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





The
senior notes due 2011 and senior subordinated notes due 2014 are
unconditionally, jointly and severally guaranteed by PDC, C&H Packaging
Company, Inc., American Plastics Company, Inc., Rose Holdings Limited, Bemrose
Group Limited, The Henry Booth Group Limited, BemroseBooth Limited, HBGI
Holdings Limited, Bemrose Security & Promotional Printing Limited and New
England Extrusion Inc. (see Note 24 “Guarantor Financial
Information”).





The
senior credit facility, senior notes and 9.75% senior subordinated notes contain
affirmative and negative covenants. In general, the covenants contained in the
senior credit facility are more restrictive than those of the senior notes and
9.75% senior subordinated notes. Among other restrictions, the covenants
contained in the senior credit facility require Appleton to meet specified
financial tests, including leverage and interest coverage ratios, which become
more restrictive over the term of the debt.





The
senior credit facility, senior notes and 9.75% senior subordinated notes also
contain covenants, which, among other things, restrict Appleton’s ability and
the ability of Appleton’s other guarantors of the senior credit facility, senior
notes and 9.75% 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; terminate the S corporation status of PDC or the
qualified subchapter S subsidiary status of its subsidiaries eligible to elect
such status; amend its debt instruments; amend or terminate the ESOP; amend
other agreements related to the transaction with AWA; repay other indebtedness;
use assets as security in other transactions; enter into sale and leaseback
transactions; sell equity interests in our subsidiaries; and engage in new lines
of business.





At the
end of 2007, there was approximately $135.3 million of unused borrowing capacity
under the $150 million revolving credit facility for working capital and other
corporate purposes. Approximately $14.7 million of the revolving credit facility
was used to support outstanding letters of credit. A commitment fee of 0.35% per
annum is assessed on the unused borrowing capacity. At December 30, 2006, there
was approximately $112.2 million of unused borrowing capacity under the previous
$125 million revolving credit facility. Approximately $12.8 million of the
revolving credit facility was used to support outstanding letters of credit. A
commitment fee of 0.5% per annum was assessed on the unused borrowing
capacity.





Scheduled
repayment of principal on long-term obligations outstanding at December 29, 2007
is as follows (dollars in thousands):





2008
            
            $
            3,1382009
            
            
            3,0652010
            
            
            3,1102011
            
            
            153,2202012
            
            
            3,225Thereafter
            
            
            376,485$
            542,243





12.        INCOME
TAXES





In
conjunction with the acquisition of Appleton, 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 and local income tax purposes. As a result, its tax provision includes
only foreign and minimal state and local income taxes. For fiscal 2007 the
Company recorded a net tax provision of $0.3 million primarily for U.S. state
and local income taxes. For fiscal 2006 the Company recorded a net tax provision
of $0.6 million which related primarily to the Company’s Canadian subsidiary.
For fiscal 2005 the Company recorded a net tax provision of $0.5 million which
included a $0.6 million tax provision recorded by the Company’s Canadian
subsidiary.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





During
first quarter 2007, Appleton received formal notice from the Internal Revenue
Service that it agreed to settle Appleton’s refund claims filed for tax years
1999 and 2000. The total amount of the refund was $6.3 million, of which, $5.2
million was a refund of income tax paid and $1.1 million was interest. As this
refund related to tax periods prior to the November 9, 2001 acquisition date,
the $5.2 million was recorded as a reduction in purchase price via a decrease to
long-lived intangible assets. Of the $1.1 million of interest, approximately
$1.0 million pertained to the accrual of interest subsequent to the acquisition
date, and as such, was included in first quarter 2007 interest income. The
remaining $0.1 million of interest earned was related to tax periods prior to
the acquisition date and was also recorded as a reduction in purchase price via
a decrease to long-lived intangible assets. This refund was received by Appleton
in early April. During second quarter 2007, Appleton filed claims for the
corresponding state income tax refunds. The total amount of these refund claims
is $0.4 million, of which, $0.3 million is a refund of state income tax paid and
$0.1 million is interest. As this refund also related to tax periods prior to
the acquisition date, $0.3 million of tax and interest has been recorded as a
reduction in purchase price via a decrease to long-lived intangible assets. The
remaining $0.1 million of interest pertained to the accrual of interest
subsequent to the acquisition date and is included in second quarter 2007
interest income.





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 been resolved or the corresponding years have been closed to audit.
All U.S. Federal C corporation tax years are closed. As such, as of December 29,
2007, accrued income taxes have been reduced by $24.3 million and,
correspondingly, intangible assets were decreased by $24.3 million. The
provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes – and Interpretation of FASB Statement 109,” were adopted by the Company
in the beginning of 2007 and did not have a significant effect on its financial
statements. Various Canadian and state tax years remain open. Reserves for
uncertain tax positions, as they relate to these matters, are
insignificant.





13.        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. Total rent expense was $7.5 million for 2007, $8.2 million
for 2006 and $8.4 million for 2005.





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





2007
            
            
            2006Building
            
            $
            4,764
            
            
            $
            4,764Less
      accumulated depreciation
            
            
            (3,191
            )
            
            
            (2,666
            )$
            1,573
            
            
            $
            2,098








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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





Future
minimum lease payments as of December 29, 2007 under leases that have initial or
remaining non-cancelable terms in excess of one year are as follows (dollars in
thousands):





Capital
            
            
            OperatingLease
            
            
            Leases2008
            
            $
            731
            
            
            $
            5,6702009
            
            
            731
            
            
            
            5,4642010
            
            
            670
            
            
            
            3,3682011
            
            
            --
            
            
            
            1,0662012
            
            
            --
            
            
            
            959Thereafter
            
            
            --
            
            
            
            --Total
      minimum lease payments
            
            
            2,132
            
            
            $
            16,527Less
      amounts representing interest
            
            
            (201
            )Present
      value of minimum lease
              payments
      under capital lease
            
            
            1,931Less
      current principal portion
            
            
            (620
            )$
            1,311








14.        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):





December
      29, 2007
            
            
            December
      30, 2006Carrying
            
            
            Fair
            
            
            Carrying
            
            
            FairFinancial
      Instruments
            
            Amount
            
            
            Value
            
            
            Amount
            
            
            ValueSenior
      subordinated notes payable
            
            $
            150,000
            
            
            $
            148,500
            
            
            $
            157,000
            
            
            $
            161,050Senior
      notes payable
            
            
            150,050
            
            
            
            147,237
            
            
            
            167,600
            
            
            
            171,371Senior
      credit facility
            
            
            224,438
            
            
            
            212,655
            
            
            
            195,533
            
            
            
            195,533State
      of Ohio assistance loan
            
            
            9,105
            
            
            
            9,378
            
            
            
            --
            
            
            
            --Industrial
      development bonds
            
            
            8,650
            
            
            
            8,650
            
            
            
            8,650
            
            
            
            8,650$
            542,243
            
            
            $
            526,420
            
            
            $
            528,783
            
            
            $
            536,604Lease
      obligation
            
            $
            1,931
            
            
            $
            1,931
            
            
            $
            2,510
            
            
            $
            2,510





The
senior subordinated notes payable, the senior notes payable, the senior credit
facility and the State of Ohio assistance loan are traded in public markets and,
therefore, the fair value was determined based on quoted market prices. The
industrial development bonds have a variable interest rate that reflects current
market terms and conditions. The fair value of the lease obligation was
determined based on current rates available to the Company for financial
instruments of the same remaining maturity and similar terms.





15.        EMPLOYEE
BENEFITS





The
Company has various defined benefit pension plans and defined contribution
pension plans. This includes a Supplemental Executive Retirement Plan (“SERP”)
to provide retirement benefits for management and other highly compensated
employees whose benefits are reduced by the tax-qualified plan limitations of
the pension plan for eligible salaried employees. Regarding its U.S. pension
plans, the Company utilized a November 30 measurement date for fiscal 2007 and
fiscal 2006. The status of these plans, including a reconciliation of benefit
obligations, a reconciliation of plan assets and the funded status of the plans,
as well as the key assumptions used in accounting for the plans, is shown below
(dollars in thousands):





57
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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)








Pension
      Benefits
            
            2007
            
            
            2006Change
      in benefit obligationBenefit
      obligation at beginning of period
            
            $
            300,263
            
            
            $
            288,503Service
      cost
            
            
            7,640
            
            
            
            7,531Interest
      cost
            
            
            16,926
            
            
            
            16,271Plan
      amendments
            
            
            --
            
            
            
            128Actuarial
      (gain) loss
            
            
            (13,747
            )
            
            
            1,603Curtailment
      gain
            
            
            (9,797
            )
            
            
            --Benefits
      and expenses paid
            
            
            (14,548
            )
            
            
            (13,773
            )Benefit
      obligation at end of period
            
            $
            286,737
            
            
            $
            300,263Change
      in plan assetsFair
      value at beginning of period
            
            $
            246,979
            
            
            $
            226,530Actual
      return on plan assets
            
            
            27,938
            
            
            
            28,222Employer
      contributions
            
            
            9,301
            
            
            
            6,000Benefits and expenses paid
            
            
            (14,548
            )
            
            
            (13,773
            )Fair
      value at end of period
            
            $
            269,670
            
            
            $
            246,979Funded
      status of plansFunded
      status at end of period
            
            $
            (17,067
            )
            
            $
            (53,284
            )UnrecognizedNet
      actuarial loss
            
            
            --
            
            
            
            36,497Prior
      service cost
            
            
            --
            
            
            
            2,541Net
      liability
            
            $
            (17,067
            )
            
            $
            (14,246
            )Amounts
      recognized in the consolidated balancesheet
      consist of:Accrued
      benefit liability-current
            
            $
            (210
            )
            
            $
            --Accrued
      benefit liability-noncurrent
            
            
            (16,857
            )
            
            
            (29,880
            )Intangible
      asset
            
            
            --
            
            
            
            2,861Minimum
      pension liability
            
            
            --
            
            
            
            12,773Net
      amount recognized
            
            $
            (17,067
            )
            
            $
            (14,246
            )Key
      assumptions at end of period (%)Discount
      rate
            
            
            6.25
            
            
            
            5.75Rate
      of compensation increase
            
            
            4.00
            
            
            
            3.50








The
amounts in accumulated other comprehensive income (loss) on the consolidated
balance sheet, net, that have not yet been recognized as components of net
periodic benefit cost at December 29, 2007 are as follows (dollars in
thousands):





Accumulated
      other comprehensive lossNet
      actuarial loss
            
            $
            (1,992
            )Prior
      service cost
            
            
            (1,953
            )Total
            
            $
            (3,945
            )





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





The
incremental effect of adopting SFAS 158 on individual line items in the December
29, 2007 consolidated balance sheet are shown below (dollars in
thousands):





Before
      Adoption
            
            
            
            
            
            After
      Adoptionof
      SFAS 158
            
            
            Adjustments
            
            
            of
      SFAS 158Accrued
      benefit cost
            
            $
            13,122
            
            
            $
            3,945
            
            
            $
            17,067





The
amount in accumulated other comprehensive loss that is expected to be recognized
as a component of net periodic benefit cost over the next fiscal year is
$192,000 of prior service cost amortization.





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





For
      the
            
            
            For
      the
            
            
            For
      theYear
      Ended
            
            
            Year
      Ended
            
            
            Year
      EndedDecember
      29,
            
            
            December
      30,
            
            
            December
      31,Pension
      Benefits
            
            2007
            
            
            2006
            
            
            2005Net
      periodic benefit costService
      cost
            
            $
            7,640
            
            
            $
            7,531
            
            
            $
            7,785Interest
      cost
            
            
            16,926
            
            
            
            16,271
            
            
            
            15,680Expected
      return on plan assets
            
            
            (18,863
            )
            
            
            (17,458
            )
            
            
            (17,089
            )Amortization
      ofPrior
      service cost
            
            
            226
            
            
            
            216
            
            
            
            216Actuarial
      loss
            
            
            1,886
            
            
            
            2,236
            
            
            
            1,692Curtailment
      charge
            
            
            363
            
            
            
            --
            
            
            
            --Net
      periodic benefit cost
            
            $
            8,178
            
            
            $
            8,796
            
            
            $
            8,284Key
      assumptions (%)Discount
      rate
            
            
            5.75
            
            
            
            5.75
            
            
            
            6.00Expected
      return on plan assets
            
            
            8.25
            
            
            
            8.25
            
            
            
            8.25Rate
      of compensation increase
            
            
            3.50
            
            
            
            3.50
            
            
            
            4.00





Expected
future benefit payments are as follows (dollars in thousands):





2008
            
            $
            13,3842009
            
            
            14,0302010
            
            
            14,7692011
            
            
            15,6062012
            
            
            16,5282013
      thru 2017
            
            
            98,986$
            173,303





As of the
Company’s 2007 and 2006 measurement dates, the approximate asset allocations by
asset category for the Company’s U.S. pension plan were as follows:





November
      30, 2007
            
            
            November
      30, 2006U.S.
      Equity
            
            
            50
            %
            
            
            52
            %International
      Equity
            
            
            4
            
            
            
            4Private
      Equity
            
            
            3
            
            
            
            3Emerging
      Market Equity
            
            
            6
            
            
            
            6High
      Yield
            
            
            6
            
            
            
            5Fixed
      Income
            
            
            24
            
            
            
            24Real
      Estate
            
            
            7
            
            
            
            6Total
            
            
            100
            %
            
            
            100
            %





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)








The
Company’s Benefits Finance Committee (the “Committee”) is, among other things,
charged with monitoring investment performance. The Committee periodically
reviews fund performance and asset allocations. The plan trustee makes 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
      U.S. Equity (including private equity)
            
            
            53
            %Total
      International Equity
            
            
            8
            %Real
      Estate
            
            
            7
            %Bonds
            
            
            32
            %





The
Company contracts with an investment advisor to assist it and the members of 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
plan advisor’s future expectations for the U.S. Treasury real yield curve. Based
on the assumptions and methodology described above, the Company has selected
8.25% for both 2007 and 2006 as its long-term rate of return on assets
assumption.




To
develop the discount rate, a yield curve was generated based on a universe of
over 500 AA graded non-callable bonds available in the market as of November 30,
2007. Then projected cash flows from Appleton’s plans were matched to spot rates
along that yield curve to determine their present value. Finally, a single
equivalent discount rate is calculated that produces the same present value as
the spot rates. The universe of bonds included in the calculation of the
discount rate are those with average yields between the 40th and
90th
percentiles. Based on the methodology described above, Appleton has selected a
discount rate of 6.25% for the pension plans.




Effective
January 1, 2008, the Company amended the Appleton Papers Inc. Retirement Plan
(the “Plan”) to provide that no individuals hired or re-hired on or after
January 1, 2008, shall be eligible to participate in the Plan. Also, plan
benefits accrued under the Plan will be frozen as of April 1, 2008, with respect
to Plan participants who elect to participate in a “Mandatory Profit Sharing
Contribution” under the Appleton Papers Inc. Retirement Savings and Employee
Stock Ownership Plan (the “KSOP”) or January 1, 2015, in the case of any other
Plan participants. These changes resulted in curtailment expense of $0.4 million
in fiscal 2007 and a reduction in the pension benefit obligation of $9.8
million.




The
Company expects to contribute approximately $10 million to its U.S. pension plan
in fiscal 2008 for plan year 2007. 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 December 29, 2007,
the accumulated benefit obligation for the defined benefit plans was
approximately $277.4 million. At December 30, 2006, the accumulated benefit
obligation for the deferred benefit plans was approximately $276.9
million.




Certain
of Appleton’s hourly employees participate in a multi-employer defined benefit
plan. Appleton’s cost for this plan amounted to $1.4 million in 2007, $1.2
million in 2006 and $1.1 million in 2005. The Company has not recorded a
liability for the unfunded amount related to this plan as the liability cannot
be reasonably estimated.




A new
deferred compensation plan, named the Executive Nonqualified “Excess” Plan of
Appleton Papers Inc., effective on February 1, 2006, was established for highly
compensated employees including all directors and executive officers. Salaried
employees, with base salaries of $100,000 and over, are eligible to participate
in the plan. This plan was established for the purpose of allowing a tax-favored
option for saving for retirement when the IRS limits the ability of highly
compensated employees to participate under tax-qualified plans. This new plan
allows for deferral of compensation on a pre-tax basis and accumulation of
tax-deferred earnings. Participants in the plan may choose to have deferrals
increased or decreased based on the performance of a selection of mutual funds.
No assets are actually set aside to fund the Company’s obligation under this new
plan. The non-employee directors are also allowed to participate in this
plan.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





16.        POSTRETIREMENT
BENEFIT PLANS OTHER THAN PENSIONS





The
Company has defined postretirement benefit plans that provide medical, dental
and life insurance for certain retirees and eligible dependents. The Company
utilized a November 30 measurement date for fiscal 2007 and fiscal 2006. 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):





Other
      Postretirement Benefits
            
            2007
            
            
            2006Change
      in benefit obligationBenefit
      obligation at beginning of period
            
            $
            46,205
            
            
            $
            46,083Service
      cost
            
            
            834
            
            
            
            844Interest
      cost
            
            
            2,590
            
            
            
            2,596Actuarial
      loss (gain)
            
            
            4,208
            
            
            
            (402
            )Benefits
      and expenses paid
            
            
            (3,118
            )
            
            
            (2,916
            )Benefit
      obligation at end of period
            
            $
            50,719
            
            
            $
            46,205Funded
      status of plansFunded
      status at end of period
            
            $
            (50,719
            )
            
            $
            (46,205
            )Unrecognized
      prior service cost
            
            
            --
            
            
            
            (14,771
            )Net
      actuarial loss
            
            
            --
            
            
            
            933Accrued
      benefit cost
            
            $
            (50,719
            )
            
            $
            (60,043
            )Amounts
      recognized in the consolidated balance sheet consist of:Accrued
      benefit liability-current
            
            $
            (3,283
            )
            
            $
            (2,863
            )Accrued
      benefit liability-noncurrent
            
            
            (47,436
            )
            
            
            (57,180
            )Net
      amount recognized
            
            $
            (50,719
            )
            
            $
            (60,043
            )Key
      assumptions at end of periodDiscount
      rate
            
            
            6.10
            %
            
            
            5.75
            %Valuation
      year medical trend
            
            
            10.00
            %
            
            
            10.00
            %Ultimate
      medical trend
            
            
            5.00
            %
            
            
            5.00
            %Year
      ultimate medical trend reached
            
            2012
            
            
            2012





To
develop the discount rate, a yield curve was generated based on a universe of
over 500 AA graded non-callable bonds available in the market as of November 30,
2007. Then, projected cash flows from Appleton’s plans were matched to spot
rates along that yield curve to determine their present value. Finally, a single
equivalent discount rate is calculated that produces the same present value as
the spot rates. The universe of bonds included in the calculation of the
discount rate are those with average yields between the 40th and
90th
percentiles. Based on the methodology described above, Appleton has selected a
discount rate of 6.10% for the postretirement benefit plan.




The
November 30, 2007 accumulated postretirement benefit obligation (“APBO”) was
determined using assumed medical care cost trend rates of 10% decreasing one
percent each year to an ultimate rate of 5% in 2012. The November 30, 2006 APBO
was determined using medical care cost trend rates of 11% decreasing one percent
each year to an ultimate rate of 5% in 2012.




The
amounts in accumulated other comprehensive income (loss) in the consolidated
balance sheet, net, that have not yet been recognized as components of net
periodic benefit cost at December 29, 2007 are as follows (dollars in
thousands):





Accumulated
      other comprehensive incomeNet
      actuarial loss
            
            $
            (5,140
            )Prior
      service credit
            
            
            12,615Total
            
            $
            7,475








61
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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





The
incremental effect of adopting SFAS 158 on individual line items in the December
29, 2007 consolidated balance sheet are shown below (dollars in
thousands):





Before
      Adoption
            
            
            
            
            
            After
      Adoptionof
      SFAS 158
            
            
            Adjustments
            
            
            of
      SFAS 158Accrued
      benefit cost
            
            $
            58,194
            
            
            $
            (7,475
            )
            
            $
            50,719








The
amount in accumulated other comprehensive income expected to be recognized as
components of net periodic benefit cost over the next fiscal year is shown below
(dollars in thousands):








Amortization
      of:Net
      actuarial loss
            
            $
            3Prior
      service credit
            
            
            (2,156
            )Total
            
            $
            (2,153
            )








As of
January 1, 2005, the Company implemented plan amendments, which included capping
company contributions for a portion of its salaried retirees and moving a
portion of both salaried and hourly retirees to managed care programs (which
include HMOs and PPOs).





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





Other
      Postretirement Benefits
            
            For
      the
              Year
      Ended
              December
      29,
              2007
            
            
            For
      the
              Year
      Ended
              December
      30,
              2006
            
            
            For
      the
              Year
      Ended
              December
      31,
              2005Net
      periodic benefit costService
      cost
            
            $
            834
            
            
            $
            844
            
            
            $
            838Interest
      cost
            
            
            2,590
            
            
            
            2,596
            
            
            
            3,103Amortization
      of prior service cost
            
            
            (2,156
            )
            
            
            (2,156
            )
            
            
            (2,064
            )Amortization
      of net actuarial loss
            
            
            --
            
            
            
            --
            
            
            
            80Net
      periodic benefit cost
            
            $
            1,268
            
            
            $
            1,284
            
            
            $
            1,957





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





For
      the
              Year
      Ended
              December
      29,
              2007
            
            
            For
      the
              Year
      Ended
              December
      30,
              2006
            
            
            For
      the
              Year
      Ended
              December
      31,
              2005Discount
      rate
            
            
            5.75
            %
            
            
            5.75
            %
            
            
            6.00
            %Valuation
      year medical trend
            
            
            11.00
            %
            
            
            11.00
            %
            
            
            10.00
            %Ultimate
      medical trend
            
            
            5.00
            %
            
            
            5.00
            %
            
            
            5.00
            %Year
      ultimate medical trend reached
            
            2013
            
            
            2012
            
            
            2008





62
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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





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





1%
      Increase
            
            
            1%
      DecreaseAggregate
      impact on service and interest cost
            
            $
            99
            
            
            $
            (90
            )Effect
      on accumulated plan benefit obligation
            
            
            1,210
            
            
            
            (1,133
            )





Expected
postretirement benefit payments for each of the next five years, and the
aggregate from 2013 through 2017, are as follows (dollars in
thousands):





2008
            
            $
            3,2832009
            
            
            3,5242010
            
            
            3,7302011
            
            
            3,9732012
            
            
            4,1312013
      thru 2017
            
            
            22,417$
            41,058





17.        SHARE-BASED
COMPENSATION





In
December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive
Plan. In July 2002, the Company adopted the Appleton Papers Canada Ltd. Share
Appreciation Rights Plan. These plans provide officers and key employees the
opportunity to earn phantom stock units, the value of which is related to the
change in the fair market value of PDC’s common stock under the terms of the
employee stock ownership plan (the “ESOP”) prior to the grant date or the
exercise date, as applicable. As of December 29, 2007, the fair market value of
one share of PDC common stock was $33.41. The phantom stock units generally vest
after three years. Vested stock units may be exercised by the participant, in
whole or in part, at any time on or before the applicable unit expiration date.
Each plan year, phantom stock units may be exercised only during the two
exercise window periods as established by the Compensation Committee of the
Board of Directors and communicated in writing to the participants. The phantom
stock units shall expire, and cease to be exercisable, at the earliest of the
following times: (1) ten years after the grant date; (2) the close of the second
exercise window that occurs after the participant’s termination of employment
with the Company due to death, disability or retirement; (3) the close of the
first exercise window that occurs after the participant’s termination of
employment for any reason other than death, disability or retirement; or (4)
immediately on termination of employment with the Company for any reason, if the
phantom stock units are not vested as of the employment termination date. The
phantom stock units are settled in cash upon exercise.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





The
Company adopted SFAS 123R, “Share-Based Payment,” effective January 1, 2006. The
adoption did not have a significant impact on the Company as, consistent with
prior years, compensation expense for the phantom stock units is recognized
based on the intrinsic value of the vested units at the end of each period. Upon
adoption, the Company elected to recognize expense based on straight-line
vesting of the units. Compensation expense for these plans was $0.1 million in
2007, $2.8 million in 2006 and $1.1 million in 2005. Based on the Company’s
common stock unit price as of December 29, 2007, the Company had approximately
$0.5 million of total unrecognized compensation expense related to nonvested
phantom stock units granted under the plans. That expense is expected to be
recognized over a weighted-average period of 1.3 years. Since the inception of
the Plan, 1,761,670 share units have been granted, 444,193 shares have been
forfeited and 374,910 shares have been exercised, leaving an outstanding balance
of 942,567 shares. A summary of 2007 and 2006 activity within these plans is as
follows:








Weighted
              Average
      Grant
              Unit
      Price
            
            
            Grant
              Units
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)
            
            
            Aggregate
              Intrinsic
      Value
              (dollars
      in
              thousands)Outstanding,
      December 30, 2006
            
            $
            26.29
            
            
            
            840,117Granted
            
            
            33.62
            
            
            
            337,000Exercised
            
            
            22.39
            
            
            
            (119,017
            )Forfeited
      or expired
            
            
            28.47
            
            
            
            (115,533
            )Outstanding,
      December 29, 2007
            
            $
            29.13
            
            
            
            942,567
            
            
            
            7.9
            
            
            $
            4,034Exercisable,
      December 29, 2007
            
            $
            20.62
            
            
            
            129,050
            
            
            
            5.3
            
            
            $
            1,650Outstanding,
      December 31, 2005
            
            $
            23.52
            
            
            
            767,514Granted
            
            
            28.74
            
            
            
            331,750Exercised
            
            
            17.67
            
            
            
            (146,181
            )Forfeited
      or expired
            
            
            25.85
            
            
            
            (112,966
            )Outstanding,
      December 30, 2006
            
            $
            26.29
            
            
            
            840,117
            
            
            
            8.1
            
            
            $
            6,164Exercisable,
      December 30, 2006
            
            $
            21.41
            
            
            
            245,317
            
            
            
            6.4
            
            
            $
            2,997





During
2005, 91,462 units were exercised at an appreciation value of approximately $1.5
million. During 2006, 146,181 units were exercised at an appreciation value of
approximately $1.7 million. During 2007, 119,017 units were exercised at an
appreciation value of approximately $1.3 million. As of December 29, 2007, a
liability of approximately $3.6 million is included in the consolidated balance
sheet, of which, $1.6 million is classified as short-term and represents 129,050
fully vested units. An additional long-term liability of $2.0 million is
included in the consolidated balance sheet at December 29, 2007 to reserve for
the compensation liability accrued to date on the remaining units not yet fully
vested.





Beginning
in 2006, the Company established a nonqualified deferred compensation agreement
with each of its non-employee directors. Deferred compensation is in the form of
share units and is earned over the course of six-month calendar periods of
service beginning January 1 and July 1. The number of shares to be earned is
calculated using the established dollar value of the compensation divided by the
fair market value of one share of PDC common stock as established under the
terms of the ESOP as of the prior December 31 and June 30, respectively. This
deferred compensation vests coincidental with the board member’s continued
service on the Board. Upon cessation of service as a director, the deferred
compensation will be paid in five equal annual cash installments. During fiscal
year 2007, expense for this plan was approximately $0.2 million. During fiscal
year 2006, expense for this plan was approximately $0.2 million. Since the 2006
inception of the Plan, 9,964 share units have been earned and represent an
approximate liability of $0.3 million in the consolidated balance sheet as of
December 29, 2007.





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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





18.        COMMITMENTS
AND CONTINGENCIES





COMMITMENTS





Currently,
the Company is not bound by any contractual arrangements for the purchase of raw
materials whereby there is a future obligation to purchase set quantities. Any
such contracts that were in place during prior years have since
expired.





CONTINGENCIES





Lower
Fox River




Introduction.Various federal and state government agencies and Native American tribes
have asserted claims against Appleton and others with respect to historic
discharges of polychlorinated biphenyls (“PCBs”) into the Lower Fox River in
Wisconsin. The claims generally fall within three categories of potential
liability - remedial action, natural resource damages (“NRDs”) and interim
restoration and remediation – which are separately discussed below.




Carbonless
paper containing PCBs was manufactured at what is currently the Appleton plant
from 1954 until 1971. During this period wastewater containing PCBs was
discharged into the Lower Fox River from a publicly owned treatment works, from
the Appleton Coated paper mill and from other local industrial facilities.
Wastewater from the Appleton plant was processed through the publicly owned
treatment works. As a result, there are allegedly eleven million cubic yards of
PCB-contaminated sediment spread over 39 miles of the Lower Fox River and Green
Bay, which is part of Lake Michigan.




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




Remedial Action.The EPA and the Wisconsin Department of Natural Resources (“DNR”) issued
a Record of Decision (“ROD”) in 2003 covering the first two segments of the
river. P.H. Glatfelter and WTM I are managing remediation efforts in the first
segment and each contributed an initial $25.2 million to cover the costs of the
required remedial action. Appleton denies any responsibility or liability for
PCB contamination in the first segment.




The EPA
and DNR issued a second ROD in 2003 covering the third, fourth and fifth
segments of the Lower Fox River. NCR and Sonoco agreed to fund a remedial
project in the fourth segment at an estimated cost of $30 million. The total
costs for the Lower Fox River remedial action plans, as outlined in the two RODs
issued during 2003, were estimated to total approximately $400 million over a 7
to 18-year time period. Other estimates obtained by the PRPs range from a low of
$450 million to as much as $1.6 billion. More recent estimates place the cost
between $594 million and $900 million.




In
February 2007 the EPA issued a General Notice letter seeking to have one or more
of the PRPs enter into an agreement to implement all remaining remedial action
for segments two, three, four and five of the river. The EPA asked the PRPs to
submit a written proposal to conduct the remedial action as well as to address
various governmental agencies’ (“Intergovernmental Partners” or “IGP”)
additional claims for unreimbursed costs and NRDs. In June 2007, the EPA and DNR
issued an amended ROD which modified the remedial action plan for the Lower Fox
River.




Following
several months of discussions with PRPs, the EPA issued an administrative order
in November 2007, directing the PRPs to implement the remedial action of the Fox
River. In response, in December 2007, the PRPs submitted a work plan for the
clean up of the Fox River to the EPA. After a review, the EPA requested
modifications be incorporated into the work plan. As of early 2008, the PRPs are
negotiating to reach a funding arrangement to enable the work plan to be
implemented.




Appleton
and NCR filed a lawsuit in January 2008 in federal court against P.H. Glatfelter
Company, Menasha Corporation and George A. Whiting Paper Company in an
effort to require other PRPs to contribute to the cost of cleaning up PCB
contamination sediment in the Fox River.


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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)







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




Interim
Restoration and Remediation Consent Decree.Appleton and NCR collectively
paid $41.5 million for interim restoration and remediation efforts pursuant to a
2001 consent decree with the IGP. This consent decree expired in 2005. In
addition, Appleton and NCR collectively paid approximately $750,000 toward
interim restoration efforts and the preparation of a report analyzing progress
toward the restoration goals related to the Lower Fox River pursuant to a 2006
consent decree with the IGP. The 2006 consent decree expired in 2006. Appleton
and NCR paid $2.8 million in 2007 to fund a land acquisition in partial
settlement of NRD claims. Neither consent decree or the land acquisition
constitutes a final settlement nor provides protection against future claims;
however, Appleton and NCR will receive full credit against remediation costs and
NRD claims for all monies expended pursuant to the consent decrees.




Appleton’s
Liability.CERCLA imposes liability
on parties responsible for, in whole or in part, the presence of hazardous
substances at a site. Superfund liable parties can include both current and
prior owners and operators of a facility involved with the disposal of hazardous
substances. A PRP is potentially liable for cleanup costs, damages to natural
resources, costs of certain health assessments, and injunctive relief (i.e.,
performing a cleanup) where a site may present an imminent and substantial
endangerment. While any PRP may be held liable for the entire cleanup of a site,
the final allocation of liability among PRPs generally is determined by
negotiation, litigation or other dispute resolution processes.




Appleton
purchased the Appleton plant and the Combined Locks paper mill from NCR in 1978,
after the use of PCBs in the manufacturing process was discontinued.
Nonetheless, the EPA named both Appleton and NCR as PRPs in connection with
remediation of the Lower Fox River. In 1998, Appleton and NCR entered into an
interim settlement agreement under which the two companies agreed to share
defense and liability costs arising from the Lower Fox River. When the 1998
interim settlement agreement expires, Appleton’s and NCR’s continuing
indemnification obligations will be defined by an arbitration determination that
was obtained in January 2006.




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




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




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




Accordingly,
Appleton has recorded a reserve for its potential liability for the Lower Fox
River. At December 30, 2006, this reserve approximated $101.2 million.
During fiscal 2007, $19.5 million of payments were made from the reserve. In
addition, as the result of an analysis of Appleton’s estimated remaining
potential liability that was completed during 2007, the remediation reserve was
increased by $112.3 million. This resulted in a remaining reserve of $194.0
million as of December 29, 2007, of which $20.6 million is recorded in
other accrued liabilities and $173.4 million is recorded as a long-term
environmental liability.


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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)







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




•
            total
      remediation costs of $600 million, based on the most recent bids received
      with a range from $594 million to $900
million;




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




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




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




•
            $38
      million in fees and expenses through
2010.




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




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




Under the
indemnification agreements, Appleton is indemnified for the first $75 million of
Fox River Liabilities and for amounts in excess of $100 million. Appleton is
responsible for the $25 million of liabilities between $75 million and $100
million. Pursuant to these agreements, AWA paid $71.2 million in connection with
Fox River Liabilities through 2007.




At
December 29, 2007, the total indemnification receivable from AWA was $169.0
million, of which $3.8 million is recorded in other current assets and $165.2
million is recorded as an environmental indemnification receivable.




A summary
of the indemnification receivable/environmental liability for the years ended
December 29, 2007 and December 30, 2006 is provided below (dollars in
thousands):





Environmental
              Indemnification
              Receivable
            
            
            Environmental
              LiabilityBalance,
      December 31, 2005
            
            $
            71,012
            
            
            $
            (96,012
            )Establishment
      of additional indemnification receivable/environmental liability
      to
              update
      current estimate of remaining potential liability
            
            
            14,755
            
            
            
            (14,755
            )Payments
      made for indemnification receivable/environmental
liability
            
            
            (9,536
            )
            
            
            9,536Balance,
      December 30, 2006
            
            
            76,231
            
            
            
            (101,231
            )Establishment
      of additional indemnification receivable/environmental
      liability
              as
      a result of Appleton’s analysis of estimated remaining potential
      liability
            
            
            112,244
            
            
            
            (112,244
            )Payments
      made for indemnification receivable/environmental
liability
            
            
            (19,477
            )
            
            
            19,477Balance,
      December 29, 2007
            
            $
            168,998
            
            
            $
            (193,998
            )





In
connection with the indemnification agreements, AWA purchased and fully paid for
indemnity claim insurance from AIG. The AIG insurance policy is designed to
provide up to $250 million of coverage for Fox River Liabilities, subject to
certain limitations defined in the policy. AWA’s obligations to maintain
indemnity claim insurance covering the Fox River Liabilities are defined in and
limited by the terms of the Fox River AWA Environmental Indemnity Agreement, as
amended.


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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)







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




West
Carrollton Mill




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




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




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





Other





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





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





In 1996,
Appleton was named as a defendant in a lawsuit and subsequently notified its
insurance carriers of a coverage claim under policies in effect at the time. The
lawsuit ultimately was resolved with the plaintiff and Appleton recovering
expenses from three or four insurers. The fourth insurer disputed coverage and
obligation to reimburse Appleton for its share of the litigation costs. Appleton
sued the insurer and in 2007 received a Wisconsin state appellate court decision
directing a trial court judgment in its favor. The trial court issued a decision
on the pending motions on February 19, 2008 authorizing judgment in favor
of Appleton. This trial court decision is still subject to further appeal;
however, there is a reasonable likelihood that Appleton will collect the
judgment and that it will have a material effect on the Company’s consolidated
financial statements upon final resolution.




During
2006, the Company recorded a nonrecurring gain of approximately $2.0 million in
selling, general and administrative expenses for favorable insurance settlements
related to litigation matters.




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





19.        CONSOLIDATED
STATEMENTS OF CASH FLOWS





Supplemental
cash flow disclosures (dollars in thousands):





For
      the
              Year
      Ended
              December
      29,
              2007
            
            
            For
      the
              Year
      Ended
              December
      30,
              2006
            
            
            For
      the
              Year
      Ended
              December
      31,
              2005Cash
      paid during the period for:Interest
            
            $
            45,020
            
            
            $
            46,569
            
            
            $
            45,740Income
      taxes
            
            
            811
            
            
            
            659
            
            
            
            1,131Cash
      received during the period for:Income
      tax refunds
            
            $
            6,454
            
            
            $
            111
            
            
            $
            129








20.           CONCENTRATIONS
OF CREDIT AND OTHER RISKS





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 large
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 approximately 10% and 7% of net sales in
2007, 11% and 7% of net sales in 2006 and 12% and 8% of net sales in
2005.




Within
the technical papers business, the Company’s five largest customers in the
coated solutions segment accounted for approximately 38% of coated solutions net
sales in fiscal 2007, 41% of coated solutions net sales in fiscal 2006 and
approximately 45% of coated solutions net sales in fiscal 2005. The five largest
customers in the thermal papers segment accounted for approximately 39% of
thermal papers net sales in fiscal 2007, 39% of thermal papers net sales in
fiscal 2006 and approximately 42% of thermal papers net sales in fiscal 2005.
Sales to the Company’s five largest customers in the performance packaging
segment accounted for approximately 43% of total segment sales in fiscal 2007,
34% of total segment sales in fiscal 2006 and approximately 28% of total segment
sales in fiscal 2005.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





Base
stock is a key raw material in the Company’s business. During fiscal 2007, the
Company purchased approximately $121 million of base stock from external
suppliers. Approximately $49 million of this base stock was purchased for the
production of carbonless products with approximately 99% purchased from three
external suppliers. The Company purchased nearly $71 million of base stock for
the production of thermal products with approximately 65% purchased from a
single external supplier. During fiscal 2006, the Company purchased
approximately $126 million of base stock from external suppliers. Approximately
$54 million of this base stock was purchased for the production of carbonless
products with approximately 97% purchased from three external suppliers. The
Company purchased approximately $70 million of base stock for the production of
thermal products with nearly 72% purchased from a single external supplier.
During fiscal 2005, the Company purchased approximately $135 million of base
stock from external suppliers. Approximately $67 million of this base stock was
purchased for the production of carbonless products with nearly 94% purchased
from three external suppliers. The Company purchased approximately $63 million
of base stock for the production of thermal products with over 69% purchased
from a single external supplier.




Appleton’s
collective bargaining agreement with the United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service Workers
International Union (“USW”) for employees at the Roaring Spring facility covers
approximately 368 employees and expired in November 2007. Appleton is in the
process of negotiating a new collective bargaining agreement with the USW and is
currently operating under a day-to-day extension of the expired contract. The
outcome of these collective bargaining negotiations cannot presently be
determined. If Appleton is unable to reach an agreement with the USW regarding
the terms of a collective bargaining agreement, the Roaring Spring facility may
be subject to work interruptions or stoppages that could materially impact
Appleton’s financial results.





21.        EMPLOYEE
STOCK OWNERSHIP PLAN





The KSOP
includes a separate ESOP 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 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. 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 $7.1 million in 2007, $7.8 million in 2006 and
$7.9 million in 2005.





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. Covenants in the agreements providing for the senior credit
facility, the 8.125% senior notes due 2011 and the 9.75% senior subordinated
notes due 2014 restrict Appleton’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 conflict with the terms of the senior credit and
note agreements. During 2005, 2006 and 2007, Appleton exercised its right to
satisfy requests for distributions to former participants using five equal
annual installments.





In fiscal
2007, the ESOP trustee purchased 232,868 shares of PDC redeemable common stock
for an aggregate price of $7.7 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
202,540 shares of redeemable common stock being issued. As a result of hardship
withdrawals, diversification elections and employee terminations, 868,888 shares
of PDC redeemable common stock were repurchased during 2007 at an aggregate
price of $28.6 million.





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





In fiscal
2006, the ESOP trustee purchased 275,668 shares of PDC redeemable common stock
for an aggregate price of $8.2 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
223,492 shares of redeemable common stock being issued. As a result of hardship
withdrawals, diversification elections and employee terminations, 886,989 shares
of PDC redeemable common stock were repurchased during 2006 at an aggregate
price of $27.1 million.





In fiscal
2005, the ESOP trustee purchased 352,867 shares of PDC redeemable common stock
for an aggregate price of $9.5 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
285,435 shares of redeemable common stock being issued. As a result of hardship
withdrawals, diversification elections and employee terminations, 347,247 shares
of PDC redeemable common stock were repurchased during 2005 at an aggregate
price of $9.4 million.





In
accordance with the FASB’s Emerging Issues Task Force (“EITF”) Topic D-98,
redeemable equity securities are required to be accreted so the amount in the
balance sheet reflects the estimated amount redeemable at the earliest
redemption date based upon the redemption value at each period end. Redeemable
common stock is being accreted up to the earliest redemption date, mandated by
federal law, based upon the estimated fair market value of the redeemable common
stock as of December 29, 2007. The earliest redemption date, as mandated by
federal law, 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 $5.9 million for the year ended December 29, 2007.
Based upon the estimated fair value of the redeemable common stock, an ultimate
redemption liability of approximately $371 million was determined. The
redeemable common stock recorded book value as of December 29, 2007 was $182
million, which leaves a remaining unrecognized liability to be accreted of
approximately $189 million. The fair value of the redeemable common stock is
determined by an independent, third-party appraiser selected by State Street
Global Advisors, 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.
The interim estimates as of the first and third quarter of each year may differ
from the values determined by the appraiser as of June 30 and December 31.
Adjustments, if any, as of the first quarter and third quarter of each year,
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.





22.        UNAUDITED
QUARTERLY FINANCIAL DATA





Unaudited
quarterly financial data for the fiscal year 2007 includes the following
(dollars in thousands):





For
      the Three
              Months
      Ended
              April
      1,
              2007
            
            
            For
      the Three
              Months
      Ended
              July
      1,
              2007
            
            
            For
      the Three
              Months
      Ended
              September
      30,
              2007
            
            
            For
      the Three
              Months
      Ended
              December
      29, 2007
            
            
            For
      the Year
              Ended
              December
      29, 2007Net
      sales
            
            $
            232,350
            
            
            $
            242,765
            
            
            $
            247,242
            
            
            $
            240,883
            
            
            $
            963,240Gross
      profit
            
            
            58,803
            
            
            
            54,135
            
            
            
            60,418
            
            
            
            56,146
            
            
            
            229,502Operating
      income
            
            
            12,947
            
            
            
            11,551
            
            
            
            17,947
            
            
            
            8,337
            
            
            
            50,782Income
      (loss) from continuing operations
            
            
            1,486
            
            
            
            (899
            )
            
            
            6,755
            
            
            
            (3,148
            )
            
            
            4,194(Loss)
      income from discontinued operations, net of income taxes
            
            
            (1,562
            )
            
            
            (848
            )
            
            
            524
            
            
            
            (8,615
            )
            
            
            (10,501
            )Net
      (loss) income
            
            
            (76
            )
            
            
            (1,747
            )
            
            
            7,279
            
            
            
            (11,763
            )
            
            
            (6,307
            )





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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





Unaudited
quarterly financial data for the fiscal year 2006 includes the following
(dollars in thousands):





For
      the Three
              Months
      Ended
              April
      2,
              2006
            
            
            For
      the Three
              Months
      Ended
              July
      2,
              2006
            
            
            For
      the Three
              Months
      Ended
              October
      1,
              2006
            
            
            For
      the Three
              Months
      Ended
              December
      30, 2006
            
            
            For
      the Year
              Ended
              December
      30, 2006Net
      sales
            
            $
            246,456
            
            
            $
            244,460
            
            
            $
            246,784
            
            
            $
            235,955
            
            
            $
            973,655Gross
      profit
            
            
            60,924
            
            
            
            60,064
            
            
            
            63,440
            
            
            
            56,624
            
            
            
            241,052Operating
      income
            
            
            17,889
            
            
            
            12,335
            
            
            
            17,392
            
            
            
            11,604
            
            
            
            59,220Income
      (loss) from continuing operations
            
            
            5,693
            
            
            
            730
            
            
            
            4,951
            
            
            
            (557
            )
            
            
            10,817(Loss)
      income from discontinued operations, net of income taxes
            
            
            (117
            )
            
            
            470
            
            
            
            95
            
            
            
            80
            
            
            
            528Net
      income (loss)
            
            
            5,576
            
            
            
            1,200
            
            
            
            5,046
            
            
            
            (477
            )
            
            
            11,345





23.        SEGMENT
INFORMATION





The
Company’s four reportable segments are as follows:  coated solutions,
thermal papers, security papers and performance packaging. The accounting
policies applicable to these reportable 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 specific segments,
interest income, interest expense, debt extinguishment expenses and foreign
currency gains and losses.





The
coated solutions segment includes carbonless paper which is used to make
multipart business forms such as invoices and credit card receipts. Appleton
also produces coated products for point-of-sale displays and other design and
print applications and offers customers custom coating solutions within this
segment. The Company supplies coated solutions products to paper merchants,
business forms printers and paper converters.





The
thermal papers segment develops substrates for the transaction and item
identification markets. These products are widely used for point-of-sale
receipts and coupons; entertainment and transportation tickets; lottery and
gaming tickets; engineering, medical and industrial charts; tags for airline
baggage and retail applications; and label products for shipping, warehousing,
medical and clean-room applications. The Company supplies thermal products
primarily to printers and paper converters.





The
security papers segment produces products with basic security features that make
them resistant to forgery and counterfeiting. Appleton’s portfolio of products
incorporates security technologies including watermarks, taggants, embedded
threads and fibers and machine-readable technologies to serve global markets.
The focus of the security papers segment is on checks and business and
government documents.





The
performance packaging segment produces single and multilayer polyethylene films
for packaging applications. It also prints and converts flexible plastic
packaging materials for customers in the food processing, household and
industrial products industries.





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PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





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





For
      the Year Ended
              December
      29, 2007
            
            
            For
      the Year Ended
              December
      30, 2006
            
            
            For
      the Year Ended
              December
      31, 2005Net
      salesTechnical
      PapersCoated
      solutions
            
            $
            571,989
            
            
            $
            572,368
            
            
            $
            590,531Thermal
      papers
            
            
            257,075
            
            
            
            260,035
            
            
            
            219,337Security
      papers
            
            
            32,335
            
            
            
            29,446
            
            
            
            24,927861,399
            
            
            
            861,849
            
            
            
            834,795Performance
      packaging
            
            
            101,841
            
            
            
            111,806
            
            
            
            99,471Total
            
            $
            963,240
            
            
            $
            973,655
            
            
            $
            934,266Operating
      income (loss)Technical
      PapersCoated
      solutions
            
            $
            52,126
            
            
            $
            50,853
            
            
            $
            54,767Thermal
      papers
            
            
            7,176
            
            
            
            13,392
            
            
            
            4,546Security
      papers
            
            
            3,482
            
            
            
            1,624
            
            
            
            (839
            )62,784
            
            
            
            65,869
            
            
            
            58,474Performance
      packaging
            
            
            6,225
            
            
            
            9,798
            
            
            
            5,938Unallocated
      corporate charges and business development costs
            
            
            (18,227
            )
            
            
            (16,447
            )
            
            
            (18,567
            )Total
            
            $
            50,782
            
            
            $
            59,220
            
            
            $
            45,845Depreciation
      and amortizationTechnical
      PapersCoated
      solutions
            
            $
            40,330
            
            
            $
            45,935
            
            
            $
            48,730Thermal
      papers
            
            
            14,309
            
            
            
            14,605
            
            
            
            15,246Security
      papers
            
            
            2,804
            
            
            
            2,805
            
            
            
            2,63657,443
            
            
            
            63,345
            
            
            
            66,612Performance
      packaging
            
            
            5,794
            
            
            
            5,478
            
            
            
            5,994Unallocated
      corporate charges
            
            
            572
            
            
            
            372
            
            
            
            461Total
            
            $
            63,809
            
            
            $
            69,195
            
            
            $
            73,067





During
2007, the Company recorded restructuring costs within its reportable segments as
follows:  $0.1 million in coated solutions, $0.2 million in thermal
papers, $0.2 million in performance packaging and $0.9 million in unallocated
corporate charges and business development costs. During 2006, the Company
recorded restructuring costs within its reportable segments as
follows:  $0.5 million in coated solutions, $0.5 million in thermal
papers, $0.1 million in security papers, $0.2 million in performance packaging
and $0.9 million in unallocated corporate charges and business development
costs. During 2005, the Company recorded restructuring costs within its
reportable segments as follows:  $3.0 million in coated solutions,
$0.4 million in thermal papers, $0.3 million in security papers, $0.2 million in
performance packaging and $3.5 million in unallocated corporate charges and
business development costs.





Revenues
from sales in the U.S. were $700.0 million in 2007, $746.6 million is 2006 and
$750.3 million in 2005. Revenues from sales to customers in foreign countries
were $263.2 million in 2007, $227.1 million in 2006 and $184.0 million in
2005.


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PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)





24.           GUARANTOR
FINANCIAL INFORMATION





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





Presented
below is condensed consolidating financial information for the Parent Guarantor,
the Issuer, the Subsidiary Guarantors and a wholly-owned non-guarantor
subsidiary (the “Non-Guarantor Subsidiary”) as of December 29, 2007 and December
30, 2006, and for the years ended December 29, 2007, December 30, 2006 and
December 31, 2005. This financial information should be read in conjunction with
the consolidated financial statements and other notes related
thereto.





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





The
senior credit facility, the senior notes and the senior subordinated notes place
restrictions on the subsidiaries of the Issuer that would limit dividend
distributions by these subsidiaries.


74
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DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
  (Continued)





CONDENSED
      CONSOLIDATING BALANCE SHEET


DECEMBER
      29, 2007





(dollars
      in thousands)





Parent
              Guarantor
            
            
            Issuer
            
            
            Subsidiary
              Guarantors
            
            
            Non-Guarantor
              Subsidiary
            
            
            Eliminations
            
            
            ConsolidatedASSETSCurrent
      assetsCash and cash equivalents
            
            $
            -
            
            
            $
            33,567
            
            
            $
            9,247
            
            
            $
            2,024
            
            
            $
            -
            
            
            $
            44,838Accounts receivable, net
            
            
            -
            
            
            
            97,424
            
            
            
            11,191
            
            
            
            8,147
            
            
            
            -
            
            
            
            116,762Inventories
            
            
            -
            
            
            
            108,721
            
            
            
            13,092
            
            
            
            2,265
            
            
            
            -
            
            
            
            124,078Other current assets
            
            
            3,800
            
            
            
            7,565
            
            
            
            447
            
            
            
            398
            
            
            
            -
            
            
            
            12,210Assets of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            36,731
            
            
            
            -
            
            
            
            -
            
            
            
            36,731Total current assets
            
            
            3,800
            
            
            
            247,277
            
            
            
            70,708
            
            
            
            12,834
            
            
            
            -
            
            
            
            334,619Property, plant and equipment, net
            
            
            -
            
            
            
            363,541
            
            
            
            30,170
            
            
            
            31
            
            
            
            -
            
            
            
            393,742Investment in subsidiaries
            
            
            331,128
            
            
            
            155,533
            
            
            
            -
            
            
            
            -
            
            
            
            (486,661
            )
            
            
            -Other assets
            
            
            165,274
            
            
            
            80,439
            
            
            
            71,637
            
            
            
            51
            
            
            
            -
            
            
            
            317,401Assets of discontinued operations
            
            
            
            
            
            
            -
            
            
            
            57,646
            
            
            
            -
            
            
            
            -
            
            
            
            57,646Total assets
            
            $
            500,202
            
            
            $
            846,790
            
            
            $
            230,161
            
            
            $
            12,916
            
            
            $
            (486,661
            )
            
            $
            1,103,408LIABILITIES,
      REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER
      COMPREHENSIVE INCOMECurrent
      liabilitiesCurrent portion of long-term debt
            
            $
            -
            
            
            $
            3,138
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            3,138Accounts payable
            
            
            -
            
            
            
            78,001
            
            
            
            4,387
            
            
            
            233
            
            
            
            -
            
            
            
            82,621Due to (from) parent and affiliated companies
            
            
            394,569
            
            
            
            (431,078
            )
            
            
            39,718
            
            
            
            (3,209
            )
            
            
            -
            
            
            
            -Other accrued liabilities
            
            
            -
            
            
            
            82,117
            
            
            
            1,942
            
            
            
            1,977
            
            
            
            -
            
            
            
            86,036Liabilities of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            21,685
            
            
            
            -
            
            
            
            -
            
            
            
            21,685Total current liabilities
            
            
            394,569
            
            
            
            (267,822
            )
            
            
            67,732
            
            
            
            (999
            )
            
            
            -
            
            
            
            193,480Long-term
      debt
            
            
            -
            
            
            
            539,105
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            539,105Capital
      lease obligation
            
            
            -
            
            
            
            1,311
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,311Other
      long-term liabilities
            
            
            -
            
            
            
            243,068
            
            
            
            -
            
            
            
            61
            
            
            
            -
            
            
            
            243,129Liabilities
      of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            20,750
            
            
            
            -
            
            
            
            -
            
            
            
            20,750Redeemable
      common stock, accumulated deficit and accumulated other comprehensive
      income
            
            
            105,633
            
            
            
            331,128
            
            
            
            141,679
            
            
            
            13,854
            
            
            
            (486,661
            )
            
            
            105,633Total liabilities, redeemable common stock, accumulated deficit and
      accumulated other comprehensive income
            
            $
            500,202
            
            
            $
            846,790
            
            
            $
            230,161
            
            
            $
            12,916
            
            
            $
            (486,661
            )
            
            $
            1,103,408





75
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PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONDENSED
      CONSOLIDATING BALANCE SHEETDECEMBER
      30, 2006(dollars
      in thousands)Parent
            
            
            
            
            
            Subsidiary
            
            
            Non-GuarantorGuarantor
            
            
            Issuer
            
            
            Guarantors
            
            
            Subsidiary
            
            
            Eliminations
            
            
            ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            -
            
            
            $
            17,249
            
            
            $
            817
            
            
            $
            1,909
            
            
            $
            -
            
            
            $
            19,975Accounts
      receivable, net
            
            
            -
            
            
            
            94,081
            
            
            
            11,094
            
            
            
            8,496
            
            
            
            -
            
            
            
            113,671Inventories
            
            
            -
            
            
            
            109,747
            
            
            
            15,471
            
            
            
            1,646
            
            
            
            -
            
            
            
            126,864Other
      current assets
            
            
            18,200
            
            
            
            6,680
            
            
            
            459
            
            
            
            90
            
            
            
            -
            
            
            
            25,429Assets
      of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            38,982
            
            
            
            -
            
            
            
            -
            
            
            
            38,982Total
      current assets
            
            
            18,200
            
            
            
            227,757
            
            
            
            66,823
            
            
            
            12,141
            
            
            
            -
            
            
            
            324,921Property,
      plant and equipment, net
            
            
            -
            
            
            
            367,326
            
            
            
            30,856
            
            
            
            20
            
            
            
            -
            
            
            
            398,202Investment
      in subsidiaries
            
            
            317,687
            
            
            
            170,040
            
            
            
            -
            
            
            
            -
            
            
            
            (487,727
            )
            
            
            -Other
      assets
            
            
            58,043
            
            
            
            87,514
            
            
            
            73,245
            
            
            
            43
            
            
            
            -
            
            
            
            218,845Assets
      of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            74,155
            
            
            
            -
            
            
            
            -
            
            
            
            74,155Total
      assets
            
            $
            393,930
            
            
            $
            852,637
            
            
            $
            245,079
            
            
            $
            12,204
            
            
            $
            (487,727
            )
            
            $
            1,016,123LIABILITIES,
      REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER
      COMPREHENSIVE LOSSCurrent
      liabilitiesCurrent
      portion of long-term debt
            
            $
            -
            
            
            $
            6,384
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            6,384Accounts
      payable
            
            
            -
            
            
            
            58,451
            
            
            
            4,328
            
            
            
            197
            
            
            
            -
            
            
            
            62,976Due
      to (from) parent and affiliated companies
            
            
            276,359
            
            
            
            (312,220
            )
            
            
            37,948
            
            
            
            (2,087
            )
            
            
            -
            
            
            
            -Other
      accrued liabilities
            
            
            -
            
            
            
            82,060
            
            
            
            3,020
            
            
            
            1,934
            
            
            
            -
            
            
            
            87,014Liabilities
      of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            26,482
            
            
            
            -
            
            
            
            -
            
            
            
            26,482Total
      current liabilities
            
            
            276,359
            
            
            
            (165,325
            )
            
            
            71,778
            
            
            
            44
            
            
            
            -
            
            
            
            182,856Long-term
      debt
            
            
            -
            
            
            
            522,399
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            522,399Capital
      lease obligation
            
            
            -
            
            
            
            1,931
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,931Other
      long-term liabilities
            
            
            -
            
            
            
            175,945
            
            
            
            -
            
            
            
            481
            
            
            
            -
            
            
            
            176,426Liabilities
      of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            14,940
            
            
            
            -
            
            
            
            -
            
            
            
            14,940Redeemable
      common stock, accumulated deficit and accumulated other comprehensive
      loss
            
            
            117,571
            
            
            
            317,687
            
            
            
            158,361
            
            
            
            11,679
            
            
            
            (487,727
            )
            
            
            117,571Total
      liabilities, redeemable common stock, accumulated deficit and accumulated
      other comprehensive loss
            
            $
            393,930
            
            
            $
            852,637
            
            
            $
            245,079
            
            
            $
            12,204
            
            
            $
            (487,727
            )
            
            $
            1,016,123


76
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PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE YEAR DECEMBER 29, 2007(dollars
      in thousands)Parent
            
            
            
            
            
            Subsidiary
            
            
            Non-GuarantorGuarantor
            
            
            Issuer
            
            
            Guarantors
            
            
            Subsidiary
            
            
            Eliminations
            
            
            ConsolidatedNet
      sales
            
            $
            -
            
            
            $
            860,674
            
            
            $
            101,697
            
            
            $
            62,867
            
            
            $
            (61,998
            )
            
            $
            963,240Cost
      of sales
            
            
            -
            
            
            
            655,074
            
            
            
            81,174
            
            
            
            59,452
            
            
            
            (61,962
            )
            
            
            733,738Gross
      profit
            
            
            -
            
            
            
            205,600
            
            
            
            20,523
            
            
            
            3,415
            
            
            
            (36
            )
            
            
            229,502Selling,
      general and administrative expenses
            
            
            -
            
            
            
            160,039
            
            
            
            14,430
            
            
            
            2,393
            
            
            
            413
            
            
            
            177,275Restructuring
      and other charges
            
            
            -
            
            
            
            1,305
            
            
            
            140
            
            
            
            -
            
            
            
            -
            
            
            
            1,445Operating
      income
            
            
            -
            
            
            
            44,256
            
            
            
            5,953
            
            
            
            1,022
            
            
            
            (449
            )
            
            
            50,782Interest
      expense
            
            
            11,059
            
            
            
            48,939
            
            
            
            -
            
            
            
            4
            
            
            
            (11,059
            )
            
            
            48,943Debt
      extinguishment expenses
            
            
            -
            
            
            
            1,185
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,185Interest
      income
            
            
            -
            
            
            
            (17,669
            )
            
            
            -
            
            
            
            (73
            )
            
            
            15,061
            
            
            
            (2,681
            )(Income)
      loss in equity investments
            
            
            (4,752
            )
            
            
            7,161
            
            
            
            -
            
            
            
            -
            
            
            
            (2,409
            )
            
            
            -Other
      income
            
            
            -
            
            
            
            (254
            )
            
            
            -
            
            
            
            (1,173
            )
            
            
            315
            
            
            
            (1,112
            )(Loss)
      income from continuing operationsbefore income taxes
            
            
            (6,307
            )
            
            
            4,894
            
            
            
            5,953
            
            
            
            2,264
            
            
            
            (2,357
            )
            
            
            4,447Provision
      for income taxes
            
            
            -
            
            
            
            142
            
            
            
            22
            
            
            
            89
            
            
            
            -
            
            
            
            253(Loss)
      income from continuing operations
            
            
            (6,307
            )
            
            
            4,752
            
            
            
            5,931
            
            
            
            2,175
            
            
            
            (2,357
            )
            
            
            4,194Loss
      from discontinued operations, net of income taxes
            
            
            -
            
            
            
            -
            
            
            
            (14,916
            )
            
            
            -
            
            
            
            4,415
            
            
            
            (10,501
            )Net
      (loss) income
            
            $
            (6,307
            )
            
            $
            4,752
            
            
            $
            (8,985
            )
            
            $
            2,175
            
            
            $
            2,058
            
            
            $
            (6,307
            )





77
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PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE YEAR DECEMBER 30, 2006(dollars
      in thousands)Parent
            
            
            
            
            
            Subsidiary
            
            
            Non-GuarantorGuarantor
            
            
            Issuer
            
            
            Guarantors
            
            
            Subsidiary
            
            
            Eliminations
            
            
            ConsolidatedNet
      sales
            
            $
            -
            
            
            $
            860,628
            
            
            $
            111,139
            
            
            $
            66,312
            
            
            $
            (64,424
            )
            
            $
            973,655Cost
      of sales
            
            
            -
            
            
            
            647,768
            
            
            
            87,537
            
            
            
            62,035
            
            
            
            (64,737
            )
            
            
            732,603Gross
      profit
            
            
            -
            
            
            
            212,860
            
            
            
            23,602
            
            
            
            4,277
            
            
            
            313
            
            
            
            241,052Selling,
      general and administrative expenses
            
            
            -
            
            
            
            163,709
            
            
            
            13,128
            
            
            
            2,582
            
            
            
            252
            
            
            
            179,671Restructuring
      and other charges
            
            
            -
            
            
            
            2,079
            
            
            
            82
            
            
            
            -
            
            
            
            -
            
            
            
            2,161Operating
      income
            
            
            -
            
            
            
            47,072
            
            
            
            10,392
            
            
            
            1,695
            
            
            
            61
            
            
            
            59,220Interest
      expense
            
            
            10,132
            
            
            
            49,186
            
            
            
            -
            
            
            
            -
            
            
            
            (10,132
            )
            
            
            49,186Interest
      income
            
            
            -
            
            
            
            (14,130
            )
            
            
            (6
            )
            
            
            (64
            )
            
            
            13,297
            
            
            
            (903
            )Income
      in equity investments
            
            
            (21,477
            )
            
            
            (8,880
            )
            
            
            -
            
            
            
            -
            
            
            
            30,357
            
            
            
            -Other
      (income) expense
            
            
            -
            
            
            
            (576
            )
            
            
            -
            
            
            
            92
            
            
            
            (29
            )
            
            
            (513
            )Income
      from continuing operationsbefore income taxes
            
            
            11,345
            
            
            
            21,472
            
            
            
            10,398
            
            
            
            1,667
            
            
            
            (33,432
            )
            
            
            11,450(Benefit)
      provision for income taxes
            
            
            -
            
            
            
            (5
            )
            
            
            31
            
            
            
            607
            
            
            
            -
            
            
            
            633Income
      from continuing operations
            
            
            11,345
            
            
            
            21,477
            
            
            
            10,367
            
            
            
            1,060
            
            
            
            (33,432
            )
            
            
            10,817(Loss)
      income from discontinued operations, net of income taxes
            
            
            -
            
            
            
            -
            
            
            
            (2,889
            )
            
            
            -
            
            
            
            3,417
            
            
            
            528Net
      income
            
            $
            11,345
            
            
            $
            21,477
            
            
            $
            7,478
            
            
            $
            1,060
            
            
            $
            (30,015
            )
            
            $
            11,345





78
 Table of Contents





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE YEAR ENDED DECEMBER 31, 2005(dollars
      in thousands)Parent
            
            
            
            
            
            Subsidiary
            
            
            Non-GuarantorGuarantor
            
            
            Issuer
            
            
            Guarantors
            
            
            Subsidiary
            
            
            Eliminations
            
            
            ConsolidatedNet
      sales
            
            $
            -
            
            
            $
            833,774
            
            
            $
            99,262
            
            
            $
            63,873
            
            
            $
            (62,643
            )
            
            $
            934,266Cost
      of sales
            
            
            -
            
            
            
            628,605
            
            
            
            78,296
            
            
            
            59,653
            
            
            
            (62,758
            )
            
            
            703,796Gross
      profit
            
            
            -
            
            
            
            205,169
            
            
            
            20,966
            
            
            
            4,220
            
            
            
            115
            
            
            
            230,470Selling,
      general and administrative expenses
            
            
            -
            
            
            
            156,170
            
            
            
            18,206
            
            
            
            2,592
            
            
            
            252
            
            
            
            177,220Restructuring
      and other charges
            
            
            -
            
            
            
            7,312
            
            
            
            93
            
            
            
            -
            
            
            
            -
            
            
            
            7,405Operating
      income
            
            
            -
            
            
            
            41,687
            
            
            
            2,667
            
            
            
            1,628
            
            
            
            (137
            )
            
            
            45,845Interest
      expense
            
            
            10,112
            
            
            
            62,950
            
            
            
            -
            
            
            
            -
            
            
            
            (23,472
            )
            
            
            49,590Interest
      income
            
            
            -
            
            
            
            (14,033
            )
            
            
            (13,375
            )
            
            
            (29
            )
            
            
            26,545
            
            
            
            (892
            )Intercompany
      royalty expense (income)
            
            
            -
            
            
            
            11,530
            
            
            
            (11,530
            )
            
            
            -
            
            
            
            -
            
            
            
            -Income
      in equity investments
            
            
            (7,098
            )
            
            
            (26,405
            )
            
            
            -
            
            
            
            -
            
            
            
            33,503
            
            
            
            -Other
      expense (income)
            
            
            -
            
            
            
            706
            
            
            
            -
            
            
            
            (347
            )
            
            
            543
            
            
            
            902(Loss)
      income from continuing operationsbefore income taxes
            
            
            (3,014
            )
            
            
            6,939
            
            
            
            27,572
            
            
            
            2,004
            
            
            
            (37,256
            )
            
            
            (3,755
            )(Benefit)
      provision for income taxes
            
            
            -
            
            
            
            (159
            )
            
            
            74
            
            
            
            633
            
            
            
            -
            
            
            
            548(Loss)
      income from continuing operations
            
            
            (3,014
            )
            
            
            7,098
            
            
            
            27,498
            
            
            
            1,371
            
            
            
            (37,256
            )
            
            
            (4,303
            )(Loss)
      income from discontinued operations, net of income taxes
            
            
            -
            
            
            
            -
            
            
            
            (2,077
            )
            
            
            -
            
            
            
            3,366
            
            
            
            1,289Net
      (loss) income
            
            $
            (3,014
            )
            
            $
            7,098
            
            
            $
            25,421
            
            
            $
            1,371
            
            
            $
            (33,890
            )
            
            $
            (3,014
            )





79
 Table of Contents





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE YEAR ENDED DECEMBER 29, 2007(dollars
      in thousands)Parent
            
            
            
            
            
            Subsidiary
            
            
            Non-GuarantorGuarantor
            
            
            Issuer
            
            
            Guarantors
            
            
            Subsidiary
            
            
            Eliminations
            
            
            ConsolidatedCash
      flows from operating activities:Net
      (loss) income
            
            $
            (6,307
            )
            
            $
            4,752
            
            
            $
            (8,985
            )
            
            $
            2,175
            
            
            $
            2,058
            
            
            $
            (6,307
            )Adjustments
      to reconcile net (loss) income to net cash (used) provided by operating
      activities:Depreciation
      and amortization
            
            
            -
            
            
            
            57,997
            
            
            
            20,313
            
            
            
            18
            
            
            
            -
            
            
            
            78,328Other
            
            
            -
            
            
            
            11,145
            
            
            
            2,307
            
            
            
            (1,173
            )
            
            
            -
            
            
            
            12,279Change
      in assets and liabilities, net
            
            
            (90,921
            )
            
            
            102,532
            
            
            
            (2,440
            )
            
            
            243
            
            
            
            (2,058
            )
            
            
            7,356Net
      cash (used) provided by operating activities
            
            
            (97,228
            )
            
            
            176,426
            
            
            
            11,195
            
            
            
            1,263
            
            
            
            -
            
            
            
            91,656Cash
      flows from investing activities:Proceeds
      from sale of equipment
            
            
            -
            
            
            
            4
            
            
            
            40
            
            
            
            -
            
            
            
            -
            
            
            
            44Additions
      to property, plant and equipment
            
            
            -
            
            
            
            (57,411
            )
            
            
            (4,389
            )
            
            
            (26
            )
            
            
            -
            
            
            
            (61,826
            )Net
      cash used by investing activities
            
            
            -
            
            
            
            (57,407
            )
            
            
            (4,349
            )
            
            
            (26
            )
            
            
            -
            
            
            
            (61,782
            )Cash
      flows from financing activities:Payments
      of senior secured notes payable
            
            
            -
            
            
            
            (196,095
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (196,095
            )Proceeds
      from senior secured notes payable
            
            
            -
            
            
            
            225,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            225,000Payments
      of senior notes payable
            
            
            -
            
            
            
            (17,550
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (17,550
            )Payments
      of senior subordinated notes payable
            
            
            -
            
            
            
            (7,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,000
            )Proceeds
      from State of Ohio financing
            
            
            -
            
            
            
            9,105
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,105Debt
      acquisition costs
            
            
            -
            
            
            
            (2,321
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,321
            )Payments
      relating to capital lease obligation
            
            
            -
            
            
            
            (731
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (731
            )Proceeds
      from revolving lines of credit
            
            
            -
            
            
            
            67,550
            
            
            
            6,446
            
            
            
            -
            
            
            
            -
            
            
            
            73,996Payments
      of revolving lines of credit
            
            
            -
            
            
            
            (67,550
            )
            
            
            (6,632
            )
            
            
            -
            
            
            
            -
            
            
            
            (74,182
            )Due
      to parent and affiliated companies, net
            
            
            118,210
            
            
            
            (118,858
            )
            
            
            1,770
            
            
            
            (1,122
            )
            
            
            -
            
            
            
            -Proceeds
      from issuance of redeemable common stock
            
            
            7,659
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,659Payments
      to redeem common stock
            
            
            (28,641
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (28,641
            )Increase
      in cash overdraft
            
            
            -
            
            
            
            6,100
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,100Net
      cash provided (used) by financing activities
            
            
            97,228
            
            
            
            (102,350
            )
            
            
            1,584
            
            
            
            (1,122
            )
            
            
            -
            
            
            
            (4,660
            )Effect
      of foreign exchange rate changes on cash and cash
    equivalents
            
            
            -
            
            
            
            (351
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (351
            )Change
      in cash and cash equivalents
            
            
            -
            
            
            
            16,318
            
            
            
            8,430
            
            
            
            115
            
            
            
            -
            
            
            
            24,863Cash
      and cash equivalents at beginning of period
            
            
            -
            
            
            
            17,249
            
            
            
            817
            
            
            
            1,909
            
            
            
            -
            
            
            
            19,975Cash
      and cash equivalents at end of period
            
            $
            -
            
            
            $
            33,567
            
            
            $
            9,247
            
            
            $
            2,024
            
            
            $
            -
            
            
            $
            44,838





80
 Table of Contents





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE YEAR ENDED DECEMBER 30, 2006(dollars
      in thousands)Parent
            
            
            
            
            
            Subsidiary
            
            
            Non-GuarantorGuarantor
            
            
            Issuer
            
            
            Guarantors
            
            
            Subsidiary
            
            
            Eliminations
            
            
            ConsolidatedCash
      flows from operating activities:Net
      income
            
            $
            11,345
            
            
            $
            21,477
            
            
            $
            7,478
            
            
            $
            1,060
            
            
            $
            (30,015
            )
            
            $
            11,345Adjustments
      to reconcile net income to net cash (used) provided by operating
      activities:Depreciation
      and amortization
            
            
            -
            
            
            
            63,703
            
            
            
            12,038
            
            
            
            14
            
            
            
            -
            
            
            
            75,755Other
            
            
            -
            
            
            
            10,117
            
            
            
            543
            
            
            
            92
            
            
            
            -
            
            
            
            10,752Change
      in assets and liabilities, net
            
            
            (19,890
            )
            
            
            11,347
            
            
            
            (14,446
            )
            
            
            (203
            )
            
            
            30,015
            
            
            
            6,823Net
      cash (used) provided by operating activities
            
            
            (8,545
            )
            
            
            106,644
            
            
            
            5,613
            
            
            
            963
            
            
            
            -
            
            
            
            104,675Cash
      flows from investing activities:Proceeds
      from sale of equipment
            
            
            -
            
            
            
            7
            
            
            
            788
            
            
            
            -
            
            
            
            -
            
            
            
            795Additions
      to property, plant and equipment
            
            
            -
            
            
            
            (26,987
            )
            
            
            (9,475
            )
            
            
            -
            
            
            
            -
            
            
            
            (36,462
            )Net
      cash used by investing activities
            
            
            -
            
            
            
            (26,980
            )
            
            
            (8,687
            )
            
            
            -
            
            
            
            -
            
            
            
            (35,667
            )Cash
      flows from financing activities:Payments
      of senior secured notes payable
            
            
            -
            
            
            
            (35,776
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (35,776
            )Payments
      of senior notes payable
            
            
            -
            
            
            
            (4,400
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,400
            )Bond
      consent costs
            
            
            -
            
            
            
            (7,994
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,994
            )Payments
      relating to capital lease obligation
            
            
            -
            
            
            
            (731
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (731
            )Proceeds
      from revolving lines of credit
            
            
            -
            
            
            
            20,000
            
            
            
            7,475
            
            
            
            -
            
            
            
            -
            
            
            
            27,475Payments
      of revolving lines of credit
            
            
            -
            
            
            
            (22,000
            )
            
            
            (7,289
            )
            
            
            -
            
            
            
            -
            
            
            
            (29,289
            )Due
      to parent and affiliated companies, net
            
            
            27,425
            
            
            
            (24,798
            )
            
            
            (1,129
            )
            
            
            (1,498
            )
            
            
            -
            
            
            
            -Proceeds
      from issuance of redeemable common stock
            
            
            8,238
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,238Payments
      to redeem common stock
            
            
            (27,118
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (27,118
            )Increase
      in cash overdraft
            
            
            -
            
            
            
            1,870
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,870Net
      cash provided (used) by financing activities
            
            
            8,545
            
            
            
            (73,829
            )
            
            
            (943
            )
            
            
            (1,498
            )
            
            
            -
            
            
            
            (67,725
            )Effect
      of foreign exchange rate changes on cash and cash
    equivalents
            
            
            -
            
            
            
            270
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            270Change
      in cash and cash equivalents
            
            
            -
            
            
            
            6,105
            
            
            
            (4,017
            )
            
            
            (535
            )
            
            
            -
            
            
            
            1,553Cash
      and cash equivalents at beginning of period
            
            
            -
            
            
            
            11,144
            
            
            
            4,834
            
            
            
            2,444
            
            
            
            -
            
            
            
            18,422Cash
      and cash equivalents at end of period
            
            $
            -
            
            
            $
            17,249
            
            
            $
            817
            
            
            $
            1,909
            
            
            $
            -
            
            
            $
            19,975


81
 Table of Contents





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE YEAR ENDED DECEMBER 31, 2005(dollars
      in thousands)Parent
            
            
            
            
            
            Subsidiary
            
            
            Non-GuarantorGuarantor
            
            
            Issuer
            
            
            Guarantors
            
            
            Subsidiary
            
            
            Eliminations
            
            
            ConsolidatedCash
      flows from operating activities:Net
      (loss) income
            
            $
            (3,014
            )
            
            $
            7,098
            
            
            $
            25,421
            
            
            $
            1,371
            
            
            $
            (33,890
            )
            
            $
            (3,014
            )Adjustments
      to reconcile net (loss) income to net cash (used) provided by operating
      activities:Depreciation
      and amortization
            
            
            -
            
            
            
            67,264
            
            
            
            12,564
            
            
            
            16
            
            
            
            -
            
            
            
            79,844Other
            
            
            -
            
            
            
            13,962
            
            
            
            491
            
            
            
            (347
            )
            
            
            -
            
            
            
            14,106Change
      in assets and liabilities, net
            
            
            (4,247
            )
            
            
            (27,984
            )
            
            
            (17,563
            )
            
            
            (1,372
            )
            
            
            33,890
            
            
            
            (17,276
            )Net
      cash (used) provided by operating activities
            
            
            (7,261
            )
            
            
            60,340
            
            
            
            20,913
            
            
            
            (332
            )
            
            
            -
            
            
            
            73,660Cash
      flows from investing activities:Proceeds
      from sale of equipment
            
            
            -
            
            
            
            36
            
            
            
            4
            
            
            
            -
            
            
            
            -
            
            
            
            40Acquisition
      of business, net of cash acquired
            
            
            -
            
            
            
            (68,832
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (68,832
            )Additions
      to property, plant and equipment
            
            
            -
            
            
            
            (25,535
            )
            
            
            (6,997
            )
            
            
            -
            
            
            
            -
            
            
            
            (32,532
            )Net
      cash used by investing activities
            
            
            -
            
            
            
            (94,331
            )
            
            
            (6,993
            )
            
            
            -
            
            
            
            -
            
            
            
            (101,324
            )Cash
      flows from financing activities:Payments
      of senior secured notes payable
            
            
            -
            
            
            
            (17,441
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (17,441
            )Payments
      of senior notes payable
            
            
            
            
            
            
            (13,000
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (13,000
            )Payments
      relating to capital lease obligation
            
            
            -
            
            
            
            (675
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (675
            )Proceeds
      from revolving line of credit
            
            
            -
            
            
            
            75,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            75,000Payments
      of revolving line of credit
            
            
            -
            
            
            
            (73,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (73,000
            )Due
      to parent and affiliated companies, net
            
            
            2,690
            
            
            
            17,666
            
            
            
            (18,379
            )
            
            
            (1,977
            )
            
            
            -
            
            
            
            -Proceeds
      from issuance of redeemable common stock
            
            
            13,940
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13,940Payments
      to redeem common stock
            
            
            (9,369
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (9,369
            )Increase
      in cash overdraft
            
            
            -
            
            
            
            846
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            846Net
      cash provided (used) by financing activities
            
            
            7,261
            
            
            
            (10,604
            )
            
            
            (18,379
            )
            
            
            (1,977
            )
            
            
            -
            
            
            
            (23,699
            )Effect
      of foreign exchange rate changes on cash and cash
    equivalents
            
            
            -
            
            
            
            (153
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (153
            )Change
      in cash and cash equivalents
            
            
            -
            
            
            
            (44,748
            )
            
            
            (4,459
            )
            
            
            (2,309
            )
            
            
            -
            
            
            
            (51,516
            )Cash
      and cash equivalents at beginning of period
            
            
            -
            
            
            
            55,892
            
            
            
            9,293
            
            
            
            4,753
            
            
            
            -
            
            
            
            69,938Cash
      and cash equivalents at end of period
            
            $
            -
            
            
            $
            11,144
            
            
            $
            4,834
            
            
            $
            2,444
            
            
            $
            -
            
            
            $
            18,422


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




None.




Item 9A.
            Controls and
Procedures




Disclosure
Controls and Procedures




Appleton
and PDC 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 or submitted by the registrants under the Securities Exchange Act
of 1934, as amended, or the Exchange Act, 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 both of the registrants, of the effectiveness,
design and operation of their disclosure controls and procedures pursuant to
Rule 15d – 15(f) under the Exchange Act. Based on that evaluation, the
registrants concluded that its disclosure controls and procedures are effective
as of the end of the period covered by this report.




Management’s
Report on Internal Control Over Financial Reporting




Appleton
and PDC are responsible for establishing and maintaining adequate internal
control over financial reporting. The registrants’ internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the registrants’
financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or because the degree of compliance
with policies or procedures may deteriorate.




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an assessment of the
effectiveness of our internal control over financial reporting as of December
29, 2007. The assessment was based on criteria established in the framework
Internal Control – Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management concluded that our
internal control over financial reporting was effective as of December 29,
2007.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




Changes
in Internal Control Over Financial Reporting




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 registrants’
internal control over financial reporting.




Item 9B.
            Other Information




None.




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PART
III




Item 10.
            Directors and Executive Officers of the
      Registrant




The
following table presents information as of February 19, 2008, regarding the
executive officers and directors of Appleton and PDC.




Name
            Age
            PositionMark
      R. Richards
            48
            Chairman,
      President, Chief Executive Officer and a Director of Appleton, and
      Chairman, President, and Chief Executive Officer and a Director of
      PDCStephen
      P. Carter
            56
            Director
      of Appleton and PDCTerry
      M. Murphy
            59
            Director
      of Appleton and PDCRonald
      A. Pace
            60
            Director
      of Appleton and PDCAndrew
      F. Reardon
            59
            Director
      of Appleton and PDCSusan
      Scherbel
            49
            Director
      of Appleton and PDCKathi
      P. Seifert
            58
            Director
      of Appleton and PDCM.
      Kathleen Bolhous
            48
            Vice
      President and General Manager, Performance Packaging of
      AppletonThomas
      J. Ferree
            50
            Vice
      President Finance, Chief Financial Officer and Treasurer of Appleton, and
      Chief Financial Officer and Treasurer of PDCJeffrey
      J. Fletcher
            55
            Controller
      of Appleton, and Assistant Treasurer and Controller of
  PDCTed
      E. Goodwin
            51
            Vice
      President, Business Development of AppletonSarah
      T. Macdonald
            43
            Vice
      President and General Manager, International of
AppletonWalter
      M. Schonfeld
            43
            President,
      Technical Papers of AppletonAngela
      M. Tyczkowski
            42
            Vice
      President, Secretary, General Counsel and Chief Compliance Officer of
      Appleton, and Vice President and Secretary of PDCKent
      E. Willetts
            50
            Vice
      President, Marketing and Strategy of
Appleton







Mark R.
Richards. Mr. Richards has been Chief Executive Officer and
President of Appleton since April 2005 and a Director and Chairman of Appleton
since June 2005 and Chief Executive Officer, Chairman, Director and President of
PDC since April 2005. Prior to joining Appleton, Mr. Richards served as
president of the Engineered Support Structures division of Valmont Industries,
Inc. since 1999. Mr. Richards is a graduate of Northwestern University’s
Kellogg Graduate School of Management where he earned a master’s degree in
business administration with concentrations in marketing and finance in 1989. He
earned a bachelor’s degree in packaging from Michigan State University in
1983.





Stephen
P. Carter. Mr. Carter joined Appleton and PDC as a Director in July
2004. Mr. Carter is currently a consultant and a director of Blackhawk
Bancorp., Inc., a publicly held bank holding company. Mr. Carter retired as
the Executive Vice President, Chief Financial Officer and Treasurer for Woodward
Governor Company in August 2005, a position he held since January 2003.
Mr. Carter graduated with a bachelor’s degree from Brigham Young University
in 1973 and is a CPA in Illinois.





Terry M.
Murphy. Mr. Murphy joined Appleton and PDC as a Director in June 2007.
Mr. Murphy has been executive vice president and chief financial officer of A.O.
Smith since joining the company in 2006. From 1999 to 2005, Mr. Murphy held
various executive management positions at Quanex Corporation and in his last
position at Quanex Corporation served as its Senior Vice President and Chief
Financial Officer. Murphy earned a bachelor’s degree from the University of
Wisconsin-LaCrosse in 1970 and a master’s degree in business administration from
Marquette University in 1974. He also earned a Juris Doctoris from Seton
Hall University School of Law in 1980 and is a certified public
accountant.





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Ronald
A. Pace. Mr. Pace has been a Director of Appleton and a Director of
PDC since January 2003. Mr. Pace has been President Kitchen & Bath –
Americas for Kohler Company since March 2006. From June 1999 to March 2006, Mr.
Pace served as Sector President Plumbing – Americas for Kohler Company.
Mr. Pace received his bachelor’s degree (Economics/Chemistry) in 1969 and a
master’s degree in business administration (Finance/Marketing) in 1972 from the
University of Connecticut.





Andrew
F. Reardon. Mr. Reardon joined Appleton and PDC as a Director in June
2007. Mr. Reardon is president and chief executive officer of TTX Company,
positions he has held since 2001. He joined TTX in 1992 as vice president of
human resources and labor relations. He later served as vice president of law
and human resources and was named company president in 2000. Mr. Reardon earned
a bachelor’s degree from the University of Notre Dame (English) in 1967 and a
Juris Doctor degree from the University of Cincinnati in 1974. He also earned a
L.L.M. degree in taxation from Washington University Law School
in 1975.





Susan
Scherbel.Ms. Scherbel has
been a Director of Appleton and a Director of PDC since January 2002.
Ms. Scherbel is employed by Bellview Associates, an investment firm she
co-founded in March 2001. Ms. Scherbel graduated with a bachelor’s degree
(Government and Economics) from Harvard College in 1979, a Juris Doctor degree
from Georgetown University in 1982 and a masters of law degree from Georgetown
University in 1986.





Kathi P.
Seifert. Ms. Seifert joined Appleton and PDC as a Director in July
2004. Ms. Seifert retired as Executive Vice President and Group President
of Global Personal Care Products for Kimberly-Clark Corporation in June 2004, a
position she held since 1999. Ms. Seifert is also currently a director of
Eli Lilly and Company, Revlon Consumer Products Corporation, Supervalu, Inc. and
Lexmark, Inc. Ms. Seifert graduated with a bachelor’s degree from
Valparaiso University in 1971.





M.
Kathleen Bolhous. Ms. Bolhous joined Appleton in January 2006 as
Vice President and General Manager of Performance Packaging. Prior to joining
Appleton, she served in various management positions with Cascade Engineering
from 1998. From 2005 to 2006 she served as Vice President and General Manager of
the Industrial Solutions group of Cascade Engineering. From 2003 to 2005
Ms. Bolhous served as Vice President and General Manager of the Emerging
Solutions Group and from, 1998 to 2003 she served as Vice President and General
Manager of the Container Group at Cascade Engineering. Ms. Bolhous is a
graduate of Hope College where she earned a bachelor’s degree in business
administration and communications in 1983.




Thomas
J. Ferree. Mr. Ferree has been Vice President Finance and Chief Financial
Officer of Appleton since October 2006 and Treasurer of Appleton and Chief
Financial Officer and Treasurer of PDC since November 2006. Prior to joining
Appleton, Mr. Ferree served as Senior Vice President of Finance and Chief
Financial Officer of Wells’ Dairy, Inc. since 2003. From 1999 to 2003 he was the
Corporate Controller for Meredith Corporation. Mr. Ferree received his
bachelor’s degree (Business Administration, Accounting) from the University of
Iowa in 1979 and he received his master’s degree in finance from the University
of Iowa in 1980.




Jeffrey
J. Fletcher. Mr. Fletcher has been Controller of Appleton and Assistant
Treasurer and Controller of PDC since March 2007. Prior to joining Appleton in
February 2007, Mr. Fletcher was Corporate Controller for Wells' Dairy, Inc.
since 2005. From 2003 to 2005, Mr. Fletcher worked for IP Innovations, Inc. as
President and Chief Financial Officer. Mr. Fletcher earned a bachelor's degree
in accounting from the University of Iowa in 1978 and a master's degree in
business administration from Northwestern University’s Kellogg Graduate School
of Management in 1992.




Ted E.
Goodwin.Mr. Goodwin has
been Vice President, Business Development since September 2005. Mr. Goodwin
previously served as Vice President, Technology at Appleton from September 2001
to September 2005. Mr. Goodwin received his bachelor’s degree (Chemistry)
from the University of Detroit in 1979 and he received a master’s degree in
business administration from the University of Wisconsin-Oshkosh in
1988.




Sarah T.
Macdonald. Ms. Macdonald has been the Vice President and General
Manager, International since joining Appleton in October 2005. Prior to joining
Appleton, she held senior sales and marketing management positions with U.S. Can
Corporation for nine years and was named the Executive Vice President of Sales
and Marketing in 2005. Ms. Macdonald studied French and business studies at
West Kent College and earned a professional certification for international
trade and finance, law and marketing in 1985.




Walter
M. Schonfeld.Mr. Schonfeld has been
the President, Technical Papers since joining Appleton in May 2006. Prior to
joining Appleton, Mr. Schonfeld served as Special Assistant to the Technicolor
CEO from May 2005 to March 2006 and as President of Technicolor’s Worldwide
Entertainment Services Group starting in 1999. Mr. Schonfeld earned his
bachelor’s degree (Computer Science) from Wilkes University in 1986 and he
received a master’s degree in business administration, finance, from the Wharton
School at the University of Pennsylvania in 1993.




Angela
M. Tyczkowski. Ms. Tyczkowski was named Vice President, Secretary,
General Counsel and Chief Compliance Officer of Appleton in August 2006 and Vice
President and Secretary of PDC in January 2006. Ms. Tyczkowski joined Appleton
in 1996 and has held various legal positions within Appleton since that time,
including Vice President and General Counsel. She earned a Juris Doctor degree
in 1991 and a bachelor’s degree in German language, criminology and law studies
in 1988 from Marquette University.


85
 Table of Contents




Kent E.
Willetts. Mr. Willetts has been the Vice President of Marketing and
Strategy since November 2005 when he joined Appleton. Prior to joining Appleton,
he worked for Kimberly-Clark Corporation for 18 years. He held executive marketing positions
that included responsibility for new product development and introduction
including Vice President of Global Brand Equity, Family Care; Vice President of
Global Brand Equity and New Business, Family; Director, Brand Position and
Advertising for Family Care; and Marketing Director for Kleenex.Mr. Willetts is a graduate of Northwestern University’s Kellogg
Graduate School of Management where he earned a master’s degree in business
administration in 1987. He earned a bachelor’s degree in business administration
from the University of Wisconsin-Parkside in 1982.




The
boards of directors of both PDC and Appleton currently consist of seven members.
PDC 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 PDC common
stock in connection with the election of directors of Paperweight’s board of
directors. Under the agreement, the ESOP Trust has agreed to vote all of its
shares of PDC common stock on and after January 1, 2005, to elect to PDC’s
board four individuals nominated by PDC’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 PDC’s chief executive officer.
In addition to the election of directors, the agreement prohibits PDC 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.




PDC has
entered into a security holders agreement with Appleton on terms substantially
similar to those described above to provide for the manner in which PDC will
vote its shares of Appleton’s common stock in connection with the election of
directors of Appleton’s board of directors. In addition to the election of
directors, the agreement prohibits Appleton from issuing capital stock to any
person other than PDC or making, or permitting any of Appleton’s 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 PDC.




Pursuant
to the agreements above, Mr. Richards, Ms. Scherbel, Mr. Murphy and
Mr. Reardon were nominated by Mr. Richards, Appleton’s chief executive
officer, and elected to the boards of directors of PDC and Appleton.
Mr. Pace, Mr. Carter and Ms. Seifert were jointly nominated by
Mr. Richards and the ESOP Trust and elected to the boards of directors of
PDC and Appleton.




Pursuant
to the terms of the new senior credit facility and the indentures governing the
senior notes and senior subordinated notes, the security holders agreements
described above may not be amended except under limited
circumstances.




The board
of directors of PDC has an Audit Committee, and the board of directors of
Appleton has a Compensation Committee. The members of the Audit Committee are
Mr. Carter, Mr. Pace and Ms. Scherbel. The members of the Compensation Committee
are Ms. Seifert, Mr. Murphy and Mr. Reardon. Mr. Carter serves as the
Audit Committee Chair and Ms. Seifert serves as the Compensation Committee
Chair. 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 PDC financial reports. The
charter of the Compensation Committee provides that the Compensation Committee
is responsible for authorizing the compensation of the Chief Executive Officer
subject to ratification by the Board of Directors, approving the compensation of
the named executive officers based on the recommendations of the Chief Executive
Officer and reviewing the compensation of the other executive officers. The
Compensation Committee also has authority for administration of our Long-Term
Incentive Plan. See “Item 11. Executive Compensation—Compensation Discussion and
Analysis,” below. The charters of the Audit Committee and the Compensation
Committee are available at www.appletonideas.com (investor information
section).




The
boards of directors of PDC and Appleton have determined that Stephen P. Carter
is an “audit committee financial expert” as defined under the applicable rules
of the SEC. Mr. Carter is an “independent director” as that term is defined
under the listing standards of the Nasdaq Stock Market, Inc.


86
 Table of Contents




We have
adopted a Code of Business Conduct and Ethics that applies to the directors,
officers and employees of PDC and Appleton, including the principal executive
officer, principal financial officer and principal accounting officer and
controller of PDC and Appleton. We have posted the Code of Business Conduct and
Ethics on Appleton’s Internet web site at www.appletonideas.com. We intend to
timely disclose on the website any future amendments to, or waivers from,
certain provisions of the Code of Business Conduct and Ethics that apply to the
principal executive officer, principal financial officer and principal
accounting officer and controller of PDC and Appleton. We have also adopted
other best practices including the following:




•
            The
      boards of Appleton and PDC regularly review their own
      performance.




•
            The
      chairman of Appleton’s and PDC’s boards performs reviews of the boards and
      the individual directors on an annual
basis.




•
            The
      boards of Appleton and PDC regularly approve our CEO succession
      plan.




•
            Our
      independent directors meet regularly without the CEO
    present.




•
            We
      have adopted guidelines for executive investment in PDC
    stock.




The Board
of Appleton has created a Corporate Governance Committee for the purpose of
developing, recommending and evaluating best corporate governance practices
applicable to Appleton, including those related to director compensation,
nomination of directors, election of members to Board committees and Board
education and practices. Members of the committee include: Susan Scherbel, Mark
Richards and Andrew Reardon. The charter for the Corporate Governance Committee
can be found on Appleton’s website at www.appletonideas.com.




Appleton
has also created an Enterprise Risk Management (“ERM”) function. The purpose of
ERM is to maximize the Company’s ability to achieve its business objectives. The
ERM function creates a comprehensive approach to anticipate, identify,
prioritize and manage material risks to Appleton’s business objectives. The ERM
Committee reports regularly to the Company’s Audit Committee of the Board
regarding the ERM Committee’s activities, findings, conclusions and
recommendations. The charter for the ERM function can be found at Appleton’s
website at www.appletonideas.com.




Item 11.
            Executive Compensation




Compensation
Discussion and Analysis




Goals and
Policies. The Executive
Compensation Goals and Policies, adopted by the Compensation Committee
of the Board of Directors, establish the objectives of our compensation
program as follows:




·
            enable
      us to attract, motivate and retain highly qualified
  people;




·
            provide
      compensation opportunities that pay generally within the middle of the
      range of management compensation for similar companies with an opportunity
      to exceed the median when higher performance levels are
      achieved.;




·
            support
      our strategic business goals; and




·
            act
      in the best interests of our beneficial owners, the participants in the
      ESOP.




Compensation
Elements.Our executive compensation includes base salary, annual
performance-based incentive pay, long-term performance-based incentive pay and
benefits, including general benefits available to all employees and specific
executive benefits. We believe these elements of executive
compensation provide the proper incentives and rewards for increasing
shareholder value. Base salary provides market competitive compensation for
executive management and leadership at a level that will attract highly
qualified professionals. Annual performance-based incentive pay, in amounts
based on market competitive values, provides an incentive for executives to
contribute their full skill and energy to achieve our annual performance goals.
Long-term performance-based incentive pay provides executives with direct
rewards for business growth that contributes to increases in shareholder value
over several years. Employee and executive benefits, based on the provision of
those benefits in competitive labor markets, provide health, welfare and
retirement income benefits that enable employees, including executives, to
maintain good health and provide security to their families so they can remain
focused on our success.




We provide
all elements of executive compensation in amounts we determine based on
targeting median market compensation levels paid by similarly-sized businesses
within our labor market for executive talent. The mix of elements of
compensation is based on the proportion of those elements of executive
compensation paid in the market. When Company performance exceeds
pre-established target goals for the year, our performance-based pay elements
(annual and long-term incentive) allow for compensation that exceeds the median
market compensation. Conversely, when performance falls short of targeted goals,
our performance-based pay elements allow for compensation below median market
compensation levels.




A
significant portion of executive total direct compensation is in the form of
annual and long-term performance-based incentive compensation. The pay that is
fixed and at risk varies by position. Executive compensation includes more pay
at risk than that of other employees in the organization (see table
below).


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 Table of Contents




2007
Total Direct Compensation Mix at Target Company Performance







Fixed
      (Salary)
            Pay
      at Risk (Annual and Long-Term Incentives)1Mark
      R. Richards
              Chairman,
      President and Chief Executive Officer of Appleton and PDC
            33%
            67%Thomas
      J. Ferree
              Vice
      President, Finance and Chief Financial Officer of Appleton and Chief
      Financial Officer of PDC
            45%
            55%Sarah
      T. Macdonald
              Vice
      President and General Manager, International
            47%
            53%Walter
      M. Schonfeld
              President,
      Technical Papers of Appleton
            42%
            58%Angela
      M. Tyczkowski
              Vice
      President, Secretary, General Counsel and Chief Compliance Officer of
      Appleton and Vice President, Secretary of PDC
            46%
            54%




1  Calculated using
annual incentive paid at target and long-term incentive expected value based on
a Black-Scholes valuation methodology. The assumptions used for valuation are:
Expected life: 6.5 years; Dividend yield: 0%; Risk free rate: 4.5%; Volatility
20%.




We
determine individual executive salaries based on the market pay for the
executive’s position and the executive’s general level of performance in the
position. At times, prior salary may influence a decision on current salary. An
executive fully performing the duties of a position will be paid full median
market pay for that position. An executive not yet fully performing in a
position may receive less than median market pay. An executive making
contributions significantly in excess of those expected for the position may
receive greater than median market pay.




We
determine median market pay by means of market surveys and analyses conducted
every other year by nationally recognized, non-employee executive compensation
consultants who report to the Compensation Committee. Our consultants have used
broad-based surveys of general industry companies of similar revenue size.
Benchmarking data comes from companies with revenues of $5 billion or less,
regressed to our revenue size. This sample was chosen because it best represents
our labor market for executive talent, which is broader than the paper industry,
and provides a reasonable sample size that allows us to track changes in the
labor market for executive talent. Our corporate human resources director
provides the consultant with descriptions of our executives’ responsibilities
but does not participate in the market surveys or analyses. The Chief Executive
Officer ( the “CEO”) provides a description of our business but does not
participate in the market surveys or analyses. In the years in which we do not
ask a consultant to conduct a full market survey and analysis, we ask a
consultant to instead provide us with a general rate of market increase for
executive compensation and we apply that general rate of increase to the market
pay determined in the prior year’s analysis.




Our
corporate human resources director also provides organizational and technical
support to the Compensation Committee by coordinating the work of the
compensation consultant and providing relevant information about company
policies and practices.




The
Compensation Committee engaged Towers Perrin as our compensation
consultant to conduct a compensation survey in 2007. Their findings, after
reviewing all elements of total compensation, including base salary, target
bonus and most recent grant of stock appreciation rights, showed that, in the
aggregate, we are competitive with the external market median, though there is
variation by position/incumbent and element of pay. Towers Perrin recommended a
change in our long-term compensation mix which the Compensation Committee
approved. The change is explained more fully in the discussion of Long-Term
Compensation. Benefits paid upon a change of control are generally consistent
with market practices, with the exception of the multiple for a CEO which is
typically closer to three-times covered pay. During 2007, Mr. Richards change of
control agreement was modified to three times covered pay which is explained
more fully in the discussion of Termination Protection Agreements.




The
Compensation Committee is responsible for authorizing the compensation of the
CEO, subject to ratification by the Board of Directors, approving the
compensation of the named executive officers based on the recommendations of the
CEO and reviewing the compensation of the other executive officers. The
Compensation Committee considers market analysis and data from Towers Perrin in
authorizing and approving compensation arrangements for executive officers.
Decisions to increase or decrease executive compensation materially, if any, are
based on: (1) significant changes in individual performance;
(2) significant changes in job duties and responsibilities; and/or
(3) review of market pay levels to ensure compensation is
competitive.




Annual
Performance-Based Incentive Plan.Our annual performance-based incentive
bonus is based on performance against growth in the value of the business, which
we refer to as business value added or BVA. BVA is calculated as earnings before
interest and taxes less a calculated cost of capital. The cost of capital
is generated by multiplying 11% times our non-interest bearing invested capital.
The Annual Performance-Based Incentive Plan allows for adjustments, as approved
by the Compensation Committee, to the calculation of earnings before interest
and taxes and non-interest bearing invested capital. These adjustments are
restricted to special circumstances such as restructuring, refinancing,
acquisitions, significant leases, multi-year capital improvement installations
and intellectual capital investment (i.e. research and development) or other
items the committee determines


88
 Table of Contents









should be
adjusted. Bonuses are awarded when business value added is above the
predetermined threshold that has been determined by the Compensation Committee
(see table below). Performance below threshold generally will result in no
annual performance-based incentive compensation and a threshold performance will
result in a 20% of target payment. In 2007, BVA targets were set at a level of
improvement from the prior year for the performance groups listed below.
Negative values result when the profits generated from the business do not cover
the calculated cost of capital invested in the business. Bonuses awarded to
executive officers who are responsible for the management of a division will be
measured on performance of their respective division’s BVA and also on BVA for
all of Appleton. Bonuses awarded to other executive officers will be measured
against BVA for all of Appleton. Mr. Richards, Mr. Ferree and Ms. Tyczkowski are
measured against BVA for all of Appleton. Mr. Schonfeld is measured against BVA
for the technical papers division (80%) and BVA for all of Appleton (20%). Ms.
Macdonald  is measured against BVA for BemroseBooth (50%), BVA for the
technical papers division (30%) and BVA for all of Appleton (20%).




2007
BVA Performance Goals ($millions)







Payout
      Levels20%
      of Target
            
            
            Target
            
            
            200%
      of Target
            
            
            300%
      of TargetAll
      Appleton
            
            
            (25.0
            )
            
            
            (23.0
            )
            
            
            (16.0
            )
            
            
            (11.0
            )Technical
      Papers
            
            
            0.0
            
            
            
            3.5
            
            
            
            9.0
            
            
            
            12.3Performance
      Packaging
            
            
            (3.4
            )
            
            
            (2.5
            )
            
            
            0.0
            
            
            
            1.0BemroseBooth
            
            
            (7.5
            )
            
            
            (6.9
            )
            
            
            (5.5
            )
            
            
            (4.0
            )









The
annual performance-based incentive bonus when BVA results are at target is 75%
of base salary for the CEO and 50% of base salary for all other named officers.
The Compensation Committee made certain adjustments to 2007 BVA based on a
multi-year capital investment and a one-time tax benefit. In 2007, actual BVA
performance against target was 95% for All Appleton (-$23.1 million), 182% for
the technical papers division (+$8.0 million) and below threshold for both the
performance packaging division (-$7.2 million) and BemroseBooth (-$11.8
million). For each executive other than the CEO, the CEO has discretion to
increase or decrease the executive’s annual performance-based incentive bonus by
20% without Compensation Committee approval based on the executive’s achievement
of strategic business objectives established by the CEO and reviewed with the
Compensation Committee at the beginning of the fiscal year. Some of these
objectives may be measurable while others may require more judgment and
discretion to evaluate. Ms. Macdonald is the only named officer receiving an
adjustment (+26.4% of earned bonus) for 2007 performance due to exceptional
international performance. The additional increase above the CEO limit of +20%
was approved by the Compensation Committee. We believe the focus on BVA and
other identified strategic business objectives closely ties this element of
executive compensation to our long-term objective to increase shareholder value
and performance relative to annual operating measures of revenue growth and
return on invested capital.




Long-Term
Compensation.We have two forms of long-term compensation, the Appleton
Papers Inc. Long-Term Incentive Plan (or the LTIP) and the Appleton Papers Inc.
Long-Term Performance Cash Plan (or the Performance Cash Plan). Of the combined
value that can be earned in long-term performance-based incentives,
approximately 75% will come from the LTIP and 25% from the Performance Cash
Plan. We believe the long-term incentive plans encourage retention of executive
talent and provide appropriate incentives to increase PDC's share
price.




Long-Term Incentive Plan. The
LTIP was amended and restated effective January 1, 2008. The purpose of the
plan is to attract and retain key management employees who are in a position to
make a significant contribution to the growth and profitability of the Company
by providing a reward for increase in stock performance to align with
shareholder interests. The plan provides for future cash payments based on
increases in the value of PDC common stock, as determined by the semi-annual
valuation provided by the ESOP trustee. LTIP units are awarded annually to
employees in an aggregate total up to 400,000 units of PDC stock. The units
are valued, as of the date of the grant, at the most recent PDC stock price as
determined by the semi-annual ESOP valuation. The cash payment upon the exercise
of a unit is equal to the increase in the value of PDC common stock from the
date of grant until the exercise date. At present, approximately 94 current
executive and management employees participate in the plan.




Employees
are generally entitled to exercise any LTIP units only after holding the units
for at least three years and for up to ten years from the date of grant. There
were no units exercised by an executive officer under the LTIP during 2007. Ms.
Tyczkowski is the only executive officer with units in this plan which she
has held for more than three years. She may exercise her right to receive a
cash payment in 2008. In the event of a change of control as defined in our
Termination Protection Agreements, described below, the LTIP units become
immediately exercisable. If payments under the LTIP in connection with a change
of control constitute “excess parachute payments” as defined in
Section 280G of the Internal Revenue Code, or the Code, which are subject
to the excise tax imposed by Section 4999 of the Code, the payments
provided under the LTIP shall be increased so that the net amount retained by
the employee after deduction of any excise tax on the payment, and any income
tax and excise tax on the additional payments, shall be equal to the original
payment.


89
 Table of Contents




Upon
termination of a holder’s employment due to death, disability or retirement, the
award of LTIP units shall be one-third vested and exercisable for each completed
year of employment after the grant of such LTIP unit. Upon termination of
employment for any other reason, any LTIP units held for at least three years
are then exercisable, and any units held for fewer than three years are
forfeited.




The first
grant of LTIP units occurred on November 9, 2001, with additional awards
made effective as of January 1, 2003, January 1,
2004, July 1, 2005, January 1, 2006 and January 1, 2007. We
expect to make additional grants every year effective as of January 1. The
actual awards of LTIP units have not been and will likely not be made on the
effective date. The actual awards will be made on a date: following the
effective date as long as the share price has not changed since the effective
date. This delay is a result of the administrative time needed by the trustee to
determine and communicate the most recent PDC stock price through the
semi-annual ESOP valuation process. The Compensation Committee determines awards
for the CEO and reviews the recommendations made by the CEO for other named
executive officers. Management decides which employees are in a position to make
a significant contribution to our growth and profitability, and of the employees
who receive LTIP awards, most receive such awards based on our succession
planning and leadership management process.




Long-Term Performance Cash
Plan. The Performance Cash Plan is a new program established effective
January 1, 2008. Our Board of Directors adopted this plan for the purpose of
attracting and retaining key management employees who are in a position to make
a significant contribution to our long-term strategic objectives of revenue
growth and profitability of the Company. The plan provides for annual grants of
long-term cash-based performance awards, which may be earned by participants
based on the Company’s achievement of pre-established performance measures and
the participant’s continued employment. Performance measures include increases
in average revenue growth and average return on invested capital over a
three-year performance period. The plan is an unfunded bonus program of the
Company and does not permit participants to elect to defer their
compensation.




At or
shortly after the start of the three-year performance cycle, a target award
shall be established for each participant. Target awards, based on market
competitive values, will be expressed as a fixed dollar amount. At the end of
the performance cycle, the target award will be revalued based upon the
Compensation Committee’s evaluation of the Company’s performance against the
pre-established performance measures. For the 2008-2010 performance cycle, the
resulting award value can range from 50% to 150% of the target award.
Performance below the minimum results in zero compensation and overall payments
are capped at 150% of target.




In the
event of a change of control during a performance cycle, the participant shall,
receive a prorated final award equal to 100% of the participant’s outstanding
target award. The prorated final award is determined based on the number of
months of employment completed during the performance cycle up to and including
the month of the change of control divided by the total number of months for the
performance cycle multiplied by 100% of the target award. If payments under the
Performance Cash Plan in connection with a change of control constitute “excess
parachute payments” as defined in Section 280G of the Code, which are
subject to the excise tax imposed by Section 4999 of the Code, the payments
provided under the Performance Cash Plan shall be increased so that the net
amount retained by the employee after deduction of any excise tax on the
payment, and any income tax and excise tax on the additional payments, shall be
equal to the original payment.




Upon
termination of a participant’s employment due to death, disability or
retirement, a prorated award will be paid to the participant (or designated
beneficiary in the case of death). The prorated award is determined by reference
to months of employment completed during the performance cycle, the target award
and the Company’s performance against the established performance measures at
the end of the month of the death, disability or retirement. Upon termination of
employment for any other reason, no award will be paid to the
participant.




The first
performance cycle will be from January 1, 2008 through December 31, 2010.
We expect to start new performance cycles every year effective as of
January 1.




Equity Ownership.Our executives are eligible to participate in our ESOP in the same manner
and with the same rights as all other U.S. employees. Because the ESOP is a plan
qualified under ERISA, we may not require executive participation in the ESOP at
any level nor may we take any adverse employment action against an executive for
the exercise of his or her right to participate or not participate in the ESOP.
We believe, however, that it is in the best interests of the employees as
beneficial owners for executives to acquire and maintain beneficial ownership
interests in the Company and accordingly have adopted guidelines to that effect.
The guidelines suggest an equity position having a value of six times base
salary for the CEO, five times base salary for the CFO, and four times base
salary for other executive reports to the CEO within five years of the
start of employment. Values in the ESOP, LTIP and any other nonqualified
deferred compensation arrangement with values tied to PDC performance, will be
counted toward the guideline.


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Termination or
Change of Control. We have entered into Termination Protection Agreements
(or TPAs) with certain of our executive officers. Subject to and limited by the
language of the agreements, these agreements provide for certain payments to the
executive officers following a “change of control,” as defined in the TPA, if we
terminate the executive officer’s employment other than for misconduct or
“permanent disability,” as defined in the TPA, or if the executive officer
terminates employment for “good reason,” as defined in the TPA. “Change of
control” is defined to include various events whereby ownership and control of
the Company is effectively transferred, including termination of the ESOP. These
events were chosen by the Company as appropriate events to trigger payment based
on competitive market analysis of such agreements for executive officers. Our
TPAs are discussed in detail under “Potential Payments Upon Termination or
Change of Control,” below.




Our Compensation
Decisions.The Compensation Committee makes compensation decisions after
reviewing comparative compensation data as described earlier. We determine
individual executive salaries based on the market pay for the executive’s
position and the executive’s general level of performance in the position. An
executive fully performing the duties of a position will be paid full median
market pay for that position. An executive not yet fully performing in a
position may receive less than median market pay. An executive making
contributions significantly in excess of those expected for the position may
receive greater than median market pay. The Compensation Committee uses
quantitative and qualitative metrics and exercises some judgment in determining
achievement of the overall company and division performance goals and assessing
the named executive’s individual performance for the prior year. The
Compensation Committee uses an evaluation of individual performance in
determining increases to base salary and awarding annual performance-based
incentive compensation and long-term compensation. Mr. Schonfeld brings
extensive prior general management experience to the organization and Ms.
Macdonald brings extensive international experience to the organization. For
these reasons, the Compensation Committee has awarded pay above the market pay
targets for their respective positions.




Compensation
Committee Report




The
Compensation Committee consists of three independent directors, Mr. Murphy,
Mr. Reardon, and Ms. Seifert, with Ms. Seifert acting as the
chairperson. The Compensation Committee is appointed annually by our Board of
Directors and operates pursuant to a Charter, which is available at
www.appletonideas.com (investor information section). The Compensation Committee
is responsible for authorizing the compensation of the Chief Executive Officer
subject to ratification by the Board of Directors, approving the compensation of
the named executive officers based on the recommendations of the Chief Executive
Officer, and reviewing the compensation of the other executive officers. It is
also responsible for adopting and amending our general compensation policies and
benefit plans, including our ESOP. The Compensation Committee may not delegate,
and has not delegated, any of these duties to others.




The
Compensation Committee has reviewed and discussed the above section titled
“Compensation Discussion and Analysis” with management and, based on this review
and discussion, recommended the inclusion of the “Compensation Discussion and
Analysis” section in this annual report.




Members of the Compensation
Committee


Kathi P.
Seifert, chairperson


Terry M.
Murphy


Andrew F.
Reardon




91
 Table of Contents


Summary
Compensation Table


Name
      and Principal Position
                  
                  Year
                  
                  Salary ($)
                  
                  Bonus ($)
                  
                  Option
                    Awards
      ($)(1)
                  
                  Non-Equity
      Incentive Plan Compensation ($)(2)
                  
                  Change
      in Pension Value and
                    Nonqualified
      Deferred Compensation Earnings ($)(3)
                  
                  All
      Other
                    Compensation($)(4)
                  
                  Total
      ($)(5)Mark
      R. Richards
                  
                  2007
                  
                  663,462
                  
                  0
                  
                  216,767
                  
                  472,717
                  
                  134,632
                  
                  47,564
                  
                  1,535,142Chairman,
      President and Chief Executive Officer of Appleton and PDC
                  
                  2006
                  
                  584,615
                  
                  0
                  
                  346,519
                  
                  833,076
                  
                  56,164
                  
                  49,546
                  
                  1,869,920Thomas
      J. Ferree
                  
                  2007
                  
                  329,231
                  
                  0
                  
                  0
                  
                  156,385
                  
                  24,284
                  
                  49,663
                  
                  559,563Vice
      President, Finance and Chief Financial Officer of Appleton and Chief
      Financial Officer of PDC(6)
                  
                  2006
                  
                  62,500
                  
                  56,250(8)
                  
                  0
                  
                  0
                  
                  7,365
                  
                  41,337
                  
                  167,452Sarah
      T. Macdonald
                  
                  2007
                  
                  279,231
                  
                  36,858(9)
                  
                  22,952
                  
                  102,758
                  
                  30,000
                  
                  29,833
                  
                  501,632Vice
      President and General Manager, International
                  
                  2006
                  
                  275,000
                  
                  0
                  
                  52,347
                  
                  140,663
                  
                  18,729
                  
                  30,636
                  
                  517,375Walter
      M. Schonfeld
                  
                  2007
                  
                  383,462
                  
                  0
                  
                  12,621
                  
                  315,589
                  
                  30,942
                  
                  42,096
                  
                  784,710President,
      Technical Papers of Appleton(7)
                  
                  2006
                  
                  223,558
                  
                  50,000(10)
                  
                  7,174
                  
                  220,313
                  
                  16,618
                  
                  53,392
                  
                  571,055Angela
      M. Tyczkowski
                  
                  2007
                  
                  283,462
                  
                  0
                  
                  19,704
                  
                  134,644
                  
                  81,114
                  
                  30,926
                  
                  549,850Vice
      President, Secretary, General Counsel and Chief Compliance Officer of
      Appleton and Vice President, Secretary of PDC
                  
                  2006
                  
                  243,077
                  
                  0
                  
                  37,566
                  
                  230,923
                  
                  19,722
                  
                  28,592
                  
                  559,880


92
 Table of Contents


(1)
            Option
      awards consist of grants of units under our Long-Term Incentive Plan. The
      amounts reflect the compensation costs recognized by the Company for
      financial reporting purposes under SFAS No. 123R for long-term
      performance-based incentive plan units. The valuation methods and material
      assumptions used in determining the long-term performance-based incentive
      plan units value are discussed in detail in Note 16 to Consolidated
      Financial Statement in Item 8,
above.


(2)
            Non-equity
      incentive plan compensation consists of payments under our Annual
      Performance-Based Incentive Plan. Amounts paid under the plan are
      determined based on company and division business value added performance
      and other extraordinary factors, positive or negative, determined by the
      CEO and the Compensation Committee. Amounts paid under the Annual
      Performance-Based Incentive Plan are earned in 2007 and paid in
      2008.


(3)
            The
      valuation methods and material assumptions used in determining the change
      in pension value are discussed in detail in Note 14 to Consolidated
      Financial Statements in Item 8,
above.


(4)
            The
      aggregate incremental costs of all perquisites are stated as actual costs
      to the Company. The relocation assistance provided to Messrs. Ferree and
      Schonfeld in 2006, as discussed below, is available to all salaried
      employees of the Company pursuant to our relocation
  policy.




All other
compensation for 2007 consists of the following for each named executive
officer:




Mr. Richards:
company match contributions to ESOP defined contribution plan $13,500, allowance
in lieu of perquisites $25,000, executive life insurance, travel and
entertainment for spouse to company events, tax gross up on travel and
entertainment for spouse to company events.




Mr.
Ferree: company match contributions to ESOP defined contribution plan $13,500,
allowance in lieu of perquisites $15,000, relocation assistance $19,058 and
executive life insurance.




Ms.
Macdonald: company match contributions to ESOP defined contribution plan
$13,500, allowance in lieu of perquisites $15,000, travel and entertainment for
spouse to company events and executive life insurance.




Mr.
Schonfeld: company match contributions to ESOP defined contribution plan
$13,500, allowance in lieu of perquisites $20,000, executive life insurance,
travel and entertainment for spouse to company events, tax gross up on travel
and entertainment for spouse to company events and relocation
assistance.




Ms.
Tyczkowski: company match contributions to ESOP defined contribution plan
$13,500, allowance in lieu of perquisites $15,000, travel and entertainment for
spouse to company events and tax gross up on travel and entertainment for spouse
to company events.







(5)
            The
      following executives deferred the following indicated amounts into the
      Nonqualified Excess Plan: Mr. Richards ($340,961); Ms. Macdonald
      ($70,416); Mr. Schonfeld ($11,504); Ms. Tyczkowski ($272,404). These
      deferrals are also described in the Nonqualified Deferred Compensation
      table.


(6)
            Mr. Ferree
      joined the company in October 2006.


(7)
            Mr. Schonfeld
      joined the company in May 2006.


(8)
            Mr. Ferree
      was paid a $25,000 sign-on bonus as part of our offer of employment.
      Mr. Ferree’s guaranteed annual incentive payment of $31,250 for 2006
      was fixed at the commencement of his
employment.


(9)
            Ms.
      Macdonald’s annual performance-based incentive compensation was adjusted
      by the Compensation Committee by $36,858 to more appropriately reflect her
      performance during 2007.


(10)
            Mr.
      Schonfeld was paid a $50,000 sign-on bonus as part of our offer of
      employment.


93
 Table of Contents


Grants
of Plan-Based Awards




Name
            Plan
            Grant
              Date(1)
            Estimated Future Payouts Under Non-
              Equity
      Incentive Plan Awards (2)
            All
      Other
              Option Awards:
              Number
      of
              Securities
            Exercise or Base
            Grant Date Fair
              Value
      of StockThreshold($)
            Target($)
            Maximum($)
            Underlying
              Options
      (#)(3)
            Price
      of Option
              Awards($/Unit)(4)
            and
      Option
              Awards($)(5)Mark R. Richards
            Annual
      Performance-Based Incentive Plan
            
            99,519
            497,596
            1,492,789Long-Term Incentive
      Plan
            1/1/07
            
            
            
            90,000
            33.62
            0Thomas
      J. Ferree
            Annual
      Performance-Based Incentive Plan
            
            32,923
            164,615
            493,846Long-Term Incentive
      Plan
            1/1/07
            
            
            
            25,000
            33.62
            0Sarah
      T. Macdonald
            Annual
      Performance-Based Incentive Plan
            
            27,923
            139,616
            418,847Long-Term Incentive
      Plan
            1/1/07
            
            
            
            18,500
            33.62
            0Walter
      M. Schonfeld
            Annual
      Performance-Based Incentive Plan
            
            38,346
            191,731
            575,192Long-Term Incentive
      Plan
            1/1/07
            
            
            
            35,000
            33.62
            0Angela
      M. Tyczkowski
            Annual
      Performance-Based Incentive Plan
            
            28,346
            141,731
            425,192Long-Term Incentive
      Plan
            1/1/07
            
            
            
            20,000
            33.62
            0










(1)
            The
      Grant Date for units under our LTIP reflects the date upon which the units
      were awarded to the named executive officer. The units are valued, as of
      the Grant Date, at the most recent PDC stock price as determined by the
      semi-annual ESOP valuation.


(2)
            All
      Non-Equity Incentive Plan grants are made under our Annual
      Performance-Based Incentive Plan and were based on Company financial
      performance. The Threshold, Target and Maximum payouts stated are based on
      2007 salaries. Actual amounts earned in 2007 and paid in 2008 are stated
      in the Non-Equity Incentive Plan Compensation column of the Summary
      Compensation Table.


(3)
            Option
      awards consist of grants of units under our Long-Term Incentive
      Plan.


(4)
            The
      units granted under our LTIP are valued, as of the date of the grant, at
      the most-recent PDC stock price as determined by the semi-annual ESOP
      valuation.


(5)
            We
      have determined, using the guidance provided in SFAS No. 123R, that
      the units awarded under the LTIP are liabilities subject to remeasurement
      at each reporting date. It is our policy to measure all of our liabilities
      incurred under the LTIP at intrinsic
value.







94
 Table of Contents




Outstanding
Equity Awards at Fiscal Year-End





Option
awards in the table describe units issued under our Long-Term Incentive
Plan.




Name
            Number of Securities
              Underlying
              Unexercised
      Options
            Number of Securities
              Underlying
              Unexercised
      Options
            Option
              Exercise
              Price($)
            Date Options
              Fully
              Vested(1)
            Option Expiration
              Date(1)Exercisable(#)
            Unexercisable(#)Mark
      R. RichardsUnits
      Awarded 2007
            0
            90,000
            33.62
            01/01/10
            01/01/17Units
      Awarded 2006
            0
            85,000
            28.56
            01/01/09
            01/01/16Units
      Awarded 2005
            0
            85,000
            27.77
            07/01/08
            07/01/15Thomas
      J. FerreeUnits
      Awarded 2007
            0
            25,000
            33.62
            01/01/10
            01/01/17Sarah
      T. MacdonaldUnits
      Awarded 2007
            0
            18,500
            33.62
            01/01/10
            01/01/17Units
      Awarded 2006
            0
            9,000
            28.56
            01/01/09
            01/01/16Units
      Awarded 2005
            0
            9,000
            27.77
            07/01/08
            07/01/15Walter
      M. SchonfeldUnits
      Awarded 2007
            0
            35,000
            33.62
            01/01/10
            01/01/17Units
      Awarded 2006
            0
            18,500
            31.27
            07/01/09
            07/01/16Angela
      M. TyczkowskiUnits
      Awarded 2007
            0
            20,000
            33.62
            01/01/10
            01/01/17Units
      Awarded 2006
            0
            9,000
            28.56
            01/01/09
            01/01/16Units
      Awarded 2005
            0
            6,000
            27.77
            07/01/08
            07/01/15Units
      Awarded 2004
            1,600
            0
            23.36
            01/01/07
            01/01/14





(1)
            Employees
      are generally entitled to exercise any long-term performance-based
      incentive plan units only after holding the units for at least three years
      and for up to ten years from the date of
grant.








Pension
Benefits


Name
            Plan Name
            Number of Years of
              Credited
      Service(#)
            Present Value of
              Accumulated
              Benefit($)(1)
            Payments During Last
              Fiscal
      Year($)Mark
      R. Richards
            Pension
            2.8
            36,169
            0SERP
            2.8
            164,917
            0Thomas
      J. Ferree
            Pension
            1.2
            18,906
            0SERP
            1.2
            12,743
            0Sarah
      T. Macdonald
            Pension
            2.2
            22,104
            0SERP
            2.2
            12,599
            0Walter
      M. Schonfeld
            Pension
            1.7
            16,278
            0SERP
            1.7
            31,073
            0Angela
      M. Tyczkowski
            Pension
            11.6
            94,705
            0SERP
            11.6
            38,298
            0





(1)
            The
      valuation methods and material assumptions used in determining the present
      value of accumulated pension benefits are discussed in detail in Note 14
      to Consolidated Financial Statements in Item 8,
  above.


95
 Table of Contents




Pension Plan and
Supplemental Executive Retirement Plan (“SERP”). We maintain a broad-based
tax-qualified, noncontributory defined benefit pension plan for eligible
salaried employees, which we refer to as the Pension Plan. Benefits under the
Pension Plan vest after five years of service. Benefits are based on years of
service and employee pay. We have also established the SERP to provide
retirement benefits for management and other highly compensated employees whose
benefits are reduced by the tax-qualified plan limitations in the Pension Plan.
Benefits under the Pension Plan and the SERP are paid as annuities (except for
small benefits unlikely to apply to any of the named executives). 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 tax-qualified plan
limitations did not apply. Under the Pension Plan and the SERP, a pension is
payable upon retirement at age 65 with 5 years of service. Benefit payments may
begin as early as age 55. The benefit is actuarially reduced when payments begin
earlier than age 65. In accordance with the terms of the plan, the company
provides an enhancement to the benefit for all eligible salaried employees when
age plus service equals 65 or more at the time of termination. 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 and deferred compensation and overtime
pay.




In December 2007, it was announced
that the Pension Plan covering eligible salaried employees, of which these named
executives officers are participants, will be frozen effective December 31,
2014. It will be replaced effective January 1, 2015 with a broad-based
tax-qualified, noncontributory defined contribution benefit, which we will refer
to as the Retirement Contribution benefit described below. All eligible
participants in the Pension Plan, including these named executive officers, will
be given a one-time opportunity to accelerate participation in the Retirement
Contribution benefit by electing to freeze their benefit in the Pension Plan on
March 31, 2008 and begin receiving the Retirement Contribution benefit effective
April 1, 2008.




Nonqualified
Deferred Compensation


Name
            
            Executive Contributions
              in Last Fiscal
      Year($)(1)
            
            
            Our Contributions in
              Last Fiscal
      Year($)
            
            
            Aggregate Earnings
              in
      Last Fiscal
              Year($)
            
            
            Aggregate
              Withdrawals/
              Distributions($)
            
            
            Aggregate
              Balance
      at
              12/29/07($)Mark
      R. Richards
            
            
            340,961
            (2)
            
            
            0
            
            
            
            23,369
            
            
            
            0
            
            
            
            471,708Thomas
      J. Ferree
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0Sarah
      T. Macdonald
            
            
            70,416
            (2)
            
            
            0
            
            
            
            11,120
            (3)
            
            
            0
            
            
            
            225,906
            (3)Walter
      M. Schonfeld
            
            
            11,504
            (2)
            
            
            0
            
            
            
            209
            
            
            
            0
            
            
            
            11,713Angela
      M. Tyczkowski
            
            
            272,404
            (2)
            
            
            0
            
            
            
            32,326
            
            
            
            0
            
            
            
            360,766





(1)
            Contributions
      to the Nonqualified Excess Plan may include base salary and/or annual
      performance-based incentive pay.


(2)
            Amounts
      reported as deferred under the Nonqualified Excess Plan are included as
      part of Total Compensation in the Summary Compensation
    Table.


(3)
            Aggregate
      Earnings includes loss on earnings in 2007 of $756 from sign-on deferral
      and Aggregate Balance includes $120,310 from 2005 other deferred
      compensation.




Nonqualified
Excess Plan.On February 1, 2006, we established a Nonqualified
Excess Plan for approximately 100 highly compensated employees including
directors and executive officers. This plan was established for the purpose of
allowing a tax-favored option for saving for retirement when the Code limits the
ability of highly compensated employees to participate under tax-qualified
plans. This plan allows for deferral of compensation on a pre-tax basis and
accumulation of tax-deferred earnings in an amount of up to 50% of a
participant’s base salary and/or up to 75% of a participant’s annual
performance-based incentive pay. Participants in the plan choose to have
deferrals deemed invested in selected mutual funds. We invest funds equal to the
amounts deferred by participants in the mutual funds which the participants
select for their deemed investments. These funds are our assets to which the
participants have no claim other than as general creditors of the Company. We
pay administrative expenses of the plan and annually add funds to the plan to
make up for any difference between the participants’ deemed investments and the
actual performance of our investments. During 2007, approximately $976,473 was
deferred into this plan.




Other
Nonqualified Deferred Compensation. As part of her initial offer of
employment in 2005, Ms. Macdonald was provided with $100,000 of deferred
compensation. The deferred compensation will be increased or reduced by the
change in value of PDC common stock as determined by the ESOP trustee. The
deferred compensation will be paid upon termination in five annual installments
at the rate of one-fifth of the original units.




Retirement
Contribution Benefit and Excess Plan.As a replacement to the
pension plan, any management employee hired after January 1, 2008, or those
electing to freeze their accrued benefit under the pension plan on April 1, 2008
or January 1, 2015, will begin receiving a contribution for future retirement
benefits into the 401(k) fund of the Appleton Papers Retirement Savings and
Employee Stock Ownership Plan (KSOP). The contribution is a points-based formula
ranging from 1% to 5% of total compensation based on the employee’s age and
service and is the same benefit provided to other eligible
employees.




We have
also established a benefit within the above referenced Nonqualified Excess Plan
for management and other highly compensated employees whose benefits are reduced
as the result of deferring income into the Nonqualified Excess Plan or by the
tax-qualified plan income limitations applied to the KSOP Plan. This benefit
provides the same 1% to 5% contribution calculated on excluded pay. There is an
additional “KSOP match” of 6% of excluded pay which is calculated regardless of
whether the employee participates in the KSOP plan.


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The table
below reflects the amount of compensation that would be paid to each of the
named executive officers in the event of termination of such executive’s
employment under various scenarios. The amounts shown assume that such
termination was effective December 31, 2007. These amounts are estimates, the
actual amounts to be paid can only be determined at the time of a termination or
a change of control.




Potential Payments upon Termination
or Change of Control




Name
            Termination Other Than for
              Misconduct or With Good Reason
            COBRA
              Health
              Benefits ($)(2)
            Outplacement
              Services($)
            Termination
              Protection
              Payments($)
            Long-Term
              Incentive Plan
              Units
              Exercisable($)(3)
            Company
              FICA
      To
              Be Paid($)(4)
            Tax Gross-Up
              Payments($)
            Total($)Mark
      R. Richards(1)
            Without
      Change of Control
            12,879
            9,950
            1,012,500
            0
            14,681
            0
            1,050,010Within two years of Change of Control
            25,758
            9,950
            3,543,750
            872,750
            64,039
            1,859,601
            6,375,848Thomas
      J. Ferree
            Without
      Change of Control
            12,879
            9,950
            495,000
            0
            7,178
            0
            525,007Within
      two years of Change of Control
            17,172
            9,950
            990,000
            0
            14,355
            481,871
            1,513,348Sarah
      T. Macdonald
            Without
      Change of Control
            12,879
            9,950
            420,000
            0
            6,090
            0
            448,919Within
      two years of Change of Control
            17,172
            9,950
            840,000
            90,525
            13,493
            417,387
            1,388,527Walter M. Schonfeld
            Without
      Change of Control
            12,879
            9,950
            577,500
            0
            8,374
            0
            608,703Within
      two years of Change of Control
            17,172
            9,950
            1,155,000
            32,240
            17,215
            508,378
            1,739,955Angela M. Tyczkowski
            Without
      Change of Control
            12,879
            9,950
            427,500
            10,624
            6,353
            0
            467,306Within
      two years of Change of Control
            17,172
            9,950
            855,000
            89,370
            13,693
            457,798
            1,442,983





(1)
            Payments
      for Mr. Richards reflect new benefit level of three times pay within two
      years of Change of Control.


(2)
            COBRA
      Health Benefits amounts stated in this table are based on average cost of
      medical and dental plans options.


(3)
            In
      the event of a change of control as defined in our Termination Protection
      Agreements, the LTIP units become immediately exercisable. The amount
      reflects the value of all outstanding LTIP units on December 31,
      2007. The value of outstanding LTIP units is determined by multiplying the
      number of units outstanding for each grant date by the change in unit
      value from the date of the grant to December 31,
  2007


(4)
            Assumes
      Medicare rate at 1.45%


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Termination
Protection Agreements. We have entered into
Termination Protection Agreements with all of our executive officers, including
the named executive officers. 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
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, directly
or indirectly (whether a shareholder, owner, partner, consultant, employee or
otherwise) engaged in a competing business, referred to in the Termination
Protection Agreements as a “major business,” as defined below.




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 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.
Effective January 1, 2008, this payment will be equal to three times the annual
base salary for the Chief Executive Officer, plus a multiple of three times his
or her targeted bonus for the fiscal year in which his or her employment
terminates.




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, if the executive
officer’s employment terminates as described in either of the preceding
paragraphs, 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
Termination Protection Agreements provide that if certain amounts to be paid in
connection with a change of control constitute “excess parachute payments,” as
defined in Section 280G of the Code, which are subject to the excise tax
imposed by Section 4999 of the Code, the severance benefits owed to the
executive officer shall be increased such that the net amount retained by the
executive officer after deduction of any excise taxes, and income taxes and
excise taxes on the additional payments, shall be equal to the original
severance benefits.




A “change
of control” is defined in these agreements as:




•
            the
      termination of the ESOP or amendment of the ESOP so that it ceases to be
      an employee stock ownership plan;




•
            an
      event whereby the ESOP ceases to own a majority interest in
      Appleton;




•
            the
      sale, lease, exchange or other transfer of all or substantially all of our
      assets to another entity;




•
            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 of control, without
the executive officer’s consent, a reduction of 25% or more of the executive
officer’s base salary, and after a change of 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 of control; or




•
            the
      relocation of the executive officer’s principal place of employment
      without his or her consent.


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“Major
business” is defined in these agreements as any business segment of the Company
(e.g. carbonless copy paper, thermal paper or other business segments) that:
(a) produced more than 5% of the revenues of the Company in the last full
fiscal year prior to the executive’s termination; or (b) is projected to
produce more than 5% of the revenues of the Company in the fiscal year of the
executive’s termination or in either of the two succeeding fiscal years
following the executive’s termination. Executive officers shall be deemed not a
shareholder of a company that would otherwise be a competing entity if the
executive officer’s record and beneficial ownership of the capital stock of such
company amount to not more than 1% of the outstanding capital stock of any such
company subject to the periodic and other reporting requirements of
Section 13 or Section 15(d) of the Exchange Act.






Non-Employee
Director Compensation. Cash compensation to directors of Appleton and PDC
who are not employees of Appleton, PDC or any of their subsidiaries consists of
$55,000 in annual fees, $10,000 annually for serving as the chairman of the
Audit Committee, $5,000 annually for serving as the chairman of the Compensation
Committee or Governance Committee. Director fees are paid quarterly in advance
of the services being provided. There are no fees paid for participation in
committee or board meetings. There are no changes in fees for 2008.




Directors
also receive deferred compensation of $35,000 awarded in units which track PDC
common stock similar to our Long-Term Incentive Plan for employees. Deferred
compensation will be paid and calculated for six-month calendar periods of
service beginning January 1 and July 1 using the PDC common stock
price determined by the ESOP trustee as of the ESOP valuation date coincident
with or most recently preceding such date of payment. If a director ceases to be
a director during the six-month period, both the cash and deferred compensation
will be prorated for the time served as a director. The deferred compensation
will be paid upon cessation of service as a director in five annual cash
installments, with each installment equal to one-fifth of the director’s units
and the first installment paid following the next semi-annual share price
determination. The value of the installment payment will be determined by the
PDC common stock price in effect at the time of payment.







Director
Compensation




Name
            Fees
      Earned or
              Paid
      in Cash($) (1)
            Option
      Awards ($) (2)
            Total
      ($)Stephen
      P. Carter
            48,750
            35,168
            83,918Terry
      M. Murphy
            28,406
            17,777
            46,183Ronald
      A. Pace
            41,250
            35,168
            76,418Andrew
      F. Reardon
            28,406
            17,777
            46,183Susan
      Scherbel
            43,333
            35,168
            78,501Kathi
      P. Seifert
            45,000
            35,168
            80,168







(1)
            Non-employee
      directors are entitled to participate in our Nonqualified Excess Plan. Mr.
      Carter deferred $48,750 of his cash compensation into that plan, and Mr.
      Pace deferred $41,250 of his cash compensation into that
    plan.




(2)
            On
      January 1, 2007 each of the then non-employee directors were issued 520.5
      deferred compensation units. On July 1, 2007, each of the then
      non-employee directors were issued 532.1 deferred compensation units.
      Messrs. Murphy and Reardon were named as directors in June 2007. The
      amounts reflect the compensation costs recognized by the Company for
      financial reporting purposes under SFAS No. 123R for long-term
      performance-based incentive plan units. The valuation methods and material
      assumptions used in determining the long-term performance-based incentive
      plan units value are discussed in detail in Note 16 to Consolidated
      Financial Statements in Item 8, above. We have determined, using the
      guidance provided in SFAS No. 123R, that the units awarded under the
      Long-Term Incentive Plan are liabilities subject to remeasurement at each
      reporting date. It is our policy to measure all of our liability incurred
      under the Long-Term Incentive Plan at intrinsic value. Therefore, the
      Grant Date Fair Value of each of the units is zero
  ($0).




Directors
are also eligible to participate in our Matching Gift Program in which we match
contributions of up to $2,000 per year to eligible educational institutions,
defined by the program as graduate and professional schools, universities,
colleges, junior colleges and secondary schools in the United States which are
accredited by national, regional or professional accrediting agencies. Annually,
we will match no more than $1,000 of an individual’s contributions to a
secondary school foundation.


No
non-employee director has a compensation arrangement which differs from these
standard compensation arrangements.
  Mr. Carter
serves as the Audit Committee Chair, Ms. Seifert serves as the Compensation
Committee Chair, and Ms. Scherbel serves as the Governance Committee
Chair.


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 Table of Contents




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 PDC. PDC
owns beneficially and of record 100% of the issued and outstanding shares of
Appleton.




The
following table sets forth as of December 31, 2007, the number of shares,
if any, allocated to the accounts of the directors, the named executive officers
and the 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)
            PercentMark
      R. Richards
            13,525
            *Thomas
      J. Ferree
            1,302
            *Stephen
      P. Carter
            —  (2)
            *Terry
      M. Murphy
            —  (2)
            *Ronald
      A. Pace
            —  (2)
            *Andrew
      F. Reardon
            —  (2)
            *Susan
      Scherbel
            —  (2)
            *Kathi
      P. Seifert
            —  (2)
            *Sarah
      T. Macdonald
            2,052
            *Walter
      M. Schonfeld
            9,004
            *Angela
      M. Tyczkowski
            18,712
            *All
      directors and executive officers as a group (15 persons)
            154,348
            *





*
            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 PDC. 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, 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.





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 Table of Contents







Item 13.
            Certain Relationshipsand Related Transactions, and
      Director Independence




None.




Item 14.
            Principal Accountant 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 December 29, 2007 and December 30, 2006, 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 $559,700 in fiscal 2007 and $521,740 in fiscal 2006. The aggregate
fees billed by PricewaterhouseCoopers LLP for audit-related services were
$65,200 in fiscal 2007 and $142,400 in fiscal 2006. The fiscal 2007 fees consist
of consultations related to Sarbanes Oxley 404 requirements. The fiscal 2006
fees consist of $34,400 for consultations related to Sarbanes Oxley 404
requirements, $14,900 relating to the consent solicitation process, $89,700 for
fraud investigation procedures and $3,400 for audit related services at
Bemrose.




Tax Fees. The aggregate fees billed by
PricewaterhouseCoopers LLP for tax services were $123,100 in fiscal 2007 and
$93,600 in fiscal 2006. The 2007 tax fees consist of tax compliance and
consulting services primarily in the United Kingdom. The 2006 tax fees consist
of $41,600 in tax service performed for Bemrose and expatriate tax services and
other tax return reviews in the U.S. for $52,000.




All Other
Fees. The aggregate fees billed by PricewaterhouseCoopers LLP for all other
services were $0 in fiscal 2007 and $11,000 in fiscal 2006.




101
 Table of Contents


PART
IV


Item 15.                 Exhibits andFinancial Statement Schedules




(a)(1)
            Financial
      Statements.Report of Independent Registered Public Accounting Firm
            
            
            39Consolidated Balance Sheets as of December 29, 2007
      and December 30, 2006
            
            
            40Consolidated Statements of Operations for the years
      ended December 29, 2007, December 30, 2006 and December 31,
      2005
            
            
            41Consolidated Statements of Cash Flows for the years ended
      December 29, 2007, December 30, 2006 and December 31,
    2005
            
            
            42Consolidated Statements of Redeemable Common Stock,
      Accumulated Deficit, Accumulated Other Comprehensive (Loss) Income and
      Comprehensive (Loss) Income for the years ended December 29, 2007,
      December 30, 2006 and December 31, 2005
            
            
            43Notes to Consolidated Financial
    Statements
            
            
            44(a)(2)
            Financial
      Statement Schedule.Report of Independent Registered Public Accounting
      Firm on Financial Statement Schedule
            
            
            108SCHEDULE II – Valuation and Qualifying
      Accounts
            
            
            109(a)(3)
            Exhibits.3.1
            Second
      Amended and Restated Certificate of Incorporation of Appleton Papers Inc.
      Incorporated by reference to Exhibit 3.1 to the Registrants’ Registration
      Statement on Form S-4 (Registration No. 333-82084) filed on
      February 4, 2002.3.2
            Amended
      and Restated By-laws of Appleton Papers Inc. Incorporated by reference to
      Exhibit 3.2 to the Registrants’ Registration Statement on Form S-4
      (Registration No. 333-82084) filed on February 4, 2002.3.2.1
            Amendment
      to Amended and Restated By-laws of Appleton Papers Inc. Incorporated by
      reference to Exhibit 3.2.1 to Amendment No. 2 to the Registrants’
      Registration Statement on Form S-4 (Registration No. 333-82084) filed on
      May 15, 2002.3.2.2
            Amendment
      to Amended and Restated By-laws of Appleton Papers Inc. Incorporated by
      reference to Exhibit 3.2.2 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.
      Incorporated by reference to Exhibit 3.3 to the Registrants’ Registration
      Statement on Form S-4 (Registration No. 333-82084) filed on February 4,
      2002.3.4
            Amended
      and Restated By-laws of Paperweight Development Corp. Incorporated by
      reference to Exhibit 3.4 to the Registrants’ Registration Statement on
      Form S-4 (Registration No. 333-82084) filed on February 4,
      2002.4.1
            Indenture,
      dated as of June 11, 2004, between Appleton Papers Inc. and each of the
      guarantors named therein and U.S. Bank National Association, as trustee
      (the “Senior Notes Indenture”). Incorporated by reference to Exhibit 4.1
      to the Registrants’ Quarterly Report on Form 10-Q for the quarter ended
      July 4, 2004.4.2
            Indenture,
      dated as of June 11, 2004, between Appleton Papers Inc. and each of the
      guarantors named therein and U.S. Bank National Association, as trustee
      (the “Senior Subordinated Notes Indenture”). Incorporated by reference to
      Exhibit 4.2 to the Registrants’ Quarterly Report on Form 10-Q for the
      quarter ended July 4, 2004.4.3
            Form
      of registered Senior Note (included as Exhibit A1 to the Senior Notes
      Indenture).4.4
            Form
      of registered Senior Subordinated Note (included as Exhibit A1 to the
      Senior Subordinated Notes Indenture).


102
 Table of Contents





4.5
            First
      Supplemental Indenture, dated as of January 11, 2005, among Appleton Papers Inc., each of the
      guarantors named therein and U.S. Bank National Association, as trustee,
      governing the 8 1/8% Senior Notes due 2011.4.6
            Supplemental
      Indenture, dated as of January 11, 2005, among Appleton Papers Inc., each
      of the guarantors named therein and U.S. Bank National Association, as
      trustee, governing the 9 3/4% Senior Subordinated Notes due
      2014.4.7
            Second
      Supplemental Indenture, dated as of June 13, 2006, among Appleton
      Papers Inc., each of the guarantors named therein and U.S. Bank National
      Association, as trustee, governing the 8 1/8% Senior Notes due 2011.
      Incorporated by reference to Exhibit 4.1 to Appleton’s current report on
      Form 8-K filed on June 16, 2006.4.8
            Second
      Supplemental Indenture, dated as of June 13, 2006, among Appleton Papers
      Inc., each of the guarantors named therein and U.S. Bank National
      Association, as trustee, governing the 9 3/4% Senior Subordinated Notes
      due 2014. Incorporated by reference to Exhibit 4/2 to Appleton’s current
      report on Form 8-K filed June 16, 2006.4.9
            Form
      of 8 1/8% Senior Notes due 2011. Incorporated by reference to Exhibit 4.3
      to Appleton’s current report on Form 8-K filed June 16,
    2006.4.10
            Form
      of 9 3/4% Senior Subordinated Notes due 2014. Incorporated by reference to
      Exhibit 4.4 to Appleton’s current report on Form 8-K filed on June 16,
      2006.4.11
            Credit
      Agreement, dated as of June 5, 2007, among Appleton Papers Inc., as
      the U.S. Borrower, BemroseBooth Limited, as the UK Borrower, Paperweight
      Development Corp. as Holdings, Bank of America, N.A. as administrative
      agent, swing line lender and L/C issuer, Banc of America Securities LLC as
      joint lead arranger and joint book manager, UBS Securities LLC as joint
      lead arranger, joint book manager and syndication agent, BNP Paribas,
      LaSalle Bank National Association and SunTrust Bank as co-co-documentation
      agents. Incorporated by reference to Exhibit 4.1 to Registrants’ Quarterly
      Report on Form 10-Q for the quarter ended July 1, 2007.10.1
            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.
      Incorporated by reference to Exhibit 10.4 to the Registrants’ Registration
      Statement on Form S-4 (Registration No. 333-82084) filed on February 4,
      2002.10.1.1
            Amendment
      to Purchase Agreement by and among Arjo Wiggins US Holdings Ltd., Arjo
      Wiggins North America Investments Ltd., Arjo Wiggins Appleton Ltd.,
      Paperweight Development Corp. and New Appleton LLC, dated as of June 11,
      2004. Incorporated by reference to Exhibit 10.2 to the Registrants’
      Quarterly Report on Form 10-Q for the quarter ended July 4,
      2004.10.2
            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 Exhibit 10.6 to the Registrants’ Quarterly Report on Form 10-Q for the
      quarter ended September 28, 2003.10.2.1
            Amendment
      to Fox River AWA Environmental Indemnity Agreement by and among
      Paperweight Development Corp., New Appleton LLC, Appleton Papers Inc. and
      Arjo Wiggins Appleton Ltd., dated as of June 11, 2004. Incorporated by
      reference to Exhibit 10.3 to the Registrants’ Quarterly Report on Form
      10-Q for the quarter ended July 4, 2004.10.3
            Fox
      River PDC Environmental Indemnity Agreement by and among Appleton Papers
      Inc. and Paperweight Development Corp., dated as of November 9, 2001.
      Incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the
      Registrants’ Registration Statement on Form S-4 (Registration No.
      333-82084) filed on April 17, 2002.10.3.1
            Amendment
      to Fox River PDC Environmental Indemnity Agreement by and among Appleton
      Papers Inc., Paperweight Development Corp. and New Appleton LLC, dated as
      of June 11, 2004. Incorporated by reference to Exhibit 10.4 to the
      Registrants’ Quarterly Report on Form 10-Q for the quarter ended July 4,
      2004.10.4
            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. Incorporated by reference to Exhibit 10.8 to Amendment
      No. 1 to the Registrants’ Registration Statement on Form S-4 (Registration
      No. 333-82084) filed on April 17, 2002.10.5
            Amended
      and Restated Relationship Agreement by and among Arjo Wiggins Appleton
      Ltd. (f/k/a Arjo Wiggins Appleton p.l.c.), Arjo Wiggins (Bermuda) Holdings
      Limited, Paperweight Development Corp., PDC Capital Corporation and Arjo
      Wiggins Appleton (Bermuda) Limited, dated as of June 11, 2004.
      Incorporated by reference to Exhibit 10.5 to the Registrants’ Quarterly
      Report on Form 10-Q for the quarter ended July 4, 2004.


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10.6
            Assignment
      and Assumption Deed, dated as of November 9, 2001, between Arjo Wiggins
      Appleton p.l.c. and Arjo Wiggins Appleton (Bermuda) Limited. Incorporated
      by reference to Exhibit 10.10 to Amendment No. 1 to the Registrants’
      Registration Statement on Form S-4 (Registration No. 333-82084) filed on
      April 17, 2002.10.7
            Collateral
      Assignment, dated as of November 9, 2001, between Arjo Wiggins Appleton
      (Bermuda) Limited Paperweight Development Corp., New Appleton LLC and
      Appleton Papers Inc. Incorporated by reference to Exhibit 10.11 to
      Amendment No. 1 to the Registrants’ Registration Statement on Form S-4
      (Registration No. 333-82084) filed on April 17, 2002.10.8
            Appleton
      Papers Inc. Employee Stock Ownership Trust, created September 6, 2001,
      effective June 1, 2001. Incorporated by reference to Exhibit 10.13 to the
      Registrants’ Registration Statement on Form S-4 (Registration No.
      333-82084) filed on February 4, 2002.10.9
            Appleton
      Papers Inc. New Deferred Compensation Plan, as amended on October 31,
      2002, and restated effective as of November 9, 2001. Incorporated by
      reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K
      for the fiscal year ended December 31, 2005.(1)10.10
            The
      Executive Nonqualified Excess Plan of Appleton Papers Inc. Incorporated by
      reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K
      for the fiscal year ended December 31, 2005.10.10.1
            Adoption
      Agreement, dated as of January 3, 2006, by Appleton Papers Inc. and
      Principal Life Insurance Company, as the provider. Incorporated by
      reference to Exhibit 10.13.1 to the Registrant’s Annual Report on Form
      10-K for the fiscal year ended December 31, 2005.(1)10.11
            Appleton
      Papers Inc. Long-Term Incentive Plan, as amended and restated, effective
      as of January 1, 2004. Incorporated by reference to Exhibit 10.15 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2005.(1)10.12
            Appleton
      Papers Inc. Supplemental Executive Retirement Plan, as amended through
      March 28, 2001. Incorporated by reference to Exhibit 10.16 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2005.(1)10.13
            Form
      of Termination Protection Agreement. Incorporated by reference to Exhibit
      10.17 to the Registrant’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2005.(1)10.14
            Termination
      Protection Agreement Amendment for Mark R. Richards dated effective
      January 4, 2008.(1)10.15
            Amended
      and Restated Intellectual Property Agreement among Appleton Papers Inc.,
      WTA Inc., Appleton Coated Papers Holdings Inc. and Appleton Coated LLC,
      dated as of November 9, 2001. Incorporated by reference to Exhibit 10.20
      to the Registrants’ Registration Statement on Form S-4 (Registration No.
      333-82084) filed on February 4, 2002.10.16
            Trademark
      License Agreement between Appleton Papers Inc., f/k/a Lentheric, Inc., and
      NCR Corporation, dated as of June 30, 1978. Incorporated by reference to
      Exhibit 10.21 to the Registrants’ Registration Statement on Form S-4
      (Registration No. 333-82084) filed on February 4, 2002.10.17
            Security
      Holders Agreement by and between Paperweight Development Corp. and the
      Appleton Papers Inc. Employee Stock Ownership Trust, dated as of November
      9, 2001. Incorporated by reference to Exhibit 10.26 to the Registrants’
      Registration Statement on Form S-4 (Registration No. 333-82084) filed on
      February 4, 2002.10.18
            Security
      Holders Agreement by and among Paperweight Development Corp., Appleton
      Investment Inc. and Appleton Papers Inc., dated as of November 9,
      2001. Incorporated by reference to Exhibit 10.25 to the Registrants’
      Registration Statement on Form S-4 (Registration No. 333-82084) filed on
      February 4, 2002.10.19
            Appleton
      Papers Retirement Savings and Employee Stock Ownership Plan effective
      September 19, 2006.10.19.1
            Resolution
      by Appleton’s ESOP Administrative Committee effective January 1, 2008,
      amending Appleton Papers Retirement Savings and Employee Stock Ownership
      Plan effective January 1, 2008.10.20
            Amended
      and restated Appleton Papers Inc. Retirement Plan approved December 5,
      2007.10.20.1
            Resolution
      by Appleton’s Board of Directors dated December 5, 2007 amending Appleton
      Papers Inc. Retirement Plan effective January 1, 2008.10.21
            Form
      of Non-Employee Director Deferred Compensation Agreement. Incorporated by
      reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended October 1, 2006.10.22
            Appleton
      Papers Inc. Long-Term Incentive Plan, as amended and restated, effective
      as of January 1, 2006.(1)
      Incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended October 1,
  2006.10.23
            Appleton
      Papers Inc. Long-Term Performance Cash Plan effective January 1,
      2008.12.1
            Computation
      of Ratio of Earnings to Fixed Charges.21.1
            Subsidiaries
      of Paperweight Development Corp.


104
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31.1
            Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities
      Exchange Act of 1934 as amended.31.2
            Certification
      of Thomas J. Ferree, Vice President, Finance, Chief Financial Officer and
      Treasurer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the
      Securities Exchange Act of 1934 as amended.31.3
            Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Paperweight Development Corp., pursuant to Rule 15d-14(a) of the
      Securities Exchange Act of 1934 as amended.31.4
            Certification
      of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight
      Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange
      Act of 1934 as amended.32.1
            Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Appleton Papers Inc., pursuant to 18 U.S.C. Section
  1350.32.2
            Certification
      of Thomas J. Ferree, Vice President, Finance, Chief Financial Officer and
      Treasurer of Appleton Papers Inc., pursuant to 18 U.S.C. Section
      1350.32.3
            Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Paperweight Development Corp., pursuant to 18 U.S.C. Section
      1350.32.4
            Certification
      of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight
      Development Corp., pursuant to 18 U.S.C. Section
  1350.







(1)
            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.




105
 Table of Contents


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.




APPLETON
      PAPERS INC.By:
            /s/
      Mark R. RichardsMark
      R. Richards
              President
      and Chief Executive OfficerDate:
            March 11,
      2008




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, 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/
      MARK R. RICHARDS
              Mark
      R. Richards
            Chairman,
      President, Chief Executive Officer and a Director (Principal Executive
      Officer)
            March 11,
      2008/s/
      THOMAS J. FERREE
              Thomas
      J. Ferree
            Vice
      President, Finance, Chief Financial Officer and Treasurer (Principal
      Financial Officer)
            March 11,
      2008/s/
      JEFFREY J. FLETCHER
              Jeffrey
      J. Fletcher
            Controller
              (Principal
      Accounting Officer)
            March 11,
      2008/s/
      STEPHEN P. CARTER
              Stephen
      P. Carter
            Director
            March 11,
      2008/s/
      TERRY M. MURPHY
            Director
            March 11,
      2008Terry
      M. Murphy/s/
      RONALD A. PACE
              Ronald
      A. Pace
            Director
            March 11,
      2008/s/
      ANDREW F. REARDON
            Director
            March 11,
      2008Andrew
      F. Reardon/s/
      KATHI P. SEIFERT
              Kathi
      P. Seifert
            Director
            March 11,
      2008/s/
      SUSAN SCHERBEL
              Susan
      Scherbel
            Director
            March 11,
      2008




Supplemental
Information to be furnished with reports filed pursuant to Section 15(d) of
the Act by Registrants which have not registered securities pursuant to
Section 12 of the Act.




No annual
report or proxy material has been provided to security holders covering the
registrant’s fiscal year 2007.




106
 Table of Contents


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.




PAPERWEIGHT
      DEVELOPMENT CORP.By:
            /s/
      Mark R. RichardsMark
      R. Richards
              President
      and Chief Executive OfficerDate:
            March
      11, 2008




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, 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/
      MARK R. RICHARDS
              Mark
      R. Richards
            Chairman,
      President, Chief Executive Officer and a Director (Principal Executive
      Officer)
            March 11,
      2008/s/
      THOMAS J. FERREE
              Thomas
      J. Ferree
            Chief
      Financial Officer and Treasurer
              (Principal
      Financial Officer)
            March 11,
      2008/s/
      JEFFREY J. FLETCHER
              Jeffrey
      J. Fletcher
            Assistant
      Treasurer and Controller
              (Principal
      Accounting Officer)
            March 11,
      2008/s/
      STEPHEN P. CARTER
              Stephen
      P. Carter
            Director
            March 11,
      2008/s/
      TERRY M. MURPHY
            Director
            March
      11, 2008Terry
      M. Murphy/s/
      RONALD A. PACE
              Ronald
      A. Pace
            Director
            March
      11, 2008/s/
      ANDREW F. REARDON
            Director
            March 11, 2008Andrew
      F. Reardon/s/
      KATHI P. SEIFERT
              Kathi
      P. Seifert
            Director
            March 11,
      2008/s/
      SUSAN SCHERBEL
              Susan
      Scherbel
            Director
            March 11,
      2008




Supplemental
Information to be furnished with reports filed pursuant to Section 15(d) of
the Act by Registrants which have not registered securities pursuant to
Section 12 of the Act.




No annual
report or proxy material has been provided to security holders covering the
registrant’s fiscal year 2007.


107
 Table of Contents


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM


ON


FINANCIAL
STATEMENT SCHEDULE




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




Our
audits of the consolidated financial statements referred to in our report dated
March 5, 2008 appearing in this Annual Report on Form 10-K also included an
audit of the financial statement schedule listed in Item 15(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 LLPPricewaterhouseCoopers
      LLPMilwaukee,
      WisconsinMarch
      5, 2008





108
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SCHEDULE II—Valuation and Qualifying Accounts


(dollars
in thousands)











Allowance
      for Losses on Accounts Receivable
            
            Balance
              at
              Beginning
              of
      Period
            
            
            Acquisition
              of
              Business
            
            
            Charged
              to
      Costs
              and
              Expenses
            
            
            Amounts
              Written
              Off
      Less
              Recoveries
            
            
            Balance
              at
      End of
              PeriodDecember
      31, 2005
            
            $
            2,464
            
            
            $
            48
            
            
            $
            283
            
            
            $
            (1,516
            )
            
            $
            1,279December
      30, 2006
            
            $
            1,279
            
            
            $
            —
            
            
            $
            895
            
            
            $
            (127
            )
            
            $
            2,047December
      29, 2007
            
            $
            2,047
            
            
            $
            —
            
            
            $
            894
            
            
            $
            (1,461
            )
            
            $
            1,480Inventory
      ReserveDecember
      31, 2005
            
            $
            3,390
            
            
            $
            106
            
            
            $
            1,996
            
            
            $
            (1,605
            )
            
            $
            3,887December
      30, 2006
            
            $
            3,887
            
            
            $
            —
            
            
            $
            3,683
            
            
            $
            (1,978
            )
            
            $
            5,592December
      29, 2007
            
            $
            5,592
            
            
            $
            —
            
            
            $
            659
            
            
            $
            (2,515
            )
            
            $
            3,736









The
amounts above do not include Bemrose since it has been reclassified as
discontinued operations. Its period-end balance of allowance for losses on
accounts receivable was $353, $752 and $705 for 2007, 2006 and 2005,
respectively. Its period-end inventory reserve was $1,598, $1,778 and $1,279 for
2007, 2006 and 2005, respectively.




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 PDC
or the notes thereto or the schedules are not required or are inapplicable under
the related instructions.






109